The history and use of cheques in India date back to the late 18th century, beginning with the Bank of Hindustan, which introduced cheques in 1770. However, it was not until 1881 that the Negotiable Instruments Act (NI Act) was enacted, which formalized the use of cheques, promissory notes, and bills of exchange in India. This Act provided a legal framework for non-cash payment instruments, setting standards for their usage and characteristics. It played a crucial role in shaping the cheque payment system in India, making it a legally recognized and standardized method of payment.
- Cheque Usage and Clearing System:
In 1938, the Calcutta Clearing Banks’ Association established a clearing house, which was a significant step toward organizing cheque settlements among Indian banks. Over time, this system became more sophisticated, culminating in the introduction of the Cheque Truncation System (CTS) in 2010. The CTS eliminated the need for cheques to be physically transported between clearing houses. Instead, cheques are processed digitally by capturing an image using Magnetic Ink Character Recognition (MICR), which is then transmitted to the concerned bank. This system has greatly increased the efficiency of cheque processing and clearance. - Decline of Cheque Usage:
Despite their historical importance, the use of cheques in India has seen a gradual decline, especially in the retail sector. In the past, banks would often provide cheques free of charge to individual account holders, making them a convenient means of payment for both individuals and businesses. However, with the rise of electronic payment methods, such as debit and credit cards, and the increasing popularity of digital banking services, cheques are rarely accepted at point-of-sale transactions anymore. Retailers and service providers prefer faster and more convenient methods like cash or cards. - Impact of Demonetisation:
The demonetisation in 2016 briefly led to an uptick in cheque usage, as people sought alternatives to cash for transactions. However, the growth in digital payments following this event, combined with the efficient cheque clearing system, has continued to drive down cheque usage. In 2019, the Reserve Bank of India (RBI) reported a slow decline in cheque volumes, acknowledging that while the decline persisted, it was gradual.
Today, while cheques remain an important method of payment, their role has diminished in favor of electronic transactions, reflecting the global trend towards digital payments. However, the Cheque Truncation System (CTS) has played a crucial role in maintaining the relevance of cheques by making their clearing process faster and more efficient.