What changed
RBI observed that some co-operative banks were collecting third-party account payee cheques for co-operative credit societies. The circular clarifies that while this practice remains prohibited, a workaround is allowed: a member bank of the Clearing House can collect such cheques from a sub-member, provided the sub-member gives a written undertaking to credit proceeds only to the payee's account.
What it means for you
Co-operative banks must stop any direct crediting of account payee cheques to accounts other than the named payee. The new arrangement lets member banks handle cheque collection for sub-members, but only with a strict undertaking to protect the payee's interest. This tightens compliance and reduces fraud risk in the co-operative banking sector.
What you must do
- Review your bank's current practice of collecting account payee cheques for co-operative credit societies and ensure no direct third-party crediting occurs.
- If your bank acts as a sponsor member for sub-members, obtain a clear written undertaking from each sub-member that proceeds will be credited only to the payee's account upon realisation.
- Update internal policies and staff training to reflect this prohibition and the permitted collection mechanism with undertakings.
- Monitor sub-member compliance to ensure undertakings are honoured and report any deviations to RBI.
Who it affects
All State Co-operative Banks (StCBs), All District Central Co-operative Banks (DCCBs), Co-operative credit societies that are sub-members of clearing houses, Member banks (sponsor members) of clearing houses dealing with sub-members
Can we still collect account payee cheques for a co-operative credit society that is our customer?
No, you cannot directly credit the proceeds to any account other than the payee's. However, if the credit society is a sub-member of a clearing house, you as a member bank can collect the cheque, provided the sub-member gives an undertaking that the proceeds will go only to the payee's account.
What happens if a sub-member fails to credit the proceeds to the payee's account?
The circular does not specify penalties, but such failure would violate the undertaking and likely attract regulatory action from RBI. Member banks should ensure strict compliance and may need to report breaches.
Does this circular apply to all types of cheques or only account payee cheques?
It specifically addresses 'account payee' cheques. The prohibition on crediting to third parties applies only to such cheques, as per the earlier circular from April 2006.