Cheques have been a staple in the world of financial transactions for centuries, offering a convenient way to make payments and settle debts. However, there are instances when banks dishonour cheques, causing distress and confusion for both parties involved. A dishonoured cheque, also known as a bounced or returned cheque, occurs when the bank refuses to pay the specified amount due to certain reasons.
In this article, we delve into the mystery of why banks dishonour cheques and explore the common causes behind check bounce. Moreover, we provide valuable insights and preventive measures to ensure a smooth and hassle-free banking experience.
What is a dishonoured cheque, and why does it happen?
A dishonoured cheque is a cheque that the bank refuses to honor and return the specified amount to the payee’s account. This happens when the payer’s account does not have sufficient funds to cover the cheque amount or when there are other issues that render the cheque invalid.
How does a dishonoured cheque affect the payee and the payer?
For the payee, a dishonoured cheque can result in delayed payments, additional charges, and inconvenience. On the other hand, the payer may face penalties from their bank and damage to their credit score, affecting their financial credibility.
20 Reasons Why Bank Dishonour Cheque
1. Insufficient Funds
One of the most common reasons for a dishonoured cheque is insufficient funds in the issuer’s account. When the cheque is presented for payment, the bank will verify if there are enough funds to cover the amount. If there are insufficient funds, the cheque will be dishonoured.
Solution: Ensure that your account has enough funds to cover the cheque amount before issuing a cheque. Keep track of your account balance and avoid writing cheques for amounts that exceed the available balance.
2. Stale Dated Cheque
A stale-dated cheque is one that is presented for payment after a certain period, usually six months from the date of issuance. Banks may dishonour stale-dated cheques as a precautionary measure against potential fraud or due to the risk of the cheque being invalid.
Solution: Ensure that the cheque is cashed or deposited within the valid timeframe to avoid it becoming stale-dated. It’s good practice to write “Void after six months” on the cheque to remind the recipient of the validity period.
3. Post-Dated Cheque
A post-dated cheque is one that bears a future date instead of the current date. While post-dated cheques are commonly used for future payments, banks may choose to dishonour them if presented before the specified date.
Solution: Communicate with the recipient about the post-dated nature of the cheque and request them to present it on the agreed-upon date. Additionally, inform your bank of the post-dated cheque to prevent any accidental dishonouring.
4. Signature Discrepancy
A mismatched or missing signature is a frequent cause of cheque dishonouring. Banks verify the signature on the cheque against the specimen signature available on record. If there is a discrepancy, the cheque will be rejected.
Solution: Ensure that your signature on the cheque matches the signature provided to the bank. If you have recently updated your signature, inform the bank to avoid any confusion.
5. Overwriting and Alterations
Making changes to the cheque, such as overwriting or alterations, can lead to its dishonouring. Banks consider such changes as potential signs of tampering or fraud.
Solution: Avoid making any alterations or overwriting on cheques. If a mistake occurs, cancel the cheque and issue a new one.
6. Missing or Incomplete Information
Missing or incomplete information on the cheque, such as the date, amount in words and figures, or the recipient’s name, can result in cheque rejection.
Solution: Double-check all the necessary details before issuing the cheque. Ensure that the amount is written both in words and figures to avoid any ambiguity.
7. Account Closed
If the issuer’s bank account is closed or inactive, the cheque will be dishonoured.
Solution: Keep your bank account active and ensure it remains open as long as there are any outstanding cheques issued.
8. Payment Stopped
An issuer may choose to stop payment on a cheque for various reasons, such as a lost cheque or a dispute with the recipient.
Solution: Communicate with the recipient if you need to stop payment on a cheque. Additionally, inform your bank of the stopped payment to prevent any unintended honouring.
9. Frozen Account
In cases where the issuer’s bank account is frozen, cheques issued from that account may be dishonoured.
Solution: Resolve any issues related to the frozen account before issuing cheques.
10. Refer to Drawer
The “Refer to Drawer” reason may be cited by the bank when there are doubts about the genuineness of the cheque or when the issuer’s account is under scrutiny.
Solution: Contact your bank to understand the reason for the referral and provide any necessary clarifications.
11. Amount Discrepancy
A discrepancy between the amount in words and figures on the cheque can lead to dishonouring.
Solution: Ensure that the amount written in words and figures matches exactly.
12. Alteration on Payee Name
Any alteration on the payee’s name may raise suspicion and result in cheque dishonouring.
Solution: Avoid altering the payee’s name once it’s written on the cheque.
13l Signature on the Back
If the back of the cheque is not signed or endorsed, it may be dishonoured.
Solution: Sign the back of the cheque before presenting it for deposit.
14. Illegible Writing
If the writing on the cheque is illegible, the cheque may be dishonoured.
Solution: Ensure legible and clear writing when issuing a cheque.
15. Payment to Bearer
Cheques marked “Payment to Bearer” are considered riskier and may be rejected by banks.
Solution: Avoid using “Payment to Bearer” on cheques to ensure acceptance.
16. Non-CTS Compliant Cheque
Non-CTS (Cheque Truncation System) compliant cheques may be rejected due to outdated security features.
Solution: Use CTS-compliant cheques to avoid rejection.
17. Crossed Cheque Misinterpretation
Misinterpreting a crossed cheque as an open cheque may lead to dishonouring.
Solution: Understand the different types of crossed cheques and use them correctly.
