All You Need to Know About Bank Cheques and Bank Drafts in Sri Lanka
Cheques are a banking instrument that is in decline but is still used in some countries around the world. It’s in use in some of the big economies like USA, and is a major payment instrument in Sri Lanka especially with the business community. But it is surprising to see that most of the people I’ve spoken to have only a very basic knowledge about cheques. Hence I thought of writing this for those who are interested to know about Sri Lanka bank cheques and their practices and regulations.
A cheque is a pre-printed piece of paper that has a specific standard layout. Cheques are used as a payment instrument instead of cash and can be written/drawn for any amount the cheque issuer wishes.
You Need a Cheque Account
If you want to issue cheques you must first open a cheque account with your bank. If you are an individual who wants to open a personal cheque account in Sri Lanka, then banks require you to find another individual who already has a cheque account in the bank as an introducer. This is a strange rule but it is what it is. An introducer is not needed to open a business cheque account. Cheque accounts do not pay any interest on the balance like savings accounts do, and cheque accounts has a minimum daily balance of around Rs.10,000/- for personal accounts and around Rs.20,000/- for business accounts that you need to maintain. You can usually obtain a debit card or a ATM card against the cheque account. The cheque account limits and other facilities allowed depends on the bank you choose.
Depositing money to a cheque account: You can deposit money to a cheque account just like you do to any other account such as a savings account. Usually you must fill a deposit slip and then hand over the money to a teller with the slip. More details on this provided later.
Withdrawing money from a cheque account: Unlike other accounts where you fill a withdrawal slip, to take money out of a cheque account, you need to write/draw a “Cash” check with the amount you need to withdraw and give to the bank teller. I’ve explained below how to draw a “Cash” check. But since cheque leaves are expensive I’d recommend you to get an debit/ATM card and use the card to withdraw money from an ATM instead of wasting a cheque leaf.
Banks issue blank/new cheques in books that contains a number of cheque leaves. You must open a cheque account with a bank to obtain a cheque book. Since a cheque leaf contains security features and special machine understood part and is printed on special paper, it is quite expensive. As of today a single leaf is priced around Rs.15/-. It is up to you to decide how many cheque leaves you want to buy when you order a new cheque book from your bank. How many cheque leaves you want depends on how often you issue cheques. A cheque book must be ordered in the bank branch where you maintain your cheque account.
Components of a Cheque
- Cheque Date: Cheques are drawn with a specified date. The date can be any date you want and need not be the date you are actually writing the cheque. But a cheque has a validity period from the date indicated on the cheque. A personal cheque is valid for 6 months while a corporate/business cheque is valid for only 3 months. Further some business cheques are issued with specific validity periods less than 3 months. For example dividend payments are usually issued with 1 month validity period. The date on a cheque is important because the cheque recipient can encash a cheque on or after the cheque date and within the validity period. Encashing a cheque or encashment is the term used to convert a cheque into real cash by either taking money over the country of the bank or depositing the cheque in the recipient’s account.
- Payee: The payee section is used to write the name of the person or company who is supposed to encash the cheque. The Payee section has a pre-printed statement that says “Or Bearer”. If you leave this section sd id then any person can encash the cheque over the counter of a bank than the person’s name that appear on the cheque. But if it is a business cheque, the banks restricts it to be encashed only by the person whose name appear on the Payee section. You can write the word “Cash” as the payee instead of a person or business name as well. This means that the cheque is meant to be used just like cash. Any person who holds the cheque can encash it from a bank branch over the counter. Further you can give a cash cheque you received from someone to another party as well as a mode of payment. For instance say your received a Rs.5,000/- “Cash” cheque from Mr. Perera and then you also has to pay Rs.5,000/- to Mrs. Silver, you can simply hand over the cheque you received from Mr. Perera to Mrs. Silva. Therefore as you can guess issuing “Cash” cheques are risky since if someone stole such a cheque or payee loose the cheque anyone can encash it.
- Amount in words: You must write the amount of the cheque in wording on the dotted lines provided. You can use Sinhala, Tamil or English but it is preferred you write it in a language understood by any bank branch. Remember to use the word “Only.” at the end of the amount in words so that no one can tamper or alter the amount later. I usually include a short horizontal line after the word “Only.” as well just to make it even safer. Computer printed cheques sometimes put 2 asterisks (*) at the end too to denote its the end of the wording.
- Amount in numerics: You must write the amount in numerical form within the box. The amount you write here must be the same amount you wrote in words. Else the cheque will be rejected from the bank.
