In our journey of building a Neo bank, we are as much intrigued as excited about many things. One of the pertinent questions to ask is this: Do you need a cheque book for transactions? To put it in a different way, when was the last time you used a Cheque leaf? May be while applying for a loan or while opening a bank account or to capture bank details while making an investment! If it’s a long time back, then do you really need them? With banking activities becoming mobile first and fund transfers happening on real time, the relevance of the humble cheque leaf needs to be re-visited. Can we live without a cheque? Is our society ready for it? What about the legal ramifications?
When I was contemplating this along with my team members, there came an announcement that Singapore is going to eradicate Cheques by 2025. The Monetary Authority of Singapore (MAS) has issued a public consultation paper to study the possibility of the same. Is this possible? If so, what will happen? Are we ready to navigate the banking world without cheque books? Let’s understand this deeply from the perspectives of: the bank or a lending institution, the regulator, the Judiciary and the Indian customer.
Banker’s Perspective:
Banks facilitate economic activities by increasing the velocity of money. Just for a lay person’s understanding, when you deposit a cheque into your savings account, banks tend to keep a small portion of that as the reserve requirements and lend close to 80% of the money deposited. Now a borrower taking loan from the bank will have a cheque, which will be deposited in his bank. Now this bank continues the process of lending 80% of the deposited amount after reserve requirements and this chain continues. This is how banks create more money in circulation in our economy and expands commerce.
Cheque issuance and processing has come a long way from simple Clearing house to image based digital clearing, which in my mind is very similar to an automated assembly line of any large-scale industry. Like factories we have seen a lot more automation and reduction of manpower in Clearing houses for all banks. To give you a perspective, from over 100 people it has come down to 10 now. With hyper-cheque volumes and with high values, there was a need to expedite this process which resulted in the evolution of Cash Management System and Automated Clearing House. With the advent of new electronic fund transfers like RTGS and NEFT, the corporate load of cheques, and with UPI, the retail volumes have also comedown drastically. All thanks to the foresight of our regulators.
Today banks can optimize the cost of cheque issuance and clearing by migrating their customers to use digital channels. They will be relieved if cheques are removed from the system, except for legal reason to bind the borrower. Again, they will await the regulators guidance and legal enactment.
Regulatory Perspective:
Being passionate bankers, we always love our regulators for the way they think on scale with social impact. While we are proud of the UPI accomplishments, trust us, this is not the first time RBI has brought in an innovation like this. One must admit that the scale of UPI has surpassed all other previous innovations like RTGS and NEFT.
Given the precedence, we are sure they would have started to think on similar lines, and we will not be surprised if they call for a white paper discussion to test the feasibility of abolishing cheques altogether. Let’s try to wear the regulator’s hat for a few seconds to reason out:
1. As of April 2021, 190 million adults in India do not have a bank account, and by default they will be out of relevance for this question.
2. Now with Jandhan push, with over 31 crore Jandhan accounts, cheque book is still a privilege. If you want one, then you will need to fulfill minimum balance criteria, and this excludes them as well.
3. Volumes of paper-based clearing has come down by 50% in the last 5 years from over 120 Mn units in 2017 to 58Mn units in July 2022
4. On an average, 1500 Digital fraud cases were getting registered per day in 2021 (Source RBI). 30% of them are related to UPI transactions and remaining is of Internet account take over, debit cards and credit cards being compromised. The number of fraud cases registered for cheque alterations or account manipulation is far lower than the digital modes, where Identity theft and account take over is rampant. Now this will be a problem to reckon with if cheques are abolished!
5. How is a common man protected today with cheque as an instrument to pay? RBI has brought in a concept of Positive pay system, where the issuer can notify the cheque issuance along with Payee’s name to its bank to avoid material alteration on the instrument. While its available for cheques above Rs 50,000 it is left to the banks to make it mandatory for cheques with Rs 5 lakh and above. In case if one does not register for Positive pay, then they cannot seek redressal mechanism for a fraudulent cheque encashment from CTS Grid. Has the awareness about Positive Pay System reached the ultimate customer?
Legal Perspective:
“As of April 2022, there were 33.44 lakh pending cheque bounced cases in the country”, courtesy Times of India. Can legal system live without a cheque? of course yes! All they need is a legal agreement to the underlying transaction and it is moving completely digital. With the advent of digital contracts, one can even sign up the Terms and conditions on mobile and these are accepted as valid contracts. With the digital evolution, we can hope for these practices to set in.
Customer Perspective:
A cheque used to make payment, or an investment protects the issuer from misuse of the same. When a crossed cheque is issued, it gives the issuer more protection as it cannot be cashed in by any individual or entity other than the payee mentioned in the cheque leaf. In my experience this was a powerful tool in the past, where banking was non digital, but not anymore.
Typically, most of us as customers would have given a cheque leaf while taking a loan, without understanding the legal gravity of it. “Cheque being a negotiable instrument, the issuer is bound legally to honor the cheque. If not, under section 138 of Negotiable instruments act, the Issuer has to pay 2-3 times the amount of cheque as penalty or to be imprisoned for not more than 2 years or both”. Now if this process is withdrawn, then will our legal obligation come down or the punishment for cheque issued getting dishonored be less severe than the one mentioned above? As we discuss, there is no clarity on this, and we need to wait and watch.
Our View:
As we try to solve problems for future by harnessing the scope of Neo banking, we will have to take a definite call on this aspect. We can draw parallel between usage of cheques and the glide path that will be opted to reduce the dependency on fossil fuels! Like how greening the planet may not happen overnight, and fossil fuels will still be consumed, we will see cheques being used albeit with a reduced scope for some more time. In other words, we may have to tax those who still wants the privilege of using cheques, especially since there are efficient ways of transacting in the digital medium. It may even call for an exemption for elderly customers as they might feel difficult to adopt to the digital ways quickly. With India leading the way on digital transactions, it will not be long before we see a generation that rarely uses the cheque leaf!