20 February 2012
Cheque truncation is the conversion of physical cheque into electronic form for transmission to the paying bank. Cheque truncation eliminates cumbersome physical presentation of the cheque and saves time and processing costs. SIMPLY SPEAKING To settle a cheque it has to be presented to the drawee bank for payment. Originally this was done by taking the cheque in person to the drawee bank, however as cheque usage increased this became cumbersome and banks arranged between each other to meet each day at a central location to exchange cheques and settle the money. This became known as central clearing. Bank customers who received cheques could now deposit cheques at their own bank and their bank would arrange for the cheque to be returned to the drawee bank and any funds credited and debited from the appropriate accounts. If a cheque was dishonoured or bounced it would be physically returned to the original bank marked as such. This process would take several days as physical cheques had to be transported to the central clearing location, from where they had to be transported to the payee bank. If the cheque bounced it would be transported back to the bank where the cheque was deposited. This is known as the clearing cycle.
OR READ THIS MORE SIMPLE The process in which cheque details are captured by the payee bank (or its clearingagent) and electronically presented in an agreed format to the drawee bank (the bank on which it was drawn) for payment. Unlike the more common form of presentment where a cheque is physically presented to the drawee bank, a truncated cheque is stored by the payee bank. What is meant by an electronic cheque? An electronic cheque is a cheque in electronic form (as against the usual paper instrument in writing). A cheque in electronic form is defined in Explanation 1 to Section 6 of the Negotiable Instruments Act as a cheque which contains the exact mirror image of a paper cheque and is generated, written and signed in a secured system ensuring the minimum safety standards with the use of digital signature (with or without biometric signature and asymmetric crypto system). Are electronic cheques valid and binding in law like paper instruments? The Negotiable Instruments Act, 1881 has been amended by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 to include a cheque in electronic form within the definition of cheque in Section 6 of the Negotiable Instruments Act. Hence, cheques in electronic form are valid and binding in law like the paper instruments (cheques in writing on paper).
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