www.infosys.

com/finacle
Universal Banking Solution | Systems Integration | Consulting | Business Process Outsourcing
Evolution of cheques and
paper-based clearing in India
Thought Paper
Thought Paper 02 Thought Paper 03
Overview
History of cheque clearing
Features of paper-based clearing
From once being a prized possession and a
status symbol to now being on the brink of
extinction, the cheque has come a long way.
During the 1st century AD, banks in Persia
and surrounding regions issued letters of
credit known as Sakks, which are believed to
have been the basis for the modern cheque.
At their customers request, bankers would
issue orders called Bills of Exchange to pay
money to identifed payees, eliminating
the need for early merchants to carry large
amounts of currency or gold.
Fully printed cheques were introduced in
the early 1700s, and the frst personalized
cheques were introduced in 1810 in England.
Daily cheque clearing started around 1770,
whereby bank clerks met to exchange
cheques and settle their balances in cash.
Features of a cheque:
A cheque should be in writing and duly signed
by the drawer.
It contains an unconditional order.
It is issued on a specifed bank.
The amount specifed must be clearly
mentioned both in fgures and words.
The payee is always specifed.
It is always payable on demand.
The cheque is invalid if it does not bear a date.
A cheque must be in order to pay money only.
This paper traces its history, current usage and
its future role in the Indian context.
Section 6 of the Negotiable Instruments Act,
1881, states A cheque is a bill of exchange
drawn on a specifed banker, and not
expressed to be payable otherwise than
on demand. So, a cheque is a written
instruction to a bank (also called the drawee
bank) asking it to pay a specifc sum of
money to the person/company whose
name is written on it. The person issuing the
cheque is called the drawer and the one to
whom it is issued is called the payee.
Types of cheques
Cheques are of basically four types.
a) Open Cheque:
A person holding an open cheque can:
I. Receive payment over the counter at
the bank.
ii. Deposit the cheque into his account.
iii. Pass it to another person by endorsing
the cheque on the reverse side.
b) Crossed Cheque:
Payment of a crossed cheque cannot be
made over the counter at a bank; it can only
Thought Paper 02 Thought Paper 03
be credited into the payees account. Cheques
can be crossed by drawing two parallel
lines across the top left corner.
c) Bearer Cheque:
A bearer cheque is payable to the person
presenting it for payment at the branch; it
does not require endorsement and can easily
be transferred.
d) Order Cheque:
An order cheque is payable only to a
particular person. In this, the word bearer
may be struck out and the word order
written. It can be transferred by the payee
to someone by simply signing his/her name
on the reverse of the cheque.
Introduction of MICR
As cheque usage grew substantially, the Magnetic
Ink Character Recognition (MICR) format was
frst developed by the Stanford Research
Institute and General Electric Computer
Laboratory in the 1950s for sorting cheques,
which by the 1990s had gained prevalence
worldwide. These machine-readable nine-
digit numbers at the bottom of the cheque
identifed its postal code/city and state of
origin. These codes helped clearing houses in
bank- and branch-wise sorting of cheques for
delivery to the respective banks on whom the
cheques were drawn. While this helped speed
up the clearing process, physical movement
of cheques continued even after this
partial automation.
Local clearing process
Local Cheque: Both the issuer and receiver
banks of a local cheque are in the same city.
Clearing House: Each bank sends its
representative to a centralized place called the
Clearing House to exchange cheques drawn
on each other. The Reserve Bank of India (RBI)
acts as a clearing house. The State Bank of
India (SBI) and other banks may act as clearing
houses in cities where RBI ofces are not
present. The clearing house and participating
branches usually have a defned distance
between them based on the transportation and
communication facilities, as cheques have to be
physically taken to and from the clearing house.
Local Clearing: Only those cheques drawn on
branches of banks within the purview of the
local clearing house are handled. The clearing
house gives the cheque to the drawers bank,
which checks if there are sufcient funds in
the account and then agrees to pay. The
clearing house settles the cheque amount by
debiting the drawers bank and crediting the
payees bank. The drawers bank then debits the
amount from the drawers account.
