The NI act was amended in 2002 and after that Cheque also means a Cheque in electronic form. The clearing of checks on the basis of electronic checks is called Cheque Truncation.
The Electronic image is generated and it is used for clearing, thus at that point the Physical Movement of the Cheque is stopped. So simply, Cheque Truncation is a system of cheque clearing and settlement between banks based on electronic data/ images or both without physical exchange of instrument.
This results in faster clearance, (T+0) in local and T+1 in intercity clearing. Faster realization is accompanied by a reduction in costs for the customers and the banks. Banks can also offer innovative products and services based on CTS and there is an additional advantage of reduced reconciliation and clearing fraud.
In cheque truncation, at some point in the flow of the cheque, the physical cheque is replaced with an electronic image of the cheque and that image moves further. The processing is done on the basis of this truncated cheque and physical cheque is stored. MICR data is very useful in check truncation. The electronic cheques are issued in electronic form with digital signatures / biometric signatures / encrypted data. The negotiable Instruments (Amendment) Act of 2002 gives constitutional validity to the electronic cheques.