Banks Requesting Cancelled Cheques: Understanding the Insurance Against Online Errors

Introduction to Loan Approval and Online Banking

These days, banks are requesting cancelled cheques from borrowers, even from Accounts Transferred through the Centralized Treasury System (CTS) banks. However, the primary reason behind this practice is not related to the borrower's repayment capacity or their intent to pay back the loan. Instead, it has a more technical and procedural purpose.

Understanding the ECS Electronic Clearing System

Apart from loan approvals, banks request cancelled cheques for various processes, including transferring funds to different bank networks or opening a demat account. One of these processes is the ECS (Electronic Clearing System), which banks use to automatically debit the EMI (Equated Monthly Installment) amounts from a borrower's account.

For ECS, the bank requires basic information such as the borrower's name, account number, bank name, branch name, address, IFSC (Indian Financial System Code) code, and MICR (Magnetic Ink Character Reader) code. While banks can identify this information themselves, it is a time-consuming process. An error in these numbers will necessitate repeating the entire process, which is a significant inconvenience.

Role of Cancelled Cheques in Ensuring Accuracy

Cancelled cheques serve as a reliable and accurate source of all the required information. They are used to verify that the account genuinely belongs to the borrower. Therefore, banks prefer to ask for cancelled cheques. Here's how they do it:

Verification of Account Information: All the necessary information, including the correct IFSC and MICR codes, is clearly written on the cheque. Guaranteed Accuracy: By checking the information on the cheque, banks ensure that all the details are correct, thus avoiding any potential mistakes. Simplifies the Process: Once the information is verified, the bank can then send the relevant information to the borrower's bank to initiate the auto-debit facility.

Considerations for Alternative Methods

In today's online banking environment, having a physical cheque book may not always be practical. Thus, some financial institutions are exploring alternative methods to obtain similar information:

Microdeposits: Under this method, a series of small amounts are deposited in the account to be verified. The customer then reports back to the bank with the transaction IDs to verify their account. Account Statements: Online account statements contain all the necessary information, making them a reliable alternative to cancelled cheques.

It is important to note that while these alternative methods are becoming more prevalent, there may still be situations where a cancelled cheque is mandatory. These situations usually require the absolute certainty that the information provided matches the correct account details.

Conclusion

Banks request cancelled cheques to ensure that all the necessary information about the borrower's account is accurate and correct. While alternative methods like microdeposits and account statements are becoming more common, cancelled cheques remain a reliable and trusted method for verifying account details. Understanding the importance of these cheques can help streamline the loan approval process and avoid potential delays or errors.