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This section is devoted to banking procedures and use of cheques. We deal with various
aspects of cheques in the first three topics: what are cheques, how are these cleared, what
are the various types of crossings etc. These topics also provide more information and tips
on using cheques safely.
The fourth topic gives some information on the risk associated with banks -- not all banks are
safe. Also you can lose your money lying in the bank if you dont take good care of it.
Finally, we explain how a bank reconciliation is done. This is often not very relevant if you have
very few transactions or all your transactions are in cash. In other cases, it can sometimes
help prevent frauds and wrong debits by the banks.
About Cheques
137
143
Blank Cheques
146
Safer Banking
148
Bank Reconciliation
150
135
136
About Cheques1
Cheques were first used in the 1600's. At that time, people used coins as money. Paper
currency had not been introduced. Cheques were therefore very convenient and safe.
When paper currency was introduced, most people did not trust it. Laws were passed to force
people to accept paper notes instead of coins. Today, people have forgotten what real money
was like.
Times keep changing. There are now laws 2 which will punish you for using currency notes,
instead of cheques.
What are cheques? How does the banking systems treat cheques?
What is a cheque
When you keep money in a bank, you can draw and spend it yourself. But, suppose you have
to pay someone (called the payee). You can go to the bank, draw the money and give it to them.
You will have to spend time and money to do this.
Banks give you an option. You can order them to pay someone, on your behalf. You can do
this by giving a cheque to the payee. A cheque is like an order to the bank. When the payee
shows it to your bank, the bank will pay the money. This is called honoring a cheque.
Depositing a Cheque
You have received a cheque from the donor. The donor has a bank account in Citibank,
Chowringee in Kolkata. You live in 15 kms. away at Behala. What do you do now? Go to
Chowringee and collect the money?
Not really. Your account is with SBI, Behala. You can request your bank to collect the money
on your behalf. You do this by simply depositing the cheque in your account with SBI.
Clearing
What does SBI do now? They must collect the money from Citibank, before they can pay you.
How will they do this? Remember that SBI would be receiving hundreds of cheques each day
from customers like you. These may be payable by dozens of different banks.
In good old days, bankers used to meet in a pub in the evening. Each banker would have some
cheques for collection from others. Similarly, other bankers would have claims on them. The
bankers used to make lists and settle the cheques by paying the difference.
This is how clearing houses work even today. Except that these are more sophisticated and
have cheque processing machines. In big metros, these machines process lacs of cheques
each day.
In most cities, the clearing houses are located in one of the SBI branches. Both the banks (your
bank and the donor's bank) should be a member of the clearing house.
Clearing time
Local clearing takes two working days. Normally, the bank will send all cheques received till 11
a.m. in same day's clearing. Cheques received after that will go next day. So if you deposit a
local cheque on Monday at 10:30 a.m., you can draw the money by around 12 noon on
Wednesday.
1
2
137
You
Donor
SBI Behala
Clearing
house
Citi bank,
Chowringee
Manual clearing
What if the donor's bank is not a member of the local clearing house? Your bank will have to
send the cheque for manual clearing. The cheque is sent by registered post or courier.
This means a delay, normally 10-14 days. Most outstation cheques have to be sent for manual
clearing.
Collection Charges
Banks don't like manual clearing. It involves a lot of paperwork and some expense. So they may
levy collection charges on you. These sometimes depend on the amount of the cheque.
In some cases, banks waive collection charges. This may be because you give them a lot of
business or they appreciate your work. This waiver is reviewed by banks' auditors. Therefore,
the banks do not do this lightly.
Types of cheques
Self cheque
When you want to withdraw cash, you
make out a cheque to 'Self'. This is
known as a self cheque. This means
that the cash will be paid to the
account-holder.
In practice, the bank will give cash to
the person who brings the cheque.
The words 'or bearer' should not be
Actually, the bank records a memorandum credit in your account on the day you deposit the cheques. By
a special magic, the bank ensures that you are not able to see it or withdraw the money for another two
days!
138
Bearer cheque
signed
Secretary
signed
Treasurer
What if you cut out the words 'or bearer' as shown below?
The cheque can now be paid to Mr.
T.K. Biswas only. For this, he may
have to go personally. Or he can
deposit the cheque in his own bank
account. If he goes personally, the
bank will normally ask for some proof
of identity (driving license, identity
card, etc.).
Crossed cheque
A cheque with two small parallel lines
is a crossed cheque. You can not
encash such a cheque across the
counter. It will only be credited to a
bank account. Such a cheque has to
go through clearing.
There are two types of simple crossing:
Cheques with above type of crossing can be
endorsed (see 'Endorsing a cheque'). The only
exception in practice is cheques which are crossed
as 'Account Payee'.
