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Government Gazette

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.

Present issues

* 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 include:

* 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 bank.

* 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 checked carefully.

* 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 proper crossing.

* Record the transaction details on the relevant cheque counterfoil.

What are the responsibilities of the bank to prevent cheque returns and frauds?

* “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 closed subsequently.

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.



Gamin Gamata - Presidential Community & Welfare Service
Ceylinco Banyan Villas

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