Bank Watch


Bad cheques, good solution

Incredible! But true. You can withdraw money from your account despite having insufficient balance.

One of the oldest banking instruments which has so far successfully negotiated the information technology revolution has been Cheque. This piece of paper infuses a kind of empowerment to a holder that holds its worthiness beyond being a mere piece of paper. Numerically speaking its use in the day to day banking transactions has of course gone down, but it’s not yet outdated. The way it has survived in the modern banking system makes us believe that the cheque is going to remain an inevitable part of the system.
How do we define a cheque? Cheque is a written order of an accountholder upon a bank to pay to or to the order of a designated party or to bearer, a specified sum of money on demand. The person who draws the cheque is called drawer, the bank on which the cheque is drawn is called drawee and the person to whom payment is to be made is called payee. It is an order of the accountholder (customer) without condition. The banker has always to pay it on demand. Precisely, it is payable to a certain person or to his nominee or to the bearer of the instrument.
The parties involved in a financial transaction through cheque are governed by certain rules to uphold its image as instrument of credibility. The first and foremost thing is that a cheque should not bounce once issued by a drawer in favour of a payee. This means, the accountholder who issues a cheque must have sufficient balance in the account to meet the liability of the cheque. On the dishonour of a cheque, one can file a suit for recovery of the cheque amount along with the cost and interest and can also file a Criminal Complaint u/s 138 of Negotiable Instrument Act for punishment to the signatory of the cheque for having committed an offence.
Precisely, it’s a criminal offence.
In order to enforce discipline among bank customers, the Reserve Bank of India (RBI) has asked the banks to take certain steps while dealing with incidents of frequent dishonour of cheques. The banks have been told to make it clear to its customers that in the event of frequent dishonour of a cheque for want of sufficient funds in the account, no fresh cheque book would be issued. In case of current accountholders, the bank has the discretion to close the account. Meanwhile, if cheques drawn on a particular account are dishonoured four times during a financial year for want of sufficient funds, banks are allowed to deny a fresh cheque book to the customer.
Another important thing to note is that the validity of the cheque is only three months. The banks are under regulatory directions not to accept cheques having age beyond three months. After the stipulated period, the cheque loses value and remains a mere piece of paper.
There’s also a regulatory direction on writing on the cheque. No alteration or modification in cheques is allowed even if an authorized signature has been made at the place of alteration. The banks will dishonour any kind of altered cheques. So, if a drawer makes some mistake in writing a cheque, he should simply cancel the cheque leaf and write new one. Otherwise, the banks will only dishonour the cheque.
Among all the things, dishonouring of a cheque is a serious lapse on account of being a criminal offence and slapping punishment to the drawer is inevitable. Innumerable instances are on record where an account holder issued cheques for a certain amount despite knowing that the balance in his/her account was insufficient. But instances also galore where drawer was not aware that his/her account is short of funds to meet the liability of the cheque. But in both cases, intentionally or unintentionally, dishonouring of a cheque is offence.
Amid the incidents of dishonouring of cheques, banks started developing products where an account holder can withdraw amount and issue cheque despite having insufficient balance in his/her account. Once such product is Smart Saver Scheme introduced by J&K Bank. If you are seriously thinking to be on safer side and avoid dishonouring of cheques, this is the financial product on which you can bank upon.
The mechanism of the scheme is amazing. You have to deposit Rs. 25,000 or more but in multiples of Rs.1,000 in a core term deposit for a period of one to ten years. Simultaneously you have to open either a savings bank account or a current deposit account which has to be linked to the core term deposit. You can operate your linked accounts (savings or current account) like a normal account. This facilitates you to deposit more money under the scheme. You don’t have to deposit it in the core term deposit, but in the linked savings bank account or current account. Whenever balance in these accounts will cross a threshold limit (which is Rs.5,000 in savings bank account & Rs.25,000 in current account) fixed deposit (FD) instruments of Rs.10,000 and Rs.25,000 respectively would automatically be booked through auto sweep and even liquidated through reverse sweep facility on their own. These term deposits are created for a pre-determined tenure of 180 days.
It’s through reverse sweep facility that whenever there is a shortfall of funds in your account and you wish to withdraw a greater amount, the fixed deposit is swept back into the account to meet your requirement. You can withdraw the amount even through ATM. In case you have issued a cheque, it wouldn’t be dishonoured for short of funds. One more benefit is that you would be getting the benefit of interest differential, as the fixed deposits offer higher interest than savings. In current account you don’t get any interest.
So smart saver option allows you to withdraw amount or issue a cheque even though there’s insufficient balance in your account. In short, credibility of cheque as a bond of trust among a drawer, drawee and the payee is maintained.
(The views are of the author & not the institution he works for. Feedback at [email protected])