Have you ever wondered why a cheque gets dishonored even when everything seems correct at first glance? Why does a bank refuse payment on a cheque that looks perfectly valid? And what happens legally when a cheque bounces due to insufficient funds or a stop-payment instruction? These questions confuse not only customers but also many bankers preparing for exams like JAIIB, CAIIB, or internal promotions.
This article breaks down the most misunderstood yet frequently encountered banking concepts—Cheque Dishonor, Section 138 of the Negotiable Instruments Act, and two highly practical rights used by banks: Banker’s Lien and Right of Set-Off. Understanding these topics is essential, because they directly impact everyday banking operations as well as legal and financial outcomes for customers.
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In this in-depth guide, you will learn:
- Why cheques get dishonored
- When Section 138 becomes applicable
- How the legal notice timeline works
- What penalties courts can impose
- How banks and customers share different relationships depending on the situation
- When banks can retain securities
- How banks adjust funds across accounts using right of set-off
Whether you’re a banker, an aspirant for JAIIB/CAIIB, or someone who deals with cheques and financial transactions regularly, this article will give you complete clarity. The concepts are explained in simple English, with relatable examples, practical analogies, and exam-relevant notes.
👉 Before we dive in, watch this video:
Why Cheques Get Dishonored – Complete Explanation
A cheque is considered dishonored when a bank refuses to make payment upon its presentation. There is a common misconception that dishonor happens only when funds are insufficient. But in reality, multiple technical, legal, and operational factors can cause a cheque to bounce.
Common Reasons for Dishonor
- Insufficient funds in the drawer’s account
- Signature mismatch
- Overwriting or unauthorized alterations
- Post-dated cheque presented early
- Stale cheque (older than 3 months)
- Mismatch between words and figures
- Account freeze due to legal orders
- Account closed or inoperative
- Drawer deceased or insolvent
- Stop-payment instructions
- Joint account rule violations
- Poor CTS image quality
When Does Section 138 Apply? (Negotiable Instruments Act)
Section 138 is one of the most powerful legal provisions that protects payees from dishonored cheques. But it applies only under strict conditions.
Section 138 Applies When:
- The cheque was issued for a legally enforceable debt
- Cheque presented within 3 months
- Dishonor due to insufficient funds or stop-payment
- Demand notice issued within 30 days
- Drawer fails to pay within 15 days
When Section 138 Does Not Apply
- Cheque issued as a gift
- Illegal or void consideration
- Cheque issued as security
- No legal liability exists
The Mandatory Legal Notice Process
Step-by-Step Timeline
- Cheque dishonored → Payee gets return memo
- Payee sends notice within 30 days
- Drawer gets 15 days to make payment
- If unpaid → Cause of action starts
- Case must be filed within 30 days
Punishment Under Section 138
- Imprisonment up to 2 years
- Fine up to twice the cheque amount
- Or both
Court presumes the cheque was issued for a valid debt unless proven otherwise.
Bank–Customer Relationship in Different Situations
| Scenario | Bank’s Role | Customer’s Role |
|---|---|---|
| Deposit Account | Debtor | Creditor |
| Loan Account | Creditor | Debtor |
| Safe Deposit Locker | Lessor | Lessee |
| Safe Custody | Bailee | Bailor |
| Demand Draft (Purchaser) | Creditor | Debtor |
| Demand Draft (Beneficiary) | Trustee | Beneficiary |
Banker’s Lien – Important Right of Retention
A lien is the bank’s right to retain securities until dues are cleared. Banks enjoy a general lien.
Bank Locker Rules | Latest RBI Guidelines, Nomination Rules & Liability
When Lien Does Not Apply
- Items in safe custody
- Locker contents
- Trust accounts
- Securities belonging to third parties
Right of Set-Off – Adjusting Balances
Set-off allows the bank to transfer funds from one account to clear dues in another account, provided both accounts belong to the same customer in the same capacity.
Conditions for Set-Off
- Same name and same right
- Debt must be due
- Customer must be informed
Conclusion
Cheque dishonor, Section 138, bank–customer relationships, lien, and right of set-off are essential concepts for every banker, student, and customer to understand. These principles form the backbone of secure banking operations and legal compliance.
If you found this guide helpful, apply it in your daily banking knowledge and feel free to share your thoughts, questions, or experiences in the comments. Don’t forget to subscribe and explore more valuable content!
