76. Cheque
One of the cliched scenes in movies — a rich dude (presumably bad guy) giving a blank cheque to a poor dude (presumably good guy)!
Nowadays you don’t see such scenes… maybe Bollywood has gone ‘digital’… Good for them!
But in real-life, Cheques are still there…
Long ago, very long ago… before UPI, before cards, before internet… there were only two types of payment instruments: Cash and Cheque (one of them is thriving and the other one is still surviving).
Earliest modern Cheque was issued in year 1659 for 400 Pounds (in UK)
Cheques do not have the glamor of UPI so we don’t get to hear about them but even today Cheques are relevant. Look at these numbers.
In 2022, 722 million Cheques worth $862B were processed. That is like ~23 Cheques per second! (It is kind of fun to convert everything to seconds :))
What is Cheque?
It is a document issued by the bank that can be used by the payer to make payment of a specific amount to the payee or the bearer.
In the era of RTGS, NEFT, IMPS and NACH… why are Cheques still in use?
Positives:
- Preferred for large value transactions
- For future payment cases (post dated cheque)
- Protected under negotiable instruments act (Cheque bounce is a punishable offense)
- Can be used for all types of transactions (C2C, C2B, B2C, B2B, C2G, G2C)
- No need to ask for beneficiary’s account details and adding beneficiary to net-banking account
Negatives:
- Physical movement: Payer to give cheque to Payee which payee has to deposit in bank branch
- Not instant (Physical movement + clearance time after cheque deposit)
- Works only on weekdays (adds more days to Cheque clearance / credit)
FYI: Banks do not like Cheques — It is expensive (printing and operational costs). To discourage users from using Cheque, bank do charge fees to issue cheque books.
Design, Paper and Security
MICR Code (Magnetic Ink Character Recognition): 9 Digit number: first 3 — City, next 3 — Bank, last 3 — Branch
Cheques come in standard size: 202mm length, 92mm width, 220mm diagonal length, 13mm width for white space at the bottom.
Cheque is printed on 94 GSM paper with a thickness of 110 micrometers. The paper should be carbon free and UV free paper.
To make it secure, a bunch of security aspects are added such as watermarks, UV features, microscopic features and photographic images.
Few things to remember while writing a cheque: (a) write ‘a/c payee’ on top left corner (b) add ‘/-’ after you write the amount (Rs. 10,000/-) (c) Do not write on bottom white space (d) Signature as per your banking records (e) do not scratch and re-write…
Why am I writing all this… I doubt any of you will ever write a cheque… let’s move on to next topic
Types of Cheques:
There are 9 different types of Cheques… Yes, 9 types of cheques (no kidding) (i) bearer cheque (ii) order cheque (iii) crossed cheque (iv) open cheque (v) post-dated cheque (vi) stale cheque (vii) Traveler’s cheque (viii) self cheque (ix) banker’s cheque
For me, knowing the fact that there are 9 different types of cheques exists itself is overwhelming… but if you are interested to know more about each type then read here.
Interesting one is the Post-dated cheque, where the cheque will have a future date and it can be encashed after that day, not before. Post-dated cheque will be valid for 3 months.
Example: If I give you a Cheque today (4th Feb 2023) with the date 14th Feb 2023, then you can encash it only after that date. Even if you deposit it earlier, the Cheque will be cleared after 14th Feb.
Post dated cheques are valid for 3 months. So the cheque I gave will be valid till 13th May 2023 (3 months as per calendar irrespective of days in those months)
Use case for Post-dated Cheques
- Payment terms (Product is given today but retailer has 15 days to pay the amount)
- At present, do not have funds so give cheque for the future
- Instalment payment
Post-dated cheques were the first Recurring Payment Solutions… Give multiple post-dated Cheques for future instalments.
Cheque Processing.
Cheques are processed using CTS (Cheque Truncation System) — Platform managed by NPCI
Example: Payer gives a Cheque that was drawn from ICICI bank to the payee, who deposits it in HDFC Bank.
CTS processing is done in three grids and different states are covered in these grids.
To improve overall efficiency (fund management, infrastructure, faster TAT), RBI is planning to implement — “One Nation One Grid”.
