NPR COLLEGE OF ARTS AND SCIENCE NATHAM

Banking theory law and practice

UNIT-I Meaning and definition of banker Meaning and definition of customer general relationship between banker and customer obligation to honour cheques obligation to maintain secrecy of customers accounts- Banker Rights Lien ,Set off, Appropriation of payments.

UNIT-II Types of Deposits current account ,savings account-fixed deposits recurring deposit-fixed deposit receipts and its legal implications general precautions for opening account. Pass book meaning legal aspects of entries in the pass book effects of wrong entries favorable to customers effects of wrong entries favorable to banker. Special types of customers ,general procedure for opening accounts in the name of minor, married woman , illiterate lunatic, partnership firm,joint stock company , non trading concern and join account.

UNIT-III Negotiable instruments : Definition types essential features of negotiable instruments. Cheque : meaning definition essentials of cheque vs Bill of exchange proper drawing of cheques Bouncing of cheques . offence under sec 138 of negotiable instruments ACT MICR cheque material Alteration : meaning - effects of material alteration bankers duty immently alteration. Making : meaning significance cases. Crossing : meaning forms of crossing significance of various forms of crossing . Endorsement : meaning and definition kinds and significanceregularly of endorsement.

UNIT-IV Paying Banker Meaning Duties of a paying banker circumstances for dis honoring a cheque Statutory protection under sec 85 of the negotiable instruments act. Forgery of customers singnature payment in due course holder in due course. Collecting banker : meaning capacity of the collecting banker duties of collecting banker statutory protection concept of negligence conversion. UNIT V General principle of Banking lending secured advances and unsecured advance secured vs unsecured advances types of advances loan cash credit . overdraft and Bill discounting model of creating charge Lien ,Pledge ,Mortgage and Hypothecatio . types of mortgage- connons of goods banking security.

UNIT I BANK MEANING

Bank have become a part and parcel of our life. Banks cater to the needs of agriculturists, industrialists, traders and be all the other sections of the society. They accelerate the growth of economy. The word, Bank is said to have derived from the French word Banco, or Bancus or Banc or Banque which means a bench.

According to Banking Regulation Act,-1949,therm banking means accepting for the purpose of lending or investment of deposits of money from the public repayable of demand (or) order (or) other ways. BANKER MEANING AND DEFINITION:

A person who in doing the banking business is called a banker. But, it is not at all easy to define the term banker precisely because a banker performs multifarious functions.

Bill of Exchange act of 1882 defines, the term banker thus, banker includes a body of persons whether incorporated or not who carry on the business of banking SECTION 3 of the Negotiable instrument act defines that the term banker includes a person or a corporation or a company acting as a banker

CUSTOMER MEANING AND DEFINITION:

There is no exact definition or meaning for customer. But Sir. John Paget defines that, to constitute a customer there must be some recognizable course or habit of dealing in nature of regular banking business.

The following are the requisites to constitute a person an a customer, He must have some sort of an account Even a single transaction may constitute him as a customer Frequency of transaction is anticipated but not insisted upon. The dealings must be of a banking nature

RELATIONSHIP BETWEEN BANKER AND CUSTOMER:

The relationship fails under two broad categories, namely

1. General relationship 2. Special relationship

1. General relationship:

I) II)

Primary Relationship Subsidiary Relationship

I)PRIMARY RELATIONSHIP (Debtor and creditor relationship)

If customers account shows a credit balance, the banker becomes a debtor and the customer becomes a creditor.

If customer account shows a debit balance, the banker becomes a creditor and the customer becomes a debtor.

The banker is under an obligation to repay the debt as and when demanded by the customer. The banker may use of deposited money of customer according to his discretion.

The following are the aspects in which the relationship between banker and customer differs from the ordinary debtors and creditor relationship.

1)DEMAND FOR REPAYMENT:

Banker, being a debtor, has to repay the deposits whenever there is a demand from the customer. Hence a banker is considered to be a privileged debtors.

