[Economy] Cheque Truncation System (CTS-2010): Meaning, Advantages explained

Economy102 Comments

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  1. What is cheque clearing house?
  2. What is MICR code?
  3. What is Cheque Truncation System (CTS)?
  4. What are the benefits of Cheque Truncation?
  5. CTS-2010

What is cheque clearing house?

  • Suppose a party from Delhi pays you via cheque of Citibank and you have account in SBI, Ahmedabad. You deposit this cheque in your area’s SBI branch.
  • Now the SBI branch manager would send his [overworked, underpaid] Bank PO to Citibank’s office in A’bad. He’d show the cheque, collect the cash and return to deposit the money in your account.
  • But SBI would be getting thosands of cheques everyday- some from ICICI, some from Citibank, some from axis and so on. SBI cannot send its staff to every other bank to get the cash, that’d be extremely time consuming.
  • Therefore To simplify this cheque transection process, each bank will send a representative to a central place and exchange cheques drawn on each other.
  • This centralized place is called clearing house/processing house.
  • Reserve bank of India is act as clearing house.
  • In cities where RBI’s office doesnot exist, usually SBI or other public sector bank acts as the clearing house.

What is MICR code?

  • By seeing the PIN code, a postman can know the destination of an envelope. Same way by using the MICR code, RBI (clearing house) can know the name of a bank, location of its branch from where the cheque was issued= faster clearing of cheques.
  • MICR = Magnetic ink character recognition.
  • At the bottom of every cheque, you’d see some black colored numbers with weird looking fonts. That is the MICR code.
  • These numbers are printed with a special ink  containing iron oxide, so that it can be automatically read by a special machine.
  • Ofcourse this sounds similar to bar codes, but there is a difference: unlike barcode, you can read the MICR code and decode it, without the use of special machines.

cheque truncation clearing system

What is Cheque Truncation System (CTS)?

  • Under the old paper cheque based clearing, the SBI bank will send the paper cheque to the clearing house and get the money and then transfer it to your account.
  • This is still time consuming. because SBI (or any bank) would need to physically move the cheques to a clearing house.
  • So RBI came up with a new idea known as ‘Cheque Truncation System (CTS)’.
  • In this Cheque Truncation System (CTS), SBI branch will not send the paper cheque to the clearing house, but instead, it’d merely scan the cheque, and electronically send the image + MICR data, to the clearing house.
  • From the clearing house, the data would goto the paying bank (Citibank in our example), they will inspect the MICR data, signature on the scanned image and release the money to SBI.
  • This process is faster and more safer than the conventional paper-cheque clearing method.

What are the benefits of Cheque Truncation?

  • It Eliminates the time, money and manpower wasted during physical movement of cheques (from banks to clearing house).
  • Thus, Cheque Truncation =faster clearing = better service to customers,
  • Cheque Truncation system reduces the scope for clearing-related frauds
  • There is no fear of losing cheque in transit.

CTS-2010

  • In the year 2010, RBI came up with the guidelines for Cheque Truncation system. (CTS 2010)
  • The banks would need to upgrade a few things to comply with CTS 2010 standards of RBI.
  • For example, in their branch offices, they would need to buy scanners and install special software provided by RBI, to securely transfer and receive the scanned image and data.
  • They may need to change the color-scheme of chequebooks so that signature and handwriting is visible in the scanned image. And so on…
  • Problem: some jholachhaap banks, are yet to comply with RBI’s CTS 2010 guidelines.
  • Hence recently RBI issued a warning to all banks: upgrade your banking infrastructure according to CTS 2010 guidelines, before the end of Sept. 2012

Mrunal recommends

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  4. Maths: Quantam CAT Sarvesh Kumar
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  6. Word Power made Easy -Norman Lowe
  7. Topic wise Solved Paperset by Disha


So far 102 Comments posted

  1. Bidisha

    Is alteration of cheques allowed under this system?

    1. ss

      No alteration isnt allowed in this

  2. Pawan

    Wonderfully Explained … Can explain to any one about this … Nicely Simplified by Mrunal … Good Sense of humour ‘to harass UPSC aspirants’

  3. ketan

    IT was nice to understand the conept of cheque clearing & cts.

  4. Satish

    Sps on mango ban by EU explained nicelyand easily pl throw some light on Tbt

  5. janjal rahul

    Excellent explanation and luk too simple to understand.

  6. vennila marimuthu

    mrunal sir, on behalf of upsc aspirants” ur great thalaiva”….

  7. mayur dubey

    why use new type of cheques… old cheques could have been scanned and sent….please clear…

  8. Pradeep

    what an idea sir ji….. never seen any other blog as good as this

  9. Pradeep

    From today onwards you would be called as “RAJINIKANTH of Aspirants”

  10. Ali

    Why to send scanned copy of cheque to clearing house ,why not directly send that scanned copy of cheque directly to citi bank .what is the need of clearing house or rbi as intermediaries..
    Is it to reduce. fraud or something else.
    pls clear sir ?

  11. deepak

    i cant stop laughing…”some zolchap companies”..:D

  12. saurav mohan

    Mrunal sir kudos to u.Really one of the best blog.I am an engineering graduate.I always had a fear of these financial terms.Bt i was keen to know these concepts.Now by the grace of god i am here.Thankyou very much for simplifying these things.

  13. saurav mohan

    Sir i want to know how RBI regulates foreign currency marketand In how many ways?Is there any article related to this?please let me know.

  14. Sandeep Gabhale

    Simple and good to understand.
    Thanks for sharing this article.

  15. Ruban

    It is simple clear explain. .more useful for me thanks

  16. AKHILESH K. VERMA

    Not any message

  17. Diamondious

    Simple and good to understand.
    Thanks for sharing this article.

    From today onwards you would be called as “King of Cheques”

  18. archana

    ur article was very helpful to understand the concept of CTS for cheques. Is it also necessary/mandatory to have these words” payable at par” mentioned on the cheques of any bank?

  19. Nivi

    Well explained. Iam elated tht I finally understand such concepts and its easy to remember them as well.

  20. Anil

    Explian of cheque Advantage & Dis Advantags In Telugu

  21. Sai

    Sir,

    Can you please let me know order of study in each topic.

    Is it top->bottom or bottom to top ?

    Thanks,
    sai

  22. mkpmkp

    very easily explained with real example. thanks.

  23. Ankur

    Very crisply and nicely explained… like a story teller…

  24. shailesh shah

    This is cool. I posses the some knowledge from website. Thank you for the support to me understand that topics.
    Shailesh

  25. ramya

    Thank you for explain it in simple lannguage with example good job sir

  26. Anant

    What is the role of NPCI in CTS?

  27. Manmohan Singh

    I loved the line, overworked underpaid!

  28. uday

    In spite of sending the image of a cheque for payment if a grossly higher payment is made (say instead of rs 4500 the service center issues advice to pay rs 45000 then the onus of correction is on which bank 7 what is the stipulated time frame to resolve such matter

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