Understanding The Mechanics Of Cheques

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Index 

  1. Introduction 
  2. Cheque According To Law
  3. Characteristics of a cheque 
  4. Anatomy Of A Cheque 
  5. Types Of A Cheque 
  6. How To Secure Your Cheque And Prevent Fraud
  7. What Is An E- Cheque 
  8. Benefits Of An E- Cheque 
  9. Disadvantages Of E- Cheques 
  10. Why Cheques Are Dishonoured 
  11. Conclusion 

Introduction 

Cheques play a crucial role in facilitating cashless transactions within an economy, contributing to the gradual shift away from physical currency. Their popularity has grown over time as people increasingly opt to use cheques in transactions rather than carrying large amounts of cash, which can be risky. Cheques, essentially paper issued by banks for making payments, offer a convenient and safer means of conducting transactions, reducing the likelihood of theft or robbery associated with carrying physical currency.

When a payee presents a cheque to the bank and receives the specified amount, the cheque is considered honoured. Conversely, if the bank refuses to pay the amount specified on the cheque, it is deemed dishonoured. A dishonoured cheque, or cheque bounce, occurs when the payee fails to meet the bank’s requirements, such as insufficient funds or the cheque amount exceeding the available balance. 

The addition of Chapter XVII in the Act, addressing the dishonour of cheques or cheque bounce, was made possible through the Banking, Public Financial Institution, and Negotiable Instruments Laws (Amendment) Act of 1988 (Act 66 of 1988).

Cheque According To Law 

According to Section 6 of the Negotiable Instruments Act, 1881, a Cheque is essentially a form of a bill of exchange that is directed to a specific banker and is payable only upon demand. Additionally, the definition of a cheque extends to encompass an electronic image of a truncated cheque as well as a cheque in electronic format.

In a cheque transaction, there are three key participants. They are the drawer, who issues the cheque, the drawee, who is always the banker upon whom the cheque is drawn and the payee, the individual to whom the payment specified on the cheque is directed.

Characteristics Of A Cheque 

Cheques share many similarities with bills of exchange and are regulated by similar rules and principles. However, they differ in certain aspects. Unlike bills of exchange, which can be drawn on any party and may have days of grace, cheques are specifically drawn on banks or bankers and can be demanded immediately without grace periods. If a bill of exchange drawn on a banker is not payable on demand, it does not qualify as a cheque. For instance, orders issued on the Government Treasury by entities like the District Board Engineer are not considered cheques because governments do not engage in profit-oriented banking activities. 

One significant difference is that there is no requirement for acceptance with cheques, leading to no direct contractual relationship between the banker and the payee. Consequently, if a cheque is dishonoured, the payee cannot sue the bank directly. Cheques must be backed by sufficient funds in the banker’s possession. Furthermore, the issuer of a cheque remains liable even if the payee fails to present it promptly, except in cases where the drawer suffers specific damages due to the delay, as outlined in Section 84 of the Negotiable Instruments Act, 1881.

Anatomy Of A Cheque

The date of issuance is a crucial component of a cheque, as it indicates the day the drawer issued the cheque. Cheques typically remain valid for three months from this date, after which they may be deemed expired.

Another essential element is the name of the payee, which must be clearly stated on the cheque. This name serves as the identification of the individual or entity to whom the payment is directed.

Furthermore, there is an optional slot on the cheque for ‘or bearer.’ This designation is utilised when the cheque’s payment is not restricted to a specific individual (the payee) but can be received by anyone presenting the cheque (the ‘bearer’).

The crucial aspect of a cheque is the indication of the sum of money the drawer intends to pay. However, there are limitations set on this amount to ensure it aligns with the agreement with the bank or the available balance in the drawer’s account.

In addition to stating the amount in words, it must also be represented in numerical digits on the cheque. This double representation is mandated to prevent discrepancies. For instance, if someone intends to write a cheque for 1000 rupees but mistakenly adds an extra zero, it could lead to erroneous transactions. This provision aims to maintain accuracy and prevent such errors. According to Section 18 of the N.I. Act, if there is a discrepancy between the amount written in digits and words, the amount specified in words takes precedence.

Also Read  Section 138 Of Negotiable Instrument Act : Law On Cheque Dishonour

A pre-printed account number is a fundamental inclusion on a cheque, providing banks with the necessary information to identify the account from which the payment is to be made. This feature streamlines the process for banks, ensuring efficient handling of transactions.

The signature of the drawer is a crucial step in cheque issuance, as it serves as the authorization for the cheque. Once signed, the cheque is considered valid and can be presented to the bank for processing and encashment.

Additionally, cheques are equipped with pre-printed details such as the cheque number and MICR code at the bottom. These elements are intentionally printed to prevent tampering or alterations, ensuring the cheque’s authenticity and integrity during processing.

Types Of Cheques

Bearer cheques are those that can be cashed by anyone presenting it to the bank because the bank doesn’t require identification from the presenter. This poses a significant risk as anyone who comes across the cheque could potentially withdraw the money.

