Understanding Cheques and Their Types

A cheque is a financial instrument that allows an individual or entity (the drawer) to direct their bank to pay a specified amount of money to another individual or entity (the payee) from the drawer’s account. Cheques have been used for centuries as a secure and convenient means of transferring funds, and despite the rise of electronic payments, they remain an integral part of the banking system worldwide.

In this article, we will explore the basics of a cheque, its various types, and how each type is used in different financial transactions.

What is a Cheque?

A cheque is a written order instructing a bank to pay a specific amount from the drawer’s account to the person named in the cheque (the payee). The cheque typically includes important information such as:

• Drawer’s Name: The person or entity who writes the cheque and authorizes the bank to transfer the funds.
• Payee’s Name: The person or entity who is receiving the funds.
• Amount in Words and Figures: The specific amount of money to be transferred, written both in words and numbers.
• Cheque Number: A unique number assigned to each cheque to help track and identify it.
• Date: The date the cheque is written.
• Signature of the Drawer: The drawer’s signature to authorize the payment.
• Bank Name and Branch: The details of the bank where the drawer’s account is held.

Cheques are often used for transactions where the amount is too large for cash payments or where the payer and payee do not have immediate access to electronic payment systems. They can also be used to guarantee payments in situations like business transactions or as a method of ensuring funds are available.

Types of Cheques

There are several types of cheques, each serving a specific purpose depending on the nature of the transaction. Below are the most commonly used types of cheques:

1. Bearer Cheque

A bearer cheque is payable to the person who presents it to the bank for payment, i.e., the bearer. No endorsement is required for the transfer of the cheque to someone else, making it transferable in nature. These cheques can be easily cashed by anyone who holds them. However, they are not as secure as other types of cheques because if a bearer cheque is lost or stolen, it can be cashed by anyone who finds it.

2. Order Cheque

An order cheque is payable only to the person whose name is written on the cheque or to someone who is specifically nominated by the payee. The cheque must be endorsed by the payee to transfer ownership to another person. This type of cheque is considered safer than a bearer cheque because it requires the endorsement of the payee before it can be transferred.

3. Crossed Cheque

A crossed cheque has two parallel lines drawn across its face, indicating that the cheque can only be deposited into the bank account of the payee and not cashed over the counter. There are two types of crossed cheques:

• General Crossing: This involves drawing two parallel lines on the top-left corner of the cheque without any words written between them. It indicates that the cheque can only be deposited into the payee’s account.
• Special Crossing: In addition to the parallel lines, this type of cheque contains the words “Account Payee” or the name of a bank between the lines. It ensures that the cheque can only be deposited into the account of the person or organization named.

Crossed cheques provide additional security because they prevent third parties from cashing the cheque if it is lost or stolen.

4. Account Payee Cheque

An account payee cheque is a special type of crossed cheque where the words “Account Payee” are written between the parallel lines. This type of cheque can only be deposited into the payee’s account and cannot be cashed. It offers higher security as it ensures that the cheque is only credited to the payee’s account, thus reducing the chances of fraud or misuse.

5. Post-Dated Cheque

A post-dated cheque is a cheque that is written for a date in the future. The drawer can instruct the bank to honor the cheque only on or after the specified date. This type of cheque is commonly used in situations where payment is due at a later date, such as installment payments for loans or services. The payee can present the cheque for payment once the specified date arrives, and the bank will process the payment.

6. Stale Cheque

A stale cheque is one that has not been presented for payment within six months from the date of issue. Most banks will not honor a stale cheque. If a cheque becomes stale, the drawer may need to issue a new cheque to the payee.

7. Traveler’s Cheque

A traveler’s cheque is a pre-printed cheque used as a form of payment by individuals traveling abroad. Traveler’s cheques are considered safer than carrying large amounts of cash because they can be replaced if lost or stolen. They can be cashed or used as a form of payment at various establishments around the world.

8. Certified Cheque

A certified cheque is one where the bank guarantees that the drawer’s account contains sufficient funds to cover the cheque amount. The bank certifies the cheque by stamping it and verifying that the funds are available. This type of cheque is often used in large transactions, such as real estate deals, where the recipient requires assurance that the payment will be honored.

9. Banker’s Cheque (Demand Draft)

A banker’s cheque, also known as a demand draft, is a type of cheque where the funds are guaranteed by the bank. The bank issues the cheque and deducts the amount from the drawer’s account or receives payment upfront. The payee can deposit or encash the cheque at their own bank. Banker’s cheques are widely used for transactions that require immediate payment, such as in business deals or government transactions.

10. Blank Cheque

A blank cheque is a cheque where the amount and the payee’s name are not filled in. The drawer signs the cheque and leaves it blank, authorizing the payee to fill in the relevant details. This type of cheque can be dangerous if it falls into the wrong hands, as the payee could fill in any amount. As such, it is rarely used and is considered highly risky.

Conclusion

Cheques remain a vital part of the financial system, offering security and flexibility in various payment situations. Each type of cheque serves a specific function and provides varying levels of security, making it important to understand when and how to use them. While electronic payments are becoming more popular, cheques continue to play an important role, particularly in situations that require manual processing, such as business transactions or larger payments.

Whether you are issuing a cheque or accepting one, it is essential to be aware of the different types and how they function to ensure that the payment process is secure and efficient.