A digital loan today rarely rests on a physical cheque or a signed promissory note. Repayment is usually collected by an automatic debit set up through a NACH or ECS mandate, the standing instruction that pulls each instalment from the borrower's account on the due date. So a practical question follows when that debit fails for want of funds: does a bounced auto-debit expose the borrower to criminal liability the way a bounced cheque does under Section 138 of the Negotiable Instruments Act, 1881? The short answer is that criminal liability can arise, but not under Section 138. It arises under Section 25 of the Payment and Settlement Systems Act, 2007, a parallel provision built for electronic transfers. This explainer sets out why Section 138 stops at the cheque, how Section 25 fills the gap, what the courts have said, and what a lender can recover when there is no cheque or note at all.
The Core Distinction: Two Instruments, Two Statutes
Section 138 punishes the dishonour of a cheque. Section 25 of the PSS Act punishes the dishonour of an electronic funds transfer. The two provisions are drafted in almost identical terms and carry identical penalties, yet they govern different instruments. A cheque is a negotiable instrument drawn on a banker. A NACH or ECS mandate is not: it is a standing debit instruction routed through an electronic clearing system. Which statute applies turns on how the loan was structured, and a lender who invokes the wrong section risks having the complaint fail at the threshold.