What are Cheques?
Cheques are an important mode of transaction in the financial system globally. To be specific, cheques can be termed a negotiable document that can be used by an individual, a company or a government to transfer money to various bank accounts. Cheques can be used for the physical transfer of money or inter-account exchange. In order to manage the cheque transfer, it is important for the issuer to own a savings or current bank account to have a smooth and hassle-free amount transfer. Further, cheques are one of the most secure ways for business transactions as they mark an entry against the bank, which helps in tracking when required. However, there is the danger of cheque bouncing.
Why does a cheque bounce?
‘Cheque bounce’ is a term that is used when there is unsuccessful processing of a cheque due to various reasons. Generally, an insufficient amount in the issuer’s account is one of the major reasons. The bank manages this by dishonouring the cheque and later imposes a particular charge. Moreover, this can amount to a crime as well if the intent of the issuer is not good, and whether it involves crossing the borders of a state.
Here’s why banks can dishonour cheques.
Reasons for Cheque Bounce:
1. Non- sufficient funds/ insufficient funds:
- If the account, from which the cheque is issued, has an insufficient amount, then it is most likely for the cheque to bounce.
- Considering this situation, the bank will charge a nominal penalty which will be imposed on both the parties - the issuer and the depositor. The issuer has the option either to issue a new cheque or to revise and resolve the issue with the depositor. Meanwhile, the depositor/receiver can opt for a legal course of action and she/he can take legal actions against the issuer. Therefore, it is advisable to be aware and careful while issuing cheques.
2. Damaged cheques are faulty:
Various banks across the country do not process cheques that are disfigured or damaged. If a cheque has marks or stains, and the details on the cheque are not clearly visible, then there are high chances of cheques getting bounced. It is important to make sure that the issued cheque is not mishandled or damaged.
3. The difference in details mentioned:
If there is any difference in the amount mentioned in the words column and the numeric value column, then the bank dealing with this will dishonour that particular cheque. Also, if the amount in the words column has any number and the numeric value column has any alphabet, then again this will be a direct cause for cheque bounce.
4. Mismatch of signatures:
This is one of the most common reasons for cheques bouncing across the country. Probably it is one of the major issues experienced by a large number of people. If the signature made on the issued cheque does not match with the signatures in the bank’s official records, then the cheque will get bounced. It’s a prime aspect - check the signature carefully while filling in the cheque. Even if the issuer signs on the MICR band present on the cheque, then also the bank can tag the cheque and bounce it.
5. Overwriting /scribbling on cheque:
Any kind of overwriting, scribbling or correction over the details or information provided in the cheque is not acceptable. In this case, the cheque is dishonoured immediately. Go for a new cheque if there is any kind of mistake in the cheque issued earlier. Hence, do not receive cheques with mistakes.
6. Dates mentioned on the cheques are equally important:
One of the most important pieces of information on a cheque is the date mentioned on it. People consider this as a petty issue but this can lead to serious cases of cheques not being processed. Any sort of difference may lead to extra work. Generally, the scribbled numbers in the date column on the cheque can cause problems for the issuer.
Moreover, in case of the expiration of date, the cheque will most certainly be dishonoured. For example, if the cheque is 4 months older than the present date, then it is of no use.
Other Cheque Bounce Reasons:
- Death of a customer
- Insolvency of a customer
- If the cheque has been issued by a firm, but it does not have a company seal on it.
- Insanity and crossed cheque
- Cheque against the rules of a trust.
- Cheque presented in the wrong branch
How to avoid cheque bounce?
- Make sure that you review the balance of your bank account before issuing cheques. Legal course of action is only possible when the cheque is issued against a debt or legal liability. Banks these days follow easy protocols to track cheques through online services. It is better to rely on actual funds with a budget rather than anticipated funds.
- If you cannot check the balance online, then make an extra effort to get a mini-statement of your account from any ATM. Prevent cheques from bouncing.
- If electronic technology-based work is causing difficulties, then the best way to control and understand the spending is to do everything manually. Once you get used to the preferential use of technology and stop being a mess with bouncing cheques, you can go ahead with technology (every aspect cannot be covered manually, using cheques can be costlier than online payment. It is important to choose according to personal convenience).
- When everything fails, it is better to get an overdraft line of credit. The above-mentioned methods are sufficient enough to prevent cheques from bouncing, but this is credibly a safety net.
Apart from all this, an important aspect will always be issuer’s and depositor’s awareness. They need to make sure that they are careful and do not mess up the details of cheques by mishandling them.
It may look like a simple mistake or error to people in general, but banks, retailers or any other depositor take the issue of cheque bouncing seriously. They charge hefty fees and try to make life difficult. So, the best way is to avoid bouncing cheques, else one can end up with criminal charges and credit damage. One doesn’t want to be at the risk end of bounced cheques. Cheque bounce reasons are pretty much based on carelessness or ulterior motives of malice and it can be avoided by simple, responsible steps. Therefore, it is better to follow some financially sound practices like budget and overdraft protection provided by banks.
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Q. What is an overdraft line of credit?
Ans. It is a particular kind of loan attached to the checking account. If someone runs out of money, it makes sure that this loan acts as an add-on, so that the issuer won’t face cheque bouncing issues.
Q. What is procedurally followed after a cheque bounce?
Ans. Nominal bank fee is a single aspect after cheque bounce, but in most cases, the beneficiary also faces a charge. For example, if a person pays a store some amount in cheque and the cheque bounces, then the store may reserve the right to re-deposit the amount along with the fee charged. Further, it may become difficult to open a savings or current account in the future.
Q. What is the negative impact of a bounced cheque?
Ans. Bounced cheques can destabilise and hamper financial credit history. A cheque bounce can disturb the credit score in such a way that one can be deprived of a loan. The guidelines of RBI also suggest that a bank can restrict the issue of cheque books if a customer is repeatedly accused of cheque bounces. If there is a cheque bounce for a large payment, the bank can even send a legal notice to deduct the amount from the active account.
Q. What are the charges imposed for cheque bounce?
Ans. According to the Section 138 of the Negotiable Instruments Act, 1881, the customer, who is found guilty, has to spend two years in jail or pay the penalty that is twice the cheque amount. The bank for this reason can also impose a penalty and stop the cheque book facility.
Q. What is a canceled cheque?
Ans. It is the cheque for which the amount mentioned is withdrawn from the payer’s account. After this, the bank marks this as canceled which means no further withdrawal of funds can be done with this cheque.