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JVIRAHYAS@GMAIL.COM

CLEARING

An account holder in a bank may receive payments by cheque from others either forsales or some other reason who hold accounts in other banks either within the

country or in other countries. In order for the account holder to draw upon the moneythese cheques represent, these cheques need to necessarily be presented to thebanks on whom they are drawn. This is done through clearing.

Clearing is an arrangement through which a bank exchanges cheques drawn onother banks for those drawn on it. This is done at the clearing house. In the absenceof this facility, each bank would have had to present cheques to each of the otherbanks for receiving payment for cheques drawn on them. Further, they would have toreceive amounts in cash (which can be risky).

The representatives of the banks in a city meet at stipulated times at the clearinghouse and exchange cheques. After this they go back to their respective banks andpass those cheques through the concerned accounts. They meet later and return the

dishonored cheques to the banks that presented them. This is known as specialclearing.

Clearing house are established in most large cities where the volume of cheques arelarge. Some cities have more than one clearing a day. In Mumbai (in the city areawhich includes Nariman Point), there is high value clearing. Cheques that are for Rs.1 lakh or more are presented for clearing at 12.00 PM. They are cleared the sameday and customers get good funds on the same day. Other cheques are presented inthe evening for clearing and good funds are received only by the next evening.

Clearing houses are autonomous institutions having ther own rules regarding theconduct of operations. These regulations relate to the admission of members, submembers, entrance fees, minimum balance of deposit and other matters.

Initially in India, the Imperial Bank (now the State Bank of India) presided overclearing houses till the Reserve Bank was constituted and took over that role in 1935.In those places where the RBI does not have a branch the State Bank of Indiapresides over the clearing house.

MICR Clearing

As volumes grew, it became necessary to mechanise clearing. This was introducedusing Magnetic Ink Character Recognition) MICR technology. Earlier cheques had tobe laboriously counted in regard to number, amount and differentiated betweenbanks. MICR technology enabled machines to sort these thus ensuring speed andaccuracy.

How does this happen?

To facilitate Cheque processing all instruments (cheques) have to be of a standardformat and size (8 X 3 2/3). These are printed on MICR grade quality paper with aread band of 5/8 in width at the bottom reserved for MICR coding (in E-138 Font).

1. The cheques are printed by approved printers. Not all printers are permitted.

2. The MICR has a distinct code structure.

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The code line is divided into five fields with distinct separations.

The first six numeric digits (numbers) are the Cheque serial number.

In the next band there are nine numbers. These are as follows:

i. The first three numbers represent the city ( Mumbai is 400)ii. The next three numbers represent the Bank ( American Express

is 031; HDFC is 240)iii. The next three numbers represent the branch (each branch has

a distinct number)

When a new bank opens, it may not have the volume to be admittedas a member of the clearing house. In these cases, it becomes a submember. These banks would have the code number of thesponsoring bank followed by the branch code which normally wouldcommence from 251.

The next six numeric digits are optional. Some banks write the

account number. On others these represent the customeridentification number). In regard to Government cheques issued bythe RBI alone these are seven digits. Government accounts are 10digits in length 7 digits occurring in the account number field and 3in the transaction code field

The transaction code field comprises of two digits (except forgovernment cheques which have three)

The last field represents the amount field and consists of 13 digits.The amount is encoded in paise without the decimal point.

Cheques Deposited

All cheques deposited for clearing by custmers are to be crossed with a Specialclearing stamp. The bank would also stamp its certification or confirmation of thevarious endorsements on the Cheque and an undertaking to the effect that theproceeds will be credited to the payees account on realization.

The Clearing Process

Cheques deposited by clients are separated between intercity and intracity.

The amount of the Cheque is coded in onto the Cheque in the area designated (thelast field).

The cheques are then put through a reader/ sorter that lists amounts, differentiatesbetween banks and reads all the other fields and prepares a listing that details thenumber of cheques, the banks they relate to and the amount.

These lists are submitted to the clearing house along with the instruments.

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DIT.CO.No.1/09.63.36/2004-05 dated July1, 2004

Cheque Truncation - Pilot Implementation

The introduction of the Magnetic Ink Character Recognition(MICR) technology forcheque 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 collectionprocess thanks to the logistics involved in the requirement that the cheques have tophysically transported all the way from the collecting branch of a bank to the draweebank branch. To solve this problem a process called cheque truncation in which themovement of the physical instruments is curtailed at a point in the clearing cyclebeyond which the process is completed purely based only on the electronic data andimages of the cheques.

Cheque Truncation Pilot Project is being inititated by the Reserve Bank for theBankers Clearing House of the National Capital Region of Delhi and its nearby areas.

The pilot project is expected to be made operational in early part of 2005.

The steps to be taken by the banks primarily revolve around the procurement and/oroutsourcing of truncation capabilities and adopting related changes in the systemsand procedures.

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