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Reviewed by Jul 26, 2021| Updated on
Truncation is the method of stopping the flow of the physical check issued at some point by a drawer with the presenting bank on its way to the branch of the drawee bank. In its place, 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.
Cheque truncation, thus, obviates the need to transfer the physical instruments through branches, rather than for clearing purposes in exceptional circumstances. The electronic transfer of information eliminates the cost associated with the transfer of the physical cheques, reduces the time required for their collection, and speeds up the entire activity of cheque processing.
Cheque truncation speeds up the process of collecting checks resulting in improved service to customers, decreases the risk for clearing-related frauds or loss of instruments in transit, lowers the cost of collecting cheques, and avoids issues related to reconciliation and logistics, thereby helping the system as a whole.
With the other major products being RTGS and NEFT, the Reserve Bank has developed the ability to allow interbank and customer payments electronically and in almost real-time.
Since cheques are still the country's prominent mode of payment, the Reserve Bank of India has decided to concentrate on improving the efficiency of the cheque clearing cycle, providing an alternative to the Cheque Truncation System (CTS). As pointed out earlier, CTS is a more secure method vis-à-vis physical document exchange.
In addition to the operational efficiency, CTS offers banks and customers many advantages, including rationalization of human resources, cost-effectiveness, re-engineering of business processes, improved service, implementation of the new technology, etc. CTS has, thus, emerged as a significant efficiency improvement initiative undertaken by RBI in the field of payment systems.