This article is written by Muhammad Aneeq Ali, International Islamic University Islamabad (IIUI), 4th year of LLB5Y student, during his internship at LeDroit India.
Abstract
The banks have played a pivotal role in conducting financial transactions and serve the role of intermediaries in financial transactions and guardians of the payment system. The cheque usually stands dishonored when presented for payment but returned unpaid by the bank due to several reasons including but not limited to insufficient funds in the account or some other technical reasons. The present study emphasizes the role of banks in mitigating check bounce incidents including but not limited to prevention measures, public awareness, the use of advanced technology, and strong regulatory mechanisms.
Keywords:
- financial transactions
- Cheque Bounce
- Bank’s pivotal role in preventing fraud
- Legal consequences of cheque bounce
- Customers’ awareness
Introduction
As the global economy has been boosted in recent decades, there seemed a variety of mediums through which financial transactions have been governed. Regulation of Financial transactions through cheques is the most favorable of such mediums. However, the rise of financial transactions has posed a challenge in the financial sector which leads to potential disputes and disruption in both commercial and personal financial transactions. This challenge is also known as Cheque Bounce or Dishonoring of Check. Cheque bouncing has now become a prevalent issue in the financial sectors which can be addressed through several techniques and measures.
Understanding Cheque Bounce and Its Implications
A bounced cheque is a legal problem in addition to a financial one. Dishonoured checks damage the payer’s reputation and interfere with the recipient’s budget. Check bounce is a criminal offense in India under Section 138 of the Negotiable Instruments Act, 1881, which carries a maximum two-year jail sentence, a fine equal to double the check amount, or both. Similar laws are found in many judicial systems across the world to deal with incidents of check dishonor.
The following are the common possible reasons for cheque bounce including but not limited to:
- Insufficient funds in the drawer’s account.
- The cheque has a mismatched signature.
- Checks that are past due or stale are submitted for clearing.
- The account holder may freeze or close their account.
- A cheque that has been altered without the required verification.
- Technical mistakes include overwriting or inaccurate information.
The above-mentioned reasons highlighted the importance of urgent attention of banks to prevent such occurrences.
Banks as Key Players in Preventing Cheque Bounce
Now, it becomes clear that the banks play a pivotal role in ensuring smooth financial transactions and reducing the risk of cheque bounce. Their responsibilities can be categorized into preventive measures, customer education, advancement in technology, and ensuring regulatory compliance.
1. Preventive Measures
a. Monitoring Account Balances
One of the most pivotal responsibilities of banks is to ensure the real-time monitoring of customers’ accounts. This responsibility requires a strong monitoring mechanism in the banking sector. The banks can perform this duty by considering the measures which include the encouragement of customers towards timely deposit to maintain minimum balance, automated alerts for low balances which will reduce the chances of check bounce due to insufficient balance, and by notifying customers about their account status.
b. Verification Processes
The rigorous verification to detect the inconsistency in the transactions should be ensured before clearing the cheques. Some other measures including but not limited to signature verification, checking the alterations, and ensuring the correctness of dates must be considered during the regulation of financial transactions through cheques. Some advanced tools for verification like an automated signature verification system must be employed in regulating such transactions.
c. Encouraging Use of CTS-compliant Cheques
The introduction of the Cheque Truncation System (CTS) should be employed in the efficient cheque-clearing process. Banks should encourage customers to use CTS-compliant cheques, which have added security features to minimize technical errors and fraud.
d. Enforcing Account Discipline
Financial discipline can be promoted in customers by imposing penalties to minimize cheque bounce incidents which ultimately discourage the customers from issuing cheques without sufficient funds.
2. Customer Education and Awareness
A customer awareness strategy may be employed to address the issue of check bounce because when the customers become well aware of their duties, the chances of irregularity arising due to the negligence of customers while conducting financial transactions through cheques be reduced. The key initiative may include:
a) Financial Literacy Programs
The customers can be trained in conducting efficient financial transactions through the workshops and providing educational materials that are not only helpful in understanding the customers of the consequences of the cheque bounce but also in reducing the irregularities in financial transactions.
b) Guidelines on Cheque Usage
Banks should provide clear guidelines and instructions as to how to fill the cheque correctly, to avoid overwriting, to ensure the writing of accurate details, and to ensure signature consistency.
c) Digital Alerts and Reminders
The customers may be kept well aware of important account information through SMS and email which encourages the customers to ensure upcoming payments and manage the low balance and cheque validity.
