The best way to minimise cheque returns
The cheque is the most popular payment instrument other than cash
known to the public. Owing to its wide usage, an average customer of a
bank is conversant with the payment and receipt of money through cheques
and its clearing and settlement process.
Out of the total number of cheques (190,582) presented daily for
clearing at LankaClear Pvt. Ltd. about 10,704 (5.6%) are returned
unpaid. The total value of such returned cheques in a day is
substantial, amounting to about Rs. 552 million.
The volume of cheque returns in Sri Lanka is high by international
standards and it has serious implications on the public confidence of cheques as a means of payment.
Therefore, the Central Bank wishes to provide following information
for the awareness of the public and banks of their basic
responsibilities and the precautions each party needs to take in using
cheques for day-to-day business transactions.
What is a “cheque”?
A cheque is an unconditional order in writing to a Licensed
Commercial Bank by its customer, requesting the bank to pay a stated
amount to a specified person or a business entity on or after the date
of the cheque. If a customer has a current account in a Licensed
Commercial Bank, he/she will be given a cheque book.
A cheque can become invalid or stale if not presented to the bank
within six months (unless the period is specifically stated) from the
date of the cheque.
If a cheque is refused at the issuer’s bank because there are
insufficient funds in the account of the issuer or for any other
reasons, the cheque will be dishonoured.
* Cheque Returns: A cheque can be returned by a paying bank for a
number of reasons which includes:
* Insufficient funds in the current account of the issuer: The main
reason for cheque returns is the failure of issuer to provide sufficient
funds in his/her account which accounts for above 52% of the daily
cheque returns. Issuing a cheque, knowing that there are no sufficient
funds in his/her account, is an offence.
Those who issue cheques without adequate funds will have to pay
deterrent charges imposed by their banks. The banks as well as
businesses will lose confidence of the cheque payment process if cheques
are not honoured on time.
Similarly the businesses will be reluctant to accept cheques from
customers having a history of frequent cheque returns.
Therefore, the issuer or the person who writes the cheque has to play
a critical role in reducing cheque returns by maintaining sufficient
funds in his/her account.
* The cheque has been cancelled by the issuer;
* Due to a technical reason such as not signed, or with incorrect
date, or with incorrect amount or with incorrect crossing etc.; and
* The payment is stopped by a legal order.
* Fraud: The cheque fraud is a behaviour that is deceptive,
dishonest, corrupt or unethical, which poses a serious risk to the
business community and individuals alike. It can result in loss of funds
from accounts or loss of goods/property. Frauds involving cheques
* Presenting or issuing lost, stolen or counterfeit cheques (with
false signature) to the bank or third party;
* Fraudulently cashing cheques using false signature;
* Cheque returns because of insufficient funds in the account; and
* Using unauthorised business/company cheque.
Legal provisions and repercussions
Drawing a cheque without funds is an offence punishable under Section
25 and Section 25A of the Debt Recovery (Special Provisions) Act, No: 2
of 1990 and Sections 400 and 403 of the Penal Code.
A consistent high rate of cheque returns would lead to an erosion of
public confidence in cheques as a payment instrument with serious
implications on the banking system.
Accordingly, it is inevitable that banks would resort to taking
action against the offenders by closing down their current accounts.
What are the precautions to be taken by the customers?
* The customer must ensure that he/she holds sufficient funds in
his/her current account in the bank to cover the value of the cheque. If
he/she does not have sufficient funds, he/she may obtain an
advance/overdraft from his/her bank or resort to any other arrangements
prior to issuing the cheque.
* If the customer makes a mistake at the point of writing a cheque
and wishes to alter it, he/she should make sure that he/she crosses out
the mistake clearly and places his/her signature near the alteration.
* The customer must have full knowledge about the cheque ‘crossings’
before placing the ‘crossing’ on the cheque. If he/she does not have
enough knowledge, he/she is expected to get the details from his/her
* The customer should not accept any cheque from an unknown
person/party and he/she should be extra cautious in accepting third
party cheques especially the ‘post dated’ cheques.
* Before accepting, the details in the cheque (i.e. date, signature,
crossing, amount in writing and figure, alterations etc.) should be
* Keep a track on the cheques by using them in sequence from the
beginning of the book.
* Keep the cheque-book in safe custody.
* Never keep the blank cheques pre-signed.
* Try to minimise the writing of ‘cash’ cheques.
* Cheques payable to the third party should be properly endorsed with
* Record the transaction details on the relevant cheque counterfoil.
What are the responsibilities of the bank to prevent cheque returns
* “Good Faith” on the bank’s part is normally conceded.
* Banks must follow due diligence in opening new customer current
accounts with proper verification with other banks regarding the past
behaviour of accounts maintenance.
* Banks must educate customers on “crossings”.
* The bank should take immediate action to close the accounts, which
have frequent cheque returns.
* The customers who are frequently issuing cheques without sufficient
funds in their accounts should be warned and their accounts should be
Stakeholders of the payment and clearing systems are now exploring
the possibilities to strengthen legal provisions to take action against
those who issue invalid cheques.
They are planning to introduce a reporting system for banks to inform
cheque return details of their customers to Credit Information Bureau
(CRIB). Banks will be able to use such cheque return details in
screening customers at the point of opening current accounts.
Such measures will help to develop a culture among cheque issuers to
ensure the issue of valid cheques, drawees to accept only valid cheques
and banks to accommodate trustworthy customers.