Cheque: Instrument of Credibility

In recent years, digital transactions have transformed the entire ecosystem of banking and financial services. With the advent of internet banking, mobile banking, credit cards, debit cards and e-wallets, the traditional banking practices usually handled manually, have considerably declined.

However, there are certain banking instruments which have not been consigned to history. One such instrument is the cheque, which has long been a reliable payment method for both businesses and consumers worldwide.

There are consumers and businesses in particular who are still in no rush to shred their cheque books just yet. However, at the same time, they also graze on the convenience of digital platforms to conduct their financial transactions.

The Cheque, one of the oldest banking instruments, is a bond of trust between three parties – the drawer, who makes the cheque; the payee, who is the recipient of the money mentioned in the cheque and the drawee, the bank where the cheque can be presented for payment.

This piece of paper infuses a kind of empowerment to a holder that holds its worthiness beyond being a mere piece of paper. Numerically speaking its use in the day to day banking transactions has of course gone down, but it’s not yet outdated.

The way it has survived in the modern banking system makes one believe that the cheque is going to remain as an inevitable part of the system. The parties involved in a financial transaction through cheque are governed by certain rules to uphold its image as instrument of credibility not only in the banking system but also in the overall financial system. The first and foremost thing is that a cheque should not bounce once issued by a drawer in favour of a payee.

Notably, among all the things, dishonouring of a cheque is a serious lapse on account of being a criminal offence and slapping punishment to the drawer is inevitable. Innumerable instances are on record where an account holder issued cheques for a certain amount despite knowing that the balance in his/her account was insufficient.

But instances also galore where the drawer was not aware that his/her account is short of funds to meet the liability of the cheque. But in both cases, intentionally or unintentionally, dishonouring a cheque is an offence. There’s also a regulatory direction on writing on the cheque. No alteration or modification in cheques is allowed even if an authorized signature has been made at the place of alteration.

What is the difference between an account payee cheque and bearer cheque?

An account payee cheque is one where the receiver is required to deposit it in his bank account to receive payment. The payment can be credited in the receiver’s bank account instantly or at the most usually in two to three days. An outstation cheque can be credited in the account within 14 days.

A bearer’s cheque is an instrument through which its bearer can visit the bank on which the cheque is drawn and get the money in cash instantly. However, this kind of cheque can also be deposited in a bank account to receive the money into the account. Notably, a bearer cheque can be encashed at any of the bank’s branches. However, the policy of a bank with respect to identity verification for encashing a bearer’s cheque, especially for an amount above Rs 50,000, may differ from bank to bank.

What is the maximum amount that can be withdrawn through a bearer cheque?

Even as there is no limitation of withdrawal of money through a bearer cheque, each bank has its own systems and procedures to ensure safety of money of its customers. Different banks have different policies based on the daily withdrawal limit, verification calls, cheque number verification, etc.

Many banks have a practice of asking customers to give advance notice in case of a high value bearer’s cheque so that they can arrange adequate cash on the day of withdrawal. According to Rule 9 of the Prevention of Money Laundering (Maintenance of Records) Rules, 2002, banks are required to conduct identity verification for all transactions equal to or above Rs 50,000. Thus, a bank may ask customers to undergo a KYC process to encash a bearer’s cheque.

Notably, the Reserve Bank of India (RBI) rules envisage that if the amount is of Rs 50,000 or more, the bank has to authenticate the identity of the person mentioned on the bearer’s cheque. The KYC process will be initiated on the person encashing the cheque. A person will be required to provide documents for proof of identity, address proof along with a photograph. However, KYC is not mandatory if the amount is less than Rs 50,000.

What are the risks associated with bearer cheque?

A bearer cheque means anyone in possession of this cheque can encash it and does not require any endorsement. There is no requirement of account holder’s authorisation for making the payment.

However, there is a risk associated with a bearer cheque. If this cheque is misplaced or stolen, the cheque can be encashed wrongfully and its issuer can lose the amount mentioned in the cheque. The issuer should immediately inform the bank if a bearer cheque is lost or misplaced and get its payment stopped.

What is a positive pay system for cheques?

In January this year, RBI implemented a ‘Positive Pay’ system to enhance the safety of cheque-based transactions. However, it is voluntary for banks to implement it up to a cheque value of Rs 5 lakh. The system is mandatory for cheque values above Rs 5 lakh. It helps to detect any discrepancies and prevent fraudulent encashment of cheques either issued as bearer cheque or account payee cheque. Under this process, the issuer of the cheque submits electronically details related to the cheque presented for clearings, such as the cheque number, cheque date, payee name, account number, amount, and other details against a list of cheques previously authorized and issued by the issuer.

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 a 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 is cancelled cheque misused?

It is a common sight on online platforms that offers are highlighted for quick loan sanctions under the 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 account holder. 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 it over to a person, even if he is known to you. Otherwise, chances of someone faking his identity and misusing cancelled cheques are ripe.

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.