SETTLEMENT BANK
Cheques
presented for
clearing
Exchange & Processing
Cheques sent to
Drawee Bank for
payment
Cheques
deposited by
customers
are sent
Unpaid
cheques
returned
Unpaid
cheques
returned
Cheques
sorted and
sent to
branches
Credit and
realization
to
customers
account
Presenting
Bank Branches
Passing
of
cheques
Drawee Bank
Branches
Presenting
Bank Service
Branch
Clearing House
Drawee
Bank Service
Branch
Unpaid Cheques
returned
Unpaid Cheques
returned
CHEQUE CLEARING CYCLE
Thought Paper 04 Thought Paper 05
Outstation clearing process
Here, the cheques have to be moved from the
Presentation Centre (the city where cheques
have been presented) to the Drawee Centre
(the city where cheques are payable),
thereby increasing the realization time for
outstation cheques.
Net settlement
The RBI, which is the settlement bank (in those
centres where it is present), maintains accounts
of all the banks participating in the clearing.
Net settlement entails transferring only the net
diferential between banks by accumulating
the transactions and then ofsetting them
against each other.
For example, suppose SBI brings in 1,000 cheques
amounting to Rs. 50 lakhs drawn on Axis Bank
and Axis Bank brings in 1,000 cheques worth
Rs. 45 lakhs drawn on SBI, the net diference of
Rs. 5 lakhs is payable by Axis Bank to SBI. In
this case, the RBI passes an entry of Rs. 5 lakhs
by debiting Axis Bank and crediting SBI. In
efect, Axis Bank needs to pay Rs. 5 lakhs to RBI
for settling this amount with SBI. This is called
Net Settlement.
Speed clearing
This refers to processing of outstation cheques
in local clearing. It is possible only if these
outstation core banking-enabled bank branches
have a networked local branch. Speed clearing
signifcantly reduces the time taken for
realization of outstation cheques.
If there is no collecting branch at the Destination
Centre, then the cheque is sent directly by the
Presenting branch to the Destination branch.
On receiving the payment proceeds from the
Destination branch, the Presenting branch
credits the customers account, and realization
of funds takes about 7 to 21 days.
A cheque drawn on outstation CBS branches
can be processed through speed clearing if
the drawee bank has a branch at the local
centre. If T denotes the presentation date of the
cheque at the clearing house, local cheques
are processed in T+1 days and customers can
withdraw funds in T+1 or +2 days. Also, no
service charges are levied on speed clearing of
outstation cheques of up to Rs. 1 lakh.
Today, branches are networked by implementing
Core Banking Solution (CBS), which eliminates
the need for physical transfer of cheques.
Speed clearing combines the advantages of
MICR clearing and CBS. However, with the
advent of the Cheque Truncation System (CTS),
speed clearing may well be on the way out.
Reasons for cheque return
Some of the reasons for a cheque to return
unpaid are:
Insufcient balance in the customers account.
Signature mismatch.
Mismatch of amount in words and fgures.
Too many alterations on the cheque.
Efects not cleared present again: Funds
not available in the account to clear the
presented cheque since the cheque(s)
deposited into the account was not yet
cleared /available for use in the account.
Counterfeit, forged or fraudulently
altered cheque.
Post-dated Cheque: A post-dated cheque
(PDC) is one, which is drawn on a future date.
To illustrate with an example, if a cheque
presented on January 10, 2012 bears the
date April 2, 2012, it is a post-dated cheque.
In this case, the bank can make the payment
only on or after April 2, 2012.
Stale Cheque: A cheque is valid for a limited
period from the date on which it is drawn.
Once the period has expired, it is called a
stale cheque and no payment can be made
for it. In India, post April 1, 2012, cheques,
drafts, pay orders etc. are valid for three
months as opposed to six months hitherto.
Mutilated Cheque: A cheque that is torn
into two or more pieces is termed mutilated
cheque. Banks will not make payments
against such cheques without obtaining
confrmation from the drawer. However,
payment may be made against cheques
Thought Paper 04 Thought Paper 05
just torn at the corners with no material
fact removed or canceled.
