What is a Cheque – Types, Features, Chequebook, Advantages

A cheque is a financial document that orders a bank to pay a particular amount of money from a person’s account to another individual’s or company’s account in whose name the cheque has been made or issued. The cheque is utilised to make safe, secure, and convenient payments. It serves as a secure option since hard cash is not involved during the transfer process; hence the fear of loss or theft is minimised.

A cheque may be issued against a current account or a savings account. Every bank cheque has a cheque number, MICR and IFSC code. Under this mode of fund transfer, there are three parties involved in the on-track movement of money through a written paper source.

Parties to a Cheque

There are three parties to cheque –

• Drawer– The person who draws the cheque, i.e., signs and orders the bank to pay the sum.
• Drawee– The bank on which the cheque is drawn or who is directed to pay the specified sum written on the cheque.
• Payee– The beneficiary, i.e., to whom the amount is to be paid.

Apart from the above mentioned parties, there are two more parties to a cheque:

• Endorser – When a party transfers his right to take the payment to another party, he/she is called an endorser.
• Endorsee – The party in whose favour, the right is transferred, is called endorsee.

Sometimes, the drawer and the payee can be the same person, when the drawer writes a self-cheque.

Features of Cheque

• It is an unconditional order
• It is always drawn on a particular bank
• A signature on the exchequer is a mandate and should be only done by the maker
• The amount is always a certain sum of money in one’s account
• It is always payable on demand
• Its payment is always in cash or account transfer
• The cash amount is to be paid to the person mentioned therein, or order, or the bearer

Types of Cheque

1. Bearer Cheque: It can be encashed by the bearer (person carrying/bearing the cheque) on presentation before the authorised bank. Banks do not require authorisation to be permitted to make payment from the issuer for these cheques.
2. Blank cheque: A blank cheque is the one that has the sign of the issuer and no other details are filled in it. It possesses high risk because if someone finds it, the person can issue the cheque to themselves.
3. Order Cheque: It can be encashed only by the payee, that is, the person whose name has been written on the cheque.
4. Open Cheque: This is an uncrossed cheque that can be encashed at any bank and the payment can be made to the person bearing the cheque. It can also be transferred from the original payee to a different payee. The issuer is required to put his signature on both the front and back of the cheque.
5. Crossed Cheque: Also known as the account payee cheque. On the top left corner of the cheque, it has the words ‘’account payee’’ written enclosed in two parallel lines. These lines ensure that the payment is made only to the person whose name is written on the cheque and hence are the safest types of cheques to issue.
6. Post-dated Cheque: It has a later date of being encashed and can be used to meet a future financial obligation. Even if these are presented to the bank by the bearer immediately, the payment is processed by the bank only on the date mentioned on the cheque. These cheques are valid for up to 3 months from the date of issuance.
7. Stale Cheque: Three months past the date of issuance, a cheque is past its validity and is called a stale cheque. No money can be withdrawn using such stale cheques.
8. Banker’s Cheque: A banker’s cheque is issued by the bank and guarantees payment.
9. Self Cheque: A self-cheque has the word ‘self’ written in the drawee column and can only be drawn at the issuer’s bank.
10. Traveller’s Cheque: It can be used by foreigners on a vacation in place of hard cash. These are issued by one bank and can be encashed in the form of currency at a different bank in a foreign location/country. Traveller’s cheques don’t have an expiry date and can be used at later date.

Read in detail: Types of Cheque

How to Cancel a Cheque

To cancel cheque leaves, you just need to strike two lines across the cheque and write the word “CANCELLED” across it. You don’t need to sign the cancelled cheque. It only works as proof that you have an account in the bank. There is the account holder’s name, branch name and address, account number, and MICR code on the cheque which is enough to submit as proof.

Purpose of a Cancelled Cheque

As all the primary details of your bank account are present in a cancelled cheque, it helps a verifier/auditor to confirm these details of yours. Moreover, a Cancelled Cheque doesn’t necessarily require your signature on it, so there aren’t any security issues which you should be concerned about when you submit your bank cheque as proof of your financial identity.

• While borrowing loans: You are required to submit cancelled cheques to banks when you apply for a loan such as a car loan, home loan, personal loan, or loan against property with them. A cancelled cheque is considered proof of your bank account with the prospective lender bank.
• When investing in the market: When you are investing in the stock market such as the National Stock Exchange or the Bombay Stock Exchange, the service provider will ask you for your cancelled cheque.
• Organizations usually ask for cancelled chequesto verify a person’s banking and financial profile. This is because through a single cancelled cheque they acquire all the usually required details of verification for your bank account.
• When you buy mutual fundsyourself or through a third party agency as per government rules, you need to provide a cancelled cheque as proof of your bank account to the seller so that any funds and derivatives which are received through your mutual funds transactions are credited in your bank account directly. As aforementioned, whenever a credit has to happen in your bank account, a cancelled cheque is required by the creditor to verify the account first.

