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What is the meaning of ‘cooling period’ in collection of foreign currency cheques?


Foreign currency cheques

A foreign currency cheque is one in which cheque amount is denominated in foreign currency like US Dollar, EURO, GBP, JPY etc. The personal -cheque, cashier cheque, travellers’ cheque, demand-draft etc. which are denominated in foreign currency are payable/ drawn on a bank outside India.

Cash Letter Arrangement

For collection of foreign currency cheques, the instruments will be sent abroad for realization of cheque proceeds. Usually cheque collecting bank sends the cheques to its correspondent bank in a country where the cheques are drawn or payable. The ‘Correspondent Bank’ on presentation of cheque to drawee bank, provisionally credits the proceeds of the cheque to ‘Nostro Account’ of the collecting bank on a predetermined date. This method of collecting a cheque through a correspondent bank is known as cheque sent under ‘Cash Letter Arrangement’.

 Nostro Account, Correspondent Bank

Nostro Account means an account maintained in a bank situated in a foreign country by the local bank for the purpose of settlements of interbank and customer transactions. Usually, Nostro Accounts are maintained in the country of the currency. The correspondent bank is the bank in which ‘Nostro account’ is maintained.

Reasons for delay in foreign cheque collection

The time taken for collecting foreign currency cheque proceeds normally ranges from 15-30 days. But in some cases it may take more than 45 days. There are two main reasons for delay in collecting the payment of foreign currency cheques of the customers. (i) Collection policy adapted by individual bank. (The method adapted for movement of foreign currency cheques to reach the final destination.) (ii) After receiving provisional credits from correspondent bank to its Nostro account, the collecting bank, has to further wait for cooling period to credit the amount to beneficiary’s account.

Meaning of cooling period

The realization period of cheque varies from country to country, as the cheques payable are subject to the laws applicable in those countries. For example, the cheques drawn on US are subject to the provisions of US federal and State laws like uniform commercial code (UCC). The possible return of the cheque in New York area is 5-8 days and 15-21 days in other cities of US. The Cooling period is thus the actual time of waiting by the collecting bank for confirming the definite clearance of cheque presented to drawee bank.  The collecting bank releases the amount lying in its Nostro account to its customer’s account only after completion of cooling period.

Secured Collection service

Some of the correspondent banks offer ‘Secured Collection service’. In this service correspondent bank gives a final guaranteed credit to the Nostro account of collecting bank within a definite interval of time. Unlike normal collection service the amount once credited to the account under the above arrangement cannot be reversed by the correspondent bank. Hence, the beneficiary of the cheque need not wait for cooling period to receive funds under this service. However, Correspondent Bank (CB) offers this facility at an extra charge.

(2) Comments

  1. RAVINDER

    WE WOULD LIKE TO KNOW HOW NASTRO ACCOUNT WILL DEBIT THE MONEY TO THEIR CHQ DEPOSIT BANK NASTRO ACCOUNT WHERE AS FOREIGN CURRENCY USD CHQ CLEARED AFTER COOLING PERIOD AND THE AMT IS CREDIT TO BENEFECIARY ACCOUNT??? SO IN THIS CASE WHAT ACTION TO BE TAKEN AGAINST BANK WHO DEBIT THE SUCH AMT INTO BEFECIARY ACCOUNT???

    1. Surendra NaikSurendra Naik - Post author

      Ravinder ji, I'm not sure on this issue.RBI has advised banks to refine their USD cheque collection procedures and frame their own USD Cheque Collection Policy covering aspects like mode of collection, collection period, charges for collection, etc.The basic legal framework for determining rights, responsibilities and liabilities of the parties in connection with collection of USD denominated cheques drawn on US banks are governed by the legal framework as laid down under the US federal and state laws like Uniform Commercial Code (UCC) etc.In the event of return of a counterfeit cheque handled through this process, the drawee bank in the US has the right to recover the proceeds from presenting banks within the period stipulated under US Clearing House guidelines.Notwithstanding, under the FCS mode, banks receive final credit in their Nostro account without any recourse to recall. It does not involve cooling period as this is already factored into by the Correspondent Banks before releasing the final credit.CBs offering this facility normally fix a cap for the amount of individual cheques collected under the arrangement. The CBs absorb any subsequent recall of payment by the drawee bank as per US laws. The bank offering such service with the approval of their customer charge an additional amount for giving credit without recourse.It appears that in the instant case amount credited to bank's nostro account was not a final credit.

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