Many people endorse checks without fully understanding the implications, potentially leaving themselves vulnerable to financial loss. A significant portion of the population, estimated at 90%, remains unaware of a crucial Reserve Bank of India (RBI) rule concerning cheque endorsements. This lack of awareness can have serious financial consequences, turning a simple act of signing the back of a cheque into a risky proposition.

The standard practice of signing the back of a cheque seems innocuous enough. It's typically done when transferring a cheque to someone else, depositing it into an account that isn't in the payee's name, or when a bank teller requests it during encashment. However, this signature makes you the endorser, and under the Negotiable Instruments Act, the endorser assumes certain liabilities.

By signing the back of a cheque, you are essentially guaranteeing that the cheque is valid and that you have the right to transfer it. If the cheque later bounces due to insufficient funds, a mismatched signature, or any other reason, the bank can hold the endorser liable for the amount. This means the bank can recover the funds from you, even if you were not the original recipient of the cheque.

The RBI has established guidelines and rules regarding cheque transactions to prevent fraud and misuse. These rules include ensuring that banks verify the identity of the person encashing a cheque of ₹50,000 or more through KYC verification. Banks are required to obtain ID proof, address proof, and a recent photograph to prevent fraud. For amounts less than ₹50,000, these checks are generally not mandatory. These measures highlight the importance of due diligence in cheque transactions.

Furthermore, the RBI has implemented measures such as the Positive Pay System, which is mandatory for checks above ₹5 lakh, to reduce fraud. Under fraud liability rules, customers must inform the bank within three days of any suspicious activity to avoid bearing the loss.

There are situations where endorsing a cheque is unavoidable. However, it is crucial to be aware of the risks involved. Before endorsing a cheque, consider the following:

• Know the person: Only endorse cheques for people you trust and whose financial dealings you are confident in.
• Verify the cheque: If possible, verify the cheque's authenticity with the issuing bank before endorsing it.
• Consider alternatives: Explore other payment methods like online transfers (NEFT, RTGS, UPI) or account payee cheques, which offer more security.
• Be aware of recourse: Familiarize yourself with the legal recourse available if a cheque you endorsed bounces.

While bearer cheques are still in circulation, they carry inherent risks. Unlike account-payee cheques, bearer cheques don't require endorsement, and anyone presenting the cheque can withdraw the amount. To mitigate these risks, banks have their safeguards, including daily withdrawal limits, verification calls, and advance notice for large amounts.

In conclusion, while signing the back of a cheque might seem like a routine action, it carries potential financial liabilities that many are unaware of. The RBI's regulations aim to protect both banks and consumers, but the onus is also on individuals to understand the risks associated with cheque endorsements. By exercising caution and staying informed, you can protect yourself from potential financial losses.