Tata Capital > Blog > Dishonoured Cheque – Meaning, Reason, Prevention
22 November 2024
6 mins read
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Cheques remain a prevalent mode of business transactions despite the rising popularity of digital payments. As a business owner, you’ve likely come across the issue of dishonoured cheques. Besides being a nuisance, a dishonoured cheque can also lead to significant financial and legal repercussions.
Understanding the dynamics of dishonoured cheques is crucial for business owners. It can help you avoid the problem and the financial and legal consequences that come with it. Don’t know where to start? Worry not; we’ve got you covered. Consider this your complete guide to understanding the issue of dishonoured cheques, its meaning, reasons, consequences, and prevention.
Suppose you write a cheque for a business transaction to a party. If the party goes to a financial institution to deposit your cheque and the institution refuses to process it for some reason, it becomes dishonoured. In India, under the Negotiable Instruments Act of 1881, a dishonoured cheque due to insufficient balance in the account is considered a crime and can result in jail time.
Remember dishonoured cheque meaning is different from that of cancelled cheque. A cancelled cheque is one that has already been processed.
If your account does not have enough balance to cover the amount written on the cheque, the cheque will bounce.
If you close your account before the cheque is submitted for encashment, the cheque will bounce.
A post-dated cheque mentions a future date for processing the cheque. Ideally, it must be submitted for to the financial institution after this date. If it has been submitted before, it is dishonoured.
A common reason for dishonoured cheques is the wrong signature of the account holder. If you make a mistake while signing your name on the cheque, it will bounce.
Alterations or overwriting on the cheque can lead to it being dishonoured. Such alterations and overwriting destroy the integrity of cheques, regarding which a financial institution has strict rules.
A crossed cheque is one with two parallel lines crossing in the top left corner or across the whole cheque. This crossing indicates to the financial institution that the cheque must be processed according to certain rules.
If these rules are not followed or the cheque is deposited in another financial institution, the cheque will bounce.
If you make a mistake when entering your account number on the cheque, it will bounce when deposited for processing.
If your account is frozen or blocked for some reason and you issue a cheque, it will bounce.
In India, if a cheque bounces due to insufficient funds, it is considered a severe offence. The person who issued such a cheque can face a fine or even jail time.
You can face multiple financial issues as the recipient of a dishonoured cheque.
First, you must pay a fine to the financial institution where the cheque is dishonoured. Second, the delay in the entire process can cost you in terms of opportunity (opportunity costs), depending on your business. Finally, if the party or the financial institution decides to file a legal complaint, you might face legal fees.
Financial institutions consider bounced cheques an indicator of financial distress or instability. This can reduce your credit rating, which can make obtaining credit difficult. A low credit rating disturbs your trust equation with financial institutions.
Trust between parties entering a transaction is the bedrock of business. A dishonoured check delivers a blow to that trust. This reduced trust makes other parties hesitant to conduct business transactions with you. This not only reduces business opportunities but can also irreparably damage your reputation.
Following the previous point, a dishonoured check can strain or even break long-established business relationships. It signals a lack of seriousness, which is a serious setback, considering the time and money spent developing long-term business relationships.
You need to be careful both as a cheque issuer (when you write the cheque) and as a cheque payee (when you are depositing a check by someone). Some steps you can follow to avoid dishonoured cheques as a payee include:
Before accepting the cheque, carefully check the amount, date and payee name to avoid any issues in advance.
A certified cheque is one that a financial institution certifies as legitimate. This ensures that the funds are available when the payee deposits the cheque.
Deposit the received cheques promptly to avoid issues like insufficient funds.
As a payee, you should keep informed about the issuer’s financial status to avoid bounced cheques.
Ensure you have sufficient balance present in your account before issuing a cheque.
Always make sure to verify your signature multiple times before you issue a cheque to the payee. Also, it would help if you don’t change your signature often for various purposes.
With a post-dated cheque, there is always the risk of the payee depositing the cheque before the mentioned date. Hence, you should avoid post-dated cheques as much as possible.
Keep updated with your account status to determine whether you have sufficient funds while issuing a cheque.
A dishonoured cheque impacts business relations and creates serious financial and legal problems. By understanding the dynamics of a dishonoured cheque and following some simple due diligence steps, you can avoid many potential issues associated with a dishonoured cheque, both as an issuer and as a payee. If you’re considering a business loan for further expansion, you do not have to worry about a dishonoured check with Tata Capital’s versatile business loans. Operating under the time is money philosophy, Tata Capital’s business loans are approved swiftly, and funds are deposited directly in the borrower’s account without delay.
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