Effective Implementation of Cheque Truncation System in Idbi Bank, New Delhi

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1. INTRODUCTION We all live in a world where we want eveyrthing instant be it Instant coffee, instant entertainment, instant information. Time is the single biggest factor in this “instant” world we live in. So how could banking stay unaffected? After anytime money and Internet banking, we now have instant cheque clearance. Image based cheque clearing system or Cheque Truncation System (CTS) is a project undertaken by Central banks of many countries such as India (Reserve Bank of India – RBI), UAE (Central bank), Saudi Arabia (Saudi Arabia Monitoring Agency – SAMA) etc. or faster clearing of cheques. CTS promises to bring multiple benefits to customers by substantially reducing the time taken to clear the cheques as well as to the banks by enabling them to offer better customer services and increasing operational efficiency by cutting down on overheads in physical clearing. In addition, CTS also offers better reconciliation and fraud prevention. CTS uses cheque image, instead of the physical cheque itself, for clearing of the cheque. Image-based clearing systems have great potential in India as implementing them can result in huge cost savings for banks.

The expenses incurred in archiving, storing, and transporting documents can be drastically reduced. It has been estimated that the cost savings for a mid-sized public sector bank to be in the range of Rs 20-25 crores per year. The benefits of electronic cheque presentment will be seen both in the back-office and at the customer interface. It will streamline cheque handling and speed up the clearing process to give customers faster access to their money. While the actual cost of the solution depends upon the number of branches that decide to adopt this technology, the minimum cost for a bank is in the range of Rs 2. crore. 1. 1 OBJECTIVE OF THE STUDY 1. To find out the need for Cheque Truncation System in Indian Banks. 2. To study the problems associated with manual handling of paper cheques. 3. To study the Key challenges in the Effective Implementation of CTS. 4. To find out the benefits of CTS. 5. To find out the risks associated with CTS. 1. 2 IMPORTANCE OF THE STUDY I am the greatest beneficiary of this study as it helped me to understand better the operations of Indian Banks. It enabled me to know how important it is to be updated with latest technology so as to survive the tough competition in Banking Industry.

The thesis will also act as a source of reference for others who desire to do some research on banking industry. This thesis will also be helpful for other Indian banks, which have not yet adopted CTS. 2. LITERATURE REVIEW 2. 1 MEANING OF CHEQUE: [pic] A cheque (or check-USA) is a negotiable instrument, instructing a financial institution to pay a specific amount of a specific currency from a specified account held in the depositor’s name with that institution. Both the maker and payee may be natural persons or legal entities.

Cheques were introduced by the Bank of Hindustan, the first joint stock bank established in 1770. In 1881, the Negotiable Instruments Act (NI Act) was enacted, formalizing the usage and characteristics of instruments like the cheque, the bill of exchange, and promissory note. The NI Act provided a legal framework for non-cash paper payment instruments in India. [pic] 2. 2 THE OLD SYSTEM 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, the Reserve Bank of India introduced Magnetic Ink Character Recognition (MICR) technology.

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 cheques from the presenting bank to the drawee bank (branch). This bottleneck had an overriding impact on any consideration for improvements or reduction in the cycle time for clearing. 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 bank-branch 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. THE CONVENTIONAL WAY Cheques dropped off in the bank or the drop box are subject to the cut-off time for clearing cycles. o After encoding and mechanical sorting, the cheques are sent to the clearing house. Banks release credit to the beneficiaries only after the return clearing process. o Time taken to clear local cheques: up to three days. o Time taken to process intercity cheques: a fortnight on an average. 2. 3 REPLACING A WEAK SYSTEM The existing system restricts the speed at which the physical cheque travels to the destination branch and there has to be physical handling of paper at multiple points enroute to its destination.

Moreover, the existing system brings with it high operational and maintenance costs for banks in the form of staff, couriers, encoding, passing, signature verification and the security of the physical instruments to be warehoused after payment. It has also been found that there are reconciliation issues associated with the system, as clearing differences, monitoring and control is an administrative cost, and clearing differences accounts is an area prone to fraud. 2. 4 THE NEW SYSTEM

Cheque Truncation is one of the ways to compress the clearing cycle to provide faster clearances of local and inter-city cheques. Cheque truncation 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. THE TRUNCATION WAY o With CTS, cheques can be processed — that is scanned — 24? at bank branches. o The digital image of the cheque is transmitted to the clearing house. o The transfer of money from the drawee’s account and to the account the cheque is drawn on will take place within 24 hours. 2. 5 CHEQUE TRUNCATION SYSTEM Clearing inter-city Cheques has traditionally been a tiresome and time-consuming process. That’s set to change as image-based cheque clearing debuts and Indian banks start clearing outstation cheques within days rather than weeks.

A system that prevailed for over a century is finally set to change. Banks are latching on to a technology called ‘Image-based clearing’ that lets banks clear inter-city cheques in two days flat. In an image-based cheque clearing system, the cheque’s image is captured using a scanner at the payee branch. This image is transmitted electronically to the payer branch or service branch where the system continuously receives and processes cheque information. The paying institution returns an image of the cheque to the presenting bank.

The upshot of all this is that a physical cheque doesn’t have to travel (within a bank, between different branches or between banks and the clearinghouse) for it to be cleared, the electronic image of the cheque is used instead and it is transmitted in a split second. This may seem to be a simple concept, but it has the potential to eliminate delays arising out of paper-based processing and transportation of physical cheques. The system reduces the time span for clearing cheques and it helps banks and the clearinghouse deploy their services in a more effective manner. 2. 6 HOW DOES CTS WORK BETWEEN TWO DIFFERENT BANKS

Under CTS when a customer deposits a cheque, a scanned image of the cheque is processed. Suppose ‘A’ has an account in the Saket branch of State Bank Of India in Delhi and he gets a cheque from his friend ‘B’, who banks with ICICI Bank, Fort, Mumbai. Under CTS, once the cheque is deposited, SBI will scan the cheque and send the digital image to RBI, which in turn will collect the money from ICICI Bank and send it to SBI and on to A’s account. This whole process, available 24? 7, will take 24 hours or less. The physical cheque would be warehoused with the bank but customer can ask for a copy of the image. . 7 ROLE OF RBI IN IMPLEMENTATION OF CTS [pic] RESERVE BANK OF INDIA: RBI is the central bank of the country since 1934. It regulates, controls credit, issue licenses and functions as banker of all banks and the government. RBI’S VISION: To increase efficiency and speed of Cheque/instrument clearing, use electronic exchange. LEGAL BASIS FOR PAYMENT OF TRUNCATED CHEQUES: In order to provide legal basis for payment of truncated paper based instruments, the Government was requested 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 draw a road map for introduction of cheque truncation for the country. The Working Group decided that an Image based Cheque Truncation Pilot Project be initiated by the Reserve Bank for the Bankers Clearing House of the National Capital Region of Delhi and its nearby areas. Several preparatory steps were required to be undertaken by both the Reserve Bank and the banks for implementation of the project.

