CHEQUE TRUNCATION SY STEM(CTS) PROJECT

By REEMA DAWRA(07/2010) RAHUL YADAV(01/2010) KHEM RAJ(19/2010) ASHWINI DURGE(18/2010) SHYAM SHARMA(14/2010)

INDEX
 Introduction  Amendment In ACTS  Comparison of Current System and CT system  Regulatory Perspectives  CTS Process Flow & Image Standards  Working Group on CT and their recommendations  CTS Benefits  Role of Banks & RBI  Pilot Project at New Delhi(2006) ; Chennai (2008) and Mumbai(2011)

INTRODUCTION
 Reserve Bank of India is undertaking a new retail payment systems initiative for the introduction of an Image based Cheque Truncation System in the country, which is aimed at improving the current process of realisation of cheques which have to be physically presented to the drawee branch for payment.  Cheque Truncation is settlement of clearing transactions on the basis of images and electronic data without the physical movement of the instruments. The Clearing Cheque is truncated at the Presenting bank itself.  CTS allow Institute to Truncate cheque at point of capture to the capabilities of Paying Bank electronically and Return Cheque Electronically. CTS require Electronic Image along with MICR field, date of presentation, presenting bank. No movement of cheque is required

HISTORY
 Request For Information sought from the various vendors in December 2003.  Request for Proposal sought from Vendors in June 2004.  Circular on Cheque Truncation to Banks issued on July 1, 2004.  Technical Bids of the Vendors opened on July 21, 2004. Technical evaluation over.  Commercial Bids Opened on April 1, 2005.  Reference Site Visit over in May 2005.  Negotiations on with the L1 Vendor.

CONT
 Committee formed by CGA to look into the various rules and procedures to be amended for Govt. participation.  Internal Committee formed in RBI for similar purposes.  Image Standards already decided.  Standardized Image friendly cheque format designed.  Procedural guidelines drafting group formed. First draft already ready.  Circular issued on September 1, 2005 outlining the role of the participating banks.

AMENDMENTS
 CTS introduced in Consonance with amendment in: Negotiable Instruments Act 1881 IT Act 2000 Bankers Book Evidence Act 1891  Cheque -it includes the electronic image of a truncated cheque and a cheque in electronic form

CURRENT CHECK CLEARING SYSTEM

Depository Institution Paying Institutions

Deposit Slip

Payee

PAYOR

CHEQUE TRUNCATION CONCEPTUAL DIAGRAM

Return Flow
PRESENTING BANK Service Branch (Bank Image Service Bureau) DRAWEE BANK

Cheque Processing Center

Service Branch (Drawee Bank)

Common Warehouse PRESENTING BANK DRAWEE BANK

REGULATORY PERSPECTIVES
 Reduction of Operational Risk in Banking Operations Clearing is a highly fraud prone operation  Developing Standards Image standards Cheque standards, Operating standards, Defining roles and Responsibilities

CONT
 Certification : for participation in CTS, setting up Warehouse  Legislation Amendments to NI, IT and BBE Acts.  Developmental Role Major developments in Payment Systems Spearheaded by RBI.

CTS PROCESS FLOW

Outward Cheques MICR & Image(1) Outward Cheques MICR & Image(2)

PRESENTING Inward Return Cheques MICR & BANK

Image(4)

CLEARING HOUSE

Outward Return PAYING Cheques MICR (3)

BANK

COMMON Cheques MIRC data & WAREHOUSE Image are captured at the Physical Cheques are archive Presenting Bank

CONT

IMAGE STANDARDS
 Black and White : 200 dpi, 2bit (16 level), TIFF image with CCITT G4 Compression  Grey Scale : 100 dpi, 8 bit (256 level), Jpeg image with Jpeg compression  Grey Scale Front and B/W front and back images used for processing.  MICR line will continue to be in E13 B font.

F O RWA R D O R I G I N A L I R D O F P E R S O N A L - S I Z E C H E Q U E , F RO N T

F O RWA R D O R I G I N A L I R D O F P E R S O N A L - S I Z E C H E Q U E , BAC K

RECOMMENDATIONS
 The physical cheque will be truncated within the presenting bank.  Within the presenting bank the point of truncation could be decided by each individual member bank providing for Service Bureau models where banks can approach or set up Service Bureaux for capturing images and MICR data.  Settlement will be generated on the basis of current MICR code line data.

