Cheques

Cheques enable swift and efficient business dealings by providing a means to conduct transactions promptly and within shorter timeframes.

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A pen sitting on top of a cheque paper. Photo by Money Knack on Unsplash
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A cheque is a written, dated, and signed financial instrument that directs a bank to pay a specific sum of money to the bearer of the cheque or to a specified person or organisation. It’s a form of payment that allows individuals or businesses to make payments without using cash. In other words, a cheque is a written directive issued to a bank directing the payment of a specified sum of money to a designated individual or the bearer of the cheque on a specified date.

Features of a Cheque

1. Bank Name and Branch: The cheque includes the name of the bank and the specific branch from which the funds will be drawn upon presentation.

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2. Date of Presentation: It specifies the date when it can be presented for payment. This date indicates when the funds will be available for withdrawal.

3. Drawer’s Account Number: It identifies the specific account from which the funds will be withdrawn, which is the account number of the individual or entity issuing it.

4. Payee’s Amount: It clearly states the specific amount of money to be paid to the designated payee.

5. Serial Number for Reference: There is a unique identifier or serial number on the cheque for tracking and reference purposes. It aids in record-keeping and helps in identifying the transaction in case of any discrepancies or inquiries.

6. Payee’s Name (which may be the Drawer): It specifies the individual or entity to whom it is payable. This could be the person issuing the cheque (drawer) or another designated recipient (payee).

7. Drawer’s Signature: This is a crucial aspect of validating the cheque. The drawer’s signature verifies the authenticity of the cheque and confirms that it has been authorised by the account holder.

8. Amount in Words and Figures: It presents the specified payment amount both in written words and numerical figures. This dual representation helps to prevent alterations or misunderstandings about the intended payment amount.

9. Stamp Duty (if applicable): In some regions, a stamp duty might be required for certain types of cheques. This duty is a tax imposed by the government, indicated by a stamp or seal on the cheque.

A Sample Cheque. Image Credit: Research Gate.

Functions of a Cheque

1. Convenience in Payments: Cheques offer a convenient method of making payments. They allow individuals and businesses to transfer funds without the need for physical currency.

2. Risk Reduction in Carrying Cash: By using cheques, the risks associated with carrying large amounts of physical cash are significantly minimised.

3. Receipt and Record-Keeping: Cheques provide tangible evidence of payment. They aid in record-keeping and financial documentation for both parties involved.

4. Facilitation of Swift Business Transactions: Cheques enable swift and efficient business dealings by providing a means to conduct transactions promptly and within shorter timeframes.

5. Secure Remittance Method: Cheques offer a traceable and accountable way to transfer funds. They reduce the risks associated with cash transactions.

6. Stoppage Option: Cheque issuers have the ability to stop payment on a cheque in certain situations. This provides a measure of control and security if needed, such as in cases of loss or dispute.

Parties Involved in a Cheque Transaction

1. The Drawer: The drawer refers to the account holder who issues the cheque. They are the owner of the bank account from which the funds are drawn. The drawer writes the cheque to pay a creditor or a designated payee.

2. The Drawee: The drawee is the bank upon which the cheque is drawn. This is the financial institution where the cheque will be presented for payment. The drawee bank is responsible for honoring the cheque and releasing the funds to the payee.

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3. The Payee: The payee is the individual or entity to whom the cheque is made payable. They are the intended recipient of the funds specified in the cheque. The payee presents the cheque at the bank for payment or deposits it into their own account.

Types of Cheques

1. Bearer Cheque: A bearer cheque is payable to whoever presents it for payment. The term ‘bearer’ signifies that the person who holds or bears the cheque is entitled to receive the funds specified in the cheque. It doesn’t mention a specific payee’s name but rather signifies payment to the presenter.

2. Order Cheque: An order cheque is payable to a specific person named on the cheque or to the order of that individual. The payee named on the cheque is the only one authorized to receive the funds. This type of cheque restricts payment to the designated payee or someone authorized by the payee.

3. Open Cheque: An open cheque is characterised by its absence of transverse lines drawn across its face. This type of cheque does not carry any specific instructions or limitations regarding its negotiation or encashment. It can be presented at the bank counter for payment without any restrictions.

4. Crossed Cheque: A crossed cheque stands in contrast to an open cheque. It features two transverse lines drawn across its face, typically between these lines, although not mandatory, ‘& Co’ or ‘Not Negotiable’ may be mentioned. This crossing signifies that the cheque is not for cash withdrawal over the counter but for crediting the funds to the bank account of the payee. It enhances security and prevents fraudulent activities.

A sample of a cheque book. Image Credit: Pinterest.

Ways of Crossing a Cheque

A. General Crossing: A cheque is considered to be super generally crossed when it contains two transverse lines across its face without any additional instructions or words written between them aside from the payee’s bank account. The cheque can only be deposited into the payee’s bank account and cannot be cashed over the counter.

B. Special Crossing: A cheque featuring ‘special or specific lined crossing’ is identified by two transverse lines drawn across its face, similar to a general crossing. However, in this case, there are additional instructions or words between the parallel lines, such as making it an account payee cheque or declaring it not negotiable. This type of crossing offers more specific and stringent restrictions on how the cheque can be processed or handled. Special crossings can be grouped into two categories:

  1. Account Payee Crossing: This is when “Account Payee” or “A/C Payee” is written between the lines. This restricts the cheque to being deposited only into the bank account of the payee mentioned on the cheque and prevents it from being endorsed to another person.
  2. Not Negotiable Crossing: This is the inclusion of “Not Negotiable” between the lines. This doesn’t affect the payment but ensures that the transferee doesn’t get a better title to the cheque than the transferor.

