A cheque has three principal parties viz. Drawer; Drawee and Payee.
- The drawer is the person who issues (draws) the cheque.
- The drawee is the paying bank whose name and address is printed on the cheque. The drawee makes payment when the cheque is presented for payment.
- Payee is the person whose name is written on the cheque. The payee is entitled to receive amount mentioned in the cheque.
Format of a cheque
- When you look at a cheque, you find the name of the bank and address of the branch prominently printed on the face of the cheque.
- The IFS code of the branch is also printed in the cheque leaf. IFSC stands for short form of for Indian Financial System Code is an alpha-numeric code that uniquely identifies a bank-branch participating in the electronic funds transfer (NEFT&RTGS) systems. Alpha-numeric code is an 11 digit code with the first 4 alpha characters representing the bank, and the last 6 characters representing the branch. The 5th character is 0 (zero). IFSC is used by the NEFT & RTGS systems to identify the originating / destination banks / branches and also to route the messages appropriately to the concerned banks / branches.
- The customer’s account number is printed on the cheque leaf.
- At top right corner you find space for entering the date of the cheque (normally in the format of 8 small squares with DD/MM/YYYY) which is to be filled in by the drawer of the cheque at the time of issuing cheque. From April 2012 validity period of a cheque is reduced to three months from the date shown on the face of it. Earlier validity of cheque was for a period of six months. A cheque bearing a date older than three months is known as ‘stale cheque’. A stale cheque has no validity and therefore it cannot be presented to the bank for payment without re-validating its date by the drawer with his full signature near the alteration. When a cheque bears a future date it is called ‘postdated cheque. The Postdated cheque indicates that it is due for payment only after the due date written on the cheque.
- Succeeding two lines after the date row begins with the word ‘PAY’ and ends with the word OR BEARER. The vacant space between the word PAY and the word OR BEARER is meant for writing the payee’s name. When the word BEARER is cut by a stroke of line, the instrument becomes order cheque.
Meaning of ‘Bearer Cheque’: Bearer cheque means a person in possession of a cheque which is payable by the drawee bank to the bearer of the cheque.
Meaning of ‘Order cheque’: ‘Order cheque’ means the payment of that cheque will be made by the bank only to ‘Payee’ or to a person to whom payee has endorsed to collect the payment and not to the bearer. The endorsement (indorsement) shall be on the instrument itself.
- The following two lines start with the word RUPEES with blank space for writing the amount in words payable. We also find a box at the end of lines. This box is to fill in the amount payable in figures. The amount written in words is called ‘legal amount’ of the cheque and amount written in figures is called ‘courtesy amount’. Where there is a difference between words and figures expressed in a cheque, the amount in words is the amount payable as per section 18 of N.I.Act 1881. It is customary to return a cheque written only in figures with a reason “Amount required in words”. However if the amount is written only in words, though it is unusual in form, it is not incomplete and therefore bank must pay the cheque, lest they would probably be liable to their customer for any damage or loss incurred through refusal.
- Underneath the rows kept for writing amount in words and figures, we find vacant space which is reserved for account holder to sign.
- Underneath the space provided for drawer’s (Account holder) signature, we find code line. The code line in a cheque is the clear White Band portion at the bottom of the cheque which is exclusively meant for MICR (Magnetic Ink Code Recognition) code numbers to facilitate mechanized cheque processing. In the code line first group of 6 digit indicates the cheque number, second group of 6 digits indicate the bank code city code branch code in cheque processing centre and next group of 2 digits like 10, 11,12 and so on indicates the type of instrument like SB, Current account, CC account etc.
- The code line should not be disturbed to avoid rejection of cheque at processing centre. The following are the common mistakes found in rejection of cheques at processing center.
(a). Written or signed on the CODE Line.
(b). Pin or stapled on the CODE Line.
(c). Pasted on the CODE Line.
(d). Folded the cheque on the CODE Line.
( e). Affixed Rubber stamps on the CODE Line.
