SUNANDO ROY – On Banking, Finance and Society

​Cheque transactions still play a major role in financial systems, especially in retail and small‑business environments. When a cheque deposited into an account is returned because the account is dormant, it exposes a fault line between internal bank controls and customer expectations, and regulators are increasingly attentive to that gap.​

1. Understanding Dormant Accounts

A bank account becomes dormant when there is no customer‑initiated activity for a defined period, typically around 12–24 months, though precise triggers vary by jurisdiction and bank policy. Dormancy classification is primarily a risk‑control measure: US examiners, the RBI in India, and the HKMA in Hong Kong all emphasise that dormant accounts need heightened monitoring to prevent fraud and insider abuse, especially when balances are significant.rbi+3​

Regulators also link dormancy to consumer outcomes. In India, the RBI requires banks to identify inoperative accounts after two years of no customer‑initiated transactions and to take proactive steps to trace customers, update KYC, and prevent fraud, while continuing to credit interest and prohibiting reactivation fees. In Hong Kong, the HKMA expects banks to periodically review dormant accounts, keep contact information updated, and make reasonable efforts to contact customers and facilitate recovery of unclaimed balances.rbi+4​

2. Why Cheques to Dormant Accounts Get Returned

When a cheque is presented for clearing into a dormant account, core banking systems detect the status and typically reject the credit with reasons such as “account dormant/inactive” or “account under restrictions.” This reflects a common regulatory expectation that withdrawals, outward cheques, or other debits should not be permitted from dormant accounts until the bank has appropriately verified the customer’s identity and intentions.tamimi+3​

From an operational standpoint, dormancy flags exist to prevent unauthorised access and misuse of inactive accounts, and global supervisors—from US prudential examiners to the HKMA—view weak controls over dormant balances as a fraud and conduct risk. The result is that a valid cheque, backed by sufficient funds, can still be returned purely because the account is subject to dormancy restrictions, even though the underlying credit relationship remains intact.taxtmi+4​

Is This Technically a Cheque Bounce?

For clearing and customer‑experience purposes, any returned cheque is a “bounce,” and the payee will typically receive a return memo citing a dormancy‑related reason. Legally, however, many cheque‑bounce regimes (such as Section 138 of the Negotiable Instruments Act in India) focus on dishonour due to insufficient funds, exceeding arrangement, or closure—so a return for “dormant/inoperative” status usually does not trigger criminal liability against the drawer.scconline+3​

Courts and regulators in India have repeatedly treated Section 138 as aimed at financial default rather than operational blocks, and RBI procedure on cheque dishonour distinguishes “want of funds” from other reasons such as account status. Similar distinctions appear in US and UK frameworks, where dishonour rules and UCC/cheque‑law concepts focus on non‑payment, while dormancy is treated under separate operational and escheat/abandoned‑property regimes rather than criminal law.elibrary.imf+5​

3. Operational Risk Perspective

From a banking risk‑management viewpoint, cheque returns on dormant accounts highlight three clusters of operational risk: system controls, communication gaps, and process inefficiency. US credit‑union guidance, HKMA circulars, and RBI instructions all stress that dormant‑account processes require internal controls, segregation of duties, and periodic reviews, because large idle balances are attractive targets for fraud.brdr.hkma+2​

At the same time, poor communication around dormancy is emerging as a conduct and reputational risk. Regulators expect banks to maintain accurate customer contact details, give reasonable notice before restricting operations, and document efforts to contact owners of inactive accounts—expectations that are explicit in the HKMA dormant‑account circular and RBI’s revised framework on inoperative accounts and unclaimed deposits. When cheques are returned without prior warning to the customer that inward items may be affected, complaint volumes, ombudsman referrals, and reputational damage can follow.rbi+4​

Process inefficiency is the third risk. Repeated cheque returns on dormant accounts create avoidable workload for clearing houses, back‑office teams and customer‑service channels, and supervisory material on operational resilience increasingly links such failures to broader expectations on payment reliability under PSD2/PSD3 in the EU and the UK Payment Services Regulations. Regulators see persistent operational defects in payment processing not just as internal issues but as potential breaches of consumer‑protection and conduct standards.edit.centralbank+2​

4. Consumer Protection Issues

Even where banks follow the letter of dormancy rules, the customer experience matters. Across jurisdictions, consumer‑protection frameworks increasingly require transparent account‑status information, fair treatment, and accessible redress when operational restrictions like dormancy lead to losses or embarrassment.edit.centralbank+2​

