Is this legal for banks to ask for blank cheques from customers as counter gaurantee ?

Cheque is nothing but a promise by one party to other to pay certain sum mentioned on the cheque throurg a banker, there is no harm in providing cheques of other banks as guarantee for payment but such cheques are duly signed and filled by the issuing party,  it will be subject to the validity period of cheque. Normally for bank guarantee, bankers will ask for an agreement on the stamp paper of appropriate value stipulating the terms and conditions of the gurantee. They will be providing you guarantee only if you provide sufficient security, either movable or immovable, based on the business policy of the banker. They can formulate their own policy subject to RBI regulations to provide guarantee, to my knowledge there is no harm in accepting cheques of other banks as gurantee but bankers normally do not do that. To my knowledge none of the provisions of Negotiable Instrument Act debar you from providing cheque as security for payment of any debt or gurantee as the case may be, but stop payment is feature attached to cheque.

Legally yes it is possible to take cheques. 

At Choradia Rupiya Mandi we are involved in providing credit to the social sector that do not qualify for loans from bank. We plug the gap here. The organization at the primary level is involved in Vehicle finance.  We specialize in making credit accessible to the social group whose livelihood depends on the vehicle.

These are typically the guys who will not shy away from paying 10-15% per month as interest on hand loans. We are trying to plug this gap by not only providing them with easy finance but also providing them a source of livelihood that not only feeds a stomach but an entire family.

We are aware of their difficulties when it comes to accessing credit to buy a vehicle to feed the family or to arrange quick money to pay as advance to rent a house or it could be making money accessible for a marriage at home or clear hospital bills of a loved one admitted.

And that is why we unabashedly say we are Creating entrepreneurs and in the process maximizing not only shareholder’s value but also enriching the stakeholders.

Additionally we take a counter guarantee and cheques from them. And our experience has shown that more often than not customers prefer to settle there dues when they are under this obligation.

Infact we did even experiment without taking cheques as guarantee. The results were catastrophic and we had to revert back to this system. As they say 'Prevention is better than cure'. And taking cheques is a preventive way of turning good loans to bad.

After all Let's not forget we are into business and nobody would love to see there money wasted or turning to bad loans more so if the intentions also are good and results are  win-win for everybody.

Sorry to be l;ate as usual Ujval!! But der aye durust aye.. :))

I think its a very sad way to deal with customers money!! And taking blank cheques is a fraudulent way to deal with for the sake of guarantee!! Its preposterous and its illegal. It gives rise to the fraudulent ways of the banking system and the people who enforce these systems on the consumers!! It also shows a certain corrupt nature of the bankers... Where would that money go... into the pockets of the bank officer or the bank safe deposit vault????

Interesting... Thanks for the referral!!

Thanks everybody here for your valuable comments.

I do not think it is illegal for banks to ask for a blank cheque from the customer as counter-guaratee for advances granted to them.

The agreement between the banks and the borrowers is based on some terms and condition and execution of some legal documents like a promissory notes, memorandum of charge, hypothecation agreement, etc. Normally, a promissory note is valid for three years and it has to be dated before execution. The repayment tenor of the loan is more than three years and in order to keep the documents legally valid, the banks seeks a blank cheque from the customer. This is like a demand note. This practice is prevalent in most countries and it is an accepted practice.

As stated above, there is no illegal and it is in line with the terms and condition for availing credit facilities.

i trust the above answers your query,

The Bank has no legal right to keep a blank cheque as security. If it has done with the consent and knowledge of the account holder, the account holder has all the legal and moral right to instruct his Bank to stop payment, before it is presented, by giving it in writing his intention to stop payment of cheque. Even under the negotiable instruments act if stop payment instructions are given to the bank no criminal action can be initiated. The Bank already has a agreement, undertaking and two guarantors who guarantee that the loanee will pay the loan. So a blank cheque is invalid document.

Well this is a news to me. I have not heard about this before. This system definitely will never work in our banking sector. How can a blank cheque be used as a counter guarantee? I would love to read the response of bankers on this one.

It is unethical and bad practice of private banker specially....no bank can claim for blank cheque as counter guarantee...when I forced during my request at HDFC...they agreed not to take this...