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An Overview of Manual and Automated Cheque Clearing System

Sushanta Paul Central Clearing Processing Unit SKB Branch

Clearing
Clearing is the process by which an individual cheque / instrument is exchanged between collecting and paying bank within the same region through Central Bank mechanism. Clearing House Function is a financial service that provides clearing and settlement for inter bank transactions.

In Bangladesh, 4 BB & 33 SB (on behalf of BB) performs this function.


In commercial banks, Clearing operation is centralized at clearing branch, i.e. Branch maintaining account with Bangladesh Bank or Sonali Bank where acting as representative of Bangladesh Bank for clearing purpose. At Trust Bank, Central Clearing Processing Unit (CCPU) at SKB Branch performs clearing activities of Dhaka Clearing House Member branches.

Inward & Outward Clearing


Inward Instruments are those clearing items which are drawn on our bank but received by other banks and lodged at the House by other banks authorized Branch representing the Bank. Under Inward Clearing System, negotiable instruments of different banks presented in the clearing house are received by the representative of the respective bank and bring the instruments to their branches for making payment. Outward Instruments are those clearing items which are drawn on other banks but received by our branches. Under Outward Clearing System, negotiable instruments drawn on other banks are presented to the respective banks through Clearing House for receiving payment and after receiving the proceeds of the cheques / instruments, the accounts of the respective clients are credited.

Work Flow of Traditional CH


Day 1 (Sunday) Day 2 (Monday)
2) Sorts Cheques, prepares schedule & Sends to LO. 1) Deposit cheques

3) LO sends physical Cheques & schedule to CH

4) Sorts Data and makes them available for paying bank

7) Return unpaid cheques with Return reason 8) Uplift hold on fund on the 3rd business day (If cheque is successfully cleared)

5) Return unpaid cheques with Return reason 3) Sends settlement amounts 5) Debit Account

6) Sends adjusted amounts

Day 3 (Tuesday)

DAB= Deposit Account Bivag

Functions at Branches & Main Clearing Branch


Before submitting the outward clearing Cheques to the CCPU of SKB Branch, all the Cheques are to be endorsed and specially crossed for making Cheques in order for payment. Then Bank wise schedule of Cheques are prepared by the clearing officer of the branch. All Cheques should reach to the CCPU, SKB Branch in advance for presenting the Cheques to the clearing house conducted at Bangladesh Bank. All outward Cheques lodged by the member banks at clearing house under the supervision of Bangladesh Bank and the outward Cheques in turn become the inward Cheques for other banks which are brought back and distributed to the branches for payment. If the Cheques are in order and the fund is available, Cheques are passed for payment and if Cheques are not in order or fund is not available, Cheques are returned to the next house with a note of reason for presenting the Cheques again. In short, this is the function of the clearing house.
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Procedural activities of Outward Clearing System at Branch level:

a) The instrument is received with duly entered Pay-in-Slip or voucher. b) The instrument is checked for any apparent discrepancy and is compared with particulars noted in the Pay-in-slip and its counterfoil, i.e. scrutinizing the correctness of the instruments that are received for clearing. c) The instrument is scrutinize by using UV detector to find out any material alteration or manipulation on the paper instrument. d) The instrument is crossed specially in favor of the Branch immediately after receipt of it, i.e. affixing branch crossing seal on the face of the instrument. e) The Clearing Stamps are affixed on the instrument and on the Pay-in-slip and counterfoil, i.e. affixing branch clearing seal on the deposit slips and on the face of the instruments.

f) The instrument is suitably discharged / endorsed by making proper endorsement on the back of the instrument which are as under:

Endorsement of Instruments- in case of collection through CH


a) In case the instrument is deposited in the account of the same title or it is an account payee instrument, the endorsement will be: Payees Account credited For Trust Bank Limited ---------------------Branch Authorized Signature b) Any instrument payable to any bank name etc. the Banks endorsement will be: Received Payment For Trust Bank Limited ______________Branch Authorized Signature c) Any instrument where Payee name includes the Bank name and A/C number of any account holder, the Banks endorsement will b e: Received Payment & Payees A/C credited For Trust Bank Limited ______________Branch Authorized Signature d) In case of Outward Bills Collection (OBC), the Banks endorsement will be: Payees A/C will be credited on realization For Trust Bank Limited ______________Branch Authorized Signature And Our branch endorsement confirmed For Trust Bank Limited ______________Branch Authorized Signature

