F.Y. B.com Semester II, Banking chapter 1

1. Prof. ISHA JAISWAL
CHEQUE & CROSSING

2. Introduction
 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.
 All cheques are bills of exchange but all the bills of
exchange are not cheques.

3. Definitions of Cheque
 Cheque is an important document that an individual,
companies, governments and many others use to
transact their business. By definition, cheque can be
termed as a negotiable document to transfer money
either in physical form or to effect inter account
transfer.
 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.

4. Essentials elements or features of
Cheque:
 A cheque must be an instrument in writing containing
an unconditional order, signed by the maker.
 Payable to bearer or to order, on demand.
 A cheque is always on a specified banker.
 Banker named must pay it, when it is presented for
payment.
 Banks provide their customers with printed cheque
books containing forms which are to be filled up and
signed by the drawer.
 The drawer’s signature must tally with specimen
signature lying with the bank.

5. Essentials elements or features of
Cheque (cont.):
 A cheque must be dated.
 Post-dated cheque is valid. It is a bill of exchange but
becomes cheque on the day when it becomes payable.
 If for any reason the cheque remains uncashed for
sufficiently long period of time after the date on which it is
due for payment, the bank may refuse to honour the
cheque.
 As per RBI guidelines, with effect from April 1, 2012, the
validity period of Cheques, Demand Drafts, Pay Orders and
Banker's Cheques has been reduced from 6 months to 3
months, from the date of issue of the instrument.

6. Types of Cheques
1. Bearer Cheque
2. Ordered Cheque
3. Uncrossed/Open Cheque
4. Crossed Cheque
5. Anti-Dated Cheque
6. Post Dated Cheque
7. Stale Cheque

7. Other Types of Cheques
 Dividend Warrant
 Interest Warrant
 Bank Draft
 Travellers’ Cheque

8. 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.

9. Ordered 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).

10. Uncrossed or 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.

11. 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.
 Crossing is an instruction given to the paying banker to
pay the amount of the cheque through a banker only
and not directly to the person presenting it at the
counter. The crossing on a cheque is intended to ensure
that its payment is made to the right payee.

12. 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.
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.

13. 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.
Dividend Warrant
A dividend warrant is a cheque drawn by a company
upon its banker in payment of dividends to its
shareholders. They are quasi-negotiable instruments.

14. Interest Warrant
Interest warrants are drafts for the payment of the
interest due on Government securities, debentures etc.
They are also quasi-negotiable instruments.

15. Bank Draft
 A bank draft is a payment on behalf of the payer,
which is guaranteed by the issuing bank. A draft is
used when the payee wants a highly secure form of
payment.
 A bank draft is an order drawn by an office of a bank
upon another office of the same bank.
 A draft is drawn either against cash deposited at the
time of its purchase or against debit to the buyer’s
current or savings account with the bank.

16. Features of Bank Draft:
 It is drawn by a banker upon its branch or upon
another bank.
 It is payable on demand.
 It cannot be made payable to bearer.
 It cannot be stopped or countermanded except by order
of the court it means amount to be refunded, when not
delivered.

17. Difference Between Bills of Exchange
and Cheque
Bills of Exchange Cheque
 A written document that
shows the indebtedness of
the debtor towards the
creditor.
 Section 5 of The Negotiable
Instrument Act, 1881.
 Validity period not
applicable.
 A bill may be payable on
demand or on the expiry of a
certain period after date or
sight.
 A document used to make
easy payments on demand
and can be transferred
through hand delivery is
known as cheque.
 Section 6 of The
Negotiable Instrument
Act, 1881.
 3 months validity period.
 Cheque can only be
payable on demand.

18. Difference Between Bills of Exchange
and Cheque
Bills of Exchange Cheque
 3 days of grace are
allowed.
 Bill of exchange needs to
be accepted.
 Must be stamped.
 A bill may be drawn on
any person, including a
banker.
 If a bill of exchange is
dishonored it can be noted
or protested.
 It is always payable at the
time of presentment.
 A cheque does not require
acceptance.
 No such requirement.
 A cheque is always drawn
on a banker.
 If the cheque is
dishonored it cannot be
noted or protested.

19. Travelers’ Cheque
 A cheque for a fixed amount that may be cashed or used in
payment abroad after endorsement by the holder's
signature.
 A traveler's cheque is a medium of exchange that can be
used in place of hard currency.
 Traveler's cheques are often used by individuals traveling
on vacation to foreign countries.
 American Express Travelers Cheques are recognised
around the world. They are safer than cash, and if lost or
stolen can be replaced worldwide, usually within 24 hours.
 A Travelers Cheque can be purchased by any one. He/She
need not be a customer of the bank.

20. Travellers’ Cheque
 The purchaser has to deposit money with the issuing
bank equivalent to the amount of travels’ cheque he
intends to buy.
 There is no expiry for the travelers’ cheques. Unused
cheques can be returned back to the issuing bank and
payment can be obtained.
 The travelers’ cheques are issued in single name only.
 Now a days the uses of travelers cheque has declined
due to increased use of other alternatives like debit,
credit cards etc.