What is a Crossed Cheque

A crossed cheque is any cheque which is crossed with two parallel lines. The lines can be drawn either across the whole cheque or through the top left-hand corner. What does it signify? It simply means that the specific cheque can only be deposited straightway into a bank account and cannot be instantly encashed by a bank or any credit institution. This ensures a level of security to the payer since it requires the funds to be handled through a collecting bank.

Different ways to Cross a Cheque

Cross cheque focuses on the instruction given by the drawer (maker) of the particular cheque to the drawee bank. This instruction demands to pay the cheque at the counter of the bank, but with a strict direction to pay it to a person who offers it through a banker. What is the purpose of crossing? Crossing makes it possible to trace the person to whom the amount/payment has been made. In India, there are various crossing tools to safeguard cheque payments such as:

General Crossing

This type of cheque crossing requires two parallel transverse lines. There isn’t any restriction on putting these parallel lines on a specific area on the cheque, but they can be drawn anywhere. Usually, it is advisable to put it on the top left corner of the cheque. The usefulness or significance of this crossing is that the cheque should essentially be paid only to the banker.

Special Crossing

Special Crossing cheque does require the name of the banker. The effect of this type of crossing is that the cheque should be funded only to the banker to whom it is crossed. It is a reminder to all the people that a special crossing cannot be changed into a general crossing.

Not Negotiable Crossing

In this type of cheque crossing variety, the paper document needs to contain the words ‘not negotiable’. Moreover, the cheque can be crossed specially or generally.  What is the effect of this crossing?  The cheque remains non-negotiable (transferrable) as well as the title of the transferee will not be better than the title of the transferor.

Uncrossing a Cheque

• If you are now familiar with the cross cheque meaning, then clearly there is no way the payee can uncross the cheque. Furthermore, the cheque is considered non-transferable, which means it cannot be transported to a third party. However, the only action which is allowed is for the payee to deposit the cheque in an account that he/she holds with their name.
• Therefore, the payer can uncross the cheque by lettering “Crossing Cancelled” across the front side of the cheque. However, such an action isn’t recommended since it eliminates the protection the payer initially had in place.

Advantages and Disadvantages of Cheque

Advantages 

• It is safer and more convenient to carry around than cash
• It is a negotiable instrument which can be endorsed in favour of a third party.
• It can be easily traced if lost

Limitations 

• Payments through cheque may be sometimes refused since it is not legal tender money
• Individuals who do not possess a bank account cannot use cheques
• Depositing a cheque into your bank account requires you to visit the bank and is time-consuming

What do you mean by Cheque Leaf

A cheque leaf, commonly known as a Cheque, is a tool which is used to transfer funds from one bank account to another. A bundle of cheque leaves attached is a cheque book which is provided by the bank to its customers.

• A cheque was developed to conduct safe and secure financial transactions.
• Cheques enable you to transfer large amounts of money from one bank account to another without the requirement of a physical transfer.

Positive Pay System

• A positive pay system has been introduced to reduce fraud which occurs due to tampering and increase customer safety in cheque payments
• The process involves reconfirming the details of large-value cheques, that is, cheques exceeding Rs. 50,000. The cheque is honoured if the details match, the discrepancy is flagged in case there is a mismatch.

How to Apply for a New Chequebook

There are various ways in which you can apply for a new chequebook using any of the following means given below:

• Internet Banking: You can log in to your bank’s internet banking account and request a chequebook by mentioning details like your account number and mailing address. The chequebook is then delivered to the address linked to your bank account.
• Mobile Application: You can simply log in to your bank’s mobile app and request a chequebook.
• ATM: You can also apply for a chequebook through an ATM by simply following the steps given below:

1. Visit your bank’s ATM and insert your debit card
2. Enter your PIN and choose the ‘issue new chequebook’ option
3. Click on ‘Submit’
4. Once your request is submitted, your chequebook will be sent to your address

• Branch Visit: You can also visit your bank branch and request a new chequebook

Things to Keep in Mind when Writing a Bank Cheque

• Omit the words ‘OR BEARER’ and Add ‘A/C Payee’ at the top left corner of the cheque. This ensures that no one apart from the individual in whose favour this cheque is drawn can acquire the stated amount
• Avoid leaving spaces between the words PAY and the Name of the Receiver and also between the name and surname. This practice is important since it doesn’t offer anyone a chance to fill in the alphabet before or after the name to claim the money.
• Always write ‘ONLY’ after mentioning the amount in words in the ‘RUPEES’ column by using the symbol ‘/-‘at the end
• Ensure there is no sort of overwriting. It means, that no scribbling or cancellation of text would be entertained by the banks
• Fill in the correct date. A cheque without a date permits anyone to put any date and pull-out cash using the bank cheque at their will. Further, a cheque with a post- or pre-date is another issue that can lead to dishonouring of the cheque. Moreover, a wrongly written date, for example, the wrong year or month would also lead you to a problem
• Make sure you do not hand over a cheque without the presence of the date, amount of cheque in numbers and words and the Payee’s name
• Keep your signature clear and if needed, sign twice to ensure that the cheque is not bounced due to a signature mismatch
• Further, mention the credit card number, mobile number, connection number, etc., on the reverse side of the cheque while you make payments towards bills for utilities
• It is strictly prohibited to staple, disfigure or fold cheque or any sort of damage to MICR Band

Different banks across India have stated specific guidelines regarding the proper filling of cheques. It is important to go through your bank’s guidelines for acquiring proper awareness. Further, do not miss to check out conditions for cheque bounce; this would make you more alert during the cheque filling process.

