Money Clearing Process

Money Clearing Process

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The instruments of exchange (cheques, drafts, etc) are used to receive or pay claims. Before the amount is credited or debited to any account, it has to pass through the clearing system. The clearing process refers to the exchange of instruments by banks drawn on them through a clearing house. Instruments like cheques, demand drafts, interest and dividend warrants and refund orders can go through clearing. Documentary bills or promissory notes do not go through clearing.

The clearing process has been highly automated in a number of countries. Electronic date is used instead of paper. Banks in India have started using MICR to automate the clearing process. They maintain an account with the reserve bank of India (RBI) which is debited for inward clearing (items drawn on plus outward returns) and credited for outward clearing (items drawn on other banks plus inward returns).

The clearing house covers banks located within a defined geographical area. Thus when we say a cheque is payable in local clearing in Bombay them it must be drawn on a bank located within the geographical area covered by the Bombay clearing house. Clearing operations are based on time limits. There is a time by which the cheques have to be given to the clearing house and time by which returned cheques have to be given back. A cheque that is not returned is treated as paid.

Credit is given to the customer as soon as the banks get credit through the clearing. The credit is with a hold for the time it takes to get returns back and debit them. Thus, the customer cannot draw on these funds till the hold is removed. Some banks credit customers only after funds are cleared. This creates a problem for customers with advances accounts as they continue paying interest for the clearing period.

Cheques deposited by customers drawn on other banks go for outward clearing. In the manual process that applies for non-and tallied before presenting them to the clearinghouse. For MICR cheques, the cheques have to be encoded and then presented to the clearinghouse.

Cheques must be returned within a tight deadline; so quick processing is essential. Returned cheques can be divided into two categories; (a) inward return (cheques presented by other banks and returned), and (b) outward returns (cheques returned by other banks). Return cheques have to be processed independently from the propel handling clearing. In the case of outward returns, it is essential that the presenting department is stamped on the cheque as otherwise the clearing department will not know the area to debit.

To conclude this section on collections, it may be stated that the major advantage of accelerating collections is to reduce the firm’s total financing requirements. Other advantages also follow. By transferring clerical function to the bank, the firm may reduce its costs. Improve internal control and reduce the possibility of fraud.