21. Advantages of using printed Cheque:
 Secure and reliable.
 It is far more efficient – especially for companies that
issue a substantial number of cheques on a regular
basis.
 By referring to the cheque-book records, a banker can
easily know the name of the drawer if the signature is
not readable.
 It is safest mode for money transaction.
 Individual by presenting a cheque at a bank counter
can easily collect money.
 Payment of money through cheque is considered to be
an authentic evidence for the legal suits.

22. Different modes of Crossing:
 General Crossing: Generally, cheques are crossed
when
 There are two transverse parallel lines, marked across its
face or
 The cheque bears an abbreviation "& Co. "between the two
parallel lines or
 The cheque bears the words "Not Negotiable" between the
two parallel lines or
 The cheque bears the words "A/c. Payee" between the two
parallel lines.

23. General Crossing

24. Special or Restrictive Crossing
 When a particular bank's name is written in between
the two parallel lines the cheque is said to be specially
crossed.
 In addition to the word bank, the words "A/c. Payee
Only", "Not Negotiable" may also be written.
 The payment of such cheque is not made unless the
bank named in crossing is presenting the cheque.
 The effect of special crossing is that the bank makes
payment only to the banker whose name is written in
the crossing.
 Specially crossed cheques are more safe than a
generally crossed cheques.

25. Special or Restrictive Crossing

26. General crossing vs Special crossing
General Crossing Special Crossing
 In this type of crossing
the two parallel
transverse lines are
there.
 Money can be encashed
by any banker.
 Less safe.
 General crossing can be
converted into special
crossing.
 In this type of crossing
there is no necessity of
drawing two parallel
transverse lines.
 Money can be encashed
only by the bank shown
under crossing.
 More safe.
 It can’t be converted.

27. Who can do alteration on a
Cheque
An alteration can be made by drawer. But an
alteration on a material part of a negotiable
instrument which is not signed makes it invalid.
A banker however, is protected under Sec.84 if he
pays a cheque with alterations and the alteration
is not apparent.

28. Holder
A person who has possession of a cheque that he is
legally entitled to enforce. In other words, a holder
means either the payee, or the bearer or endorsee of an
instrument.
The person legally entitled to receive the money due on
the instrument is called the ‘holder’.
Conditions:
 He should be entitled in his own name to the
possession of the instrument.
 He should have the right to recover the amount due
thereon from the parties.

29. Holder in due course
Holder-in-due course means any person who for
consideration became the possessor of a
promissory note, bill of exchange or cheque, if
payable to bearer, or the payee or endorsee
thereof, if payable to order, before the amount
mentioned in it became payable, and without
having sufficient cause to believe that defect
existed in the title of the person from whom he
derived his title.
Conditions:
 He obtained the instrument for valuable
consideration.
 He becomes holder of the instrument before its

30. Following person cannot be said to be a
holder-in-due-course
 When he has obtained the instrument by gift or
for an unlawful consideration or by illegal
methods.
 When he acquires the instrument after its
maturity.
 When the circumstances are such that a
reasonable person would suspect that the
transferor is defective.

31. Aspect
Meaning
Consideration
Holder
Holder means any
person entitled in his
own name to the
possession of the
negotiable instrument
and to recover or
receive the amount
due thereon from the
parties thereto.
Consideration may
not pass from a
holder of the
instrument.
Holder-in-
due-
course
A holder in due
course on the other
hand, means a holder
who takes the
instrument in good
faith for consideration
before it is overdue
and without any
notice of defect in the
title of the person
who transferred it to
him
A person who claims
to be a holder in due
course must show
that he acquired the
instrument for
consideration.

32. Aspect
Liability
Maturity
Holder
A holder of the
instrument can
enforce it against
the person who has
signed it
A holder may
acquire the
instrument even
after it has become
due for payment.
Holder-in-
due-
course
A holder in due
course can sue all
prior parties to a
negotiable
instrument until the
instrument is duly
satisfied.
A person will be a
holder in due course
only if he acquires
the instrument
before the amount
mentioned in it
become payable

33. M.I.C.R. Cheques
 For speeding up the cheque clearing process, the
Reserve Bank of India introduced mechanized
cheque processing system using MICR
technology.
 MICR stands for Magnetic Ink Character
Recognition.
 Banks issue cheque, draft and other payment
instrument in MICR format using the special
quality paper and printing specifications.
 On MICR instruments, there is code line at the
bottom containing information printed in magnetic
ink, which is required for mechanical processing.

34. Code line contains following information:
 First six numbers indicate the cheque number.
 Next three numbers indicate city code.
 Next three numbers indicate bank code.
 Next three numbers indicate branch code.
MICR cheque should not be folded, pined or
stapled. Rubber stamp should not be affixed on
the band line.
MICR cheque books provide for record slips at the
end which are used for recording the details of
every cheque issued.

35. Advantages of MICR Technology
 The chances of error is minimised because the
instrument are read by the machines.
 The transfer of funds between two banks is fast
and easy.
 The work of clearing becomes easy.
 The manual work of staffs is minimised.
At Par Cheque
The cheque which is recovered at its face value is
said to be at par cheque.