Lack of Awareness and Right to Clear Information

Many customers are unaware that an account has become dormant, that inward cheques may be rejected, or that reactivation requires updated KYC. India’s RBI instructions now require banks to trace and contact customers of inoperative accounts, offer KYC updating (including at any branch and, more recently, through video‑based customer identification), and prohibit reactivation charges, explicitly linking dormancy treatment to fair‑treatment and grievance‑redress expectations.sarthaklaw+4​

In Hong Kong, the HKMA expects authorised institutions to educate customers about the risks of inactive and dormant accounts, make reasonable efforts to contact holders, and authenticate identity carefully upon reactivation to balance fraud prevention and customer access. Singapore’s industry code of consumer‑banking practice similarly requires banks to notify customers if accounts are frozen or restricted because of dormancy and to explain how to prevent or reverse that status.mas+3​

Financial Loss, Inconvenience, and Redress

Returned cheques can trigger bank charges, late‑payment penalties, and reputational harm for both payee and drawer, even when the root cause is dormancy rather than lack of funds. Regulators in the EU and UK are moving toward stronger consumer‑rights frameworks for payments more broadly, with PSD2/PSD3 and the proposed Payment Services Regulation in the EU, and updated UK payment rules, all emphasising clear information about blocked or delayed payments and reinforced complaint‑handling mechanisms.tarungaur+4​

In the USA, while there is no specific “dormant cheque‑bounce” rule, the Consumer Financial Protection Bureau (CFPB) has treated certain deposit‑account practices (such as unilaterally reopening closed accounts to process transactions) as potentially unfair under the Consumer Financial Protection Act, underscoring that unexpected account‑status changes that generate fees can breach federal consumer‑protection law. This reasoning can inform how US institutions think about dormancy decisions that cause avoidable customer harm.consumerfinance+2​

5. Legal Implications and Offence Classification

A cheque returned due to dormancy typically does not trigger criminal liability for cheque‑bounce in most jurisdictions, because the dishonour arises from an operational restriction, not from absence of funds or an intent to defraud. In India, Section 138 of the NI Act explicitly targets dishonour for “insufficiency of funds” or exceeding arrangement, and commentary and case law treat other return reasons (including “account closed” or “dormant”) differently.claww+2​

That said, banks can face legal or supervisory scrutiny if dormancy is mishandled. In India, RBI guidelines require that accounts are not arbitrarily treated as inoperative, that customers are contacted, and that interest continues to be credited; wrongful dishonour contrary to RBI directions can give rise to complaints to the Banking Ombudsman or civil claims for negligence. In Hong Kong and Singapore, failure to follow HKMA or industry‑code expectations on customer communication, monitoring, and fair handling of dormant accounts may be treated as conduct failings subject to supervisory action.abs+5​

Responsibility Allocation

• Bank: Generally not criminally liable for cheque‑bounce when refusing payments on dormant accounts, as dormancy restrictions are often mandated or expected by regulators to prevent fraud and misuse. However, banks can be criticised or sanctioned if they misclassify accounts, do not follow reactivation or notification rules, or impose undue barriers to restoring normal operations.publishedguides.ncua+2​

• Account holder (payee): Expected to ensure that an account intended to receive cheques is active and KYC‑compliant, but regulators increasingly recognise that banks must make reactivation practical—RBI’s 2024–2025 reforms, for instance, require multi‑channel KYC updating and prohibit reactivation fees.caalley+2​

• Cheque issuer (drawer): Usually not guilty of a cheque‑bounce offence where the return reason is dormancy rather than lack of funds, though civil consequences (e.g., contractual disputes with the payee) may still arise.scconline+2​

In extreme cases, systemic mishandling of dormant accounts—such as reopening accounts or processing items in ways that generate unforeseen fees—can be treated as unfair practices, as recent CFPB circulars on deposit‑account reopening illustrate.compliancealliance+2​

6. Global Regulatory Policy Snapshot

This section briefly maps how key regulators approach dormant accounts, cheque‑related operational risk, and consumer protection.

