What is Clearing House? and Its Types and Objectives

A clearing House may be defined as an organization of various banks con situated to offset interbank indebtedness arising from the transfer of deposits by a customer of a particular bank to another bank.

what is clearing house in banking
what is clearing house in banking

The place where the exchange of instruments occurs and the claims are settled is known as the Clearing House.

For example, In India, the cheques are cleared in the clearing houses managed by RBI or the reserve bank of India.

Objectives of Clearing House

The objectives of the clearing house are:

  1. To make arrangements for the speedy and economic collection of cheques, bills and other documents payable or deliverable at or through offices of the members and sub members of the house situated in the city/town by a system of clearing with power to apply or to extend any system or systems to any place in the environs of and from time to time abandon, re-constitute or alter any system or systems.
  2. To make arrangements and to frame rules relating to the collection or non-collections or documents between members and sub-members of the Clearing House.
  3. To maintain records of the clearing house and of such other matters as may be thought fit.
  4. To draw up and prescribe from time to time forms for the use of members and sub-members of the House in connection with the clearing.
  5. To do all such other lawful things as are incidental or conducive to the attainment of all or any of the foregoing objects.

What is the capital asset pricing model with example?

Types of Clearing House

The types of clearing are as follows:

1. Outward House Clearing

Outward refers to instruments that are deposited by customers that are drawn on other banks that need to be presented at the clearing.
This can be further divided to:

  1. Local clearing (instruments drawn on banks in that city).
  2. Outstation clearing (instruments drawn on banks outside the city). These may be within the country or on banks in other countries.
what are the types of clearing houses
what are the types of clearing houses

Branches normally collect all the local cheques and other instruments deposited by customers and after ensuring they have all the relevant details send them to their service branch.

The service branch then presents these at the clearinghouse.

What are the functions of a merchant banker?

With regards to outstation cheques practices can differ:

  1. Some banks send the instruments to branches they have in the locations where the banks on whom the instruments are drawn for collection.
  2. Otherhand over the instruments to a large bank that has branches in multiple locations for collection.
  3. The bank can also participate in National clearing. This is managed by the reserve bank of the country. Cheques drawn on metropolitan centers are cleared in eight-day (different timings in different countries). In other cases, cheques drawn on other centers are cleared in fourteen days except those drawn on state capitals.
  4. If there are delays banks are expected to pay interest for the period of delay at the rate applicable for fixed deposits for the period of delay beyond the stipulated days. If the delay is abnormal then penal interest at the rate (which already decided by the reserve bank) above the fixed deposit rate has to also be paid.

Cheques are posted to the representative branch or correspondent branch for presentation in the clearing house in the outstation center.

On realization, the proceeds are remitted to the original presenting bank for credit to the customer’s account.

There are often considerable delays in the payment transaction both for the recipient of the funds as well as the banks involved.

2. Inward House Clearing

  1. The service branch will collect cheques drawn from the bank and the cheques would then be checked for completeness – signature, whether there is adequate balance, date, and the likes.
  2. If there is any inconsistency the cheque is returned.
  3. It should be remembered that all paper-based instruments have to be presented at the drawer bank either in person or by another bank in clearing or through the collection.
  4. Delays are due to the requirements of the physical presence of the paper instrument.

3. Return House Clearing

  1. Return clearing is the aggregate of all unpaid items. This:
  • Is debited to the original presenting bank.
  • Is credited to the drawee bank.

2. Credit given to the payee is reversed.

What are the advantages and disadvantages of banks?

Clearing Procedures

The system is local and confined to a defined jurisdiction covering all the banks and branches situated in the area under a particular zone.

The clearing house is a voluntary association of banks under the management of a bank where the settlement accounts are maintained.

Wherever Reserve bank has its office (and, a bank department), the clearing house is managed by it.

In the absence of an office of the reserve bank, the clearinghouse is managed by the State bank of India (In India manner), and its associate banks, and in a few cases by public sector banks.

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