Use & Misuse of Cheque

With the advent of internet banking, mobile banking, credit cards, debit cards and e-wallets, the paper based transactions are now perfectly on phase-out track. This electronic scenario has put the cheque, one of the traditional banking instruments, in its death throes as a payment channel. Even as the usage of cheque has fallen to a large extent, it continues to be an instrument of credibility. In fact there are consumers and businesses in particular  who are still in no rush to shred their cheque books just yet.

It’s also a fact that this piece of paper has been basis of innumerable bank disputes,  mostly when the cheque has been dishonoured for want of sufficient funds. Innumerable incidents galore where cheque has been (and continues to be) grossly misused by the fraudsters. For example, the criminals fraudulently alter a beneficiary’s name or amount on a genuine cheque before it is paid. Counterfeit and forged cheque frauds are other common examples of misuse of this piece of valuable paper. Many times, even though the original cheques were held by the account holder, fraudsters enchased cheques with the same number.

Frequent incidents of frauds through ‘cancelled’ cheque leaves have been surfacing. Though a ‘cancelled’cheque makes sure that no one can withdraw money from your account, there have been cases where the money has been withdrawn fraudulently through ‘cancelled cheque’ leaves.

Notably, in order to check banking fraud, the Reserve Bank of India just two days ago announced to introduce the ‘positive pay system’ for cheque from January 1, 2021, under which re-confirmation of key details may be needed for payments beyond Rs 50,000. The issuer of the cheque will be required to submit electronically, through SMS, mobile app, internet banking or ATM certain minimum details of that cheque like date, name of the beneficiary, payee, amount to the drawee bank.

Let’s go through some important facts related to the cheque.

What is a cheque?

Cheque is not a mere piece of paper. It is a written order of an accountholder upon a bank to pay to or to the order of a designated party or to bearer, a specified sum of money on demand. The person who draws the cheque is called drawer, the bank on which the cheque is drawn is called drawee and the person to whom payment is to be made is called payee. The banker has always to pay it on demand.

What is a cancelled cheque?

A cancelled cheque is crossed by drawing two parallel lines on the cheque and the word “Cancelled” is written on it. Except this, nothing else needs to be written on the cheque. However, the cheque will have bank account number, MICR code and cheque number which can be used for the reference of concerned persons. ‘Cancelled cheque’ means no one can withdraw money without your knowledge.

There are certain areas where you will be asked to submit a cancelled cheque leaf. For example, a cancelled cheque has become essential for know your customer (KYC) procedures and documentations. Investment plans like mutual funds, stocks etc require KYC documents in which a cancelled cheque submission is mandatory. A cancelled cheque is also a requisite for finalising EMI payments for various types of loans. Even submission of a cancelled cheque is asked on purchase of some insurance policies,  and in opening of a demat account too you shall be asked to submit a cancelled cheque.

How a cancelled cheque leaf can be misused?

It is a common sight now on online platform that offers are highlighted for quick loans sanctions under personal loan segment. The fraudster acting as a loan agent among other documents asks for cancelled cheques for sanctioning the loan. After the documents are submitted, the fraudsters misuse the ‘cancelled cheque’ and withdraw money from the accountholder.

So, be cautious while submitting a cancelled cheque. Here, you need to cancel it in a proper way so that it has no scope of becoming an instrument of abuse. You have to draw two parallel lines across the cheque leaf and write the word “cancelled” across the lines. Don’t sign the cheque as it’s not to be used in any transaction.

It is also important for you to be sure about the person whom you are handing over the cancelled cheque. Always submit it to the institution in person instead of handing over to a person, even if he is known to you.

What is chequebounce?

When a cheque is returned by the bank unpaid, it is said to be dishonoured or bounced. Cheque bounce could occur due to several reasons such as insufficiency of funds, etc. When the cheque is bounced for the first time, the bank issues a ‘cheque return memo’ along with reasons for non-payment.

What should be done when a cheque is dishonored due to insufficient balance by the bank?

It is a criminal offence, covered under section 138 of the Negotiable Instruments Act.  In case of a cheque bounce, the payee is eligible to resubmit the cheque within 3 months of the date of issue if he knows that it would not be dishonoured the next time.

Yet another way is to send a legal notice with the help of your lawyer, to the issuer (defaulter) within 30 days of receiving the cheque return memo. All the relevant facts of the case, including the nature of the transaction, amount, date of depositing the instrument in the bank, and the subsequent date of dishonoring should be clearly mentioned in the notice. If no action is taken on the notice and a fresh cheque or repayment is not done within 30 days of receiving the notice, the payee has the right to file a criminal complaint under Section 138 of the Negotiable Instruments Act. The complaint should be registered in a magistrate’s court within a month of the expiry of the notice period.

If found guilty by the court, the defaulter can be punished with aimprisonment and/or a fine, which can be as high as twice the cheque amount. However, the defaulter can appeal to the session’s court within one month of the date of the judgment of the lower court. If a prolonged court battle is not acceptable to both the parties, an out-of-court settlement can be attempted at any point.

In case of non-recovery of the due amount during the long battle of legal dispute, one can separately file a civil suit for recovery which would cover the costs borne by the petitioner during the legal battle.

What are the RBI guidelines with regard to cheque bounce?

In order to enforce financial discipline among bank customers, the RBI has asked the banks to make it clear to its customers that in the event of frequent dishonour of a cheque (four times in  a month) for want of sufficient funds in the account, no fresh cheque book would be issued. In case of current accountholders, the bank has the discretion to close the account. However, in respect of loan accounts like cash credit (C/C) account and overdraft (OD) account, banks have to review the need for continuance or otherwise of these credit facilities and the cheque facility relating to these accounts.

Who is responsible for loss or delay in cheque clearing?

When a cheque is lost in clearing process, the bank officials commonly wash their hands off the matter by asking the customer to get a new cheque. However, as per the rules, in respect of cheques lost in transit or at the paying bank’s branch, banks have to immediately bring it to the notice of the account holder so that he can issue a stop payment instruction. He can also take care that other cheques issued by him are not dishonoured due to the non-crediting of the amount of the lost cheque.

Since the onus for such a loss is on the collecting banker, not on the account holder, customers are not only expected to be reimbursed for any ensuing expenses, but are also entitled to the interest for the time taken to obtain the duplicate cheque.

As far as delays in cheque clearing is concerned, banks are required to afford credit or debit for local cheques on the day when it is presented in the bank. At the most, due to unavoidable circumstances, it has to be credited or debited on the next day of presentation in clearing. For Outstation Cheques, the maximum time-frame for collection of cheques drawn on state capitals, major cities and other locations are 7, 10 and 14 days, respectively.

As per the rules in place, if there is any delay in collection beyond this period, the customers are entitled to interest at the rate specified in the cheque collection policy of the bank.