TAT for Clearance: 1 day if payer and payee bank are same, 2–3 days if payer and payee banks are different. CTS operates only on RBI/Bank working days.
Funds: Once the Cheque is cleared, payer’s account (ICICI bank) is debited and Payee’s account (HDFC Bank) will be credited through RBI (clearing House for the interbank money movement).
CTS Failure Reasons: There are more than 90 reasons for failure (Yes, 90+ failure codes… who knew!) that can be classified into business (user related) and technical (CTS process, bank related).
Few of the top failure reasons: (1) Insufficient funds (2) Signature mismatch (3) Stale cheque (>3 months) (4) Stop payment
What happens to the Payer’s physical Cheque?
It is stored with the Payee’s bank for 10 years. In case Payer wants to see the physical Cheque (assume, he ‘missed’ that particular cheque a lot :)), then the payer needs to send a request to the payee’s bank through his bank.
Negotiable Instrument Act
Cheque is one of the negotiable instruments. What does that mean?
A Negotiable instrument is a signed document that promises a sum of payment to a specified person or the assignee — Investopedia
Cheque bounce / Dishonour: Meaning, Cheques is not cleared (payee couldn’t receive money) due to insufficient balance or the amount exceeded the arrangement to be paid from that account.
To qualify as ‘dishonor/bounce’, the transaction should involve some sort of liability from the payer to payee (e.g., loan repayment or payment towards service availed)
Cheque bounce is a criminal offense under Section 138 of Negotiable Instruments Act, 1881
The offender may get (a) jail term up to 1 year or (b) penalty equivalent to twice the cheque amount or © both.
Note: Original Negotiable Instrument Act needed physical cheque should be presented. In 2002, the Act was amended to include digital images (to upgrade legacy products, not only tech; even related regulations need to be amended)
NACH (paper and digital) and UPI AutoPay are also covered under the same Negotiable Instruments Act
Positive Pay System:
To prevent the frauds (Cheque tampering), RBI rolled out ‘Positive Pay System’.
Think of it like the 2nd Factor Authentication (AFA) of the CTS process.
- After issuing the cheque, Payer should provide the cheque details (Cheque No, name of payee, amount) to the his/her bank
- During the cheque clearance, these details are cross-checked and cleared
Note:
- Method to share cheque details: Mail (attach excel sheet with details), visit bank branch or internet banking (above illustration)
- Payer should enter details at least one day (24hours) before payee deposits the cheque
- Applicable only for high value Cheques (>Rs.50,000)
- Optional for >Rs.50K but less <=Rs.5L; mandatory for amount > Rs.5L
No Cheque
World is becoming more and more digital. Do we still need an age old ‘paper based’ payment instrument?
The United Kingdom thought the same and tried to phase out Cheques in 2018. But due to demand/resistance from people, the UK government pulled back the plan.
Recently, Singapore announced that it will phase out Cheques by 2025!
Will it happen in India? No… not yet.
There is no doubt that overall Cheque usage has reduced as the numbers are halved in the last 15–20 years. But the cheques are still popular among certain users and businesses. So cheques will survive for a couple of decades!
RBI’s vision document 2025 sets a target of reducing Cheque-based payments to less than 0.25% of the total retail payments.
Few things that are being done to reduce Cheque usage:
- Promote NEFT, RTGS, IMPS and UPI transfers (Already done)
- Charge fees for issuance of new Cheque books (already done)
- Make Cheques expensive for payee so a payee will insist on online transfer (Not sure if already done)
Okay… How about making ‘Cheque’ digital (just like everything else these days)?
Clever idea (wait for it)… not new idea.
RBI created a working group for issuance of e-cheque in 2003. So what happened next? No clue!
I found that ICICI bank has eftCheque App for issuance of digital cheque. But in reality it is nothing but NEFT/RTGS transfer disguised as a digital cheque issuance platform.
Let’s stop here about the Cheques… I know you have a curious mind but I bet you know more about Cheques than you need to know in this lifetime. unless you have plans to become Frank William Abagnale Jr of Catch Me If You Can (a wonderful movie directed by Steven Spielberg starring Leonardo DiCaprio and Tom Hanks).
Hurry… I started the article with ‘movies’ and somehow ended it with ‘movies’
