The bouncing of cheques is one of India's most common financial crimes. Our country processes a large volume of cheques (around ₹6 lakh cheques per day). The main reason cheques bounce is that the cheque is not written correctly or the bank account is not handled well. Many people are unaware of how to use a chequebook and often write a cheque in the wrong way which becomes a reason of cheque bounce.
Did you know?
The penalty for a dishonoured cheque is a fine of twice the amount due or imprisonment of 2 years or both plus a civil recovery of money suit. The May 2021 figures of the National Automated Clearing House (NACH) shows that the percentage of bounced cheques stood at approximately 31%!
Dishonoured cheque meaning
When a cheque is presented to the Payee Bank, it goes through the approval or clearing process and is paid in cash or credited to the payee’s account. But, at times, the payee bank refuses to honour the cheque or denies it while specifying why it cannot pay the cheque. If it does so, then the cheque is said to be returned or bounced.
All reasons for cheque bounce incur a penalty in both the drawer’s and payee’s accounts. The payee can fill the bank memo and can opt to resubmit the cheque for clearing within 90 days from the dishonour. For example, this works when the drawer’s account has funds that have not yet been cleared and hence the memo shows the cheque return reason ‘insufficient funds and mentions that the payee can resubmit the cheque to be cleared.
However, when the receiver refuses to re-present the cheque, they should, within 30 days of the cheque bounce memo, ask the drawer in writing (while providing 15 days) to clear the amount due. When the drawer still does not pay the amount due even after 30 days of the cheque return memo, the payee or receiver of the cheque can initiate legal proceedings against the defaulting drawer of the cheque.
Let's start with the basics for understanding why cheques bounce in detail.
What is a cheque?
When you know why cheques bounce, you can insure against such unpleasant consequences. It is essential to understand what a cheque means and the various reasons why a cheque may be returned. So here is what a cheque is.
A cheque is a popular method to make payments from your bank account and has the following characteristics.
- The cheque is an unconditional order to your bank to pay the person mentioned or the bearer of the cheque.
- It is an on-demand promissory note drawn on the cheque drawer’s bank.
- If it is a bearer cheque, the payment is cash to any person presenting the cheque.
- If it is a crossed cheque, the amount is credited only to the person mentioned in the cheque and always to the receiver’s bank account.
- The cheque amount payable is mentioned on the cheque face, and the drawer's bank account should have more than specified amounts in it.
A cheque is written by the drawer and made out in the payee's name. Hence the terms to be understood here are:
- Drawer- This person draws or is the maker of the cheque. The bank account is called the drawer's account.
- Drawee- This term denotes the drawer's bank on which the cheque is written out. The cheque contains the Drawee bank’s name, branch, and the cheque/transaction number in its MICR code. The Drawee bank must pay the Payee when sufficient funds are available in the Drawer’s account.
- Payee- This is the person mentioned in the ‘Pay’ field of the cheque.
- Bearer- When it is a bearer cheque meaning the person's name with the ‘or Bearer’ not cancelled, any person presenting the cheque becomes the payee.
- Transferor/transferee- In a transfer cheque between two accounts of the same individual held at the same branch, the drawer and payee are the same.
Now let us look at what cashing and depositing a cheque means.
Clearing, cashing and depositing cheques
Clearing a cheque: A cheque is a paper method to access your bank account to pay a specific sum to a person or company. A cheque is cleared when it is presented to the bank and goes for collection to the issuer’s bank, and the amount is paid to the receiver’s bank account. Thus, you can access your bank account, transfer funds, withdraw money, and deposit money into your account using a cheque book.
Cashing a cheque: Cashing a cheque means that you visit the bank branch on which the bank is drawn and present the cheque for payment. The bank approves the cheque after due verification of the name of the person payable to and makes the cash payment at its teller counter. If not, the cheque bounce reasons are mentioned, and payment is refused. This method can only be used when the cheque is not crossed. If the bearer option is uncrossed, then anyone can encash the cheque even when their name is not mentioned on the cheque.
Depositing a cheque: While depositing a cheque, you have a few options: Using dropbox, ATM or presenting the cheque at your banker’s counter to have the proceeds credited to your account. The cheque is then sent to the clearinghouse for the approval of the paying bank for clearing. The clearing process normally takes 3 to 7 working days. Let’s say you drop the cheque to be deposited to your account before 11 am. The deposited cheque goes for clearing the same day. If you use dropbox any later than 11 am, the deposited cheque will be cleared the next working day.
