The term “bouncing of cheques” refers to a situation where a check issued by an individual or a company is presented to the bank for payment, but the bank refuses to honor the check due to insufficient funds in the issuer’s account or other reasons. Bouncing of cheques is also known as a “bounced check,” “dishonored check,” or “returned check.”
Here’s a detailed explanation of how the process works and the implications of bouncing cheques:
- Issuing the Cheque: When a person or a company writes a cheque to pay for goods or services, they are essentially giving the recipient authorization to collect a specified amount from their bank account.
- Presenting the Cheque: The recipient (payee) of the cheque deposits or cashes it at their bank. The bank then processes the cheque through the clearing system to the bank on which it was drawn (the drawee bank).
- Checking Account Balance: Upon receiving the cheque, the drawee bank verifies whether the issuer (drawer) of the cheque has sufficient funds in their account to cover the cheque amount. If there are insufficient funds, the cheque will be dishonored.
- Reasons for Dishonoring: There are various reasons why a cheque may be dishonored:
- Insufficient Funds: The most common reason for a bounced cheque is the lack of enough money in the issuer’s account to cover the cheque amount.
- Irregular Signature: If the signature on the cheque does not match the specimen signature the bank has on record, they may reject the cheque.
- Stale Cheque: A cheque becomes stale after a certain period (usually six months), and it is no longer valid for payment.
- Post-Dated Cheque: If the cheque bears a future date on which it is not yet valid, the bank will dishonor it if presented before that date.
- Drawer’s Account Closed: If the issuer’s bank account has been closed or is inactive, the cheque will be dishonored.
- Payment Stop Request: If the issuer requests a stop payment on the cheque, it will not be honored.
- Consequences of Bouncing Cheques:
- Penalty Fees: The issuer may be charged penalty fees by their bank for the bounced cheque, in addition to fees charged by the payee’s bank.
- Legal Action: Bouncing a cheque is considered a criminal offense in many jurisdictions. The payee can take legal action against the issuer to recover the amount owed, and if found guilty, the issuer may face fines or imprisonment.
- Damage to Credibility: Bouncing cheques can severely damage the issuer’s credit rating and reputation, making it difficult for them to obtain credit or financial services in the future.
- Loss of Trust: The payee and other parties may lose trust in the issuer’s ability to fulfill financial obligations.
To avoid bouncing cheques, it is essential for individuals and businesses to maintain sufficient funds in their accounts, keep track of their transactions, and ensure that they issue cheques responsibly. Electronic payment methods, such as online banking and electronic fund transfers, can also help minimize the risk of bounced cheques.