Have you ever come across a condition when the bank rejected your cheque? The first question that comes to mind is ‘Why does the cheque bounce?’ It is not easy to write a cheque, and there are numerous reasons because of which it might get cancelled.
The primary reason behind it is that people are not well aware of creating and operating bank account services properly.
The number of people with bank accounts has increased drastically in the last couple of years, because of which a vast majority of people is using the cheques. As the usage of cheques has risen with that, the number of dishonoured cheques has also grown.
First, let us understand what it means in detail.
What is a Bounced Cheque?
A cheque is said to be cleared if the bank gives the amount mentioned in the cheque to the payee. But a dishonoured cheque is one which the bank denies to pass or honour. The event is then informed to the issuer, and the receiver both, plus a penalty is also charged.
If a cheque is dishonoured, then the drawee bank issues a cheque return memo to the payee banker telling the reason for dishonour. After that, the payee banker offers notice and the bounced cheque to the payee.
The good thing is that payee gets an option to resubmit the cheque within three months of the assigned date on the cheque after closing the reason for the rejection of the cheque.
Once this is done, then the payee has to provide a notice to the drawer within 30 days from the date he receives a cheque return memo from the bank. In this notice, it should be addressed that payee will get the amount within 15 days from the date of arrival of note from the drawer.
In case if the drawer does not give the amount within 30 days of obtaining the notice, then the payee has a legal right to conduct a legal proceeding against the defalcator.
If the cheque bounces for a considerable amount, then it might also lead to criminal proceedings. Bouncing cheque is one of the most prevalent financial crimes in India, which could lead to troublesome consequences for the issuer.
As you are well aware of the meaning of a bounced cheque, it is also imperative to understand the essentials of a cheque so that you can avoid the rejection of your cheque.
Essentials of a Cheque
There are some features of a cheque that everyone should be aware of and have knowledge about before using this payment mode. Here are some of its elements-
- It is an unconditional order.
- It is always drawn on a specific bank.
- It is payable on demand.
- The payment of cheque is made in cash.
- The amount mentioned on the cheque is always a certain sum of one’s account.
- The cash amount specified in the cheque has to be paid to the person whose name is indicated on the cheque.
These were some of the basic aspects of the cheque that are important for you to know if you use this method of payment.
Depositing vs Cashing a Cheque
You very well know what a cheque and its essentials are, but it is also paramount for you to know about depositing and cashing a cheque for better insight about its payment system-
- Cashing means that you would get the cash when the bank clears the cheque. You need to deposit the cheque in the particular bank, and you can get the money and spend it as per your requirement without any restrictions.
- Depositing a cheque means adding or crediting the amount to your bank account. In this process, you might have to wait for 24- 48 hours for the amount to get credited in your account.
As, when you deposit the cheque in any branch or cheque box, then the bank collects the cheque and then they approve it and credit the money to your account.
Number of parties involved with a cheque
When you create a cheque, it is usually in the name of a third party that can withdraw it from a specific bank. Hence, there are three parties involved with a cheque. Here is some of the information on them-
- Drawer- He is also called the maker and is the account holder that creates the cheque.
- Drawee- It is the bank of which the cheque is drawn, and thus it is called drawee. As mentioned above, the cheque is always drawn for a specific bank.
- Payee- He/she is the person whose name is mentioned in the cheque for getting the payment. If it is just a transfer, then the drawer and payee can be the same individuals.
These were some of the basics of the cheque that you should know if using this method. Now, let us know about the reasons why your cheque can bounce or dishonour.
9 Reasons Why Your Cheque Bounced Or Dishonoured
If your cheque has been dishonoured, then there could be one of the following reasons. Perhaps, keep these in mind while issuing a cheque to avoid bouncing your cheque by bank in future-
1. Insufficient Funds
One of the most prevalent reasons for dishonouring of the cheque is lack of funds in the account. If you have issued a cheque linked to the account with fewer amounts than the amount you have written in the cheque, then the bank would not find enough money to complete the transaction.
This non-availability of requisite balance would stop the payment, and the bank would dishonour the cheque.
This can also lead to penalties on both parties involved, the issuer and the payee. Once this happens, the issuer can either provide a new cheque ensuring that they have sufficient balance in the account.
If the receiver wants, he can also take legal actions against the issuer for dishonouring of the cheque, which can have serious consequences. Therefore, you should be diligent while writing a cheque and see if you have enough balance before issuing one.
2. Irregular Signature
Nowadays, people have started using digital banking, and cheques are the few financial instruments relying on signatures. Yet it holds a lot of importance as it is a primary element of cheques.
Bank will never accept the cheque if the signature of the issuer does not tally with the exemplar signature available with the bank. Various people signed 4 to 5 years back in their bank while opening the account and do not remember their sign which they did then.
It is a prevalent mistake because of which the cheque gets to bounce, so always remember that signature plays a vital role while issuing a cheque.
If it does not match as per the bank records, then your cheque would not be approved by the bank. Another thing to keep in mind is that you should never sign on the MICR band on the cheque and it also leads to dishonouring of the cheque. Thus it would help if you were very careful while signing on it.
3. Date of Cheque
The date holds a lot of significance in the cheque, and any difference or problem with it can lead to disapproval or dishonouring of your cheque. It is a vital piece of information and thus cannot be taken lightly.
Usually, the issue that comes with the date is that it can be disfigured, illegible or has some error or is scribbled; if there is any of this on your cheque, then it can lead your cheque to dishonour. If the date is not definite, then the bank would have no option but to reject it.
