What is Bank Cheque – Cancelled Cheque & Different Types of Cheque

Bank cheques are bills of exchange wherein one party instructs the drawee bank to transfer funds into the payee’s account. However, this definition is not enough to help you understand the basics and importance of cheques. Want to know more about bank cheques? Read on to find it out yourself:

What does a Bank Cheque Mean?

A Bank cheque is a written instruction to the financial institution that permits the payment of the written amount on the cheque from the account holder’s account to the bearer. The individual who authorizes their bank to transfer funds and writes out the cheque is known as the drawer. Further, the bank of the individual who wrote the cheque will disburse the specified amount upon its cashing or deposit by the payee.

Working of Bank Cheque 

A cheque can be thought of as a bill of exchange that pledges a certain amount of money, as mentioned on the cheque. It is printed for the drawing bank’s purpose of issuing it to an account holder (the payor) for their utilization. The one who writes the cheque is known as the payor, and the one who takes it and either deposits it in their account or cashes out the money is known as the payee.

In simple words, a cheque is a document that instructs the bank to transfer funds from the payor’s account to the payee’s account. Cheques are usually written against a checking account and allow two or more than two parties to make a financial transaction without involving physical money. However, cheques can also be used for transferring funds from one’s account to one’s own other account as well.

Cheques from bank can be used for various purposes, such as gifting, enabling a transaction between two parties, bill payments, and a lot more. It is a secure way of transferring cash, especially when dealing with huge amounts. Also, the security level is such that even in the event of loss or theft of the cheque, any third party who steals or gets the cheque cannot make the withdrawal, and only the payee can negotiate the cheque. 

Parties involved in Bank Cheque 

There are basically three parties involved while making a cheque transaction, as mentioned below:

• The drawer: It is the individual who fills out or writes the cheque.
• The drawee: The bank obligated to transfer funds is the drawee.
• Payee: The payee is the intended beneficiary of the cheque, or you can say it is the person who is named as the recipient of the cheque.

Components of Bank Cheque 

Below are the components of a bank cheque:

• IFSC: Indian Financial System Code (Indicates the bank branch that holds registration with the RBI and facilitates the transfer of funds.
• MICR: Magnetic Ink Character Recognition ( facilitates cheque clearance process)
• Cheque Number
• Drawer: The person who writes the cheque
• Drawee: The bank that stands responsible for paying the funds
• Payee: The person in whose name the cheque is issued.
• Amount: The sum that is instructed to be paid.
• Date: It is the date on which the drawer writes the cheque
• Signature: It is the signature of the drawee who authorizes the payments from the bank to be made.

Types of Bank Cheques

Here, we mention the different bank cheque typesthat exist in the Indian Banking System:

1. Bearer Cheque

The bearer cheque is a form of cheque wherein the person who has the cheque is granted authorization to cash the cheque. This implies that the person bringing the cheque to the bank is eligible to request the bank for its encashment. These cheques are subject to endorsement and can be used for making cash withdrawals. In such cheques, no specific identification is needed for the person who bears the cheque. However, if an individual wishes to make their cheque non-endorsable, they can cross out the “OR BEARER” option specified on the cheque.

2. Order Cheque

Order cheques are non-endorsable, which means that only the payee who is named in the cheque can collect the designated amount in cash. To restrict encashment to the payee alone, the drawer should strike off the “OR BEARER” indication specified on the cheque. Furthermore, the bank may verify the payee’s identity before disbursing the amount.

Example: If Ira has signed a cheque for payee Samar, then only Samar can encash the cheque by visiting the bank and showing his ID cards.

3. Crossed Cheque

This category of cheque does not allow any cash withdrawal. Only transfer of funds can take place from the drawer account into the account of the payee. However, any third party can visit the bank for the submission of the cheque. For a crossed cheque, the drawer is compulsorily required to draw two lines at the upper left corner of the cheque.

4. Account Payee Cheque

This is equivalent to an account payee cheque, but it does not necessitate any third-party participation. In such a case, the funds are transferred straight to the payee’s account number. To confirm the status of a cheque as an account payee cheque, two lines are drawn on the left top corner of the cheque, marking it as “A/C PAYEE.”

5. Stale Cheque

The validity of a cheque in India is only three months from the date on which the cheque is written or issued. So, if the payee forgets to withdraw the cheque within three months from the issued date, that particular cheque will be treated as a stale cheque. 

