Dishonoured Cheque – What does it mean
Cheque is an instrument which indicates the right to get paid for the value of the cheque. Unlike other terminologies, dishonoured meaning in banking is pretty straight forward. It means that the obligation of payment could not be met, and the bank will not release the payment due to multiple reasons which we’ll discuss ahead. When a cheque is dishonoured, it means the bank does not honour or accept it for payment due to different possible reasons. Typically, these include insufficient funds in the account of the person who issued the cheque, closure of their bank account or when there isn’t a match between signatures on checks and those registered with respective banks. This situation can result in serious outcomes for both parties involved: those who gave out cheques as well as people receiving them could face financial penalties and legal consequences. It is common to hear this type of cheque being referred to with terms like “bounced” or “returned”.
What is a Dishonoured Cheque?
A dishonoured cheque is one that a bank does not honour. This can happen when the person who wrote the cheque, known as the drawer, does not have enough money in their account or there are other issues with it. like spoilt, illegible, incorrectly executed, and outdated cheques. The realm of possibilities is huge. When this occurs, banks send back such cheques to payees without paying them. Dishonoured cheques are inconvenient and may lead to financial losses for those who were expecting money from such an instrument.
Reasons for a Dishonoured Cheque
A cheque is dishonoured when it cannot be processed for payment. This might occur due to a variety of reasons, like the person who issued the cheque having insufficient funds in their account or there being a difference between signatures on it and those registered with bank records. Post-dated cheques, meaning they have been written for a future date, can also be refused if presented earlier than this specific time frame.
Similarly, stale-dated cheques are ones older than six months from their issue date – and may not get honoured by banks since they are considered too old and could cause issues with accounting. If someone tries to cash in a cheque from an account that has been closed, it will lead to dishonour as well. Sometimes errors are made while writing out the details on the cheque. For instance, getting the amount wrong or putting down an incorrect date can also result in dishonour.
Cheques can be dishonoured for the following reasons:
- Insufficient funds : Happens when the funds available in the cheque issuer’s bank account is less than the cheque amount
- Issues with the date of instrument : Cheque may get dishonored in case of post dated cheques or cheques older than 6 months
- Spoilt cheques : Cheque failure may happen due to spoilt instrument, i.e. external factors spoiling the shape and form of the cheque
- Illegible information on the presented cheque : Information written on the cheque is not readable, or too many scribbled corrections
- Inoperational bank account : cheque may get rejected if the bank account is closed before presenting the cheque
- Restricted accounts : Although rare, but cheques may get returned due to some RBI restriction
- KYC Issues : Cheque failure in case the presenter is unable to present identification document upon asking
Why is a Dishonoured Cheque a Serious Offense?
When a person does not honour a cheque, it is considered serious wrongdoing because it harms the trust and integrity of the banking system. They might face legal consequences like being sued in court or facing criminal charges, as well as having to pay fines or possibly serve time in jail; this varies based on how grave their conduct was and which laws they violated locally.
Also, it is essential to know that not all dishonoured cheques will result in legal action; however, it will most definitely attract penalty charges from the bank.
The only cases where there might be legal implication is if the cheque depositor chooses to press legal charges. In case of intended fraud, non-repayment of loans, or failing to pay commitments resulting in cheque getting dishonoured, may a cheque depositor choose to take legal action.
Implications of Dishonoured Cheques:
You may be wondering what happens if a cheque bounces? Before thinking of the implications, it is essential to understand why cheque is dishonoured? When a cheque is not accepted, it can lead to big problems for the person who wrote it and also for the one who was supposed to get money. The writer of the cheque might have to pay extra fees, see their credit reputation get worse, and could face legal issues. However, the one who receives payment experiences discomfort, loss of money and possible harm to business connections.
Also Read: What is a Cancelled Cheque and How to Write One
Preventing Dishonoured Cheques: As an Issuer
To prevent cheques from being rejected, people who write them need to check they have enough money in their bank account first, make sure the information on the cheque is correct, and keep good records of all their payments. It’s important too for them to talk clearly with the ones getting paid about when and how they will get their money. Also it is essential for the issuers to ensure that the issued cheque is legible and in good shape, there are many instances where the banks reject cheque because the information written on the instrument is not clearly written. In some instances, cheques are written in regional languages. Although it is allowed, if the regional language is not written clearly, then chances are that the cheque will get rejected.
