Bounced Cheques: A Commercial Problem Needs A Commercial Solution
Credit discipline and credibility of cheque payments don’t need crutches of criminality, writes Pramod Rao.
It’s a topic that evokes passionate debate and divided opinions. Yet it’s important to review what the criminalisation of cheque bounce sought to achieve and whether that has indeed been achieved. Or not. It’s also important to discuss if there are alternatives available that facilitate achieving the same goals.
Just over 30 years ago, Parliament criminalised cheque bounce. The person paying by cheque could face fine or imprisonment if the cheque bounced or was dishonoured for insufficient funds in the account. This was done to inculcate faith in the efficacy of banking operations, enhance credibility in transacting business through cheques and to popularise acceptance of cheques as a payment instrument.
Since then, a huge number of cases have been filed in criminal courts, with the current count of pending cases of cheque bounce being in excess of 35 lakh. In addition to clogging the criminal courts, it has also yielded a disproportionately rich jurisprudence and multiple amendments to the law to address real and hitherto unforeseen issues.
It will be safe to say that securing credibility for cheque payments continues to be a challenge with 30 plus years of criminalising cheque bounce.
Clogging The Courts: Worth It?
Many lay the blame on the criminal courts applying standards of the criminal justice system to cases of cheque bounce.
I have never understood why we blame magistrates and judges at criminal courts for doing exactly what their training and our criminal justice system warrants. Keep in mind that since cheque bounce is a civil wrong which has been criminalised, police or law enforcement agencies play no role in investigation, inquiry or prosecution of cheque bounce as a criminal offence (making it clear that cheque bounce is not a public wrong by itself).
It is the payee who has to act as the ‘complainant’. The complainant has to be present on each occasion in the court when the matter is listed. The ‘accused’ is innocent until proven guilty. Evidence and witnesses are required to establish the offense. All these take time especially given the volume of all cases which courts deal with, of which about 70% are criminal cases. Determination of cases on an average takes anywhere between 2 to 5 years or more (excluding time taken for appeal processes that culminate with the Supreme Court).
There is no data available either of convictions on account of cheque bounce or that the coercive measure succeeded in helping realise the pending amount.
Given the pendency problem, suggestions have been made that cheque bounces cases should be conducted as summary trials. But this ‘solution’ belies the challenges of dealing with this matter for over 30 years.
Clearly, asking magistrates and judges to switch off their ordinary approach and switch on the summary approach has not happened and we cannot expect it to happen. Expecting another resource to be harnessed, for instance the police, is putting additional burden on an already overworked, understaffed infrastructure which is charged with ensuring public order and prosecuting public crimes.
Will Lenders Suffer?
Equally, everyone’s favorite reason for why criminalisation of cheque bounce should continue is that it safeguards bankers and non bank finance companies.
To be sure, obtaining post-dated cheques for equated monthly installments (EMIs) payable to service consumer loans was a practice pioneered by an (MNC-owned) NBFC. It indeed paved way for consumer finance to grow and flourish in India, with the ‘post-dated cheque’ technique being adopted by all banks and NBFCs. Access to the criminal justice system when cheques bounced may have served as deterrent...for a while borrowers understood that a bounced cheque could...potentially...land them in jail.
And yet, it is quite clear from the pendency data that cheques have continued to bounce, overwhelming the criminal justice system.
This is partly due to the over-dependence of the payees (receiving payment by cheques), bankers and other lenders on the criminal justice system to address a civil issue, and specifically of recovery.
It has also created a mini-cottage industry that serves complainants and accused alike.
Debtors’ Prison Versus Credit Scores
As a civilised society we should move on from the Dickensian ideals of workhouses and debtors’ prison. Incidentally, Charles Dickens did much to mould public opinion in favour of abolition of individuals being imprisoned for defaulting on repayment of debt. What started in the early Middle Ages, took the United Kingdom until 1970 to review and abolish (following the Payne Committee report of 1966). There is also the International Covenant on Civil and Political Rights, 1966 to consider, which forms part of the UN’s International Bill of Human Rights, and of which India is a ratifying signatory. It explicitly states that the right to liberty includes the prohibition of imprisonment as punishment for breach of contract, which presumably extends to cheque bounce.