The Reserve Bank initiated relevant steps to procure the required hardware and software systems for the central system. The steps that were to be taken by the banks primarily revolved around the procurement and/or outsourcing of truncation capabilities and adopting related changes in the systems and procedures. Table:1 |Image Standard for Cheque Truncation System | |Black & White: 200 dpi, -bit (16-level), and TIFF image with CCITT G4 Compression | |Grey Scale: 100 dpi, 8-bit (256-level), and Jpeg image with Jpeg compression | |Grey Scale Front and B/W front and back images used for processing | |MICR line will continue to be in E13 B font. | |Source: RBI | 2. 8 CHEQUE TRUNCATION MODEL FOR INDIA [pic]

FIRST IMAGE BASED CTS IN THE COUNTRY: The cheque processing market is in transition from traditional paper processing and bank-to-bank paper exchange to image processing and bank-to-bank image and electronic exchange of data. NCR’s “ECPIX” solution, already implemented by Punjab National Bank was the first ever image based cheque truncation system in the country which has helped banks move into the image based processing. FEATURES OF CTS MODEL FOR INDIA 1. Point of truncation: The Working Group deliberated on the point in the clearing cycle, where the movement of the physical paper should be stopped i. . – whether cheques should be truncated at the Presenting Bank, the Clearing House or the Drawee Bank. The Group was aware that full benefits of truncation will be available only when the truncation takes place at the Presenting Bank; otherwise, the clearing process will again be slow and the clearing cycle will be inefficient to that extent. Truncating the cheque after the Clearing House does not entail any advantage to the current clearing process and therefore, truncation at the drawee bank is not suitable.

Therefore, the Group recommended that in India the cheques should be truncated at the Presenting Bank itself and within the Presenting Bank it should be left to the individual banks whether cheque is truncated at the branch or at the service branch or whether the truncation process is outsourced, depending upon the individual efficiency, resources, facilities and cost considerations of the bank. 2. Mode of truncation: Secondly, the Group deliberated on the mode of truncation i. e. whether the truncation was to be based on electronic image of the cheque or based on the MICR code line only.

As payment based on the MICR code line exchange would not provide opportunities for signature verification (which is a legal requirement as on date), the Group recommended electronic image based cheque truncation. 3. Preservation period: The preservation period of the physical cheques was considered by the Group. Presently, the preservation period of the physical cheque leaves is eight year as mandated by the ‘Banking Companies Preservation of Records’ Rules 1985. Under the amended NI Act, the certificate from the drawee bank on the print out of the image of the physical cheque is a proof of payment.

Therefore, the Group debated whether the present period of eight years is suitable or whether it can be reduced. The Group was of the opinion that the preservation period should be governed by the reconciliation period between the customers and the banks. The Group also considered that storage requirement of the electronic image of the physical cheques and deliberated that technology places no limitation on the period the images can be stored. The Group recommended that the preservation period of the electronic image of the cheque should be eight years.

The Group also recommended that Government may be approached to amend the ‘Banking Companies Preservation of Records’ Rules 1985 to enable image preservation for eight years 4. Storage location of cheque images: The Group debated on the idea of the cheque images being stored at by a Central Image Warehousing Agency or by the presenting banks/drawee banks themselves. As per the amended NI Act, it is the drawee bank that has to certify the printout of the image of the cheque as a proof of payment. So, the images should be stored at the drawee bank.

On the other hand, the physical cheques are with the presenting bank and it is the presenting bank which initiates the process of truncation and hence the images as well as paper instruments are available with it and the presenting bank should be responsible for storage of images. A third alternative that was considered by the Group was that of a Centralized Image warehouse. The drawee bank can always request the central agency for any image and certify that image for the purpose of proof of payment.

Also, having a Centralized Agency will give the member banks the benefit of having to approach a single agency in case it requires images of any instruments rather than to approach multiple presenting banks. From the point of view of efficiency and control, the Group concluded that Centralized Agency per clearing location should act as an image warehousing facility for the banks. However, given the challenges involved in setting up a single agency in the Indian context, the Group recommended that the choice could be either a single agency or individual drawee banks as the points of storage. . Imaging of cheques: Imaging of cheques can be based on various technology options, the cheque images can be black and white, Grey Scale, or colored. The Group considered all the three options. Black and White images do not reveal all the subtle features that are there in the cheques. Colored Images increase storage and network bandwidth requirements. Therefore, the Group recommended the Grey Scale technology which helps capture finer features on cheques and also have relatively lesser storage and network bandwidth requirements will be suitable for India. . Standardization of cheques: Another question that arose was whether cheques should be standardized as it has been done in Singapore from security and image friendliness perspective. In Singapore, a common format for cheque has been designed and is used by all the banks. The Group suggested that the same can be done but the introduction of truncation process should not be made to wait till the process is complete and old cheques are fully withdrawn.

Also, it would entail a cost to the banks who have already printed large number of cheques and the withdrawal of old cheques is a time consuming process with non-MICR cheques still being presented by customers. Therefore, the Group recommended that truncation and standardization of cheque format should be independent initiatives with the latter being implemented after even after the introduction of cheque truncation. 7. Changes in the MICR line: The Group also considered the issue of changes to the MICR line as has been done in Singapore.

