Balmori Software Inc.

[ Article ]

Posted on 2015 November 17

In recent weeks, emails and website announcements by prominent Philippine banks have been warning of imminent major changes in cheque clearing practices. These new practices are sure to have an impact on the everyday processes, procedures, and costs of anyone doing business.

And we predict these new rules will prove inconvenient and at least temporarily disruptive for many.

In brief, the new changes are as follows:

1. Starting on 2016 January 04, corrections will no longer be allowed on the cheque face, even if they are accompanied by initials of the signatory (PCHC Memo Circular 15-460)
2. Starting in 2016 March, banks will have to redesign their cheque forms in line with a new layout provided by the PCHC.
3. The clearing house will no longer return cleared cheques to their issuers.

Here's what some of the banks are saying on this topic: BPI, BDO, Maybank, RCBC Savings Bank, HSBC, Planters Bank.

Implications for you and me. In a nutshell, the new clearing rules have the effect of offloading a lot of the burdens of the checking system from the banks onto the consumers.

Consequently, in sheer self-defense, businesses and individuals who issue and receive cheques will now have to institute new behaviors, new practices, and new procedures among their back room staff. Here are some of the obvious ones.

First, since all checks deposited within the Philippine banking system need to go through the Philippine Clearing House Corporation (PCHC), this means that ALL banks will be changing their practices to comply.

And that in turn means that anybody who issues cheques is also affected willy-nilly. For example, by March 2016, everyone will have to purchase newly redesigned cheque forms. This will have obvious costs.

Banco de Oro says that the old cheque forms can be “used until further notice.” So does Metrobank. But is this “further notice” going to come down on all our necks in March 2016, as the PCHC policy announcement states?

Or will the banks allow customers to exhaust their current supplies of the obsolete cheque forms? Some sort of grace period extending beyond March 2016 is possible, even likely, given the Filipino culture of pagtawad and pagbibigay.

But keep in mind that there will be little old ladies out there who issue maybe one cheque per month, who will then take forever to exhaust their booklet of 100 cheque forms.

It would seem inevitable that the banks will clamp down at some point not too far into the future; they can't afford to wait for everyone to exhaust their old cheque forms.

Second, the new rule requiring zero corrections on the cheque face means that, if you're a cheque issuer, each mistake will cost you (at least) the price of a cheque form. At today’s rates, that’s around PhP3.50 per cheque.

There’s of course no assurance that the cost of cheque forms will stay the same after the new design and cheque size go into effect, so the cost of waste could go higher.

Then there's the penalty for issuing a defective cheque. As you can see, corrections on cheques now fall into the category of “defects."

What if you're the recipient of a cheque bearing such a defect?

People receiving payments by cheque must inspect the cheques that they receive with extra care, lest they fall afoul of the new no-corrections rule. (Could too-clever-by-half payors insert corrections to buy themselves a few days' delay in paying?)

For individual payees, extra care means taking the trouble to inspect the face of every single cheque they receive and making sure that there are no correcting fluid marks and type-overs.

But for businesses and institutions that receive dozens or thousands of cheques every month, extra care means new procedures, new processes.

They will have to emplace new procedures to detect corrections in each and every one of the numerous cheques that they receive. If they find any corrections on any of these cheques, they must insist the issuer replace the cheque before issuing any receipts. This implies even more additional processes and procedures.

This will surely drive up operating costs to some degree. Not to mention making the lives of collection messengers and cashiers more stressful.

If you accept a cheque that has a correction (among other “defects”), and then issue an official receipt, and then deposit that cheque, you can expect a call from your banker. And perhaps some awkward interactions with the cheque issuer.

And can you imagine the possibilities when issuing cheques to or receiving cheques from government entities? Ohohoooo!

And different banks have different views on this matter.

Our Banco de Oro banker tells us that, when the no-corrections rule takes effect in January 2016, cheques with corrections will be cancelled, then returned to the issuer with no penalty charge. This implies that – for BDO at least - the only bank-related cost to the sloppy issuer is PhP3.50, the cost of the cheque form.

Our Metrobank banker tells us something slightly different. He says that MBTC's policy will be to return cheques with corrections, but that there is no word yet whether there will be a penalty. So, at least for MBTC, there may be a penalty fee involved.

(The inattentive cheque issuer may incur other costs, of course. For example, say you issue a cheque to pay for a loan amortization. Alas, you unthinkingly make a correction, and initial it, and send it off to your lender. Naturally your cheque gets returned on account of the correction. Will your lending institution consider your defective cheque payment as having been paid on time? Or will it take the rejection of this cheque as a de facto non-payment, and your make-up cheque as a late payment, subject to penalty charges?)

How to mitigate the hassle. One way to minimize cheque-cutting mistakes is to computerize cheque preparation. While there’s no cure for the inattentive or careless worker (except perhaps separation?), computerizing cheque preparation will at least eliminate the harmful effects of muscular spasms, momentary distractions, and mismatching of amounts in words vs. amounts in numbers.

Third, the new rules state that cheque issuers will not be getting back their cleared cheques. This means you have to have a reliable audit trail to substitute for having physical possession of the cancelled cheque form.

BPI, for one, has not been returning cleared cheques for about three years now. But perhaps in tacit acknowledgement of customers’ need for an audit trail, BPI sends its customers photocopies - albeit in 1/3 scale - of their cleared cheques.

But there’s no guarantee that other banks will provide photocopies of cancelled cheques, as BPI does. If your bank does not provide such documentation, how will you prove that you’ve already paid for a particular payable?

Under current practice, the cancelled, cleared cheque is the ultimate proof that you did in fact make a particular payment.

A business can of course count on other proofs, such as official receipts, delivery receipts, and invoices.

But what if you were to make your notoriously forgetful sister-in-law a friendly loan of PhP50,000 – interest-free or not? What if you're forced to prove that you actually made this loan in order to be able to collect three months hence?

What this means is that you’d have to cover yourself as best as you can, because the banks will no longer give you back your cancelled cheque to wave under your brother's wife’s nose.

For example, you could photocopy the cheque before handing it over to your forgetful sis-in-law. Or you could get her to sign a promissory note – which makes the transaction clearer but also less “friendly.”

However you decide to respond to this new reality, at the end of the day it means that the banking system has pushed the burden of self-protective documentation upon you, the customer. -rsr


Title:   Better start being less sloppy
            Clearing house sets new rules on cheque clearing



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