2)DEMAND AT PROPER TIME AND PLACE:

a. Time for making demand:

Payment must be made by

customer during the normal working hours on any working day of the bank. Otherwise banker will be liable. b. Place for making payment: The demand for repayment

must be made by the customer at the branch of the bank where he is keeping the account.

3)DEMAND IN PROPER MANNER:

The demand for repayment must be made through a cheque or any other written order as commonly used among the bankers.

II)SUBSIDIARY RELATIONSHIP:

Trustee and beneficiary relationship: A trustee is a person who holds assets and perform certain services for the benefits of another person called the beneficiary. Points regarding relationship are as follows;

Ownership of the articles of deposited for safe custody.

Such articles are not available for distribution

Position of banker as a trustee and debtor

a)If special instructions given, banker will be trustee and debtor. b)If special instructions are not given, the banker will be a debtor and not trustee c)When a cheque or bill is deposited for collection, before collection the banker will be trustee. d)When a cheque or bill is deposited for collection, after collection the banker will be debtor.

2.Agent and Principal Relationship:

In all cases, the customer is the principal and the banker is the agent.

Collection of cheques and bills, purchase and sale of securities, payment of customers dues like insurance premium etc. are the service done by banker.

A nominal charges are provided by banker and a customer cannot compel a banker to provide these services.

Special Relationship:

[I] Obligations of a Banker:

a. Obligation to honor cheque:

The banker has the obligation to honor cheques drawn on him by the customer. The following conditions subjects to obligations. b. Sufficiency of Funds: There must be sufficient funds of the customer in the hards of the banker for honouring the cheques drawn by the former. c. Applicability of Funds: The funds in the account must be properly applicable to the payment of a cheque. d. Proper requirement for payment: The banker must honour the cheque only when he is duly required to pay. e. No Garnishee of Attachment order: A banker may refuse payment on a customers a/c when a Garnishee order has been issued against that account. 2. Obligation to maintain secrecy of accounts:

The banker has the obligation to maintain secrecy of customers account otherwise customer may to have supper loser. The following circumstances are those the banker is justified in disclosing secrecy of customers account.

[i] Legal Necessity: A banker may disclose the secrecy of customers account when required by low.

[ii] Banking practices: The practices and customer aiming the bankers may also permit the disclosure of information about the customers account under the following circumstances. [a] Disclosure with customers consent: A banker is justified in disclosing any information relating to his customers account with the consent of the customer. Such consent may be express or implied.

[b] Disclosure with bankers own interest: A banker may disclose the customers a/c in order to protect his own interest legally. [c] Disclosure on request by other banks: The exchange of information [ie] credit information to other banks must be confidential. [d] Disclosure with public interest: A Banker is justified to disclose info mating relating to his customers a/c for public interest in some specific cases. [ii] Rights of a Banker: 1. Right of Lien:

Lien is a right of a person who can retain the goods of another in his possession until a debt due to his is paid it is of two kinds: Particular Lien: Particular property retail. General Lien: Any property retain. 2.Right of set Off: It means that a debtor has the right to set off any amount due to his by a creditor making payment on the creditors claim. 3.Right of Appropriation: It arisen when a customer owes several debts to a banker and makes a payment which is not sufficient to discharge all his debits. Provisions regarding payments of appropriations are as follows: [i] Appropriation by the debtors [sec.59]: The creditor must apply the money received from a debtor according to his choice when the debtor falls to exercise his option. [ii] Appropriation by the creditor[sec.60]: The creditor may apply the money received from a debtor according to his choice when the debtor Falls to exercise his option. [iii] No option of appropriation by the debtor and creditor: If neither party has given the option to appropriate the money, the appropriation shall be made to discharge debts in the order of time.

3. Right to charge interest, incidental charges, etc. A banker has the right to charge interest on the advances made by his. The banker may collect some amount from their customers as incidental charges an current accounts.