In Singapore, a check digit has been introduced in the MICR line which enables verification of the genuineness of the cheque at the presenting bank itself and provides an additional level of control in case of image misreads. The Group was of the opinion that any change in the existing MICR line structure in a vast country like India will lead to a delay in implementation and additional costs as hardware and software changes will be required at all processing points in the clearing cycle-presenting bank/branch, clearing house and the drawee bank/branch, apart from printing costs of cheques to accommodate modified MICR Code line.

Therefore, the Group recommended that the truncation should be introduced in India for settlement to be generated on the basis of the current structure of the MICR fields. 8. Security Requirements: The Group also considered the issues related to the security requirements for the flow of cheque data and images over the network from the presenting bank to the clearing house and onwards to the drawee bank etc. and the handling of data and images at the various processing nodes in the clearing cycle. The Group was of the view that digital signatures should be used but encryption may not be essential.

The Group also deliberated on the security requirements during storage of the images of the cheques either by banks or at the Centralized Image Warehousing Facility and recommended that these should be in consonance with the requirements of IT Act 2000. The Group accordingly recommended that use of Public Key Infrastructure (PKI) should be adopted to protect data and image flow over the network and to establish authenticity, non-repudiation, integrity etc and suggested that digital signatures should be used.

The standards defined for the PKI are as followed: o Hash algorithm SHA-1 o Padding algorithm pkcs#1 o RSA asymmetric encryption with 1024 bit key length o Triple DES (3DES, TDES) symmetric encryption with 168 bit key length o Certificates in x. 509v3 format 9. Certification Process: Another question that arose was whether various participants in the truncation process should be subjected to a certification process and based on that certification process they should be allowed as members in the truncation process.

The certification process would ensure that the participants adhere to the minimum requirements of security and efficiency and recommended that the members in the truncation based clearing system should be subjected to a certification process based on prevalent Information Security Audit Guidelines of the Reserve Bank of India. 10. Implementation Approach: The Group considered two approaches – big bang versus phased approach to implementation. The advantage of the big bang approach is that once a cut-off date is decided for truncation at a centre, all the processes and members will be geared towards meeting the date.

If a phased approach is adopted, full benefits of truncation will not be available. Also, the group was of the opinion that if truncation process is to be phased out, say, for ready banks by one cut-off date and remaining banks by a second cut-off dates, there will be duplication of efforts and confusion and operational issues like sorting out and transportation of cheques for banks which are not ready and imaging and transmission of cheques for banks which are truncation ready.

Therefore, the group recommended that truncation should be introduced for all banks and all clearings at a centre from a cut-off date for all participants at that centre. 11. Cut-off amount: A related question that arose was whether truncation should be based on a cut-off amount as is a practice prevalent in some countries. The Group felt that truncation should not be based on amount as it will require cheques to be sorted out at the presenting branch itself and there will be two separate channels and two separate clearing requirements both in terms of infrastructure required and process definitions.

Therefore, the Group recommended that there should be no amount based cut-off for truncation and all cheques, irrespective of value, should be truncated. 12. City Cheque truncation: The Group also considered the issue concerning from which city, the city cheque truncation should be commenced. The centers with lower volumes should be targeted first, where implementation process will be smooth in view of smaller number of cheques, smaller number of participants etc. or the efforts should be concentrated on centers with large cheque volumes where the efficiency and customer service impact will be much larger.

The Group recommended that the truncation initiatives should be targeting larger cities viz. the four metros which account for the major chunk of the cheque volumes in India and once the truncation process is established in these centers, rolling it out to the other centers will be a relatively easier task. 2. 9 BENEFITS OF CTS KEY BENEFITS o Efficient and streamlined processing of images. o Elimination of transportation of physical cheques. o Shorter clearing cycles. o Extended cut off time for Cheque submission. o Real time clearing positions available to banks throughout the day. Economies of scale with centralized National Image archieve. o Automated inward signature verification process. BENEFITS TO THE COUNTRY o Cheque truncation will reduce costs for the country as a whole and also reduce liquidity risks. o Data and information collected through the Cheque Truncation system will be used for reducing frauds. BENEFITS TO THE BANK o Lower Cheque handling costs – elimination of courier costs and other costs associated with paper instruments. o Bank floats would disappear, as there will be no delay in the clearing of payments between banks. Reduction in turn around time from 15-20 days to 3-4 days. o Reduction in service issues related to cheques lost. o CTS will bring efficiency in the bank’s system. o Though frauds cannot be eliminated completely, frequency of their occurrence will certainly be reduced. o Reduction in the work time and manpower required at a branch manning theses activities through human interface. o The customer’s payment pattern will become known to the banks, which can then prepare profile and thereby add value to their consumer. BENEFITS TO THE CUSTOMER o Customers will be the biggest beneficiaries of Cheque truncation ecause of reduction in time for physical clearing to a few hours. o Improved customer service levels. BENEFITS OF CTS AS PER RBI o Time Saving o Reduced Physical Transportation o Electronic clearing within hours o Multiple clearings in a day (with truncation at Branches) o Ease of Operations o Lesser and Quicker reconciliation o No chances of lost cheques and discrepancies at Clearing house o Higher efficiencies, better managed operations o No need for expensive Magnetic Ink encoding, and fault prone encoders o Reduction in Logistics overhead o Eliminate Frauds 2. 0 RISKS IN CHEQUE TRUNCATION The introduction of the truncation process will change the roles and the responsibilities of the various participants in the truncation process and may lead to introduction of certain risks that will have to be mitigated. These are documented below. 1. At the presenting bank level, the responsibility to verify the genuineness of the cheque based on the apparent tenor or the visible features of the cheque presented for collection may lead to banks refusing to accepting a genuine cheque or accepting a forged cheque based on a manual scrutiny.

Images and MICR data to be sent to the clearing house have to be matched before they are released to the Clearing House. 2. The Clearing House will have to assume that the data given by the banks is the data meant for that day’s clearing and will have to arrive at the settlement based on this assumption. If the MICR data given by the bank is not that matching with the day’s image the bank has sent for collection, it may lead to erroneous settlement and large returns. 3. Truncating cheques entails additional operational risks.

