Individuals, banks, companies, governments, etc. need to make payments to one another. Payments can be made in India in the form of cash, cheque, demand drafts, credit cards, debit cards and also by means of giving electronic instructions to the banker who will make such a payment on behalf of his customers. This sections covers cheques. We shall also find out:
What is cheque , Parts of cheque, Cheques written on cow, paper, Big cheques(in size,amount), Kinds of cheque(Blank, Bearer, A/C Payee), How cheques get cleared(what happens once cheques are depoisted), Alternatives to cheques(Demand Draft, Travellers Cheques), Alternatives to cheques,(Money order, ECS) Alternatives to cheques,(EFT, NEFT, RTGS)what happens when cheque is depoisted how money gets credited. We shall also look at the different kinds of cheque.
Do you know that the cheque comes from the Arabic Sakk pronounced 'check' in Persian, which is a written document or letter or note of credit Muslim merchants. In United States of America, cheque is spelt as check.
In India in a year around 13,000 lakh cheques are transacted ( Ref ). Though usually cheque is written on cheque leaf, a cheque doesn't necessarily have to be written on paper. There are legends of cheque written on a live cow or a toilet paper. To find out about such Interesting cheques check out section "Cheques on anything"
What is Cheque?
People, Companies, Governments are buying and they need to make payments. One can pay using notes and coins. If small amount is involved then most would pay in cash but if amount is big say 10 lakh then how will the payment be made. To eliminate carrying last quantity of cash, cheques were introduced.
Suppose I need to pay Rs 500 to my friend Raj and I decide to pay by cheque then I will fill in details in the cheque such as Raj's name, amount, date and sign it and give it to Raj. To know more about what's written on cheque see the section Details a of cheque. So cheque is like a written instruction to the bank asking it to pay the person's whose name is written on cheque the sum of money. The person who writes the Cheque is called drawer and to whom it is paid is called aspayee. So in th above example I am the drawe and Raj is the payee.
To get his money, Raj can take cheque to my bank and bank will take money from my account and pay him in notes and coins. Raj can also depoist the cheque to his bank. His bank will collect money from my account in my bank and put it in Raj's account. To know more about how cheque is processed, see the section "Processing of cheque"
Remember a cheque is not cash, as it does not assume that the payment has been made. The funds may not be available with the drawer or the drawer may have withdrawn funds from his bank account in the meanwhile leading to the possibility of the cheque being dishonoured on presentation. Hence often you read On Realization of cheque
Details of Cheque
The cheque leaf has the following details. Some of the details are automatically printed on the leaf, while others need to be manually filled. To see details in cheque click Details Sample Check . To do exercise on filling a cheque click here
- Name of person / company to which one is paying from ones account. This is how the bank knows who to give your money to. The person named in the cheque, to whom money would be paid, is called the 'payee'.
- Date of issue is the date from which the cheque becomes valid. It is the date from which you wish the cheque can be used for withdrawing money. Usually cheque is valid for six months from the date of issue.
- Amount is the amount of money one is promising to pay in numbers or figures. It can be any amount depending on the available balance.
- Amount is the amount of money one is promising to pay in words. This is for safety, so that no one can change the amount one is promising to pay. It can be any amount depending on the available balance.
- Name and address of bank where one has an account.
- Signature of the account holder. A cheque becomes valid only when the account holder signs it. Signature is checked against the records before a cheque can be passed.One's signature tells the bank it's ok to give the money you promised. The maker of a cheque is called the 'drawer'.
- Cheque Number is a 6 digit number which is to help one keep track of who one paid the cheque to.
- Routing / account number in MICR format -The routing number is a nine-digit number which identifies postal code/city and state of the origin of the cheque.
- Account Number gives the bank the information on which account to use for this particular transaction. This number tells the bank whose money to use to pay the check.
Cheque on anything
Cheque on a toilet paper
Richard Roper of England wrote a cheque on toilet paper in protest at an "over-zealous" parking fine On September 30 when he parked his card near his home in Long Melford, near Sudbury in Suffolk. The front of his car was in a bay but the rear end was outside. At 9pm, PCSO John Woodgate gave him a £30 fixed penalty notice. Mr Roper wrote the unorthodox cheque but in a covering letter said he would pay twice the amount to charity if his ticket was waived - an offer which was refused. To see the cheque on toilet paper click here. Reference: Daily Mail UK and Reference:Guardian UK
Cheque on a cow
Once cheque was written on the side of a cow, and the cheque was accepted and cashed by the bank!!. This is a tale taken from adventures of Albert Haddock, the fictitious and creation of British writer A.P. Herbert from his book Uncommon Law first published in 1935. BBC "Misleading Cases" comedy series, based on the exploits of the fictional Albert Haddock, aired "The Negotiable Cow," originally on 20 June 1967 . To see cow-cheque in detail click here.