Ante-dated cheques: Such a cheque bears
a date earlier than the date of presentment
for payment. For example, a cheque that is
issued on March 22, 2012 may bear the date
March 6, 2012.
If a cheque is not returned within a stipulated
time, it is considered realized as per the Return
Discipline established by the clearing house.
The collecting bank credits funds to the
benefciary after this scheduled time period.
Advantages of paper-based clearing
in India
Presence of faster cheque clearing
infrastructure with more than 1,200 clearing
houses in India.
With implementation of core banking and
the resultant payable in all branches in India
concept, most outstation cheques (through
speed clearing) are cleared in T+1 working days.
Safety: Only the named Payee can cash
the cheque.
Trust and Habit: Cheques have long been an
alternative to cash, trusted over generations
and convenient.
Buying time: 1) The time window between
cheque deposit and clearance of cheques
gives the payer time to arrange funds in
the account. 2) Post-dated cheques allow
payment for goods and services in advance,
even if funds are not available at the
time of issue.
The benefciarys name is the only requirement
to pay through a cheque whereas e-payments
require many additional details.
Cheques allow anonymity in payments
through bearer instruments.
Issuing cheques is quite economical to the
drawer since most banks ofer some cheque
leaves free of cost. Collection charges too
are waived in many cases. At present in
India, there are no charges for local cheque
collection and for speed clearing cheques of
up to Rs. 1 lakh. On the other hand, electronic
payments attract some charges.
Limits on transferable amounts constrain
online payments; account holders too are
at times allowed to set their limits per
transaction. Issuing of cheques has no ceiling
(apart from some cheques which have a
specifc upper limit).
Convenient and Flexible: There is no need to
carry cash.
More secure than cash: If stolen, the bank
can be informed immediately and the
transaction stopped.
Certain groups of people still prefer cheques,
for instance, visually challenged and home-
bound individuals (due to age or illness).
Disadvantages of cheques
Expenses in cheque usage and issuance
towards printing, ensuring security, postage
charges, clearing costs, handling costs etc.
The time lapse before the actual credit or
debit of a cheque may lead to accounting
errors for the account holder or result in
overdrawing of the account. The issuer needs
to keep track of his account balance to avoid
issuing cheques without sufcient balance.
Cheques could get stolen or lost. It is
necessary to keep cheque books under
lock and key.
Since a cheque is basically paper, it can
be easily tampered with, leading to
fraudulent transactions.
Any person handling the cheque has easy
access to the account number mentioned on
the cheque.
Cheques will be returned if the signature on
the cheque does not match that in the
banks fles. Inadvertent errors by the account
holder while signing the cheque may cause
it to be returned.
Bank holidays, system failure, insolvency, strikes
etc. can adversely afect the clearing process.
Latest in paper-based clearing in India
Cheque truncation system (CTS 2010)
CTS 2010 is the prescribed standard by the
RBI for cheques issued by all Indian banks to
facilitate faster clearing. Instead of the collecting
branch sending the physical cheque to the
paying bank, an electronic image of this
cheque with relevant information like the MICR
code, date of presentation, presenting banks
etc. is transmitted to the drawee branch by the
clearing house, hastening the entire cheque
clearing process.
In CTS, the presenting bank/branch captures
the MICR band data and cheque images using
an Image Capture System comprising a scanner,
Core Banking Solution and/or other applications.
Presenting and paying banks have an interface/
gateway called Clearing House Interface (CHI),
which enables banks to transmit images and
data in a secure manner to the clearing house.
The presenting bank sends this digitally
encrypted and signed data with captured
images to the clearing house, where this data
is processed, a settlement fgure arrived at
and the images and data routed to the paying
banks. This is called presentation clearing. The
drawee banks receive data and images for
processing the payment through their CHIs,
which also generate the return fle for
instruments that are unpaid.
