A cheque is an important part of banking. It is simple and safest way to carry money. Cashless transactions are on the rise, but India still processes over 90 million cheques per month In this article, we will talk about What is cheque and discuss different types of Cheques such as Blank Cheque, Crossed Cheques, Cancelled Cheque, Self Cheque, Banker’s Cheque. What happens when a cheque bounces?
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.
After opening an account in a bank, with cheque book facility, the bank you will provide you with a chequebook which has many cheque leaves. The cheque (technically called cheque leaf) has the following details. Some of the details are printed on the leaf, while others need to be filled. One needs to fill in following details.
Our article What is Cheque? How to write a cheque? Clearing of Cheque explains cheque and how to fill in detail
- 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.’
Types of Cheques
Blank Cheque is a cheque which has no date, no name and no amount written but is already signed i.e A cheque on which the drawer puts his signature and leaves all other columns blank is called a blank cheque. A blank cheque is dangerous for its owner because whoever gets the cheque can write in any amount of money and would be able to cash it (to the extent that the account contains such funds). You would see often in movies where the Villain or the Heroine’s father would give them to the hero or Some individual.
When a cheque bears across its face two parallel transverse lines, the cheque is said to be crossed. The lines are usually drawn on the left-hand top corner of the cheque. But they may be drawn anywhere across the face. You can also mention ‘A/c Payee’ in between the two parallel or crossed lines.
Crossing affects the mode of payment of the cheque. A crossed cheque cannot be en-cashed at the cash counter of a bank but it can only be credited to the payee’s account. Thus, the crossing is a mode of assuring that only the rightful holder gets payment. Even if some wrongful person secures payment, it can be traced, because he can receive payment only through an account with a bank.
When a cheque is not crossed it is called as Uncrossed Cheque or Open Cheque.
A cheque which is payable to a person whosoever bears it is called bearer cheque. The cheque has word Bearer but if you do not strike this word it becomes a bearer cheque. Means a person holding the cheque can withdraw the amount (only if it is signed). Anyone can exchange it for cash by producing it at the bank counter. It is not very safe. Such type of cheques are very risky and in case misplaced can lead to loss of the amount mentioned on the cheque.
SELF CHEQUE is when you write/issue a cheque for yourself, where you will act as both DRAWER and PAYEE. For example, you need to draw money more than the ATM Limit. So you would visit your bank and issue a cheque to draw the money physically. It is also used when paying for DD or banker’s cheque.
Post Dated Cheques or PDC
PDCs are cheques issued with a future date on it. Once a cheque is issued it will be valid for three months from the date of issue. It is used for making of a payment on a future date. The bank will process the cheque only after the date mentioned in the cheque. Let’s say on 20 Oct 2018 you draw a cheque with the Date 28 Nov 2018. This cheque can be deposited only on/after 28 Nov 2018 and will be valid till 28 Feb 2019. It was earlier used for payment of EMI where one used to give post-dated cheques to the lender.
A cancelled cheque is any cheque word “cancelled” is written between two lines crossing the cheque. You do not need to sign or write anything on the cheque. It’s proof that the individual maintains an account with the bank. You re asked to cancel the cheque is to make sure that it is not misused in any manner. A cancelled cheque is required for KYC purposes. Nowadays, most investment firms require you to submit a cancelled cheque as part of KYC. Typically it is used in following transactions
- Setting Electronic Clearance Service (ECS) from the account.
- To open a demat account.
- Financial lending organizations often ask borrowers for a cancelled cheque to process their loan request.
- When purchasing insurance policies such as endowment plan or money back plan, you may be asked to submit a cancelled cheque.
- For withdrawal of EPF funds.
The cheque which is more than three months old is a stale cheque i.e the cheque has expired. For Example, Ram issues a cheque on 1 Jul 2018 to Shyam. Shyam should deposit the cheque in his bank before 1 Oct 2018 because the validity of the cheque is 3 months.
What will happen when you carry the Stale cheque to the bank?
Banks will refuse to honour the cheque until drawer reconfirms that payment either by inserting a new payment date or by issuing a new cheque.
If a Cheque is torn into two or more pieces then the cheque is called as Mutilated Cheque. What will the bank do if the cheque is Mutilated?
Generally, the bank will not accept the Cheque if it is torn into two or more pieces without getting confirmation of the drawer.
However in some special cases, if a cheque is torn only at the corners and no material fact is erased or cancelled, the bank may make payment against such a cheque.
