Payment and Collection of Cheques
Who pays a cheque, who collects it, and the rules that decide whether it clears.
A cheque is a written order from an account holder to their bank: pay this amount to this person. Two banks handle it. The paying bank (where the writer has the account) pays it, and the collecting bank (where the receiver deposits it) collects the money for its customer.
Recovery agents handle cheques all the time: an EMI cheque, a part-payment cheque, a cheque handed over at a field visit. Knowing who pays, who collects, how crossing works and how long a cheque stays valid stops simple mistakes that delay credit to the loan account.
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The People in a Cheque
- Drawer
- The person who writes and signs the cheque. In a loan repayment, this is usually the borrower.
- Drawee
- The bank the cheque is drawn on, where the drawer has the account. Also called the paying banker.
- Payee
- The person or organisation named on the cheque to receive the money. For a loan repayment, this should be the lender.
- Collecting banker
- The payee's bank. It takes the cheque from its customer, presents it for clearing and credits the money.
- Holder in due course
- Someone who got the cheque for value, before it was due, and without reason to suspect a defect in the giver's title (Section 9). The NI Act gives this person strong rights to the money.
Crossings and What They Do
Crossing means drawing two parallel lines across the cheque. Sections 123 to 131 of the NI Act cover it.
| Marking | What it means |
|---|---|
| No crossing (open cheque) | Can be paid in cash at the counter of the paying bank. |
| General crossing: two parallel lines, with or without "& Co." | Paying bank pays only to another banker, so the money must go into a bank account. |
| Special crossing: a bank's name written across | Paying bank pays only to that named bank (or its collecting agent). |
| "Not negotiable" added to a crossing | Whoever takes the cheque gets no better title than the person who gave it. Protects against theft. |
| "A/c Payee" added | RBI bars banks from collecting it for anyone other than the payee named on it. |
Protection for the Two Banks
The paying banker is discharged when it pays "in due course": in good faith, without negligence, to the right person, according to what the cheque says (Section 85). If it pays a crossed cheque in cash at the counter, it loses that protection and is liable to the true owner (Section 129).
The collecting banker is protected under Section 131 if it collects a crossed cheque for its own customer in good faith and without negligence, even if the title later turns out to be defective. This is why banks check the payee name against the account before crediting.
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How a Cheque Is Cleared Today
Physical cheques no longer travel between banks. Under the Cheque Truncation System (CTS), the collecting bank scans the cheque and sends the image and data through the clearing house. Since 13 October 2023 there is one national grid. The NI Act itself says a cheque includes this electronic image (Section 6).
RBI has moved CTS to continuous clearing: cheques are presented and confirmed through the day instead of in fixed batches. Once a cheque is confirmed and settled, the collecting bank releases the money to its customer within one hour of settlement, according to RBI's cheque clearing FAQ.
Two practical rules follow. First, a cheque with any correction to the payee name, amount in figures or amount in words is not accepted in CTS; the drawer must write a fresh cheque. Second, for cheques of ₹50,000 and above, banks offer Positive Pay: the drawer confirms the cheque details to their bank in advance, and CTS flags any mismatch. Banks may make it compulsory for cheques of ₹5 lakh and above.
A Cheque Is Valid for Three Months
Banks used to honour cheques for six months. From 1 April 2012, RBI cut this to three months from the date on the cheque, for cheques, drafts, pay orders and banker's cheques. A cheque presented after that is stale and will be returned. A post-dated cheque counts from the date written on it.
Handling a Repayment Cheque in the Field
Good practice that follows from the rules above.
- checkThe payee should be the lender, exactly as the lender instructs, never you personally.
- checkCheck the date: not older than three months, and not a date far in the future unless the lender accepts post-dated cheques.
- checkCheck that the amount in words matches the figures and that nothing is overwritten. An altered cheque will not clear.
- checkGive the borrower the receipt your lender requires, and deposit the cheque the same day or as your lender's process says.
- checkIf a cheque is lost in your custody, report it at once so the borrower can stop payment.
How the DRA Exam Tests This
Expect definition questions ("The bank on which a cheque is drawn is called the ___") and crossing questions ("A cheque with two parallel lines only is crossed ___"). The classic trap is mixing up the paying banker's protection with the collecting banker's, or answering six months for cheque validity. The current answer is three months.
FAQs
How long is a cheque valid in India?expand_more
Three months from the date written on it. RBI reduced the period from six months for instruments issued on or after 1 April 2012.
Can an account payee cheque be deposited in someone else's account?expand_more
No. RBI instructions bar banks from collecting an account payee cheque for anyone other than the payee named on it.
Can I cash a crossed cheque at the bank counter?expand_more
No. A crossed cheque is paid only through a bank account. Only an open, uncrossed cheque can be paid in cash at the counter.
How fast does a cheque clear now?expand_more
Under continuous clearing, once the paying bank confirms the cheque and settlement happens, the collecting bank releases the money within one hour, according to RBI. The total time depends on when the cheque is presented and confirmed.
What happens if a cheque bounces?expand_more
The bank returns it with a reason memo. If it bounced for lack of funds, the payee may take action under Section 138 of the NI Act, which has its own notice and time limits.
Next steps
- NI Act, 1881arrow_forward
- Cheque Bounce (Sec 138)arrow_forward
- Banker-Customer Relationshiparrow_forward
- Syllabusarrow_forward
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