Ideally, payment systems should be paperless, and in the long run, this will happen. But in reality, the situation is anywhere but close to realizing this desire.
The primary goal of any national payment system is to enable the circulation of money in its economy. It is recognized world wide that an efficient and secure payment system is an enabler of economic activity. It provides the conduit essential for effecting payments and transmission of monetary policy. Payment systems have encountered many challenges and are constantly adapting to the rapidly changing payments landscape.
To a large extent, payments through credit cards and debit cards have gained prominence in India over the last decade. However, currency still remains an important means of payment in India. According to studies conducted by RBI, almost 19 percent of transactions in India are represented by currency, as against its share of 6 to 7 percent in advanced countries.
This is supplemented by cheques and drafts for payments in commercial transactions. Various other paper instruments like a Banker's cheque, Payment order, Payable at Par cheques (Interest/Dividend warrants, refund orders, gift cheques etc), are also used to cater to specific payment needs. But of all these modes of payment, the cheque remains the most commonly used instrument. If we study banking and payment trends in India over the last two or three decades one would notice a substantial rise in cheque volumes and especially so in the last few years. Cheque volumes have risen steadily in all urban centers. Its growth in the country’s metropolitan centers and other major cities has been much faster than the rest. Mumbai, for example, has a substantially higher volume than the other metropolitan centers. But the upcountry markets are not too far behind in the raise.
In recent times, cheque volumes in the smaller cities have also registered a sharp increase in volumes. In fact, the rapid rise in cheque volumes in the last few years have been contributed to a large extent by markets like Ahmedabad, Vadodara, Pune etc. Several factors have contributed to the growth of cheque volumes and one of the key reasons for the same could be attributed partly to the rapid expansion of bank branches through the seventies and the consequent spread of banking. In addition to this, the increasing tendency among consumers to invest in financial assets like shares and debentures has also made significant contributions towards accelerating this trend. There has also been a significant growth in such corporate instruments as fixed deposits. This is reflected in the substantial increase in the use of payable 'At Par' instruments for dividends, interests and refund orders.
The substantial increase in the volumes of cheques has been one of the key factors that prompted RBI to drive the banking community to upgrade the existing infrastructure for exchange and settlement. In the past and to a large extent even today most banks depend on manual clearing arrangement. Since the possibilities for fraud and even inefficiency is relatively higher in such a system RBI has been driving the initiative to upgrade to more efficient and electronically driven systems. Manual sorting and listing of instruments result in long delays as well as errors in computation of the total claims.
The settlement process itself would get delayed and result in the problem of irreconcilable entries between the banks. Banks have therefore realized the need to focus on technology to improve the situation and remain competitive especially in an era where multinational banks are eating into their market share thanks to superior products offerings, which have been enabled by judiciously leveraging technology. Technological innovations have dramatically altered the financial landscape. Payment systems, for example, can be improved by technology. In the future, we expect payment systems to be completely paperless, and given time, this will happen. But today’s reality is a long way from that.
Even a technology pioneer like the US depends on large volumes of paper cheques. Therefore, to apply technology to the payment system, a realistic interim target is to aim for cheque truncation. The Reserve Bank has been taking several reform measures to improve safety and efficiency in the payment modes. Though the thrust has been towards a move to the safer and more efficient electronic modes of payment, the RBI thought it is imperative to take measures to improve efficiency in the paper based modes of payments as well.
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 be physically transported all the way from the collecting branch of a bank to the drawee bank branch. The way several countries have sought to solve this problem is by introducing 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.
The question of introduction of cheque truncation in India has been engaging the attention of the Reserve Bank for quite some time. In order to provide legal basis for payment of truncated paper based instruments, it deliberated with the Government to amend the Negotiable Instruments Act, 1881 and accordingly the Act was suitably amended in December 2002. A Working Group for Cheque Truncation and e-cheque was constituted by the Reserve Bank in January 2003 under the chairmanship of Dr. R. B. Barman Executive Director, Reserve Bank of India to, among other things, draw a road map for introduction of cheque truncation for the country. The Working Group recommended the suitable cheque truncation model for India. Cheque truncation means that the physical cheque is scanned at the point of deposit, and thereafter the electronic image of the cheque, rather than the paper cheque itself, is transmitted to the clearing house for sorting, and then onwards to the paying banks.
In other words, the flow of the physical cheque is fully truncated at the point of deposit. The Reserve Bank of India along with a few select national banks are currently in the process of establishing a cheque truncation system, which would ensure that currency transactions are much faster and cheaper than handling paper cheques. The RBI was also considering a national image archive to centralize the storage of cheques.
