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The system for settling payments due from one bank to another. There are numerous commercial banks, and in most transactions settled by a transfer of bank balances from buyer to seller, the two parties hold accounts with different banks. The inter-bank clearing process is an arrangement to reduce the amount of funds which needs to be transferred to settle all these payments. All the cheques are sent to a clearing-house, where the amounts payable to and from the customers of each bank are added up. Each bank then needs to make a payment only if total payments by its customers exceed total payments to them, and the bank need receive a payment only if the total receipts of its customers exceed their total payments. The actual settlement is normally done daily, by the transfer of balances held by the various banks with a central bank.


Reference: Oxford Press Dictonary of Economics, 5th edt.