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BACH Operation

Kazi Mohammad Ismail


Senior Principal Officer & Incharge
ADC & Corporate Marketing Deptt
BPMD, DW, IBBL HO, Dhaka
Email:- kmismail@islamibankbd.com

BACH in Definition

Bangladesh Automated Clearing House


“BACH” means the overall system and facility that supports the Exchange and settlement of
payment items between Participating Banks and the Bangladesh Bank.

BACH Component

1. BACPS- Bangladesh Automated Cheque Processing System


“BACPS” means a facility that clears cheques and approved payment items for Bank
companies.

2. BEFTN- Bangladesh Electronic Fund Transfer Network


The Bangladesh Electronic Funds Transfer Network (BEFTN) will operate as a processing
and delivery centre providing for the distribution and settlement of electronic credit and
debit instruments among all participating banks.

BACH Implementation History

BACPS
1. Central Bank Started Project on 2008 partnership with DFID, UK
2. Payment & Settlement System Regulation issued on 2009
3. MICR Cheque issue started from 2009
4. BACPS Rules and Procedure Circular Issued on 17.01.2010
5. Live Day Simulation (LDS) started on 04.08.2010
6. BACPS go Live operation Started on 7.10.2010

BEFTN
1. BEFTN Operating Rules issued on 10.08.2010
2. BEFTN Live Operation started on 28.02.2011
* This paper is prepared as per BACPS & BEFTN rules & Procedures
BACH Infrastructure

Manual Clearing Flow


Automated Clearing Flow

Cheque Truncation and Verification


Cheque Scanner

Cheque Orientation:-

Put the Cheque here.

Front side of Cheque will place at right


side and back side will place left side.

 20 or 30 Cheques may scan at a


time.

 Be sure no pin with the cheque


while scanning.
Introduction of MICR Cheque

Front View

Instrument No. (7 digit) Routing No. (9 digit) Ins. A/c No. (13 digit) Instrument Type (2 digit)

Rear View

Payee’s A/C no. & Phone No Clearing Stamp Endorsement & Sign Endorsement line print
Manual & Automated Clearing

Manual Clearing Automated Clearing


1. 45 clearing house in the country 1. Only one clearing house instead of 45
2. Human required in clearing house 2. No Human required in Clearing House
3. Time consuming 3. Time reduced tremendously
4. Huge collection cost from outside city 4. Collection cost is same as own city
5. Time session may change by request 5. Time session is automated &
unchangeable
6. Establishment cost very poor 6. Establishment cost is very high
7. No charge from client 7. Charges are collecting from client
8. Same Day clearing for only few branch 8. Same Day clearing for whole country
9. Used by NIKASH or manual ledger 9. Operated by Cheque Processing System
10. Data cannot save long time 10. Data and Image have to save for 12
years
11. Presenting Bank preserve other banks
11. Paying Bank preserve own cheques cheques
12. Non MICR cheque can clear 12. Non MICR cheque is unacceptable
13. Positive pay Instruction not mandatory 13. Positive Pay Instruction is mandatory
14. Paying banks responsibility is high 14. Presenting banks responsibility is high
15. UV detector not required 15. UV detector is mandatory
16. Cheque lost incident was high 16. Cheque lost incident is low
17. Physical movement was obvious need 17. Physical movement was truncated
18. Cheque mutilation possibility was high 18. Cheque mutilation possibility is rare
19. No centralized system 19. Processed under a secured centralized
system
20. Dependency on network was absent 20. Dependency on network is must
21. High tech equipment not required 21. High tech equipment required
22. Physical cheques presented through BB 22. Only Data and Image presented
through BB
23. Controlled by BACH Manager and
23. Controlled by Local Main Branches
Service Branch
24. Return reason were 7 to 15
24. Return reason are more than 29
25. Fraudulent attempt were frequent
25. Fraudulent attempt are reduced
Responsibility of Presenting Bank
1. Comply with the BACPS rules.
2. Certifies that presented Item is a copy of the original instrument.
3. Prima facie genuineness of the cheque be verified with
i) Due diligence and ordinary care.
ii) Genuineness of the cheque leaf,
iii) Material alteration of payee name, amount or date.
iv) Verification by UV detector
4. Instruments, Image & data preserve for 6 years.
5. Original cheque available for inspection within 7 calendar days.
6. If failed, it will result in non-payment of the instrument.
7. Credit to customer A/C on settlement date or internal rules of the bank.
8. Central Bank holding the Bank’s Settlement A/C to credit on house date.
9. Indemnify the BB processing/settling for the item for any loss or expense.
10. Reconciliation.