Clearing Entries

Branches Entries: Outward Clearing: Debit - TBL General A/C (SKB Branch) Credit Clients A/C Debit - Clients A/C (For return cheques) Credit - TBL General A/C (SKB Branch)

CCPU SKB branch:


Outward Clearing Adjustment A/C
SKB

Debit

Clearing Adjustment A/C


Outward Return Clearing Adjustment A/C Clearing Adjustment A/C Inward

Other branch

Credit (total amount)

Other branch

Debit (return amount)


SKB

Credit

Clearing Adjustment A/C


Clearing Adjustment A/C Inward return Clearing Adjustment A/C Clearing Adjustment A/C

Other branch
SKB SKB Other branch

Debit (total amount) Credit Debit Credit (return amount)

Net Difference: Summary House Sheet


Trust Bank Ltd 1st Clearing, Dhaka.
Delivere d Cheques
23 19,20,738.25

Amounts

Name of Banks Agrani Bank

Received Amounts Cheques


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8,96,497.00

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5,40,958.00

Al-Arafah
Islam

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20,57,080.7 0

Net amount receivable/payable (Net Difference)


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Net Difference contd.


If the delivered cheque amount is greater than the received cheque amount then it is favorable to us (favor in BB Clearing House) and the accounting treatment will be:

If delivered cheques amount is less than received then net difference is unfavorable to us (Disfavor in BB Clearing House) and the accounting treatment will be:

**

TBL,HO,ID maintains Trust banks account with Bangladesh Bank and they settle the net difference amount with Bangladesh Bank. 11

Inward Clearing at Branch Level


After having the instruments, the branch checks it out with their books of account and records whether they can honor all the instruments received from the Clearing House. The branch should check whether the client/party has rendered positive pay notice to the branch in case of HV cheques amounting tk.5 lac & above. If the branch dishonors any instrument for any reason, they have to return the instruments by debiting TBL General A/C (SKB Branch) for the total value of the instruments returned unpaid and passed the following entries:
DebitSB/CD/CC/SND A/C of the clients, Pay Order A/C / DD payable le A/C / Draft paid without advice A/C etc. CreditTBL General A/C (SKB Branch)

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At CCPU SKB Branch:


After receiving the returned instruments from the branches, instruments are return marked in the NIKASH software and encoded in the diskette at CCPU SKB Branch and following entries are passed:

Debit--Clearing Adjustment A/C CreditTBL General A/C (Respective branches) [Responding IBDA of branches] Then CCPU SKB branch delivers all returned unpaid instruments to other banks through Clearing House mechanism of Bangladesh Bank. Similarly, CCPU also receives back the instruments returned unpaid by other banks. Bank account with Bangladesh Bank (maintained by HO,ID) is similarly debited or credited for the net amount payable or receivable.

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Same Day Clearing (HV Clearing)

Bangladesh Bank, Dhaka has another clearing house named Same Day Clearing for quick clearing of large amount of instruments. This clearing house deals with instruments drawn on Branches of different Banks and for the instruments amounting Tk.5 lac and above. All BACH member branches are at present eligible to present HV cheques for clearing through BACPS system.

This Clearing House starts at 12.00 AM everyday. So instruments under the criteria deposited before 11.00 AM can be presented in the same day for clearing. Again return house for this house is at 3.00 PM.

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Manual Clearing House vs. Bangladesh Automated Cheque Processing System (BACPS)
Manual CH 1. Physical movement of instrument for both presentment and returns 2. 3. Time Consuming Paying banks store physical instruments. BACPS 1. Image exchange instead of physical movement of instruments :Returns : only the data, not the image 2. Less Time Consuming 3. Physical instruments will be stored by the presenting bank 4. Central Archive in BB
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4.

