What changed
RBI has issued a directive under Section 35A of the Banking Regulation Act, 1949, explicitly prohibiting UCBs from collecting account payee cheques for anyone other than the payee named on the cheque. Previously, some banks credited such cheques to third-party accounts citing market practice, which RBI has now deemed unauthorized. Banks must now refuse any instruction to credit proceeds to a different account and ask the drawer to withdraw the cheque or the account payee mandate.
What it means for you
UCBs must strictly enforce the rule that account payee cheques can only be credited to the payee's account, eliminating any flexibility for third-party credits. This protects banks from legal liabilities and ensures compliance with the Negotiable Instruments Act. It also tightens controls against payment system abuse, particularly in IPO-related transactions.
What you must do
- Update internal policies and staff training to ensure no account payee cheque proceeds are credited to any account other than the named payee.
- Implement system-level checks to flag and reject any attempt to credit account payee cheques to third-party accounts.
- Instruct customers that if they want proceeds credited elsewhere, they must have the drawer withdraw the account payee mandate or issue a fresh cheque.
- Review past transactions for any unauthorized third-party credits.
Who it affects
All Primary (Urban) Co-operative Banks, Customers of UCBs who issue or receive account payee cheques, Other banks that draw cheques payable to UCBs
Can a UCB credit an account payee cheque to a joint account where the payee is one of the joint holders?
Yes, if the payee named on the cheque is one of the joint account holders, crediting to that joint account is permissible as the payee is a constituent. The prohibition applies only when the proceeds go to a person not named as payee.
What if a customer insists on crediting an account payee cheque to a third party account?
The bank must refuse and advise the customer to ask the drawer to withdraw the account payee mandate or issue a fresh cheque without that restriction. The bank cannot process such an instruction.
Does this circular apply to cheques drawn by one bank in favor of another bank?
Yes, the circular explicitly states that the same prohibition applies to cheques drawn by a bank payable to another bank. The proceeds must go to the payee bank's account, not a third party.