Bouncing of cheques is one of the most common operational and legal issues faced by banks in day-to-day banking. From an examination point of view, this topic is important because it involves banker–customer relationship, negotiable instruments, customer rights, bank duties, and legal consequences under law. A cheque is a negotiable instrument and once it is dishonoured, it creates financial inconvenience as well as legal implications for all parties involved.
Meaning of Cheque Bouncing
Cheque bouncing, also known as dishonour of cheque, refers to a situation where a cheque presented for payment is returned unpaid by the bank. When a customer deposits a cheque in his account, the collecting bank sends it for clearing. If the paying bank finds any defect or problem, it refuses to make payment and returns the cheque with a specific reason. This act of returning the cheque unpaid is called cheque bouncing.
From the banker’s perspective, cheque bouncing is a refusal to honour a cheque due to certain valid reasons as per banking rules and legal provisions. From the customer’s perspective, it results in non-receipt of money and may attract charges and legal action.
Parties Involved in Cheque Bouncing
To understand cheque bouncing clearly, it is important to know the parties involved:
- Drawer: The person who issues the cheque.
- Drawee Bank: The bank on which the cheque is drawn (payer’s bank).
- Payee: The person in whose favour the cheque is issued.
- Collecting Bank: The bank that presents the cheque for collection on behalf of the payee.
Any issue arising at the drawee bank during verification can lead to cheque bounce.
Common Reasons for Bouncing of Cheques
Cheque bouncing can happen due to several reasons, which may be related to funds, technical defects, signature issues, or account status. These reasons are generally mentioned clearly on the cheque return memo.
1. Insufficient Funds
This is the most common reason for cheque bouncing. When the drawer does not have sufficient balance in his account to honour the cheque amount, the bank returns the cheque unpaid. This reason is legally very serious and attracts penal provisions under law.
2. Exceeds Arrangement
When the cheque amount exceeds the overdraft or cash credit limit sanctioned by the bank, the cheque is dishonoured with the reason “Exceeds Arrangement”.
3. Signature Mismatch
If the signature on the cheque does not match with the specimen signature available in the bank records, the bank will return the cheque. This usually happens due to change in signature style, shaky signature due to illness, or careless signing.
4. Post-dated Cheque
If a cheque is presented before the date mentioned on it, it is returned as “Post-dated cheque”. A bank cannot honour a cheque before its due date.
5. Stale Cheque
A cheque becomes stale if it is presented after three months from the date of issue (as per RBI guidelines). A stale cheque is not payable and is returned unpaid.
6. Alteration Not Authenticated
If there is any alteration in the cheque, such as change in date, amount, or name, and it is not properly authenticated by the drawer’s full signature, the cheque is dishonoured.
7. Account Closed
If the drawer has closed his account and a cheque is presented afterwards, the cheque is returned with the remark “Account Closed”.
8. Stop Payment Instructions
If the drawer has instructed the bank to stop payment of a particular cheque, the bank will dishonour it even if sufficient balance is available.
9. Frozen Account
If the account is frozen due to legal orders, KYC non-compliance, or regulatory instructions, the cheque cannot be honoured.
Procedure Followed by Banks in Case of Cheque Bouncing
When a cheque is presented and found to be defective or unpayable, the drawee bank follows a systematic procedure. The cheque is returned through the clearing system along with a cheque return memo specifying the reason for dishonour. The collecting bank then credits back the amount provisionally credited earlier (if any) and informs the customer.
Banks are required to clearly mention the exact reason for dishonour, as it is important for legal and customer grievance purposes. Transparency in return reasons is mandatory as per RBI guidelines.
Cheque Return Charges
Banks levy cheque return charges when a cheque is dishonoured. These charges are generally recovered from:
- The drawer, when the cheque is bounced due to insufficient funds or account-related reasons.
- In some cases, from the payee, especially if the cheque is deposited and returned unpaid.
RBI has instructed banks to display cheque return charges transparently and not to levy excessive or hidden charges.
Legal Provisions Related to Cheque Bouncing (Section 138 of NI Act)
Cheque bouncing due to insufficient funds or exceeding arrangement is a criminal offence under Section 138 of the Negotiable Instruments Act, 1881.
Under Section 138, a cheque bounce becomes an offence if the following conditions are satisfied:
- The cheque is issued for discharge of a legally enforceable debt or liability.
- The cheque is returned unpaid due to insufficient funds or exceeding arrangement.
- The payee gives a written legal notice to the drawer within 30 days of receiving information of dishonour.
- The drawer fails to make payment within 15 days of receiving the notice.
If all these conditions are met, the drawer can be prosecuted.
Punishment under Section 138
If the offence is proved in court, the drawer can face:
- Imprisonment up to 2 years, or
- Fine up to twice the cheque amount, or
- Both imprisonment and fine
This provision acts as a strong deterrent against cheque misuse and promotes trust in banking transactions.
Role and Responsibility of Banks
Banks play a neutral role in cheque bouncing cases. They are not parties to the dispute but have certain responsibilities:
- Banks must ensure proper verification of cheques before dishonour.
- They must provide clear and correct return reasons.
- Banks should follow RBI guidelines on cheque return timelines.
- Banks should not dishonour cheques arbitrarily or without valid reasons.
Failure to follow proper procedures may attract customer complaints and banking ombudsman intervention.
Impact of Cheque Bouncing on Customers
Cheque bouncing affects the credibility of the drawer and may result in:
- Financial loss and penalty charges
- Legal action and court cases
- Damage to creditworthiness and reputation
- Loss of business relationships
For businesses and individuals, repeated cheque bounces can severely affect their financial standing.
Preventive Measures to Avoid Cheque Bouncing
Cheque bouncing can be avoided through careful banking practices. Customers should ensure sufficient balance before issuing cheques, maintain updated signatures, avoid overwriting, and monitor cheque validity dates. Banks also educate customers about safe cheque usage and encourage digital payment alternatives.