04 February 2013

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Know 21 Important Facts about Cheque Truncation System CTS


Know 21 Important  Facts about Cheque Truncation System CTS


It was expected that from January 2013 new system Cheque Truncation System (CTS) will become operational but as banks did not complete the requirements the Reserve Bank of India (RBI) extended the deadline to 31st March 13

Before CTS new system, cheque were physically moved but this new system will eliminate that and process will become more faster.
How?
An electronic image of the cheque will be sent along with relevant information.

1. 
What is Cheque Truncation? 
Truncation is the process of stopping the flow of the physical cheque issued by a drawer
to the drawee branch.
The physical instrument will be truncated at some point en-route to  the  drawee  branch  and  an  electronic  image  of  the  cheque  would  be  sent  to  the drawee  branch  along  with  the  relevant  information  like  the  MICR  fields,  date  of presentation, presenting banks etc. Thus with the implementation of cheque truncation, the  need  to  move  the  physical  instruments  across  branches  would  not  be  required, except in exceptional circumstances.
This would effectively reduce the time required for payment  of  cheques,  the  associated  cost  of  transit  and  delay  in  processing,  etc.,  thus speeding up the process of collection or realization of the cheques.

2. 
Why Cheque Truncation in India?           
Cheque Truncation speeds up collection of cheques and therefore enhances customer
service,  reduces  the  scope  for  clearing  related  frauds,  minimizes  cost  of  collection  of
cheques, reduces reconciliation problems, eliminates logistics problems etc.  With the
other  major  product  offering  in  the  form  of  RTGS,  the  Reserve  Bank  created  the
capability  to  enable  inter-bank  payments  online  real  time  and  facilitate  corporate
customer payments.  The other product, National Electronic Funds Transfer, is an
electronic credit transfer system. However, to wish away cheques is simply not possible
and that is the reason why the Bank decided to focus on improving the efficiency of the
Cheque Clearing Cycle.  Cheque Truncation is the alternative.  Moreover contrary to
perceptions, Cheque Truncation is a more secure system than the current exchange of
physical documents in which the cheque moves from one point to another, thus, not only
creating delays but inconvenience to the customer in case the instrument is lost in transit
or manipulated during the clearing cycle.  
In  addition  to  operational  efficiency,  Cheque  Truncation  has  several  benefits  to  the
banks  and  customers  which  includes  introduction  of  new  products,  re-engineering  the
total  receipts  and  payments  mechanism  of  the  customers,  human  resource
rationalization, cost effectiveness etc.  
Cheque  Truncation  thus  is  an  important  efficiency  enhancement  initiative  in  the
Payments Systems area, undertaken by RBI. 
  

3. 
How the uniqueness of the cheque would be imparted to the image?
The images captured at the presenting bank level would be transmitted to the Clearing
House and then to the drawee branches with digital signatures of the presenting bank.
Thus, each image would carry the digital signature, apart from the physical endorsement
of the presenting bank, in a prescribed manner.  In order to ensure only images of
requisite quality reach the drawee branches, there will be a quality check process at the
level of the Capture Systems and the Clearing House Interface. This would ensure only
images  of  requisite  quality  secured  with  the  digital  signatures  of  the  presenting  banks
reach the drawee branches.  In addition, drawers could consider using holograms, bar coding, or such other features, which would add to the uniqueness of the images.

4. 
How RBI is proposing to implement Cheque truncation?
RBI  is  proposing  to  implement  the  project  on  a  PILOT  basis  in  the  National  Capital
Region (NCR), New Delhi.  Based on the experienced gathered, it would consider
extending the coverage to other centers.
  In the process of implementation, banks have been given the freedom to decide the
point of truncation.  RBI  would  be  installing  an  interface  with  its  system  (CHI)  at  the
service  branches  of  banks,  who  are  members  of  New-Delhi  Bankers  Clearing  House.
Banks  have  to  decide  the  point  of  truncation  and  have  to  ensure  that  the  images  are
digitally signed after their capture. It would flow thereafter to the interface (CHI) provided
by  RBI,  from  where  the  images  would  flow  to  the  clearing  House  with  the  digital
signatures of the banks. These digitally signed images would reach the service branches
of the drawee branches clearing house interface. The service branches have to ensure
that these images are moved across their branches to ensure their processing.