CTS-2010 format of a cheque
With the migration to new CTS clearing system, the old format of cheque leaf in banks is substituted by the new look “CTS-2010 standard” cheque leaf. CTS-2010 is a ‘standard cheque form’ with more security and standardized features. In CTS-2010 standard cheque forms, mandatory features are prescribed with set of benchmarks as specified by RBI. One of the mandatory features of the CTS (Cheque Truncation System), prescribed by RBI is that no changes / corrections should be carried out on the cheques (other than for date validation purposes, if required). For any change in the payee’s name, courtesy amount (amount in figures) or legal amount (amount in words), etc., fresh cheque forms should be used by customers. This would help banks to identify and control fraudulent alterations.
Cheque Truncation System (CTS): Cheque Truncation System (CTS) is basically an online Image-based Clearing System (ICS). In this system the collecting bank need not present the physical cheque to the drawee branch. The physical instrument is truncated at some point en-route to the drawee branch and an electronic image of the cheque is sent to the drawee branch along with the relevant information like the MICR fields, date of presentation, presenting banks etc. In the process, time taken for payment of cheque, cost of transit is considerably reduced, as the instrument need not reach the drawee branch except in exceptional circumstances. The cheque images and Magnetic Ink Charecter Recognition (MICR) data are captured at the collecting bank branch and transmitted electronically, to drawee branch, thus speeding up the process of collection and realization of cheques.
Meaning of e-Cheque:
E-cheque is a cheque in the electronic form which is exact replica of paper cheque, generated in a secure manner with the use of digital signature and asymmetric crypto system of computer. Some e-cheque’s have added security of biometric access to digital signature of drawer.
Inchoate or incomplete cheque
A cheque signed by a drawer of cheque without completing the material particulars such as date, amount or name of the payee, it is known as inchoate or incomplete cheque. The authority to complete the inchoate cheque is vested only with either the drawer or the person to whom the cheque has been negotiated for not beyond certain amount. A stranger to the negotiation can not bind the drawer of the cheque by filling in inchoate cheque. Section 20 of N.I.Act 1881 applies to cheque, although this section deals with completing blank instruments which requires to be stamped.
Crossing of a Cheque
When two parallel transverse lines are appearing on the face of a cheque with or without the words “& Co.”, “Not Negotiable”, “A/c. Payee”, between the two parallel lines, it is called generally crossed cheque. When a particular bank’s name is written in between the two parallel lines such a cheque is called specially crossed or restrictively crossed cheque. The payment of a generally crossed cheque cannot be made across the counter by cash payment and the payment proceeds should be credited to an account.
Special or restrictive crossing
The Special or Restrictive Crossing on a cheque, makes it payable only to the banker whose name is written in the crossing. When the words “Account Payee” or “Not negotiable” appearing on the cheque, it is the responsibility of the collecting bankers to credit the proceeds to payees account only. There is no mention of “Account Payee” in negotiable instruments act, but courts have upheld that “Account Payee” is a clear instruction to the paying banker to credit the proceeds to payee’s account only. Therefore the payment made to a collecting bank is subject to commitment made by collecting bank to paying bank that it would credit the proceeds collected, to the payee’s account only. The cheque marked ‘not negotiable’ to a crossed cheque does not bar it from transferred in the name of another person. However, a person who takes a cheque marked ‘not negotiable’ does not acquire better title than the person from whom he acquired the cheque. For example, a person takes a stolen cheque marked with ‘Not Negotiable’ from another person, then he is liable to refund encashed money to the true owner.
Material alteration in a cheque
Any alteration in original state of a cheque such as date, amount, payee’s name, changing the word ‘order’ to bearer appearing after payee’s name or in endorsement is called material alteration. All material alteration must have drawer’s approval with his full signature (not initials) where the alterations are made. One of the mandatory features of the CTS-2010 cheque format, prescribed by RBI, is that No changes / corrections should be carried out on the cheques (other than for date validation purposes, if required). For any change in the payee’s name, courtesy amount (amount in figures) or legal amount (amount in words), etc., fresh cheque forms should be used by customers. This would help banks to identify and control fraudulent alterations.
The following are not considered as material alteration under N.I.Act:
- filling up of incomplete instrument (sec 20)
- Conversion of blank endorsement into a special endorsement (section 49).