The consolidation of such shared back-end services will yield economies of scale at an institutional level. In fact, the pilot project was expected to commence in the national capital region by May 2006. Punjab National Bank (PNB) was among the first banks to deploy the first image-based cheque clearing system in India. This provided clearance of inter-city cheques within 48 hours after the cheque is presented, at selected centers using cheque truncation, where there is image based cheque clearing system. Earlier it took about 15-20 days for clearance of outstation cheques. PNB was the first bank to launch the Intra Bank Inter City Cheque truncation project by using NCR’s ECPIX (Electronic Cheque Presentment with Image Exchange) technology. After a successful pilot run the system was introduced by connecting MICR Centers located at Lucknow, Nagpur, Jaipur, Kanpur, Ludhiana, Chandigarh, Jalandhar, Agra, Allahabad and Varansi.
However, the RBI’s initiative to launch cheque truncation solution had run into difficulties initially because the L1 bid from NCR didn’t meet some technical requirements as set in the tender. The company had to revisit these specifications without affecting the commercial aspects to satisfy its requirement. If NCR hadn’t, the bid could have been disqualified. Once they went live with the new specifications, they again found that the solution had not scaled up to RBI’s requirements like minimum number of cheques to be truncated and branches to be connected to the centralized solution. RBI has started its pilot in Delhi with eight banks in the first phase.
Once it finds this successful, it would move to other cities. No resistance to change at technology level. Many banks, especially new ones who are technology savvy, and those who already had NCR systems have begun to send truncated copies of cheques internally. Banks like ICICI Bank and HDFC Bank are already using the system. There will be a change but it will take a little time adjusting. Till now, the responsibility of verifying genuineness or identifying fraud was on paying bank, not the collecting bank. The attitude among collecting bank was that since the cheque was drawn on another bank, it wouldn’t bother. Cheques were procedurally and mechanically sent to the Central Bank, RBI. If rejected by RBI they were returned to the collecting bank.
Now, the responsibility is with the collecting bank. With truncation, fraud can be prevented at various levels. The collecting bank retains the paper document, and ensures that the image is genuine using a UV lamp. Regulations stipulate that the bank retains the physical document for 8-15 years. Also, there is no security in transmission of the physical cheques, which may be lost in transit or pilfered. With digital signatures, PKI and encryption technologies, such issues can be resolved.
The primary goal of any national payment system is to enable the circulation of money in its economy. It is recognized world wide that an efficient and secure payment system is an enabler of economic activity. It provides the conduit essential for effecting payments and transmission of monetary policy. Payment systems have encountered many challenges and are constantly adapting to the rapidly changing payments landscape.
To a large extent, payments through credit cards and debit cards have gained prominence in India over the last decade. However, currency still remains an important means of payment in India. According to studies conducted by RBI, almost 19 percent of transactions in India are represented by currency, as against its share of 6 to 7 percent in advanced countries.
This is supplemented by cheques and drafts for payments in commercial transactions. Various other paper instruments like a Banker's cheque, Payment order, Payable at Par cheques (Interest/Dividend warrants, refund orders, gift cheques etc), are also used to cater to specific payment needs. But of all these modes of payment, the cheque remains the most commonly used instrument. If we study banking and payment trends in India over the last two or three decades one would notice a substantial rise in cheque volumes and especially so in the last few years. Cheque volumes have risen steadily in all urban centers. Its growth in the country’s metropolitan centers and other major cities has been much faster than the rest. Mumbai, for example, has a substantially higher volume than the other metropolitan centers. But the upcountry markets are not too far behind in the raise.
In recent times, cheque volumes in the smaller cities have also registered a sharp increase in volumes. In fact, the rapid rise in cheque volumes in the last few years have been contributed to a large extent by markets like Ahmedabad, Vadodara, Pune etc. Several factors have contributed to the growth of cheque volumes and one of the key reasons for the same could be attributed partly to the rapid expansion of bank branches through the seventies and the consequent spread of banking. In addition to this, the increasing tendency among consumers to invest in financial assets like shares and debentures has also made significant contributions towards accelerating this trend. There has also been a significant growth in such corporate instruments as fixed deposits. This is reflected in the substantial increase in the use of payable 'At Par' instruments for dividends, interests and refund orders.
The substantial increase in the volumes of cheques has been one of the key factors that prompted RBI to drive the banking community to upgrade the existing infrastructure for exchange and settlement. In the past and to a large extent even today most banks depend on manual clearing arrangement. Since the possibilities for fraud and even inefficiency is relatively higher in such a system RBI has been driving the initiative to upgrade to more efficient and electronically driven systems. Manual sorting and listing of instruments result in long delays as well as errors in computation of the total claims.