5. 
What kind of services will RBI provide to facilitate cheque truncation?
RBI  services  include  system  development  and  installation  at  the  clearing  house,
interfaces  at  the  banks  end,  network,  handholding,  awareness  propagation  and
training. 

6. 
Can you briefly explain the entire process flow envisaged in the CTS?
The  CTS  project  envisages  a  safe,  secured, faster  and  effective  system for  clearing  of
the cheques.  In  the  CTS  the  presenting  bank  will  capture  the  data  &  images  of  the
cheques  using  their  Capture  System  which  is  internal  to  them.  They have to meet the
  specifications and standards prescribed for data and images. To ensure security, safety
and non-repudiation the PKI (Public Key Infrastructure) is being implemented across the
system. The banks will send the captured images and data to the central clearinghouse
for onward transmission to the payee/drawee banks.  For that purpose RBI will be
providing the banks software called the Clearing House Interface (CHI) that will enable
them  to  connect  and  transmit  data  in  a  secure  way  and  with  non-repudiation  to  the
Clearing House (CH).  The  Clearing  House  will  process  the  data  and  arrive  at  the
settlement  figure  for  the  banks  and  send  the  required  data  to  payee/drawee  banks  for
processing at their end.  The drawee/payee banks will use the same CHI mentioned
earlier  for  receiving  the  data  and  images  from  the  Clearing  House.  It will be the
responsibility  of  the  drawee  bank  Capture  System  to  process  the  inward  data  and
images and generate the return file for unpaid instruments.

7. 
Who can participate in the Cheque truncation system?
The criteria for banks participating in the Cheque truncation system are:
i. Membership of the clearinghouse in the NCR.
ii. Membership of the Indian Financial Network (INFINET)

8. 
How the non-INFINET member banks can participate in the CTS?
In respect of banks who are not members of the INFINET, the following alternatives are
available 
(a)  They may become the sub-members of the direct members or
(b)  Such  banks  may  use  the  infrastructure  of  the  other  banks  having  INFINET
membership  without  being  the  INFINET  members  themselves  and  there  clearing
settlement  can  be  done  either  directly  or  through  the  member  through  whom  they  are
participating.

9. 
Is the infrastructure requirement same for all the banks? 
The  infrastructure  required  for  CTS  from  banks  end  are  connectivity  from  the  bank
gateway to the clearinghouse, hardware, and software for the CTS applications.
RBI shall be providing member banks with the CHI and the banks have to procure other
hardware and system software for the CHI and the application software for their capture
systems on their own.

The  hardware  requirement  is  based  on  the  volume  of  the  cheques  processed  by  the
banks.  Based  on  the  volume  the  CHI  is  categorized  into  four  types  and  the  hardware
requirement is different for each category.
The bandwidth requirement for each bank is calculated based a number of factors like 
the peak inward and outward volume of the bank, average size of an image, efficiency
factor of the network etc.  In addition to that future requirement have been taken into
consideration for calculating the band with requirement. 

10. 
What are the image specifications in the CTS?
Imaging  of  cheques  can  be  based  on  various  technology  options.  The cheque images
can be black and white, Grey Scale or colored. Black and White images do not reveal
all the subtle features that are there in the cheques. Colored Images increase storage
and network bandwidth requirements.  So  it  was  decided  that  the  electronic  images  of
truncated cheques will be in gray scale technology.  There will be three images of the
cheques i.e. front grey, front black & white and back black & white which will be made
available to member banks. The image specifications are:
Image Type            Minimum DPI   Format            Compression 
Front Grayscale     100 DPI JFIF      JPEG
Front Black & White     200 DPI TIFF      CCITT G4
Reverse Black & White 200 DPI TIFF      CCITT G4
The image quality of the Grey Scale image shall be 8 bits/pixel (256 levels).

11. 
What is a gray-scale image?
Scanners  also function  like  photo-copiers  by  reflecting  the  light  passed through  narrow
passage on to the document. Tiny sensors measure the reflection from each point along
the strip of light.  Reflectance measurements of each dot is called pixel.  Images are
classified as black and white, gray-scale, or color based on hoe the pixels are converted
into digital values. For getting a gray scale image the pixels are mapped onto a range of
gray shades between black and white.  The entire image of the original document gets
mapped as some shade of gray, lighter or darker, depending on the color of the source.
In the case of black and white images, such mapping is made only to two colors based
on the range of values of contrasts.  A  black  and  white  image  is  also  called  a  binary
image.
  

