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LOCAL CLEARING PROCESS

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1. What is Clearing and what is a Clearing House?

If a cheque drawn by a customer is drawn on another bank in the same city, it is sent to the
payees bank collected. Banks in a city who receive instruments from their customers, drawn on
other banks in the same city, present the instruments through local clearing process, since
payment of cheques across the drawee banks by other means, is a cumbersome process. The
process is simplified by each of the banks sending a representative carrying the cheques to be
collected to a central place. The place or office where the representatives of all the banks
meet and exchanges cheques drawn on each other is called a Clearing house
2. Specify the importance of Clearing system
Clearing is an importance settlement mechanism between banks at a particular center.
Clearing Houses established by RBI to conduct Clearing at various centers.
Physical instruments are exchanged at the Clearing House and the total presentations are
accounted for in the Current Account maintained by banks with the Clearing House Bank.
Settlement is done on the basis of Net position for each bank
2. How does Clearing Operate?
Let us suppose that at the clearinghouse, the representative of State Bank of India gives 456
cheques for Rs. 50,00,000 to the representative of ABC Bank. Similarly, the representative of
ABC Bank gives the representative of State Bank of India 674 cheques for Rs. 70,00,000 drawn
on SBI. ABC Bank has to pay Rs. 50,00,000 and SBI has to pay Rs. 70,00,000. Their claim on
each other is settled by SBI paying ABC Bank the difference of Rs. 20,00,000. RBI debiting
the account of SBI and crediting the account of ABC BANK effects the payment. The
representative will carry the cheques to their respective banks and debit the accounts of the
respective customers.
3. Who manages a Clearing House
Generally, RBI, which is the settlement bank, manages the clearinghouse. At some centres like
Ahmedabad, where RBI has an office, the management of the clearinghouse is done by RBI.
However, at places where RBI is not present, SBI or some other bank, which acts as the
settlement bank, manages the clearinghouse. All the banks at that centre will maintain accounts
with the settlement bank to facilitate settlement of the claims on each other.
4. What is Net Settlement?
As stated earlier, the final clearing settlement is made by debiting and crediting the net
amount payable. This is known as net settlement as against a gross settlement where each
bank pays the amount due to the other bank as in the case of RTGS.

5. What is CTS?
The introduction of CTS ie., truncation of cheques or avoidance of presentation of the
physical cheques to the clearinghouse has brought more transparency, which is risk free where
settlement is done at a Real Time. It replaces the physical cheques and passes on only the
images to the clearinghouse. The images are transmitted to the concerned paying bank for
further processing.

Inward and Outward Clearing:

For any bank, there are two activities involved in Clearing:

Clearing cheques drawn on other banks presented in clearing by say State Bank of India,
are called OUTWARD CLEARING instruments of State Bank of India. The amounts
relating to these instruments are credited to the customers account at State Bank of
India.
Similarly while State Bank of India delivers these instruments to other banks,
instruments drawn on State Bank of India, will be delivered by other banks, which will be
collected by State Bank of India, and amounts debited to the customers accounts
maintained at their branches. These are referred to as INWARD CLEARING instruments
of State Bank of India.
Instruments of the above clearing when returned unpaid for various reasons are referred
to as Outward returns and Inward returns respectively.

Transactions
Outward clearing:
1. Cheques of a customer are presented in Clearing to other banks. Hence,
Dr. RBI Clearing Imprest account
Cr. Customers account
2. Similarly when some instruments are returned,
Dr. Customers account
Cr. RBI Clearing Imprest Account (Return account)
Inward Clearing:
1. Cheques of customers are received in clearing and accordingly,
Dr. Customers account
Cr. RBI Clearing Imprest Account
2. Similarly when some instruments are returned,
Dr. RBI Clearing Imprest Account
Cr. Clearing Return Account.
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Types of Clearing

General Clearing or Normal Clearing

High Value Clearing
Return Clearing
Inter Bank Clearing
ECS clearing
Special Clearing and so on
Time schedules are prescribed for each type of Clearing at each center to be strictly
adhered to.

MICR Clearing:

Magnetic Ink Character Recognition (MICR)

Sorting is done in a common place by a machine called READER SORTER after reading the
details encoded in the MICR band of the cheque.
MICR code comprises of 9 digits - First 3 city, next 3 bank, next 3 branch.
Before sending instruments in clearing they are encoded with the details with the help of
an Encoding machine.
Cheque returns take place the same day.