Hopefully today no one would argue for debtors’ prison being brought back as punishment for defaulting to lenders (noting that defaulters who are fraudsters, cheats or swindlers are a very different class deserving due prosecution under applicable criminal statutes by law enforcement agencies or the lenders) and shouldn’t do so for cheque bounce too. From a bankers’ perspective, recovery of the dues and enforcement of covenants and security interest are the key, and not necessarily seeing a person behind bars (other than the exceptions noted earlier).
To this end, the strengthening of civil courts and debt recovery tribunals, as well as providing rights under SARFAESI for obtaining possession of the property mortgages, have served bankers well - when they work. These have their own challenges which are far more important to address than continued criminalisation of cheque bounce.
- DRTs are usually plagued by lack of judges, vacancies galore and a huge volume of pending cases.
- SARFAESI rights are contingent on the district magistrate or metropolitan magistrates providing orders in a timely manner for police assistance in obtaining possession.
Equally, for instant payments, Reserve Bank of India and the banking system have delivered many a solution (UPI, NEFT, RTGS, IMPS) that obviate usage of cheques in the first place, and the concern if at all will be for the ‘post-dated cheque system’.
Another development in the last 20 years which has worked for banks is the emergence of credit information bureaus. These bureaus aggregate loan repayment history, payment of utility bills and so on, helping create a credit profile and credit scoring of the borrower. These profiles and scoring have been remarkably accurate forecasts of credit behaviour, and allowed calibrated growth of the booming consumer finance industry.
A borrower knows that a payment default will be reported to the bureau and that it will impact credit scores and his ability to borrow in future. Extend that to cheque bounce data.
These bureaus can aggregate cheque bounce data - the data can be directly provided by the banks without the payee needing to report the same. The data can be provided for the full past period that banks hold data (at least last 8 years or so), and would cover all instances when cheque bounce took place due to insufficiency of funds.
This will ensure that the benefits of the data aggregation can begin immediately. This data can be utilised in updating the credit profile and credit scoring.
This will help not just banks and NBFCs but also businesses and ordinary persons who can ask for and look at a credit information report before accepting a cheque or transacting with someone.
Technology today allows the potential payee to access this information at her fingertips, through a mobile app or though OTP-secured sms or other messaging apps, which the person paying by cheque can receive and provide.
Meanwhile, abating all pending cases of cheque bounce will de-clog the courts. In parallel, extending limitation for those who had not filed a separate civil claim for cheque bounce, will result in the judiciary, litigants, and lawyers focusing on civil cases allowing them to be handled expeditiously, with emphasis on mediation under Commercial Courts Act, and in general with options to explore alternative or online dispute resolution mechanisms. Even as a post-pandemic response, de-clogging the courtrooms is highly desirable and a public necessity to safeguard the judiciary, litigants and lawyers.
With both, the Supreme Court of India signaling the need for a review, in the Makwana Mangaldas Tulsidas vs State of Gujarat case, and now the government inviting public comments to a note proposing decriminalisation of cheque bouncing, among other offences, it is now that the public and polity much consider extending support for such a change.
A commercial solution (of credit information bureau and its reports) supporting a commercial transaction (of payment by cheque) creates necessary commercial discipline - which if it fails, accessing a de-clogged judiciary with civil claims makes far better sense for a civil society than continuing to regard a private civil wrong as a criminal offense, which in any case has not succeeded in providing required credibility for cheque payments.
To conclude, credit discipline and credibility of cheque payments don’t need crutches of criminality – both goals can be achieved by harnessing credit information bureaus and seeking a stronger civil contracts enforcement system.
Pramod Rao is Group General Counsel at ICICI Bank. These are his personal views.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.