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Dishonoured Cheque - What Does It Mean and Its Impact on Business Loan?
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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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A dishonoured cheque occurs when the bank of the cheque issuer refuses to honour the payment, citing reasons like insufficient funds or signature mismatch. Both individuals and businesses involved in financial transactions must understand the meaning of a dishonoured cheque.
It's crucial to note that a dishonoured cheque differs from a cancelled cheque. A cancelled cheque is one for which payment has already been made, marked by the word “cancelled” between two parallel lines. This prevents the cheque from being used for withdrawals.
Understanding Dishonoured Cheques
A dishonoured cheque, or bounced or returned cheque, refers to a situation where the issuer's bank refuses to honour the payment. This can happen for various reasons, such as insufficient funds, signature mismatches, or other discrepancies. The implications of a dishonoured cheque are significant, leading to legal and financial consequences for individuals and businesses involved in financial transactions. It is crucial to be aware of the reasons behind dishonoured cheques and take proactive measures to prevent them, maintaining trust and credibility in financial dealings.
It is essential to note the distinction between a cancelled cheque and a dishonoured cheque in banking. A cancelled cheque is characterised by two parallel lines drawn across it, with the term "CANCELLED" written between these lines. This precautionary measure renders the cheque unusable for unauthorised financial transactions, ensuring enhanced security. This differs from a dishonoured cheque, where the issuer's bank refuses the payment.
Reasons for Bounced or Dishonoured Cheques
One of the primary causes of dishonoured cheques is insufficient funds in the account. The bank rejects the payment when the cheque amount exceeds the available balance.
Dishonour can occur due to a signature mismatch, where the issuer's signature significantly differs from the specimen held by the bank. This strict verification is in place to ensure authenticity.
Dishonour may result from unauthorised alterations or overwriting on a cheque. Banks have strict guidelines regarding cheque integrity, and any tampering can lead to rejection.
Cheques from an account which is frozen or blocked due to legal issues or other reasons will be dishonoured. This restriction ensures compliance with legal proceedings.
Dishonour can occur if post-dated cheques are issued without ensuring sufficient funds on the indicated future date. It is crucial to verify fund availability before issuing such cheques.
Cheques will be dishonoured if drawn from an account closed before a presentation. This can happen either at the account holder's initiative or due to actions taken by the bank.
Understanding these reasons is essential for cheque issuers and recipients to navigate the complexities associated with dishonoured cheques and take preventive measures.
Also Read: Government loan schemes for small businesses
Impact of Dishonoured Cheque on Business Loan
Issuing a dishonoured cheque carries legal consequences that can adversely affect a business's loan eligibility. In many jurisdictions, it is considered a criminal offence, and legal action, including fines and imprisonment, may be imposed on the issuer. These legal implications can create hurdles in obtaining or maintaining a loan for a business with Kotak Mahindra Bank, which offers customised Business Loans ranging from Rs.3 Lakh to Rs.1 Crore.
The repercussions of a dishonoured cheque include financial losses for both the issuer and the recipient. The issuer incurs charges for the bounced cheque, and the recipient may face additional costs, such as opportunity costs and potential legal fees. These financial setbacks can impact the business's health, influencing Business Loan eligibility.
Businesses rely on trust and credibility in financial transactions. Issuing a dishonoured cheque can significantly damage the credibility of the business. Banks may view such incidents negatively, affecting the business's reputation and perceived creditworthiness.
For businesses, the impact of dishonoured cheques extends to credit scores. A dishonoured cheque incident can harm the business's credit score. This, in turn, can hinder the business's ability to secure loans or credit facilities in the future, as financial institutions often assess creditworthiness based on past financial behaviour.
What are Prevention Measures for Issuers?
Ensure the account from which the cheque is drawn maintains an ample balance to cover the cheque amount. Vigilantly monitoring and proactively managing account balances can avoid dishonouring from insufficient funds.
Verify the signature on the cheque aligns with the specimen signature on record with the bank. Any alterations to the signature should be authorised appropriately to uphold consistency and prevent dishonour arising from signature discrepancies.
When issuing cheques, particularly those post-dated, confirm the availability of sufficient funds on the specified future date. Issuing post-dated cheques without ensuring adequate funds may result in dishonour and subsequent legal repercussions.
Continuously monitor account balances and stay vigilant about any alterations in the account status to prevent the issuance of cheques from frozen or closed accounts. Regular monitoring empowers issuers with awareness of their financial standing, enabling them to make well-informed decisions when issuing cheques
What are the Preventive Measures for Payees?
Thoroughly examine all aspects of the cheque, including the amount, date, and payee information. This meticulous verification process helps address discrepancies before accepting the cheque, minimising the risk of dishonour.
Opt for certified cheques or bank drafts whenever feasible. Certified cheques provide an additional layer of security, ensuring fund availability and reducing the likelihood of encountering dishonoured cheques.
Prioritise transactions with individuals or entities that have established trust. Building a reliable relationship with the cheque issuer contributes to a smoother financial transaction process and minimises the chances of receiving a dishonoured cheque.
Actively and promptly deposit any received cheques. Timely depositing is crucial in expediting the cheque-clearing process, reducing potential issues such as insufficient funds.
Also Read: Business Loan Repayment Strategies
Conclusion
Dishonoured cheques pose significant legal, financial, and reputational risks for businesses. The impact on Business Loan eligibility is substantial, with legal consequences, financial losses, damaged credibility, strained relationships, and adverse effects on credit ratings. Preventive measures for issuers, including maintaining sufficient funds and verifying signatures, are essential. Payees can take preventive measures by verifying cheque details, preferring certified cheques, and establishing trust with issuers. Overall, proactive measures are key to avoiding the serious repercussions of dishonoured cheques in financial transactions.
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