Non -MICR Clearing:

High

In centers where the is no MICR Clearing and the process / sorting is done manually by
the banks.
When volume increases, a need arises for MICR clearing.
Manual settlement and accounting of the presentations takes place.
Cheque returns normally take place the next day hence care to be taken while releasing
of credits for Outward Clearing after the returns are accounted for.
Value Clearing:
Conducted in some big centers only.
Separate Clearing for instruments of Rs. 1 lac and above
This is an additional clearing along with regular MICR clearing
Returns will be known on the same day.
All branches cannot participate because of distance.
Funds to be made available after finalization of Returns.
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Inward Clearing Returns:

Cheque returns pertain to Inward Clearing have to be finalized and submitted as per
Clearing House Return timings. This is also called Return Outward.
Returns can be for financial (funds) or non financial reasons (date, difference in amount
in words figures etc)
After finalizing the returns and checking the report the Inward Clearing Zone in Finacle
is closed.
Counter Return is not a part of Inward Clearing Return as it is outside the Clearing
discipline and has to be dealt with separately.
Outward Clearing Returns:
Cheque returns pertain to Outward Clearing have to be finalized and submitted by the
other banks as per Clearing House Return timings. This is also called Return Inward.
After receipt of the Returns the same have to be posted to the respective accounts
through Return Zone opened in finacle.
On ensuring that all the returns are posted the Outward Clearing credits can be released.
Counter Return by other banks is not a part of Outward Clearing Return as it is outside
the Clearing discipline and has to be dealt with separately.
ECS Clearing
ECS - Debit
ECS - Credit
ECS Debit
Customer accounts will be debited directly through the Report sent by Clearing House
Debit Mandate is taken initially from customer for participating in ECS Debit Clearing
and debit of their account.
Facility is available at all MICR centers and uses the MICR code of bank branches for
processing.
Meant for Corporates / Utility companies wherein all utility payments etc., can be
recovered from their customers through ECS.
ECS returns have to be made to the Clearing House as per stipulated timings.
ECS Credit
Customer accounts will be credited directly through the Report sent by Clearing House
Credit Mandate is taken initially from the customer for permitting credits in the account
through ECS Credit
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Facility is available at all MICR centers and uses the MICR code of bank branches for
processing.

Meant for Corporates / Utility companies wherein all interest/dividends credits etc., can
be paid to their customers through ECS.
ECS returns have to be made to the Clearing House as per stipulated timings.

Special Features of Cheque Truncation:

Helps in faster processing of cheques.
The presentation of physical instruments is truncated or stopped at the collecting
bank and only images are sent to Clearing House.
Special software processes images for presenting clearing/returns.
Multiple Clearing can be held each day.
Outstation cheques
Deposited by presenting bank customers
SPEED CLEARING is available at RBI centers for faster collection.

AUTOMATED CLEARING HOUSE (ACH)

1. What is Automated Clearing House (ACH)?
Automated Clearing House (ACH) is an electronic network for financial transactions which
operates through National Payment Corporation (at BKC, Mumbai). ACH processes large volumes
of credit and debit transactions in batches. ACH credit transfers include direct deposit, payroll
and vendor payments.
ACH is a computer-based clearing and settlement facility established to process the exchange
of electronic transactions between participating depository institutions.
2. What is ACH Direct Debit transfer?
ACH direct debit transfers include consumer payments on insurance premiums, mortgage loans,
and other kinds of bills. Debit transfers also include new applications such as the point-ofpurchase (POP).
3. Discuss the salient features of ACH
The nation is now geared up for another NPCI mandate i.e. ACH or Automatic Clearing House.
The primary motive of ACH is to handle low value, high-volume transactions based on electronic
files. Ideally implementing this mandate will allow transactions to be cleared in real-time mode
rather than batch mode. This paradigm shift to Real-time mode will be a milestone for the
Payment landscape in the country and mirror global standards. The scope of ACH is set to cover
82,000+ Bank Branches spread all over India.
Objectives of NACH: (National Automatic Clearing House)

Leverage on distribution footprint and technology to provide a modern, robust platform

to handle large volumes of repetitive payments
Define and Manage Governance Process by way of a set of Operating Guidelines, practices
and standards for all Participants, Service Providers and Users etc.
Introduce a refined Mandate Management system and processes with defined and
transparent SLAs.
Provide Enhancements and Enrichments additional data elements in the message
formats, secured access, and user control.
Facilitate Exceptions and Dispute management
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Support financial inclusion by providing support for Aadhaar based transaction.