Post Dated Cheques For Home Loan EMI Would be Banned : RBI

Here is another surprise move from the Reserve Bank of India (RBI) for stopping acceptance of post-dated cheques (PDCs).

PDCs are preferred by lenders such as Banks and Housing Finance Companies (HFCs)  as it is considered a “safe instrument” while banking public feels at ease with its usage

In a notification issued on 18th March (2013), the central bank RBI said the system of post-dated cheques and payment via equated monthly instalment (EMI), in either the old or the new format, would be banned from now wherever electronic debit facilities are available.

“Lending banks shall make all efforts to convert existing PDCs in such locations into electronic clearance service (ECS) or /  regional ECS (RECS) for debit by obtaining fresh mandates from the borrowers,” the RBI said.

Lenders across India are sitting on a pile of huge number of PDCs worth thousands of crore of rupees. Most are them are reluctant to call the borrower,  take a mandate for ECS and return all the PDCs. This is not only a time-consuming process but also increases the workload on bank employees. 

While on paper the idea looks good, there are several hurdles for implementing these changes. PDCs are the most favoured system by lenders across India, as it is considered “fail-safe”, in case the borrower defaults.

In case of default in repayment through PDC, the borrower can be tried under Section 138 / 142 of the Negotiable Instruments Act, 1881. Section 138 aims to promote better compliances in terms of honouring cheques and discharging liabilities by imposing a penalty for any default committed in this respect.

It is a medium of speedy remedy provided for the protection of the holder/payee of the cheque, where the debtor seeks to discharge his obligation through cheque but does not intend to honour it.

 Even the Supreme Court, in a recent judgement, has ruled that stop payment of PDCs issued by a person to discharge his / her debt or / liability could amount to penal offence.

A bench comprising Justice Mr. M.B. Shah and Justice Mr. Arun Kumar said, “A PDCs will lose its credibility & acceptability if its payment can be stopped routinely.”

Another issue with the RBI's new directive is at present, there are  about 80 centres or / locations that offers local ECS, while there are just 9 centres, which offer RECS across India.

National ECS, on the other hand is operated at Mumbai &  facilitates the coverage of all core-banking enabled branches located anywhere in India.

Though our Indian banking system is developing fast, the access to banking today is not available to one-third of our population & ramifications of a hasty decision to penalise usage of cheques will be too catastrophic for a nation such as ours, which requires social up-liftment & inclusive banking before forcing technology on our people.

Earlier, while speaking at Chennai in December 2012, Dr K.C Chakrabarty, Deputy Governor, RBI had said, “Technology has the potential to act as a force multiplier in our financial inclusion efforts, provided it is implemented in a planned manner. There is, however, an increasing realization that mere reliance on technology-enabled non-face to face channels alone would not be sufficient to meet our goal of creating an inclusive financial system. There is a need for opening more brick-and-mortar outlets as delivery points, both as a control mechanism for business correspondents (BCs) & to gain the trust & acceptability of the masses.”

 Before asking banks to stop accepting PDCs, the RBI needs to first educate the banking public about using ECS / RECS facility and incentives its usage, if needed.

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