However, in some special cases, banks may honor
endorsement of an account-payee cheque also4. To prevent this, the cheque must be crossed
as 'Account Payee only, Not Negotiable'.
Endorsing a cheque
Suppose you receive a crossed personal cheque. You can deposit this cheque into your bank
and receive payment in 2-3 days. What if you needed the money urgently?
If the cheque is simply crossed, you can endorse the cheque to a friend. The friend can give
you cash against the cheque. He / she will then deposit the cheque into their account.
139
The Payee
A cheque will mostly be paid to the person named as payee. Therefore, try to be as clear as
possible. Making out a cheque in the name of 'Mr. Singh' is not a good idea. Say 'Mr. Satbir
Singh, Patiala' instead.
Suppose, you want to make a payment to 'Godrej Soaps Limited.' You should then write out
the full name. Just saying 'Godrej' is not enough.
When it comes to NGOs, names can be quite a problem. There are at least five organizations
named 'Disha', that we know of. Similarly, there must be many organisations named Parivartan,
Prayas, Sahyog, Rural Development Centre.
If you are uncomfortable about this, there are at least two ways to tackle the problem:
Firstly, always write the full legal name of the organization, in addition to the acronym. For
example, you should write 'CRY- Child Relief & You', instead of just CRY.
Second, add the name of the city where the NGO is located.
However, let us suppose that the amount involved is large and you are sending the cheque by
mail5. What can you do to add more safety?
Ask the NGO for their bank account number and name of the bank. Then make out the cheque
as follows:
Also cross the cheque as 'A/c Payee
only - Not Negotiable'.
Pen or Pencil
Unbelievable but true! There are people
with cheque books who treat both pen
and pencil as equals. So once in a
while, these artistic souls will make
out a cheque in pencil. Surprisingly, by a special providence, their bank balance continues to
grow!
140
Amount in words
Why do you have to write the amount in figures (numerals) and in words? To make it difficult
for people to alter the amount. Still this is not a foolproof system. For example, a cheque for
Rupees Six Thousand can be changed6 to Rupees Sixty Thousand, by inserting 'ty'. Therefore,
write the amount in words clearly. Do not leave spaces. Try to write in an even handwriting.
In most cases, if the amount in words and figures do not match, then the bank will return the
cheque. However, if the bank does not suspect an alteration, then the bank can pay the amount
in words.
Living Dangerously
When you put a future date on the cheque, it is called a post-dated cheque. Post dated cheques
can land you in trouble. How? For example, Satnam issues a cheque for Rs.15,000 today. The
date on the cheque is for the next month. Three weeks later Satnam goes to the bank and finds
that there is a lot of money there. He withdraws some and spends it. One week later when the
post-dated cheque comes for clearing, there may not be money to pay it. It will then 'bounce'7.
Bounced Cheques
If Satnam's cheque bounces, the payee will obviously get in touch with him. He should then pay
the amount within 15 days. If he doesn't, then he could be arrested8.
Kiting
When a cheque is issued, it takes time for it to appear in
the bank. This may be two days to a fortnight. For example,
electricity bills, telephone bills often do not show up in the
account for two weeks.
People sometimes try to take advantage of this. They issue
a cheque, hoping to deposit enough money to cover it.
Sometimes it works, sometimes it does not. This is known
as kiting and can cause severe embarrassment to say the
least.
Float
However, suppose there is already money in the bank. The cheques will not show up for some
time. When you are issuing lots of cheques all the time, mostly there will be some money lying
'idle'.
This money is sometimes called a float. It can run into lacs, depending on your transactions.
Large companies find clever ways to use the float. Others should not try it as it can cause loss
of goodwill or even criminal proceedings.
Stop Payment
Sometimes you may lose a cheque. Or you may find that the supplier has cheated you. If the
cheque is not already paid, you can ask the bank to stop payment. For doing this, you should
issue the instructions in writing. Take an acknowledgement. Some foreign banks also accept
the instructions on phone. Most will first verify that the cheque has not yet been paid. If it has
not been paid, then they will accept your instructions. The stop payment remains effective for
six months.
Who loses the money if this happens? You. See Safer Banking for more on this and forgeries.
You should the words returned unpaid in polite company.
8
Section 138 of Negotiable Instruments Act, 1881
7
141
If the cheque is paid due to an oversight by the bank, the bank will bear the loss.
For issuing the instructions, you must give the correct cheque number,
payee's name, amount and date. The instructions can be issued by
anyone who is a signatory. It is not necessary that both signatories
(in case of joint operation) should sign. You can even give the
instructions by telegram/ telephone and follow it up with a written
letter.
Upto what time can you issue stop payment instructions for a bearer
cheque? Till the time the cash is actually passed across the counter.
If the cheque comes through clearing, your bank can accept 'stoppayment' before the expiry of time for returning unpaid cheques as per
clearing house rules.
