Cheque Returns – Recent Trends in Sri Lanka
While the use of cheques globally continues to decline, cheques remain an integral part of Sri Lanka’s payment environment. There are still an average volume of 190,000 cheque transactions that pass through the National Cheque Clearing House on each business day. As the nation reaches financial maturity personal cheque is likely to disappear, but businesses continue to value cheques as the most convenient non cash payment instrument and an easily reconciled payment method for commercial transactions, despite the gaining popularity of other payment instruments such as credit cards, debit cards and electronic payment modalities.
The annual growth rate over the last four years is depicted in Chart 1 below which indicates a drastic growth of 20.33% in volume and 23.48% in value of cheques during the year 2006/07. The total value of cheques transacted amounted to Rs. 4,303 Billion and the corresponding volume from 40.8 million to 49.1 million cheques. This is in fact contrary to the global trend in use of cheques. This is an indication that there is still an opportunity for the expansion of use of cheques in the rural areas of this country, which could be identified as a growing “Rural Financial Market”. |
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Reasons for Cheque Returns
A cheque can be returned for a number of reasons which includes, |
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Insufficient funds in account it being drawn on, |
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It has been cancelled by the drawer (the person who wrote the cheque) |
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A technical reason (unsigned, wrong date, amount, bad image, encoding errors, etc) |
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Fraud (as in the case of a stolen cheque) |
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Legal order |
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| Return Cheques are one of the biggest problems in a paper based debit transfer system. Legal Risk is real in the cheque payment system and the inefficiency and/or the inadequacy of the legal system of the country can make the litigation ineffective, costly and cause long delays. The high number of cheque returns would expose the payment system to Settlement Risk (settlement will not take place as expected), leading to Systemic Risk (possibility that the failure of one participant to meet his payment obligations on a due date will cause other participants in the payment system to fail to meet their payment obligations when due). Furthermore, increase in return cheque volumes imposes a heavy load to the National Clearing House who has a daunting task of generating and printing Cheque Return Notification (CRN) within a short span of time. |
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What is a Cheque Return Notification (CRN)
With the transition from the automated to the Cheque Imaging and Truncation System (CITS) dishonoured cheques are not physically returned to the customer instead Cheque Return Notification is issued under the provisions of the Payment & Settlement Systems Act Section 34(2) which states “An image return document shall be deemed to be the cheque to which it relates”.
An image return document which is known as a Cheque Return Notification (CRN) is issued by Lanka Clear or an authorized Commercial Bank in the event a cheque is dishonoured and the CRN conforms to all requirements set out by the Central Bank of Sri Lanka. According to section 35(2) of the Act a banker who issues a CRN warrants that it is a true copy of the cheque to which it relates and shall also indemnify the drawer against any loss in the event of the cheque itself being paid or sued on |
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| CRNs are of two types. |
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A CRN which carries a return notification which allows representment.
(Re-presentable) |
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A CRN which carries a return notification which does not permit representment. (Non-Re-presentable) |
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| The limited purposes of a CRN are as given below: |
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A CRN can be deposited for re-presentment only at the bank where the original cheque was deposited. |
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A CRN can be used for re-presentment only once |
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There is provision in the CRN for endorsement to be written if required |
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A CRN can be used for the purpose of evidence |
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A CRN cannot be presented over the counter for encashment. |
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A CRN cannot be negotiated |
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Alterations, insertions, interlineations are not allowed on the CRN as an altered CRN will not correspond with the image of the cheque stored in the system. |
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If a holder of a CRN loses it or misplaces it he should notify without delay in writing the drawer of the original relevant cheque. |
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A CRN can be used for representation only within a period of six months. |
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| There are 26 Return Codes (refer Table 2) defined and accepted by the Banking Community. The category which is the Non-Re-presentable can be further categorized as returns due to technical faults. Accordingly it was found that an average of 73% of the CRNs was Re-presentable, an average of 24.6% was Non-Re-presentable and an average of 2.4% is due to technical reasons. |
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