Let’s suppose the deposited cheque’s bank is the same as the drawer’s bank, but bank branches are different, then the deposited cheque must go for clearing, and this cannot be called a transfer cheque. Transfer cheques can be used only when both the accounts debited and credited reside in the same bank branch.
Reasons why cheques may be refused
Now let us study the cheque dishonour reasons, or why cheques are refused, returned, bounced or dishonoured.
Funds are insufficient
This is the most common among cheque rejection reasons and cheque bounce cases. Always check that you have sufficient funds in your account before the cheque is encashed. When the bank account limits are exceeded, and the funds in the account do not cover the cheque amount, both the drawee and issuer get fined for the cheque dishonour. Plus, you may be prosecuted by the drawee for issuing a cheque with insufficient funds in your account. Yes, at times, the drawer may have funds in the clearing process. In such cases, the bank notifies the payee, and the drawer can also request the payee to present the cheque later. Or the drawer can issue a new cheque. However, there is no excuse for issuing such cheques, and the courts take strict action against such cheque bounces.
The date field is very significant as it shows the date on which the amount is to be paid. If the date is illegible, altered, disfigured, not definite, not visible, or wrongly mentioned, then it leads to cheque dishonour. The cheque is returned unpaid. A cheque is valid for 90 days only and should be paid within it. The Supreme Court held that a cheque for 15/5/2021 is payable only until 14/08/2021. Also, if the date is mentioned as 31st of January and no year is mentioned, the date is indefinite, then the cheque is returned. Suppose you mean to write 30/01/2022 and write 30/01/2021 instead. The cheque is time-barred and hence returned.
Mismatch of signature
The signature on the cheque must tally with the bank’s records, or else it becomes a dishonoured cheque, meaning the cheque is dishonoured. Since people nowadays use multiple signatures and digital banking, a signature mismatch is quite high. Older people may have this problem as they may not remember their signature in an account opened many years before. Sometimes due to illness or other factors, the signature may not match the bank’s signature. Remember to never sign on the left-bottom of the cheque with the MICR code. If you do not avoid a signature mismatch, your cheque may bounce.
When the date on the cheque is not current, the cheque is returned unpaid. For example, a cheque is issued to a person on 10th January 2022 and mentions 31/01/2022 as the payment date. If this cheque is presented on the 28th January 2022, it will become a dishonoured cheque as it is a post-dated cheque, not a current-dated cheque. When presented on 31st of Jan 2022, the same cheque can be successfully cleared. At times, people forget and enter the date as 31/01/21 instead of 30/01/22. Such a cheque is time-barred and hence is returned.
Cheque is damaged
The bank will not accept a defaced, illegible, badly stained, torn, frayed, or damaged cheque whose physical condition is not good.
Mismatch in numbers and words in the amount field
Cheques bounce when there is a mismatch between the amounts entered in the figures and words. For example, the amount in words says Fifteen Thousand while the figures show 50,000/-. Some people also make the mistake of writing figures in words section. For example, the figures show 50,000/- and the amount in words show ‘50 Thousand only’ whereas it should be Fifty Thousand only. Thus, in this case, your cheque may bounce if there is any mismatch between the figures entered and the amount mentioned in words.
Cheque is overwritten
Often, the drawer may have made corrections, overwritten the name, amount, etc., or the handwriting is illegible and ambiguous. Such may become reasons for dishonour of cheque, and the cheque should be re-written as fresh cheques, or they are returned.
When a stop payment has been applied
The drawer may request their bank not to clear the cheque using a stop payment. For example, the goods sold are damaged and hence payment is not to be made or payment has already been made by other digital means, etc. If the drawer has applied a stop-payment, then the cheque is not paid, and the cheque is returned to the Payee with such a comment in the cheque return memo.
The account is inactive or frozen
Sometimes, the cheque may have been issued on an old, inactive bank account. Also, courts and banks may freeze an account under due orders. Cheques drawn on such accounts will not be paid and are returned or bounced.
Nowadays, cheques are mostly used for business transactions. A cheque is a form of financial guarantee and a promise to pay. A cheque bounce or cheque dishonoured is a serious matter and can lead to grave penalties. This implies your accounts, taxes, finances, and more should be maintained responsibly. The possible reasons resulting in a dishonoured cheque have been identified in this article. Therefore, write cheques correctly for avoiding cheque bounces.
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