Cheque on egg
Another A. P. Herbert "misleading case" concerns "The egg of exchange". The question there was whether a cheque written on an egg could be paid into a bank, given the risk of the egg breaking or going bad. It was suggested that the cheque could be boiled.
Biggest cheque:The astronomical sum of one quadrillion, seventy-two trillion, four hundred and eighteen billion and three million dollars only note the only was drawn on the MBCA Bank in Zimbabwe, part of one of the largest banking groups in Africa. It was paid by Kasawe Estates, a property company, and was emailed to the Daily Mail. In Zimbabwe a 100 billion-dollar note which is now not enough to buy a loaf of bread. To see enlarged view of cheque click here
Oversized presentation cheques Oversized cheques are often used in public events such as donating money to charity or giving out prizes. The cheques are commonly 18 by 36 inches (46 cm — 91 cm) in size. Regardless of the size, such cheques can still be redeemed for their cash value as long as they have the same parts as a normal cheque, although usually the oversized cheque is kept as a souvenir and a normal cheque is provided. A bank may levy additional charges for clearing an oversized cheque. These cheques are a great way to highlight a charitable donation, recognize a prize winner, and make a big deal out of the situation. Photographs of the awarding of the cheque are useful in gaining media coverage of presentation.
Big Size cheque 12 metres by 25 metres, the cheque for US$100,000 was withdrawn from the Kuwait Finance House and signed by Mr Mohammed A Al Otabi. It was presented at the Shahr Al Kheir Festival on 26 October. For more details check out Guinness World record.
Kinds of cheques
Blank Cheque is a cheque which has no amount written but is already signed. Blank cheque can be extremely dangerous for their
owner, because whoever obtains the cheque could write in any amount of money, and would be able to cash it (to the extent
that the account contains such funds)
Crossed chequeWhen a cheque bears across its face two parallel transverse lines, the cheque is said to be crossed. The lines are usually drawn on the left-hand top corner of the cheque. But they may be drawn anywhere across the face. Crossing affects the mode of payment of the cheque. The cheque is no more payable to the payee or holder at the counter of the bank. The payment of a crossed cheque can be obtained only through a bank account. Thus, crossing is a mode of assuring that only the rightful holder gets payment. Even if some wrongful person secures payment it can be traced, because he can receive payment only through an account with a bank.
Bearer Cheque The cheque which is not crossed is called a bearer cheque. Anyone can exchange it for cash producing it at the bank counter. It's not very safe.
Dishonoured cheque A "dishonoured" cheque incident is where the bank returns a cheque as there are insufficient funds in the account than the cheque is drawn on. Banks will typically charge customers for issuing a dishonored cheque, and in some jurisdictions such an act is a criminal action.
Local Cheque If a cheque is to be paid within the same city it is called as Local Cheque. while If a cheque is to be paid not in the same city it is called as Outstation cheque . It takes longer for outstation cheque and extra money is charged by the bank There are special types of cheques which are Payable at Par cheque in various branches of a bank across the country. Suppose a cheque is from a bank in Bangalore and is submitted in Kolkata with 'at par' written on it. Then in Kolkata this cheque would not be considered outstation cheque.
High Value Cheque A cheque with amount to paid is 1 lakh or more is called a High Value Cheque.
Processing of cheque
Cheque is just a piece of paper. To get the money one has to get it cleared. Lets check out the steps in processing the cheque. This is also called as clearing. Cheque is written by the drawer for the amount to be paid to payee To see details of clearing process click here
- The Payee would deposit the cheque is his/her bank. If the payee or beneficiary of cheque has an account in the same bank in the same city then the funds are credited into his account through internal arrangement of the bank
- If the beneficiary has an account with any other bank in the same or in any other city, then his banker would ensure that funds are collected from the payer's banker through a clearing house. A clearing house is an association of banks that facilitates payments through cheques between different bank branches within a city / place. There are more than 1000 clearing houses operating all over the country facilitating cheque payments. These are managed by the RBI, State Bank of India and other public sector banks. The clearing house identifies the paying bank. To identify the paying bank, the clearing looks at check's routing number, the nine-digit number on the bottom left hand corner of your check, to the left of your account number.
