(source: RBI Circular)
After announcing that the Pilot Project for Cheque Truncation in the National Capital Region will go live during the first quarter of 2006, the Reserve Bank of India had advised all member banks to prepare themselves to be in line with the progress of the Project.
The Pilot Project was to clear the path for all current paper-based clearing to be replaced by image and data clearing for outward and inward transactions, only data for return item processing. Cheque data and images will be stored in image archives for outward and inward items. The archive at the clearing house will retain all the clearing images and data for eight years.
The paper instruments are required to be retained for eight years till further instructions on the subject were given out by RBI. The RBI had also noted, through meetings with senior officials of banks at regular intervals in New Delhi and apprising them of the developments in the Project and the preparatory steps to be taken by them that most member banks have not taken the steps outlined in its circular dated July 1, 2004.
The RBI had then drawn the banks’ attention and urgent action to the following All banks that are members of the New Delhi Bankers’ Clearing House are required to finalise the point of truncation for their outward presentations i.e. the point in the clearing cycle, the physical movement of cheques within the banks shall stop. Banks can choose to truncate and process their cheques at the branches, ATMs, client locations, in central locations or clusters and at Image Service Bureaus. Some banks may choose to opt for a hybrid model if required.
This would help the banks decide on the type of scanners and the networks that are necessary for participation. Similarly, the point of processing for inward payments of the instruments based on images and MICR lines received from the Clearing House needs to be finalized i.e. whether the bank will be going in for centralised payment processing of inward items or decentralized payment processing or adopt a hybrid approach.
Banks are required to amend their existing internal banking and clearing manuals for presentation of images in Clearing and acceptance of images for payment processing. Since payment processing activity is sensitive in any banking organization, there would be a need for policy instructions/ guidelines to flow down to the branches from the Head Office/ Controlling Office. Banks are recommended to use new processing tools to simplify and improve the processing in the Cheque Truncation Clearing system. Banks may decide on the use of automatic or manual/rule based signature verification tools, Fraud Detection tools, Account monitoring tools, Courtesy Amount Recognition (CAR) and Legal Amount Recognition (LAR) tools, etc.
Banks have to decide 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 based on the retention policy of individual bank (Banks may decide on the online retention period for inward and outward based on their business requirements) and their retention on the suitable media offline as per the legal requirements, networking infrastructure required for transmission of the images and MICR data to the Clearing House and internal networks of the banks.
The size and the configurations of the systems to be used for outward and inward processing is a function of the banks’ business requirements and may be worked out by the banks based on the volume of inward and outward instruments of the bank, the period of retention of such inward and outward images and MICR data by the bank and size of the images of the cheques. The exact size of the three prescribed images of each image may vary according to the source instrument of the different banks. However, for the purpose of sizing, banks may choose conservatively 75 (seventy five) KB as the size of the three prescribed images along with the digital signature.
The point of truncation and the retention period shall have a bearing on the storage requirements and banks need to suitably work out the storage requirements of their systems accordingly. Banks also need to consider the scalability of their systems depending upon the future requirements. 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. The indicative detailed functionality of the CHI is given in the RFP for CTS Project. Banks are advised to ensure that the images and data sent to the RBI’s Clearing House Interface (CHI) comply with all the guidelines that are issued by us.
The images may have to pass the required Image Quality Assurance (IQA) and Image Quality Usability (IQU) specifications which will be issued by us, failure to do so may result in rejection of such images. The banks are required to interface their existing clearing and/or banking applications with the requirements for data and image formats to be accepted/delivered by the Clearing House Interface software.
For the purpose, each bank needs to finalise a vendor for carrying out the integration of the current banking applications that are being internally used with the Clearing House Interface (CHI). The Reserve Bank shall be publishing the Interface requirements and the data structures in which the images and MICR data shall be received or sent to the Clearing House Interface. As CTS clearing is based on images it is important that the source documents are image friendly.
The Cheques have to be printed on the MICR standard stationary given in the MICR procedural guidelines and the size of the cheque remains unchanged. However, banks need to take certain precautions which include: the background colour should be light to enhance the text and dark colours in the background may be avoided; Features which are heavy on design or excessive use of micro-lettering may be avoided as they reduce the contrast between background and the text. Holograms and Logos and other unique features of an instrument may remain on the face of the instrument.