UNIT II
Deposit Account : The relationship between the banker and his customer begins with the opening of account by the customer in a bank. Initially all the accounts are open-ended with a deposit of money by the customer and rice this accounts are called deposit accounts. Different types of deposit account :Deposit Accounts are classifier into caprices types. Some of fee classified are as follows, 1. Final deposit Accounts, 2. Earning deposit accounts, 3. Current accounts, and 4. Recurring deposit accounts. Fixed deposit Account :A fixed deposit is one which is repayable after the expiry of a preen determined period fixed by the customer himself. A deposit Account can be opened for a period of more then three years and in that care the rate of interest remains the same level. This deposits are not repayable on

demand but they are with drabble subject to a period of notice. Hence, it is properly known as time deposits are time liabilities. ii) Savings deposit Accounts :A saving banks Account is mint for the people of the lower and middle classes who wish to save a part of this current incomes to meet tier futures needs and also intent to earned an income from this savings. This is restoration on with drawls in a month. Heavy with drawls are pomaded

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only against prior notes gently. The number of with drawls is permitted is 50% per half year. iii) Current deposit Accounts :A current Accounts is on Account which is opened for their convenueiens. Money can deposited an withdrawn at any time. Money can be withdrawn by only by means of cheques usually a hank does not allowed any interest an this account. Even then, people come formed to deposit money on current Account because of two important pricilegeges which type can enjoy in a current A/c. a) over draft facilities. b) Other facilities like close of cheques gofer of money, Gendering agency and gendered utility services. iv) Recurring deposit Account : It is one of the farm of saving deposit. Depositor save and deposit regularly even month a fixed installment so that they assured of the sizeable amount at a later period. This will enable the depositors to meet contingent expenses. Many people would not have sawed if this deposits had not b introduced. This deposit works on the maxim little drops of water make a big ocean. Opening and operating of fixed deposit Accounts :i) Rate of Interest :Interest at a specified Rate is admissible on the amount hold in the deposit account for the contract period. Interest is not allowed with expirer of the deposit period unless it. Geneva the rate of interest and other terms and conditions on which the Bank accept is deposits are Regulated by the RBI. ii) Payment of Interest :The banker usually pay interest quarterly or half yearly. Interested will be payable by the Bankers on the deposits for the over due period
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onyx the deposits Renewed. Wit drawl of Interest or the principal through cheque of is not permitted through cheques is not permitted. At the

