[sbinews] Internet and Banking - Article on how Truncated Cheques work(Financial Express)

  • From: rspai@xxxxxxxx
  • To: sbinews@xxxxxxxxxxxxx
  • Date: Sat, 22 Nov 2003 05:41:38 +0500

Internet And Banking  
(Financial Express) 
Internet has been constantly penetrating the lives of common men and the same 
has been revolutionised over the years. It holds within its ambit unfathomable 
avenues, innumerable have been discovered and infinite remain to be explored. 
The opportunities internet could bring in the future are enormous, from 
communication to entertainment. Banking services is one sector that has 
enormous potential and it is already knocking down the traditional means of 
doing business. The latest to join the league is the electronic means of 
payment. With the invasion of hand held computers and instant access to 
internet, electronic cheques might even replace the preferred way of payment, 
besides cash and plastic. As the volume of payments continues to rise, the cost 
to banks and business and ultimately to customers is also increasing. Various 
other methods of payment have been considered and tried, but nothing seems to 
be as simple and efficient as an electronic cheque. 

The paper cheque has long been established as the main instrument of payment. 
It is used as a means of paying bills between individuals and organisations, 
between businesses, and between individuals. In Singapore last year, the banks 
cleared over $600 billion worth of cheques. In the United States, the banks 
handled more than 70 billion cheques and in Mumbai and Delhi approximately 
1,400,000 cheques are cleared every day. 

Electronic cheque is an electronic end-to-end payment instrument that works 
just like a paper cheque and is eligible for legal treatment as a paper cheque. 
It is modelled on the lines of a paper cheque, except that it is initiated 
electronically, uses digital signature for signing and endorsing and digital 
certificates to authenticate the payer’s bank and the bank account. Following 
the technological advancement globally, the Negotiable Instruments Act, 1881 
(the ’Act’) has been amended to incorporate e-commerce aspects. 

The amendment has brought in two concepts of digital cheques. One is a ’mirror 
image’ of a cheque digitally signed. Second is the concept of ’truncated 
cheque’ where the physical cheque carrying a physical signature of the drawer 
is killed and replaced with an image of the signed cheque. Power to create a 
truncated cheque lies with the clearing house or by the paying or collecting 

Accordingly, Section 6 of the Act has been amended to include electronic 
cheques, which means a cheque that contains the exact mirror image of a paper 
cheque and is generated, written and signed in a secure system ensuring safety 
standards with the use of digital signature (with or without biometrics 
signature) and asymmetric crypto system. Closely linked to the concept of 
electronic cheque is the process of cheque truncation, which has been given 
legal backing by the Act. It is a process, which avoids the problem of physical 
movement and transportation of cheques. 

In the cheque truncation process, the cheque is halted at some stage during the 
clearing cycle. It is not returned for final payment to the bank on which it is 
drawn. The truncation is made where the physical movement of the cheque will be 
halted and an electronically transmitted image of the cheque would be passed 
on, for further processing and payment. At present, the drawee bank has the 
right to be shown the instrument on presentment and to have the instrument 
delivered to it on payment. 

In cheque truncation, the instrument remains with the collecting bank and a 
certificate is issued on the foot of the printout of the electronic image of a 
truncated cheque by the banker who paid the instrument, which shall be prima 
facie proof of such payment. Accordingly, Section 81 of the Act has been 
amended and even after the payment, the banker who received the payment shall 
be entitled to retain the truncated cheque. 

Section 89 of the Act has also been amended and where the cheque is the 
electronic image of a truncated cheque, any difference in apparent tenor of the 
electronic image and the truncated cheque will be a material alteration and it 
shall be the duty of the bank or the clearing house, as the case may be, to 
ensure the exactness of the apparent tenor of the electronic image of the 
truncated cheque while truncating and transmitting the image. In consonance 
with the amendment of the Act, Information Technology Act, 2000 (the ’IT Act’) 
has also been amended to give legal sanction to the electronic cheque 
transactions. Consequently, as per section 13 of the IT Act, in the electronic 
payment system the finality of irrevocable nature takes place when the payment 
is made. It is so because dispatch of electronic record occurs when it enters 
the computer resource outside the control of the sender. Since, in electronic 
systems actions are instantaneous and there is no time lag, the prese
nt concept of stop payment has to be brought in consonance with the system and 
usage. Also, there will remain concerns pertaining to hacking and manipulations 
of electronic records, which can only be perfected over a period of time with 
advancement of technology. The initiation of the electronic transaction process 
in the banking sector would have far reaching results in terms of cost and 
speed of transactions. Nevertheless, in the present scenario, internet banking 
is in the earliest stages of development and an electronic cheque has its own 
limitations in India. 

Internet banking restricts access only to internet users and the density of 
internet users in India is dismal. Consumers’ unfamiliarity with the basic 
mechanics of internet working and data flow creates additional obstacles. But, 
this is a significant beginning and over time electronic payment will 
proliferate to masses. 

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