The RBI had also advised banks to choose the vendor best suitable for their requirements, at the earliest. The list of approved vendors for the CTS project was also to be submitted to the RBI. The selected vendor has to integrate the CHI output with the software available in the bank, ensure that the outward images are accepted by the CHI, provide modules for payment processing, storage retrieval and other modules as required by the bank concerned.
The selected vendor has to meet the required standards. It is therefore important that the bank’s vendor is selected early, since the success of the project depends on the successful integration of the banks system to RBI CHI. It is important that the banks carry out stringent and rigorous tests to ensure that the systems comply to the bank’s and RBI requirements and the selected system should be tested and proven to seamlessly interface to the CHI. Technical specifications for site preparation for the CHI would be given shortly.
Cheque Truncation
The cheque is currently the most visible and significant mode of payment in India. In view of the importance of cheque to the retail segment, Magnetic Ink Character Recognition (MICR) technology was introduced by the Reserve Bank of India. MICR technology enabled the banking system to handle the growth in the cheque volumes and to provide faster and efficient clearing services to customers and to do straight through processing using MICR data.
Over a period of two decades, a number of MICR Clearing Houses have evolved. The entire clearing cycle is dependent on the movement of the physical paper cheque from the presenting bank to the drawee bank (branch) as was mandated by the NI Act prior to its amendment. This bottleneck had an overriding impact on any consideration for improvements or reduction in the cycle time for clearing. Until very recently, legal covenants in India required the cheque to be presented to the paying branch for payment.
The paying branch is the last node in the clearing cycle as it exists in the country, and thus the paper cheque is on the move through the entire cycle from the bankbranch of the collecting bank where it is first deposited to the service branch of the collecting bank, onward to the Clearing House, which acts as a focal point for the cheques of all the banks, and from the Clearing Centre to the paying bank service branch and lastly the paying branch.
If the cheque is returned unpaid, it has to re-trace the entire path back to the presenting branch Cheque Truncation is one of the ways to compress the clearing cycle to provide faster clearances of local and intercity cheques. Cheque truncation, very loosely defined, is the process in which the physical movement of cheque within a bank, between banks or between banks and the clearing house is curtailed or eliminated, being replaced in whole or in part, by electronic records of their content (with or without the images) for further processing and transmission.
After announcing that the Pilot Project for Cheque Truncation in the National Capital Region will go live during the first quarter of 2006, the Reserve Bank of India had advised all member banks to prepare themselves to be in line with the progress of the Project.
The Pilot Project was to clear the path for all current paper-based clearing to be replaced by image and data clearing for outward and inward transactions, only data for return item processing. Cheque data and images will be stored in image archives for outward and inward items. The archive at the clearing house will retain all the clearing images and data for eight years.
The paper instruments are required to be retained for eight years till further instructions on the subject were given out by RBI. The RBI had also noted, through meetings with senior officials of banks at regular intervals in New Delhi and apprising them of the developments in the Project and the preparatory steps to be taken by them that most member banks have not taken the steps outlined in its circular dated July 1, 2004.
The RBI had then drawn the banks’ attention and urgent action to the following All banks that are members of the New Delhi Bankers’ Clearing House are required to finalise the point of truncation for their outward presentations i.e. the point in the clearing cycle, the physical movement of cheques within the banks shall stop. Banks can choose to truncate and process their cheques at the branches, ATMs, client locations, in central locations or clusters and at Image Service Bureaus. Some banks may choose to opt for a hybrid model if required.
This would help the banks decide on the type of scanners and the networks that are necessary for participation. Similarly, the point of processing for inward payments of the instruments based on images and MICR lines received from the Clearing House needs to be finalized i.e. whether the bank will be going in for centralised payment processing of inward items or decentralized payment processing or adopt a hybrid approach.
Banks are required to amend their existing internal banking and clearing manuals for presentation of images in Clearing and acceptance of images for payment processing. Since payment processing activity is sensitive in any banking organization, there would be a need for policy instructions/ guidelines to flow down to the branches from the Head Office/ Controlling Office. Banks are recommended to use new processing tools to simplify and improve the processing in the Cheque Truncation Clearing system. Banks may decide on the use of automatic or manual/rule based signature verification tools, Fraud Detection tools, Account monitoring tools, Courtesy Amount Recognition (CAR) and Legal Amount Recognition (LAR) tools, etc.