Banks will have to take adequate measures to ensure that all necessary safeguards are provided for – in consonance with legal requirements and banking practice while making payments, especially for high value instruments. 4. The drawee bank has to verify the signature on the image of a cheque. If a drawee bank chooses to verify signatures on the images of cheques above a cut-off amount only, then it runs the risk of paying some forged instruments. 5. The Warehousing Agency for images and physical storage of cheques might not be able to produce the image or the physical cheque demanded by the bank.

This may lead to legal complications and assignment of liabilities. These will have to be covered by suitably drafted agreements and service level agreements between the banks and the Warehousing Agency. 2. 11 SWOT ANALYSIS STRENGTH o Integration of CTS with the existing system is very easy. o No change in the existing method of issue of cheques. o High value clearing is a value added service. WEAKNESS o Majority of customers are unaware of the new system. o Customer might question the security of this system. o Only frequent users of cheques would shift to this new system and would be benefited by it. Overseas cheques cannot be cleared using this technology. OPPORTUNITY o CTS allows banks to maintain electronic data to address customer queries within the shortest possible time. o Realization of proceeds of cheque possible within the same day. o Minimizes risks through a secured cheque clearing system. o Will result in cost savings due to lower cost in physical movement of cheques. o Minimizing bottlenecks and delays between presentation and realization time. o Provides shorter clearing cycles and a centralized image archival system. CTS will speed up the liquidity flow in the economy and create a momentum for economic growth. o CTS offers new business applications such as post-dated cheque processing. THREAT o Different systems employed by different banks may not work together. o The process may sound simple but given the high cheque volumes in the country, the different regional holidays and states with varying levels of IT readiness, bringing them all on one platform and implementing the new technology hasn’t been easy. 2. 12 COMPANY PROFILE [pic] Industrial Development Bank of India Ltd. IDBI) Industrial Development Bank of India (IDBI) is the tenth largest bank in the world in terms of development. The National Stock Exchange (NSE), The National Securities Depository Services Ltd. (NSDL), Stock Holding Corporation of India (SHCIL) are some of the institutions which has been built by IDBI. IDBI is a strategic investor in a plethora of institutions, which have revolutionized the Indian Financial Markets. IDBI Bank, promoted by IDBI Group started in November 1995 with a branch at Indore with an equity capital base of Rs. 1000 million. Vision Statement

To be trusted partner in progress by leveraging quality human capital and setting global standards of excellence to build the most valued financial conglomerate. Preamble IDBI Bank Ltd. is committed to creating long term economic value for all its stakeholders, including shareholders, depositors, customers, employees and the society as a whole. IDBI Bank Ltd. is committed to maintaining high standards of ethical and professional conduct in all its corporate activities. Main functions of IDBI IDBI is vested with the responsibility of coordinating the working of institutions engaged in financing, promoting, and developing industries.

It has evolved an appropriate mechanism for this purpose. IDBI also undertakes/supports wide-ranging promotional activities including entrepreneurship development programmes for new entrepreneurs, provision of consultancy services for small and medium enterprises, upgradation of technology and programmes for economic upliftment of the underprivileged. IDBI’s role as a catalyst IDBI’s role as a catalyst to industrial development encompasses a wide spectrum of activities. IDBI can finance all types of industrial concerns covered under the provisions of the IDBI Act.

With over three decades of service to the Indian industry, IDBI has grown substantially in terms of size of operations and portfolio. Developmental Activities of IDBI 1. Promotional activities: In fulfillment of its developmental role, the Bank continues to perform a wide range of promotional activities relating to developmental programmes for new entrepreneurs, consultancy services for small and medium enterprises and programmes designed for accredited voluntary agencies for the economic upliftment of the underprivileged.

These include entrepreneurship development, self-employment and wage employment in the industrial sector for the weaker sections of society through voluntary agencies, support to Science and Technology Entrepreneurs’ Parks, Energy Conservation, Common Quality Testing Centers for small industries. 2. Technical Consultancy Organizations: With a view to making available at a reasonable cost, consultancy, and advisory services to entrepreneurs, particularly to new and small entrepreneurs, IDBI, in collaboration with other All-India Financial Institutions, has set up a network of Technical Consultancy Organizations covering the entire country.

TCOs offer diversified services to small and medium enterprises in the selection, formulation and appraisal of projects, their implementation and review. 3. Entrepreneurship Development Institute: IDBI played a prime role in setting up of the Entrepreneurship Development Institute of India for fostering entrepreneurship in the country. It has also established similar institutes in Bihar, Orissa, Madhya Pradesh, and Uttar Pradesh. IDBI also extends financial support to various organizations in conducting studies or surveys of relevance to industrial development. . 13 CTS SOFTWARE USED BY IDBI BANK [pic] IDBI Bank has adopted ChequeMark Solution of NCR. Built on NCR’s popular ImageMark NCompass Solution, ChequeMark has been designed and developed by NCR’s Asian R&D team for the Asian financial industry. ChequeMark has a proven track record to help reduce costs, increase operational efficiencies, protect long-term investments, and make it easier than ever to offer superior customer service. In addition, the open architecture of ChequeMark allows for easy customization of customer and Asian country-specific requirements. pic] NCR, as the leading payments solutions provider in India, has in partnership with RBI and the commercial banks developed NCTS which meets the requirements of the banks. NCR has been entrusted by RBI and the commercial banks to implement and support over 40 clearing centers in India. NCTS has been developed for these stringent expectations. Some NCTS highlights include: 1. Multi-Collection Point Processing a. A-POD – ATM Proof of Deposits, integrated with ATM networks b. B-POD – Branch Proof of deposits, integrated with banking networks c.

C-POD – Corporate Proof of Deposit, integrated with secured public networks d. R-POD – Retail Proof of deposit, integrated with retail stores network e. M-POD – Master Proof of Deposit which consolidates the items from the collection points and interfaces to RBI. 2. Seamless integration to the RBI CHI (Clearing House Interface) RBI requires that the cheques and data are submitted to the CHI in secured bundles according to specific time schedules depending on the type of transaction and according to RBI specified technology standards.

