Check truncation training

CHEQUE TRUNCATION

Partho H. Chakraborty

What is Cheque Truncation

• Cheque Truncation is a system of cheque clearing and settlement
between banks based on electronic data/images or both without
physical exchange of instrument.

• Cheque Truncation System is designed to enable banks to handle
more cheques electronically, which should make cheque processing
faster and more efficient.

Partho H. Chakraborty Cheque Truncation

Why do we need Cheque Truncation

• The bank customers would get their cheques realized faster as T+0
local clearing and T+1 inter-city clearing is possible in Cheque
Truncation System (CTS).

• As straight through processing and automated payment processing
are enabled by CTS faster realization is accompanied by a reduction
in costs for the customers and the banks.

• It is also possible for banks to offer innovative products and services
based on CTS.


Brief Overview of Cheque Truncation

• Payments from traditional Paper Based Systems moving on to Electronic
System

•Corporate Customers still pay by cheques. and it entails cost and time to
move these paper based instruments to different locations and in time for
effecting payments

• Demand Drafts are used for distant remittances making them vulnerable to
frauds and they can also be lost or sent to wrong clearing locations

• Amendments to the Clearing Systems were effected all across the globe
such as India, UK, Singapore, USA, etc in order to effect payments through
images.


Salient Features of Cheques

• 5 Singaporeans have written an average of more than 83 million
cheques a year over the past ten years. In 2001, the figure was 92
million.
(SPEECH BY THE MINISTER FOR HEALTH AND SECOND MINISTER FOR FINANCE AT THE
SECOND READING OF THE BILLS OF EXCHANGE (AMENDMENT) BILL 2002)

• Significant costs are incurred by the banking industry to clear these
cheques.

• Time taken for Clearing, especially outstation cheques

• Dependency on Couriers


Benefits of Cheque Truncation

• Minimize risks and introduce a secured cheque clearing system Make
cheque clearing process more efficient through electronic transmission of
cheque images. This will reduce the time to complete the clearing cycle
of cheque presenting, returning as well as cheque realization time.

•The existing cheque realization time span varies from 1 to 10 days. The
new cheque imaging system will try to minimize this to T + 1, where the T
is the cheque receiving date.

•More importantly this would result in minimizing bottlenecks and delays
due to the couriers of cheques. Customer’s point of view, the new system
will reduce the time lag between cheque presentation and realization
time.


Process Flow

Cheque Image
Archived Archived
Customer Deposits Cheque Image
Archived

$ $ $ $ $
$
Cheques

Bank Branch
Nodal Branch CMS Hub RBI CMS Hub
CH Interface Clearing House System CH Interface
Cheques
(CLHS)
$
$
$

Customer receives funds Bank Branch
or Collects the Returned
Physical Instrument Bank Branch
Nodal Branch

Data and Image sent ATM
Electronically as a Batch File

Electronic Return
Branches linked online
with CMS Hub


Inward Clearing


Outward Clearing


Requirements

• Image Standard

• Cheque Scanner

• Hardware

• Software

• Interface

• Network


Image Standard

• Black & White: 200 dpi, 2-bit (16-level), and TIFF image with CCITT
G4 Compression

• Grey Scale: 100 dpi, 8-bit (256-level), and 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.


Cheque Scanner

• High-Speed Check Scanning – both obverse & reverse in one go
Range varies from 60 to 180 checks per minute
• Advanced Text Enhancement & Color Dropout
Should have the ability to scan the original color check in 2 different modes
B&W and Advanced Text Enhancement

Advanced Text Enhancement
Original Check Black & White Mode
Mode

• Very High Accuracy in MICR Data reading

MICR Data


Cheque Scanner

• Smooth Document Feeding

• Built-in Imprinter
To print characters on the back of each check as they are scanned.

