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A world first from RBI

The Reserve Bank of India has embarked on an ambitious Cheque Truncation System project which will enable banks to clear outstation cheques quickly and efficiently, says Abhinav Singh.

If all goes well, the Cheque Truncation System (CTS) will become a reality by March 31, 2006. The Reserve Bank of India (RBI) is on target to achieve this goal. A safe, secure, sound and efficient payment system is RBI’s goal.

Through the CTS, transactions are settled on the basis of images and electronic data without the physical movement of the instruments. It eliminates the movement of cheques in the cheque clearing cycle. The clearing cheque is truncated at the presenting bank itself. A CTS allows a financial institution to truncate cheques at the ‘Point of Capture’ by providing the capabilities of presenting cheques to the ‘Paying Bank’ electronically and to process return cheques electronically. The importance of the CTS can be gauged from the fact that physical cheques still account for 80 percent of all transactions, while electronic means, including credit cards, account for the remaining 20 percent. According to the RBI, the CTS in India is the first project in the world incorporating all the three components of CTS—proof of deposit, settlement, and an eight-year-long archive.

During a mid-term review in October 2002, a working group on cheque truncation and e-cheques was set up under Dr R B Barman, Executive Director of RBI. Its aim was to examine various models of cheque truncation and to suggest an appropriate one for India. The group submitted its report in July 2003, and suggested that greyscale technology be deployed for imaging and that images be preserved for eight years. A centralised agency per clearing location would act as an image warehouse for the banks. The group also recommended norms for agencies to provide the service.

Replacing a weak system

The existing CTS had weaknesses which needed to be done away with. Explains Barman, “The existing system restricts the speed at which the physical cheque travels to the destination branch and there has to be physical handling of paper at multiple points enroute to its destination. Moreover, the existing system brings with it high operational and maintenance costs for banks in the form of staff, couriers, encoding, passing, signature verification and the security of the physical instruments to be warehoused after payment.” It has also been found that there are reconciliation issues associated with the system, as clearing differences, monitoring and control is an administrative cost, and clearing differences accounts are an area prone to fraud.

Pilot project

A pilot project is already underway in the capital region as the New Delhi Clearing House has 82 direct bank members and nearly 2,500 bank branches spread across Delhi, Gurgaon, Noida, Greater Noida, Faridabad, Ballabgarh, Loni, Maharajpur, Sonepat and other cities in the region. The project is unique as it is the single biggest site with all three aspects of CTS.

Punjab National Bank (PNB) has introduced CTS across its ten micro centres, and plans to extend it across the country when the CTS project goes live by the end of March. Comments K S Bajwa, General Manager, Information Technology Division, PNB, “The CTS has the capability to speed up outstation cheque clearance from the present one week’s time to less than 48 hours. If proper security norms are adhered to, the CTS can be a huge success in India.”

The foremost benefit from the CTS will be better customer service levels. Barman says, “By introducing CTS it will be possible for banks to extend the jurisdiction of the clearing house to the entire country, and there will be no geographical barriers. Operational efficiency will benefit the bottom lines of banks, and reduce risks by securing the transmission route.” The CTS will also make banks more cost-effective.

Re-engineering processes

According to the RBI, to achieve CTS all banks will have to re-engineer their internal processes to enable passing of cheques based on images. They will have to decide on their service centre hardware configuration based on their storage and payment processing needs. They will have to select a vendor to address their technology requirements. RBI has recommended to the banks that they should network all their different branches with the required bandwidth. They should also connect the CHI (Clearing House Interface) or service branch with the clearing house, and integrate the Clearing House Input with the bank’s software to enable straight-through processing.

RBI has also decreed that the point of truncation is the internal matter of each bank depending upon its convenience and level of technology. The RBI would be providing the software for presentation and receipt or CHI only. The CHI will talk to the Clearing House System. Integration of the CHI output with the bank’s own software has to be done by the banks themselves. The choice of vendor is left to the bank. The image and data standards would be open and inter-operable, and hence straight-through processing should be possible.

Once the project goes live, around 82 banks having about 2,500 branches are expected to move ahead with CTS, and customers are expected to benefit immensely from the same.

abhinav@expresscomputeronline.com