Other than cash people use various ways to pay in India such as cards, cheques, demand drafts, mobile payment apps, e-wallets and net banking. India remains a largely cash-based economy though Demonetization on 8 Nov 2016 encouraged people to go cashless. Cashless transactions are on the rise, but cash is still the king. India still processes over 90 million cheques per month.The value of payments via cheques has roughly averaged about Rs 7 lakh crore a month in recent months. This article explains what is a cheque? Details on a cheque leaf, Kinds of cheques, clearing of the cheque. How to write a cheque? Has cheque usage gone down?
What is a Cheque?
A cheque is a written order that orders a bank to pay a specific amount of money from a person’s/organization’s account to the person /organization in whose name the cheque has been issued. If you have a savings bank account or current account in a bank, you can issue a
cheque in your others/own name directing the bank to pay the specified amount to the person named in the
The act of writing out a cheque is referred to as drawing. A cheque typically involves three parties,
- Drawer: The person who draws a cheque is called the ‘DRAWER’. He is also called as MAKER OR ISSUER of the Cheque. He is person who issue’s the cheque.
- the payee or the drawee, to whose order the cheque is issued
- Drawee or payor bank, the bank which has the drawer’s account from which the cheque is to be paid. It is always bank on which cheque is drawn and is ordered to pay the amount of cheque. The banker on whom it is drawn is the ‘DRAWEE’. This drawee is the responsibility of where the cheque is issued. Drawer can issue the cheque from this drawee only.
Remember, a cheque is not cash as it does not confirm that the payment has been made. The funds may not be available with the drawer or in the meanwhile, the drawer may have withdrawn funds from his bank account, leading to the possibility of the cheque being dishonoured on presentation. Hence, one often reads, “On Realization of the cheque.”
There is also another concept called as SELF CHEQUE where you will act as both DRAWER and PAYEE. For example: Consider a person X residing in Madurai and he wants to process a cheque made by him. So he makes a cheque and goes to his branch and process the cheque.
Our article,Payment Methods While Shopping Cash,Cards,Digital Wallets, explains payment methods used while shopping such as Cash, Cards, Digital Wallets.
Did you know: First Bank to Introduce Cheque system in India was BENGAL BANK in 1784
Has Cheque Usage Gone Down?
Cheques are unlikely to die out completely. In a speech on May 30, 2018, RBI Deputy Governor BP Kanungo had highlighted that India still processes over 90 million cheques per month. This is important as cheques are also non-cash transactions and are often not given due importance, Kanungo had said. The value of payments via cheques has roughly averaged about Rs 7 lakh crore a month in recent months.
Virat Diwanji, who heads retail liabilities and branch banking at Kotak Mahindra Bank Ltd., said that a number of small and medium businesses and traders still prefer to use cheques. Cheques give a leeway of a day or two, longer if issuing a post dated cheque, enabling the issuer to arrange for funds, said Diwanji. He added that those who are not comfortable with technology also prefer cheques and see them as a secure means of payment.
Details on a Cheque
After opening an account in a bank, with cheque book facility, the bank you will provide you with a cheque book. However, based on type of accounts (saving, current account) the number of cheques in a chequebook differ.
A chequebook is a collection of cheque leaves and is issued to the customer having an account in the bank.
The cheque leaf has the following details. Some of the details are printed on the leaf, while others need to be manually filled.
One needs to fill in following details
- 1 Name of person/company to which one is paying from one’s account. This is how the bank knows who to give the money to. The person named in the cheque, to whom the money would be paid, is called the ‘payee.’
- 2 Date of issue is the date from which the cheque becomes valid. It is the date from which the cheque maker wishes the cheque to be
used for withdrawing money from his account. A cheque is valid for three months from the date of issue. From April 1, 2012, RBI reduced validity for Cheques, Drafts, Pay orders from 6 months to 3 months
- 3 The amount in Figures is the amount of money one is promising to pay in numbers or figures. It has to be an amount less than or equal to the balance in the account.
- 4 The amount in Words is the amount of money one is promising to pay in words. This is for safety so that no one can change the amount one is promising to pay. It has to be the amount less than the balance in the account. It should match the amount in figure
- 6 Signature of the account holder. A cheque becomes valid only when the account holder signs it. Signature is checked against the records before a cheque can be passed. One’s signature is an indication for the bank that it is ok to give the money promised by the cheque maker. The maker of a cheque is called the ‘drawer.’
The fields given below are already filled in the cheque.
- 5 Name, address and IFSC code of the bank, where one has an account. IFSC Code refers to the Indian Financial System Code, which is an eleven-character code assigned by RBI to identify every bank branches uniquely. This code is used by electronic payment system applications such as RTGS, NEFT, IMPS.
- 7 Cheque Number is a 6 digit number required to track the person/ organization for whom the cheque has been drawn.
- 8 Routing/account number in MICR format A routing number is a nine-digit number which identifies the postal code/city and state of the origin of the cheque. MICR is an acronym for Magnetic Ink Character Recognition. It is used for faster processing of cheque.
- First three digits: City/district
- Next three digits: Name of bank
- Last three digits:- Location of branch/branch name.
- 9 Account Number helps the bank in identifying the account in whose favour the transaction will take place i. e from whose account the money has to be deducted or credited.
