What is the Local clearing procedure?

Most of us have deposited cheques in our bank account to collect amount from somebody or from a business. And bank collected the amount from issuer bank and credited your account. Let’s see what are the processes involved in it. Before knowing the clearing procedure you should know what a local cheque is? It is a cheque issued by a person or company in the same city where receiver bank located. Since issuer bank and receiver bank is located in the same city cheque realization done within the city. Now let us see the clearing procedure. Consider scenario State bank of India gets thousands of cheques for clearing each day from its customers. These cheques may be drawing on different banks; say Indian bank, axis bank, Indian overseas bank etc. In this case State bank has to go each bank for collecting amounts which is a bit difficult and time consuming process.

To simplify this process each bank will send a representative to a central place and exchange cheques drawn on each other This centralized place is called clearing house. Reserve bank of India is act as clearing house. SBI or some other banks acts as clearing house in cities where RBI’s office is not exists.

Suppose SBI brings 1000 cheques for Rs 50 Lacks drawn on axis bank and axis bank brings 500 cheques for Rs 45 lacks drawn on SBI. So axis bank should give 50 lacks to SBI and SBI should give 45 lacks to axis .instead of giving full amount consider net difference which is 5 lacks payable by axis bank to SBI account.

The settlement bank; that is RBI passes an entry by debiting axis bank and crediting SBI in their books. This means that Axis bank should give 5lacks to RBI for paying SBI. And RBI will settle this amount. This kind of settlement is “net settlement”.