All You Need to Know About Cheques

Cheques are a traditional paper instrument that instructs a bank to pay a specific sum of money from one account to another. They serve as a secure and documented method for financial transactions, widely used for their reliability and traceability. In this article, we will cover what a cheque is, its key characteristics, benefits, different types, and how to write one correctly.

What is a Cheque?

A cheque is a written order to a bank, instructing it to pay a specified amount of money from the drawer’s account to the payee’s account. This payment instruction is usually issued by the account holder (the drawer) to their bank (the drawee) to transfer funds to another person or entity (the payee). When a cheque is presented, the bank verifies the details and transfers the funds, making it a traceable transaction.

Key Characteristics of Cheques

Cheques possess several distinct characteristics that define their use and function in the financial system:

• Written Instrument: A cheque is always a physical, written document, not a digital one.
• Three Parties Involved: It always involves a drawer (the person writing the cheque), a drawee (the bank on which the cheque is drawn), and a payee (the person or entity receiving the payment).
• Specific Amount: The cheque must specify a definite amount to be paid, written both in words and figures.
• Date of Issue: Every cheque must have a date of issue. This date determines its validity period.
• Signature: The drawer’s signature is mandatory for the cheque to be valid. The signature must match the one on record with the bank.
• Validity Period: A cheque is typically valid for three months from its date of issue. After this period, it becomes a “stale cheque” and is generally not honoured by banks.
• MICR Code: Each cheque leaf has a unique Magnetic Ink Character Recognition (MICR) code at the bottom. This 9-digit code helps in quick processing and identification of the bank and branch.

What are the Benefits of Using Cheques?

Cheques offer several advantages that contribute to their continued use:

• Security: Carrying a cheque is safer than carrying large amounts of cash. If a cheque is lost, payment can often be stopped, reducing the risk of unauthorised use.
• Record Keeping: Cheques provide a clear paper trail for both the payer and the payee, making it easy to track transactions for accounting or dispute resolution purposes.
• Large Value Transactions: Cheques are commonly used for transferring significant sums of money, where digital limits might be a concern or a physical record is preferred.
• Post-Dating Capability: Cheques can be post-dated, allowing a payment to be scheduled for a future date, ensuring funds are available when needed.
• Proof of Payment: A cancelled cheque or the record of its clearance serves as official proof of payment.

Understanding Different Types of Cheques

Various types of cheques exist, each with specific features and uses:

Order Cheque

An order cheque is made payable only to the person or entity whose name is written on it. The word “bearer” is typically cancelled out. To encash or deposit an order cheque, the payee must be identified by the bank, providing an added layer of security against unauthorised collection.

Bearer Cheque

A bearer cheque can be encashed by the person who presents it at the bank, without requiring identification. The words “or bearer” are not cancelled out. These cheques offer convenience but come with a higher risk if lost or stolen, as anyone can collect the funds.

Crossed Cheque

A crossed cheque has two parallel lines drawn across its top-left corner, sometimes with “Account Payee Only” written between them. This crossing means the cheque cannot be cashed over the counter; it must be deposited directly into the payee’s bank account. This significantly enhances security by ensuring funds reach the intended recipient’s account.

Open Cheque

An open cheque is one that is not crossed. It can be cashed over the counter at the drawee bank by the payee. If the payee wishes, they can also transfer it to another person by endorsing it (signing on the back). While offering flexibility, it carries more risk than a crossed cheque.

Post-Dated Cheque

A post-dated cheque (PDC) is a cheque written with a future date. The bank will not honour the cheque until that specific date arrives. PDCs are useful for scheduling future payments, such as rent or loan installments, ensuring that the payment is made on time while managing current funds.

Stale Cheque

A stale cheque is one that has been presented for payment after its validity period has expired. In India, this period is typically three months from the date of issue. Banks will generally not honour a stale cheque, and the drawer would need to issue a new one if the payment is still required.

Self Cheque

A self cheque is written by an account holder to themselves, usually by writing “Self” or “Cash” in the payee’s name section. It is used to withdraw cash from one’s own account without needing a withdrawal slip. The account holder must sign the cheque and present identification at the bank.

Here’s a quick comparison of some common cheque types:

How to Write a Cheque Correctly

Writing a cheque accurately is crucial to ensure it is honoured by the bank. Follow these steps carefully:

Step 1: Write the Date. In the top right corner, fill in the current date in the format DD/MM/YYYY. For a post-dated cheque, write the future date on which the payment is intended.

Step 2: Enter the Payee’s Name. On the line that starts with “Pay,” clearly write the full name of the person or entity receiving the money. Ensure the spelling is correct.

Step 3: Write the Amount in Words. On the line below the payee’s name, write the amount of money in words. For example, “One Thousand Five Hundred Only.” It is good practice to add “Only” at the end to prevent any alteration.

Step 4: Write the Amount in Figures. In the small box on the right side of the cheque, write the same amount in numerical form. For example, “₹1500/-“. Ensure the figures are clear and there is no space for tampering.

Step 5: Sign the Cheque. In the bottom right corner, sign the cheque exactly as your signature appears in your bank records. An inconsistent signature can lead to the cheque being dishonoured.

Step 6: (Optional) Cross the Cheque. If you want to make it a crossed cheque for added security, draw two parallel lines across the top-left corner. You can also write “Account Payee Only” between these lines.

When Are Cheques Still Used Today?

Despite the rapid adoption of digital payment methods, cheques continue to be relevant for several specific scenarios:

• Large Payments: For very large transactions, such as property purchases, business deals, or institutional payments, cheques are often preferred for their documented nature and security.
• Utility Bills and Fees: Some organisations, government bodies, or educational institutions may still require or prefer cheque payments for certain fees or bills.
• Loan Repayments: For certain loan products, especially older ones, banks might still accept or require post-dated cheques for installments.
• Evidence of Payment: For legal or accounting purposes, a physical cheque and its clearance record provide tangible proof of a transaction.

Modern Alternatives for Payments

While cheques offer specific advantages, digital payment methods provide speed and convenience for everyday transactions. Platforms like the Paytm app offer a wide range of digital payment options for various needs. For instance, UPI has transformed daily transactions, processing more than 20 billion transactions every month, as per NPCI’s monthly product statistics. 

For faster, more frequent payments, exploring digital options through the Paytm app can be beneficial. You can pay merchants by scanning any UPI QR code, send money to friends and family using their UPI ID or mobile number, and manage your bank accounts linked to UPI all within the app.