- The clearing house presents paying bank with the cheque along with a payment request to drawee's bank, which checks if there are sufficent funds in the account of drawer to pay money.
- If the drawer's bank decides to pay then the clearing bank proceeds to settle the check, debiting drawer's bank and crediting the payee's bank for the value of the check.The paying bank debits the amount from the drawer's account.
Generally, for a local cheque, it would take 2-3 days for money to be available to beneficiary. In the case of outstation cheques, the time taken would vary from three to ten days. In case of local cheques, no charges are levied. In case of outstation cheques, the bank would take some processing / collection charges depending upon the amount of the cheque and the place from where it has to be realized. The charges levied by the banks are generally decided by the Indian Banks Association or the banks themselves. Banks are also required to publicize the schedule of service charges.
At the end of this process, the payee has access to the cash value of the cheque.
Alternatives to cheques: Traveller's cheque, Demand Drafts,
Travelers Cheque Carrying large amounts of cash is very risky, especially when one is traveling. Travelers cheques are a secure and convenient alternative to carrying cash. These are prepaid instruments available in fixed denominations. The holder of the Travelers cheque is required to sign the instrument upon purchase and again in the presence of the merchant establishment at the time of making payment or realizing proceeds thereof. Travellers cheques can be replaced if they are lost or stolen at no additional cost. Travelers cheques are available in both domestic and international currency. These instruments can be readily exchanged at bank branches anywhere and in several merchant establishments. click here to see enlarge view
Demand DraftsConfirmed cheques are DD (Demand Draft). These are cheques that are issued to customers/non-customers after paying the amount (cash/money) upfront. DD is often payable across the country with a validity of 6 months from the date of issue. Other type of DD that is payable only within the city limits is called as Pay-order.
The Demand Draft is a pre-paid Negotiable Instrument, wherein the drawee bank undertakes to make payment in full when the instrument is presented by the payee for payment. The demand draft is made payable on a specified branch of a bank at a specified centre. click here to see enlarge view
For details on stories of Tulsi please check the section bank and Money in book Be Money Aware
Alternatives to cheques:Money order, ECS
Money Order Another important payment instrument which is widely popular is the Money Order service offered by the Department of Posts, Government of India. A money order is an order issued by the Post Office for the payment of a sum of money to the person whose name the money order is sent through the agency of the Post Office. A â€˜Payeeâ€™ is the person named in money order as the person to whom the money is to be paid . A `remitter` is the person who send money order The advantage of sending money to someone through money order is that the money is delivered at the house or his place of stay.The Money Order enables an individual to send remittances to a third party under the aegis of the Post Office. It is a point-to-point delivery of funds. Because it is required that the funds be prepaid for the amount shown on it, it is a more trusted method of payment than a personal check. Merchants welcome the extra security of a pre-paid money order instead of a personal check, which can bounce. For details on Instant Money Order Service check out Indian Postal service website
Electronic Clearing Service (ECS) It is a mode of electronic funds transfer from one bank account to another bank account using the services of a Clearing House. This is normally for bulk transfers from one account to many accounts or vice-versa. This can be used both for making payments like distribution of dividend, interest, salary, pension, etc. by institutions or for collection of amounts for purposes such as payments to utility companies like telephone, electricity, or charges such as house tax, water tax, etc or for loan installments of financial institutions/banks or regular investments of persons. The ECS facility is available in more than 60 centres across India . For more information check out FAQ of ECS at RBI website
Read more at HistoryWorld
Alternatives to cheques: NEFT, RTGS, EFT
Inter Bank Transfer is a special service that allows you to transfer funds electronically to accounts in other banks in India through:
- NEFT - The acronym “NEFT” stands for National Electronic Funds Transfer. Funds are transferred to the credit account with the other participating Bank using RBI's NEFT service. RBI acts as the service provider and transfers the credit to the other bank's account.
- RTGS –The acronym “RTGS” stands for Real Time Gross Settlement. The RTGS system facilitates transfer of funds from accounts in one bank to another on a “real time” and on “gross settlement” basis. The RTGS system is the fastest possible inter bank money transfer facility available through secure banking channels in India.
Electronic Funds Transfer (EFT) is a system whereby anyone who wants to make payment to another person / company etc. can approach his bank and make cash payment or give instructions / authorisation to transfer funds directly from his own account to the bank account of the receiver / beneficiary. Complete details such as the receiver's name, bank account number, account type (savings or current account), bank name, city, branch name etc should be furnished to the bank at the time of requesting for such transfers so that the amount reaches the beneficiariesâ€™ account correctly and faster. RBI is the service provider for EFT.