Uncollected funds

Uncollected funds are deposits made by check that are not yet available in the receiver's account. The bank needs to verify the transaction before the funds are released to the depositor. If you try to make a payment that exceeds the available funds in your account, you may be charged an uncollected funds fee.
What are Uncollected Funds (UCF)
3 min
13-December-2024

Uncollected funds are part of a cheque deposit that stays unavailable in the receiver’s account until the transaction is verified by their bank. The bank has to ensure that the transaction amount has been received by the receiver’s bank and transferred to the depositor’s account, implying that the uncollected funds are cleared. If you try to make payments that exceed the available funds in your account while there are uncollected funds as well, an uncollected funds charge may be levied on the account.

In this article, we will discuss what are uncollected funds and explain the concept with an example. We will also take a look at the benefits and drawbacks of this banking system and learn how it works.

What are uncollected funds?

It can often take a few days for a cheque to clear in the banking system after you deposit it. It can sometimes clear in a day or take up to four or five business days as well. So, what happens to the funds while your cheque is being processed and verified? This can be understood through the system of uncollected funds. This is a part of the transaction amount that remains unavailable in your account until their delivery and receipt are verified by the bank.

After the bank clears the cheque, the funds are marked as collected. At this point, the entire cheque amount is deposited in the receiver’s account.

Example of uncollected funds

With the meaning of uncollected funds clear, let us further expand our understanding of the concept through an example. Consider a scenario where Priya deposits a Rs. 10,000 cheque from Rohan into her account. Now, Priya immediately writes a cheque for Rs. 8,000 to pay her monthly rent. However, Rohan's cheque bounces due to insufficient funds, causing Priya's Rs. 8,000 cheque to be returned as well due to uncollected funds. Moreover, Priya may also have to pay an uncollected funds charge. This will typically include fees charged by her bank for the bounced cheque she wrote to her landlord due to the bounced cheque she received from Rohan.

Importance of uncollected funds

Understanding the concept and process of uncollected funds is important for individuals and businesses. This is because it directly impacts a crucial part of financial planning, i.e., fund management. Understanding the process of uncollected funds may be even more important for companies as they have to constantly deal with payments received from clients and made to vendors.

Accounts payable and receivable are quite important as they directly affect a company’s finances and determine the firm’s working capital. Any discrepancies or delays caused by insufficient or uncollected funds can also impact the company's supply chain. In addition, a bounced cheque may incur penalties and punishments under the law.

Also read: What is unclaimed dividend

How do uncollected funds work?

Uncollected funds are part of transactions that require clearing and verification. The cheque depositor’s bank must complete this, and the funds are subsequently released for use.

1. Cheque clearing process

The deposited funds must be mandatorily verified by the receiver’s bank once they are cleared by the payer’s bank. Until this process is completed, these funds are referred to as uncollected funds or UCF/UF. On the deposit side, the funds are marked as ‘pending’.

Typically, cheques for a large amount are not cleared immediately. A big chunk of the total amount is put on hold, with a small portion being accessible to the depositor immediately. However, do note that this is subject to the depositor’s relationship with their bank.

2. Uncollected funds fee

Usually, when a check bounces due to uncollected funds in the account, an uncollected funds charge is levied. This fee is also known as the UCF fee.

Also read: Save for retirement or save for a house

Benefits of uncollected funds

The uncollected funds system does have several benefits. These include:

1. Protection against fraud

This is one of the primary benefits of the concept of uncollected funds. Without this process in place, it would be possible for anyone to draw a bad cheque from one bank account, which could then be deposited in a second account. This second account could then be used to immediately withdraw the cash that was never transferred in the first place because of the bad cheque.

2. Support in money management

The small waiting period accompanied by depositing a cheque promotes healthy money management practices and discourages overdrafts. With the funds clearly marked as uncollected, the customer remains informed and just has to wait for the amount to be cleared.

3. Short-term investments

The banks use the hold period, during which they verify and clear the funds to invest them in short-term investment plans, which increases their income and returns.

Also read: What is financial risk

Drawbacks of uncollected funds

All of the above-mentioned benefits do not imply that there are no criticisms of the concept of uncontrolled funds. These are:

1. Unfair fees

From the perspective of a customer who has deposited a cheque in the bank, the uncollected fund charges can seem unfair. This is because customers assume that the money is instantly transferred to their account as soon as they deposit the cheque. Thus, to these customers, the uncollected fund charges may seem like an underhanded tactic by the banks to make extra money.

2. Excessive fees

While the individual who draws a bad cheque knows it will not be cleared, the person with uncollected funds remains in the dark. Thus, the UCF fee, be it any amount, would seem excessive from the perspective of the receiver.

3. Uncertain hold periods

Whenever you deposit a cheque, it is never immediately cleared. It goes through a process of verification before the funds are actually transferred. Until then, the money is held by the bank. Given that the wait times are not certain, customers never really have an exact timeline when it comes to cheque clearing. While the advent of online banking has made it easier to track the status of your cheques, the system is far from ideal for customers.

Also read: What is direct tax code

Uncollected funds vs. Insufficient funds

The concepts of uncollected funds and insufficient funds may seem similar, but they mean different things. Insufficient funds mean that an account does not have enough money to cover a cheque. If you knowingly draw a cheque against an account with insufficient funds, it will always result in a bounced cheque and a fee. It may even be considered a crime.

On the other hand, uncollected funds refer to money that has been deposited but not yet cleared by the bank. Drawing a cheque against uncollected funds can result in a bounced cheque if it is cashed before the funds clear. However, if the cheque is cashed after the uncollected funds have cleared, the payment will go through successfully. Understanding the difference between these two concepts is crucial for managing account balances and avoiding fees and/or legal issues.

Conclusion

Understanding the system and concept of uncollected funds is essential for individuals and businesses to manage their finances effectively. This system helps prevent fraud and promotes mindful money management by ensuring that deposited cheques are verified before funds are released. While it offers several benefits, it also has drawbacks like potentially unfair and excessive fees and uncertain hold periods. Additionally, distinguishing between uncollected funds and insufficient funds is crucial to avoid bounced cheques, fees, and legal issues.

Owing to all these factors, the uncollected funds process plays a vital role in maintaining the transparency and efficiency of financial transactions. If you wish to be financially independent, you can start investing in mutual funds. To do so, visit the Bajaj Finserv Mutual Fund Platform and use the SIP calculator or the lumpsum calculator to better plan your investment journey. You can choose from 1000+ mutual fund schemes on the platform, empowering you to achieve your investment goals quickly.

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Frequently asked questions

What is payment returned due to uncollected funds?

Payment returned due to uncollected funds occurs when a payment is reversed because the funds were not available or cleared in the account. This can result from uncleared cheques or pending deposits, which may lead to returned payment fees and other charges. This is identified by ACH Return Code R09.

What does drawn on uncollected funds mean?

Drawn on uncollected funds means that a payment or cheque was issued from an account that does not have enough funds to cover the amount. This can result in the transaction being returned or rejected due to insufficient available funds.

What do uncollected funds mean on a returned cheque?

Uncollected funds on a returned cheque mean the cheque has been returned because the cheque drawing account does not have enough funds to cover the transaction. That is, the bank did not complete the transaction due to insufficient funds.

What is the reason code for uncollected funds?

The code that refers to uncollected funds is ACH Return Code R09. This code indicates that a transaction was returned because the account from which the cheque was drawn did not have sufficient funds to cover the payment.

How long can funds take to clear?

Bank transfer times vary based on factors like fraud prevention, time zones, currency types, and weekends. Typically, funds can clear within one to five business days, though specific times can differ depending on these variables and individual bank policies.

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.