Central archive available.

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BACH & BACPS


BACH means the overall system and facility that supports the Exchange and settlement of payment items between Participating Banks and the Bangladesh Bank. BACPS is a facility that clears cheques and approved payment items for Bank companies. BACPS deals with image based electronic interchange of clearing items, the associated clearing and settlement of those items, and the long term central archive and retrieval of all transit items processed, and on-us items provided by their issuing banks which are solely for archive. The basic features of BACPS are the adoption of new cheque design standard with a Magnetic Ink Character Recognition (MICR) code line and the exchange of cheque image and data instead of paper cheques for clearing and settlement purpose. Retention of the original paper cheque will become the responsibility of the presenting bank rather than the paying bank. Two vital component of BACH are: Cheque imaging & truncation system and MICR.
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BACPS Features

New CH Instruments design with MICR code line Image exchange instead of physical movement of instruments Returns : only the data, not the image Physical instruments will be stored by the presenting bank Central Image Archive in BB BACPS Clearing Time Line : Regular clearing presentment cut-off 13:00 return cut-off 17:00 (same day) settlement 17:01 (same day) High value clearing presentment cut-off 12:00 return cut-off 15:00 (same day) settlement 15:01 (same day)

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MICR Cheque Line


Magnetic Ink Character Recognition (MICR) is a recognition technology based on the characters printed with the magnetic ink or toner and processed by being magnetized and sensed magnetically. MICR characters are printed information on documents so that the code line information can be captured by magnetic recognition.
In the bottom line on all cheques printed and used in many counties worldwide are printed using specific fonts like CMC-7 or E-13B using the special ink called magnetic ink. MICR line on a cheque allows the cheque information to be automatically read by inexpensive scanner/reader machine. In the MICR line, following codes are used: Cheque serial number Bank's routing number Account number Transaction code number
MICR Cheque Line Chq No Routing No A/C No Tx
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Standardized Cheque

Front side

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Front Side of the Clearing Instruments (Sample: Demand Draft )

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Back Side of the Clearing Instruments

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BACPS relevant terms


Cheque Truncation
Truncation is the process of stopping the flow of the physical cheque issued by a drawer at some point with the presenting bank en-route to the drawee bank branch. In its place an electronic image of the cheque is transmitted to the drawee branch by the clearing house, along with relevant information like data on the MICR band, date of presentation, presenting bank, etc. Cheque truncation thus obviates the need to move the physical instruments across branches, other than in exceptional circumstances for clearing purposes. This effectively eliminates the associated cost of movement of the physical cheques, reduces the time required for their collection and brings elegance to the entire activity of cheque processing.

Cheque Truncation System (CTS) in Bangladesh


Cheque Truncation speeds up the process of collection of cheques resulting in better service to customers, reduces the scope for clearing-related frauds or loss of instruments in transit, lowers the cost of collection of cheques, and removes reconciliation-related and logistics-related problems, thus benefitting the banking system as a whole. CTS is a more secure system vis-a-vis the exchange of physical documents. In addition to operational efficiency, CTS offers several benefits to banks and customers, including human resource rationalization, cost effectiveness, business process re-engineering, better service, adoption of latest technology, etc. CTS, thus, has emerged as an important efficiency enhancement initiative undertaken by Bangladesh Bank in the Payments Systems area.

Truncation Point
This is a point from which physical movement of an instrument is stopped, here the image and data will be captured and transmitted to the service branch. A bank may have multiple truncation points.

