Individuals, firms and corporate organisations successfully use various financial payment methods. Among these multiple options, a cheque serves as an essential negotiable instrument that can also transfer money using simple delivery methods. This blog is a comprehensive guide to explaining the A-Z of cheques, their types, uses and features.
What Is a Cheque?
A cheque is a document that instructs a bank (or credit union) to pay a specific amount of money from a person’s account to the person named on the cheque.
Although cheques have been in use since ancient times, they became a widely-used non-cash payment method, and their usage peaked during the 20th century. Although now this system is eroded by the wide use of electronic payments, cheques are the most trusted form of payment due to the strict identity security of the users.
How Does a Cheque Work?
A cheque is a bill of exchange or document that guarantees the payment of a specific amount of money. It is printed for a drawing bank to distribute to an account holder when they create their bank account with that bank. The holder writes the cheque and gives it to another holder, who takes it to their bank or other financial institution to be exchanged for cash or deposited into an account.
Cheques can get cashed or deposited, and allow two or more parties to exchange money without exchanging physical currency. Instead, the amount written on the bill serves as a substitute for the same amount of physical cash. Even if a cheque is lost, the third party won’t be able to use it without the first party’s signature. The cheque number is the first six numbers on the bottom of the cheque leaf and a user can use it to track the status of the cheque.
Features of a Cheque
Three parties are involved in processing a cheque, and all of these parties are required for cheque-based transactions.
Drawer – The person who holds the bank account and issues the cheque
Payee – The person who receives the cheque and has their name on the cheque
Drawee – The financial institution where the cheque is cashed or deposited
- The date is written at the top right-hand corner of the cheque.
- The payee’s name appears on the centre’s first line of the cheque. The phrase ‘Pay’ indicates this.
- The amount is written in words on the line beneath the payee’s name. Enter the cheque amount in rupees in the box next to the amount in terms.
- Write your account number below the amount and sign the cheque at the corner, which makes it valid for the transaction.
- Magnetic Ink Character Recognition, also known as MICR, is a code typically printed at the bottom of a cheque leaf and allows for easier identification of cheques, elimination of errors, and processing of cheque payments faster.
- It is important to remember that a cheque is only valid for three months, after which it becomes invalid.
Types of Cheques
There are different cheques issued based on the drawer and payee, so let’s explore the different cheques to know which ones are used at appropriate times.
- Bearer Cheque
A bearer cheque will have ‘Bearer’ on the right top corner. It is one in which payment is made to the person holding or carrying the cheque. These cheques are transferable by delivery, which means that if you bring the cheque to the bank, you will be paid. The banks do not require any additional authorisation from the issuer to make the payment.
- Order Cheque
The word ‘Bearer’ is removed from these cheques. The person whose name appears on the cheque can only issue these cheques, and the bank will conduct a background check to confirm the identity of the cheque bearer before releasing the payment. Only the name mentioned can cash or deposit this cheque.
- Crossed Cheque
A crossed cheque is one on which the issuer has drawn two parallel lines in the top left corner. No one else will be able to obtain the cheque because of these lines. The payee can only cash the amount, thereby reducing the risk of money being received by an unauthorised person.
- Open Cheque
An open cheque is an uncrossed cheque. Any bank can cash this cheque, and the person holding the cheque can make the payment. The bank can also transfer the cheque from the original payee (the original recipient of the amount) to another payee. The issuer’s signature is required on both the front and back of the cheque.
- Post Dated Cheque
These types of cheques have a later date of encashing. Even if the bearer presents this cheque to the bank right away, the bank will only process the payment on the date specified on the cheque. This cheque is valid after the selected date, but not before.
- Stale Cheque
A cheque expired past its expiry date, after three months of validity.
- Travellers Cheque
Traveller’s cheques are used by foreigners on vacation instead of hard cash. These cheques are issued by one bank and can be cashed in the form of currency at another bank in another city or country. Traveller’s cheques have no expiration date and can be used for future trips.
- Banker’s Cheque
Bankers’ cheques are issued on the customer’s behalf by the bank, and the bank is instructed to pay a specific amount of money to the payee within the city. These cheques are valid for three months from the issue, but the account holder can revalidate them if specific legal requirements are met.
- Cashier’s Cheque
A cashier’s cheque is guaranteed by the bank and signed by a bank cashier, implying that the bank is responsible for the funds. This type of cheque is frequently required in large transactions.
- Self Cheque
The drawer himself writes self-cheques, and they are only drawn when the drawer wishes to withdraw money from their bank account.
How to fill cheque?
These are the essential steps to be followed while writing cheques, and will ensure that your cheques don’t get cancelled or bounced while depositing them.
- Write the correct date on the right-hand top corner of the cheque. Since the cheque is a legal source of transaction, make sure the date is the same even while signing at the bottom of the cheque.
- Always scratch the “Bearer” and write A/c Payee, so the amount goes to the payee only. This avoids theft in case the cheque is in an unknown’s hand. Mention the name of the receiver in capital letters for clarity. Make sure you include the receiver’s full name, either company or individual, so they receive it without any hassle. Never use acronyms, which can confuse.
- The drawer should always write the sum within the rectangular box next to the printed word “Rs” and the rupee symbol. Furthermore, a sign of “/-” must be added after the written amount to prevent anyone from adding more numbers.
- It is critical to write the amount in the space provided on a cheque and add Only. Furthermore, always add a running line after the specified amount to ensure that no one can write anything else to misuse it.
- If a cheque is not personally signed, it is considered invalid. Keep the signature as clear and close to the line as possible; a cheque can get bounced if you do not remember your actual signature used in all legal documents.
- Always add a running line at the end of each blank so nobody else can fill anything in it.
- Never overwrite any of the names or amounts; this can lead to fraud, and a cheque can bounce due to improper information.
Various banks in India have issued specific guidelines for correctly filling out cheques. It is critical to read through your bank’s policies to gain proper awareness. The above guidelines are the common tips to follow while filling out your cheque but reading your bank instructions will avoid at least two trips to your bank.
Frequently Asked Questions
Three parties are involved in a cheque transaction: the drawer, the drawee, and the payee who’s the cheque receiver. The payee can deposit the cheque for cash or deposit the cheque amount in their bank account.
If you want to withdraw money from your bank account, write ‘Self‘ on the cheque.
A cancelled cheque has been paid or cleared by the bank after being deposited or cashed. The cheque is “cancelled” once it has been used or paid, and nobody can use it again.
If the cheque doesn’t have a date and the validity has expired, the bank can refuse the payment.
The bank will notify the customer who is the cheque’s issuer as soon as possible, and the customer is also entitled to reimbursement.
It takes at least three days for specific credit union accounts in India, but this can extend in several cases. It is critical to note that you will not be able to withdraw the requested amount until the cheque has cleared.
Always write Payee on top of the cheque, and do not leave spaces while filling spaces. Add Only after the amount is written in words and also /- this symbol after writing a figure for the cheque. These tips will ensure no overwriting for your cheque.
A cheque can get bounced if your signature doesn’t match your original bank signature, if the account has insufficient funds and if your cheque has expired beyond its validity.
You can apply for a new cheque book through your bank’s internet banking facility or your mobile app or by selecting the cheque book feature at your ATM.