142
Some Tips
Cuttings & Changes
l
Put a carbon (black side up) under the cheque when making it. This practice is standard in
banks and government offices (see The Confused Bankers).
Registered Post
l
Special Stickers
l
143
o.
& C
The plain crossing, without any words means that cheque can be
paid only through another banker.
This crossing is similar to the one above. The words & Co. do
not add any protection.
If you add the words Not Negotiable, the cheque can not be
endorsed. If the bank credits this cheque to a different account,
you can recover the money from the bank.
ee
Pay
c
/
A
ee
Pay
A/c otiable
Neg
Not
144
AccountAid Kit # 12
Crossing the
Cheque
Cross the
cheque here, at
top left hand.
The crossing
should cover
some of the
shaded portion
also
Filling Cheques
Bearer Cheque
If the cheque is to be deposited in a bank,
these words should be crossed out.
If you want to withdraw cash from the
bank, dont cross out these words.
If a bearer cheque is made out to self, put
the societys stamp on reverse and sign
again.
Safety Pattern
This is how the pattern on your
cheque looks when magnified. It
helps prevent alterations. Any
erasure or use of chemicals will
leave a mark on the pattern.
22 August
19 9 6
---------------X---------------------------------------X---------------------X-Bank of Magadh
t ; k feJk
S ec retary
Your bank
account number
appears here.
Cheque number
When depositing a
cheque, you have to write
the cheque number on
deposit slip.
The funny markings on
both ends of this number
should be ignored.
!
!
%%$&%%
"
$"'(&#
12 - 2
T.R.Singhi
T re as urer
!
%
Blank Cheques10
Signing blank cheques is a very common practice amongst NGOs. Mostly this is done due to
practical reasons, such as a long
outstation trip or one of the signatories
Shankars Self-Help Program
living in another town.
Many people feel uncomfortable in
signing blank cheques. But this practice
has continued due to lack of a practical
alternative.
Here we discuss one of the ways by
which the risks of signing blank cheques
can be minimized.
A Safer Alternative
Most of the payments are very small, less than
Rs.5,000 each. Emergency cash requirements
are also small. The Society can therefore adopt
a system where cheques below Rs.2,000 (or
Rs.5,000) can be signed by either of the trustees.
Cheques for higher amounts will have to be
signed by both the trustees as earlier.
This is a system which is very common with
large companies where hundreds of payments
are made every day. It makes work simpler while
maintaining a reasonable degree of security.
10
146
Faithfully Yours...
West Bengal, 1989-1996: Mr. Chatterjee
had a lot of faith in his friends and
colleagues. Thats why he would sign as
treasurer of the society whenever they sent
him some cheques. Later they started
sending him blank cheques. The
friendship and the faith continued.
Therefore, Mr. Chatterjee got a shock
when he received court summons in 1989.
He was accused of having siphoned off
Rs.12 lakhs over a period of 5 years.
Mr. Chatterjee had a tough time proving
to the court that he had signed blank
cheques in absolute faith. His name was
cleared only after seven years of court
appearances.
Real story; All names changed
Amending Bylaws
In some cases, your bylaws may not permit this kind of bank resolution. Then you will have
to amend these. Therefore, before passing the bank resolution, check the Memorandum and
Bylaws of Association. There you may find a clause which says that such and such officebearers will be authorised to sign the cheques.
If you find such a clause, then you can not follow the above procedure right away. You will have
to first call a General Meeting and change your bylaws to say the following:
...bank accounts in the name of the Society may be operated by such persons as are
authorised by a resolution of the Board/ Executive Committee, which should have been passed
at a meeting attended by not less than 75% of the members of the Board/ Executive Committee...
After passing this resolution11, you will have to register the change with the Registrar of Societies
in your state. The procedure for this varies from state to state.
The bank will ask for a copy of the amended bylaws before registering your new resolution.
11
147
Safer Banking12
Frauds
Frauds in banks are more common than you may think. In the year 1995, over 22,000 major frauds
were reported. A fraud normally involves bank officials. It may not affect your account directly.
Its effect on you will depend on its size. Frauds like the Share Market Scam are quite capable
of wiping out entire banking networks. Even a small fraud may affect the confidence of the
depositors. They may queue up at the bank and demand their money. This is called a run on
the bank. What follows depends mainly on mass psychology and to some extent on the banks
liquidity and intervention of the RBI.
Alterations
Suppose the bank receives a cheque for
payment. You had originally made out the
cheque for Rs.6000 only. Someone
changes the word six to sixty. He also
adds a zero to 6,000, making it 60,000.
This alteration is done very cleverly. It can
not be seen unless one examines it very
carefully. The bank pays Rs.60,000 to this
person. Can you recover the difference from
the bank? No, you can not!
Section 89 of the Negotiable Instrument
Act protects the banker in such a case.
