Over the last decade, Indian banking has evolved over the traditional way of banking with use of innovative technologies. As a result, user experience has improved significantly. It is widely acknowledged by industry experts that technology can play a larger role in Indian banking, and one area that certainly craves for attention is cheque processing.
Though under the Reserve Bank of India (RBI) guidance, the e-banking systems has been implemented by banks that allows end-users to take advantage of online fund transfer, RTGS, e-cheques etc, India continues to write lot of cheques every day. People still believe in the physical instrument rather than on electronic media. The estimated cheques written in India are around 1.2 billion per year. This includes local, intercity, interstate, and intra state cheques. If we consider the whole cheque clearing process, it is obvious that these are not very effective. It takes about 15 days for inter-city cheque clearance. Apart from time consuming process, there are overhead costs for transportation and storage. In short, poor cheque clearing cycle reduces operational efficiency.
The Central Banks of many countries have exploited the technological innovations today and implemented the electronic transmission of images rather than the physical transportation of cheques for clearing. For example, the US has already implemented Check Clearing for the 21st Century Act (or Check 21 Act).
In India, the RBI has mandated the use of pilot Cheque Truncation Project in the National Capital Region. More than 10 banks are already processing their cheques through the system now. Based on the experience gathered, it would consider extending the coverage to other centers.
Cheque Truncation is the process of stopping the flow of the physical cheque issued by a drawer to the drawee branch. The physical instrument will be truncated at some point en-route to the drawee branch and an electronic image of the cheque would be sent to the drawee branch along with the relevant information like the MICR fields, date of presentation, presenting banks etc.
To wish away cheques were simply not possible so, the focus is on improving the efficiency of the Cheque Clearing Cycle. Cheque Truncation is the alternative. Contrary to perceptions, Cheque Truncation is a more secure system than the current exchange of physical documents in which the cheque moves from one point to another, thus, not only creating delays but inconvenience to the customer in case the instrument is lost in transit or manipulated during the clearing cycle.
Some of the challenges in implementing Cheque Truncation Solution are:
- Integration with existing large banking systems – as banks have already invested on legacy system, it is important that the new system seamlessly integrate with the existing system
- Security – In any financial software, security is of prime importance. Hence, information transmitted over electronic media should be secure enough
- Changing the current workflow – There is often resistance to change. For any new system to be successful, users need to support the system as it changes the traditional way of working
- Customer acceptance – in electronic cheque processing, merchants/customers need not visit the bank to deposit the cheque but they can scan their cheque from their desktop and submit for bank clearing. This calls for tremendous change in mindset among customers to feel secure to do transactions over electronic media
Some Implementation Guidelines
- Banks need to evaluate their existing system, as they would have already invested good amount of money into it. So the solution they would like to implement should be able to integrate with the existing system as well as other heterogeneous systems with ease
- Security of the system should be of prime importance
- The new solution should be able to scale and meet the increasing demands from the customers and handle the load
- Should be able to provide software as service to customers and related institutions
- All systems are good only if people accept and ready to work with it. Hence, having a governance model in place is important and the current team should be enthusiastic enough to accept the new solution. Most companies forget this aspect, which leads to failure of the system
Beneficiaries of Cheque Truncation
- Banks – have a simplified system to collect all the information from their merchants/branches, consolidate, process them and submit for clearance
- Customers of banks – can electronically deposit large number of cheques without fear of loss in transit. For example, LIC collects thousands of cheques every day can deposit the cheque from its office rather than going and dropping cheques in multiple banks
- Bank’s Branches – teller can directly scan and deposit the cheque to its head office for clearing rather than transporting the cheque to the HO
- Check processing centers – streamline back office operations for the banks with greater audit and tracking
- Users of the system – can track the status from their desktop and plan their business or personal goals accordingly
Thus, with the implementation of cheque truncation solution, the need to move the physical instrument across branches would not be required, except in exceptional circumstances. This would effectively reduce the time required for payment of cheques, the associated cost of transit and delay in processing, etc., thus speeding up the process of collection or realization of the cheques.
Major advantages of Cheque Truncation
Cheque Truncation thus is an important efficiency enhancement initiative in the Payments Systems area that will help financial institutions in India to increase their top and bottom line and above all ultimate customer satisfaction. Apart from operational efficiency, Cheque Truncation has several benefits to the banks and customers in India
- Faster fund availability
- Better reconciliation and fraud prevention
- Cost effectiveness – reduce overhead cost in cheque processing – savings in transportation, storage of paper cheques
- Online tracking and audit of cheque status at any point of time
- Re-engineering the total receipts and payments mechanism of the customers
- Human resource rationalization – improved efficiency of bank employees