18. Duplicate Cheque Presentation
Presenting a duplicate cheque for payment can result in dishonouring.
Solution: Keep track of your cheque issuances and avoid presenting duplicates.
19. Technical Errors
Technical glitches in the banking system may cause cheque dishonouring, although rare.
Solution: Contact your bank for assistance if technical errors occur.
20. Insufficient Information on Deposit Slip
If the information on the deposit slip accompanying the cheque is incomplete or inaccurate, the cheque may be rejected.
Solution: Double-check the information provided on the deposit slip before submitting the cheque.
Preventive Measures to Avoid Check Bounce
Preventing cheque bounce is crucial to maintaining a smooth financial transaction experience and avoiding unnecessary stress and complications. By implementing the following preventive measures, you can significantly reduce the chances of your cheque being dishonoured:
Maintain Sufficient Funds
One of the most effective ways to prevent cheque dishonour is to ensure that your bank account has enough funds to cover the cheque amount. Regularly monitor your account balance and be cautious when issuing cheques if your balance is low. Keep in mind that banks may charge additional fees for dishonoured cheques due to insufficient funds, and these charges can quickly add up if not addressed promptly.
Verify Signature
Before issuing a cheque, it’s essential to verify that your signature matches the specimen signature provided to the bank. Inconsistent signatures can raise suspicion, leading the bank to dishonour the cheque. Practice consistency in your signature and inform your bank if you decide to update your signature to avoid any discrepancies.
Issue Valid Dated Cheques
Always issue cheques with the current date to ensure their validity. Banks generally honour cheques that are within the validity period, typically six months from the date of issue. Avoid post-dating cheques, as presenting them before the specified date can lead to dishonour. Additionally, make it a practice to cancel any stale cheques and issue fresh ones to avoid inadvertent dishonour.
Avoid Overwriting or Alterations
When writing a cheque, be cautious and avoid making any alterations or overwriting on the cheque. Even minor changes can raise concerns and lead to cheque dishonour. If you make a mistake while writing a cheque, it’s best to cancel it and issue a new one with the correct information.
Keep Track of Account Activity
Regularly monitoring your account activity is essential to stay informed about your account’s status. Keep track of deposits, withdrawals, and debits to ensure that you have a clear picture of your available funds. By staying vigilant, you can avoid issuing cheques when your account balance is low, reducing the risk of cheque dishonour due to insufficient funds.
Communicate with Your Bank
If you anticipate any issues with your account or foresee challenges in honouring a particular cheque, consider communicating with your bank proactively. Some banks may offer overdraft facilities or other options to cover cheque amounts temporarily. Discussing your concerns with your bank can help you explore possible solutions and prevent dishonoured cheques.
Record and Document Cheque Issuance
Keeping proper records of cheque issuance can help you stay organized and avoid any confusion or oversight. Maintain a cheque register or digital record of the cheques you issue, including the payee’s name, cheque number, date, and amount. This practice will help you track cheque transactions and ensure that you have adequate funds to cover each cheque.
Educate Payees on Prompt Deposits
If you are issuing a cheque to a payee, encourage them to deposit the cheque promptly to minimize the risk of cheque dishonour. Remind them of the cheque’s validity period and advise them to deposit it within a reasonable time frame to avoid any complications.
Set Up Overdraft Protection
Some banks offer overdraft protection services, which allow you to link your bank account to a backup funding source, such as a savings account or line of credit. If your main account lacks sufficient funds to cover a cheque, the bank will automatically draw from the linked backup source to prevent cheque dishonour.
Review Bank Statements Regularly
Frequent review of your bank statements is essential to detect any potential issues promptly. Verify that all cheque transactions are accurately recorded and that no discrepancies exist. If you notice any irregularities or unauthorised transactions, report them to your bank immediately.
Preventive measures play a significant role in ensuring a seamless and hassle-free banking experience. By following these best practices and staying proactive, you can significantly reduce the risk of cheque bounce and maintain financial stability and credibility. Always be mindful of the validity of your cheques, maintain sufficient funds, verify your signature consistency, and communicate openly with your bank to address any concerns. With a well-informed approach, you can safeguard your cheque transactions and avoid the frustration of dishonoured cheques.
Addressing Dishonoured Cheques
What to do if your cheque is dishonoured?
If your cheque is dishonoured, take the following steps:
- Inform the Payee: Inform the payee about the dishonoured cheque and explain the situation.
- Rectify the Issue: Identify the reason for the cheque dishonour and take the necessary steps to rectify the issue.
- Reissue the Cheque: If the dishonour was due to insufficient funds, ensure that your account has enough money and reissue a new cheque to the payee.
- Communicate with the Payee: Maintain open communication with the payee to resolve any concerns or inconveniences caused by the dishonoured cheque.
Conclusion
Bank dishonoured cheques can be frustrating and inconvenient, causing delays and financial setbacks. By understanding the various reasons behind cheque rejections and implementing the recommended solutions, you can minimize the chances of encountering such issues. Always ensure that your cheques are filled out accurately, your signature matches the bank’s records, and there are sufficient funds in your account to cover the cheque amount. Additionally, stay informed about the latest banking procedures and use CTS-compliant cheques to ensure smooth transactions.
Remember, a well-prepared cheque not only saves time but also ensures a hassle-free banking experience for both you and the recipient. Happy cheque writing!