3. Making Use of Technology
Financial transactions may be secured with the use of advanced technologies. The banking industry’s use of technology will guarantee safer and more effective transaction procedures. Thus, banks use technology in the manner listed below:
d) Transaction Monitoring in Real Time
Before checks are executed, sophisticated technologies monitor transactions in real time and spot any problems. This proactive strategy aids in identifying and resolving disparities early.
e) Internet and mobile banking
Online systems provide consumers greater control over financial operations by enabling them to follow account activity, verify balances, and keep an eye on issued checks.
f) Integration of Artificial Intelligence (AI)
In recent years, AI technology has transformed every industry. Similarly, AI-based technology has the potential to transform the banking industry by reducing financial irregularities. The use of artificial intelligence (AI) technologies will aid in the analysis of transaction trends as well as the prediction and prevention of fraudulent acts, such as the issuing of dishonoured checks.
g) Blockchain Technology
The blockchain technology is useful in ensuring transparency and security in financial transactions which offers a good solution for preventing cheque fraud and bounce. So, the effective implementation of blockchain technology is a prerequisite for ensuring financial transactions.
4. Ensuring Regulatory Compliance
To protect the interests of their clients and preserve the integrity of the financial system, banks must abide by the rules and regulations. The following are well-known compliance measures:
a) Putting RBI Guidelines into Practice
The use of CTS and the maintenance of a grievance redressal system for dishonored checks are two of the procedures for processing checks that are required by the Reserve Bank of India (RBI) in India. Strict adherence to these rules is guaranteed by banks.
b) Reporting Dishonored Cheques
Banks are required to report cases of cheque dishonor exceeding specific limits to credit rating agencies. This measure is efficient in capturing and penalizing habitual offenders.
c) Collaboration with Legal Authorities
The collaboration of banks with the legal authorities by providing the necessary identity and other documents and records of cheque bounce is necessary to ensure the timely resolution of disputes.
Challenges Faced by Banks
While incorporating all the measures to prevent irregularity in financial transactions, the banks still may face certain challenges which include:
1. Customer Negligence:
Despite public awareness campaigns, several customers fail to follow proper guidelines and instructions set by the bank authorities while writing a cheque.
2. Fraudulent Activities:
Preplanned illegal activities including sophisticated frauds, and counterfeit cheques, pose significant challenges.
3. Technological Barriers:
Although the major banks or banks backed by the government have many funds to transform the technological advancements but the smaller banks having not enough funds to prioritize technological advancement may still face fraudulent challenges due to the lack of technological tools and this limits their ability to prevent cheque bounce effectively.
4. Legal and Operational Costs:
Initiate legal proceedings against the offenders who indulged in illegal activities including the fraudulent dishonoring of cheques is an effective way of reducing this crime. But the problem is, that this involves considerable legal and operational expenses to continue the legal proceedings effectively which ultimately affects the bank resources.
The Way Forward: Strengthening Preventive Measures
To address all the challenges effectively, the banks must adopt further strategies to discourage all mala fide intentions by implementing an effective mechanism.
1. Enhancing Technological Infrastructure
In the modern age, technological-based challenges need technological-based solutions. The banks are required to transform their ordinary working process into the latest and modern form by incorporating technologies like AI, machine learning and blockchain, etc.
2. Promoting Digital Payments
The dependency on cheques which ultimately caused the irregularity in financial transactions, can be minimized by encouraging customers to prefer digital payment methods which is also a secure and efficient method of financial transactions.
3. Strengthening Customer Relationships
In order to deepen customer awareness of fraudulent activities, the banks should focus on fostering trust and communication with the customers.
4. Working Together with Financial Regulators
Maintaining constant communication with regulatory bodies guarantees that the banking industry is following the most recent standards and industry best practices.
Conclusion
The role of banks in preventing cheque bounce extends beyond mere transaction facilitation. It encompasses proactive measures, technological advancements, and customer-centric approaches to ensure a secure and efficient payment system. While challenges persist, the commitment of banks to uphold financial discipline and integrity remains unwavering. By combining robust preventive measures with customer education and regulatory compliance, banks can significantly mitigate cheque bounce incidents, fostering trust and reliability in the financial ecosystem.
References
- Banking Laws in India by M.L. Tannan
- M/s. Dalmia Cement (Bharat) Ltd. v. M/s. Galaxy Traders and Agencies Ltd., (2001) 3 SCC 426:
- Sampelly Satyanarayana v. Indian Bank, (2011) 3 SCC 658
- K.K. Verma v. Union Bank of India,
- Cheque bounce: A growing concern for banks by the Hindu BusinessLine 2020
- Cheque truncation system: a step towards preventing cheque bounce by the Financial Express 2017
- Preventing cheque bounce: a challenge for banks by the Indian Express.
