A banker’s cheque, also known as a banker’s draft, is a specialized form of payment instrument issued directly by a bank. Unlike a regular cheque, which draws funds from an individual’s account, a banker’s cheque is paid from the bank’s own funds. These cheques are commonly obtained by bank customers for a nominal fee. The primary advantage of a different types of cheques is that it offers a high level of security to the recipient, as it is guaranteed by the issuing bank, minimizing the risk of the cheque bouncing.
Banker’s cheques are negotiable instruments that can be payable to order, much like regular cheques. They are subject to the same legal provisions as order cheques. Typically, banker’s cheques remain valid for six months from their date of issue, and in genuine cases, they may be revalidated to extend their validity.
If you want to delve deeper into the specifics of banker’s cheques, you can find more information below.
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- 1 Normal Banking Cheques Explained
- 2 Reducing Risk with Banker’s Cheque
- 3 Benefits of Banker’s Cheques
- 4 Types of Cheques
- 5 Bearer Cheque
- 6 Order Cheque
- 7 Crossed Cheque
- 8 Open Cheque
- 9 Post-Dated Cheque
- 10 Stale Cheque
- 11 Traveller’s Cheque
- 12 Self Cheque
- 13 Banker’s Cheque
- 14 Differences Between a Bearer Cheque and an Order Cheque
- 15 Understanding Account Payee Cheques
- 16 How to Write an Account Payee Cheque
- 17 Significance of an Account Payee Cheque
- 18 Why Do People Use Cheques?
- 19 Banker’s cheque (FAQ)
Normal Banking Cheques Explained
When an individual or company maintains a current account (also known as a checking account), they have the ability to issue cheques to transfer funds from their account to a creditor’s account. The creditor subsequently submits the cheque to their own bank, which employs a clearinghouse or a similar mechanism to orchestrate the transfer of funds from the debtor to the creditor over a span of a few days. This process effectively resolves any outstanding debt.
Reducing Risk with Banker’s Cheque
Traditional cheques are not as secure as cash since there’s a potential for them to be worthless if there aren’t enough funds to honor them. In such cases, the cheque is returned unpaid, leaving the recipient empty-handed. This risk is commonly referred to as a “bounced” cheque.
To mitigate this risk, individuals can opt for a type of cheque where the funds are drawn directly from the bank’s own reserves rather than from their personal accounts. This is a safer option for creditors because the cheque will be honored unless there’s a significant issue, such as the cheque being forgotten or the issuing bank going out of business before the cheque is cashed.
To ensure that the issuing bank has sufficient funds to honor the cheque, the bank immediately deducts the cheque’s value along with any associated charges from the customer’s account. This reduces the risk of a dishonored cheque and provides greater security for all parties involved.
Benefits of Banker’s Cheques
- Convenient for International Transactions: different types of cheques are a convenient means of settling accounts with foreign partners, such as payments for goods and services, book subscriptions, lotteries, training in foreign schools, visa fees at embassies, and cash gifts.
- Non-Urgent Payments: different types of cheques are ideal for non-urgent money transfers, providing a hassle-free way to make payments.
- Cost-Effective: They are a cost-effective method for international money transfers, making them an economical choice.
- Limited Payee Information: different types of cheques are suitable when there’s limited information about the payee, such as when a firm only provides its name and address, making international payment orders impossible.
Types of Cheques
Negotiable instruments serve the purpose of facilitating seamless monetary transactions according to specific needs. While cash is the preferred mode for immediate payments, cheques are accepted for transactions with deferred payment terms. More recently, credit cards and debit cards have become prevalent for direct account-to-account transfers. Each payment method corresponds to a particular type of negotiable instrument. In the case of cheques, various types are utilized for different situations.
Bearer Cheque
- This type of cheque is payable to the bearer or the individual named in the “drawee” field.
- “Or bearer” is printed at the end of the dotted lines on this cheque, specifying the drawee’s name.
- It can be presented in person at the drawee’s bank and is payable to the presenter.
- This is a transferable instrument, and it can be passed to another person through simple delivery; there’s no requirement for endorsement.
Order Cheque
- The printed word “bearer” on the cheque is invalidated, rendering it payable exclusively to the individual whose name appears as the drawee.
- After the cancellation of “bearer” on the cheque, it is implicitly transformed into an order cheque. The bank will process the transaction solely upon confirming, to their satisfaction, that the bearer of the cheque matches the person named on it.
Crossed Cheque
- In a crossed cheque, the drawer creates two parallel, transverse lines at the upper corner of the cheque, either with or without adding the notation “a/c payee.”
- This precaution guarantees that, regardless of who submits the cheque to the drawer’s bank, the funds are deposited exclusively into the account of the individual named on the cheque.
- The primary benefit of a crossed cheque is the mitigation of the risk associated with unauthorized individuals gaining access to the funds.
- Only the drawee’s bank has the authority to cash this type of cheque.
