How to avoid Cheque Bounce?

Introduction

A cheque is a negotiable tool used by banks to move money. That is, savings bank or current account cheque books can be used regardless of the form of account. If you pay anyone by cheque, you are the cheque drawer, and the payee would be the one you issue.

If you have ever used cheques for payment, you must be aware of the term ‘cheque bounce’ which is very common amongst people using this mode of payment. But do you know what exactly it is?

What is meant by Cheque Bounce?

A bounced cheque is a payment cheque that was used, but it could not be accepted because of various reasons like it could be post-dated, the amount in words and the number is different, stele cheque, mismatch of signature, torn cheque or insufficient funds in account. In India, cheque bouncing is a criminal offence punishable under Section 138 of the Negotiable Instruments Act.

In most situations, we are concerned of cheque bouncing ^[1] because of inadequate funds.

Consequences of Cheque Bounce

Cheque bounce can seldom invite various risks and penalties to the drawer like:

• Penalty from bank – The cheque writer’s bank will reject the payment request when an account has insufficient funds and return the cheque (or the electronic request) to the bank of the payee. The order for payment “bounces” back, the defaulter and the payee are charged a penalty amount by their respective banks instead of transferring money to the payee. Generally, this charge is an NSF charge^[2], i.e., when the account has insufficient funds and the bank chooses to bounce the cheque. The sum of this payment depends, along with the form of account, also on causes and quality of the cheque bounce.
• Negative impact on CIBIL Score- Your financial credit history can be dented by a bounced cheque. Even a single bounce will irreparably change your CIBIL score ^[3] to the point that you will be refused a loan in the future.
  • For your business, a CIBIL score is important and when you approach them for your loan, it will invariably influence your equation with investors or banks. Your equation with the creditors will be influenced by a bounced cheque, including those with very genuine reasons like signature not appropriate or disparity in the dates.
  • The easiest way to keep your CIBIL score safe is to ensure that your cheques are never dishonoured and that after cheque encashment, you have substantially more funds than the required amount in your account.
• Legal Implications– A civil or criminal lawsuit will be brought against you as the issuer of the cheque if the aggrieved party agrees.
  • Banks can stop issuing cheque book facilities to any customer booked for the recurring cheque bounce offense, according to RBI guidelines.^[4]On cheques worth above Rs. 1 lakh, the minimum stipulated rate of offense is set at least four times.
  • The bank is well within its authority to issue a legal notice or to withhold money from your account if you have maintained some collateral protection with the bank on any debt and if the EMI redemption cheque bounces.

Laws relating to Cheque Bounce

Under section 198 of the Negotiable Instruments Act 1881^[5], bouncing a cheque due to inadequate funds is a penal crime. An individual may be fined up to twice the value of the cheque after repeated warnings if bouncing of cheques still continues or may even be jailed for 2 or more years. In the case of Cheque Bounces, Mens Rea^[6]is not appropriate and cannot not be taken as a defense by the drawer.

How to avoid Cheque Bounce?

It is very easy to bounce a cheque, but it is even easier to avoid a bounce. Here are a few ways in which you can do it:

• Know your balance- A safe way to stay safe from bounced cheques is to check the account balance. The majority of the reason for the cheque bounce is generally due to inadequate funds. It would be wise if you were able to verify the existence of funds from the bank or from the cheque drawer in the account.
  You can also make use of your bank’s smartphone applications to do this at your fingertips. Usually, these applications are safe and pose no risk to security.
• Check the date- A date can result in a bounced cheque. The common problem with the date might be that the date is disfigured or has some flaw that may lead to the cheque skipping, or is not readable or scribbled.
  The other reason is either that the deadline has elapsed or, in other words, that the date on the cheque is more than three months past the present date. A cheque is valid for just 3 months from the date indicated in the date column of the cheque.
  • For example, if the date on the cheque is mentioned as 12/02/2021 then it will be valid only till 11/05/2021. In other situation, if you have a cheque with a date 11/11/2020; that cheque is not valid as of 12 Feb 2021. In such a scenario, the bank would dishonour the cheque is a cheque is sent with an expired date is sent.
  • The other thing is that post-dated cheques are paid very early than they are due. Post Dated Cheques or PDC are cheques for a certain date where a cheque is given. For example, on 12 Feb 2021, I might give you a cheque for some date in the future, such as 14 November 2021. If you were to deposit the cheque before 14 November 2021, the bank will dishonour the cheque and bounce the cheque.
• Handle with care– If the cheque is damaged, torn, disfigured meaning it is not in a good condition or has some details not clearly visible; has too many stains for whatever reason, etc., these types of cheques will bounce. So, preserve the cheques properly.
• Avoid overwriting- Any type of scribbling, overwriting, correction, etc on a cheque is not tolerated and it would be dishonoured if a cheque is found that way. If you find an error when composing it, it is always good to submit a new cheque. Often, if you get a cheque that has something like that, apply for a fresh cheque.
• Write the amount carefully- If the cheque happens to have some discrepancy between the amount payable in terms and numbers, so the cheque will be bounced by banks. This is also valid if there are numbers in some aspect of the sum listed in the words section, and also if the amount in the column of figures/numbers has any words written in it.
• Maintain an official signature- Your cheque will bounce if the signature is mismatched or does not fit the records of the banks. If the signature is not in compliance with bank documents, the cheque would be dishonoured. Even if you happen to sign the cheque on the MICR Band^[7], the cheque will bounce. So be vigilant about the signatures.

Conclusion

There are different explanations for bouncing a cheque, and whatever they may be, it is important that when issuing cheques, one must take caution.

Being safe is better than being sorry. Therefore, make sure that the cheques given are legible and clear in writing. And, in cases where the cheque bounce notice is given, within the period stipulated, revert back with payments.

This easy diligent act would save your integrity and credit score and shield you from disciplinary action of any sort.

This article is authored by Samarth Jain, student at Institue of Law Nirma University, Ahmedabad.