Presenting
Banks
Truncated
documents
Item data
and image
files
Item data
and image
files
Central Bank
Accounting System
(Equation)
Image Cheque
Clearing System
Issuing
Banks
Item data
and image
files
Returns from
Issuing Banks
Returns to
Collecting Banks
Outward
Clearing
Return of
Inward
N
e
t

s
e
t
t
l
e
m
e
n
t
s
I
m
a
g
e
s

&

d
a
t
a
I
n
c
l
.

r
e
t
u
r
n
s
Return of
Outward
Inward
Clearing
Central Image Archive
IMAGE CLEARING SYSTEM
Source:http://www.bemoneyaware.com
The RBI deadline for all banks to ensure that all
non-CTS-2010 standard cheques are withdrawn
and replaced with CTS-2010 Standard cheques
has been extended to July 31, 2013. Non-CTS-
2010 standard cheques that are presented
beyond the extended period will continue
to be accepted but will get cleared at less
frequent intervals.
The only changes customers need to incorporate
while using the new cheques are:
Use image-friendly, dark-coloured inks while
writing the cheques.
Avoid alterations or corrections and if
inevitable, use a fresh cheque altogether.
Cheques for CTS 2010
CTS-2010 standard cheques have been introduced
in the country to standardize cheques issued
by banks and reduce incidence of fraud.
Thought Paper 06 Thought Paper 07
The new cheque format must display these
security features:
1. The bank logo must be printed with invisible
ink (ultra-violet ink) and branch address
along with IFSC code printed beside it, on top
of the cheque.
2. A photocopy of the cheque should display
a pantograph below the account number
that reads VOID/COPY.
3. Cheque Printer details with CTS-2010 must be
displayed on the left side of the cheque.
4. The new rupee symbol should precede the
amount in fgures feld.
5. Please sign above must be mentioned on the
bottom right side of the cheque.
Some others security features include:
Date in dd/mm/yyyy format with boxes.
Watermark CTS INDIA to be visible when
cheque is held against a light source.
Efect of CTS 2010 on customers
Fresh CTS-2010 compliant cheques will
have to be issued for all post dated cheques
issued previously.
Pay_____________________________________________________________________
A Cheque in New Format
Rupees ________________________________________________________________
_________________________________________________________________________
mr
000779" 000000001: 000000: 10
Pay_________________________________________________________________________________________________
Bank Logo
& Details
1
4
2
5
3
M kUM M or Order
only
`
A/c No. 0123456789000000
Please sign above
D D M M Y Y Y Y
S
r
i S
a
i P
r
in
t
e
r
s
2
0
0
1
-
1
0
All cheques issued after July 31, 2013, need
to be CTS-2010 compliant.
Benefts of cheque truncation system
1. Quicker cheque clearance and settlement
process with shorter clearing cycles and faster
credit of money into an account.
2. Reduced cost of storage electronic storage is
considerably cheaper.
3. No fear of cheques being lost in transit, since
cheques will not be physically transferred.
4. Proposal to integrate clearing locations of all
banks regardless of their location, resulting
in a standard clearing system across India,
enabling cheque clearances within 24 hours.
5. Easy detection of fraud by intercepting
altered and forged instruments which pass
through the electronic imaging system.
6. Improved operational efciencies of our
banking system resulting in better customer
service and liquidity position for customers.
In RBIs words, CTS brings elegance to the
entire activity of cheque processing and clearing
and ofers several benefts to banks in terms
of cost and time savings, including human
Thought Paper 06 Thought Paper 07
Future of paper-based clearing in India
With the increasing usage and popularity
of electronic payment modes, a substantial
decline in cheque usage is inevitable, all too
evident from statistics showing fewer cheques
being cleared.