On the other hand, an order cheque is one where the word ‘bearer’ is replaced with ‘or order,’ making it payable only to the person named as the payee or to someone endorsed by the payee. Banks will process such cheques only when they can verify the identity of the payee, ensuring that the funds are disbursed to the rightful recipient.

When a cheque features two parallel lines on either the top right or left corner, it is categorised as a crossed cheque. These lines may be accompanied by phrases like ‘& CO.’, ‘account payee,’ or ‘not negotiable.’ In the case of a crossed cheque, cash transactions are not permitted; instead, the payment is directed to the payee’s bank account, ensuring a more secure and traceable transaction.

An uncrossed or open cheque lacks these crossing lines. It can be either a bearer cheque or an ordered cheque. Bearer cheques can be encashed at any bank, either at the bank counter or directly transferred to the payee’s account. 

Ordered cheques allow the payment to be received similarly, offering flexibility in how the funds are accessed or transferred.

An anti-dated cheque refers to a situation where the date mentioned on the cheque is earlier than the date it is presented to the bank. These cheques are valid for a period of up to six months from the date mentioned on them. For instance, if today is the 17th of July 2019, but the cheque issued bears a date of the 31st of July 2019, it would be considered an anti-dated cheque. Such cheques are sometimes used in cases where contractual obligations are delayed, allowing parties to avoid unnecessary complications.

On the other hand, a post-dated cheque involves mentioning a future date on the cheque that is later than the day it is issued. For example, if a cheque is issued on the 5th of September 2017 but carries a date of the 6th of September 2018, it is termed a post-dated cheque. The payee can only withdraw funds after the date mentioned on the cheque. Post-dated cheques are commonly used when the issuer lacks sufficient funds at the time of issuance but is obligated by a contract to make the payment at a later date.

According to the guidelines issued by the Reserve Bank of India (RBI) effective from April 1, 2012, cheques remain valid for a period of three months from the date they are issued. Beyond this timeframe, known as the validity period, banks are not authorised to process these cheques as they are considered stale.

A mutilated cheque refers to a cheque that has been torn into multiple pieces. Typically, banks do not accept such cheques. However, in certain cases where the damage is minor, banks may consider accepting the cheque, but only with confirmation from the issuer (drawer) to credit the funds.

A blank cheque is one that only has the issuer’s signature and lacks essential details like the amount, date, etc. This type of cheque is often used when payment depends on an uncertain future event or for gifts. For instance, a parent might give their child a blank cheque out of love, allowing them to fill in any amount later.

Also Read  How To File A Case Under The Negotiable Instruments Act

However, blank cheques can be risky as they can be misused. In the example above, the child could write an unreasonable amount and withdraw all the funds from the issuer’s bank account.

A self-cheque is a form of payment where the account holder’s name is written on the cheque, allowing them to withdraw money in person from the branch where the account is held. This type of cheque is typically used when the account holder needs physical cash or wants to make a specific withdrawal from their own account.

On the other hand, a pay yourself cheque is a crossed cheque made out in the bank’s name. This cheque is utilised when the account holder wants the bank to deduct funds directly from their account to purchase bank services or products such as drafts, pay orders, fixed deposit receipts, and so on. It’s a convenient way to authorise the bank to make deductions for services rendered.

Traveller’s cheques are specifically designed for use by individuals during their travels. They can be exchanged for local currency in foreign countries where foreign currencies are accepted, providing a convenient and secure method of payment for travellers.

Banker’s cheques are issued directly by banks and come with a payment guarantee. The funds for these cheques are paid to the bank in advance, ensuring that they cannot be dishonoured due to insufficient funds. This makes banker’s cheques a reliable and widely accepted form of payment.

A cancelled cheque is one where the word “cancelled” is written between two parallel lines that cross the cheque. This action renders the cheque void for financial transactions but serves as proof that the account holder maintains an account with the bank.

A cancelled cheque is essential for various banking procedures such as opening a savings or current account, setting up Electronic Clearance Service (ECS) mandates, fulfilling KYC (Know Your Customer) requirements, and facilitating withdrawals from schemes like the Employee Provident Fund. Its use spans from verifying account details to enabling smooth electronic transactions and financial documentation.

When applying for a loan, individuals include a cancelled cheque to initiate the loan processing. Similarly, when purchasing an insurance policy, submitting a cancelled cheque is part of the required documentation. Additionally, when opening a Demat account, which holds shares electronically (dematerialized), a cancelled cheque is necessary. Dematerialization involves converting physical shares into electronic form, and this process is integral to managing shares in a Demat account.

When opting for Equated Monthly Instalments (EMIs) as the repayment method for a loan, individuals are asked to provide a cancelled cheque as part of the process to finalise the repayment arrangement through EMIs.

How To Secure Your Cheques And Prevent Fraud

To enhance cheque security, replace ‘or bearer’ with ‘A/c payee’ by writing it on the top right corner between two parallel lines, thus ensuring the cheque is intended for a specific recipient, not anyone who finds it. Additionally, enclose the payee’s name within a horizontal line to prevent unauthorised alterations, safeguarding against fraudulent issuance of funds under false pretences.

