CLEARING SYSTEM OF BANKING Transaction

Presented by –Deepali Kasrekar

LLM in Business law, University of Pune

INTRODUCTION

• During the 1st century AD, banks in Persia and surrounding regions issued

letters of credit known as Sakks, which are believed to have been the basis

for the modern cheque.

• At their customers request, bankers would issue order called “Bill of

Exchange” to pay money to identified payees, eliminating the need for early

merchants to carry large amount of currency or gold.

• Fully printed cheques were introduced in the early 1700s, and first personalized

cheques were introduced in 1810 in England.

• Daily cheques clearing started around 1770, where bank clerks met to exchange

cheques and settle their balances in cash.

INTODUCTION

• In India, the clearing system is local and confined to a defined jurisdiction

covering all the banks and branches situated in the area under a particular zone.

• The clearing house is a voluntary association of banks under the management of

a bank where the settlement accounts are maintained. Wherever Reserve Bank

of India has its office (and a banking department), the clearing house is

managed by it.

• In the absence of an office of the Reserve Bank, the clearing house is managed

by the State Bank of India, its associate banks and in a few cases by public

sector banks.

CLEARING HOUSE IN INDIA

There are 860 Bankers

clearing houses in India,

of which 840 are

managed by State Bank

of India and its

Associates, 14 by

Reserve Bank of India,

and the rest 6 by

nationalised banks

Continued…..

• Reserve Bank of India manages 14 clearing houses at Ahmedabad, Bangalore,

Bhubaneshwar, Mumbai, Calcutta, Chennai, Guwahati, Hyderabad, Jaipur,

Kanpur, Nagpur, New Delhi, Patna and Thiruvananthapuram.

• These cover most of the major urban and semi-urban centres of economic

activity. Other than the major cities and metropolitan centres, the volume and

value of cheques cleared are very low.

• The cheques cleared in the clearing houses managed by Reserve Bank of India

account for 62% in terms of volume and 86% in terms of value of the total

cheques cleared in the country 

Introduction of MICR

• The Magnetic Ink Charter Recognition (MICR) format was 1st developed by the

Stanford Research Institute and General Electric Computer Laboratory in the

1950s for sorting cheques, which by the 1990s had gained prevalence

worldwide.

• These machine-readable 9 digit number at the bottom of the cheque indentified

its postal code/ city and state of origin.

• These code helped clearing houses in bank and branch-wise sorting of cheques

for delivery to the respective banks on whom the cheques were drawn.

• While this helped speed up the clearing process, physical movement of cheques

continued even after this partial automation.

MICR Code

Latest in paper-based clearing in India – CTS 2010

• Cheque Trunacation system 2010 is the prescribed standard by the RBI for cheque by all

Indian banks to Facilitate faster clearing. Instead of the collecting branch sending the

physical cheque to the paying bank, an electronic image of this cheque with relevant

information like the MICR code, date of presentation, presenting banks etc. is transmitted to

the drawee branch by the clearing house, hastening the entire cheque clearing process.

Latest in paper-based clearing in India – CTS 2010

• In CTS the presenting bank/branch captures the MICR band data and cheque image using an Image

Capture System comprising a scanner, Core banking Solution and/or other application Presenting and

paying banks have an interface/gateway called Clearing House Interface (CHI), which enables banks to

transmit images and data in a secure manner to the clearing house.

• The presenting bank send this digitally encrypted and signed data with captured images to the clearing

house, where this data is processed, a settlement figure arrived at and the images and data routed to the

paying banks. This is called presentation clearing. The drawee banks receive data and images for

processing the payment through their CHIs, which also generate the return file for instruments that are

unpaid.

Image Clearing System

New CTS 2010 format for Cheque

Future of Electronic Payment System

• With the increasing usage and popularity of

electronic payment modes, a substantial decline

in cheque usage is inevitable, all too evident

from statistics showing fewer cheques being

cleared.

Future of Electronic Payment System

• Some of the suggestions by RBI to discourage cheque usage and promote electronic payments are;– Total Stoppage of cheques above a threshold limit.– Limit set or charges levied on cheque book issue.– Levy charges on cheque usage to both the issuer and

beneficiary– Avoid transition to cash transactions.– Widespread awareness and accessibility to electronic

payments.– Liability of customers and banks

Conclusion

• Completely phasing out cheque usage in the near future is next to impossible.

• However, the time may be ripe to aggressively promote electronic modes over cheques. system providers, payment gateway providers, utility companies, intermediaries, corporate users including educational institutions etc. need to work together and ensure that electronic payments modes are easy to use, reconciliation and reporting mechanisms along with grievance handling are efficient, with least inconvenience to customers.