Collection Services Objectives

In this session, you will learn to:

Understand mechanism of collection of cheques by banks Describe the functioning of MICR clearing and non-MICR clearing houses Explain clearing cheque returns, high value clearing and payment against clearing Understand cheque truncation

Slide 1 of 13

Collection Services Collection Services

Collection services performed by banks are:
Local clearing Outstation collection Upcountry collection

Slide 2 of 13

Collection Services Collection Services (Contd.)

Clearing house:
An association of banks that facilitates payment of cheques between different bank branches within the city or town. Acts as a central meeting place for bankers:
To exchange the cheques drawn on one another. To claim funds for the cheques from each other.

Two types of local clearing are:

Non-MICR clearing MICR clearing

Slide 3 of 13

Collection Services Collection Services (Contd.)

Non-MICR clearing:
Is a manual clearing system.

Non-MICR clearing houses exist in semi-urban towns and other non-metropolitan centres. On any clearing day, the following formula results in clearing house adjustment:
Total of all favourable balances total of all unfavourable balances = 0

Slide 4 of 13

Collection Services Collection Services (Contd.)

MICR clearing:
Clearing by electronic or magnetic media.

MICR code consists of:

Cheque number:
Six digits: Unique to each cheque.

Sort code:
Three digits : City code Three digits : Bank code Three digits : Branch code

Account number:
Six digits: Uniquely represent each account.

Transaction code:
Two digits: For SB 10 and for current account 11.

Slide 5 of 13

Collection Services Collection Services (Contd.)

Amount code: Code printed by MICR encoder corresponding to the amount of the cheque. Service branch: Branch where all the cheques drawn on other banks are consolidated before sending to clearing house. Clearing cheque return: Time duration by which a cheque should return to clearing house in case funds are not available in customer account. High value clearing: Clearing of cheques amounting more than five lakhs. Uncleared balance or shadow balance: Credit shown in account for uncleared funds.

Slide 6 of 13

Collection Services Collection Services (Contd.)

Outstation clearing: Clearing of cheque issued by branch outside the local clearing zone. Upcountry collection: Clearing of cheque issued by branch located in area where the drawee bank does not have any branch. Cheque truncation: Technique where electronic image of the physical cheque presented for clearing is shared between the banks to reduce time delays.

Slide 7 of 13

Collection Services

Check Your Understanding

Slide 8 of 13

Collection Services

Activity

Slide 9 of 13

Collection Services

Practice Questions

Slide 10 of 13

Collection Services Summary

In this session, you learnt that:
Collection services of banks through local clearing, outstation cheque collection or upcountry collection immensely benefit their customers. There two types of local clearing are MICR clearing and nonMICR clearing. Non MICR clearing is a manual clearing i.e. listing and sorting of the cheques are done manually. Non MICR clearing houses exist in semi-urban towns and non-metro centres where the volume of cheques cleared is not very high. In India, there are 1047 clearing houses as of 2009 out of which only 42 are MICR centres and the rest are non MICR centres.

Slide 11 of 13

Collection Services Summary (Contd.)

If any cheque is not returned to clearing house before the stipulated time on the same day, it is deemed to have been passed and such a cheque cannot be returned later by the drawee bank. MICR clearing is very fast and mechanised. An MICR cheque will have a blank band at the bottom where the codes are printed in magnetic ink, to identify the bank, branch, account no., city, and transaction. In a metropolitan clearing house normally the return time of clearing cheques is allowed till the next day. All banks have their Service Branches functioning in metropolitan centres to represent them in the respective clearing houses.

Slide 12 of 13

Collection Services Summary (Contd.)

RBI acts as the manager of clearing houses in metropolitan centres. At other centres SBI or PNB or any bank with large operations acts as manager of the clearing house. Under cheque truncation, the physical movement of the cheque from one place to another is reduced to the minimum. A cheque can be forwarded by a bank to any other bank in India in a fraction of a minute and the proceeds of the cheque collected and credited to the account of the beneficiary may be within a few minutes through electronic mirror imaging technology. Cheque truncation is being done as a pilot project by RBI in Delhi.

Slide 13 of 13