Different Types Of Cheques And Their Uses

Types of Cheques: How many types of cheques are there? Cheques come in various forms to suit different banking needs. While blank and crossed cheques are common, many other types of cheques are used for secure transactions. Whether for personal or business payments, each cheque type serves a specific purpose.

In banking, different types of cheques include bearer, order, crossed, post-dated, stale, traveller’s, and self-cheques. Each has unique features, validity, and usage. Understanding cheque types helps ensure safe and hassle-free transactions.

This guide covers the types of cheques in banking, the number of parties involved, and their practical uses. Let’s explore how each type of cheque in a bank works.

What is a Cheque?

A cheque is a written instruction from the account holder (drawer) to the bank, authorizing the payment of a specified sum to the person or entity (payee) named on the cheque. It serves as a secure method of transferring funds without using cash.

For example, if you owe a merchant, you may issue a cheque for the required amount. The types of cheques include bearer, crossed, and post-dated, each serving different needs.

Understanding the types of cheques helps in choosing the right one for various financial transactions, whether personal or business. Cheques are governed by the Negotiable Instruments Act, of 1881, ensuring their legal validity.

Also Read: What is a Bank Overdraft?

Essential Features of a Cheque

Cheques are commonly used for secure financial transactions and have the following key features:

Account Holder Only: Only individuals with a savings or current account can issue a cheque.
Non-Editable Payee and Amount: Once the payee or amount is written, it cannot be changed. A new cheque must be issued for any changes.
Signature Required: A cheque must be signed by the drawer to be valid. Without a signature, it is considered invalid.
Validity Period: A cheque is valid for up to 6 months from the date mentioned. After this, it is considered stale but can still be used for transactions.
Mandatory Details: A cheque includes the drawer’s bank name, account number, the payee’s name, the amount (written in both words and figures), the signature, and a unique cheque number.
Magnetic Ink Character Recognition (MICR): Cheques include a MICR code to help banks process payments quickly and efficiently.
Non-Alterable: The payee’s name and the amount cannot be altered once written.
Payable on Demand: A cheque can be cashed immediately if there are sufficient funds in the account.

Also Read: Non-Performing Assets (NPA)

Different Types of Cheques in Banking

Cheques are essential financial tools used for making payments or transferring funds. In India, different types of cheques serve various purposes depending on the transaction type and security level. Understanding the types of cheques can help you make secure financial decisions.

Below is an overview of the various types of cheques in banking, along with examples and their specific use cases:

1. Bearer Cheque

A bearer cheque is one of the most common cheque types. It is payable to whoever presents the cheque to the bank. This means that the person carrying the cheque can cash or deposit it without any additional endorsement or verification.

Bearer cheques carry a higher risk since anyone can encash it, so it is essential to be cautious when issuing or handling them.
Example: If you issue a cheque to “Pay to the order of John” with no further restrictions, John can hand it over to anyone who can cash it.

2. Order Cheque

An order cheque is payable only to the specific person or entity mentioned on the cheque. It eliminates the bearer option, ensuring that the payment is securely received by the intended recipient.

It is more secure than a bearer cheque as it ensures the payee’s identity is validated before payment.
Example: A cheque issued to “Pay to the order of [Name]” means only that person can cash the cheque, and the bank may verify their identity.

3. Crossed Cheque

A crossed cheque features two parallel lines drawn across the face of the cheque. This type of cheque can only be deposited into the payee’s bank account and cannot be cashed at the bank’s counter.

Crossed cheques are a safer method for transferring money as they prevent encashment at the bank counter, reducing the chances of theft or misuse.
Example: If you draw two lines on a cheque and mention “A/C Payee” between them, the cheque can only be deposited in the payee’s bank account.

4. Post-Dated Cheque

A post-dated cheque contains a date that is set in the future. It cannot be cashed or deposited until that specific date arrives. This type of cheque is useful for setting up payments or transfers for a later date.

It is useful for planning future payments but may lead to issues if funds are insufficient on the given date, which could result in a bounced cheque.
Example: If today is March 1st and you issue a cheque with the date March 15th, the payee cannot cash it until the 15th.

5. Stale Cheque

A stale cheque is one that is more than three months old. Banks typically reject stale cheques due to the risk of fraud or errors. This type of cheque is no longer valid for encashment after the expiration period.

To avoid issues, ensure that cheques are deposited or cashed within the validity period.
Example: If you receive a cheque dated December 1st and try to cash it on March 1st, the cheque will be considered stale and rejected by the bank.