request of the customer the Banker may credit the amount of Interest of the principal who is savings or current Accounts from which he may with draw the same through cheques. iii) Payment before due date :Through a fixed deposits is payable at the expiry of the specified period, Banker also permit encased of such deposits even before he due date. if the depositors so distress, If a customer to want to with draw a fixed deposit before maturity be should for go 1% less then the Rake of applicable interest to the period for which deposit as remind in the Bank. iv) Renewable before maturity :The reserve Bank as permitted the Banker to renew an existing term deposit before maturate, with out involving tee penalty provided. v) Loss of fixed deposit receipt :Were a deposit Receipt is lost, generally, a Banker demands the customer to sign an identity Bond with a guarantee. it will pretext the Banker against losses in future. In extra ordinary cases, the courtiers may be asked to go though the court and seek its authorization. vi) Exception from stamp duty :A fixed deposit Receipt, thought an Important document is excepted from stamp duty under the Indian stamp Act this is just to popularized the deposits Accounts other wise any Receipt exceeding Rs.20 Requires to be stamped. vii) Dictation of the at source : Section 194 (A) of the Income tax Act provinces for deduction of take at source from Interest on time deposit, payment by a Bank o co-operative security where it exits Rs. 5000 in a financial gear.
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Opening of current and savings Account :Before opening a new Accounts a Banker should take certain prevention the following are the general precaution to taken by a Bank. In opening of new Account. i) Application on the presented from : The Request for opening a savings a or current A/c is made on the present from the Bank concerned Banks provide separate Application forms of opening savings and current Accounts for individual, prater ship forms and companies, the customer mention is named, trust, occupations, specimen signature and the name and signature of a person for References. ii) Introductions of the application :It is always advisable on the part of the Banker to always the prospective customer to open an account only with a proper instruct the usual practice for the banker is to demand a letter of instructions from a responsible person know to both the particles. iii) Specimen signature : Every new customer is excepted to give three on more specimen signatures, usually they are obtained on cards, which are filed alphabetically for Ready Referees. Each bank maintains a signature Book for this purpose thus specimen signature protect the bankers against forgery. iv) Past port size photo graph :Nowdays Banks incite upon the prospective customers to abele their passport size photo graph on the application firm at the time of opening Accounts. v) Safety against wrong full over draft granted :It a Banker grants an overdraft even by mistake, to a customer who is not prosperity introduction the risk of losing case it is not repaid by the
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customer, In such a care the amount can be creative only is the customer is a respectable solvent party. vi) Mad date writing :If a new party wants in accounts to be operated by come party else, the Banker should demand a mandate from his customers in writing the man date contains the agreement between the two regarding he operation of the account, the specimen signature of the authorized person and the power delegated to him. vii) Amount in cash :After the above calamities are over the time of opening an account. The minimum amount is Rs. 500 with cheque and 250 for with out cheques facility for savings Bank accounts. Operating of current and savings account :Operating a bank means that the customer deposits for there sums of money, cheques etc into the bank and with dreams money according to his need on convenience so the Banker hands over to the customer. i) ii) iii) Cheque book. Paying-in-slip book and Pass Book

i) Cheque Book :The cheque Book contains Bank forms of cheques which are used as an Instrument to with draw money form the Bank. The cheque may be in favor of the customer himself of in favor of third party. he must write the amount both in words and figures the book will dishonor a cheque if there is any defect in it. ii) Pay in slip :The pay-in-slip contains with counter foils to be failed in by the deposit for himself on by his agent at the time of depositing cash, calques,

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draft, bills, etc., to the credit of his account. Though the size and define such slips by from bank to bank. iii) Pass Book : The Pas Book is a small handy book which count ions the record of transitions in depts. and credit returns a Baker and his courtier. it is called a pass Book because it passes between the hands of customer and banker. If refuels the customers A/c in the bankers laager.

Special Types Of Bankers Customers :When a Banker opens an account in the name of customer this arises a counteract between the two. This contract will be valued one only when the Both the parties are component to enter into counteracts. Some different special types of customers are as follows. i) ii) iii) iv) v) vi) vii) viii) ix) Minor (or) infant Married women illiterate person lunatics executions, administrators and urinates Joint account Partnership form Joint stock companies Club, society and Non trading associations.

i) Minor or infant :A person who has not completed 18 years of age is a minor. if a guardian, of his person are property appointed by the court before he completes 18th years , he remains manor till he completes his 21st year. According Indian counteract act 1872. A minor his not capably of entering into a valid counteract and a contact entered into by a minor his void. A counteract for he supply of necessary of life to a minor, however, a valid counteract.
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ii) Married women :A Bank may open an account in the married women. The married women were allowed to open accounts only after getting consent of their husband moreover, all their became the properties of her husband on her husband, she was not allowed to hold property in her hold name. A married women cannot make her husband responsible for the debts incurred by her expect in some cases. If she is authorized to act has on agent of other husband, then the husband can be made liable for the debts in the follow cases. a) If the loan taken with his contend of authority and, b) If the debts is taken for the supply of necessary of life to the wife incase the husband defaults in supply in the same to her. 3) Illiterate person :The bankers can open account in the name of illiterate person who cannot sign but banker can take his thump impression as a substitute for signature. The banker should also take session potlograntr attended by a first class magistrate for the purpose of Indintification. While drawing cash from the bank such person should to the bank and get cash in the