USA (Prudential Regulators and CFPB)

US banking law does not define a single “dormant account” rule at federal level, but supervisory guidance to credit unions and banks treats dormant accounts as requiring enhanced internal controls, periodic review, and segregation to mitigate fraud risk. At the same time, the CFPB has clarified that deposit‑account practices which surprise consumers or generate avoidable fees—such as unilaterally reopening closed accounts to process items—can constitute unfair acts or practices under the Consumer Financial Protection Act.consumerfinance+4​

For operational cheque issues, the Uniform Commercial Code (UCC) and case law focus on dishonour, stale cheques, and bank duties of ordinary care, while state unclaimed‑property laws govern long‑term inactive balances; dormancy‑driven returns are thus primarily a conduct and operational‑risk concern rather than a criminal matter. Institutions are expected to treat customers fairly in how status changes are communicated and how associated fees are imposed, and to align cheque processing with broader consumer‑protection standards.elibrary.imf+1​

UK (FCA and Payment Services Regulations)

In the UK, dormancy is addressed through a mix of payment‑services law, conduct standards, and industry practice. The Payment Services Regulations 2017 implement PSD2‑style consumer protections, requiring payment service providers (PSPs) to provide clear information on payment execution, value dates, and reasons for refusing transactions, and to maintain effective complaint‑handling mechanisms.legislation+2​

The FCA’s broader approach to payment accounts and access emphasises non‑discrimination in opening and maintaining basic accounts, fair notice before closure or restriction, and transparent terms on when accounts may be suspended or made inactive. New UK payment reforms also strengthen consumer protection in digital payments, including powers to delay suspicious payments and mandatory reimbursement for certain frauds, signalling a regulatory expectation that banks manage operational restrictions—including dormancy—in a way that does not unfairly penalise consumers.fca+3​

EU (PSD2, PSD3, and PSR)

The EU’s Payment Services Directive (PSD2) and forthcoming PSD3/Payment Services Regulation framework set the overarching consumer‑protection and operational‑resilience context for payment accounts, including cheque‑related credits where applicable domestically. PSD2 already caps consumer liability for unauthorised transactions, requires strong customer authentication, and imposes transparency and complaint‑handling standards, while the proposed PSD3/PSR package focuses on fraud prevention, clear disclosure when funds are blocked, and harmonised conduct rules across member states.grantthornton+4​

Although PSD2/PSD3 do not regulate “dormant accounts” as a standalone category, they frame provider duties around secure processing, timely information, and access to redress when payments are refused or delayed for operational reasons. Industry commentary on the PSR proposal underlines that PSPs will gain clearer powers to block or delay suspicious payments, but must pair those powers with robust consumer rights and transparency, which naturally extend to dormancy‑related restrictions.borenius+4​

Singapore (MAS and Industry Codes)

MAS has not issued a dormancy‑specific statute for retail bank accounts, but its e‑payments user‑protection guidelines and shared‑responsibility framework define baseline protections and liability allocation between customers and financial institutions for unauthorised and erroneous transactions. These guidelines emphasise clear disclosures, timely notification, and accessible dispute resolution, all of which are relevant when accounts are restricted or reactivated.mas+2​

Additionally, Singapore’s Code of Consumer Banking Practice (issued by the Association of Banks in Singapore) directly addresses dormant accounts, recognising that banks may freeze or restrict accounts that have been inactive for a period, but requiring reasonable notice, guidance on how to avoid or reverse dormancy, and clear disclosure of any fees. MAS’s broader consumer‑protection agenda, including recent guidelines on safeguarding customer assets held by digital‑payment‑token providers, reinforces expectations of strong risk‑control systems that do not compromise basic fairness in access and information.digitalpolicyalert+2​

Hong Kong (HKMA)

The HKMA has issued detailed expectations on handling dormant accounts and unclaimed deposits, positioning dormancy as both a consumer‑protection and fraud‑risk issue. Banks are expected to educate customers about avoiding dormant accounts, keep contact information up to date, make reasonable efforts to contact owners of inactive accounts, monitor for unauthorised activity, and authenticate customers upon reactivation.deacons+2​

The HKMA also encourages banks to help customers search for and recover lost accounts and to adopt a risk‑based approach, paying particular attention to large balances and long dormancy periods. Subsequent circulars on balanced AML/CFT measures note that when dormant accounts are reactivated, trigger customer‑due‑diligence reviews should be conducted, reinforcing the linkage between dormancy controls, financial‑crime risk, and customer experience.synpulse+1​

India (RBI and NI Act)

India has one of the most detailed regulatory frameworks for inoperative accounts and cheque dishonour. RBI circulars stipulate that savings and current accounts should be classified as inoperative/dormant after two years of no customer‑initiated transactions, and that banks must trace and contact customers or their nominees, facilitate reactivation, and ensure that interest is credited and no charges are levied for reactivation. New instructions in 2024–2025 require banks to offer KYC updating and reactivation facilities at all branches and, where possible, through video KYC, explicitly to reduce friction and consumer grievances.sarthaklaw+4​