Presenting Banks Due Diligence


As settlement will be done on the basis of image and data, conducting due diligence is the
responsibility of the presenting bank
1. Verify the prima facie genuineness of the cheque
2. To be truncated
3. Attempt to detect any fraud, forgery or tampering
4. Enforce KYC norms in letter and spirit.
5. Observe all precautions which a prudent banker takes,
6. To check the apparent tenor of the instrument,
7. Physical feel of the instrument,
8. Tampering visible to the naked eye with reasonable care, etc.
For enhanced attention banks may employ suitable risk management techniques like
1. Scrutiny of high value transactions,
2. Limit based checking by officials,
3. New accounts alerts, etc.

Operational Due Diligence


1. Sorting of Instruments 9. Image quality checking
2. Stamping 10. Handling IQA failure
3. Capture of images and data 11. Frequency of submission
4. Reject repair and balancing 12. Submitting electronic data and images
5. DIN (document identification no) 13. Alternative delivery media
endorsement 14. Submitting items to The Bureau Service
6. Re presented cheques 15. Electronic File Acceptance or not
7. Validation Acceptance
8. Master table synchronization 16. Internal Control
Responsibility of Paying Bank
A Paying Bank, by maintaining or using an Account with the Bangladesh Bank for settlement of
items or by accepting an item from the Bangladesh Bank:
1. Comply with the applicable BACPS rules
2. Agrees to process the item in accordance with these Rules.
3. Authorizes the Bangladesh Bank to charge the amount of a payment item to the Paying
Bank’s Settlement Account on the Settlement Date
4. Indemnify the Bangladesh Bank for any loss or expense incurred as a result of a breach
of the foregoing agreements or of any action taken by the Bangladesh.
5. The agreements, authorization and indemnity do not limit any other agreement,
authorization or indemnity not inconsistent with these Rules.
6. Return an approved payment item to the Bangladesh Bank by the deadline in the BACPS
schedule.
7. Taking Positive Pay Instruction from cheque issuer.

Paying Bank’s Due Diligence


1. Transmission of Posting File
2. Digital Certificate Verification of CHM
3. Payment Processing
i) Signature verification
ii) Account balance verification
iii) Verification of endorsement
iv) Positive Pay instruction
v) Restriction to account by customer or other legal authority
vi) Stop payment verification
vii) Verification of date
viii)Matching amount and figure
ix) verification of data entry error
x) vii) Other prudent practice
4. Returned Cheque
5. Request for Paper
6. Internal Control
7. Reconciliation of Clearing Differences

Abbreviation
1. MICR: Magnetic Ink Character 6. PBM: Participant Banks Module
Recognition 7. OCE: Outward Cheque Envelope
2. CPS : Cheque Processing System 8. ORE: Outward Return Envelope
3. CBS : Core Banking System 9. ICE : Inward Cheque Envelope
4. CH : Clearing House 10. IRE : Inward Return Envelope
5. CHM: Clearing House Module 11. IQA : Image Quality Analysis
Processing at PBM
PBM:- Participating Bank Module
The BACPS Participating Bank Module (PBM) provides cheque envelope validation and provides
an interface for sending and receiving cheque envelopes from and to BACPS.

For Outward Clearing


1. Duplication Checking
i) Destination Routing Number
ii) Origin Routing Number
iii) File Creation Date
iv) File Creation Time
v) File ID Modifier
2. Receiving Outward Presentment
3. Image Quality Analysis and Failure Handling
4. Item Processing
5. Session Attachment
6. Use of PKI
7. Reconciliation of Outward Presentment

For Inward Clearing


1. Receipt of Inward Data/Images
2. Validation, Authentication and Acknowledgement
3. Control Mechanism
4. Generation of Posting File

Eligible Instruments for BACPS


Following MICR encoded payment Items and instruments are eligible for BACPS
MICR MICR
No. Type of Instruments No. Type of Instruments
CODE CODE

1 Savings Bank Account Cheque 10 2 Current Account Cheque 11

3 Refund Warrant 18 4 Banker’s Cheque 12

5 Pay Order 19 6 Cash Credit Account Cheque 13

7 Govt. Cheque 31, 32 8 Dividend Warrant 14

9 Credit Card Cheque 20 10 Demand Draft 15

11 Foreign Taka Demand Draft 23 12 Gift Cheque 16

13 Fractional Dividend Warrant 15 14 Interest Warrant 17


BACPS Threats
The whole system is highly secured but some fraudulent attempts have found misusing the
BACPS system:

What they did -


1) Material alternation in amount both numeric and word figure
2) Material alternation in instrument no.
3) Material alternation in MICR encoded line
4) Material alternation in MICR line
5) Duplicate print

Protection way -
1) Verifying by UV detector before present
2) Instrument print with erasable UV ink
3) Positive pay Instruction
4) New account alert
5) KYC update and monitoring

Example
Accounting of BACPS
Service Branch of a particular Bank is operating the total clearing house of that bank. This
service branch operates with Bangladesh Bank for cheque processing. But accounting affected
on principal account of that bank at Central Bank. Service Branch always maintains this
operation on behalf of central accounts department i.e. FAD for IBBL. The total accounting
procedures are as follows:

For FAD:-
A. If total clearing house is favorable :
Dr. Balance with Bangladesh Bank
Cr. IBG (service Branch)

B. If total clearing house is not favorable:


Dr. IBG (service Branch)
Cr. Balance with Bangladesh Bank

For Service Branch:-


A. If total clearing house is favorable :
Dr. IBG (FAD)
Cr. IBG (Branch)

B. If total clearing house is not favorable:


Dr. IBG (Branch)
Cr. IBG (FAD)

For Other Branch:-


A. As a paying branch:
Dr. Party A/C
Cr. Clearing Adjustment

B. As a presenting branch:
Dr. Clearing Adjustment
Cr. Party A/C

C. If branch Clearing Adjustment A/C Balance is in positive:


Dr. Clearing Adjustment A/C
Cr. IBG (Service Branch)

D. If branch Clearing Adjustment A/C Balance is in negative:


Dr. IBG (Service Branch)
Cr. Clearing Adjustment A/C

At present all IBCA/IBDA is originated by service branch i.e. Local Office by automatic process
and branch have to respond that IBCA/IBDA.

Note: Daily balance of Clearing Adjustment A/C head should be kept in nil always.
Bangladesh Electronic Funds Transfer Network (BEFTN)

Kazi Mohammad Ismail


Senior Principal Officer & Incharge
ADC & Corporate Marketing Deptt
BPMD, DW, IBBL HO, Dhaka
Email:- kmismail@islamibankbd.com

The Bangladesh Electronic Funds Transfer Network (BEFTN) will operate as a processing and
delivery centre providing for the distribution and settlement of electronic credit and debit
instruments among all participating banks. This Network will operate in a real‐time batch
processing mode. All payment transactions will be calculated into a single multilateral netting
figure for each individual bank. Final settlement will take place using accounts that are
maintained with Bangladesh Bank.

Participants in BEFTN
The EFT Network is a multilateral electronic clearing system in which electronic payment
instructions will be exchanged among Scheduled Banks. The system involves transmitting,
reconciling and calculating the net position of each individual participant at the end of each
processing cycle. The participants involved are:
(a) Originator.
(b) Originating Bank (OB)
(c) Bangladesh Electronic Funds Transfer Network (EFT Operator)
(d) Receiving Bank (RB)
(e) Receiver
(f) Correspondent Bank

a) Originator
The Originator is the entity that agrees to initiate EFT entries into the network according to an
arrangement with a receiver. The originator is usually a company, government agency or an
individual directing a transfer of funds to or from a consumer’s or a company’s account. The
originator executes an EFT fund transfer entry through an Originating Bank (OB).

b) Originating Bank (OB)


The originating bank is the bank which receives payment instructions from its client (the
originator) and forwards the entry to the BEFTN. A bank may participate in the EFT system as a
receiving bank without acting as an originating bank; however, if a Bank chooses to originate
EFT entries, it must also agree to act as a receiving bank.

c) Bangladesh Electronic Funds Transfer Network (BEFTN)


BEFTN is the central clearing facility, operated by Bangladesh Bank that receives entries from
OBs, distributes the entries to appropriate RBs, and facilitates the settlement functions for the
participating banking institutions
d) Receiving Bank (RB)
The receiving bank is the bank that will receive EFT entries from BEFTN and post the entries to
the account of its depositors (Receivers).

e) Receiver
A receiver is a person/organization who has authorized an Originator to transmit an EFT entry
to the account of the receiver maintained with the Receiving Bank (RB).

f) Correspondent Bank
In some cases an Originator, Originating Bank or Receiving Bank may choose to use the
services of a Correspondent Bank for all or part of the process of handling EFT entries. A
Correspondent Bank’s function can include, but is not limited to, the creation of EFT files on
behalf of the Originator or acting on behalf of an OB or RB, respectively. All Correspondent
Banks must be approved by Bangladesh Bank before a bank enters into an agreement with the
Correspondent Bank.