Banks have to decide 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 based on the retention policy of individual bank (Banks may decide on the online retention period for inward and outward based on their business requirements) and their retention on the suitable media offline as per the legal requirements, networking infrastructure required for transmission of the images and MICR data to the Clearing House and internal networks of the banks.
The size and the configurations of the systems to be used for outward and inward processing is a function of the banks’ business requirements and may be worked out by the banks based on the volume of inward and outward instruments of the bank, the period of retention of such inward and outward images and MICR data by the bank and size of the images of the cheques. The exact size of the three prescribed images of each image may vary according to the source instrument of the different banks. However, for the purpose of sizing, banks may choose conservatively 75 (seventy five) KB as the size of the three prescribed images along with the digital signature.
The point of truncation and the retention period shall have a bearing on the storage requirements and banks need to suitably work out the storage requirements of their systems accordingly. Banks also need to consider the scalability of their systems depending upon the future requirements. 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. The indicative detailed functionality of the CHI is given in the RFP for CTS Project. Banks are advised to ensure that the images and data sent to the RBI’s Clearing House Interface (CHI) comply with all the guidelines that are issued by us.
The images may have to pass the required Image Quality Assurance (IQA) and Image Quality Usability (IQU) specifications which will be issued by us, failure to do so may result in rejection of such images. The banks are required to interface their existing clearing and/or banking applications with the requirements for data and image formats to be accepted/delivered by the Clearing House Interface software.
For the purpose, each bank needs to finalise a vendor for carrying out the integration of the current banking applications that are being internally used with the Clearing House Interface (CHI). The Reserve Bank shall be publishing the Interface requirements and the data structures in which the images and MICR data shall be received or sent to the Clearing House Interface. As CTS clearing is based on images it is important that the source documents are image friendly.
The Cheques have to be printed on the MICR standard stationary given in the MICR procedural guidelines and the size of the cheque remains unchanged. However, banks need to take certain precautions which include: the background colour should be light to enhance the text and dark colours in the background may be avoided; Features which are heavy on design or excessive use of micro-lettering may be avoided as they reduce the contrast between background and the text. Holograms and Logos and other unique features of an instrument may remain on the face of the instrument.
The RBI had also advised banks to choose the vendor best suitable for their requirements, at the earliest. The list of approved vendors for the CTS project was also to be submitted to the RBI. The selected vendor has to integrate the CHI output with the software available in the bank, ensure that the outward images are accepted by the CHI, provide modules for payment processing, storage retrieval and other modules as required by the bank concerned.
The selected vendor has to meet the required standards. It is therefore important that the bank’s vendor is selected early, since the success of the project depends on the successful integration of the banks system to RBI CHI. It is important that the banks carry out stringent and rigorous tests to ensure that the systems comply to the bank’s and RBI requirements and the selected system should be tested and proven to seamlessly interface to the CHI. Technical specifications for site preparation for the CHI would be given shortly.
Cheque Truncation
The cheque is currently the most visible and significant mode of payment in India. In view of the importance of cheque to the retail segment, Magnetic Ink Character Recognition (MICR) technology was introduced by the Reserve Bank of India. MICR technology enabled the banking system to handle the growth in the cheque volumes and to provide faster and efficient clearing services to customers and to do straight through processing using MICR data.
Over a period of two decades, a number of MICR Clearing Houses have evolved. The entire clearing cycle is dependent on the movement of the physical paper cheque from the presenting bank to the drawee bank (branch) as was mandated by the NI Act prior to its amendment. This bottleneck had an overriding impact on any consideration for improvements or reduction in the cycle time for clearing. Until very recently, legal covenants in India required the cheque to be presented to the paying branch for payment.
The paying branch is the last node in the clearing cycle as it exists in the country, and thus the paper cheque is on the move through the entire cycle from the bankbranch of the collecting bank where it is first deposited to the service branch of the collecting bank, onward to the Clearing House, which acts as a focal point for the cheques of all the banks, and from the Clearing Centre to the paying bank service branch and lastly the paying branch.
If the cheque is returned unpaid, it has to re-trace the entire path back to the presenting branch Cheque Truncation is one of the ways to compress the clearing cycle to provide faster clearances of local and intercity cheques. Cheque truncation, very loosely defined, is the process in which the physical movement of cheque within a bank, between banks or between banks and the clearing house is curtailed or eliminated, being replaced in whole or in part, by electronic records of their content (with or without the images) for further processing and transmission.
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