presents of a ditties in the office of the bank manager. 4) Lunatic :Lunatic is a person of an unfound mind and hears he is incompetent into enter into a valid contract under the Indian counteract act, 1872, since a lunatic does not understand what is right? and what is wrong? so, the counter enter into him is void. 5) Executors, administers and trustee :Exactors and ammoniates are persons who are appointed to content the faired of a person after his death. When a person know as dictator, [maker of will] appoints another person for this purpose through a will, he is know as a exactors, if the will of the testator does not mention the name of
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the exactor, (or) if the person appointed as executer dies (or) refuses to act, the court appoints the person. For the purpose that is know as

administered. A trustee is a person in whose care he control of an estate is placed under an instrument of trust on trust deed. 6) Joint Accounts :A joint Account is one which is opened by two or more indigos, who are not partners in a farm (or) who are not joint trustee. While opening the joint Account, the Banker must get a clear man date in writing, countering instructions as to, how the account is to be apprised. The Banker should get specific interactions regarding the operate of the account and the major of the powers delegated to the authorized person. In the assertion of a man date, all joint holders must jointly opportunity the account.

7) Partnership form :According to section 4 of the Indian partnership Act, 1932, A partnership is The relaxation between persons who have agreed to share the profit of a business, carried by on by all (or) any of them acting for all.

Unit III NEGOTIABLE INSTRUMENTS:

Many documents are rued in the mordent commercial world, but, certain documents are freely used in commercial transfer which are called Negotiable Instruments. Definitions: The negotiable stunts in India are governed by the Negotiable Instruments act of 1881. This Act does not define a negotiable

Instruments reaction 13 of negotiable instrument simply states that @ A

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Negotiable Instrument means priming note, Bill of exchange, (or) cheque payable either to order (or) to Bearer. One the property in which is acquired by any one who takes it benefited and for value not-with-standing any defect of title in the person from where he took it? ---- JUSTICE K.C.WILLS FEATURES OF NEGOTIABLE INSTRUMENTS :i) Free transfer :There is know formality to he complied with the transfer of Negotiable Instruments. It can be crassly either by more delivery or by endorsement and delivery Transplant is on geranial feature of a amegable instrument . But all transaxle Instruments are not negotiable instruments. ii) Free from defects :A person who takes Negotiable instrument from another person, who had stolen it from somebody heals, will have absolute and dispute little to instrument provide. He rescues the same for value. [i.e. after paying its full value]. The transferee is called the holder in due course and his

interest in the instrument his well proceed by the law. iii) No notes to Transfer :The transferor of a negotiable transmit can simply transfer the documents, with out shrilling any notes of transform to the party who is liable on the instrument to pay. iv) Right of action :A holder of a Negotiable instrument being a holder in due course gets the Right of action to such open the instrument in his own name. Types of Negotiable instruments :In India, Negotiable instrument classifier into three, viz., i) Promissory Note.
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ii) iii)

Bill of exchange Cheque. According to section (4) of negotiable Instrument Act of 1881,

i) Promissory Note :-

promissory Note is all instrument in writing containing an unconditional under taking, righted by the Maker to pay a certain some of money only to (or) to the order of a certain person, (or) to the Bearer of the Instrument. Thus, the promise not count ions promise by the detour to the creditor to pay certain sum of money after a certain date. else it is always drawn by the holder. he is called the matter of the Instrument. Specimen of a profiling Note : Rs. 10,000/Chennai-600 082 20th July 2007 Three months after date, I promise to pay maha (or ) order the sum of Rupees ten thousand, for To Maha Stamp