Authorization
A written arrangement with the originating company signed by an employee or customer to
allow payments processed through the EFT Network to be deposited in or withdrawn from his
or her account at a bank. Authorization can also be a written agreement that defines the terms,
conditions and legal relationship between Originator and Receiver.

EFT Transaction Flow


EFT Entries
A) EFT Credits
• Inward Foreign remittances B) EFT Debits
• Domestic remittances • Utility bill payments
• Payroll private and government • Equal Monthly Installments (EMI)
• Dividends/Interest/Refunds of IPO • Government tax payments
• Business to business payments (B2B) • Government license fees
• Government tax payments • Insurance premium
• Government vendor payments • Mortgage payments
• Customer‐initiated transactions • Club/Association subscriptions

Consumer vs. Corporate Payments


EFT transactions are typically categorized as either consumer payments, Government payments
or commercial payments. These transactions are defined in accordance with the relationship of
parties involved in the transaction and the type of receiver account.

Consumer payments that could be made via the EFT network include credit applications such
as payroll, dividend, interest and annuity payments and so on. Consumer EFT debit applications
include the collection of utility bills, insurance premiums, loan installments and other recurring
obligations.

Corporate EFT applications include cash collection and disbursement, corporate trade
payments, government, tax payments etc. Cash collection and disbursement allows companies
to achieve efficiency in cash management through intra‐company transfer of funds. Corporate
trade payments enable corporations to exchange both data and funds with trading partners,
facilitating an automated process of updating their accounts receivable and accounts payable
systems.

Payment Application
I. Consumer Applications
• CIE – Customer Initiated Entry: Customer initiated entries are limited to credit applications
where the consumer initiates the transfer of funds to a company or person for payment of
funds owed to that company or person, typical example of these entries are utility bill and other
Internet banking product payments.
• PPD – Prearranged Payment and Deposit Entry
Direct Deposit: Direct deposit is a credit application that transfers funds into a consumer’s
account at the receiving bank. The funds being deposited can represent a variety of products
such as payroll, remittances, interest, pension, dividends and/or refunds, etc.

Preauthorized Bill Payment: A preauthorized payment is a debit application. Companies with


existing relationship with the customers may participate in the EFT through the electronic
transfer (direct debit) of bill payment entries. Through standing authorizations, the consumer
grants the company authority to initiate periodic charges to his or her account as bills become
due. This concept is especially applicable in situations where the recurring bills are regular and
do not vary in amount such as insurance premiums, loan installments, etc. Standing
authorization may also used for bills where the amount does vary, such as utility payments.

II. Corporate Applications


• CCD – Corporate Credit or Debit: This application can be either a credit or a debit application
where funds are either distributed or consolidated between corporate entities or government
entities. This application can serve as a stand‐alone fund transfer between corporate or
government entities, or it can support a limited disclosure of information when the funds are
being transferred between organizations (i.e. sister concerns) under the same group.
• CTX ‐ Corporate Trade Exchange: This application supports the transfer of funds (debit or
credit) within a trading partner relationship in which business payment remittance information is
sent with the funds transfer. The payment‐related information is placed in multiple addenda
records in a format agreed to by the parties and BEFTN.

III. Other Applications


• ADV – Automated Accounting Advice: This SEC Code represents an optional service to be
provided by BEFTN that identifies automated accounting advices of EFT accounting information
in machine‐readable format to facilitate the automation of accounting information for
Participating Banks.

Settlement
Settlement is the actual transfer of the funds between participating banks to complete the
payment instruction of an EFT entry. The transactions processed by the BEFTN will affect the
accounts of the concerned banks maintaining accounts with BB at the end of each processing
cycle.

Legal Framework
1) The EFT process operates from beginning to end through a series of legal agreements.
2) BEFTN Rules and Procedures
Other laws/regulations that have a direct bearing on EFT operation are listed as under:
• Bangladesh Bank Order, 1972 (Amended 2003)
• The Banks Companies Act, 1991
• Money Laundering Prevention Act, 2009
• Information and Communication Technology Act, 2006.
• The Bankruptcy Act, 1997
• The Foreign Exchange Guidelines, Volume 1 & 2.
• Foreign Exchange Regulation Act, 1947.
• The Bangladesh Telecommunication Act, 2001.
• Anti Terrorism Act 2009
• Combating on Financial Terrorism Act 2013
• Bangladesh Payment and Settlement Systems Regulations, 2009 (amendment 2013)