The working of Canceled Check - Banking Terms

Canceled Check

A cancelled cheque in India simply refers to any cheque that has strike marks on it with the words ‘cancelled’ written across. A cancelled cheque is considered to be proof that you actually hold an account with the bank. From withdrawal of EPF funds to setting up an Electronic Clearance Service from the account, a cancelled cheque is required in many cases.

How to cancel a Check?

To cancel a check leaf, all you need to do is draw two parallel lines across the cheque and write ‘Cancelled’ in between the two lines. A cancelled cheque doesn’t require your signature. It gives details such as account number, account holder’s name, MICR code, name and branch address of the bank.
Though no one can withdraw money from your account using a cancelled cheque, fraudulent activities using a cancelled cheque have happened in the past. So be very careful when you issue a cancelled cheque and make sure that the person you are handing it over to is extremely trustworthy. Got it?
A cancelled cheque may be used at various places. Below are few transactions for which cancelled cheque can be used:

• To process Electronic Clearance Services (ECS).
• While paying Equated Monthly Installment (EMI).
• While giving or updating Know Your Customer (KYC).
• At the time of buying an Insurance Policy.
• At the time of making an investment with mutual funds.
• At the time of Employee Provident Fund (EPF) withdrawal.

Working of Canceled Checks

A canceled check is the last step in the traditional check cashing process. To illustrate, say Jan writes a check to Bob. Bob takes the check to his bank and deposits it. The bank credits Bob's account in the amount of the check. In some cases, the credit takes place automatically, and in other cases, there is a delay on all or a portion of the funds until the check clears. Bob's bank sends the check to Jan's bank. Jan's bank debits Jan's account for the amount of the check, and it stamps the check as canceled.

As of 2006, 57% of banks were still using the traditional process of cashing and depositing checks, but by 2016, nearly 100% of banks have shifted to an electronic process. The concept is the same, but the paper check almost never leaves the facility where it is deposited. Rather, a special scanner creates a digital impression of the front and back of the check, which it sends to the other bank. When the check finally clears the account of the person who wrote it, it is considered canceled. Essentially, canceled means the process is done, and the check cannot be reused.

Difference Between a Canceled Check and a Returned Check

While a canceled check is honored by the bank, a returned check is not honored. If someone writes a check and there is not enough money in his account to cover it, the bank may decide to return it. This means the bank sends it back to the account into which it was deposited.

Continuing with the previous example, if Jan does not have enough money in her account to cover the check she wrote to Bob, Jan's bank can return the check. At that point, Jan's account is not debited, but she may incur a non-sufficient funds fee. When Bob's bank receives the check, it debits Bob's account the amount it previously credited. Then, it either tries to resubmit the check to Jan's bank, or it sends an electronic copy of the returned check back to Bob.

Can a Cancelled Cheque be Misused?

No, if it’s about presenting the cheque in the bank for making cash withdrawal. A cancelled cheque cannot be honored by the bank. The cancelled cheque loses its financial transactional power right at the moment when word “cancelled” is written on it. Its status is converted to a dummy cheque.

The only misuse possible is of details printed on the cancelled cheque.  Wrongdoer could take an advantage of details printed on cancelled cheque foran e-banking transaction. So ensure that it is given in the right hands.