Cheque

Indian Economy glossary

Topic: Banking, Credit Creation and Monetary Policy · NCERT: Class 7, Ch 8 "Banks and the Magic of Finance"; Class 10, Ch 3 "Money and Credit"

Meaning

A cheque is a paper that tells a bank to pay a set amount from the payer's account to the person named on it. It lets people settle payments without handing over cash. Cheques can be drawn only on demand deposits, which are savings and current account balances that the bank must pay out whenever the account holder asks. The money moves from one account to another in a couple of days. This is one reason demand deposits are counted as money, along with currency.

Example

Salim, a shoe maker, has to pay his leather supplier. He writes a cheque for the amount due in the supplier's name. The supplier deposits it in his own bank, and within a couple of days the money moves from Salim's account to the supplier's account. No cash changes hands.

Don't confuse with

  • Demand deposit: the cheque is only the written instruction to pay. The money itself is the demand deposit in the bank account. A cheque is worth nothing if the account does not have enough balance.
  • Legal tender: currency notes issued by RBI are legal tender, so no one can refuse them in payment. A cheque is not legal tender, so anyone can refuse it.

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