Dishonoured or Bounced Cheques: Meaning, Reasons, Avoid Charges & Consequences
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  • Business
  • Corporate
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  • Personal
  • Business
  • Corporate
  • Private Banking
  • Privy League
  • NRI Services
  • Investors

Cheques have always been a reliable tool for businesses for making and receiving payments A cheque is a document that is used to transfer money from a payer's bank account to the payee’s account.

Cheques provide authenticity, formality and an easy-to-use method. Cheques provide systematic ways to pay and receive payments. It is a secure way to make payments. It is a flexible tool and builds trust among the parties concerned.

Yet, with every cheque usage comes to the risk of cheque bounce or dishonour. There are many reasons associated with the dishonour of cheques. The primary reason involves insufficient funds in the drawer’s bank account. This risk comes with penalties, fines & imprisonment (at times).

What is a Dishonoured Cheque (Bounced cheque)?

A dishonoured or bounced cheque is a situation where the cheque is presented for payment by the payer and is unapproved by the banks. This situation occurs when the payer's account has insufficient funds to pay the payee.

What are the Reasons for Cheque Bounce

From unclear instructions on the cheque to insufficient funds in the payer’s account, the bank can decline a cheque for many reasons. These reasons include:

  • A cheque may bounce due to insufficient funds in the payer's bank account.
  • If the signature on the cheque does not match the registered signature, it will not be accepted.
  • Any correction, overwriting or scribbling on a cheque can lead to a cheque bounce.
  • The banks will not accept a cheque if it is damaged or disfigured.

To prevent cheque bounces and guarantee a seamless financial transaction process, ensure not to cause any mistakes while issuing a cheque.

What are the Consequences of Bounce Cheque?

A cheque bounce can lead to various financial and legal consequences for the payer. Some consequences are listed below:

  • Legal action: Under the Negotiable Instruments Act of 1881, writing a cheque without sufficient funds in the payer's account is a criminal offence. Under Section 138 of the Act, it carries a maximum sentence of two years in jail, a monetary fine, or both. Section 138 of the Negotiable Instruments Act permits the payee to bring a criminal complaint against the payer if, within 30 days following the notification, the issuer fails to make another payment.
  • Financial consequences: If a cheque bounces, the payee or holder may charge a penalty. This penalty compensates for additional work required to manage an unsuccessful transaction. These charges can place a financial burden on the payer.
  • Loss of reputation: Dishonoured or bounced cheques can hurt the payer’s personal and professional reputation. It impacts the credibility and trust among the business dealers.

How to Avoid Cheque Bounce Charges

To avoid cheque bounce charges and consequences, you must take preventive measures to protect your business from adverse impacts. Some measures to avoid these charges are:

  • Maintain sufficient funds: Maintain adequate funds in your account while drawing a cheque to avoid inconvenience. Keep a regular track of your account to dismiss low balances.
  • Avoid mistakes: Make a special request with the bank if you're unsure about the signature you have registered with the bank to avoid any mistakes. Make sure the numerical amount and alphabetical amount entered match.
  • Enter the correct information: When drawing a cheque, ensure you enter the date precisely and keep a margin of at least 3-4 days to avoid any expiration of the cheque and bouncing of the cheque.
  • Use digital payment modes: Consider using digital techniques to transfer money rather than depending on conventional methods like writing checks. It involves transferring money straight to other accounts via mobile banking apps or internet banking systems.

Tips to Keep in Mind When Issuing a Cheque

It is wise to use caution and follow best practices when issuing checks to prevent cheque bounces. When issuing a cheque, bear the following in mind:

  • Ensure sufficient funds: At every step of the way, maintaining adequate funds is the key to avoiding inconvenience and avoiding bouncing of the cheques.
  • Use the correct method: Always issue the cheque by using the proper approach. The best practice is to draw two parallel lines across the top-left corner of the cheque. It ensures the legality and security of the cheque.
  • Maintain a record of issued cheques: Keeping a record of all the cheques can prove to be advantageous. It will ensure that you have a record. You can consider the records and take the necessary actions.
  • Double-check the details: Double-check all the details before sending the cheque to the bank. Even a slight mistake can cause the cheque to bounce - leading to further problems.
  • Inform about the delays: Inform the payee about the delay and give them a timeframe within which the cheque will be issued.

Go Digital, Avoid Cheque Dishonour Charges

With the world going digital, it is only valid for you to use digital methods and avoid cheque dishonour charges. Numerous platforms are available to make online financial transactions like Net banking and mobile banking apps. Here are the reasons why you should consider transitioning to digital methods.

  • 24/7 access: You can track the transactions and the bank activities all the time, which helps you to maintain sufficient funds and avoid penalty charges.
  • Automated payments: You can set up automatic payment deductions for paying bills. This way, you will be able to plan your financial activities accordingly.
  • Reduced processing time: Online transactions save time compared to traditional methods. Some transactions are processed immediately, while some take 24 hours at max.
  • Flexible payment modes: With flexibility in payments using credit cards, debit cards, UPI, NEFTs, RTGS You can choose which methods suit the best for you and your business.

Although cheques are still a common way to transfer money, it is critical to understand the risks associated with cheque bounce. Lower the chance of a cheque bounce by using digital banking. It is also advisable to understand the rules and laws about cheques with your banks and to take all required safety measures to stay out of trouble.

Read Also : Wealth Creation: What Is It and How to Build It


FAQs About Dishonour of Cheque (Cheque Bounce)

What causes a check to bounce?

A cheque bounce is caused due to various factors like insufficient funds, mismatched signatures, expired cheques, wrong format, incorrect information, etc. Make sure to avoid making mistakes to avoid cheque bounce.

What type of case is a cheque bounce?

According to section 138 of the Negotiable Instruments Act of 1881, a cheque bounce is a criminal offence. If found guilty, a drawer can be punished for 2 years or a fine will be charged.

What happens if the cheque bounces 3 times?

There is no limit on how many times a cheque is issued. On the other hand, if you submit the cheque and it is bounced once again, you can have grounds to file a complaint under Section 138 of the Negotiable Instruments Act of 1881.

What are the disadvantages of cheque bounce?

There are various disadvantages associated with cheque bounce:

  • A negative and unhealthy credit score
  • High penalty charges
  • Bad relations with merchants
  • An increase in legal trouble.

Which cheque is risky?

Bearer cheques are risky. These cheques are negotiable documents that can be cashed by any individual possessing them. But because this kind of cheque is like carrying cash, it is riskier. If it is stolen or lost, anybody can use it.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.