Bank clearing house is an institution established by member banks to simplify exchanging and obtaining of payments for the cheques that are paid into bank branches throughout the country. The clearing system is used among banks to settle cheques drawn on them. Indebtedness between banks as a result of the differences between the daily totals of cheques exchanged are set off against each other. Final settlement is effected through the banks’ accounts.
Types of clearing house
- Local clearing house: The local clearing house takes care of clearance of cheques among various banks in the same town. All large towns have their own clearing houses where representatives of the various banks in the town meet each day to clear cheques.
- Head office clearing house: Head office clearing system undertakes to settle cheques drawn by the customers of a bank from various branches.
- Bankers clearing house: Bankers clearing house is the place where ultimate clearance and settlement of cheques are carried out in a country. All banks in the country will come together to sort out cheques drawn on each other. The final settlement is through cheques drawn on the central bank.