Defination of Clearing House

Clearing House is a place or an institution where mutual claims and accounts are
settled as between banks. Clearing house ordinarily has to perform only the function of
settling the differences between banks at the end of each clearing or at the end of each day.

According to Dictionary Of Banking and Finance ,Clearing House is a place where

representative of the banks in the same locality meet each day at an agreed time to
exchange cheques drafts and drawn on each other and to settle in resulting balances.
Oxford Dictionary of Business has to said, Clearing House is a centralized and
computerized system for settling indebtedness between members.
Professor Sayers has to say that, The interbank indebtness arising from the transfer of
deposit from one person to another is made by bankers clearing house.
Bankers clearing house is an organization that transfers money between member banks
originally to clear cheques.
In fine saying that clearing house is place where settling inter banking indebtness and
claims arising from cheques, bank drafts, and bills under the custody of central bank.

Origin of the Clearing System

The clearing system in its present form is a remarkable instance of evolution, it was not
suddenly created but it is the outcome of a gradual growth brought about as a necessity to
meet the requirements of time. In deeds developments although has been due to forces
from without rather than from within. The Walk Clerks were apparently the pioneer of the
existing system.
The early history of the clearing system is largely a matter of conjecture. It originated in the
simple exchange walk clerks of draft payable at their respective banks. Little did walk clerks
realize that they were instituting machinery which would eventually become the center for
the exchange of bankers charges not only for London but for the whole England and Wales ?

Origin of the Clearing House

In England cheques were used from the 17th century. Up untill1770 an informal exchange of cheque took place
between London banks. Clerks of each bank visited all of the other banks to exchange cheques whilst keeping

tally of balances between them until they settle with each other .Daily cheque clearing began around 1770

when the bank clerk meet at the 5 bells a tavern in Lombard street in the city of London to exchanging all their
cheques in one place and settle the balance in cash.

The first organization for clearing cheque was the Bankers Clearing House established in
London in the 19th century. It was founded by Lubbocks bank on Lombard Street in a single
room where clerk for London bank meet each day to exchange cheques and settle accounts.
In 1832 Charles Babbage who was a friend of a founder of the clearing house published a
book on mass production The Economy of machinery and Manufactures in which Babbage
described how the clearing house operated.
In a large room Lombard street about 30 clerks from the several London bankers take
their stations ,in alphabetical order ,at desk placed round the room ,each having a small
open box by his side and the name of the firm to which he belongs . From time to time other
clerks from every house enter the room and passing along , drop in to the box the cheques
due by that firm to the house room which this distributor is sent.
In 1935 before the establishment of Reserve Bank of India the functions of clearing is
conducted in this subcontinent under the custody of Imperial Bank of India. In 1948 after
the establishment of State bank of Pakistan this bank takes the responsibility of clearing
house. After 1972 clearing house is conducted under the custody of Bangladesh Bank.

Procedure or mechanism of clearing house

Sending and receiving points:
A bank may have multiple points of truncation, but will
have one single point of connection with BACPS which will be termed as sending and
receiving point the BPM will be located at this point.

Settlement:

Settlement shall be made on the basis of the electronic cheque data

including the amount that accompanies the image and that is contained in cheque return
data. The specification that qualifies cheques for image based clearing must be strictly
adhering to.

Digital signature:

The use of the public key Infrastructure (PKI) will ensure data
authenticity integrity and non repudiation, adding strength to the entire system. The PBM of
the presenting bank will affix digital signature on each file from the sending point. The

image and data must be secured using the PKI throughout the entire transmission cycle
between the presenting bank clearing house and the paying bank.

Use of secure network:

All electronics files dully validated, encrypted and

digitally signed, will travel over a secure communication link connecting each bank with the
clearing house all acknowledgement messages will be transmitted via the same links.

Storage and archiving system:

A sound storage and archiving system is an

integral part of BACPS which ensures that all relevant data is immediately available to
resolve disputes, complaints, reconciliation issues etc. The physical instrument (truncated
items) must be sequentially preserved for 6 years by the presenting bank.