On cheque dishonour, RBI has long distinguished between returns for “want of funds” and other reasons, and Section 138 of the NI Act criminalises dishonour only where insufficiency of funds (or exceeding arrangement) is the cause. Legal commentary and practical guidance on cheque‑bounce cases therefore treat dormancy‑based returns as outside the criminal framework, while noting that wrongful dishonour contrary to RBI instructions or contractual obligations can still support civil claims or regulatory complaints.taxtmi+4​

7. How to Prevent Cheque Bounce on Dormant Accounts

For customers and small businesses, the practical steps remain straightforward but now sit against a clearer regulatory backdrop. Regulators in India, Hong Kong, and Singapore encourage customers to keep contact details current, perform occasional transactions to avoid dormancy, and respond promptly to re‑KYC requests, while banks must offer convenient reactivation channels and fair treatment.taxmann+2​

Banks should align dormancy processes with global best practice:

• Implement risk‑based monitoring and segregation of duties for dormant accounts, as described in US, HKMA and RBI guidance.brdr.hkma+2​

• Provide proactive alerts (SMS/email/app) before and after dormancy classification, explaining effects on inward cheques and how to reactivate.abs+2​

• Review cheque‑return fee policies to avoid penalising customers where dormancy reflects weak communication rather than neglect, consistent with emerging consumer‑protection expectations in the EU, UK and US.decta+2​

For businesses, simple process changes—such as confirming account status before issuing or accepting cheques, offering alternative payment methods (NEFT/RTGS/UPI, FPS, SEPA credit transfers), and maintaining open communication with counterparties—can prevent reputational damage and disputes that no regulator can fully repair after the event.grantthornton+2​

• Association of Banks in Singapore. Code of Consumer Banking Practice. Singapore, 2018.

• Borenius Attorneys Ltd. “Revised Payment Services Rules to Improve Consumer Protection and Competition in the EU.” Legal Alert, November 17, 2024.

• Central Bank of Ireland. “PSD2 – Consumer Information.” Dublin, December 16, 2019.

• Consumer Financial Protection Bureau. Reopening Deposit Accounts That Consumers Previously Closed. Consumer Financial Protection Circular 2023‑02. Washington, DC, 2023.

• Deacons. “HKMA Circular on Handling of Dormant Accounts and Unclaimed Deposits.” Client Newsletter, March 15, 2022.

• European Commission. “Revised Rules on Payment Services.” Q&A, 2023.

• Flagright. “PSD3 & PSR: What EU’s New Payment Rules Mean for Payment Processors.” Insight, December 4, 2025.

• Grant Thornton. “EU Introduces Regulation to Modernise Payments and Enhance Consumer Protection.” September 8, 2024.

• Hong Kong Monetary Authority. Handling of Dormant Accounts and Unclaimed Deposits. Circular, November 18, 2021.

• Nexus Group. “PSD2 (the Second Payment Services Directive) Explained in 3 Minutes.” February 11, 2020.

• Reserve Bank of India. “Procedure for Dishonour of Cheques.” Notification No. DBOD.Leg.BC.59/09.07.005/2025‑26, October 29, 2025.

• Reserve Bank of India. “Inoperative Accounts/Unclaimed Deposits in Banks – Revised Instructions.” Circular No. DOR.SOG(LEG).REC/32/09.08.024/2025‑26, June 12, 2025.

• Reserve Bank of India. “Guidelines on Inoperative Accounts and Unclaimed Deposits in Banks.” January 1, 2024.

• Sarthak Advocates & Solicitors. “RBI Update – Activation of Inoperative Accounts and Unclaimed Deposits in Banks – Revised Regulatory Framework 2025.” June 15, 2025.

• Schoenherr Attorneys at Law. “The EU’s New Payments Services Package.” June 26, 2024.

• Tarun Gaur. “Cheque Bounce Law in India 2025: Section 138 NI Act Guide.” June 28, 2025.

• Taxmann. “RBI Issues Revised Instructions for Inoperative Accounts/Unclaimed Deposits in Banks.” January 2, 2024.

• Treliant. “Waking Up to the Long‑Dormant Risk of Deposits.” August 25, 2024.

• U.S. National Credit Union Administration. Examiner’s Guide: Dormant Accounts. October 14, 2021.

Links to explore