Example: If a cheque was issued on 01 January 2024, the cheque holds validity for only a period of three months. If the payee visits the bank on 0-1 My 2024, he/she will be denied the disbursement of funds as the cheque will be declared as a stale cheque. 

6. Post Dated Cheque

If the person issuing the cheque prefers the recipient to request the withdrawal or money transfer after the current date, they can fill out a post-dated cheque.

Example: If the drawer is filling the cheque on 01 January 24 but he wishes that the payment should be done on or after 31 January 24, then he/ she can fill up the date as 31 January 24, which instructs the drawee bank that the cheque amount cannot be withdrawn before 31 January 24. 

7. Ante Dated Cheque

If the drawer of the cheque specifies a date earlier than the current date, it is referred to as an ante-dated cheque.

Example: If the present date is 30 January 24 and the drawer mentions the date on the cheque as 01 January 24, then it will be considered as an ante-dated cheque.

8. Self Cheque

If the person writing the cheque desires to receive cash for themselves, they can issue a cheque with the word “SELF” in the payee’s name section and obtain the cash from the bank branch where they hold an account.

9. Traveler’s Cheque

As you can make out from the name, Traveler’s cheques are designed for use when an individual is journeying to a foreign destination where the local Indian currency is not used or accepted. Thus, when a person is traveling to a foreign country, he/she can carry the Traveler’s cheque and use it to get an encashment in foreign countries.

10. Mutilated Cheque

If a money cheque arrives at the bank in a damaged or torn state, it is referred to as a mutilated cheque. If the cheque received by the bank is torn into two or more pieces, with essential information being damaged, the bank has all the right to reject the cheque and deem it invalid.

Further, the drawer will be required to confirm its validation for the bank to accept the same. On the contrary, if the cheque is torn from the sides but contains all the essential information clear and intact, then the bank can process the cheque. 

11. Blank Cheque

A cheque that bears only the signature of the drawer while leaving all other fields empty is termed a blank cheque.

What is a Cheque Number?

Each cheque is assigned a unique cheque number, which is indicated on the cheque leaf. The status of a cheque can be determined by referring to its cheque number, which is present at the bottom of the cheque leaf. The first six numbers are read as the cheque number and function as a reference number for transactions associated with the cheque.

What is a Cheque Leaf?

A cheque leaf is basically an individual cheque on which you write a cheque for payment purposes. The cheque book has multiple cheque leaves and is issued by the drawer’s bank to the account holder. It is a written directive to a bank which instructs the disbursement of funds the payee as mentioned by the drawer. 

A cheque leaf is versatile and can be utilized for withdrawing, depositing, or transferring funds between different accounts.

Format of Cheque Leaf

A cheque leaf has various components as mentioned below:

• Date: It is the area where the date on which the drawer writes the cheque is mentioned.
• Drawer’s Account Number: The unique account number of the drawer is already mentioned on the cheque and is printed on the cheque leave for identification purposes which informs the payee from where the funds originate. The account number helps in maintaining record and traceability management.
• Payee: This is the space wherein the name of the recipient of the cheque is mentioned. 
• Currency Box: This box indicates the amount of money that will be transferred to the payee.
• Personal Information: Crucial details of the account holder such as the account number, branch, location, etc., is mentioned as personal information of the drawer. It may be either printed or can be available in the form of a barcode.
• Cheque Amount: This section presents the numerical amount written in words within the currency box. After writing the amount in words, you have to use the word only so that no one can add on to the actual amount written. 
• Signature Line: This is where the drawer signs to authenticate the payment. The signature signifies that the payee is granted approval by the drawer to receive the designated amount.
• MICR Code: Also referred to as Magnetic link character recognition code, this number provides information about the bank and its branch from which the cheque was issued to the account holder.
• Cheque Leaf Number: The cheque number serves as an identifying code for the cheque which differentiates the cheques from each other within the cheque book. Every cheque leaf is assigned a different cheque number to enhance the security feature further reducing the potential for fraudulent activities.
• Memo Line: However, this is not a mandatory field, it is the extra space where the drawer can write additional notes or details on the cheque leaf. 

Validity of a Cheque

Earlier, the cheques used to stand valid for a period of six months from the date when the cheque was written. However, after the guidelines issued by the RBI that stand effective from 01 April 2012, the validity of cheques has been reduced to a period of 3 months from the date of writing the cheque. 