NCR has been selected by RBI to implement the national truncation system. NCTS has been designed to ensure a seamless integration. 3. Predictability & Assurance Given that any new system will require localization, development of new banking procedures and staff training, critical portions of NCTS have been implemented in major commercial banks over the past 24 months. 4. Value added Business Applications Post Dated Cheque (PDC), intelligent signature verification system, corporate cash management system, and lockbox systems are some of the benefits provided by NCTS. . Support NCR has a real-time support system backed by qualified personnel and spare parts to keep Banks’ systems up and running without interruption to banks’ business. NCR has incorporated the most advanced imaging and recognition technologies to make sure ChequeMark can automate most of the item processing procedures. In fact, NCR has designed it to streamline every facet of banking operations: |Image Proof and Capture |Signature Verification |ATM and Branch Image Capture |Web Signature Verification | |Image Data Entry and Recognition |Web Signature Viewer | |Multi-bank / Clearing House module |Automatic Signature Verification | |Commercial Bank module |Archive and Web View Research | |Positive Pay |Digital Delivery (CD-ROM & DVD) | |Sorting |Remittance Processing | 2. 14 FEATURES OF CHEQUEMARK o ChequeMark addresses the total cheque processing requirements of service branches and is typically suited for branches having volumes of 2,000 cheques and above per day. o Use of ChequeMark helps banks to control cheque frauds and reduce reconciliation issues. o This solution facilitates banks to clear their inter-city cheques within 24 hours compared to the 7-21 days required at present. o The solution suite consists of high-speed power encoding, inward clearing verification, company-wise sorting of dividend warrants and rule-based signature verification module. ChequeMark also provides an interface to the SMS service of cellular phone providers. Using this module the bank can automatically send SMS messages to their customers advising them of cheques being identified for return in the day’s clearing. o ChequeMark can integrate the bank’s image archive to interface with its Internet banking application. This allows retail customers of the bank to view their paid cheques over the Web and also print the same for their records. 3. METHODOLOGY Figure STRUCTURE OF OVERALL ANALYSIS [pic] Formulating/ Defining Problems: Several problems are associated with manual handling of cheques such as: o Inherent manual handling process. o High costs for banks. Longer clearing cycles. o Banks enjoy free-fund floats. o Cheques are lost during transportation. Formulating thesis Objectives: o To find out the need for Cheque Truncation System in Indian Banks. o To study about Key challenges in the Effective Implementation of CTS. o To find out the benefits of CTS to the Banks, customer and the country. Developing Hypothesis: Several problems are associated with cheques such as inherent manual handling process; high costs for banks; high transportation costs between parties. Also the time taken in clearing local cheques is 3 days and that in outstation cheques is 15 days. Preparing the research Design:

The research design involved exploratory research under which secondary data study and experience survey methods were used. In the Experience survey/qualitative method, a depth interview was conducted with the Clearing Head of IDBI Bank. The depth interview consisted of 10 open-ended questions. Also, a customer questionnaire consisting of 15 multiple choice questions was prepared so as to get an insight into the topic. Secondary data was collected through newspapers, case studies, and online references. These methods enabled me to have a better understanding of the topic. Determining the Sample design: The sample size consisted of 50 customers who hold an account with IDBI Bank. Collection of Data: Data was collected and analyzed in the following manner: 3. Primary research First hand information was collected from the registered branch office of IDBI Bank by seeing how the clearing of cheques actually takes place. I got to know how the cheques are truncated using the ChequeMark solution of NCR. 3. 1. 1 One-on-One Interview A Depth interview with a list of fixed questions was conducted with the Clearing Head of IDBI bank. 3. 1. 2 Questionnaire Respondents (IDBI Bank account holders) were selected at random from different streams of work and lifestyle to have a better and diversified sample. 3. 2 Secondary research o Newspaper (e. g. Hindustan Times, etc) o Websites (e. g. RBI, IBA, etc. ) Analysis of Data:

The collected data was analyzed based on the parameters such as the most preferred method of making payments, time taken in clearing, problems faced in manual handling, disadvantages, and advantages of CTS. The result of the questionnaires was used to reach to a conclusion that how successful IDBI Bank has been able to implement Cheque Truncation System so as to provide better customer service. Testing the Hypothesis: The hypothesis was tested based on the result of the analysis. Interpretation: The results were interpreted keeping in mind the objectives that were set in the initial part of this overall structure. Based on the feasibility and importance they were sequenced and described in the recommendation part. 4. REPORT OF DATA COLLECTIONS-ANALYSIS AND FINDINGS 4. 1 ANALYSIS Ques 2. Gender: Male ___ Female ___ [pic]

Out of 50 account holders interviewed: o 35 (70%) were male respondents. o 15 (30%) were female respondents. Ques 3. Age: 18-30 ___ 31-50 ___ above 50 ___ [pic] Out of 50 account holders interviewed: o 20 (40%) respondents were of the age-group 18-30. o 20 (40%) respondents were of the age-group 31-50. o 10 (20%) respondents were of the age-group 50 above. Ques 4. Occupation: Business ___ Service ___ Housewife ___ Student ___ [pic] Out of 50 account holders interviewed: o 20 (40%) respondents were businessmen. o 15 (30%) respondents belonged to the service class. o 10 (20%) respondents were housewives. o 5 (10%) respondents were students. Ques 5.

What kind of account do you hold in IDBI Bank? Current ___ Savings ___ [pic] Out of 50 account holders interviewed: o 30 (60%) respondents hold a current account in IDBI Bank. o 20 (40%) respondents hold a savings account in IDBI Bank. Ques 6. Do you prefer making payments by:- Cash ___ Cheque ___ Credit Card ___ Debit Card ___ [pic] Out of 50 account holders interviewed: o 10 (20%) respondents prefer to make payment through cash. o 30 (60%) respondents prefer to make payment through cheques. o 5 (10%) respondents prefer to use credit card for making payment. o 5 (10%) respondent prefers to use debit card for making payment. Ques 7.

How many days does your bank take to debit your account when you make payment through cheque, in case of:- Local: 1-2 days___ 2-3 days___ Outstation: 7-15 days___ 16-21 days___ [pic] Out of 50 account-holders interviewed: o 10 (20%) respondents said that IDBI Bank takes 1-2 days to debit their account while clearing local cheques o 40 (80%) respondents said that IDBI Bank takes 2-3 days to debit their account while clearing local cheques. [pic] Out of 50 account-holders interviewed: o 40 (80%) respondents said that IDBI Bank takes 7-15 days to credit their account while clearing outstation cheques. o 10 (20%) respondents said that IDBI Bank takes 16-21 days to debit their account while clearing outstation cheques. Ques 8.