• Two Output Pockets
Enables to sort the cheques which have been read in 1 pocket and error cheques
in another pocket

• Ease of Maintenance


Hardware

RBI has mentioned the under-mentioned specifications

• Pentium Processor/AMD 32 Bit (Dual core) – Windows 2003 Standard

• HSM Card – PCI 1200/7000 from Rainbow/Safenet


Software

•The software must configure the following:

• Image of Cheque to be displayed on the Monitor.
This includes both the obverse and reverse with black and white and colour images

• The text boxes where the data would be entered must be below the image so that the
operator can view the image and enter the data

• Schedules to be generated automatically

• Data captured for both the cheque images as well as schedules to be archived and the
system should be able to retrieve them when called for
Data would include instrument and customer details along with the MICR Code
The data would be sent as Coma Separated File


Interface

• The system should have a seamless interface with the Clearing
House Interface (CHI).

• CH Interface will be with the service branch only which will
consolidate all the images and schedules in a file and send it to CHI.

• There will only be 1 file to be sent to RBI which will contains various
schedules and cheque images along with data

• File uploaded to CHI is called “Push” and File downloaded is called
“Pull”


Network

• All Branches which will offer Cheque Truncation must be linked with
data transfers on a Real Time Basis.

• They would have to send data to a CMS Hub for onward sending to
CHI

• Files downloaded will be processed at CMS Hub where images
would be liquidated (Paid or Returned)


CLEARING HOUSE INTERFACE

• The Reserve Bank will be providing only the Clearing House Interface (CHI) application
software to the member banks.

•The member banks have to purchase (i) appropriate hardware, (ii) systems software and
(iii) networking infrastructure.

•The CHI will act 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 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 shall aggregate the images and MICR data received from
the branches for outward presentation and will deliver the inward images and MICR data
drawee bank branch-wise to the respective Clearing House Interfaces.


CLEARING HOUSE INTERFACE

Application Software required for running CHI

• Oracle 10G R2 Standard Edition – appropriate for the server in use

• Macromedia J Run 4.0

• Crystal Report Developer Edition

• I. P. Switch FTP Pro

• I. P. Switch FTP Serve

• NETAL SL 4 NT Logger

• Roxy – OCD Creator


Other Requirements
Features and standards of the solution offered should have:
• Capable of reading and capturing MICR data from MICR code line during the process of
image scanning without necessitating a second step or process for the same.

• Automatic endorsement on the reverse of the instrument with a unique item sequence
number.

• Ensures quality and error free transmission of images along with the MICR data between the
CTS participating branches.

• Should support transmitting one cheque at a time or in a batch mode.

• Security features to be built in conformity with PKI standards, encryption techniques and
digital signatures.

• Support inter-operable open image standards and be capable of being viewed by any
standard browser.

• Capable of sorting the intra-bank, inter-bank and inter-city instruments and transmitting the
inter-bank instruments after consolidation at Service Branch to RBI for clearing.


Other Requirements
Features and standards of the solution offered should have:
• Should have a settlement Module for Inter Bank, Intra bank and Inter City clearing with
capabilities for consolidating the day’s inward and outward presentation for raising a single
debit or credit on the participating branches.

• Archival system for Storage and retrieval of both front and back of the Cheque Facility for
storage and archival of MICR and amount data.

• Easy Processing of return cheques.

• Facilities for necessary interfaces for transfer of data and images to any external data
warehouse.

• Systems should conform to the requirements of the IT Act 2000 and the Negotiable
Instruments (Amendment & Miscellaneous Provisions) Act 2002 for recognition of images as
valid instruments for payment by the drawee banks.

• The System should be in a position to prove its large volume handling capacity as per the
parameters stipulated by the Bank.

• Hosting clearing data on a secure Intranet site.


Current Scenario
• Cheque Truncation went online on 21 July 2003 in Singapore.

• Countries as diverse as France, Hong Kong, Thailand, and Sri Lanka are now getting
close to rolling out their own image-based cheque truncation systems.

• Perhaps most significantly, in the USA, which has historically had one of the lowest rates of
electronic money transmission, the coming into force of legislation enabling image-based
cheque truncation in October 2004 (the Check 21 Act) is expected to cause an explosion in
the use of such systems

• In India, Punjab National Bank (PNB) has introduced CTS across its ten micro centres.

