Paper Clearing

Banking and paper based payments

The Banking Regulation Act, 1949 defines '"banking" as the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise.

Payment by means of cheque is, therefore, embedded in the very definition of banking. Paper-based payment systems historically occupy an important place in any country's payment landscape as initially, apart from cash, cheque payment was the only available alternative.

'Clearing' of cheques required a centralised payment and settlement system, which facilitated payments made through cheques by netting through participating member banks, without going through the tedious task of individually settling each and every cheque / instrument.

Magnetic Ink Character Recognition (MICR)

The cheque clearing systems have evolved from manual clearing system to MICR clearing systems in mid 1980s, which brought in automation, standardisation and efficiency in cheque clearing process. MICR instruments with Magnetic Media Based Clearing Systems (MMBCS) technology facilitated carrying out of 'clearing' activity electronically, wherein clearing data was processed electronically with physical cheques exchanged alongside. To further ease up the process, High Value Clearing (HVC) was introduced during the eighties for clearing cheques of value of Rupees one lakh and above. This clearing was available at select large centres in the country till it was discontinued in the year 2009.

Following implementation of Core Banking Systems (CBS) in banks, Speed Clearing was launched in the year 2008, for local clearance of outstation cheques drawn on core-banking enabled branches of banks, which drastically reduced the turnaround time for clearing of outstation cheques.

Cheque Truncation System (CTS)

CTS enables use of the image of cheque for payment processing thereby eliminating the need for physical movement of cheques, with concomitant benefits of reduced turnaround time for clearing of cheques, particularly more so in case of outstation cheques. During the year 2008, RBI conducted a pilot study in New Delhi on the possibility of introducing CTS. Based on the learnings and outcomes of this pilot study, in February 2010, CTS-2010 standards were framed to enhance and standardise the security features on cheque forms. Mandatory features were specified including paper & watermark (at manufacturing stage), void pantograph and bank's logo with UV ink (at printing stage), field placements of a cheque, colours and clutter-free background, prohibiting alterations / corrections on cheques, pre-printed account number, etc. Apart from these, banks were given the leeway to include suitable desirable features provided the mandatory security features are not compromised. Banks were advised to issue only CTS-2010 standard cheques henceforth. After the successful run in New Delhi, CTS was introduced in the rest of the country, at Chennai in September 2011, to cover CTS clearing in southern and eastern zones, and Mumbai in April 2013 covering the western zone, with New Delhi covering CTS clearing in the northern zone.

In CTS, the presenting bank / collecting bank captures the MICR data and scans the images of the cheque as per CTS specifications and instruments are cleared on the basis of these digitally signed encrypted images. To facilitate CTS clearing, amendments were made to the Negotiable Instruments Act, 1881 to legalise electronic movement of cheques, retention of cheque by the presenting banker and placing the onus of verifying prima facie genuineness of the cheque to be truncated on the bank receiving the payment.

All sixty-six MICR centres operating across the country were subsumed in grid-based CTS clearing and MICR clearing was discontinued with effect from July 2014. As on date, all 1219 non-MICR clearing houses have been migrated to CTS.

The concept of a panel for resolution of disputes (PRD) for speedy and timely resolution of disputes between member banks was drawn up by RBI in September 24, 2010 to handle disputes. Each grid has its PRD; the President of the Grid is ex-officio chairman of PRD who is assisted by four other members representing member banks. The scope of the dispute resolution mechanism is limited to interpretation, scrutiny and resolution of disputes within the ambit of rules, regulations, operational and procedural guidelines relating to the payment products, various instructions issued by the system providers, instructions and directions issued by RBI. The resolution given by PRD is binding on the disputing banks, unless an appeal is made to the Appellate Authority against judgement of PRD.

To further augment customer safety in cheque payments and reduce instances of fraud occurring on account of tampering of cheque leaves, a mechanism of Positive Pay for all cheques of value of ₹ 50,000 and above was announced in September 2020. Under this mechanism, cheques will be processed for payment by the drawee bank based on information passed on by its customer at the time of issuing the cheque. In the Centralised Positive Pay System (CPPS), customers, after issuance of cheques will provide details of issued instrument/s to their banks. The data received will be uploaded in NPCI's CPPS system by the member bank. During the presentment, cheques presented will be validated by clearing house against CPPS data base. If any difference is observed while matching results, the clearing house will put a specified flag with the cheque data. Since CPPS will be the central repository for all participating banks, validation and provision of the flag at the time of clearing process will enable banks to save time in clearing process. It will be an add-on facility to contain any occurrence of fraud. The facility was implemented from January 01, 2021.

To conclude, India has a fast and efficient cheque processing system. Standardisation of cheque forms and the cheque clearing system in the country made it the most efficient and best in the world in terms of its T+1 clearing and settlement cycle across the length and breadth of the country. Cheque truncation eliminated the associated cost and time for movement of physical cheques, reduced the time for collection and brought in efficiency to the entire activity of cheque processing.

Source : RBI