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.

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.

Daily cheque clearing started around

1770, whereby bank clerks met to
exchange cheques and settle their
balances in cash.

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 cheques
Cheques 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

02 Thought Paper

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