While writing a cheque may seem simple, multiple factors can lead to cheque bouncing or dishonouring. Learning these reasons will help you avoid financial complications. A bounced cheque is when the bank refuses to pass it, informing both the issuer and the recipient. This refusal results in penalties and even leads to legal action in some cases.
With cheques being widely used for financial transactions, it's essential to be aware of the key reasons for dishonour of cheque. Below are six main factors that lead to cheque bounce demanding your attention and awareness.
What is cheque bounce?
A bounced check, often referred to as a rubber check, occurs due to various reasons. One of the most common instances is when the account holder doesn't have enough funds to cover the check. Rather than honouring it, the bank returns or "bounces" the check, charging the check writer a penalty fee. Passing bad checks is more than just a financial problem, it can lead to legal consequences. The severity of the crime varies, ranging from a penalty fee to legal action.
Must Read: What Is Cheque & Different Types Of Cheque
6 reasons why a cheque bounces or dishonoured
Several reasons can cause a cheque to bounce, below are six major cheque return reasons with meanings:
1. Insufficient funds
One of the most prevalent reasons for cheque bounce is insufficient funds in the issuer's account. If the account linked to the cheque lacks the necessary funds to cover the written amount, the bank will be unable to process the transaction, leading to dishonour. This situation triggers a nominal penalty for both the issuer and the recipient.
The issuer has the choice to reissue the cheque or resolve the matter with the recipient. Alternatively, the recipient can opt for legal action against the issuer for non-payment and cheque dishonour.
To prevent such complications, it's crucial always to ensure sufficient balance before issuing a cheque. Being mindful of your account balance can help you avoid the hassles associated with insufficient funds.
2. Date issues on cheque
The date on a cheque is very important, and any discrepancy can lead to bouncing issues. If the date is disfigured, contains errors, or is illegible, the cheque may bounce. Another problem arises when the date has expired. Cheques are valid for three months from the specified date.
For instance, if the date reads 12/02/2024, it is valid until 11/05/2024. Depositing a cheque after its expiration will result in dishonour by the bank.
Post Dated Cheques (PDCs) present another challenge when deposited prematurely. PDCs are issued for a future date, but if deposited before the due date, the bank will dishonour the cheque. For instance, if a cheque is issued on 12th February 2023 for 14th November 2023, depositing it before the specified date will lead to bouncing.
Understanding and ensuring the accuracy of cheque dates is crucial to preventing these common issues and maintaining financial transactions smoothly.
3. Mismatched signature
Another prevalent cause for bounced cheques is a signature mismatch. If your signature on the cheque doesn't match the bank's records, it's likely to be dishonoured. An accurate and consistent signature is important to successfully clear your cheque. Even inadvertently signing on the MICR Band of the cheque can result in bouncing. Always ensure that your signature matches the bank's records for smooth and trouble-free transactions.
4. Inconsistent amount
One of the critical aspects contributing to cheque bounce is any inconsistency between the amount mentioned in words and numbers. Banks meticulously verify this information, and even a slight difference can lead to dishonour.
If the written amount in words states 'Fifteen Thousand Two Hundred Ninety Nine Only,' but the numerical figure is 16,000/-, your cheque faces rejection. Similarly, if the amount in words is '50 Thousand' while the numerical figure is 50,000/-, or if you interchange numbers with words, your cheque may still bounce. You must strictly adhere to consistency in both the words and figures sections to avoid any differences and avoid bounced cheque.
5. Damaged cheque
When a cheque is damaged, torn, or disfigured, it poses a significant risk of bouncing. Whether torn, disfigured, or stained, a cheque in poor condition can hinder clear details and compromise its integrity. Preserving cheques carefully is important to prevent this issue and ensure smooth transactions.
A damaged cheque not only hampers the readability of essential information but also raises concerns for banks. It results in the cheque being declined. Therefore, you should handle and store cheques with care to maintain their integrity and facilitate seamless financial transactions.
Must Read: Account Payee Cheque - Meaning And How to Issue
6. Overwriting
Any form of overwriting, corrections, or alterations is strictly prohibited. If a cheque bears such marks, it will likely be dishonoured by the bank. It's advisable to issue a fresh cheque if any errors occur during the writing process. When receiving a cheque with such markings, requesting a new, clean cheque is the best course of action.
The banking system is particular about the integrity of cheques. Even a minor alteration can make a cheque considered suspicious or possibly forged. In such cases, the bank reserves the right to dishonour the cheque, contributing to the list of reasons for a bounced cheque. Therefore, it's important to adhere to the proper guidelines for writing cheques.
What happens when a cheque bounces?
When a cheque bounces, it triggers various consequences. These affect both the issuer and the recipient. If the cheque is dishonoured due to insufficient funds, it's considered a criminal offence under the Negotiable Instruments Act of 1881. The issuer may face prosecution and potential jail time for up to two years.
Additionally, banks impose penalties for dishonoured cheques, with charges varying between institutions and depending on the amount involved. These penalties discourage issuing cheques without adequate funds.
Conclusion
A cheque is a commitment to payment used by several businesses and individuals. However, when a cheque bounces or is dishonoured, it escalates into a serious matter. A bounced cheque can seriously affect your accounts, taxes, and financial standing. It is important to issue cheques responsibly, considering the potential consequences.
Understanding the reasons behind a dishonoured cheque will help you take proactive measures to mitigate the risks. Writing cheques accurately and adhering to the necessary protocols ensures smoother transactions and financial stability.
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