Facts Everyone Should Know About Types of Cheques

A cheque is a written instruction to a bank, directing it to pay a specified sum of money from one account to another. It serves as a traditional and secure method for making and receiving payments, widely used for various financial transactions.

Understanding the different types of cheques available helps in choosing the right instrument for specific payment needs and ensures secure handling. In this article, we will cover the basic definition of a cheque, the parties involved, and the various types of cheques including order, bearer, open, crossed, post-dated, blank, gift, banker’s, stale, self, and mutilated cheques.

What is a Cheque and Who are the Parties Involved?

A cheque is a negotiable instrument that orders a bank to pay a specific amount of money from a person’s account to the person in whose name the cheque has been issued. It is a reliable method for transferring funds without using physical cash.

There are three primary parties involved in any cheque transaction:

• Drawer: This is the person or entity who writes and signs the cheque, instructing their bank to pay money from their account. The drawer is the owner of the bank account from which funds will be debited.
• Drawee: This is the bank on which the cheque is drawn. The drawee bank is responsible for processing the cheque and making the payment as per the drawer’s instructions.
• Payee: This is the person or entity in whose favour the cheque is issued. The payee is the recipient of the funds and is entitled to encash or deposit the cheque into their own bank account.

Types of Cheques Based on Transferability and Security

Cheques can be categorised based on how they can be transferred and the level of security they offer. These differences determine who can receive the funds and how the cheque must be processed.

Order Cheque

An order cheque is a cheque where the word “bearer” is cancelled out or not present. This type of cheque is payable only to the person or entity whose name is specifically written on it. To encash or deposit an order cheque, the payee’s identity must be verified by the bank. This feature makes order cheques a secure option as they cannot be freely transferred to another party.

Bearer Cheque

A bearer cheque is a cheque where the word “bearer” is not cancelled. This means the funds can be paid to the person presenting the cheque at the bank, whether or not their name is written on it. Identity verification of the bearer is generally not required, making it easily transferable simply by handing it over. While convenient for quick transactions, bearer cheques offer lower security compared to order or crossed cheques.

Open Cheque

An open cheque is an uncrossed cheque that can be cashed at the counter of the drawee bank. It can also be transferred to another person by the payee by endorsing it (signing on the back). When an open cheque is presented for encashment, the bank may ask the payee to sign on the back of the cheque for record-keeping. This type of cheque offers flexibility but also carries a higher risk due to its easy transferability and cashability.

Crossed Cheque

A crossed cheque has two parallel lines drawn across the top left corner. These lines indicate that the cheque cannot be encashed at the counter but must be deposited directly into a bank account. This significantly enhances security as the funds are traceable and only the named payee’s account can receive the money. Often, the words “Account Payee” or “A/c Payee” are written between the lines, further ensuring that the funds are credited only to the payee’s account.

Here is a comparison of these common cheque types:

Types of Cheques Based on Date

The date written on a cheque plays a crucial role in its validity and when it can be processed.

Post-Dated Cheque

A post-dated cheque is a cheque that bears a future date. The funds for this cheque will not be transferred to the payee’s account until the specified future date arrives or passes. This type of cheque is useful for scheduling payments in advance, such as rent, loan instalments, or future supplier payments. It ensures that the payment is processed only at the intended time.

Stale Cheque

A stale cheque is a cheque that has exceeded its period of validity. In India, a cheque is typically valid for three months from the date it was issued. If a cheque is presented to the bank after this three-month period, the bank will not honour it, and it will be considered a stale cheque. Payees should deposit cheques promptly to avoid them becoming stale.

Types of Cheques for Specific Purposes

Some cheques are designed for particular scenarios or offer unique features beyond standard fund transfers.

Blank Cheque

A blank cheque is a cheque that has been signed by the drawer but has the amount and sometimes the payee’s name left blank. The drawer trusts the payee to fill in the correct amount. While offering extreme flexibility, issuing a blank cheque carries significant risk, as the payee could potentially fill in any amount, leading to unauthorised debits from the drawer’s account. It is generally advisable to avoid issuing blank cheques.

Gift Cheque

Gift cheques are special cheques issued by banks for the purpose of gifting money. They often come in decorative formats and are typically for a specific, rounded amount. These cheques serve as a formal and convenient way to present monetary gifts, especially for special occasions like weddings or festivals, and are a popular alternative to giving cash.

Banker’s Cheque

A banker’s cheque, also known as a pay order, is issued by a bank on behalf of its customer. Unlike a regular cheque, the payment for a banker’s cheque is guaranteed by the bank itself, as the funds are debited from the customer’s account at the time of issue. This makes it a highly secure payment instrument, particularly useful for large transactions or when the recipient requires assured payment. Banker’s cheques are typically valid for payments within the same city and have a validity of three months from the date of issue.

Traveller’s Cheque

Traveller’s cheques are pre-printed, fixed-amount cheques issued by financial institutions, designed for individuals travelling internationally. They served as a secure alternative to carrying large amounts of cash, as they could be replaced if lost or stolen. While less common today due to the rise of credit/debit cards and digital payments, they offered a level of security and convenience for travellers.

Self Cheque

A self cheque is a cheque written by the drawer to withdraw cash from their own account. The drawer writes “Self” in the payee section of the cheque. This allows the account holder to personally draw cash from their bank account at the branch counter, provided they present valid identification. It is a direct method for account holders to access their funds.

Types of Cheques Based on Condition

The physical condition of a cheque can also affect its processing.

Mutilated Cheque

A mutilated cheque is a cheque that is torn, damaged, or defaced. If a cheque is severely damaged to the extent that crucial information (like the amount, payee’s name, or signature) is illegible or missing, the bank may refuse to process it. In cases of minor damage where all essential details are still clear, the bank might process it after confirmation from the drawer, but it is generally advisable to request a fresh cheque if one becomes mutilated.