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Process flow of BACPS


In BACPS, the presenting bank (or its branch) captures the data (on the MICR band) and the images of a cheque using their Capture System (comprising of a scanner, cheque processing software or core banking software) which is internal to them, and have to meet the specifications and standards prescribed for data and images. To ensure security, safety and non-repudiation of data / images, end-to-end Public Key Infrastructure (PKI) has been implemented in BACPS. As part of the requirement, the collecting bank (presenting bank) sends the data and captured images duly signed and encrypted to the central processing location (BACH at Bangladesh Bank) for onward transmission to the paying bank (destination or drawee bank). For the purpose of participation, the presenting and drawee banks are provided with an interface / gateway called the Participating Bank Module (PBM) software provided by Bangladesh Bank that enables them to connect and transmit data and images in a secure and safe manner to the Clearing House (CH). The Clearing House (BACH at BB) processes the data, arrives at the settlement figure and routes the images and requisite data to the drawee banks. This is called the presentation clearing. The drawee banks through their PBM software receive the images and data from the Clearing House for payment processing. The drawee PBMs also generate the return file for unpaid instruments, if any. The return file / data sent by the drawee banks are processed by the Clearing House (BACH) in the return clearing session in the same way as presentation clearing and return data is provided to the presenting banks for processing. The clearing cycle is treated as complete once the presentation clearing and the associated return clearing sessions are successfully processed. The entire essence of BACPS lies in the use of images of cheques (instead of the physical cheques) for payment processing. 23

Electronic Cheque Envelope


The Electronic Cheque Envelopes (ECE) currently identified are as follows:

Outward Electronic Cheque Envelope (OCE) The Outward Cheque Envelope is generated by the presenting bank and encapsulates the outward clearing items for that bank that are to be distributed as Inward Clearing to the issuing banks for each item. Outward Return Electronic Cheque Envelope (ORE) The Return Cheque Envelope (RCE) is generated by the paying bank. It has the same fundamental structure and format as the OCE; however, the RCE contains only return cheque information and does not contain the image of the cheque, which are on-us cheques that the paying bank is returning as unpaid to their original presenting banks.

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Electronic Cheque Envelope continued Inward Electronic Cheque Envelope (ICE) Inward Electronic Cheque Envelopes have the same structure and format as Outward Electronic Cheque Envelopes; however, Inward Electronic Cheque Envelopes are Bank-specific and only contain Cheque Detail Records for a single Bank, the paying Bank for those cheques.

Inward Return Electronic Cheque Envelope (IRE) Inward Return Electronic Cheque Envelopes have the same structure and format as the Outward Return Electronic Cheque Envelopes; however, Inward Return Electronic Cheque Envelopes are presenting Bank-specific and only contain return data records for cheques they presented and are now being returned. No Image is returned.

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Outward Clearing Process


Purpose of this process is to scan and create images of the cheques depositing at the clients Accounts. All the images and data generated by the system are according to the Bangladesh bank requirement. Each branch supposed to generate own Outward batches. Outward cheques could be consists of first time deposited cheques and represented cheques. Cheques could be represented to any bank to any branch maximum twice. It is the responsibility of the bank to manually verify the acceptability of a represented cheque/s .Once Outward batches being generated, user could generate OCE files and upload into PBM server. Apart from generating OCE files user is supposed to download all the Inward return files from PBM and process.
Steps:@ Branch Level:

1. Create Normal Outward Batches


Before start scanning, branch user should manually prepare the outward batch that is supposed to be scanned. Each outward batch consists of Batch Ticket (B), Deposit Slips (S) and cheques (C) associated to each slip. Outward batch could be as follows B,SC,SCC,SC,SCCC etc. A batch should consist of at least a Batch ticket and a Deposit slip. User is required to select the desired Routing No (Branch No). While scanning system automatically capture the MICR line details and endorse the 23 digits DIN No back side of the cheque and system captures the front and rear side of the cheque. After system scans the complete batch, user is required to update and close batch. Batch closing should be done if user does not have any intend to add any cheques to the batch. A batch could possess even 1000 cheques. But recommend quantity is 50-100 cheque per batch. System would assign unique No for each batch. This No is unique throughout the entire bank for current processing date. Once scanned batches close only then user could start the processing.
2. Process Outward Batches After batch update and close, created batch automatically available for processing users to process. Once the processing user logs in to the function he could see all the batches being created and not being processed yet. He could see Normal batches and represented batches separately. He could choose one of the available batches and start process. First user could see the batch ticket along with reference no entered by the scanning user. If required he could change the No. once batch ticket a accept system automatically move next available Slip. Here user required to enter the Slip Account No (Cheque/s deposited No) along with Slip total. Once Account No entered system automatically validate the Account No And status of the account, if account is acceptable system would display the Account holders Name for user to verify. Account verification possible only if accounts details available with the system. If system offline this would not possible. 3. Confirm Outward Batches. Once the Processed batches being closed confirmation user could see access one takes one and start processing. First user could see the batch ticket of the batch. Once its being accepted by the user system automatically moves next available slip. One same screen confirmation user could see the slip Data its associate cheque/s along with relevant data captured by the system and entered by the processing user. If all the data being acceptable user could confirm the slip. Or otherwise he could reject the slip. Once slip being rejected user required to enter the rejected reason. Then rejected slip and its associated cheque/s along with batch would return to original processing user to do the necessary corrections. Once all the slips in the batches being authorized system close the batch as confirmed batch. 4. Release Outward Batches to CCD All the batch/s being completed by the branch would release to CCD. Once batch/s being released to CCD.

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Inward Clearing Process Purpose of this process is to process all the inward files (ICE) which are uploaded into PBM by central bank and downloaded into the DMSImago and process the entire Inward batches at relevant branches and mark Outward return if there are any. If there are any Outward Returns, user could generate outward return files (ORE) and upload into PBM. ICE files downloading from PBM and Outward Return (ORE) Uploading into PBM take place at CCPU.
Steps:@ Branch Level:

1. Delegate Inward Batches All the Inward batches generated and release to branch would available here. Branch authorized officer is required to delegate these batches to clearing user in the branch. If required, Officer could re-assign batches. 2. Scrutinize/ Repair inward Batches Once the delegation completes user could start processing the batches assign to them. Once user login to function he would get all the batches assign to him. He could process one by one. When selecting the batches user required giving priority to high value batches. A batch could contain more than one inward cheque. Once each cheque appear on the screen user required to verify the Cheque image, verify the Cheque MICR line details with MICR line data appear on the screen. If the Cheque Image and the data acceptable to bank/branch user could accept the cheque otherwise it required to be returned. If cheque/s marks as return cheque, then user is required to enter the return reason. This return reason should be one of the 27 return reasons available in the system. Once the batch being completed, user could start processing another batch. 3. Batch Authorization All the Processed completed batches would appear on the authorized officers batch list for confirmation. User would authorize a batch and start confirmation one by one. User could verify all the details and either confirm or reject. If a cheque is rejected by the user then the User is required to enter the reject reason, for user to refer. When cheque get rejected at this level the reject cheque may again returns to processing level, for original processing user to rectify error. 4. Release Batches to CCD All the batch/s being completed by the branch should be released to CCD. If there is any returns involve CCD could generate the Outward Return file (ORE) to PBM. Once the batch/s being released to CCD branch does not have any control over it and cannot be able to recall batches to branch again.

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Presenting Banks Responsibilities

By presenting an approved BACPS-Eligible item to BACH for payment, the presenting bank: a.) certifies that the front and back images of the BACPS-Eligible item is a copy of the original negotiable instrument ; b.) it shall be the duty of the presenting bank to verify the prima facie genuineness of the cheque that can be verified with due diligence and ordinary care. c.) the presenting bank shall be responsible for detecting genuineness of the cheque leaf, material alteration of payee name, amount or date.

In such cases where genuineness can not be verified or material alteration is detected, the presenting bank should not submit such cheques to the BACPS.
d.) agrees within seven calendar days to make the original negotiable instrument available for inspection during normal business hours, if requested by the Paying Bank. e.) upon realization of the proceeds the presenting bank shall pass the same to their customer account on the date of settlement subject to completion of the return session or internal rules of the bank.