- Qualifying or limiting an acceptance (section 86)
- Crossing of a cheque by holder (section 125)
Stop payment of a cheque
A drawer has the right to stop (or countermand) payment of a cheque issued by him any time before it is paid by the drawee bank. Usually when a cheque is lost or destroyed or drawee believes that the payee has not fulfilled the condition of the contract for which he has issued the cheque. To stop the payment of a cheque the drawer has to inform his bank in writing to record stop payment with full details of the lost cheque viz. cheque no, date of the cheque, Amount of the cheque, payee’s name etc. The stopping of a cheque does not terminate the drawer or any endorser from his/their liability to any holder in due course.
Cash payment of a cheque
When uncrossed cheque is presented for payment in cash at the counters of the bank, the presentor should sign on the reverse of the cheque. Banks verify the signature on the cheque with specimen signature of drawer on record before making payment. The payment cashier will ask for another signature to be made by the presentor at the time of payment. The banks ordinarily do not insist for presence of account holder for making cash withdrawals in case of ‘self or bearer’ cheques unless the circumstances which warrants bankers to take precaution. In case of the bearer word in the cheque is cut then it becomes an order instrument .Banks make payment of order cheque only on confirming the endorsement/s of Payee and other endorsees on the reverse of the cheque. A depositor cannot withdraw a smaller sum than one Rupee except the occasion of closure of the account.
Withdrawal by illiterate/bedridden persons
If the depositor is unable to write, he/she must call on the Bank personally to withdraw money from her/his account. In case of aged or bedridden person, banks depute a person or an official at depositor’s cost, to obtain the signature/thumb impression duly witnessed.
Cheque payment through clearing
If an order cheque is paid through clearing or collection from another banker, it will be the responsibility of collecting bankers to ensure that proceeds collected by them is credited to account of proper title holder.
Cheques return on insufficiency of funds
The drawer should ensure that sufficient balance is available in the account before issuing a cheque for payment. If the cheque was returned for insufficiency of funds or exceeding amount arranged to be paid, it is a criminal offence under sec.138 of N.I Act punishable with imprisonment for a period up to one year or with fine which may extend to twice the amount of the Cheque. Hence banks shall take care that they should not return the customers’ cheque because balance goes below the minimum required. If the minimum balance is not maintained, bank shall write to the customer in polite and persuasive language, the need for maintaining minimum balance. Banks should inform their customers in a transparent manner the requirement of maintaining minimum balance and levying of charges, etc. If minimum balance is not maintained even after one month of notice sent by registered post branch can stop issuing cheque books to such customers.
Cheque bearing date as per National Calendar (Saka Samvat): Government of India has accepted Saka Samvat as National calendar with effect from 22 March 1957 and all Government statutory orders, notifications, Acts of Parliament, etc. bear both the dates i.e., Saka Samvat as well as Gregorian calendar. Therefore an Instrument written in Hindi having date as per Saka Samvat calendar is a valid instrument. Cheques bearing date in Hindi as per the National Calendar (Saka Samvat) shall be accepted by banks for payment, if otherwise in order.
Cheques in Regional Language: The cheque leaves are printed in Hindi and English. The customer may, write cheques in Hindi, English or in the concerned regional language as per his/her preference. Banks shall accept such instruments for payment if otherwise in order.
Returning of dishonored cheque: The ‘Paying bank’ should return the dishonored cheques presented through clearing houses strictly as per the return discipline prescribed for respective clearing house in terms of Uniform Regulations and Rules for Bankers’ Clearing Houses. The collecting bank on receipt of such dishonored cheques should dispatch it immediately to the payees / holders in any case within 24 hours, as per Goiporia Committee recommendations on customers’ service to be implemented by the banks. In relation to cheques presented direct to the paying bank for settlement of transaction by way of transfer between two accounts with that bank, it should return such dishonored cheques to payees/ holders immediately. Cheques dishonored for want of funds in respect of all accounts should be returned along with a memo indicating therein the reason for dishonor as “insufficient funds”.
Difference between a cheque and bills of exchange: Though cheque is a kind of bill of exchange, it has some peculiarities from other bills of exchange. The difference between a cheque and other type of bill of exchange is that a cheque is always a drawn on a bank and it is always payable on demand, where as in case of other bills of exchange, it normally made payable after a fixed period.