What are the Possible Reasons why Bank can Dishonour a Cheque

A bank can refuse to make the payment mentioned on a cheque due to various reasons. Some of them are mentioned as follows:

• Insufficient funds in the payer’s bank account
• Signature missing or mismatch
• Account number mismatch
• An issue with the date of the cheque
• Mismatch in the amount of words and numbers
• Disfigured or damaged cheque
• Crossing the limit of the overdraft
• Scribbling, overwriting or omissions on the cheque without authorization(signature) of the payer
• Cheque is expired
• Drawer’s account is closed
• Payment is stopped by the drawer
• Garnishee order on account
• Death or insanity of the drawer
• The seal of the company is missing on the cheque issued by an organization
• Suspicion of a forged cheque

MICR

MICR or Magnetic Ink Character Recognition is a 9-digit code generally printed at the bottom of the cheque leaf. The first three digits represent the city, the next three the bank and the last three the particular branch code. The MICR code on cheque helps in easier identification of cheques, eliminate payment errors and process cheque payments faster.

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FAQs

Q. What is the punishment and penalty related to a dishonoured cheque?
Ans. The court, after receiving the complaint along with relevant documents, will start the case. If the drawer is found guilty, as per Section 138 of the Negotiable Instruments Act, 1881, he/she can be sent to the jail for up to two years and/or pay the penalty of amount twice the cheque amount. In addition, the banks also have the right to close the guilty person’s account (on repeated bounce cheque offence) or stop their cheque book facility. The bank may also charge a penalty to both the drawer and the payee for the inconvenience, extra paperwork and wasting the bank’s time.

Q. What happens if the payee takes legal action against the drawer?
Ans. If the payee decides to proceed legally, a chance is given to the drawer to pay the cheque amount immediately. For this, the payee is supposed to send a notice to the drawer within 30 days from the date the payee receives the “Cheque Return Memo” from the bank. The notice should state that the cheque amount must be paid to the payee within 15 days of receiving the notice.

If the drawer still fails to pay money to the payee within 30 days of receiving the notice, the payee has full right to file a criminal report against the drawer as per Section 138 of the Negotiable Instruments Act, 1881. But the complaint or report should be registered in a magistrate’s court within a month of the expiry of the notice period.

Q. What happens if a cheque is dishonoured by the bank?
Ans. As per the Negotiable Instruments Act, 1881, if a cheque is dishonoured by the bank due to insufficient money in the bank account of the drawer then it is a criminal offence. In such a case, the drawee bank issues a ‘Cheque Return Memo’ to the payee’s bank mentioning the reason for non-payment. In turn, the payee’s bank handovers the bounced cheque and the memo to the payee.

Now the payee has the choice to either re-present the cheque within three months from the date mentioned on it or legally prosecute the drawer. If the payee proceeds with the former choice and if even the second time, the drawer fails to make the payment then the payee has the right to sue the drawer. However, the payee can sue the drawer only if the amount mentioned on the dishonoured cheque is to pay off a debt or any other liability of the drawer towards the payee. The drawer cannot be sued in such cases in which the cheque was handed out as a gift or to lend a loan to the payee or for unlawful purposes.

Q. What is the difference between depositing and cashing a cheque?
Ans.

Encashing	Depositing
Cashing a cheque means that you’ll be offered the cash in hand. You can simply walk away with the complete amount of the payment and can spend that money as per your requirements and without any restriction.	Depositing a cheque means adding that amount to your bank account or credit union. Under the deposit process, you might need to wait a couple of days until the full amount is available for withdrawal or spending.

Q. Is a cheque payable outside of banking hours?
Ans. No, a bank is liable to make the payment only during working hours.

Q. Can banks refuse to make a payment?
Ans. Yes, the bank can refuse to make a payment in the following circumstances:
If the cheque is without a date
In case more than 3 months have elapsed since the issue of the cheque
In case a post-dated cheque is presented before its date

Q. What is a cheque number?
Ans. It is a 6-digit unique number printed on each cheque leaf.

Q. Can a cancelled cheque be used multiple times?
Ans.Yes, the same cancelled cheque can be used multiple times.

Q. Can I cancel the cheque using red ink?
Ans.You should always use black or blue ink to cancel the cheque. No other colours are accepted.

Q. What are the numbers on cheque?
Ans. These numbers on cheque are present – MICR code, cheque number, RBI account number, transaction code, cheque amount, account number, etc.