When you receive payment through cheque, how many days does your bank take to credit your account, in case of:- Local: 1-2 days ___ 2-3 days ___ Outstation: 7-15 days ___ 16-21 days ___ [pic] Out of 50 account-holders interviewed: o 30 (60%) respondents said that IDBI Bank takes 1-2 days to credit their account while clearing local cheques. o 20 (40%) respondents said that IDBI Bank takes 2-3 days to credit their account while clearing local cheques. [pic] Out of 50 account-holders interviewed: o 35 (70%) respondents said that IDBI Bank takes 7-15 days to credit their account while clearing outstation cheques. o 15 (30%) respondents aid that IDBI Bank takes 16-21 days to credit their account while clearing outstation cheques. Ques 9. Did you face any problems in manual handling of paper cheques? Yes ________________________________ (explain) No___ [pic] Out of 50 account holders interviewed: o 10 (20%) respondents faced problem due to delay in account debit at the time of making payment through cheques. o 5 (10%) respondents faced problem due to misplacement of cheque. o 5 (10%) respondents faced problem due to alteration of cheque. Ques 10. Are you aware of the introduction of image based Cheque Truncation System? Yes ___ No ___ [pic] Out of 50 account holders interviewed: 20 (40%) respondents were aware of the introduction of CTS by way of newspapers and websites. o 40 (60%) respondents were unaware of its introduction. Ques 11. Did your bank inform you about CTS before its implementation? Yes ___________________ (explain) No___ [pic] Out of 15 account holders interviewed: o 20 (40%) respondents were informed about the introduction of CTS by IDBI Bank, that too at the time, when they faced problems in manual handling of cheques. o 30 (60%) respondents were not informed about its introduction. Ques. 12 Does your bank charge you extra money for this service? Yes _______________ (how much? ) No ___ don’t know ___ [pic]

Out of 50 account holders interviewed: o 20 (40%) respondents said that their Bank does not charge them extra for this new system. o 30 (60%) respondents were unaware of its introduction and hence about the extra money charged if any. Ques 13. Are you aware about new features of image based Cheques:- (a) Standardization of cheques: Yes ___ No ___ (b) Use of dark colored ink: Yes ___ No ___ [pic] Out of 50 account-holders interviewed: o 20 (40%) respondents were aware about standardization of cheques. o 30 (60%) respondents were not aware about standardization of cheques. [pic] Out of 50 account-holders interviewed: 35 (70%) respondents were aware of the use of dark-colored ink. o 15 (30%) respondents were not aware of the use of dark-colored ink. Ques 14. Are you happy with CTS being introduced in your bank? Yes ___ No ___ [pic] Out of 50 account-holders interviewed: o 40 (80%) respondents are happy with the introduction of CTS. o 10 (20%) respondents are not happy with the introduction of CTS as they feel this new system will only benefit frequent users of cheques. Ques 15. Do you feel that CTS should be introduced in every bank? Yes ___________________________ (explain) No___ [pic] Out of 50 account-holders interviewed: o 50 (100%) respondents feel that CTS should be introduced in every bank.

Earlier, they were of the view that it would benefit only frequent users of cheques, but when they were made to understand how this new system would help prevent cheque frauds, remove bottlenecks from the existing system, they all agreed that CTS must be introduced in every bank. So that, the not-so frequent users of cheques might also switch to making payments through cheques to take advantage of the improved services CTS offers. 5. RECOMMENDATIONS o Large corporates and government agencies, which transact in a large number of cheques, could have tie-ups with their banks. Instead of sending the physical cheques, they can send them scanned images to the branch concerned, which would then forward it to RBI for settlement. A cheque processing system is not a document management system. The rate of arrival of the items and the standardization of the cheque require fast throughput process by the cheque process system in order to manage and empty processing queues and empty them in the shortest time possible. o Image based system must provide the banks the ability to capture items at the ATM, the Branch, Corporate clients, Retail locations as well as the service centre. o Awareness must be spread so that even the not-so frequent cheque users (40% of the respondents) may get inclined to use cheques for making and receiving payments so as to be able to take advantage of the value added services offered by CTS. Efforts must be taken by the Bank so as to gain the trust of customer in this new system. 6. CONCLUSIONS AND IMPLICATIONS Cheque truncation is the next logical step in Payments system after MICR, ECS, EFT, and RTGS. This would put India on the global map. By introducing CTS it will be possible for banks to extend the jurisdiction of the clearing house to the entire country, and there will be no geographical barriers. Operational efficiency will benefit the bottom lines of banks, and reduce risks by securing the transmission route. The CTS will also make banks more cost-effective. Cheque processing is not simply back office – it is the backbone system of a successful bank.

Correct procedures, committed ongoing support, backup continuity, and tight service level agreements are imperative to ensure the ability to cope with the growing cheque volumes expected to be processed in India in the near future. Image based processing creates the opportunity to offer new business applications to existing service offerings such as post-dated cheque processing. The truncation can also be done at ATMs. The customer could send the image of the cheque by inserting it in the machine. The captured image will be send to the service branch for settlement and clearing. Customers would get a receipt. If proper security norms are adhered to, the CTS can be a huge success in India. 7. BIBLIOGRAPHY ? http://indiancurrentaffairs. blogspot. com/2008/07/26072008. html ? www. hindubusinessline. om ? www. iba. org. in ? www. ibm. com ? www. rbi. org. in ? www. idbibank. com ? www. banknetindia. com ? www. newgen. com ? www. financialexpress. com ? www. moneycontrol. com ? www. hindustantimes. com 8. ANNEXURE 8. 1 QUESTIONNAIRE Ques 1. Name: _________________________________ Ques 2. Gender: Male ___ Female ___ Ques 3. Age: 18-30 ___ 31-50 ___ above 50 ___ Ques 4. Occupation: Business ___ Service ___ Housewife ___ Student ___ Ques 5. What kind of account do you hold in IDBI Bank? Current ___ Savings ___ Ques 6. Do you prefer making payments by:- Cash ___ Cheque ___ Credit Card ___ Debit Card ___ Ques 7.