Effects of Crossing a Cheque

1. Bank Account Deposit Requirement: A crossed cheque mandates that it must be deposited into a bank current account. It cannot be directly cashed but needs to be credited to the bank account of the payee mentioned on the cheque.

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2. Counter Cash Restriction: Generally, a crossed cheque cannot be cashed over the counter at a bank. However, the drawer can bypass this restriction by explicitly writing ‘please pay cash’ in between the two transverse lines. This instruction allows the cheque to be cashed at the counter.

3. Restriction to Specific Bank: Crossing a cheque restricts its negotiation to a particular bank mentioned between the transverse lines. It directs the cheque to a specific bank in a town or a specified location, ensuring that the funds are processed through that bank only.

4. Theft Prevention Measure: Crossing a cheque serves as a crucial security measure by preventing its encashment if it’s stolen. The requirement for bank deposit ensures that the cheque cannot be easily converted to cash without being deposited into the intended payee’s bank account.

5. Clearance Timeframe: When a crossed cheque is paid into a current account, it typically takes a minimum of four working days to mature or clear. This processing period allows the bank to verify and process the funds before they become available for withdrawal by the payee.

Other Forms of Cheques

1. Post-Dated Cheque: A post-dated cheque bears a date in the future. It indicates a date later than the day it was issued. This type of cheque allows for future payments or transactions, as the funds will not be released until the specified date arrives.

2. Stale Cheque: A stale cheque is the opposite of a post-dated cheque. It carries a date in the past, indicating that the cheque is no longer valid or has expired. Banks typically don’t honour stale cheques, and they may be rejected or require reissuance for the transaction to proceed.

3. Certified Cheque: A certified cheque is one that the issuing bank guarantees or verifies by setting aside the amount specified on the cheque from the customer’s account. The bank then issues the cheque, essentially ensuring that the funds are available and will be paid when the cheque is presented for payment.

4. Dishonoured Cheque: A dishonoured cheque, also known as a bounced cheque, is one that the bank refuses to pay upon presentation due to various reasons such as insufficient funds, account closure, or other issues. When a cheque is dishonoured, it cannot be processed for payment. Thus, it is rejected by the bank.

Reasons for Dishonouring Cheques

  1. Insufficient Funds: When the account balance is insufficient to cover the amount specified on the cheque, the bank will dishonour the cheque due to lack of funds.
  2. Death of the Drawer: In the event of the drawer’s demise, the bank might dishonour the cheque as the authority to issue payments ceases upon the account holder’s death.
  3. Irregular Signature: If the signature on the cheque does not match the authorised signature on file or if it appears irregular or inconsistent, the bank may refuse to honour the cheque.
  4. Non-Existing Account: If the account mentioned on the cheque does not exist or has been closed, the bank will dishonour the cheque due to the non-existence of the designated account.
  5. Bankruptcy: In cases where the account holder has declared bankruptcy, the bank may dishonour the cheque as part of legal proceedings that restrict or nullify financial transactions.
  6. Frozen Account: When an account is frozen due to legal reasons, disputes, or regulatory requirements, any cheques drawn on that account may be dishonoured by the bank until the account status is resolved or unfrozen.
  7. Stale Cheque: A cheque becomes stale when it is presented after a certain period from its issuance date. Banks may dishonour a cheque that has surpassed its validity period, typically around six months, as it is considered expired.
  8. Alteration on the Cheque: Any unauthorised changes, alterations, or amendments made on a cheque, whether to the payee, amount, or date, can result in the cheque being dishonoured by the bank.
  9. Post-Dated Cheque: A cheque bearing a future date beyond the current date is known as a post-dated cheque. If presented before the specified date, banks may refuse to honour it until the indicated date arrives.
  10. Stopped Payment: If the drawer requests the bank to stop payment on a cheque, banks are obliged to honour this request, which will result into the dishonour of the cheque upon presentation.
  11. Closed Account: When the account mentioned on the cheque is closed or inactive at the time of presentation, the bank will dishonor the cheque due to the non-availability of the account.
  12. Discrepancy in Amounts: If there is a discrepancy between the amount written in words and the amount in figures on the cheque, banks might dishonor it to avoid confusion or potential fraudulent activities.
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Bounced Cheque

A bounced cheque, also known as a dishonoured cheque or a returned cheque, is a cheque that a bank refuses to honour or pay out the funds specified on it. This refusal occurs due to various reasons such as insufficient funds, a closed account, discrepancies in signatures or amounts, post-dated cheques presented prematurely, alterations on the cheque, or a stop payment request from the account holder.

When a cheque bounces, it is returned to the payee or the bank where it was deposited. The implications of a bounced cheque extend to the transaction being voided or unable to be completed due to issues associated with the cheque or the account from which it was drawn. A bounced cheque is colloquially referred to as a “dud cheque.”

Cheque Clearing System

The cheque clearing system is the process of settling cheques drawn and deposited into bank accounts. Cheques undergo clearance through various methods:

  1. Branch Clearing or Book-Entry Settlement: This method involves a drawer (the person issuing the cheque) and a payee (the intended recipient) who both maintain current accounts in the same branch of a bank. The cheque is cleared internally within the bank without involving external entities.
  2. Head Office Clearing: Head office clearing occurs when the drawer and payee maintain current accounts in the same bank but at different branches. In this method, the cheque is cleared between different branches of the same bank. This allows for transactions between accounts held at various branches of the bank.
  3. Local Clearing: Local clearing is a method used for the settlement of cheques drawn upon different banks within the same town or locality. This process enables the transfer of funds between various banks operating in a specific geographical area.
  4. Bankers Clearing House: Bankers clearing house operates as a national-level clearing system involving representatives from the head offices of all the banks within a country. This centralized system facilitates the efficient and systematic clearance of cheques among multiple banks nationwide. It streamlines the process on a larger scale.
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