An account holder in a bank may receive payments by cheque from others either for sales or some other reason who hold accounts in other banks either within the country or in other countries. In order for the account holder to draw upon the money these cheques represent, these cheques need to necessarily be presented to the banks on whom they are drawn. This is done through “clearing”.
“Clearing” is an arrangement through which a bank exchanges cheques drawn on other banks for those drawn on it. This is done at the clearing house. In the absence of this facility, each bank would have had to present cheques to each of the other banks for receiving payment for cheques drawn on them. Further, they would have to receive amounts in cash (which can be risky).
The representatives of the banks in a city meet at stipulated times at the clearing house and exchange cheques. After this they go back to their respective banks and pass those cheques through the concerned accounts. They meet later and return the dishonored cheques to the banks that presented them. This is known as special clearing.
Clearing house are established in most large cities where the volume of cheques are large. Some cities have more than one clearing a day. In Mumbai (in the city area which includes Nariman Point), there is high value clearing. Cheques that are for Rs. 1 lakh or more are presented for clearing at 12.00 PM. They are cleared the same day and customers get good funds on the same day. Other cheques are presented in the evening for clearing and good funds are received only by the next evening.
Clearing houses are autonomous institutions having ther own rules regarding the conduct of operations. These regulations relate to the admission of members, sub members, entrance fees, minimum balance of deposit and other matters.
Initially in India, the Imperial Bank (now the State Bank of India) presided over clearing houses till the Reserve Bank was constituted and took over that role in 1935. In those places where the RBI does not have a branch the State Bank of India presides over the clearing house.
As volumes grew, it became necessary to mechanise clearing. This was introduced using Magnetic Ink Character Recognition) MICR technology. Earlier cheques had to be laboriously counted in regard to number, amount and differentiated between banks. MICR technology enabled machines to sort these thus ensuring speed and accuracy.
How does this happen?
To facilitate Cheque processing all instruments (cheques) have to be of a standard format and size (8 X 3 2/3). These are printed on MICR grade quality paper with a read band of 5/8 in width at the bottom reserved for MICR coding (in E-138 Font).
· The code line is divided into five fields with distinct separations.
· The first six numeric digits (numbers) are the Cheque serial number.
· In the next band there are nine numbers. These are as follows:
i. The first three numbers represent the city ( Mumbai is 400)
ii. The next three numbers represent the Bank ( American Express is 031; HDFC is 240)
iii. The next three numbers represent the branch (each branch has a distinct number)
· When a new bank opens, it may not have the volume to be admitted as a member of the clearing house. In these cases, it becomes a sub member. These banks would have the code number of the sponsoring bank followed by the branch code which normally would commence from 251.
· The next six numeric digits are optional. Some banks write the account number. On others these represent the customer identification number). In regard to Government cheques issued by the RBI alone these are seven digits. Government accounts are 10 digits in length – 7 digits occurring in the account number field and 3 in the transaction code field
· The transaction code field comprises of two digits (except for government cheques which have three)
· The last field represents the amount field and consists of 13 digits. The amount is encoded in paise without the decimal point.
All cheques deposited for clearing by custmers are to be crossed with a Special clearing stamp. The bank would also stamp its certification or confirmation of the various endorsements on the Cheque and an undertaking to the effect that the proceeds will be credited to the payee’s account on realization.
Cheques deposited by clients are separated between intercity and intracity.
The amount of the Cheque is coded in onto the Cheque in the area designated (the last field).
The cheques are then put through a reader/ sorter that lists amounts, differentiates between banks and reads all the other fields and prepares a listing that details the number of cheques, the banks they relate to and the amount.
These lists are submitted to the clearing house along with the instruments.
DIT.CO.No.1/09.63.36/2004-05 dated July1, 2004
Cheque Truncation - Pilot Implementation
The introduction of the Magnetic Ink Character Recognition(MICR) technology for cheque processing and the creation of imaging capabilities helped bring in efficiency improvements in handling volume and reconciliation of clearing differences. However, beyond a point the MICR technology could not speed up the collection process thanks to the logistics involved in the requirement that the cheques have to physically transported all the way from the collecting branch of a bank to the drawee bank branch. To solve this problem a process called cheque truncation in which the movement of the physical instruments is curtailed at a point in the clearing cycle beyond which the process is completed purely based only on the electronic data and images of the cheques.
Cheque Truncation Pilot Project is being inititated by the Reserve Bank for the Bankers Clearing House of the National Capital Region of Delhi and its nearby areas. The pilot project is expected to be made operational in early part of 2005.
The steps to be taken by the banks primarily revolve around the procurement and/or outsourcing of truncation capabilities and adopting related changes in the systems and procedures.