CONT
 Electronic images will be used for payment processing.  Grey scale technology will be deployed for imaging.  Images will be preserved for eight years.  A Centralised Agency per clearing location will act as an image warehouse for the banks. Group recommended norms for agencies to provide the service.  Public Key Infrastructure will be deployed to protect images and data flow over the network

BENEFITS OF CTS

BENEFITS OF CHEQUE TRUNCATION

 Three Dimensions of CT -Operationally Efficient ;Cost Effective & Customer Service Benefits  Clearing and forwarding times will reduce  Fraud can be detected at early points and addressed more effectively  Operational costs can be brought down dramatically along with cycle times  Minimizing Float and hence the misuse of float funds and preventing scams  Inter branch reconciliation will be smoother:

RISKS IN CHEQUE TRUNCATION

If a drawee bank chooses to verify signatures on the images of cheques above a cut-off amount only, then it runs the risk of paying some forged instruments. Banks will have to take adequate measures to ensure that all necessary safeguards are provided for in consonance with legal requirements and banking practice while making payments, especially for high value instruments If the MICR data given by the bank is not that matching with the days image the bank has sent for collection, it may lead to erroneous settlement and large returns The Warehousing Agency for images and physical storage of cheques might not be able to produce the image or the physical cheque demanded by the bank. This may lead to legal complications and assignment of liabilities

BANKS & RBI ROLES

 Reengineer Internal Process  Vendor Selection And Integration of CHI with Banks Software  Network All the Branches  Point Of Truncation Internal Matter of Banks  RBI provides CHI or Software & Integration has to be done by banks  Image and Data Standards would be open and inter-operable

PILOT PROJECT
 Reason for Pilot Project: Cheque volumes, Infrastructural requirements and Other influencing factors for an all India based implementation .  In End March 2006 at NEW DELHI started CTS Pilot Project. Followed by Pilot Project in Chennai(2008) and Mumbai(2011)  New Delhi Clearing House has 82 direct bank members & 2500 bank branches & Project unique as it is biggest single site  Includes 3 aspects of CTS - POD; Settlement & Archive

Pilot Cheque Truncation Project at National Capital Region Checklist for the Banks
1 Deciding point/s of outward truncation within the bank Assessing the networking infrastructure required for transmission of images & 2 MICR data to the Clearing House and internal networks of the bank 3 Deciding point/s of inward payment processing of images and MICR data 4 5 6 7 8 9 10 Deciding on the systems for storage of inward and outward images in an electronic form and their subsequent retrieval, retention period for the outward presentation and inward instruments online in an electronic form. Assessing the hardware & software requirement for outward & inward clearing, storage of outward/inward images/ data etc. Deciding on the re-engineering of the payment processing workflow; and training & reorientation of the staff concerned Finalising/ shortlising vendor/s for acquisition of necessary hardware/ software and for integration of CHI with the existing banking/ clearing applications of the bank Finalisation of the Procedural Guidelines Awareness Training Programme for all officers and staff members associated with clearing operations Installation of Hardware and Software September September September September September September October November December January First week of February, 2006 Last Week of March 2006

11 Commencement of Test Runs with dummy cheques 12 "Live Run"

HYBRID TRUNCATION MODEL

 There are 3 Models: Peer to Peer; Clearing House & Hybrid Model  As the banks in New Delhi are at different stages of Technology the model accommodates all of them.  Fully Networked banks may come by networks.  Media submission also allowed.  Banks may use the services of Image Service Bureaus

REFERENCES
         F http://www.bis.org http://www.thehindubusinessline.com http://www.cisco.com/go/banking http://www.rbi.org.in http://www.federalreserve.gov http://www.dnaindia.com/money/report_a-pan-india-cheque-truncation-systemhttp://en.wikipedia.org/wiki/Cheque_truncation_system http://www.rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=1756 http://www.iba.org.in/events/Cheque%20Truncation_Kaza%20Sudhakar_RBI.PD

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