Open Cheque
- An open cheque, sometimes referred to as an uncrossed cheque, falls into the category of any cheque that lacks crossing.
- This type of cheque can be presented to the drawee’s bank and is payable to the person presenting it.
- The drawee of an open cheque can also transfer it to another person by inscribing their name on the cheque, designating them as the new drawee.
- To maintain the cheque as open, the word “OPEN” should remain uncrossed, and the issuer must ensure their signature on both the front and the back of the cheque. Otherwise, the bank may deny payment to the payee.
- The payee is also expected to endorse the back of the cheque upon receiving the amount.
Post-Dated Cheque
- A post-dated cheque is a cheque bearing a date later than the day it is issued.
- This type of cheque may be presented to the drawee bank at any time following its issuance, but the funds will not be debited from the payer’s account until the date specified on the cheque.
- Furthermore, the payee has the option to present the cheque even after the date indicated on the cheque, and it will still remain valid, with the money transferred to the payee’s account.
Stale Cheque
- A stale cheque is a check that has exceeded its validity period and is no longer redeemable.
- Originally, this validity period was six months from the date of issue, but it has now been reduced to three months.
Traveller’s Cheque
- Traveller’s cheques are akin to universally accepted currencies.
- They are widely available and come in various denominations.
- These instruments are issued by banks for facilitating payments from one location to another.
- Traveller’s cheques do not have an expiration date, making them usable for future trips. Alternatively, they can be encashed upon your return.
Self Cheque
- A self-cheque is typically issued by the drawer to themselves.
- The “name” field for the drawee contains the word “self.”
- Self-cheques are employed when the drawer intends to withdraw cash from their bank for personal use.
- They can only be encashed at the account holder’s or drawer’s bank. Caution is advised as if lost, another person might easily encash it by visiting the drawer’s bank.
Banker’s Cheque
- A banker’s cheque is issued by a bank on behalf of the account holder to make a specified payment, typically within the same city.
- It is valid for three months from the date of issue but can be revalidated, subject to certain legal requirements.
Differences Between a Bearer Cheque and an Order Cheque
The table below highlights the distinctions between a bearer cheque and an order cheque:
Aspect | Bearer Cheque | Order Cheque |
---|---|---|
Payable to | The bearer of the cheque. | A specific person or entity named on the cheque. |
Transferability | Easily transferable to others. | Non-transferable; only the named payee can encash it. |
Security | Less secure, as anyone holding the cheque can encash it. | More secure, as it can only be encashed by the named payee. |
Understanding Account Payee Cheques
- An Account Payee Cheque is a highly secure type of cheque, as the funds can only be deposited into the account of the specified payee. This cheque cannot be endorsed to another individual. To grasp this concept fully, it’s essential to differentiate between the roles of the drawer, drawee, and payee.
- The drawer is the party who typically writes and signs the cheque. This individual holds the account from which the money will be debited or is an authorized signatory for the account.
- The drawee is the party upon whom the drawer writes the cheque. Usually, the drawee is a bank, and the drawer instructs the bank to disburse the specified amount.
- The payee is the recipient to whom the final payment is made, and their name is written on the banker’s cheque.
- In the case of an account payee cheque, the payment can only be made by depositing it into the payee’s account.
How to Write an Account Payee Cheque
- To issue an account payee cheque, draw two transverse lines on the left corner of the cheque and write “Account Payee” between these lines.
- It’s crucial to note that simply crossing the cheque without including the words “Account Payee” will result in a crossed cheque, not an account payee cheque.
- It’s important to understand that the features of a crossed cheque differ from those of an account payee cheque, so they should not be confused.
Significance of an Account Payee Cheque
- The primary reason for the popularity of account payee cheques is their exceptional security.
- Since the funds can only be received by depositing them into the payee’s savings account, there is minimal risk of the cheque being misused.
- Furthermore, the payee cannot endorse the cheque to another party, enhancing the security of these cheques.
- It’s worth noting that an account payee cheque is only valid for three months.
Why Do People Use Cheques?
- Several reasons explain why people continue to use different types of cheques for fund transfers, despite the prevalence of digital banking:
- Cheques remain valuable for carrying significant sums of money, which may not be as practical with other methods.
- In the event of a dispute or fraud, well-documented cheques can be traced easily, serving as physical evidence of payment.
- Cheques offer a broad customer base as not everyone is familiar with electronic payment methods. Therefore, individuals who are not well-versed in digital banking still prefer using cheques for money transactions.
Banker’s cheque (FAQ)
Typically, it takes two business days for a cheque to clear.
Yes, you can encash your cheque at any branch that corresponds to the bank where the cheque is held.
Yes, a dishonored cheque can be reused if you believe there is a possibility of it being honored on a subsequent presentation.
A cheque remains valid for three months from the date of issuance.
Yes, a wet cheque can be encashed if it is in acceptable condition, with visible, authentic, and complete information.