The settlement process itself would get delayed and result in the problem of irreconcilable entries between the banks. Banks have therefore realized the need to focus on technology to improve the situation and remain competitive especially in an era where multinational banks are eating into their market share thanks to superior products offerings, which have been enabled by judiciously leveraging technology. Technological innovations have dramatically altered the financial landscape. Payment systems, for example, can be improved by technology. In the future, we expect payment systems to be completely paperless, and given time, this will happen. But today’s reality is a long way from that.
Even a technology pioneer like the US depends on large volumes of paper cheques. Therefore, to apply technology to the payment system, a realistic interim target is to aim for cheque truncation. The Reserve Bank has been taking several reform measures to improve safety and efficiency in the payment modes. Though the thrust has been towards a move to the safer and more efficient electronic modes of payment, the RBI thought it is imperative to take measures to improve efficiency in the paper based modes of payments as well.
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 be physically transported all the way from the collecting branch of a bank to the drawee bank branch. The way several countries have sought to solve this problem is by introducing 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.
The question of introduction of cheque truncation in India has been engaging the attention of the Reserve Bank for quite some time. In order to provide legal basis for payment of truncated paper based instruments, it deliberated with the Government to amend the Negotiable Instruments Act, 1881 and accordingly the Act was suitably amended in December 2002. A Working Group for Cheque Truncation and e-cheque was constituted by the Reserve Bank in January 2003 under the chairmanship of Dr. R. B. Barman Executive Director, Reserve Bank of India to, among other things, draw a road map for introduction of cheque truncation for the country. The Working Group recommended the suitable cheque truncation model for India. Cheque truncation means that the physical cheque is scanned at the point of deposit, and thereafter the electronic image of the cheque, rather than the paper cheque itself, is transmitted to the clearing house for sorting, and then onwards to the paying banks.
In other words, the flow of the physical cheque is fully truncated at the point of deposit. The Reserve Bank of India along with a few select national banks are currently in the process of establishing a cheque truncation system, which would ensure that currency transactions are much faster and cheaper than handling paper cheques. The RBI was also considering a national image archive to centralize the storage of cheques.
The consolidation of such shared back-end services will yield economies of scale at an institutional level. In fact, the pilot project was expected to commence in the national capital region by May 2006. Punjab National Bank (PNB) was among the first banks to deploy the first image-based cheque clearing system in India. This provided clearance of inter-city cheques within 48 hours after the cheque is presented, at selected centers using cheque truncation, where there is image based cheque clearing system. Earlier it took about 15-20 days for clearance of outstation cheques. PNB was the first bank to launch the Intra Bank Inter City Cheque truncation project by using NCR’s ECPIX (Electronic Cheque Presentment with Image Exchange) technology. After a successful pilot run the system was introduced by connecting MICR Centers located at Lucknow, Nagpur, Jaipur, Kanpur, Ludhiana, Chandigarh, Jalandhar, Agra, Allahabad and Varansi.
However, the RBI’s initiative to launch cheque truncation solution had run into difficulties initially because the L1 bid from NCR didn’t meet some technical requirements as set in the tender. The company had to revisit these specifications without affecting the commercial aspects to satisfy its requirement. If NCR hadn’t, the bid could have been disqualified. Once they went live with the new specifications, they again found that the solution had not scaled up to RBI’s requirements like minimum number of cheques to be truncated and branches to be connected to the centralized solution. RBI has started its pilot in Delhi with eight banks in the first phase.
Once it finds this successful, it would move to other cities. No resistance to change at technology level. Many banks, especially new ones who are technology savvy, and those who already had NCR systems have begun to send truncated copies of cheques internally. Banks like ICICI Bank and HDFC Bank are already using the system. There will be a change but it will take a little time adjusting. Till now, the responsibility of verifying genuineness or identifying fraud was on paying bank, not the collecting bank. The attitude among collecting bank was that since the cheque was drawn on another bank, it wouldn’t bother. Cheques were procedurally and mechanically sent to the Central Bank, RBI. If rejected by RBI they were returned to the collecting bank.
Now, the responsibility is with the collecting bank. With truncation, fraud can be prevented at various levels. The collecting bank retains the paper document, and ensures that the image is genuine using a UV lamp. Regulations stipulate that the bank retains the physical document for 8-15 years. Also, there is no security in transmission of the physical cheques, which may be lost in transit or pilfered. With digital signatures, PKI and encryption technologies, such issues can be resolved.
Comments
Post a Comment