Imagine you have relatives in the US as well as a European country; you have a financial emergency and have asked them for money. Now even if you deposit the cheques sent by both the relatives on the same day, the credit of money may happen on different days. The time taken for credit of cheques issued from different countries is different.
Why does this happen?
A cheque issued by an individual having a bank account outside the country would be in foreign currency. These cheques are payable in the issuing bank of that country only. Therefore, for credit in your Indian banks, these cheques are sent back to the issuing bank in the foreign country.
Since different banks of different countries have different modes of cheque collection, the time taken in realization varies accordingly.
What are the modes of cheque collection?
There are basically three modes of cheque collection— cash letter arrangement, final credit services and direct collection arrangement. All banks may not provide all modes. Let’s take bank A in India and bank B in, say, the US, from where the cheque has been originally issued.
Cash letter arrangement: Under this, after receiving the cheque, bank A sends it to a correspondent bank (CB), with which it has a tie up (it could be its own branch or some other bank’s branch) in that country. The CB then sends the cheque to bank B. After clearing the cheque, bank B will credit the money into an account maintained by bank A with the CB; this account is known as Nostro account. The process usually takes 12-15 days.
However, you in India do not receive the money in 12-15 days as the money is subject to a cooling period. This is the time up to which banks wait after receiving provisional credit in their Nostro account for possible return of the cheque under provisions of laws prevalent in a particular country. The cooling period varies from country to country and even within a country. For instance, Bank of India has a cooling period of seven days for New York City area, but 11 days for other states in the US. Similarly, its cooling period is six days for France and 30 days for Italy.
Final credit services mode: Here, there is no cooling period and once the money reaches the Nostro account, you can withdraw it. However, the process before the money reaches the Nostro account takes more time than in the cash letter arrangement mode.
Direct collection arrangement: Under this, cheques are sent directly by the receiving bank (bank A,in our example) to the issuing bank (bank B) in a particular country for collection.
Generally, high value cheques are sent through this mode since the risk of return (of the cheque) is negligible. However, the time taken in this case is more than all modes.