What is Drawee Bank?
In the context of a cheque, the term drawee bank refers to the specific bank upon which a cheque is drawn. In simpler words, when you write a cheque, the drawee bank is the bank where you hold your account and from which the funds will be withdrawn. For example, if Mohan has a savings account at Bank ABC and writes a cheque to pay her electricity bill, Bank ABC is the drawee bank for that cheque.
A few key points to understand about the drawee bank in India:
Role in Cheque Processing:
- When a cheque is issued by a customer (drawer), the drawee bank is responsible for verifying that the drawer’s account has adequate funds.
- The drawee bank must ensure that the signature on the cheque matches its records and that the cheque is properly filled out (date, amount in words and numbers, etc.).
Distinction from Drawer and Payee:
- The drawer is the person or entity writing the cheque (for example, Mohan).
- The payee is the person or entity receiving the money (for example, the electricity company).
- The drawee bank is the drawer’s bank (Bank ABC in our example), which ultimately pays the payee when the cheque is presented.
Cheque Book Section and Account Relationship:
- When a bank issues a cheque book to its customer, it is essentially giving the customer a set of blank, pre-printed cheques that bear the bank’s name, branch, and MICR code (Magnetic Ink Character Recognition).
- Every cheque from that book is linked to one specific account at the drawee bank. In the cheque’s printed details, you will see the branch name and the bank’s logo these details identify the drawee bank.
Legal Framework in India:
- Under the Negotiable Instruments Act, 1881, a cheque is defined as an unconditional written order directing a bank to pay a certain sum of money.
- Indian banking regulations require the drawee bank to honor a valid cheque, provided the account has enough balance and there are no legal impediments (such as a stop-payment instruction or a freeze on the account).
Because a drawee bank plays a central role in completing a cheque transaction, understanding this concept helps customers and payees know where the money is coming from and whom to approach if issues arise (for instance, if the cheque is dishonoured or returned unpaid).
How Does Drawee Bank Work?
When a payee (for example, a shopkeeper or a service provider) receives a cheque, they must present it to their own bank (called the collecting bank). The collecting bank then sends that cheque through the clearing system, eventually reaching the drawee bank for final payment. Below is a step-by-step overview of how the drawee bank functions in this process in India:
Cheque Presentation and Clearing:
- The payee’s bank presents the cheque to the drawee bank, usually via the local clearing house. In most cities, there is a scheduled cheque-clearing cycle (often once a working day).
- Cheques are processed electronically under the Cheque Truncation System (CTS), which reduces the time for physical movement. The collecting bank sends an image of the cheque to the drawee bank.
Verification by the Drawee Bank:
Upon receiving the cheque image and data, the drawee bank performs several checks:
- Signature Match: The bank compares the signature on the cheque with the specimen signature on file.
- Account Balance: The drawee bank checks if the drawer’s account has sufficient funds to cover the cheque amount.
- Cheque Validity: The bank checks the date to ensure it is not post-dated (a cheque dated for a future date) or stale-dated (dated more than three months earlier).
- Cheque Alterations: Any erasures, overwrites, or suspicious alterations may lead to the cheque being returned.
- Legal Holds: If there is any instruction such as a stop-payment request by the drawer or a court order then the drawee bank must not pay out.
Payment or Dishonour:
- If all checks pass, the drawee bank deducts the specified amount from the drawer’s account and transfers it to the collecting bank, which then credits the payee’s account. This process normally completes within one to two working days under CTS, though it can take longer if the drawee branch is in a different city or region.
- If any check fails, the drawee bank will dishonour (bounce) the cheque and return it to the collecting bank with a reason code (for example, “Insufficient Funds,” “Signature Mismatch,” or “Stale/Dated Cheque”). The collecting bank then informs the payee about the returned cheque and the reason for dishonour.
Customer Notification and Ledger Impact:
- Once the drawee bank debits the drawer’s account for a valid cheque, the drawer sees this in their passbook or account statement. In the case of dishonour, the drawee bank also debits a returning charge (bounce fee) from the drawer’s account.
- Payees must monitor their bank account to ensure the cheques they deposit are cleared successfully. If a cheque is dishonoured, the payee can approach the cheque issuer (drawer) for resolution.
Special Scenarios:
- Post-dated Cheques: If a cheque is presented before its date, the drawee bank will not honour it until the specified date.
- Stale Cheques: In India, a cheque typically becomes stale invalid if presented more than three months after the date written. The drawee bank will return such cheques to the collecting bank.
- Stop-Payment Instructions: A drawer can instruct the drawee bank not to pay a particular cheque before it is presented. Once that instruction is in place, the drawee bank must refuse payment if the cheque is seen in the clearing cycle.
Importance of the Drawee Bank’s Role:
- The drawee bank safeguards the drawer’s account by confirming that funds are available and that the cheque is genuine. This protects both the drawer and the payee from fraudulent or unauthorized payments.
- Because India’s banking system uses a network of clearing houses and electronic images, the drawee bank plays a central role in ensuring fast, reliable, and accurate settlement of all cheques.