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Paying Banks Responsibilities

A Paying Bank, by accepting an item from Bangladesh Bank: a.) agrees to process the item in accordance with BACPS rules. b.) Paying banks will examine the pertinent images and information, and send back to the BACPS for return items (further examination if any inconsistency like fund insufficiency or mismatch of signature etc.) c.) A Paying Bank may return an approved item in accordance with the BACPS approved return reasons and by the deadline (cut-off time) set forth in the BACPS processing schedule. The Bangladesh Bank processes a returned approved item it receives from a Paying Bank and sends it back to the presenting bank as per BACPS rules governing the processing of items. d.) If the Paying Bank disputes the processing Banks claim in accordance with BACPS rules, the Bangladesh Bank will reverse the provisional settlement for the disputed return.

Records:
Each Participating Bank must keep original paper items for (6) years to permit it to resolve questions that arise concerning the handling of items. Government items are excluded from this provision. 31

Benefits of automated clearing


With the introduction of imaging and truncation, the physical movement of instruments is stopped. The electronic movement of images of cheques speeds up the process of settlement and facilitates reduction in the clearing cycles as well. Moreover, there is no fear of loss of instruments in transit. Further, limitations of the existing clearing system in terms of geography or jurisdiction can be removed, thus enabling consolidation and integration of multiple clearing locations managed by different banks with varying service levels into a country-wide standard clearing system with uniform processes and practices. BACPS also benefits issuers of cheques i.e. banks. Use of images obviates the need to handle and move physical cheques at different points. The scope for frauds inherent in paper instruments is, thus, greatly reduced. The Corporates if needed can be provided with images of cheques by their bankers for internal requirements, if any. As only the images move, the time taken for receipt of paid cheques is reduced which also gives an early opportunity to the issuers of cheques (banks) to detect frauds or alterations, if any, in terms of what (and to whom it) was issued and what (by whom it) was realized.

BACPS brings elegance to the entire activity of cheque processing and clearing. Cheque frauds can be greatly reduced with introduction of minimum security features, such as MICR-codes, encrypted codes, logos, watermarks, holograms, etc., for early interception of altered / forged instruments. Obviating the need to move the physical cheques is extremely beneficial in terms of cost and time savings.
The benefits from BACPS could be summarized as follows Shorter clearing cycle Superior verification and reconciliation process No geographical restrictions as to jurisdiction Operational efficiency for banks and customers alike Reduction in operational risk and risks associated with paper clearing

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Service charge on BACH & EFTN Transactions Bangladesh Bank has imposed transaction charge on High Value and Regular Value cheques effective from March 01, 2013 per Bangladesh Bank PSD Circular No 1/2013 dated February 28, 2013. Circular excerpt follows:

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Accounting procedure for realizing the Service Charges in case of HV & RV Outward Clearing Cheque s: Branch Posting 1 Deposit / Cash Account..Dr. OCPF (A/C No.9007038/).Cr. OCPF (A/C No.9007038)..Dr. OCPF/EFTN Charges Payable (A/C No. 9009241)Cr. OCPF (A/C No.9206038)Cr. VAT on OCPF/ EFTN Charge (A/C No. 9009242).Cr.

Branch posting 2

Above postings in Flora Software shall be performed by branches on a daily basis. CCPU Posting (Online GL) OCPF/EFTN Charges Payable (A/C No. 9009241).Dr.(Own Branch) OCPF/EFTN Charges Payable (A/C No. 9009241)..Cr.(SKB Br)

As per PSD Circular no.1/2013 dated 28/02/2013 (enclosed) VAT is included in Bangladesh Bank Clearing Charge portion of the total clearing charge and branches need to deduct VAT only from Banks income part @ 13.0435%. For example, VAT on Tk.2 @ 13.0435% = Tk.0.26 VAT on Tk.10 @ 13.0435% = Tk.1.30 VAT on Tk.5 @ 13.0435% = Tk.0.65 Note that you need to deduct Cheque Collection Charge from your customers as per Bangladesh Bank PSD Circular no. 01/2013 dated December 26, 2012 and this revised Clearing charge will be applicable from 01/03/2013.

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Thank You

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