- Authorized signatory: When you open a cheque account, you provide a sample signature to the bank. You must place the same signature in this area to make the cheque valid. This area is just under the box where you wrote the amount in numbers. A cheque without a correct signature is an invalid cheque even if all other sections are properly filled. Join cheque accounts may have one or more joint account holders that needs to sign a cheque. You indicate at the account opening how many signatures a cheque needs to have to make a cheque valid. Usually it is one signature or 2 signatures. Having multiple signatories on a cheque to be valid is common practice for business cheques and is used as a form of preventing fraud since two parties will verify the cheque before signing. Such a cheque usually carry a company stamp as well.
- Machine readable area: All cheques has a white horizontal area at the bottom of the cheque. It is printed with numbers and special characters using a special ink called magnetic ink and with a special font. This is a machine readable are and you must not damage this section of a cheque. This is why the cheques are folder parallel to the longer sites than shorter sites. It prevents any folding over this machine readable area. Banks feed the cheque they receive to cheque scanners and this area is read by the machine. The characters printed in this area are called magnetic ink characters. Therefore the cheque scanners are called MICR or Magnetic Ink Character Readers. In Sri Lanka this area contains the 6 digit cheque number (enclosed between special characters), then the 4 digit bank number followed by the 3 digit branch code and finally your account number. In some countries like USA this area will include additional data such as routing numbers and clearance numbers as well.
How to Issue a Valid Cheque
In order to issue a valid cheque you must fill all the sections properly without any corrections. The date must be a date that won’t make the cheque invalid and the handwriting must be clear. The signature must match the sample signature given to the bank at the account opening. If you make mistakes while writing you must place the signature close to each place you have done a correction. You will find a small piece of paper extra in each cheque leaf attached to every cheque book. When you detach a cheque leaf, this small piece is left with the cheque book. This is to write information you put in the cheque for your reference. This piece of paper will have pre-printed sections for cheque date, payee, amount and even the balance in the account after the cheque is issued. It is a good practice to fill this section because a cheque is valid for 6 months and you may forget what cheque is issued to whom over time.
Sometimes cheques are issued with a future date. Such cheques are known as forward dated cheque. When the cheque date is a future date you cannot deposit or encash the cheque until the date arrives. This is common practice for business cheques where businesses purchase items on credit. So when businesses purchase items on say 30 day credit, the buying party issues a cheque to the selling party with a date that is 30 days in future. Hence the seller received the payment but seller can only convert this into cash after 30 days. By doing so, buyer can make sure he find enough money to honour/satisfy the cheque he just issued within the next 30 days.
Crossing a Cheque
A crossed cheque is a cheque that is payable only through a collecting banker and not directly at the counter of the bank. The simplest form of crossing is to draw two short parallel lines on a cheque usually around the top left area without obstructing the information on a cheque. You can use a seal or print crossing on the cheque as well. Crossing instruct to the receiver of the cheque that the cheque must be deposited in an account and cannot be encashed over the counter. This also means that there is a conflict of crossing while using the word “Cash” as the payee. You must not cross a cash cheque because the two practices are in conflict of each other. You can write restrictive instructions between the 2 lines. If the instructions “Account Payee Only” is indicated between the crossed lines then the cheque must be deposited in an account that match the name written on the cheque as the payee. If the crossing carry a name of a bank as instructions then it is to be collected through the bank name that appear between the crossed lines. If the crossing does not carry instructions then we call it a general crossing and can be deposited in any account.
Encashment or Encashing
When a valid cheque is deposited in an account it takes few days until your bank receive money from the bank that maintain the cheque issuer’s account. This collection is known as encashment. Encashment takes about 2 bank days in Sri Lanka thanks to the Lanka Clear network but in other countries such as USA this process takes about 7 work days. If the depositor and the issuer belongs to the same bank then the encashment happens within 1 day or even less since the bank has to collect money within its own accounts. Anyone who wish to encash a cheque over the counter (without depositing) can only be done so in a bank branch of the issuer’s bank.
Cheque bouncing is where a cheque deposited in your account is refused encashment because the cheque issuer’s account did not have sufficient money to honour the cheque. Your bank will contact you and you are supposed to go and collect the cheque that you previously submitted for encashment. Banks do not take any responsibility to honour a cheque if the cheque issuer do not have money. But the issuer’s bank will charge a penalty against the cheque issuer’s account for every cheque bounced which is around Rs.200/- per cheque bounced as a way of discouraging account owners to issue cheque for which funds are not available. You can deposit a bounced cheque again on a later date once you have sorted out the payment with the cheque issuer and if the issuer has verified the funds are now available in the account. If by chance issuer has issued a cheque and is not honouring it, then you can take legal action to recover your dues and the cheque becomes a strong proof in a court of law.
The rear of the cheque is kept for two types of endorsements. Endorsements of the depositor and endorsements of the bank. If you are depositing a cheque it is advised to write your name and account number at the back in the area left for depositor’s endorsement. If you are cashing the cheque over the counter the bank will ask you to write your name, NIC number and put 2 signatures. as well as provide a mobile or phone number of yours. This is to track back if a thief has encashed a cheque over the counter.