When writing the amount in words on a cheque, it should be concluded with ‘only’ for precision. Ensure there are no additional spaces between words or digits, including when denoting paisa after a decimal point (use ‘/’ instead of a space). 

Regarding signatures, always place it above your printed name, taking care not to encroach on the MICR band. Failure to do so might result in the bank being unable to read the cheque, potentially leading to its rejection.

Always include the date on cheques to prevent misuse by others who might fill it in later to their advantage, possibly leading to cheque dishonour if funds are insufficient when the date is added. Additionally, refrain from overwriting cheques as this is a common reason for cheque dishonour, so it’s best to avoid alterations or corrections.

What Is An E- cheque 

An E-cheque, short for electronic cheque, is a digital version of a traditional paper cheque. Instead of physically writing and delivering a paper cheque, an e-cheque is processed entirely electronically, allowing for faster and more efficient transactions. Here’s how it typically works:

  1. The process begins when the payer (the person making the payment) initiates an e-cheque transaction through an electronic payment system or platform. This can be done online through banking websites, payment gateways, or other financial institutions.
  2. The payer provides necessary information such as the recipient’s name, account number, routing number, and the amount to be paid. This information is securely transmitted to the recipient’s bank for authorization.
  3. The recipient’s bank verifies the information and checks if the payer’s account has sufficient funds to cover the transaction. This is similar to the process involved in traditional paper cheques but done electronically and much faster.
  4. Once verified, the recipient’s bank processes the e-cheque, debiting the specified amount from the payer’s account and crediting it to the recipient’s account.
  5. The transaction then goes through the clearing process, where the payer’s bank communicates with the recipient’s bank to settle the payment.
  6. Once the transaction is successfully processed and cleared, both the payer and the recipient receive confirmation of the payment.
Also Read  How To File A Case Under The Negotiable Instruments Act

Benefits Of An E- Cheque 

E-cheques offer customers several benefits. Firstly, since there is no physical handling of cheques, customers can avoid concerns about their cheques being lost during processing, thus reducing the risk of cheque loss. Secondly, e-cheques provides a faster payment method, with transactions typically clearing within 3-4 working days, saving customers valuable time. Lastly, this electronic mode of payment is more secure compared to physically carrying cheques, as it eliminates the risk of theft or robbery associated with traditional paper cheques. 

Utilising electronic payment methods offers heightened security compared to physically carrying cheques, mitigating risks of theft or robbery. Moreover, it proves cost-effective by minimising resource utilisation. With its efficient record-keeping capabilities, electronic payments enable users to access their transaction histories swiftly, granting them better control over their expenses.

Customers are charged a minimal commission compared to Unattended Payment Terminals (UPTs), which are self-service solutions allowing customers to initiate transactions independently. This payment method features an intuitive user interface, enhancing its user-friendliness, and has a global reach, catering to individuals worldwide. It offers convenience as anyone with internet access can utilise it from anywhere and at any time, making it a convenient option for making payments.

 

Benefits Of An E-Cheque To The Bank 

Shifting to online clearing processes reduces risk and enhances convenience for banks, with advanced verification and reconciliation methods minimising errors. Geographical barriers are eliminated, and the absence of physical cheque handling translates to cost and time savings. 

Additionally, the use of e-cheques further reduces processing costs as they require no manpower and incur no fees for transactions or deposits. Setting up an e-cheque platform is resource-efficient, contributing to reduced fuel usage and greenhouse gas emissions associated with paper cheque transportation.

Disadvantages Of An E-Cheque

The disadvantages of e-cheques include limited accessibility for individuals who are not technologically adept, heightened risks of misuse such as hacking and online fraud, and the challenge of unauthorised transactions without traceable records, a concern especially pronounced for banks. Additionally, the reliance on internet transactions increases vulnerability to network failures, leading to payment delays. Furthermore, not all parties involved may have access to e-cheque facilities, and there are restrictions on the number and amount of transactions per day, and per transaction, imposed.

Why Cheques Are Dishonoured 

Cheques can be dishonoured due to various reasons such as insufficient funds in the account, closure of the drawer’s account before cheque presentation, overwriting on cheques, missing or mismatched signatures, stop payment instructions, unclear payee information, discrepancies between written and numerical amounts, missing or unclear account numbers, court-ordered payment stops, drawer’s incapacity or insolvency, unauthorised changes on cheques, incorrect or absent dates, and physical damage to the cheque like tearing, wetness, or stains.

Conclusion

In conclusion, cheques remain a vital financial instrument despite the evolution of digital payment methods. Understanding the various types of cheques, their components, advantages, and disadvantages is crucial for users to make informed decisions. Cheques offer convenience, traceability, and a paper trail, yet they are susceptible to dishonour due to various reasons such as insufficient funds, signature mismatches, or post-dated issuances. As we navigate modern financial landscapes, acknowledging both the strengths and limitations of cheques empowers individuals and businesses to leverage this traditional yet enduring tool effectively.

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