Financial Times

Promoting an age-old tradition of payments
Sri Lankans not taking full advantage of cheques
By S. A. Karunaratne
There has been a rapid expansion of banking services during the last two decades and at least for the citizens living in urban areas, banks are very much a part of life. Many have already taken to sophisticated devices like credit cards and debit cards. The ATMs became popular almost overnight. However, it seems that they have not made use of the full potential of the ‘cheque’. This comment of course does not apply to large institutions and business houses which have no other option.

Here, we are referring to the ordinary individual. It is very rare to see our householders paying their bills, taxes, fines, license fees, and loan instalments by cheque. Furthermore very few employees receive their monthly or weekly salaries by cheque. To some extent, the arrival of the ATM, the Credit and Debit Cards have also obviated the need to use cheques. The purpose here is to show that the more traditional cheque has many advantages that make it a very versatile and safe medium of conducting financial transactions irrespective of their size.

There are obvious advantages in the use of cheques. The security aspect is perhaps the most important these days.

Scarcely a month passes without an incident or two involving highway robbery of cash being transported - in most cases, to pay employees' salaries. Such losses are completely avoidable if the employees are paid by cheque.

Of course, the common argument against such a practice is that most employees do not have their own current accounts and they have to incur an extra cost in converting the pay-cheque into cash. This need not be the case. The paying office can easily make an arrangement with its own local bank / branch to cash such cheques at no cost to the payee. Eventually, the employees can open their own current accounts so that they become less dependent on cash. Surely, there is adequate capacity in the existing banking institutions to take on many new customers and therefore this is not a real constraint. After all, it can bring in considerable additional business to the banks.

There are also several less obvious advantages. When more and more transactions are carried out through cheques, the banks themselves do not have to maintain large stocks of cash which means a considerable reduction in risk in the event of hold-ups or fire. Obviously, no burglar is going to run away with a sackful of cheques, which for him are worthless pieces of paper. The Central Bank in Sri Lanka's case, incurs considerable expenditure in issuing and maintaining the large stock of currency notes and coins, and a substantial saving of these expenditures can be effected if cheque-based transactions replace cash transactions.

Security-wise, the other advantage is that when payments are made by cheque, opportunities for committing fraud are greatly reduced. A cheque is written evidence of a transaction, and unlike cash, it leaves a trail behind its path, which can easily be traced. Therefore cheques can be safely sent by post if the precaution is taken to correctly cross them. Furthermore, the cheque transactions are much more amenable to electronic data processing and thus involve lesser use of paper work and physical space - a considerable reduction in operational costs.

For the individual transactor, cash transactions entail certain disadvantages. When paying bills, fines, license fees, duties, etc the payer is put to considerable inconvenience or forced to incur a small loss when he does not have the exact change. It is common knowledge that some of the counter staff of official agencies have developed this 'no change' ruse to a fine art and the poor client gets cheated all the time. Such small losses can add up to large sums over the years.

Despite all the advantages of using cheques for routine financial transactions, Sri Lankan society is still not quite comfortable with them.
I think part of the blame has to be taken by the bankers, some government agencies, public sector organizations and businessmen themselves. It is significant that the government agencies do not accept cheques from individuals and sometimes even from institutions and businesses. Of course, there are exceptions.

Try paying the annual revenue license fee for a vehicle, rates to the local authority, customs duty or the stamp duty on a transaction. The chances are that you will face a blank refusal or will be made to wait for hours or even days and. possibly an interview with a higher official with an explanation. You will be made to feel that you are about to commit a unpardonable fraud, giving additional work to the staff or both, even though you are certain that more than adequate funds are available in your account to cover the cheque.

Despite this general negative attitude, some of the major state owned enterprises selling their services to the ordinary people, for example, Sri Lanka Telecom, the National Water supply and Drainage Board and the Sri Lanka Electricity (Pvt) Company Ltd. have been very progressive in this respect. They have quite correctly established a large number of collection points that accept personal cheques in settlement of monthly bills. Perhaps, the only exception to this rule is the Ceylon Electricity Board (CEB) which for some reason adopts a restrictive policy and accepts cheques over the counter only at its head office in Colombo. To add to the hassle, the CEB wants the payers to write a long and complicated payee name ('Peoples Bank on Account of Ceylon Electricity Board' etc) on the face of the cheque.

This payee name is so long that when the commercial banks introduced a new cheque format recently, the space provided in the new cheque leaf was inadequate to accommodate it. Fortunately, more space is provided in a revised cheque format that came into use subsequently. Why not make it simpler and shorter for the customers by introducing a more sensible account name? Why not accept cheques at other payment counters including those at the commercial banks and divisional offices? After all, the electricity users are the major source of CEB's income.

Therefore, being customer friendly will eventually bring its benefits. It may not be a coincidence that the other enterprises mentioned above, which have simplified their procedures and become progressively customer friendly suffer less from financial crises than the CEB which seems to be in an unending financial mess.

We cannot help but notice that even the business community has traditionally viewed cheques with some suspicion. Most establishments would never accept a personal cheque from an individual unless the issuer is well known to them. This attitude is understandable but not always reasonable. There is also a feeling among the small businessmen (traders in particular) that accepting a cheque amounts to a credit transaction and it affects their liquidity. This is not necessarily true unless the cheque happens to be post-dated, which practice of course needs to be discouraged. With the new advances in technology, the clearance time is now much shorter.

When everybody issues and accepts cheques freely, in principle, there is no effect on liquidity of the individual transactor. What is required is to develop a business culture based on honesty and trust, so that the probability of someone knowingly issuing a dud cheque is minimized. There are many other ways to deal with those who resort to fraudulent cheque transactions than adopting a negative attitude in general to the use of cheques. The banks have a very important role to play here. They should in fact encourage the use of cheques and educate their customers on how to use this payment instrument correctly.

The government itself should take a part of the blame for discouraging the use of cheques. Besides the traditional reluctance to accept cheques from individuals, the government has been charging a bank debits tax from all those who maintain current accounts and this tax collection is almost directly proportional to the value of cheques issued.

This would have the effect of discouraging cheque-based payments thus encouraging cash transactions. Despite being a very convenient way to collect revenue, this is obviously bad policy. If a proper study is done, it will become clear that the various costs of conducting transactions using cash will add up to more than the bank debits tax collected annually by the government. When a former minister of finance introduced this tax, the people were made to understand that it will be in force for a limited period only.
However as usual, such promises are forgotten and the bank debits tax seems to go on forever. Therefore, it is high time that the government removed this tax and all such measures that discourage the use of cheques.

It is possible to argue that the traditional cheque book must now give way to the modern methods of payment - 'plastic money': the credit, debit / charge cards and ATM facilities etc. On closer examination, none of the latter performs exactly the same function as the cheque. Some are essentially variations of cash based transactions with all or some of the attendant disadvantages.

These new instruments are in many instances, complementary to the cheque. For example, a person who has a credit card need not write a post-dated cheque or resort to a bank overdraft as long as the amount involved is within his credit limit.

For the sensible individual, a judicious combination of the cheque with one or more of the card instruments can help to minimize costs and reduce risks.

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