How many days does your bank take to debit your account when you make payment through cheque, in case of:- Local: 1-2 days___ 2-3 days___ Outstation: 7-15 days___ 16-21 days___ Ques 8. When you receive payment through cheque, how many days does your bank take to credit your account, in case of:- Local: 1-2 days ___ 2-3 days ___ Outstation: 7-15 days ___ 16-21 days ___ Ques 9. Did you face any problems in manual handling of paper cheques? Yes ________________________________ (explain) No___ Ques 10. Are you aware of the introduction of image based Cheque Truncation System? Yes ___ No ___ Ques 11.

Did your bank inform you about CTS before its implementation? Yes ___________________ (explain) No___ Ques. 12 Does your bank charge you extra money for this service? Yes _______________ (how much? ) No ___ don’t know ___ Ques 13. Are you aware about new features of image based Cheques:- (a) Standardization of cheques: Yes ___ No ___ (b) Use of dark colored ink: Yes ___ No ___ Ques 14. Are you happy with CTS being introduced in your bank? Yes ___ No ___ Ques 15. Do you feel that CTS should be introduced in every bank? Yes ___________________________ (explain) No___ THANK YOU 8. 2 DEPTH INTERVIEW 1. What is Cheque Truncation?

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. 2. Can you briefly explain the entire process flow envisaged in the CTS? The CTS project envisages a safe, secured, faster, and effective system for clearing of the cheques. In the CTS, the presenting bank will capture the data & images of the cheques using their Capture System which is internal to them. They have to meet the specifications and standards prescribed for data and images.

To ensure security, safety, and non-repudiation the PKI (Public Key Infrastructure) is being implemented across the system. The banks will send the captured images and data to the central clearing house for onward transmission to the payee/drawee banks. For that purpose RBI will be providing the banks software called the Clearing House Interface (CHI) that will enable them to connect and transmit data in a secure way and with non-repudiation to the Clearing House (CH). The Clearing House will process the data and arrive at the settlement figure for the banks and send the required data to payee/drawee banks for processing at their end. The drawee/payee banks will use the same CHI mentioned earlier for receiving the data and images from the Clearing House.

It will be the responsibility of the drawee bank Capture System to process the inward data and images and generate the return file for unpaid instruments. 3. What is the need for CTS in India? Cheque Truncation speeds up collection of cheques and therefore enhances customer service, reduces the scope for clearing related frauds, minimizes cost of collection of Cheques, reduces reconciliation problems, eliminates logistics problems etc. 4. How the uniqueness of the cheque would be imparted to the image? In order to ensure only images of requisite quality reach the drawee branches, there will be a quality check process at the level of the Capture

Systems and the Clearing House Interface. 4. What are the benefits of CTS to a customer? Is it cheaper? Or would it get more expensive? The CTS provides integration to existing technology to enable instant retrieval of clearing information via the internet. It is also a more secure and efficient way of clearing cheques. The cost to the customer remains the same provided the cheques are utilized in an efficient manner. 5. What is a gray-scale image? Images are classified as black and white, gray-scale, or color based on how the pixels are converted into digital values. For getting a gray scale image the pixels are mapped onto a range of gray shades between black and white.

The entire image of the original document gets mapped as some shade of gray, lighter or darker, depending on the color of the source. In the case of black and white images, such mapping is made only to two colors based on the range of values of contrasts. 6. Will there be any change in the process for the customers? There will be no change in the clearing process. Customers would continue to use Cheques as at present, except in the use of image friendly colored ink for making the instruments. 7. What type of cheques can be presented in the CTS? All the local cheques can be presented in the CTS. Banks may also present cheques on banks situated outside the NCR, but such banks have branches in the NCR region.

The CTS also supports the intercity clearing and specialized clearing like high value clearing etc. The on-us instruments where both presenting and drawee banks are same are not allowed in the CTS. Images of such instruments would be stopped at the Clearing House Interface itself. 8. What are the precautions required to be taken by the bank customers to avoid frauds? Bank customers should use image friendly cheques. They should preferably use dark Colored ink while drawing the instruments. Care should be exercised in the use of rubber stamp, so that it would not interfere with the material portions of the cheque such as date of the cheque, payees name, amount, and signature. 9. What is an IRD?

Under CTS, after the capture of the image, the physical cheque would be warehoused with the presenting bank. In case the beneficiary or any other connected persons require the instrument, the payee bank could issue a copy of the image, under its authentication, which is called Image Replacement document. It is a legally recognized replacement of the original cheque for re-presentment. The provisions of NI act (Section 81(3) of the NI Act as amended) also permit the usage of such IRD. 10. What are the key challenges in the implementation of CTS? Each bank can adopt its own model that suits its specific requirement & depending on its technology readiness.

Banks could come together and develop specific models including sharing services. The choice of the model would depend on the customer service, the distribution network, and the technology readiness of the bank. Investments would be required in bandwidth, hardware, and linking the core banking system to the imaging system. Training would need to be imparted on new work flows, image based clearing and measures to control fraud. 8. 3 ARTICLE “BANKS TOLD TO PAY FOR DELAY IN CLEARANCE OF CHEQUES” – HINDUSTAN TIMES, NEW DELHI, JULY 17, 2008 Banks have to credit local cheques to your account the same day or at the most the next day, the national consumer court has ordered.

And outstation cheques have to be encashed between seven and 14 days, depending upon the distance from the place where the cheque is issued. You can claim interest from a bank for delayed encashment of your outstation cheques. “If there is any delay in collection of the said (outstation) cheques beyond the period… interest at fixed deposit rate, or at a specified rate as per the respective policy of the banks, is to be paid to the payee of the cheques,” the National Consumer Disputes Redressal Commission said in its July 14 order. Advocate Atul Nanda, on whose petition the landmark judgment came, said banks would have to pay interest to customers for delayed encashment of local cheques as well. It usually takes up to three days to be encashed.

