According to the Negotiable Instruments Act a truncated cheque is a cheque "which is truncated during the course of a clearing cycle either by the clearing-house or by the bank whether paying or receiving payment immediately on production of an electronic image for the transmission, substituting the further material movement of the cheque in writing".
Cheque Truncation is a system of cheque clearing and settlement between banks based on electronic data or images or both without material exchange of instrument. Cheque truncation is being presently used in many countries and is being introduced in India in April 2006. For introducing cheque truncation in India, a working group was constituted by the Reserve Bank (RBI). They submitted Part I of its report in July 2003 and suggested a model for the cheque truncation in India.
Following are the major recommendations of the working group :
A scanner in the local branch of the bank where the cheque is deposited is used to capture the image of the cheque and send it to an automated clearing-house and from there onto the paying bank. Returned cheques also follow the same route. Physical cheques will remain in the branch. In the pilot cheque truncation project the current paper based clearing might be replaced by image and data clearing for outward and inward and only data for return item processing. Cheque data and images will be stored in image archives for all the outward and inward items. The archive at the clearing-house will retain all the clearing images and data for a minimum of eight years. The paper instruments are required to be preserved for eight years till further instructions on the subject are evolved. The size and the configurations of the systems to be used for outward and inward processing is a function of the banks’ business necessities and is to be worked out by the banks based on the size of inward and outward instruments of the bank, the duration of retention of such inward and outward images and MICR data by the bank and size of the images of the cheques. The exact size of the three prescribed images of each image may vary according to the source instrument of the various banks. However, for the purpose of sizing, banks might choose conservatively 75KB as the size of the three prescribed images along with the digital signature. The point of truncation and the retention period shall have a bearing on the storage necessities and banks need to suitably work out the storage requirements of their systems accordingly. Banks should also consider the scalability of their systems depending upon the future requirements.
The RBI will provide only the Clearing-house Interface (CHI) application software to the member banks. The member banks have to purchase the following :
The CHI will perform as a gateway for outward and inward MICR data and the images of the instruments to be sent to/received from the Clearing-house over the network/media. The Clearing-house Interface (CHI) is a Windows based software with embedded Oracle Relational Database to be loaded on the Gateway Server. The Gateway shall be deployed using the Public Key Infrastructure for all its communication with the Clearing-house. The Clearing-house Interface (CHI) shall cumulative the images and MICR data received from the different branches for outward presentation and will deliver the inward images and MICR data drawee bank branch-wise to the respective Clearing-house Interfaces. The images have to pass the required Image Quality Assurance (IQA) and Image Quality Usability (IQU) specifications which are issued by the RBI, failure to do so may result in rejection of such images.
As CTS (Cheque Truncation System) clearing is based on images it is important that the source documents should be image-friendly. The Cheques should be printed on the MICR standard stationary given in the MICR procedural guidelines and the size of the cheque remains unchanged. However, banks need to take certain safety measures which include :
As a guide, ideally the bank’s imaged based processing system/s should have the following characteristics :
Introduction of the truncation process might change the roles and responsibilities of the various participants in the truncation process and may lead to introduction of certain risks that will have to be mitigated. These are documented below :
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