Depositing a cheque
When depositing a cheque in your bank account, you must fill a cheque deposit slip and attache the cheques to it. You can deposit more than one cheque in a single deposit as long as the cheques are within the valid period. Banks maintain cheque deposit machines as well where you can deposit cheques throughout the day. Remember to retain the counter foil of the deposit slip or the receipt given by the bank until all the cheques you deposited together are encashed into your account. Remember to endorse the cheque with the account number so that bank errors can be minimised. The cheque can be deposited in a cheque account, but nowadays some banks allow you to deposit cheques in some savings accounts as well after you speak to the bank manager and explain what the payment is for.
Bank drafts, pay orders or manager’s cheques
I’ve explained earlier that though you have a valid cheque in your hand, you may end up not getting paid for it since the issuer not having funds in the account to honour it. Further issuer’s bank or your bank is not responsible to honour it. Therefore cheques carry a risk of not getting paid. Bank drafts are there to make sure this risk is taken out. A bank draft is a cheque issued by a bank branch and is always guaranteed to get paid. Its also called a pay order or a manager’s cheque. So how do you get a bank draft? Well you need to go and speak to a bank branch and tell them you need a bank draft. What the bank will do is they will take the money worth the mount to put on the cheque from your account and issue you a cheque belonging to the bank. You must of course tell the bank for whose name the cheque must be drawn/written. The cheque is signed by the bank and states it’s a bank cheque. Since the bank collected the money upfront it is guaranteed to be honoured by the bank when you deposit it in your account. You also has to pay a fee of around Rs.300/- for every bank draft you raise. If you don’t know the buyer and if the amount involved is big, such as a payment for a sale of a vehicle or sale of a property; then demanding for a bank draft is the safe option than accepting a standard cheque.
Do NOT sign blank cheques!
This is a big NO NO. Do not sign blank cheques and keep with you for later use. A cheque becomes valid once the proper signatures are put on it. Hence if you sign a blank cheque it becomes a valid cheque for anyone to fill the other details that will let them withdraw any amount of money from your account. You must write the amount at minimum if you are handing over a signed cheque to someone else. The receiver can write the payee name and the cheque date.
Should I Open a Cheque Account?
If you are an individual looking to open a cheque account most probably it will be a “no”. Unless there is a pressing reason for you to issue cheques, in Sri Lankan context you can get away without a cheque account. So what if you receive a cheque from someone? As I said earlier, nowadays most banks allow you to deposit cheques to your savings accounts. Some banks require you to get a manager’s signature to make the deposit and managers will usually ask what the payment is about. Sri Lanka is comparatively relaxed with charges and fees on cheque accounts compared to USA and middle east. But still there is no interest paid on your balance and you need to maintain a minimum balance which is substantial for an average person + you must have activity on your account as well.
When Will My Account Receive the Money From a Cheque I Deposited?
The encashment process takes few bank work days. Usually it is midnight of a bank day for same bank’s cheques and 2 bank days for different bank’s cheques. Same bank’s cheques are cheques where the depositor’s and the cheque issuer’s accounts are in the same bank. The encashment period may be longer if you deposit a cheque after 3 pm or at a bank outlet that is not a real bank branch. A bank outlet are places that the bank maintain a presence like in supermarkets or malls but is not a real branch. When you deposit a cheque in those outlets, they send the cheques to a branch the outlet attached to on the following day where the cheques get added to the bank’s system for encashment. So if you are in a hurry to get your money soon, deposit the cheque before 3 pm at a proper bank branch and if its not a crossed cheque you can visit the bank the cheque belongs to and collect cash over the counter.
What to Do if the Cheque Has Expired?
Earlier I said that a personal cheque is valid for 6 months from the cheque date and a business cheque is valid for 3 months (or less if specified). While this is sufficient time for anyone to encash a cheque, we might run into situations where we misplaced the cheque and found it after it expired. Since the cheque is expired and you cannot deposit it as is, you need to meet the cheque issuer and ask him to change the date to current date and then get his proper signature for the date change. Once the correction is done the cheque becomes valid again. Or you can simply give your old check back and get a new cheque from the issuer.
Are Cheque Numbers Unique?
No the cheque numbers are not unique. The cheque numbers are recycled over and over again. So a cheque number you had in one of your cheques might be reissued in few months. But the banks make sure not to issue the same cheque number again for the same bank branch or to the same account. Even if a cheque number is re-issued again, both cheques are still valid for use if drawn properly. This is why we have to fill in the cheque number and the bank branch details when we deposit a cheque. Since a Sri Lankan cheque number is only 6 digits long, a bank has only 999,999 cheque numbers to issue for all their cheques.
Hope this helped you to learn about the A, B, Cs of cheque accounts! If you have questions please leave a comment and I’ll try to find answers.