Also Read: NBFC : Non Banking Financial Institutions in India
Preventing Dishonoured Cheques: As a Payee
As someone receiving a cheque, it is very important to check if the cheque is real by looking at things like the person’s signature and how much money it says. If anything looks wrong or there are problems with the cheque, tell the person who gave you the cheque quickly. Also, think about using other ways to pay, like online bank transfers, so there’s less chance of bounced checks. Another practice that the presenter can follow is checking with the issuer. If the cheque issuer is an individual, and is in touch with you, then it just makes sense to inform the issuer that you’re presenting the cheque. There are chances that an issuer may forget about the issued cheque due to which they may not keep required funds in the account for the cheque to get processed. To avoid any such instances where due to awareness gap, the cheque fails, the payee should give a small reminder in advance to ensure timely processing.
Tips to Keep in Mind When Issuing a Cheque
When issuing a cheque, ensure accuracy in writing the amount in words and figures, date the cheque correctly, and sign it appropriately. Double-check the recipient’s details and ensure sufficient funds are available in your account to cover the cheque amount. Funding your small business dream can be challenging. If there’s an instance where you’re unable to fulfill your cheque commitment due to lack of finding, you may look at opting for a working capital loan to ensure smooth business operations. Lendingkart offers MSME loans specifically designed to meet the needs of growing businesses.
Go Digital, Avoid Cheque Dishonour Charges
With the world moving digital with modern banking solutions like APIs, and other digital solutions, it is essential for the individuals to also move to digital products from paper based instruments. As these offer high flexibility, ability to track payments in real time, among a host of features. In today’s digital age, consider using electronic payment methods such as online transfers, mobile banking, or digital wallets to avoid the hassles and risks associated with paper cheques. Electronic payments offer convenience, speed, and security, reducing the likelihood of dishonoured cheques and associated charges.
Lendingkart offers seamless financing solutions to support businesses, including business loans, working capital loans, and Mudra loans. With straightforward eligibility criteria and competitive interest rates, Lendingkart provides hassle-free financing options to fuel business growth in India.
Summary
A dishonoured cheque means when the bank refuses to release money against the presented cheque due to various reasons. These reasons include insufficient funds in the issuer’s bank account, soiled cheque, illegible information on the instrument, expired date (Over 6 months post cheque date), instrument presentation before the date, among many others.
While the implications of bounced cheque can vary, depending upon the magnitude of the issue, like it may result in severe penalties and legal proceedings in case of willful fraud, it can also result in something very small as cheque bounce penalty.
There are various steps that an issuer as well as the presenter can take to avoid cheque bounce. Like filling the information properly and legibly, presenting on date, ensuring that you’re not presenting a mutilated cheque, maintaining adequate balance in case of an issuer, among many others.
Considering that the world is moving digital, it is essential for the individuals to move from paper instruments like cheques to digital payments.
Frequently Asked Questions
1. What is the reason for Cheque dishonour?
A cheque might not go through for different reasons, like not enough money in the account, signatures that don’t match, cheques written for a future date or too old, or maybe the account has been closed. Mistakes made while filling out a cheque, such as writing the wrong amount or date can cause it to be rejected too.
2. Is the dishonoured cheque debit or credit?
A dishonoured check means money going out because it takes funds from the person’s account who wrote it when someone tries to cash the check, but if there isn’t enough money or another problem happens, then the bank won’t process this payment.
3. What is the penalty for the dishonour of a cheque?
The punishment for bounced checks can be different based on the rules in that place and what the bank decides. Usually, the person who wrote the check might have to pay extra fees to their bank, and they could also face trouble with the law like having to pay money as a fine or going to jail.
4. What is the difference between cheque bounce and Cheque Dishonour?
When a bank does not accept a cheque for payment, it is called either Cheque bounce or Cheque Dishonour. Both these terms mean the same thing and are used when a cheque cannot be processed successfully.
