
The Cheque Truncation System has revolutionized the way cheques are processed, making it a game-changer for the banking industry.
By truncating cheques, banks can reduce the time it takes to clear cheques from several days to just a few hours. This means that payees can access their funds faster.
This system has also increased the efficiency of cheque processing, allowing banks to process a large volume of cheques quickly and accurately.
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What Is Cheque Truncation
Cheque truncation is the method of stopping the physical check issued by a drawer at some point by a presenting bank on its way to the branch of the drawee bank.
The clearinghouse transmits an electronic picture of the cheque to the drawee branch along with relevant information, such as MICR band details, date of presentation, bank presentation, etc.
This process eliminates the need to transfer the physical instruments through branches, reducing the associated costs and time required for their collection.
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Cheque truncation thus speeds up the entire activity of cheque processing.
The Reserve Bank of India (RBI) defines truncation as the process of interrupting the flow of a physical cheque.
A drawer issues the cheque en route to the paying bank branch at some point, and instead, the clearing house sends an electronic image of the cheque to the paying branch.
The RBI has implemented the Cheque Truncation System (CTS) to clear cheques electronically, expediting the clearance of cheques and reducing the associated costs of moving physical cheques.
This mechanism stops the flow of actual cheques from a drawer to the drawee branch, minimizing the time required for collecting.
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How It Works
Cheque truncation is a process that speeds up transactions involving cheques and helps banks keep a timely record of all such transactions. This system eliminates the need for physical paperwork, making it easier for banks to streamline their records.
The process of cheque truncation involves both outward and inward clearing of checks. In the first step, the accepting bank captures the image of an electronic cheque using a 'Capture System'.
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The captured image is then sent to the clearing house by the accepting bank. The clearing house acts as a gateway between the two banks (paying bank and accepting bank).
The clearing house transmits the data related to the electronic cheque-based transaction between the two banks. This process is also known as data reading, which is done to confirm the authenticity of the cheque.
Here's an overview of the steps involved in cheque truncation:
- Inward Clearing: The accepting bank captures the image of the cheque.
- Outward Clearing: The clearing house sends the encrypted image to the paying bank.
- Presentation Clearing: The clearing house performs data reading to confirm the authenticity of the cheque.
- Verification: The paying bank receives the data and images, and verifies everything before processing the cheque forward.
The paying bank verifies the data and images before processing the cheque forward. This ensures that the transaction is legitimate and accurate.
National Systems
In the United States, the Substitute Check in the Check 21 Act plays a significant role in cheque truncation. This system allows banks to substitute a digital image of a cheque for the physical document, making the process faster and more efficient.
The Cheque Truncation System (CTS) is also used in India, where it has improved the efficiency of the cheque clearing cycle and provided an alternative to physical document exchange. CTS is a more secure method, reducing the risk of clearing-related frauds or loss of instruments in transit.
Here are some key benefits of CTS:
- Rationalization of human resources
- Cost-effectiveness
- Re-engineering of business processes
- Improved service
- Implementation of new technology
National Systems

In the United States, a substitute check system is in place under the Check 21 Act. This system allows banks to electronically process and deposit checks, reducing the need for physical checks to be transported.
The Cheque Truncation System, or CTS, is used in India to speed up the process of collecting checks. CTS offers several advantages, including improved service to customers, reduced risk of clearing-related frauds, and lower costs.
The Reserve Bank of India has focused on improving the efficiency of the cheque clearing cycle in India. This is partly due to the fact that cheques are still a prominent mode of payment in the country.
CTS has emerged as a significant efficiency improvement initiative in India, offering benefits such as rationalization of human resources, cost-effectiveness, and improved service.
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For Banks
The National Systems, specifically the Cheque Truncation System (CTS), offers numerous benefits for banks. Implementing CTS leads to a faster clearing cycle, allowing banks to technically realize the proceeds of a cheque within the same day.
Banks can enjoy better reconciliation and verification with CTS, making it easier to manage transactions. This also translates to improved customer service and a more enhanced customer window.
CTS reduces operational risk by securing the transmission route, giving banks peace of mind. Centralized image archival systems make data storage and retrieval a breeze.
Manual tasks are minimized with CTS, resulting in fewer errors. Real-time tracking and visibility of cheques are also made possible, reducing the chances of fraud.
Here are some key benefits for banks:
- Reserve Bank of India (RBI) involvement in payment and settlement systems in India
- Reduced operational risk through secure transmission
- Improved customer service and customer window
- Enhanced operational efficiency
- Less manual tasks and fewer errors
- Real-time tracking and visibility of cheques
- Reduced fraud risk
Benefits and Purpose
Cheque truncation aims to speed up the steps involved in processing digital checks, improving efficiency and reducing banks’ costs.
In the US, Americans still use paper checks for certain expenses like rent, making the check truncation process vital to America’s financial system.
The check truncation process saves time, money, and resources spent on the physical transfer of cheques from banks to clearing houses.
It also eliminates the risk of cheque loss due to mishandling by banks.
CTS is safe and secured, and clearing-related fraud becomes less likely.
The CTS system has eliminated geographical jurisdictional limits, expediting the clearance of cheques.
Here are some key benefits of the CTS system:
- Saving time and resources
- No chance of cheque loss due to mishandling
- Clearing-related fraud becomes less likely
- CTS is safe and secured
- The CTS has eliminated geographical jurisdictional limits
- It expedites the clearance of cheques
- No extra charges for collecting cheques written on a bank inside the grid
The CTS system has been effective in resolving logistical challenges, reducing operational risk, and bringing uniformity and standardization to the system that handles transactions.
Frequently Asked Questions
What is the difference between a truncated cheque and an electronic cheque?
A cheque is truncated when its physical movement stops and electronic processing begins, whereas an electronic cheque is issued digitally with no paper involved. This key difference affects how cheques are processed and handled in the banking system.
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