Evolution of cheques and paper-based clearing in India

Evolution of cheques and paper-based clearing in India

Thought Paper

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Overview

From once being a prized possession and a status symbol to now being on the brink of extinction, the cheque has come a long way.

This paper traces its history, current usage and its future role in the Indian context.

History of cheque clearing

During the 1st century AD, banks in Persia and surrounding regions issued letters of credit known as Sakks, which are believed to have been the basis for the modern cheque. At their customers request, bankers would issue orders called Bills of Exchange to pay money to identified payees, eliminating the need for early merchants to carry large amounts of currency or gold. Fully printed cheques were introduced in the early 1700s, and the first personalized cheques were introduced in 1810 in England. Daily cheque clearing started around 1770, whereby bank clerks met to exchange cheques and settle their balances in cash. Section 6 of the Negotiable Instruments Act, 1881, states A cheque is a bill of exchange drawn on a specified banker, and not expressed to be payable otherwise than on demand. So, a cheque is a written instruction to a bank (also called the drawee bank) asking it to pay a specific sum of money to the person/company whose name is written on it. The person issuing the cheque is called the drawer and the one to whom it is issued is called the payee.

Features of paper-based clearing

Features of a cheque: A cheque should be in writing and duly signed by the drawer. It contains an unconditional order. It is issued on a specified bank. The amount specified must be clearly mentioned both in figures and words. The payee is always specified. It is always payable on demand. The cheque is invalid if it does not bear a date. A cheque must be in order to pay money only.

Types of chequesCheques are of basically four types.a) Open Cheque:A person holding an open cheque can:I. Receive payment over the counter at the bank.ii. Deposit the cheque into his account.iii. Pass it to another person by endorsing the cheque on the reverse side.b) Crossed Cheque:Payment of a crossed cheque cannot be made over the counter at a bank; it can only

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