Scanning standard:

The scanning will conform to the prescribed standards which

are bi tonal (black and white) .At the time of scanning the instruments the scanner or reader
will print a single line endorsement on the back of each instrument which shall be the
unique identifies for the instrument.

Internal control:

The banks should documents the process flow and ensure

that adequate control mechanism is in place. Special care and adequate quality control
should be place during rescanning of instruments representation of instruments. The bank
must have mechanism to generate internal control reports at the end of the day to
effectively reconcile the presentation made and the credit received by it from clearing
house.

Importance of clearing House

To settle interbank indebtness, mutual claim between member banks clearing house plays a
vital role. The role of clearing house is highlighted below:

Quick settlement of transaction

Easy transfer of money
Minimization of risk
Liquidity facility
Credit control

Saving of time
Easy control of banking system
Economic policy
Development of banking system
Development of money system.

Automated Clearing House

Automated clearing house is a computer based clearing and settlement facility
established to process the exchange of electronic transaction between
participating depository institutions. ACH is a nationwide electronic fund transfer
that provides for the interbank clearing of debit and credit transaction and for the
exchange of information among participating financial institution.
The purpose of ACH is to exchange (clear and settle) electronic transactions. The
ACH is a secure, private electronic payment transfer system that connects all
financial institution of a country.
Utilizing ACH payment is cheaper and faster than processing paper cheques both
B2B (business to business) and B2C (business to consumer) E-commerce
activities heavily rely on the ACH system.

A little history of ACH context of Bangladesh

The modernization of the payments and settlement systems is one of the core
objectives of Bangladesh Bank. In November 2006, BB with financial assistance
from the United Kingdom Department for International Development (DFID)
initiated a project called Remittance and Payment Partnership (RPP).
The project and BB directives encouraged banks to install core banking and
thereby upgrade their own internal operations. 31 banks now have their core
banking system (CBS) installed remaining banks are at different stage of
implementations of CBS and linking up all their branches countrywide.

Bangladesh Automated Clearing House (BACH)

BACH is the first ever electronic house has started live operation in Dhaka from
October7, 2010. It has two components_ 1.Bangladesh Automated Cheque
Processing System (BACPS)
2. Bangladesh Electronic Fund Transfer Network (BEFTN).
BAC S is the electronic cheques processing of paper based instruments,
uses cheque Imagine and Truncation Technology. The system support both

intraregional and interregional clearing and is based on a centralized

processing centre located in Dhaka.
BEFTN is the maiden initiatives for electronic transfer of fund.

Clearing and Settlement System

At present 4 clearing houses in Dhaka and its branches in seven other

cities.
Sonali Banks clearing houses in 31 cities where there are no BB
branches
The Bangladesh Bank large value cheque settlement system and
The Bangladesh Bank foreign currency system in Dhaka which clears
and settles foreign currency, cheques and pay orders by the Forex
Reserve and Treasury Management Department.

There are 4 clearing each day at the BBs clearing house. The first
clearing starts at 10.30 are and return of the first clearing are at
5.30 pm. The same day clearing starts at 11 am and return occurs
at 2 pm. The instruments cleared through the clearing houses are
cheques, bankdrafts,and, pay orders, dividend warrants drawn on
commercial banks.

General rules of clearing system

The following rules are to be followed governing the clearing system:
The total amount of the morning and country delivery shall be
agreed by each clearer before leaving the clearing house

All clerks that are in the clearing house by the time appointed for
final delivery shall be entitled to deliver their articles, though they
may not have been able to pass them to the different desks before
the clock strikes
All returns in the clearing house upon the stroke of the clock at the
time appointed for final delivery must be received by the clearer
and credited the same day
Inspectors are instructed to close the doors and not reopen them
until such return have been delivered

Any bank which has accepted and paid an article returned to it in

error may require payment through the clearing house on the
following day.

Uses of ACH payment system

Bank management treasury departments sell this service to business and

government customers

Business to business payments

Direct debit payments of consumer bills such as mortgages, loans,

utilities, insurance premiums, rents and any other regular payments

Direct deposit of payroll, social security and other government payments

and tax refund

E-commerce payments

Federal, state and local tax payments.