12. 
How the quality of the images will be ensured?
As the payments will be made on the basis of the images, it is essential to ensure the
quality of the images. For that purpose, the solution proposes Image Quality Audit (IQA)
at different level. RBI will be specifying the image standards to the member banks. The
presenting bank is required to perform the quality audit during the capture itself. Further
quality audit will be done at the gateway before onward transmission to clearing house.
Further the drawee bank can ask for the physical instrument if it is not satisfied that the
image quality is not good enough for payment processing.
13. 
How the image and data transmitted over the network is secured?
The  security,  integrity,  non-repudiation  and  authenticity  of  the  data  and  image
transmitted  from  the  paying  bank  to  payee  bank  will  be  ensured  using  the  Public  Key
Infrastructure (PKI). The CTS is compliant to the requirement of the IT Act, 2000. It has
been made mandatory for the presenting bank to sign the image & data from the point of
origin itself. The image and data are secured using the PKI throughout the entire cycle
covering capture system, the presenting bank, the clearinghouse, and the drawee bank.
The  PKI  standards  used  are  in  accordance  with  the  appropriate  Indian  acts  and
practices  of  IDRBT  which  is  the  certifying  authority  for  banks  &  financial  institutions  in
India. The standards defined for the PKI are as followed:
1)      hash algorithm SHA-1
2)      padding algorithm pkcs#1
3)      RSA asymmetric encryption with 1024 bit key length
4)      Triple DES (3DES, TDES) symmetric encryption with 168 bit key length
5)      Certificates in x.509v3 format
 
14.
What type of cheques can be presented in the CTS?
All the local cheques can be presented in the CTS. Banks may also present cheques on
banks situated outside the NCR, but such banks have branches in the NCR region. The
CTS also supports the intercity clearing and specialized clearing like high value clearing
etc. The on-us instruments where both presenting and drawee banks are same are not
 allowed in the CTS. Images of such instruments would be stopped at the Clearing House
Interface itself.

15. 
What are the precautions required to be taken by the bank customers to avoidfrauds?
Bank  customers  should  use  image  friendly  cheques.  They  should  preferably  use  dark
coloured  ink  while  drawing  the  instruments.  Care  should  be  exercised  in  the  use  of
rubber stamp, so that it would not interfere with the material portions of the cheque. The
date  of  the  cheque,  payees  name,  amount  and  signature  are  the  basic  features  which
are  essential  in  a  cheque.  The  use  of  rubber  stamps,  etc,  should  not  overshadow  the
clear appearance of these basic features in image. In order to ensure that all essential
elements  of  a  cheque  are  captured  in  an  image  during  the  scanning  process,  bank
customers have to exercise appropriate care in this regard.

16.  
Will there be any change in the process for the customers?
There  will  be  no  change  in  the  clearing  process.  Customers  would  continue  to  use
cheques as at present, except in the use of image friendly coloured ink for making the
instruments.  Of  course,  such  of  those  customers,  who  used  to  receive  the  paid
instruments,  like Government  Departments,  would  only  receive  cheque  images  instead
of the physical  instruments. This will also facilitate in better processing at their end, as
they will be able to access online images in addition to the data. As the images are going
to be moved across, the time taken for the receipt of paid instruments at their end could
be reduced so that better and timely control could be exercised over payments. This will
also  give  an  early  opportunity  to  the  drawers  or issuers  of  cheques to  detect frauds  or
alterations in their cheques.
It is also possible for cheque issuers to consider newer techniques such as embedded
verifiable  features  such  as  bar-codes  or  logos  or  watermarks,  encrypted  codes,
holograms, etc., which would facilitate early interception of altered/forged instruments.
  
