Cheque Clearing & Collection by Banks
In one of the older posts titled Using a Bank Cheque we had taken a look at what a Cheque is, how to issue a cheque and the things to remember when we use one. There is one area that we did not touch "Cheque Collection & Clearing" in that article. One of our blog readers even has left a comment on the same in that post. So, the purpose of this article is to explain how the Cheque clearing & collection works along with a lot of other details.
Before we proceed with the Cheque collection & clearing part, let us take a look at the types of cheques we can use
Local Cheques - These are cheques whereby the cheque issuer and the receiver reside in the same city
Outstation Cheques - These are cheques whereby the cheque issuer and receiver reside in different cities
How Does Cheque Clearing & Collection Works?
Lets say I owe you Rs. 10,000/- and give you a cheque drawn on my bank account (ICICI). Let us see the sequence of events
1. I hand over the cheque worth Rs. 10,000/- drawn on ICICI Bank to you
2. You take it to your bank (lets say HDFC) and deposit it into your bank account
3. HDFC Processes the cheque and sends a request to ICICI for payment
4. If I have enough funds in my account, ICICI will process the payment and release the funds to HDFC Bank
5. HDFC Bank processes the payment and credits the funds into your bank account
The above is a simple illustration of how this whole Cheque Collection & Clearing mechanism works. If you had an ICICI Bank account too, this whole process would be much faster because, step 3 is not required at all. The bank will just check if you have enough funds in your account and if so, move the money into the payee's bank account.
Cheque Clearing & Collection Timelines
In the previous section, in Step 3 - HDFC Bank sends a request to ICICI Bank for payment and in Step 4 ICICI releases the funds to HDFC Bank. However, this step is the one that takes the most time. Banks have a predetermined service standards on how much time they can take to process cheques issued/deposited by customers. This depends on various scenarios like, whether both parties have a bank account with the same bank or whether it is a local or outstation cheque and so on...
The Guidelines as set by RBI are:
Local Cheques - All Local Cheques must be cleared on a T+1 basis. i.e., If I Deposit a local cheque into my bank account today (irrespective of which bank the cheque is drawn or deposited) the funds must reach my account by End-Of-Day Tomorrow. Of course, this is only if the deposit happened before the cut-off time for today.
For ex: Lets say ICICI Bank has a cut of time of 1:00 PM. So, all cheques deposited after 1:00 PM the previous day and those deposited before 1:00 PM today are processed in one batch and sent for payment. If you deposit your cheque after 1:00 PM, it will be processed only tomorrow and funds will be available one day after that.
Outstation Cheques - Processing of Outstation Cheques depends on what location the drawn bank is situation.
Banks in State Capitals - Max 7 days
Banks in Major Cities - Max 10 days
Banks in Other Locations - Max 14 days
Go back to the example a few paragraphs away where I gave you a cheque. Here, lets do a small change. Lets say you live in Delhi and I am giving you a cheque. If I lived in Chennai, you will get the money in a maximum of 7 days. Whereas, if I lived in a Major city of TamilNadu say Trichy or Madurai you will get the money in 10 days max and if I lived in an area like Thirumalaisamudram in Tanjore, it will take up to 14 days.
Did Thirumalaisamudram catch you off guard? That is the village in Tanjore, Tamil Nadu where I did my college. So, just used it for example :-)
Cheque Clearing & Collection Fees
Local Cheque collection charges are decided by the concerned bank from time to time and communicated to customer as part of the Code of Bank’s Commitment to Customers. However, these days most banks dont charge any fee on local cheque collection.
In case of Outstation Cheques, all banks charge a fee. Go back to the example where I lived in various parts of Tamil Nadu and gave you a cheque... In such cases, RBI has set up guidelines on the maximum fee banks can charge you depending on the cheque amount.
* Up to and including Rs.5000 – Rs.25 per instrument + service tax
* Above Rs.5000 and Up to and including Rs. 10,000 – not exceeding Rs. 50 per instrument+ service tax
* Above Rs. 10,000 and up to and including Rs. 1, 00,000 – not exceeding Rs. 100 per instrument + service tax
* Rs.1, 00,001 and above – left to the banks to decide. You need to check your banks oustation cheque collection policy & fees document to find out the fee. However, RBI has recently asked Banks in a recent circular to reconsider their charges & Reduce them. There is not much clarity on how much banks will reduce these fees but they will be reducing it soon.
No additional charges such as courier charges, out of pocket expenses, etc., should be levied.
So, if you used an outstation cheque and were charged a fee that is more than the amounts above, you have the right to question your bank
What is a Cheque ? Meaning ↓
Cheque is an important negotiable instrument which can be transferred by mere hand delivery. Cheque is used to make safe and convenient payment. It is less risky and the danger of loss is minimised.
Definition of a Cheque ↓
"Cheque is an instrument in writing containing an unconditional order, addressed to a banker, sign by the person who has deposited money with the banker, requiring him to pay on demand a certain sum of money only to or to the order of certain person or to the bearer of instrument."
Different Kinds / Types of Cheques ↓
1. Bearer Cheque
When the words "or bearer" appearing on the face of the cheque are not cancelled, the cheque is called a bearer cheque. The bearer cheque is payable to the person specified therein or to any other else who presents it to the bank for payment. However, such cheques are risky, this is because if such cheques are lost, the finder of the cheque can collect payment from the bank.
2. Order Cheque
When the word "bearer" appearing on the face of a cheque is cancelled and when in its place the word "or order" is written on the face of the cheque, the cheque is called an order cheque. Such a cheque is payable to the person specified therein as the payee, or to any one else to whom it is endorsed (transferred).
3. Uncrossed / Open Cheque
When a cheque is not crossed, it is known as an "Open Cheque" or an "Uncrossed Cheque". The payment of such a cheque can be obtained at the counter of the bank. An open cheque may be a bearer cheque or an order one.
4. Crossed Cheque
Crossing of cheque means drawing two parallel lines on the face of the cheque with or without additional words like "& CO." or "Account Payee" or "Not Negotiable". A crossed cheque cannot be encashed at the cash counter of a bank but it can only be credited to the payee's account.
5. Anti-Dated Cheque
If a cheque bears a date earlier than the date on which it is presented to the bank, it is called as "anti-dated cheque". Such a cheque is valid upto three months from the date of the cheque.
6. Post-Dated Cheque
If a cheque bears a date which is yet to come (future date) then it is known as post-dated cheque. A post dated cheque cannot be honoured earlier than the date on the cheque.
7. Stale Cheque
If a cheque is presented for payment after three months from the date of the cheque it is called stale cheque. A stale cheque is not honoured by the bank.
Happy Using Cheques!!!
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