In his consumer interest litigation, Nanda had said the delay in crediting the cheques to the customers’ account was leading to “undue enrichment” of banks, which were earning crores in interest on the customers’ money for the delayed period. Directing the banks to comply with the order within two weeks, commission chairman Justice M. B. Shah asked them to write in bold letters in every branch’s notice board the salient features of their policies on collection period of outstation cheques and interest payable in case of delay. He asked the RBI to monitor the order. 8. 4 RESPONSE SHEETS 8. 4. 1 Thesis Response sheet (01) Thesis Topic: Effective implementation of Cheque Truncation System in IDBI Bank, New Delhi Date: 7th July 2008 Name : Neha Satija Batch : PGP- FW 06-08 Alumni ID : DF68-M048 Phone No : 9810809669 Email ID : [email protected] com

Date of Consultation with guide: 6th July 2008 Progress of the work: The face of banking is changing rapidly. With increasing Competition, banks in India will have to benchmark themselves against the best in the world. Therefore, IDBI bank needs to go beyond its peripheral issues and tackle significant issues like improvements in profitability, efficiency and technology. These are some of the issues that need to be addressed if IDBI bank has to succeed, not just survive, in the changing milieu. The introduction of an Image Based Cheque Truncation System (CTS) in IDBI Bank is aimed at streamlining and speeding up the current process of clearing and realization of cheques.

Under CTS, images of the instruments will be sent to the drawee bank and received from the presenting bank through RBI’s Clearing House Interface (CHI) obviating their physical presentation. The secondary study shows that IDBI plans to establish the necessary infrastructure for CTS solution as per RBI’s standards and specifications. Also IDBI would like to evaluate the entire CTS solution functionality and architecture models, from the perspective of alignment with IDBI’s present & future IT initiatives in pipeline. IDBI is planning to implement the end-to-end CTS solution at National Capital Region, Delhi as a pilot project. The same solution can thereafter be extended throughout the country in appropriate stages, as per RBI’s Directives/instructions.

Comments from external guide: The thesis is guided in the progress of collecting all relevant information keeping in mind the various aspects like problems associated with manual handling of cheques, the need for CTS, technology challenge, key benefits of CTS ( to the country, bank and the customer). 8. 4. 2 Thesis Response sheet (02) Thesis Topic: Effective implementation of Cheque Truncation System in IDBI Bank, New Delhi Date: 28th July 2008 Name : Neha Satija Batch : PGP- FW 06-08 Alumni ID : DF68-M048 Phone No : 9810809669 Email ID : [email protected] com Date of Consultation with guide: 27th July 2008 Progress of the work:

After knowing the current scenario of Banking Sector, steps are taken to identify the reasons, rather problems in manual handling of cheques which lead to the implementation of CTS in Delhi as a pilot project. A detailed questionnaire is prepared for interviewing account holders of IDBI Bank who would be benefited the most from this new system. * Please see the attached questionnaire Comments from external guide: The thesis is guided in the progress of collecting relevant information from the customers on the benefits they have realized from the implementation of CTS in IDBI Bank by way of questionnaires. The motive is to find out that are the customers charged an extra amount for this improved system. 8. 4. 3 Thesis Response sheet (03)

Thesis Topic: Effective implementation of Cheque Truncation System in IDBI Bank, New Delhi Date: 18th August 2008 Name : Neha Satija Batch : PGP- FW 06-08 Alumni ID : DF68-M048 Phone No : 9810809669 Email ID : [email protected] com Date of Consultation with guide: 14th August 2008 Progress of the work: The Research constitutes the following steps followed in a particular sequence:- 1. Formulating/Defining the Problems associated with manual handling of cheques. 2. Formulating Thesis Objectives. 3. Developing a Hypothesis. 4. Preparing Research Design. 5. Determining Sample Design. 6. Collecting Data. 7. Analysis of Data. 8. Testing the Hypothesis. 9. Interpretation. 10.

Writing the Thesis Report. Comments from external guide: The thesis is guided in the progress of collecting all relevant information from the customers of IDBI Bank (by way of questionnaires) on the positives and negatives of CTS because they are the ones who would be actually benefited by this new system. 8. 4. 4 Thesis Response sheet (04) Thesis Topic: Effective implementation of Cheque Truncation System in IDBI Bank, New Delhi Date: 20th August 2008 Name : Neha Satija Batch : PGP- FW 06-08 Alumni ID : DF68-M048 Phone No : 9810809669 Email ID : [email protected] com Date of Consultation with guide: 19th August 2008 Progress of the work:

After collecting the information from the customers, the next step is to analyze this information so as to convert this information into meaningful data which will not only be useful for IDBI Bank, but also for other Banks who are thinking of introducing Cheque Truncation System. Comments from external guide: The thesis is guided in the progress of analyzing the information that has been collected from the customers of IDBI Bank by way of questionnaires, which is the most important part of this thesis. 8. 4. 5 Thesis Response sheet (05) Thesis Topic: Effective implementation of Cheque Truncation System in IDBI Bank, New Delhi Date: 25th August 2008 Name : Neha Satija Batch : PGP- FW 06-08 Alumni ID : DF68-M048 Phone No : 9810809669 Email ID : [email protected] com

Date of Consultation with guide: 24th August 2008 Progress of the work: As my secondary research as well as primary research is now complete, the final step is to compile the information so collected into a report which will be useful not only to me, but will also serve as a guideline for the forthcoming generations of IIPM students. Comments from external guide: The thesis is going in the right direction. This thesis will also be helpful for other Indian banks which have not yet adopted CTS. 8. 4. 6 Thesis Response sheet (06) Thesis Topic: Effective implementation of Cheque Truncation System in IDBI Bank, New Delhi Date: 12th September 2008

Name : Neha Satija Batch : PGP- FW 06-08 Alumni ID : DF68-M048 Phone No : 9810809669 Email ID : [email protected] com Date of Consultation with guide: 11th September 2008 Progress of the work: The thesis is now modified according to the set standards like margin, page number, etc. as per the thesis guidelines. Also a bibliography containing various sources upon which information was collected is prepared. And the modifications and corrections were done after consulting with the external guide. I’ll be submitting the thesis in both hard and soft copy on 15th September. ———————– TOTAL NO. OF RESPONDENTS=50 35 MALE (70%) 15 FEMALE (30%)

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