Our article Third Party Fund Transfer: NEFT, RTGS explains how to transfer money electronically such as third-party fund transfer, interbank transfer using IFSC code
Game of filling a cheque
Try to fill a cheque on behalf of Siddhant. Siddhant has to write a cheque to Pay Rs 10,000 to Aryan Kumar on 25/Oct/2018
Please move/drag the text boxes to their appropriate place.
Kinds of Cheque
There are various kinds of cheques which serve different purposes. For example,
Bearer cheque: is payable to the person specified or to anyone else who presents it to the bank for payment.
Crossed Cheque: Crossing of cheque means drawing two parallel lines on the face of the cheque with or without additional words like “& CO.” or “Account Payee” or “Not Negotiable”. A crossed cheque cannot be encashed at the cash counter of a bank but it can only be credited to the payee’s account.
Blank Cheque: In this type of cheque, drawer put his/her sign on the cheque and left all other columns empty.
Self Cheque: A self-cheque is written by drawer as pay self to receive the money in the physical form from the branch where he holds his account.
Clearing of the Cheque
The cheque is just a piece of paper and one doesn’t get the money till the cheque is deposited or presented in the bank. For the money to be transferred the cheque needs to be cleared and settled. This process is called as Clearing of the cheque. Following are the steps in processing the cheque, also termed as clearing:
1. The Payee deposits the cheque in his/her bank. If the payee or beneficiary of the cheque has an account in the same bank in the
same city then the funds are credited into his account through the internal arrangement of the bank.
2. If the beneficiary has an account with any other bank in the same or in any other city, then his banker would ensure that funds are
collected from the payer’s banker through the means of a clearing house.
A clearing house is an association of banks that facilitate payments through cheques between different bank branches within a city/
place. Steps for clearing a cheque are as follows.
- The clearing house identifies the paying bank. To identify the paying bank, the clearing looks at check’s or MICR number, the
nine-digit number on the bottom left hand corner of the check, to the left of the account number. The routing number identifies the
bank that issued the check.
- Having identified the bank as the paying bank, the clearing house presents paying bank with the cheque along with a payment request. If paying bank agrees to pay, the cheque has been verified.
- The clearing bank proceeds to settle the cheque, debiting the cheque maker’s bank and crediting the payee’s bank for the value of the cheque.
- The paying bank debits the amount from the drawer’s account.
- At the end of this process, the payee has access to the cash value of the cheque.
In 2010 Cheque Truncation System (CTS) or Image-based Clearing System (ICS), in India, was introduced by the Reserve Bank of India, RBI, for faster clearing of cheques. Earlier cheques used to be sent physically and this involved delay.
CTS is basically an online image-based cheque clearing system where cheque images are captured at the collecting bank branch and transmitted electronically. It became possible for the removal of the restriction of geographical jurisdiction normally associated with the paper cheque clearing. This resulted in an effective reduction in the time required for payment of cheques, the associated cost of transit and delays in processing, etc.
Video on CTS 2010
The Video below shows how Cheques are cleared now using CTS 2010 Clearing
Cheque Dos and Don’ts
Check that all the cheque leaves are intact and proper at the time of getting it issued by the bank. Never leave your chequebook unattended. Unused cheques and requisition forms should always be returned to the bank.
- When writing a cheque, use a pen with permanent ink. Ideally, a ball pen.
- Do cross the cheque wherever applicable.
- If you make a mistake, apart from alteration in date, do not make any other changes to the cheques presented in CTS clearing. Also, the change must be backed by your signature.
- Never leave unused spaces on the cheque. You must always draw a line through them
- In case you realise later that you have made a mistake, to stop payment of cheque, give written instructions to the bank by giving the cheque no., date, amount, and payee’s name.
Wrong way of writing the cheque
Difference between Cheque and Demand Draft
In many transactions cheque is not usually accepted when the people ( drawer and payee) are unknown, then there is a risk that cheque may bounce. So, in such cases, Demand draft or DD is accepted where the transfer of money is guaranteed.
The Demand Draft is a way of payment wherein the drawee bank undertakes to make payment in full when the DD is presented by the payee for payment. The demand draft is made payable on a specified branch of a bank at a specified centre. Like Cheque, Demand draft is valid for a period of 3 months. Sample demand draft is shown in the image below.
Our article What is Demand Draft? How to make, Cancel a Demand Draft explains it in detail.
You can make the Demand draft by visiting the bank. If you have an account in the bank then you can pay by cheque. Else you need to pay by cash. You can also make Demand Draft online. If you make the demand draft by visiting the bank then you will get Demand Draft within 30 mins. But if you order it online then it would take a few days and would be delivered to your correspondence address.
Banker’s cheque is another payment way similar to a demand draft. Banker’s Cheque is issued for the payment of money within the local boundaries, whereas the Demand Draft is issued for transferring money between people/organizations in two different places
Let us differentiate between Cheque and the Demand Draft.
|The drawer is individual/company account holder||Drawer is normally a scheduled bank.|
|No certainty of payment.||Payment is certain.|
|The drawer can stop it by issuing an order||No one can stop it.|
|No extra charges by the bank for the cheque.||Each bank charges some amount for issuing a DD.|