Promote electronic payment modes
Some of RBIs suggestions to discourage cheque
usage and promote electronic payments are:
a) Total stoppage of cheques above a threshold
limit: RBI has mandated since August 2008
that payments greater than Rs.10 lakhs
between RBI-regulated entities/markets have
to be made via electronic modes.
b) Limits set or charges levied on cheque book
issue: Free cheque books are to be kept to
a minimum and charges levied beyond this
fxed number, depending on the customers
cheque usage history.
c) Levy charges on cheque usage to both
the issuer and benefciary: The drawer can
be made to bear charges when he issues
cheques. These charges may be at par with
charges for electronic payment systems like
NEFT/RTGS etc. Cheque collection charges
may also be levied on the benefciary of the
cheque (even local ones) beyond a certain
amount. For corporate entities, these charges
should be levied irrespective of amount
limits, and can be proportionate to the cost
incurred by the collecting banks.
i. Repayment of loans should be entirely
through electronic payment modes and
PDCs completely stopped. Existing ones
need to be converted to electronic mandates
within a stipulated time.
ii. Credit card payments should be through
electronic modes only and card holders
paying with cheques penalized heavily.
d) Avoid transition to cash transactions: Ensure
that the decrease in cheque usage does not
lead to an increase in cash transactions.
Frequent, high-value cash withdrawals may
also be charged.
e) Widespread awareness and accessibility to
electronic payments: Electronic payments
resource rationalization, cost efectiveness and
business process re-engineering.
Cheque payments versus electronic
payments
Chart 1 below shows that in terms of
value, electronic payments have increased in
comparison to cheque payments.
Chart 2 shows that even though in terms of
volume cheques constitute around 52% of total
payments, their share shows a downward trend.
Source: RBI Annual Report
Source: RBI Annual Report
Chart-1: Non-cash Payments Turnover: Paper vs Electronic - Value
1200
1000
800
600
400
200
0
2
0
0
3
-
2
0
0
4
2
0
0
4
-
2
0
0
5
2
0
0
5
-
2
0
0
6
2
0
0
6
-
2
0
0
7
2
0
0
7
-
2
0
0
8
2
0
0
8
-
2
0
0
9
2
0
0
9
-
1
0
2
0
1
0
-
1
1
2
0
1
1
-
1
2
V
a
l
u
e

i
n
T
r
i
l
l
i
o
n
SHARE OF CHEQUE SHARE OF ELECTRONIC
Chart-2: Non-cash Payments Turnover: Paper vs Electronic - Volume
3000
2500
2000
1500
1000
500
0
2
0
0
3
-
2
0
0
4
2
0
0
4
-
2
0
0
5
2
0
0
5
-
2
0
0
6
2
0
0
6
-
2
0
0
7
2
0
0
7
-
2
0
0
8
2
0
0
8
-
2
0
0
9
2
0
0
9
-
1
0
2
0
1
0
-
1
1
2
0
1
1
-
1
2
V
o
l
u
m
e

i
n

M
i
l
l
i
o
n
s
SHARE OF CHEQUE SHARE OF ELECTRONIC
Finacle 08 Finacle 09
Conclusion
Completely phasing out cheque usage in the
near future is next to impossible. However, the
time may be ripe to aggressively promote
electronic payment modes over cheques. System
providers, payment gateway providers, utility
companies, intermediaries, corporate users
including educational institutions etc. need
to work together and ensure that electronic
payment modes are easy to use, reconciliation
and reporting mechanisms along with grievance
handling are efcient, with least inconvenience
to customers.
Madhumita Shyam
Senior Associate Consultant, Finacle-Payments, Infosys
References
1. www.rbi.org.in/
2. www.moneylife.in
3. aitec.usp.net
4. www.bemoneyaware.com
5. m.economictimes.com
should be easily accessible to the public
with no disparity in demand and supply of
such services.
f ) Liability of customers and banks: Customers
need to be made aware of the extent of
liability, protection provided by and obligation
of banks in the event of unauthorized
transactions using customer credentials.
Greater trust in banks would encourage use
of electronic payment modes more often.
Finacle 08 Finacle 09
Finacle from Infosys partners with banks to transform process, product
and customer experience, arming them with accelerated innovation
that is key to building tomorrows bank.
About Finacle
2013 Infosys Limited, Bangalore, India, Infosys believes the information in this publication is accurate as of its publication date; such information is subject to change without notice. Infosys
acknowledges the proprietary rights of the trademarks and product names of other companies mentioned in this document.
www.infosys.com/finacle For more information, contact Finacleweb@infosys.com