Time Required to Liquidate a Cheque

As soon as you deposit the cheque, you may not get immediate access to the entire amount when you deposit the cheque. You can expect the amount to be deposited in your account within two to three working days from the date of deposit of the cheque. 

Steps to Write a Bank Cheque?

A canceled cheque serves as evidence of having a bank account and validates the details of the account holder. Canceled cheques may be required for various purposes, so here is how you can cancel a cheque:

• Step 1: Take a new cheque leaf.
• Step 2: Make sure that you do not sign on the cheque.
• Step 3: Now, you have to draw two parallel lines across the cheque and write canceled in between
• Step 4: While drawing the lines, make sure that you do not draw them in a way that they hide any of the important details of the cheque, such as your account number, MICR, IFSC, etc.

What is the Purpose of a Cancelled Cheque?

Canceled cheques are required for a plethora of purposes in India. It is primarily used as proof for financial transactions such as loan applications, credit card applications, insurance policies, and a lot more. It serves as evidence for the account holder’s name, bank details, and signature. Here we list down a few purposes wherein you may be required to produce a canceled cheque:

• Provident fund withdrawal
• For KYC
• Electronic clearing service
•  For the processing of EMIs
• Loan applications
• Insurance policy

What is a Crossed Cheque?

Crossing a cheque provides specific instructions to a financial institution on how to manage the cash transaction. A crossed cheque is essentially a check that bears two parallel lines across it. These lines can be either drawn across the whole cheque or at the top left-hand corner of the cheque. It indicates that the specific cheque can only be deposited directly into a bank account and cannot be immediately cashed by a bank or any other financial institution. This enhances the security of the drawer as the funds have to be transferred to a collecting bank.

Different Ways to Cross a Cheque

Crossed cheques provide instructions as given by the drawer of the cheque to the drawee bank. The directive mandates payment of the cheque at the bank’s counter, specifically instructing that it should be paid to an individual presenting it through a banker. Crossing enables the tracing of the recipient to whom the payment amount has been disbursed. Here is how the cheque can be crossed in different ways:

1. General Crossing

It mandates two transverse parallel lines, which instructs that such cheques should be mandatorily paid to the bank. These parallel lines can be drawn at any corner of the cheque. However, the top-left of the cheque is the ideal spot to draw the lines that indicate general crossing. 

2. Account Payee Crossing 

It is a restrictive crossing and indicates that such cheques are non-negotiable. Between the parallel lines, the drawer should essentially write in words account payee only. 

3. Special Crossing

The significance of such a form of crossing is that the cheque must be credited solely to the bank to which it has been crossed. It serves as a caution to everyone that a specific crossing cannot be altered to a general crossing.

4. Non-negotiable Crossing

In this type of cheque crossing, the document must include the words “not negotiable.” Additionally, the cheque can be either specifically or generally crossed. The non-negotiable status of the cheque ensures that the transferee’s title does not surpass that of the transferor.

Difference Between Depositing & Cashing a Cheque?

What is MICR & its Role?

MICR stands for Magnetic Ink Character Recognition. It is a technology primarily employed in the banking sector to authenticate the genuineness of documents. It aids in simplifying the processing and clearance of different banking documents, including cheques. The MICR code is imprinted using a unique ink or toner containing magnetic elements. This magnetic ink can be effortlessly interpreted by the bank’s computer even if the MICR code is covered with a signature, stamp, or any non-magnetic ink. With its help, the computer can easily identify the branch to which the cheque belongs, eliminating the need for human involvement.

How to Apply for a New Chequebook?

Applying for a cheque book is quite easy, here is how you can apply for a new cheque book by visiting the ATM:

• Visit your bank ATM that allows you to apply for a cheque book.
• Insert your debit card and enter your PIN to login to your account.
• Search for the option to request a new cheque book. This option is usually available under the “Services” or “Other Transactions” option.
• Adhere to the instructions displayed on the screen to finalize the application procedure. 
• When the application process is completed, the ATM will generate a receipt which verifies the request recieved. Retain this receipt for your documentation.
• The newly requested cheque book will be sent to the address you supplied within a short period. You can start using it as soon as it is delivered to you.