• A pilot project is already underway in the capital region as the New Delhi Clearing House
has 82 direct bank members and nearly 2,500 bank branches spread across Delhi,
Gurgaon, Noida, Greater Noida, Faridabad, Ballabgarh, Loni, Maharajpur, Sonepat and
other cities in the region. The project is unique as it is the single biggest site with all three
aspects of CTS.


Bank’s Strategy

• Cheque Scanner is expensive. Thus all branches ideally will not have this facility
as the costs do not justify it.

• Readers/Sorters will be installed in branches identified by the bank’s management and
the nearby branches will sent the physical cheques to it for cheque truncation

• When branches send instruments to the main branch for cheque truncation as
reader/sorter is located there, they only mention the number of instruments and the
total amount in a piece of paper. It is accompanied by the original deposit slips and they
keep the photocopies of the deposit slips only

• Similarly all ATMs would not offer cheque truncation and a few select ATMs will offer
this facility

• A point to note is that Banks lose on Float but save marginally on courier costs

• Images and original instruments will have to be preserved for eight years


Cheque Volume
This is the data for Oriental Bank of Commerce. SBI and ICICI Bank will have much larger
cheque volumes (As of 2005)
S. No. Nodal Branch No. of Inward No. of Outward
Clearing Cheques Clearing Cheques

1 Delhi 39400 42000

2 Gurgaon 2700 3000

3 Faridabad 3500 3000

4 Ghaziabad 5800 4600

5 Noida 3600 5000

6 Sonepat 1000 1000


Integration

• The system will be designed as a Stand Alone system.

• The system can be integrated with Cash@Will, FinnOne, Finacle, or with any Host
System.

• There will be a Maker and Checker Concept

• For security reasons the User’s rights will be defined based on parameters such as
amounts, time, etc.


Data Entry Screen


Local Currency Clearing


Foreign Currency Clearing


Post Dated Cheques

• PDC Screens will be the same with the only difference being that the images of the
cheques will be displayed.

• Instead of sending physical cheques for cheque images will be sent for clearing where
the data will be captured as seen in the previous slide

• There will be a Maker and Checker Concept


Backend Process

• This is very crucial as it will have to factor the following:

1. Image Linkup with data being entered on the screen

2. Schedule Preparation

3. Consolidating Data into Batch Files

4. Encrypting Data before sending it over to CHI

5. Digital Signature verification – Manually or Auto

6. Liquidation Process


Image Lockbox

• Image Lockbox allows the customer to view the instruments received and the
corresponding invoices against it

• This helps the customer reconcile the payments received with their matching invoices and
the moment it gets processed.


Image Lockbox


Competitors

• Newgen

• Unisys

• DESS

• NCR


Cost

•There are no proper estimates as this is a “ Wait and Watch” policy. RBI has deferred it
twice to start the process and it has finally taken off.

• The major cost to cheque truncation comes from:
1. Hardware – Cheque Readers and Sorters
2. Software – To process the images and send it to CMS Hub, which in turn would send it to
RBI Interface
3. Archival – Data Archival System

• If we assume that there are 50 Branches of ICICI Bank, HDFC Bank and SBI put together in
Delhi, it would entail an outlay of a minimum of ` 50 lakhs at a very conservative scale.

• SBI has more than 150 branches and that means over one crore on the basic hardware
procurement. The software would be charged extra.

•Also the hardware and software would have to be integrated with ATMs.


Business Potential

• As per ET it is a ` 25,000-crore opportunity for the IT sector.

•This is a general approximation for cheque truncation looking at India as whole.


Thank You

Partho H. Chakraborty
A - 305, DSR Spring Beauty Apts., 124/1, ITPL Main Road, Brookefields,
Kundalahalli, Bangalore - 560 037, India

Tel: +91 80 420 50293, Cell: +91 99863 22504
email: parthohc@airtelmail.in parthohc@rediffmail.com
Skype: parthohc01

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