6. Self-Cheque

A self-cheque is issued by the account holder for withdrawing funds from their own bank account. The payee is marked as “Self”, allowing the drawer to cash the cheque at their bank.

While convenient, self-cheques should be handled with care to avoid misuse if lost or stolen.
Example: If you need to withdraw money from your bank account, you can issue a cheque with “Self” written in the payee section.

7. Traveller’s Cheque

A traveller’s cheque is a prepaid cheque used primarily by travellers abroad. These cheques are often used to replace cash and can be encashed or used for purchases in foreign countries. They provide security because if lost or stolen, they can be replaced.

Traveller’s cheques are secure, and their widespread acceptance makes them a popular choice for international travel.
Example: A traveller’s cheque can be issued in a foreign currency, and you can exchange it for local currency when travelling abroad.

8. Banker’s Cheque

A banker’s cheque is issued by the bank on behalf of the account holder. It is a secure method of making payments within the same city. The bank guarantees the payment, making this cheque type reliable for large transactions.

Since the bank guarantees the payment, it is considered a highly secure form of cheque.
Example: If you need to make a large payment to a supplier, you can request a banker’s cheque from your bank.

9. Blank Cheque

A blank cheque is a cheque that has only the drawer’s signature and no other information filled in. This is a highly risky cheque type, as anyone who finds it can fill in any amount and cash it.

Blank cheques pose a high-security risk and should never be issued under any circumstances unless necessary.
Example: If you hand over a blank cheque to someone, they can write any amount and present it to the bank.

10. Mutilated Cheque

A mutilated cheque has been damaged, torn, or is in poor condition. A bank will typically not process a mutilated cheque unless the drawer verifies.

If a cheque is mutilated, you must request a replacement from the drawer to avoid delays in processing.
Example: A cheque that is torn in half or has significant portions missing would be considered mutilated.

Also Read: Common Banking Terms You Should Know

Therefore, these are common types of cheques used in banking, each with specific functions and security features. Knowing them helps ensure secure transactions and reduces risks, especially with transferable cheques like bearer cheques.

Parties Involved in a Cheque

Understanding the parties involved in a cheque is essential when dealing with different types of cheques. Here are the complete details of each role:

Drawer: The drawer is the individual who issues and signs the cheque. This is the account holder who instructs the bank to transfer funds from their account to the payee.
Drawee: The drawee is the bank where the cheque is drawn. The drawee bank is responsible for processing the cheque and transferring the funds to the payee.
Payee: The payee is the person or entity named on the cheque who will receive the payment. This is the individual or business the cheque is intended for.
Endorser (Optional): An endorser is a payee who transfers their right to receive payment to another party. This can happen when the payee signs the back of the cheque to endorse it.
Endorsee (Optional): The endorsee is the person to whom the payee’s rights to the cheque are transferred. They are the final recipient of the cheque payment.

Also Check: How to Get a Bank Job in India? A Complete Guide

Furthermore, each party has a specific role in ensuring the smooth processing of different types of cheques.

Moreover, familiarity with the various types of cheques is crucial for anyone pursuing a banking or finance career. It helps in managing transactions securely, adhering to banking practices, and minimizing fraud risks. Gaining this knowledge strengthens your professional expertise and prepares you for essential tasks in the financial industry.

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Types of Cheques FAQs

What are the different types of cheques in banking?

There are several types of cheques, such as bearer cheques, order cheques, and crossed cheques. Each type serves different purposes, offering varying levels of security and transferability, depending on the cheque type in the bank.

What is a cheque and how does it work?

A cheque is a written order from an account holder (drawer) to their bank (drawee) to pay a specified amount to a person or entity (payee). It’s a secure method for transferring money without using cash.

What are the advantages of using a cheque?

Cheques offer a secure and traceable way to transfer money. They reduce the risk of carrying cash and can be used for both small and large payments, making them convenient and reliable in different financial transactions.

How do you write a cheque correctly?

To write a cheque, include the date, payee’s name, and amount in figures and words, and sign it. Ensure that all details are accurate to avoid errors or fraud, and use a pen for permanent markings.

Can a cheque be cancelled after issuance?

Yes, a cheque can be cancelled before it is cashed or deposited. To cancel a cheque, inform the bank and ensure the cheque is marked as “void.” However, once processed, it cannot be reversed.