What Is a Dishonoured Cheque? Meaning, Reasons, and How to Avoid Them

A dishonoured cheque is a cheque that is rejected for payment by the bank.  It is a concern for both the person who has issued it and the person who attempts to encash it. For anyone who uses cheques for payments, e.g. business owners paying their vendors or individuals paying bills, it is important to know what a dishonoured cheque means, its impact and most importantly, how to avoid it. Let's dive in and learn more.

Dishonoured Cheque: Meaning

A cheque is basically an order that the issuer has given to their bank to transfer a certain amount from their account to someone else's account. If the amount in the account is not sufficient to pay the cheque value when the payee encashes the cheque, it does not go through; it is returned as undelivered / bounced / dishonoured.

Common Reasons Why Cheques Get Dishonoured

There are many reasons why a cheque might bounce, such as:

1. Not Enough Balance in the Account

Insufficient balance is the most common reason for cheques being dishonoured. If there isn't enough money to cover the cheque’s amount, the bank will return it.

2. Signature Mismatch

The cheque might bounce if the issuer's signature does not match the one in the bank's records. The bank returns the cheque to safeguard the account against possible fraud.

3. Stale Cheque

A stale cheque is one that is presented for encashment after its validity period is over. A cheque has a validity of 6 months from the date mentioned on the cheque.

4. Closed Account

If the account from where the cheque has been issued doesn’t exist, the cheque bounces.

5. Post-Dated Cheque

A post-dated cheque is a cheque that bears a future date. If the payee deposits it, i.e. tries to encash it before that date, then it might bounce.

6. Technical Mistakes

Cheques can bounce due to technical issues like mistakes in the Account Numbers or processing errors.

7. Worn-Out Cheque

Banks do not accept a cheque if it is torn, since this might undermine the authenticity and legibility of the cheque.

Consequences of a Dishonoured Cheque

A dishonoured cheque has various implications for the issuer and the payee, such as:

1. Bank Charges

Banks charge a fee to the issuer of the cheque when a cheque gets dishonoured. These fees vary from bank to bank. The fees can put additional strain on the finances of the issuer.

2. Reputation Damage

Issuing a dishonoured cheque can also harm your reputation, especially for businesses. Payees may decline to accept your cheques in the future, further damaging your credibility.

3. Legal Penalty

When the cheque bounces, the payee may sue you if you do not pay them using another way. In India, issuing a dishonoured cheque is considered a criminal offence and you could face fines or even imprisonment.

Way to Ensure Your Cheque Doesn’t Bounce

Here are simple steps to make sure your cheques don’t bounce:

1. Monitor your Bank Balance

Always check your account balance before issuing a cheque to ensure that you have sufficient balance to pay the value of the cheque. You can also set up low-balance alerts for your account.

2. Buffer Amount

Do not forget to maintain a buffer balance in your account over and above the cheque amount. This extra amount can prevent the cheque from being dishonoured if certain unexpected expenses arise in the interim.

3. Verify Details

Verify all the details mentioned on the cheque before presenting it. Incomplete or incorrect details are often the cause for a cheque being dishonoured.

4. Use Online Banking

Online banking through ICICI Bank Net Banking or the iMobile app lets you easily make and track payments and check your balance. It is a good alternative to making payments and avoids the risk of dishonoured cheques.

5. Ensure Communication with the Payee

If you believe that the cheque you have issued will bounce, notify the payee in advance. It is good to warn them before they deposit it. This can preserve trust and protect your relationship from possible harm
and also gives you time to deposit funds in the account before the payee deposits it, so that the cheque doesn’t bounce.

What You Should Do if Your Cheque Bounces

If your cheque bounces, here is what you must do immediately:

1. Check the Reason

Call your bank immediately to know why your cheque bounced. The bank will let you know the reason for the same. If low balance is the issue, you should deposit enough money into your account to cover the payment. Doing this will ensure that future cheques go through without further complications.

2. Inform the Payee

When you are the issuer of the cheque, then it is your responsibility to communicate with the individual or business to whom you issued the cheque.

3. Pay Using a Different Method

If a cheque has been returned because of a signature mismatch or incorrect details on the cheque, make the payment using means, e.g. settling by cash or online transfer.

4. Pay Bank Fees

Your bank may charge a fee for a dishonoured cheque. It's essential to pay this fee promptly to avoid additional penalties or complications with your account. Ignoring these fees could lead to further financial issues, so it is best to address them immediately.

5. Resolve Legal Issues

If the dishonoured cheque has led to legal proceedings, take utmost care of the issue. Consult a lawyer for expert advice on handling the situation and resolving potential legal complications.

Conclusion

A dishonoured cheque simply means that the cheque has been rejected for payment by the bank. This might affect your reputation and result in fines or legal proceedings. However, it can be avoided by maintaining sufficient balance in your account and confirming the details on the cheque before presenting it to the payee. Prevention is always better than cure when handling your cheques.