Check out time for cheques

The Reserve Bank has recently come out with a circular cautioning against the rise in the number of cheque-related fraud cases in the banking industry. It has said that many of these frauds could have been avoided had due diligence been observed while processing the cheques and monitoring newly opened accounts.

The RBI has advised reviewing and strengthening the cheque passing and account monitoring processes.

It has also suggested some preventive measures for banks. They include ensuring KYC compliance, scrutinising cheques under UV lamps and passing it through multiple levels based on the value of the cheque.

But there is no initiative to restrict the use of cheques. When the RBI published a discussion paper last year on ‘Disincentivising Issuance and Usage of Cheques’, we seemed to be going in the right direction. But nothing concrete seems to have been done since then.

A cheque is nothing but an instruction to the bank by the account holder to pay money to someone or to the account holder herself. Technology provides there other ways of giving this instruction.

Over the years, the automatic teller machine (ATM) has replaced the need to issue ‘self’ cheques to draw money from the bank. However, cheques continue to be a major mode for third party payments.

As rightly pointed out in the RBI discussion paper, paper-based systems such as cheques and cash come at a considerable cost.

Besides the obvious financial costs related to cheque usage such as printing, security, postage, clearing and handling, high cheque (and cash) usage also causes environmental damage.

Cheques give scope for fraudulent transactions. The bank needs to ensure that cheques are drawn properly and the signature on the cheque is genuine before making payment. If any signature on a cheque turns out to be forged, the bank cannot recover the money from its customers. Bank officials who pass forged cheques unknowingly due to work pressure are often taken to task.

The RBI estimates that the use of paper-based instruments (such as cheques, drafts, and the like) accounts for nearly 60 per cent of the volume of total non-cash transactions in the country. In value terms, the share is presently around 11 per cent.

With the introduction of the electronic clearing system (ECS), companies stopped issue of dividend and interest warrants and theECS debit system obviates the necessity to issue cheques for utility bills.

Facilities such as NEFT/RTGS enabled customers to transfer funds from one account to another account online, which again stopped the flow of cheques for such transactions. Core banking solutions and internet banking enable online transfer without using paper instruments.

Since August 2008, the RBI has mandated that all payments above ₹10 lakh between RBI regulated entities and in RBI regulated markets are to be made through electronic modes. It has also advised that banks should not take post-dated cheques should not be taken for EMI payments.

But these are baby steps. There should have been substantial incentives to use the electronic mode of transfer, or punitive disincentives for customers who continue to use cheques.

On the one hand, the RBI has been taking steps to smoothen the clearance of cheques by introducing speed clearing at a number of centres (around 1,300) and the Cheque Truncation System to avoid physical transfer of cheques between banks.

But on the other hand, it has not provided any incentives to use facilities like NEFT/RTGS. Banks charge a commission for effecting NEFT/RTGS whereas cheques do not bring any transaction cost.

The penetration of telecommunication facilities in India is phenomenal. Mobile phones are used for communication and entertainment. Internet penetration is substantial.

It is time the RBI mandated that cheque transactions should not be permitted beyond a cut-off amount, say ₹50,000. Government departments and corporate customers should be prohibited from issuing cheques. There should be a cost on every cheque transaction.

Banks can be encouraged to provide more e-lounge facilities for customers who do not have internet access.

When 20 of the 27 EU member states have effectively eliminated cheques with usage down to two cheques per capita per annum or less, with mobile phone and internet penetration, it is possible for India too to move to paperless bank transactions.

The writer is a retired banker

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