BANK INSTRUMENTS TO LIVE LESSER

[Dr. Sanjiv Agarwal]

While all the bankers of country assembled at Chennai recently to deliberate upon banking challenges, Reserve Bank of India, banking regulator in India has brought in a historic change in life of bank instruments - cheques, pay orders and drafts.

By a notification dated November 4, 2011, Reserve Bank has reduced the life ( validity ) of bank instruments from existing six months to three months, ie, the life of cheques issued by bankers and customers which was hitherto six months from the date of issue has been halved to three months. Not only this, the three month period will also apply to drafts, banker's cheques and pay orders issued by the banks on behalf of the customers

. Since the origin of the banking history in India, cheques have had a validity period of six months and the payee can present the same within a period of six months at any time he pleases. If the period of six months elapses, the instrument becomes stale and it can not be used further. Though the cheques used to be validated by the issuer in case it could not be presented within six months, that may not be possible now as cutting and over-writing on cheques is no longer allowed.

This implies that cheques will have to be presented within three months only to avoid its becoming stale and problems of the reissue or revalidation the payee will have to ensure that cheques are banked promptly within a period of six months.

This directive is welcome step as it would check two main menaces prevalent - one, issuing of cheques in back date as long as six months. When one maintains accounts on accrual or cash basis, such a practice is very much in vogue in business circles which allows them the benefit of payment without actual debit to the bank account .Two, it will afford a quicker reconciliation of unpaid instruments so far as banks are concerned.

With shortening of cheque's life , misuse could be checked. However, this direction will affect individuals more as business houses generally deposit the cheques etc promptly, thus optimally utilizing the funds and managing working capital efficiently.

As this practice will get implemented from April,2012, banks have been instructed to print this direction of validity on all the leaves of cheques and drafts etc so that the bank customers are made aware of the same.

The RBI has also tightened the issuance of drafts and pay orders by reducing their validity to three months. Also, banks have been directed to ensure that cheques or drafts are only credited to accounts of persons whose name appear on the instrument. All demand drafts of amount above Rs. 20,000 will now have to be only account payee and not bearer. The proceeds of such instruments will have to be credited in the account only, thus minimising the chances of misuse and possible money laundering. It will also curb corruption to some extent.

The impact of these sea changes may be positive but the decision of reducing the validity period by half is certainly bold one and historic.

 

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