Clearing House

Clearing house is an arrangement for the banks to mutually settle their claims over each other arising out of deposit transfer from one bank to another by their respective customers. This arrangement is a recent development in banking without which no bank can imagine to function in today's market comprising millions of customers banking with dozens of banks.

It is a common knowledge that every day thousands of cheques and drafts are drawn by the customers. These cheques and drafts are payable at a particular branch of a particular bank. To get payment of such cheques and drafts they can go personally to those branches. But problem arises when people in possession of cheques and drafts drawn on the other banks stay far away. It becomes inconvenient for them to go there. Moreover, it is also time consuming not to speak of cost. 

Under the circumstances, what a customer can do is to just deposit the cheques and drafts drawn on other banks with his own bank. The bank will then collect the proceeds of those instruments on behalf of the customers and credit the customers account with the proceeds. 

For the purpose of collection of cheques and drafts banks have devised a system called 'Clearing House' where all the banks have their accounts. They mutually settle their claims by simple 'debit and credit' to that account without physically transferring any funds. This is a convenient system in the sense that it does neither involve traveling nor cash handling by the customers. Branches of other banks where cheques and drafts are drawn are not to be visited by the customers. Simply by depositing those into their accounts, the customers get those collected by their bankers.

It may, therefore, be said that clearing House is an organization of the banks which settles inter-bank liabilities due to transfer of deposits by the customers from one bank to another.

Now a days this collection service is a very common service rendered by all the banks. Bank may or may not charge any service charge for this service.