Things to consider in cheque operations

S. R. Balachandran

S. R. Balachandran

Cheques are the popular mode of payment worldwide. If properly monitored it has several advantages, some of which are as follows:

(1) Large sums of money need not be retained or transported and thereby losses could be avoided.

(2) An official receipt is not essential for cheque payments, as you could always obtain a certificate from the payment Bank, if necessary.

(3) Provides better control and internal check within the organization.

(4) Avoids suppression of information. For eg: In India it is mandatory that any payment above Rs 50,000 has to be made by cheque.

Crossings on cheques

Cheques drawn as "cash" or in the name of a person without any crossings (two parallel lines drawn at the corner of the cheque leaf without obstructing the written instructions), could be encashed at the counter of the relevant Bank.

However, if the cheque has gone into wrong hands by mistake, the fraudulent party cannot be identified.

Therefore, it is always advisable to issue crossed cheques which can be paid only through an account, so that the payment bank will be in a position to identify the final beneficiary if the necessity arises. Cheques are crossed in one of the following methods:

(a) Simple crossing - can be paid through any bank account

(b) "Not Negotiable" crossing - - do -

(c) "Account Payee" crossing - paid through the Account of the person in whose name the cheque has been drawn (drawee)

(d) Restricted "Account Payee" - paid through the specified Bank Account crossing mentioned on the cheque leaf

In the case of "cash" cheques, if a person "A" steals the cheque from the drawer - "B" and issues it to a third person "C" in settlement of dues owing to him, "C" has the right to claim for the amount stated on the cheque from "B", unless "A" is caught and admits to stealing the cheque from "B". If the cheque is crossed: "not negotiable" then "C" loses his right for any claim as he has no better title to the cheque than "A".

Therefore, utmost care should be exercised when encashing such cheques presented by unknown persons.

It is always advisable to issue crossed cheques which can be paid only through an account

Proceeds from a cheque crossed: "A/C payee" can be transferred only into the account of the drawee or beneficiary. If the name of Bank, A/C No. etc are stated on the cheque, then payment is restricted only to the specified Account.

These type of cheques are issued when making payments to the Inland Revenue Department and Customs Department

Returned cheques

This is the main drawback in accepting cheque payments and the payee faces many difficulties when cheques presented to his bank are returned. Cheques are returned with one or more of the following remarks and the fate has to be determined accordingly:

(i) Payment stopped by drawer Collection is doubtful

(ii) Account closed Funds not adequate in the Account

(iii) Refer to Drawer Do

(iv) Exceeds Arrangement Payment could be collected Funds not

(v) Effects not realised adequate in the Account Collection is

(vi) Not arranged for doubtful

(vii) Payment deferred pending drawer's confirmation Validity of the cheque has expired

(viii) Stale cheque usually (six months). Payment could be collected with due certification by

(ix) Alternations on cheque not drawer

Usually accounts maintained verified in trouble areas of the country

(x) Account not verified The payment bank requires thecollection bank to confirm the (xi)Credit requires banker's authenticity of the drawee. This confirmation happens for cheques issued byGovernment authorities.

Eg. FPF, ETF Depts.

* Imposed by the Central Bank or Treasury

(xii) Credit Squeeze * By order from a Court of Law or the

Dept. of Inland Revenue

(xiii) Account frozen

Precautions to be taken with regard to cheque operations

1. Cheque leaves/books should always be kept in safe custody

2. Operating mandate together with the list of authorised signatories should be submitted to the relevant Bank and any changes therein should be notified immediately.

3. Alternations made on cheques should be specified and authorised.

4. Minimum two signatures should be mandatory for business organisations. One man operation is not advisable.

5. Bank reconciliation should be done regularly

6. Close scrutiny is necessary with regard to:

a. Deposits not realised for a long period of time

b. Cheques issued not presented for payment

c. Proper bank debit tax charges. Eg: transfer of funds between two accounts of the same party is exempt from Bank Debit Tax.

7. Bank Debit Tax is being imposed from 1.5.2002 on all payments. However, exemption has been granted for special payments such as: Customs duties, Tax payments to the Inland Revenue Department and Treasury Bills, provided a special account is opened with the approval of the Inland Revenue Department.

There is a problem faced by the business community when a cheque is returned by the bank and the customer has not furnished the latest correct address (innocently or fraudulently), and such customer cannot be contacted or traced. In such instances the drawers' bank also will not give the address of its client without his consent.

Suitable amendment have to be made in the law to rectify this problem, where the bank should provide the clients address when adequate proof has been submitted for the claim on the cheque returned.

(The writer is Council member of the National Chamber of Commerce of Sri Lanka)