Optional Grouping: Introduction to Cheques

Let’s understand how cheques work. A cheque is a promise made in writing by one person to another to unconditionally pay a specified amount of money. However, you can also write a cheque to yourself.

For example, if Amit owes Asha Rs. 10,000, he can give Asha a cheque of Rs. 10,000. When Asha presents this cheque to the bank, she will receive Rs. 10,000 as cash or in her bank account. Rs. 10,000 will be deducted from Amit’s account.

In technical terms, as used by bankers and lawyers, a cheque is also referred to as and is a type of a ‘Negotiable Instrument’.

The different parties involved in dealing with a cheque are:

• The issuer of the cheque (Drawer)
• The payee/holder of the cheque and
• The bank (Drawee)

If a cheque you issued has bounced, intention of the drawer of the cheque does not matter. It is irrelevant whether or not you intended to for your cheque to bounce. Even if the bouncing of the cheque has happened without ill intent or malice it is considered illegal and a crime under the law.

The signature on a cheque means that the person who has signed it is giving permission to the bank to take money out of his or her account. When you give a cheque to the bank, keep in mind the following:

• Make sure the signature of the person who issues the cheque matches with the signatures in his bank records.
• If your signature on the cheque mismatches with your signature in the bank records, then the bank can fine you for this.

A signature mismatch can attract a penalty if the bank decides to return your cheque.

Follow these steps to encash a cheque.

Analyse the type of cheque that has been issued to you.

Bearer Cheque

If it is a bearer cheque, then there will be no name written on the cheque. You can:

• Go to any branch (in the city) of the bank that the cheque belongs to
• Present it for clearance
• The bank teller, will verify the details on the cheque and clear it
• The cheque will be cleared then and there and you will get the cash

Order Cheque

If it is an order cheque it will have your name written on it. You can:

• Go to any branch in the city of the bank that the cheque belongs to and
• Present it for clearance
• The bank teller, will verify the details on the cheque and clear it -The cheque will be cleared then and there and you will get the cash

Account Payee Cheque

If it’s an account payee cheque, then write your name, your account number and contact number at the back of the cheque, fill the deposit slip and exercise any of the following options.

Bank/ATM Dropbox Deposit

You can either go to an ATM of your bank or directly go to any branch of your bank where you have an account.

If the ATM of your bank has cheque deposit slips and a drop box, the most convenient option is to do the following:

• Fill in the cheque deposit slip. A deposit slip has two parts; the smaller part that you fill and keep with yourself and the bigger part that you fill and deposit in the drop box, along with your cheque.
• Tear your portion of the slip and keep it with yourself
• Pin the cheque and other part of the deposit slip
• Drop in into the ATM dropbox.

However, with this dropbox option, you will not receive an acknowledgement from the Bank of the receipt of your cheque and deposit slip. This means that if the cheque is lost by any chance, you will not be able to find out about the status of the cheque from the bank. However, you can still stop your cheque through internet banking or by writing a letter to the Bank.
If the ATM of your bank branch does not have the dropbox facility, then you have to go to the bank and drop the cheque. The detailed procedure is given below.

ATM Deposit

Some ATM’s have the option to deposit the cheque in the ATM machine itself. Please follow the procedure set out in the machine and deposit it accordingly.

Bank Deposit

• Fill a cheque deposit slip
• Get the appropriate cheque deposit slip form amongst the various slips that are usually kept at the dropbox area of the branch. Make sure you have the proper slip.
• Carefully fill in your bank account number, branch name, cheque amount etc. – Sign at the appropriate place. Also fill in details of the cheque, such as cheque number, bank from which the cheque is drawn, amount, date on which such cheque was drawn etc. Make sure that you fill in these details in the relevant places.
• Tear your portion of the slip, pin both cheque and the other part of the slip and drop them in the dropbox.

Cheque Clearing means processing a cheque from one bank to another by transferring the amount mentioned on the cheque to the payee’s account. The two most commonly used forms of cheque clearing systems are:

• Cheque Truncation System
• Speed Clearing

Cheque truncation is a form of cheque clearing system. It digitises a physical paper cheque into a substitute electronic form. This is done for transmitting the amount of money mentioned on the cheque to the paying bank. This is also referred to as ‘Local Cheque Clearing’.

In this process, an electronic image of a cheque is sent by the clearing house to the paying branch. This image contains all relevant information like date of presentation of the cheque, presenting bank, data on the MICR [Magnetic Ink Character recognition], etc. By this process, the paying branch gets these details automatically.

This is a much simpler and a faster process of clearing a cheque than physically transferring a cheque from one bank to another. Since cheque truncation speeds up the process of collecting cheques it results in better service to customers and reduces the scope of loss of cheques in physical transit. This process is faster and more secure.

Endorsing cheques means that if you have an order cheque then you can endorse it to someone else. Endorsing means the payee can use the same order cheque to pay to someone else (the creditor) by writing that person’s name on the back of the cheque and signing it. When a person gets an endorsed cheque, he can collect the cash himself.

Example: Rahul gave a cheque to Raju. If Raju wants to endorse that cheque to Divya, he has to write Divya’s name behind the cheque and sign it.

Endorsing in favour of multiple people

A cheque can be endorsed any number of times. This means that a person can give it to someone, who can give it to someone else and the same can be continued multiple times. However, the bank may seek further information before crediting the amount in the account of the last person to whom the cheque is endorsed i.e. the final beneficiary of the cheque.

For Example

Jeet issued a cheque in favor of Sohini and Sohini decides to endorse the cheque to Adrija, by writing Adrija’s name behind the cheque given to her. Adrija can endorse the same cheque to any other person in the same way. Now, if the cheque has finally come to Param then the bank could ask for details (such as ID card) from Param when he approaches the bank to receive the cash.

Cheque that cannot be endorsed further

If a cheque is crossed and “Account Payee Only” or “Not Negotiable” is written on it, then it means that the cheque cannot be endorsed to anybody else. The cheque has to be necessarily collected by the banker of the payee on his behalf.

For Example

Simran has issued a cheque in favour of Namrata. But, she has written “Account Payee Only” or “Not Negotiable” and crossed the cheque. Then, Namrata cannot endorse it further.

Cheques can be issued to a person holding a bank account in a bank branch in the same city or outside. When the cheque is issued to a person outside the same city then it becomes an outstation cheque.

Speed Clearing is a process that makes it possible to clear such cheques, locally. With the help of MICR and Core Banking System (CBS), the entire process of clearing such cheques has become easier and faster. It is also referred to as ‘Grid-Based Cheque Truncation System’.

Before the Speed Clearing Process existed, if you deposited an outstation cheque at your bank, it would first go to the local clearing house in your city and then the cheque would be physically sent to the outstation branch to process the payment. Now, with speed clearing, the cheque is sent to the local branch of the drawee bank for clearance.

Hence, clearance becomes faster with the Speed Clearing System.