Cheque Truncation System

Definition: The Cheque Truncation System or CTS is the cheque clearance system introduced by RBI to fasten up the clearing of cheques. In this system, instead of producing the physical cheques to the payee bank, just the electronic image of the cheque along with the MICR code and other cheque credentials are transmitted to the drawee bank for the payment through a clearing house.

Benefits of Cheque Truncating System

1. The speed of cheque clearance process has been increased manifold since there is no need for the physical transfer of cheques between the banks.
2. As there is no physical movement of cheques from one bank to the other, there is no fear of loss of cheque due to mishandling by either bank.
3. The Cheque Truncation system has helped the banks to have a superior verification and an effective reconciliation process.
4. The CTS system has eradicated the geographical restrictions as to the jurisdictions. Earlier the clearance was restricted to the banks operating within the restricted geographical area, but now with this system, the cheques even drawn on upcountry banks can be cleared electronically with ease.
5. The CTS-compliant cheques are prone to fewer frauds and hence are more secured than the old cheques.

The Cheque Truncation System was evolved to overcome the limitations of the earlier cheque clearing system that required several days of clearance. Earlier, the cheques deposited in the collection bank were supposed to be physically transferred to the drawee bank to get the amount credited to the drawer’s account, which was a cumbersome process and resulted in the delay in the clearing of cheques.

Thus, in order to overcome this delay, the cheque truncation system came into practice, wherein the electronic image of the cheque is sent to the payee bank, which further sends it to the RBI for the final settlement. This whole process of cheque clearance gets completed either on the same day or on the very next working day.