What is Cheque Truncation System

Of late you must have noticed advertisements in newspapers put up by banks urging account holders to stop circulating non-CTS compliant cheques and replace their old cheque books with new CTS enabled ones.

Some banks also created awareness through various modes of communication like SMS alerts, letters, display boards in branches and ATMs, pop-up messages in internet banking and notification on website. All this is because we are moving from an old format to a new format of cheque clearance in India.

Beginning 1st April 13, Cheque Truncation System (CTS) would be implemented, whereby the flow of the physical movement of the cheque will be eliminated in the cheque clearing process. Instead, an electronic image of the cheque will be sent along with relevant information.

While the existing cheque standard was supposed to be phased out from circulation beginning 2013, the Reserve Bank of India (RBI) extended the deadline to 31st March 13 based on representations by some banks as they needed more time to set up the systems.

The shift from the old system to the new cheque format essentially means that if you have given any post-dated cheques to your banks for loan EMIs you will have to replace them with new cheque leaves. And if you hold any post-dated cheques beyond 31st March you will have to arrange to get it replaced with a new Cheque Truncation System cheque.

CTS is an efficient way of clearing cheques. It is in fact, better than the existing method. This article attempts to explain CTS and its benefits both to account holders as well as banks.

What is a Cheque Truncation System?

Cheque Truncation System (CTS) is a cheque clearing system undertaken by the Reserve Bank of India (RBI) for faster clearing of cheques. As the name suggests, truncation is the process of stopping the flow of the physical cheque in its way of clearing. In its place an electronic image of the cheque is transmitted with key important data.

Cheque truncation thus obviates the need to move physical instruments across branches. This effectively eliminates the associated cost of movement of physical cheques, reduces the time required for their collection and brings elegance to the entire activity of cheque processing. It is a system which is practised worldwide in the banking sector.

Cheque Truncation System (CTS) was introduced and implemented in the National Capital Region (NCR) in February ’08 on a pilot basis. The number 2010 in 'CTS-2010' is because the guidelines for Cheque Truncation System came up in the year 2010.

Why CTS?

In India, the RBI has made available inter-bank and customer payments online in near-real time in the form of RTGS and NEFT. However, cheques still remain a prominent mode of payment in the country. Physical cheques still account for 75% to 80% of all transactions.

So, the RBI has decided to focus on improving efficiency of the cheque clearing cycle. Thus, offering CTS is an alternative. CTS also reduces operational risks in banking operations as clearing is a highly fraud-prone operation. This explains CTS from the regulators’ perspective.

Benefits to Account Holders

Since there is no physical movement of cheques, there is no fear of loss of cheque in transit. Usage of CTS cheques also means quicker clearance, shorter clearing cycle and speedier credit of the amount to your account. Depending on whether the cheque is local or outstation, the cheque can get cleared on the same day or within 24 hours.

The biggest advantage is that CTS-compliant cheques are more secure than old cheques and, hence, less prone to frauds. Also, as the system matures, it is proposed to integrate multiple locations and reduce geographical restrictions in cheque clearing.

Hence, there are chances of multi-city cheques getting cleared on the same day, going forward.

For banks the benefits from CTS could be summarized as follows:

• Shorter clearing cycle
• Superior verification and reconciliation process
• No geographical restrictions as to jurisdiction
• Operational efficiency for banks and customers alike
• Reduction in operational risk and risks associated with paper clearing

Also, to reiterate, scope for frauds are minimum under the CTS regime, which is good for banks. In addition to this, obviating the need to move physical cheques is extremely beneficial in terms of saving cost and time for banks. Certain benchmarks across the country have been prescribed like quality of paper, watermark, bank’s logo in invisible ink, void pantograph, etc, and standardization of field placements on cheques. This will achieve standardization of cheques issued by banks.

Source: Nirmal Bang's Beyond Market