Also, another reason for cheque bounce can be when the date has expired. There is an order by the Supreme Court that Cheque cannot be cashed after a period of 3 months. Let us understand this by an example, if the issuer mentions the date on Cheque 15/5/2020 then this would be valid only till 14/8/2020.
In such cases, the cheque gets expired, and the issuer would have to issue a new cheque and this expired cheque, if submitted, would get dishonoured by the bank.
4. Post-Dated Cheque
A post-dated cheque is one on which the date mentioned is yet to come. Numerous people miss on checking the date mentioned on the cheque and put it in the bank.
Post-dated cheques are issued for a future date and cannot be presented in the bank before the date mentioned on the cheque as it gets dishonoured.
For example, if the issuer writes the cheque on 17/05/2020 and mentions the date on Cheque 20/5/2020, this is a post-dated cheque. It will get dishonoured if it is presented on the bank before 20/5/2020. Therefore, you should always issue post-dated cheques when it is due.
5. The difference in the amount in words and numbers
In case if you write incorrect amount as expressed by the difference in words and numbers your cheque would bounce. Also, if there are numbers in words sections or words in the numbers section, then also the bank would not approve your cheque.
For example, in words section, you write fifteen thousand only but in the amount in figures you write 1, 50,000. This is a huge difference, and the bank would dishonour your cheque.
The next situation is using numbers in words columns, even if you write the same amount still the bank would reject it. For example, if in words section your write 15 thousand only and in numbers section as well you write 15,000, still it would be dishonoured.
You should also know that incorrect writing can also get you in trouble.
6. Damaged Cheque
The bank does not accept any cheque that is damaged or torn or whose condition is not good. Also, if the details on the cheque are not clear, it would get dishonoured.
Moreover, if it has too many stains for whatever reasons it would get rejected by the bank, perhaps, it essential for you to preserve the cheque properly so that it does not get dishonoured.
7. Scribbling and overwriting on Cheque
If there is any scribbling, correction or overwriting on the cheque, then the bank does not accept the cheque. Because of any reason if you have to make any changes, always issue a fresh cheque so that it does not get dishonoured.
Cheques are like notes which should not be overwritten. As scribbled or overwritten cheques appear scrupulous and are not accepted by the bank.
8. Frozen Account
You might be hearing this term for the first time, but it is also an important reason why cheque can get dishonoured. This happens when the government or court orders the bank that a person’s account has to be frozen. In cases like this, the bank will reject all the issued cheques in the name of that person.
9. When payment is stopped
This happens when the drawer asks the bank to stop the cheque and do not clear the payment, in such a situation the cheque would bounce, and the payee would not receive the amount mentioned in the cheque.
These are some of the primary reasons why the cheque gets rejected by the bank, and it is paramount to know them well so that you can stay away from any unwanted hassle. But what befalls when the cheque gets dishonoured? What are the outcomes?
What happens when a cheque gets bounced?
Once the bank rejects your cheque after that, the issuer would receive a cheque return memo to payee telling why the cheque bounced. The payee has an option to resubmit the cheque if he thinks that it would be accepted the second time. In case if it gets dishonoured the second time as well then as per the law, the payee can prosecute the drawer legally.
Here are some of the consequences that you might have to bear if the cheque gets bounced-
1. A penalty by the bank– If the Cheque gets dishonoured because of insufficient funds or any other reason like a signature mismatch, date issue, etc. then both the drawer and payee would have to pay the penalty to their respective banks.
If the cheque that has got dishonoured is against the repayment of a loan then in that situation you would have to pay for late payment charges along with the penalty levied by your bank. Well, the penalty charges vary from bank to bank but usually, the penalty for cheque outward return around Rs.300, and inward return is close to Rs.100.
Also Read: The Charges & Penalty under Cheque Bounce
2. Damage to Credit history- A dishonoured cheque can hamper your financial credit history. Your credit history gets negatively hit as all your payment activities are reported to the credit bureaus by the financial institutions.
Even one dishonoured cheque can put a dent on your CIBIL score to a large extent that you can be refused for a loan in the future. The lenders only trust you if your credit score is good, hence you should take all the measures and ensure that your cheque does not get rejected.
You should always keep some extra money in your account more than the minimum balance for your account so that the chances of the cheque get rejected lessens. A good CIBIL score helps you, particularly when you wish to lend money from any financial institution.
3. Filing of civil & criminal charges by the payee- There can be a situation when the aggrieved person disagrees with the penalty fee and file a civil or criminal case against you as an issuer of the cheque. In case if the cheque dishonour is intentional, then the issuer can be prosecuted. If you are found liable, then you can get imprisonment of 2 years or fined twice the cheque amount.
4. Other drawbacks- As per the guidelines of RBI, the bank can prevent issuing a cheque to any person who has a record of recurred cheque book bounce offence minimum four times on cheques valued more than 1 crore.
If you have taken a loan by keeping collateral security and your EMI cheque gets dishonoured then the bank has right to issue a legal notice or deduct money from your account.
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After reading this, all your doubts related to the reasons for cheque bounce or dishonoured cheque must be clear. Thus, you should always confirm that all cheques issued by you are honoured on time. Apart, from the reasons mentioned above if the bank thinks the cheque is suspicious or forged, then the bank can reject the cheque, resulting in a bounced cheque.
Keep in mind that cheque is a monetary guarantee which should be transacted and delivered with utmost care.