Cheque Truncation System

Cheque truncation means stopping the flow of the physical cheque issued by a drawer to the drawee branch. Instead of carrying the paper from branch to branch and city to city, the system sends an electronic image of the cheque to the drawee bank for payment.

The Cheque Truncation System is a project of the Reserve Bank of India, commenced in 2010, for faster clearing of cheques. With CTS, in the workbook's words, physical cheques do not move between locations for clearing; cheque images of requisite quality move in the CTS processing cycle instead.

For mutual funds this matters because a cheque's value to the investor depends on how fast it becomes clear funds — and the NAV he gets depends on that.

The workbook lists what truncation removes: the need to move physical instruments across branches, which gives an effective reduction in the time required for payment of cheques, the associated cost of transit, and delays in processing — speeding up collection or realisation.

That changed how mutual funds look at cheque types:

The workbook adds that in modern banking, there is no practical difference between a local cheque and an outstation cheque. Mutual funds still do not accept outstation cheques.

Images do not remove the registrar's checks. The RTA still verifies that the cheque is not stale — not more than 3 months old — and not post-dated, that amounts in words and figures match, that it is signed and not mutilated, and that the scheme name matches. It sends instruments for clearing in stipulated time, reconciles returns, and ensures units are not issued on a returned cheque.

Illustrative numbers.

Mr Kapoor hands in an application at an ISC with a local cheque for Rs 2,00,000 for a debt scheme. The form and cheque are time stamped together.

The collecting bank does not send the paper cheque to Mr Kapoor's bank. Its CTS processing cycle sends an image of acceptable quality. His bank sees the image, checks it and pays. The funds become available for utilisation, and the RTA applies the closing NAV of that day — say Rs 40.00:

Stamp duty (0.005%)  = Rs 10.00
Net investable       = Rs 1,99,990.00
Units                = 1,99,990 ÷ 40.00 = 4,999.750

Now the other outcome. His bank returns the cheque for insufficient funds. The collecting banker's reverse feed marks it bounced, the RTA reconciles, and no units are issued. There is nothing to reverse, because no units were created before realisation.

And a third version: Mr Kapoor's cousin writes an outstation cheque, drawn on an account in another city with no multi-city facility. The ISC does not accept it at all.

Chapter 13 (Banking Operations in Mutual Funds) mentions CTS in the cheque discussion in section 13.1.2 and defines it in section 13.4.2 under Electronic Clearing Mechanisms, alongside NPCI and NACH. Its sample question asks which instrument is not valid for subscription — the outstation cheque. Chapter 14 (Financial Transactions) supplies the payment instrument checks the RTA runs on every cheque, and Chapter 13.5 the rule that units are never issued on a returned cheque.

• CTS is an RBI project, commenced in 2010. Not NPCI's, and not SEBI's.
• Truncation stops the physical cheque, not the cheque as an instrument. Investors still write cheques; the image travels.
• Outstation cheques are not accepted by mutual funds, because realisation delays affect NAV applicability — even though the workbook says there is no practical difference between local and outstation cheques in modern banking.
• An at-par cheque is treated as a local cheque when presented at any branch of the drawee bank.
• Faster clearing does not relax instrument checks: a cheque over 3 months old is stale, and post-dated cheques are not accepted.
• Units are not issued on a returned cheque. The RTA's reconciliation of the bank's reverse feed enforces it.