Dishonoured Cheque or Bounced Cheque
A dishonoured cheque is where the bank returns a cheque as there are insufficient funds in the account that the cheque is drawn on. Banks will charge customers for issuing a dishonoured cheque, and in some jurisdictions, such an act is a criminal action under sections 138 to 142 in the NI Act, 1881 deals with the cases of bouncing of cheques.
- Cheque should be presented for encashment within validity.
- After receiving cheque from the bank due to “insufficiency of funds”, the payee should give notice demanding payment to the drawer within 30 days.
- The drawer can make the payment within 15 days to the payee after receiving the notice (In some articles, this period is mentioned as 30 days).
- If it has not complied, the complaint is to be made within one month of the cause of action arising.
- No court inferior to that of Metropolitan Magistrate or I Class Judicial Magistrate will try the offence.
- Punishable with imprisonment for a term which may extend up to one year or with fine which may amount to twice the amount of cheque or both.
Different Kind of Cheques: Banker’s Cheque, Traveller’s Cheque
Banker’s Cheque cheques are issued by the bank itself and guarantees the payment to person/organization in the same city. As money is paid by the person who is requesting the banker’s Cheque while requesting for banker’s cheque, it is not dishonoured. It is similar to Demand Draft or DD. Bank charges some amount for making the Banker’s cheque. Useful when paying charges for Universities, Educational Institutions. It is a mode of payment (also called as an instrument) non-negotiable.
Difference between Banker’s cheque and Demand Draft
Banker’s Cheque cheques are issued by the bank itself and guarantees the payment to person/organization in the same city. While demand draft guarantees the payment to person/organization in another city.
In both cases money is paid by the person who is requesting the banker’s Cheque/DD before the DD/banker’s cheque is issued. Issuing bank charges some amount for making the Banker’s Cheque/Demand Draft.
|BANKER’S CHEQUE||DEMAND DRAFT|
|Banker’s Cheque or Payment Order is a cheque issued for making the payments within the same city.||Demand draft is used to transfer money from one person at one city to another person in another city.|
|It can be cleared in any branch of the same city.||It can be cleared at any branch of the same bank.|
|All banker’s cheque is pre-printed with “NOT NEGOTIABLE”.||Demand draft of Rs. 20,000 or more should be issued with “A/c payee” crossing.|
Traveler’s cheques are used by traveler who is travelling to a different country. They have declined in popularity since the advent of credit, debit cards or Forex card.
Traveler’s cheque is required when one travels to a country which has a different currency for example when one is travelling to USA one would buy some Foreign exchange and Traveler’s cheque in US Dollar. It is equal to carrying cash but one can travel safely without carrying huge amount. Several brands of travelers cheques have been marketed; the most familiar of those were Thomas Cook Group, Bank of America and American Express.
Marcellus F. Berry, an employee of the American Express Company,invented the travelers cheque, in 1891. American Express sold more than $26 billion worth of travelers checks in the year 2000.
One purchases them from an issuing institution such as bank CitiBank, Visa or American Express. In some cases the issuer may charge a small transaction fee. One is expected to sign the travelers’s cheque’s upon receipt.
They can be encashed abroad where foreign currency is normally acceptable. When you want to use the traveler’s cheque one needs to countersign the cheque in the presence of the cashier, who compares the signatures. The travelers check is accepted at the same rate of exchange as cash, and any change due is returned to the consumer in local currency.
Kind of Cheques no longer used Local/Outstation/Payable at Par
Earlier before CTS 2010, the cheques were sent physically to the bank of which the cheque was issued. Then cheques were classified as Local and OutStation Cheques. With CTS 2010 there is no difference between Local and Outstation Cheques or Payable at Par cheques.
If a cheque issued was submitted in a bank within the same city, it was called a Local Cheque.
If a cheque issued was submitted in a bank, not in the same city, it was called an Outstation Cheque.
Payable at Par Cheque or Multi City Cheques
Par value in finance means original value.
Payable at par cheques were cheques which could be deposited in any city across the country. The term ‘at par’ indicates that the full face value of the instrument has to be credited to the account of the payee, without any deductions in the form of collection charges, which banks usually levy whenever an instrument is sent for collection. Many banks used to issue payable at par/ multi-city cheques with value cap or limit, some other banks issued these cheques as per category of account, for example, High Net-worth Customers.
In 2012 the Reserve Bank of India (RBI) had asked all CBS (core banking solutions) enabled banks to issue only ‘payable at par’ or ‘multi-city’ cheques to their customers to bring about more efficiency in cheque clearing. Since such cheques (payable at par) are cleared as local cheques in clearing houses, customers were levied extra charges.