17. 
What would be benefit of cheque truncation to customers of banks?
Before  we  answer  this question,  we  have  to  understand  the  present  system  of  cheque
clearance. The cheques presented by customers, today, are sent to the clearing house
at  the  drawee  centres  by  the  beneficiariesí  bank.  The  cheques  at  the  bigger  cities,  in

view  of  the  large  volume  of  paper  instruments,  are  subjected  encoding  and  then  to
mechanical  sorting  and  thereafter  reach  the  drawee  branches.  As  per  the  existing
banking practice, these instruments received at the counters of the drawee branches are
paid  or  returned  by  them.    The  returned  instruments  are  passed  on  to  the  presenting
customers  through  the  process  of  a  return  clearing.  Only  after  the  return  clearing
process gets over, banks release the credit to the customers. The beneficiariesí account
gets  credited  on  the  same  day  on  which  the  draweesí  account  gets  debited;  however,
the beneficiary is permitted to use the proceeds only after the return clearing process.

  With  the  introduction  of  the  imaging  and  truncation,  the  physical  movement  of
instruments would be stopped and the electronic movement of images of cheques would
speed  up  the  process  of  settlements  and  ultimately  alter  the  clearing  cycles.  The
clearing cycle could be shortened and it would be possible for customers to realize the
proceeds of cheques early. Thus cheque truncation would reduce effectively the time of
float, i.e. time from the point of issue of cheque to the point of time the actual debit takes
place.  In  case  such  clearing  is  introduced  across  the  cities,  it  would  ensure  the
realisation  of  inter-city  instruments  faster  thus  ensuring  early  availability  of  funds  to
beneficiaries.
  Thus the benefits could be summarized as:  

a)  Faster clearing cycle

b)   Better reconciliation/verification process 

c)         Better Customer Service ñ Enhanced Customer Window 

d)  T+0 for Local Clearing and T + 1 for inter-city clearing.
      e)   Elimination of Float ñ Incentive to shift to Credit Push payments.
      f)   The jurisdiction of Clearing House can be extended to the entire country
ñ No Geographical Dependence 

      g)  Operational  Efficiency  will  benefit  the  bottom  lines  of  banks  ñ  Local
Clearing activity is a high cost no revenue activity. 

      h)   Minimises Transaction Costs. 

       i)    Reduces operational risk by securing the transmission route. 
      
  

18. 
What is an IRD? 
Under CTS, after the capture of the image, the physical cheque  would  be warehoused
with the presenting bank. In case the beneficiary or any other connected persons require
the instrument, the payee bank could issue a copy of the image, under its authentication,
which is called Image Replacement document.  It is a legally recognized replacement of
the original cheque for re-presentment. The provisions of NI act (Section 81(3) of the NI
Act as amended) also permit the usage of such IRD.

19. 
If the customer wants to see the paper cheques for any reason, what are theoptions available to the customer?
The  physical  instruments  are  required  to  be  stored  for  a  statutory  period.  It  would  be
obligatory  for  presenting  bank  to  warehouse  the  physical  instruments  for  that  statutory
period. In case a customer desires to get a paper instrument back, the instrument can be
sourced from the presenting bank through the drawee bank.

20.
If you have given postdated cheques for the loans you will be required to change them.

21.
if you hold any post-dated cheques beyond 31st March 2013  get the new cheques from concern party.

Reality views by sm –

Monday, February 04, 2013

Tags – Cheque CTS Important Facts

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12 comments:

Usha February 04, 2013  

This is very good news about Indian banking system, Lot of efforts are needed before cheque truncation system gets fully automated.

When SBI upgraded to core banking, there were few errors...it was withdrawing few monthly bills of other person from our account..this continued until we observed...Bank rectified it by depositing withdrawn amount back to our account.

sm, Thanks for detail update on cheque Truncation stystem.

Renu February 04, 2013  

One more technical advancement..

MEcoy February 04, 2013  

very detailed post sm keep it up

Destination Infinity February 04, 2013  

The point no. 1 & 2 were very useful to me as I didn't know what CTS was about. Now I know. That reminds me - I need to exchange my old cheques for the new ones ASAP!

Destination Infinity

Krishna February 05, 2013  

great info...

i already done a post on CTS please follow below link to read

http://krishnasepages.blogspot.in/2012/11/cts-2010-standard-and-old-bank-cheques.html

rudraprayaga February 05, 2013  

Very useful.Automation reduces effort and duration.

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