How Cheque Clearing Process Works in Banks in Pakistan

The word Clearing has been derived from the word “CLEAR” and is defined as “a system by which banks exchange Cheques and other Negotiable instrument drawn on each other within a specified area and thereby secure payment through the clearing house at specified time” in an efficient way. 

As we know that, one of the basic economic functions of commercial banks is to receive deposits and to honour Cheques drawn upon them. So, Businesses after opening bank accounts use cheques. The cheque is the most commonly used instrument for making payments by account holders.

Along with the Cheques, there are some other negotiable instruments like Pay Order (PO), Demand Draft (DD), Travelers Cheques (TC), Call Deposit receipt (CDR) etc, that are used for making payments and are drawn upon a bank.

The question arises that how these Cheques & other negotiable instruments drawn on one bank are deposited in other banks and money is transferred from one bank to another. 

Clearing House has provided this facility. Clearing house facilitates different banks, in one city, to get their Cheques drawn upon other banks to be cleared. 

Cheques lodged in clearing connect two types of clearing:

Lodgement of Cheques in Outward Clearing

When Cheques, Traveller Cheques and other negotiable instruments drawn upon other banks like MCB, ABN-AMRO of the same city (as Lahore) are presented in your Bank to deposit them in the respective payee’s accounts (customer’s account), these instruments are lodged in outward clearing(o/w clg) of your Bank. 

Stamps Marked on Cheques

When the Cheques are presented in ACBL to be deposited in their respective payee’s accounts, different stamps are marked on Cheques before their lodgment in outward clearing. 

Crossing the Cheque

Crossing means two parallel transverse lines, drawn across the face of the Cheques with or without words (Payee’s A/C Only) written in between them. 

Crossing may be general or special. In clearing Cheques are crossed specially. Cheques are stamped with bank’s name between two transverse parallel lines to constitute special crossing. 

After the Cheques have been crossed specially, the holder cannot receive payment except through the bank named on the Cheque. Basic advantage of crossing is to save the instrument to go it from illegal hands. If, a crossed Cheque is lost or stolen, there is no risk of wrong payment. So it is an effective means of minimizing the risk of loss or forgery.

Clearing Stamp

After the Cheques have been crossed specially, clearing stamp is put on the Cheques and other instruments, with the following day’s date, as these Cheques would have to be presented in their concerned Drawee banks on the subsequent day.

Endorsement Stamp

The word endorsement is derived from Latin word ‘indorsum’ which means ‘on the back’. Ordinarily, it means anything written or printed upon the back of an instrument. 

So, at the end, the Cheques are endorsed in full (endorsed specially) by putting the stamp with words describing “Payee’s account Credited in ACBL Tufail road, Lahore”.

After putting these three stamps on Cheques & other negotiable instruments, they are sent to NIFT (National Institutional Facilitation Authority) with Add List in a SATCHEL. NIFT after segregating the Cheques of different banks delivers them to their concerned branches, which constitute the inward clearing for those (drawee) banks. 

Return in Outward Clearing

Some of the Cheques lodged in o/w clearing are dishonoured by the concerned branches due to some deficiencies and returned back through NIFT. This process is carried out under main branch’s governance. 

Either, these Cheques are again lodged in outward clearing or returned to customers by canceling bank’s all stamps, based on the reasons. 

Now, the accounting entries opposite to first are passed i.e. Payee’s accounts are debited & main branch’s account is credited. 

Inward Clearing

Cheques and other negotiable instruments (PO, DD, PS, CDR etc.) drawn on your bank branch, sent by other banks, constitute the inward clearing of ACBL. 

After having all the stamps and dates of Cheques confirmed, the concerned drawer’s accounts are debited (in ACBL Circular Road) and main branch’s account is credited by the total amount. 

Return of Inward Clearing

In case of Cheques dishonoured (returned) due to some deficiencies, the main branch’s account is debited by the amount of Cheques returned, and the Cheques are sent back to the NIFT by attaching the RETURN MEMO.