Besides this approach, you can also visit the bank or write a letter requesting a new cheque book. But while writing the request letter, make sure that you also write down the number of cheque leaves you want and the reason why you are requesting a new cheque book. 

Things to Keep in Mind While Writing a Bank Cheque

A cheque that has the signature of the drawer can be misused for wrong motives by fraudulent people, which can further lead to financial losses. Thus, it is essential that you follow these simple tips while filling out the cheque to mitigate the risk of falling prey to fraud or legal issues.

• Make sure that your account doesn’t run short of funds and has enough balance to cover the cheque amount.
• Check whether you have written the date correctly.
• Ensure that the payee’s name is written correctly.
• Check if the amount as mentioned on the cheque is correct, both in numerals and words. 
• Use permanent ink to prevent the chances of unauthenticated tampering of the cheque.
• Sign at the appropriate place and make sure that the signature is the same and matches with the one on record with the bank.
• Note down the cheque number for your records to be sure of what you have paid and to whom you have paid in case of any discrepancy that may arise at a later stage.
• Avoid signing on a blank cheque because if such a cheque goes into the wrong hands, you may end up facing a huge financial loss. 
• Safeguard the cheque book to prevent loss or theft. Though a cheque does not stand relevant within your signature, there is always scope for it to be misused. Thus, it is always a good idea to keep your cheque books safely. 

Importance of Bank Cheque 

The cheque, as a crucial negotiable instrument, can be transferred through simple hand delivery. It entails lower risk, minimizing the potential for loss. A cheque facilitates the transfer of a larger sum of money compared to the practicality of carrying the equivalent amount in cash. It is a document that can easily get the funds transferred to any other account and prevents physical loss of cash. 

Characteristics & Features of Bank Cheque 

Here we pen down the features and characteristics of a bank cheque:

1. Features of Bank Cheque 

• Must be written
• Must have a date mentioned
• Must be unconditional
• Must specify the correct amount: 
• Must draw on a specific banker
• Must be paid in money
• Must hold the signature of the drawer
• Must mention the bearer

2. Characteristics of Bank Cheque 

• Cheques are printed documents employed for the purpose of making payments.
• Exclusive access to and utilization of cheques is restricted to individuals who hold bank accounts.
• A cheque is payable upon request.
• Cheques typically remain valid for a period of three months. However, post-dated cheques are also valid cheques.
• Cheques involve three parties: the drawer (who issues the cheque), the drawee (the bank), and the payee(the recipient of the cheque).
• A cheque incorporates built-in protections, which include the necessity for the signature of both the parties on the cheque.
• The bank issuing the cheque provides a guarantee for the disbursement of funds and assures that the payee’s bank will receive the funds.

What are the Reasons for Dishonor of a Cheque?

A cheque is termed as dishonored when the payee deposits the cheque in the bank but the cheque is not successfully processed. If the bank declines to disburse the amount as indicated on the cheque, the cheque is considered dishonored. Here are a few probable reasons wherein a bank can dishonor a cheque:

• Insufficient funds in drawer’s account
• Mismatched signature
• Discrepancy in the date mentioned on the cheque 
• Damaged, torn, or cheques in subpar condition. 
• Cheques in which details are unclear
• Stained cheques
• Overwriting on cheques also appears suspicious and are prone to rejection

Advantages & Disadvantages of Bank Cheque 

Bank cheques come with their own set of advantages and disadvantages. Here we list down a few of them: 

1. Advantages of Bank Cheque 

• Cheques are more convenient to carry in compared to huge amounts of cash
• It is more secure and prevents the loss of cash
• It is a transferable document that can be endorsed in favor of a third party.
• If by chance you misplace the check, it can be easily tracked.

2. Disadvantages of Bank Cheque 

• As cheques are not recognized as legal tender, there are instances where transactions using them might be rejected.
• Only people who have a bank account can use cheques
• Depositing a cheque into your bank account requires a visit to the bank, which can be a time-consuming process.

Final word 

We hope this guide helps you traverse through the various types of bank cheques available in the Indian banking system, its importance, characteristics and everything that you should know while writing a cheque. But, as you know that bank cheques can be risky too if not dealt carefully, make sure that you always keep your bank cheques safely and follow all the necessary tips while writing the cheque.

FAQs

Disclaimer

This article is solely for educational purposes. Stable Money doesn't take any responsibility for the information or claims made in the blog.