Only exception is where you can prove
that the bank was careless on other counts
- for example if the person who encashed
the cheque looked like a beggar. Or that
one of the bank employees had made the
alteration, as in the case of Trilok Nath
Sood (See box The Benzene Miracle).
12
13
148
Forgeries
No protection is available to the bank in case
someone has forged your signatures (See The
Hard-working Postmen). This is so because
a forged cheque is treated as never having
been issued. It does not matter how good the
forgery was. It is also immaterial that the forger
got hold of the cheque due to your
carelessness, such as from your unlocked
drawer.
What to do?
Even though the banker may be liable for the
loss in case of forgery, it is better to try and
prevent it. Try these tricks:
l
Tear out the cheque from the cheque book before signing it. This way you dont leave a
traceable impression on the cheque below.
Put a carbon (black side up) under the cheque when making it out. This will leave an impression
on the reverse of the cheque, making it difficult to alter.
You can also get special transparent stickers from the market. These cost about ten paise
each. You put them over the amount and other sensitive places after the cheque has been
made out. You can also use cello-tape instead if you are not using an MICR cheque book.
Use of cello-tape should be avoided except where manual clearing is done.
Get a Not Negotiable, A/c Payee stamp made. Use it whenever possible.
You can also mark a cheque with something like Under Rupees Two thousand only.
If sending cheques by post, use registered post (see The Hard-working Postmen).
149
Bank Reconciliation14
A Bank Reconciliation is somewhat like a routine medical check-up. If you do it regularly, you
will never feel the need for it. If you dont do it regularly, one day you will wish you had gone
to the doctor every month.
_____________________________
_____________________________
Difference
Compare the two balances. Chances are that the two balances will be different 16.
Why a difference?
A difference may be simply due to some cheque which has not reached your bank for payment.
Or it may be due to normal clearing delay for some cheque which you deposited.
Sometimes the problem can be more serious. The difference may be due to a dishonoured
cheque. Or the bank may not have credited some deposit to your account. In either case, the
earlier you know, the better it is. You can then contact the bank and have the problem corrected.
Apart from this, small charges like collection charges, bank charges, etc. are levied on your
account from time to time. Normally the bank does not send you any intimation. Also the bank
credits interest to your account twice a year. You have to pass entries in your books for these
transactions.
Sometime the bank makes totaling errors. Also someone may alter a cheque and draw a large
sum of money from your account.
When a difference appears between your ledger balance and the pass book, you have to prepare
a Bank Reconciliation to understand the reasons.
14
150
31.7.98.
q Compare the opening balance (1.4.98) of the Pass book and the Ledger.
q If there is a difference in the opening balances, locate the previous reconciliation17. Your
dishonoured.
q This will give you the corrected ledger balance20.
These will appear as unticked items on the Credit side of the ledger.
q The resulting balance should be the same as the corrected Ledger balance.
If a difference remains, scan the pass book and ledger for unticked items. Check the totaling
and the manner in which you have added or deducted items. If the difference still remains, you
will have to tick the items again. Use a different color pen this time. And be more careful!
17
The previous reconciliation shows the unticked items of the previous ledger. Compare these with the
pass book and tick off all the items that match. Rest of the items will appear again in the new reconciliation.
18
In case of cash book, see entries on Receipts side
19
In case of cash book, see entries on Payments side.
20
Later on, you should pass entries for these in your ledger or cash book.
151
Follow-up Steps
After reconciling the bank, you must look into
the items that appear on the list. Pass entries in
the ledger for bank charges, interest etc. Pass
entry for dishonored cheque also. Depending on
reasons for dishonor, talk to the concerned party
or your bank.
Figure 1: Bank Pass Book
Date
Particulars
Withdrawals
Deposits
B/F
12/4/95
29/4
4/5
12/5
15/5
20/5
20/5
25/6
1/7/95
4/7/95
30/7
ch. 470181
To cash: 470182
Clg. 470183
By Deposit
Ch. ret.
By clg.
Coll. fee
To cash
S. Das - 470186
Cash
Cash
Balance Initial
66,714 sn
6,000
1,000
4,500
23,150
23,150
55,214 ds
23,150
50
2,000
1,450
5,000
5,000
64,864 s.n
64,864
Total c/o
Dr.
66,914
Dr.
66,864
Cr.
64,864
-50
10,000
-8,000
Cr.
66,864
This cheque
Folio
has not been
Opening Balance
collected yet.
By Ch. 470181: Mr. S. Das
When collected it
By cash: 470182
will increase the
By Ch 470183
balance.
To Grant received
Particulars
Debit
Credit
66,714
6,000
1,000
4,500
23,150
2,000
1,450
5,000
8,000
Dr/ Cr
Balance
Dr.
66,714
Dr.
66,914
10,000
5,000
152