II Bill of exchange :According to section (S) A bill of exchange is a An installment in writing count ion an uncoundiral order, signed by me matter, Directing a certain person to pay a certain sum of Money only to, (or) to order of, A person or to the bearer of the Instrument@. A bill of exchange continued an order from the creditor to the editor to pay a specified amount to a person mentioned therein. The maker of a Bill is called the drawer. person on whom it is drawn is called drawee. (or) acceptor and the person to whom the amount is payable is called the payee some times the drawer himself is the payee. Specimen of a ill o exchange. Rs. 10,000/Chennai-600 082
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20th July 2007 Three months after date, pay to Mr.Ram (or) order the sum of Rupees ten thousand, for value revised. Accepted To G. Eany, 7th Cross, Krishnagiri Features Of A Bill Of Exchange And Promises Note :i) Instrument in written :A bill of exchange are promisser note must be in writing only. oral order (or) promise dont make a value instrument. ii) Un conditional order :The promise (or) order must be unconditinal if any condign are Stamp

applied destroys the Negotiable crater of an instrument. But promise (or) order to pay at a partum place (or) after a specie time (or) on the happening an event retuning to happen his moot conditioner. Corn example :- 7 promise to pay Rs. 1,000 days after x is retirement is not conditional. 3) Drawn on a certain person :A Bill is always drawn on a certain person, preferably, by the seller n his courtier., hence the drawee must be a sorting person.

4) A certain sum of money :The order have o the drawer of a Bill and the promise by the written of a promise note must be to pay a retain sum of money and not any thing heals. (ex. ) foods and sectary.
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5) Payee to be certain:A bill or promising note is drawn payable to a certain person or to his order (or) to the Berea of the instrument. Thus the payee his certain, however promise note are Bill of exchange or not the made payable to bazaar on demand. 6) Payable on demand (or) after certain date :A Bill (or) promise note may be payable on demand in which care it is called demand Bill (or) it may be payable afar a refaced period and such bill are called Time Bills. In case of time bill, acceptance is essential and usually three days grace is allowed in the case of payment of a Bill. 7) Signature of the drawn (or) Promising :A bill of exchange (or) a provision note is valid only it if hears the signature of the drawn (or) the provision. 8) Stamping of promission Notes and Bills :The Indian Stamp act 1899 requires that the promiser note and the Bill of exchange must be stamped, otherwise it cannot be addimtted in evidence.
DEFINITION OF THE CHEQUE:

Section 6 of the Negotiable Instruments Act defines a cheque as follows: A bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.

A better understanding of the concept of cheque entails the definition of a Bill of Exchange, since, a cheque is nothing but a Bill of Exchange.

THE SALIENT FEATURES OF A CHEQUE:

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1. Instrument in writing: A cheque must necessarily be an instrument in writing Oral orders therefore do not constitute a cheque. There is no specific rule regarding the writing material to be used. It may be done by means of a nib, a pencil, a type writer or any other printed character.

2. An unconditional order: A cheque is an order to pay and it is not a request. In the indigenous bill of exchange, words of courtesy with little monetary implications were generously employed.

3. On a specific banker: A cheque is always drawn only on a particular banker. Usually the name and address of the banker is clearly printed on the cheque leaf itself.

4. Payee to be certain: In order that a cheque may be a valid one, it must be made payable to the order to the order of a certain specified person or to his agent or the bearer thereof.

5. A certain sum of money: A cheque is usually drawn for a definite sum of money. Indefiniteness has no place in monetary transactions. Any phrase like less than Rupee One hundred only or Above rupees two hundred only does not give a clear and concrete idea to the parties concerned and it will render the cheque invalid.

6. Payable on demand:

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A cheque is payable only on demand. It is not necessary to use the word on demand as in the case of a demand bill. The cheque is always payable on demand.

7. To be signed by the drawer:

The cheque must be signed by the drawer, i.e. the customer. The drawer normally puts his signature at the bottom right hand corner of the cheque. The signature must be that of the person in whose name the account is kept or his authorized agent. When the signature differs from the specimen or it is slightly different, the banker nee not honour the cheque.

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TYPES OF CHEQUES:
1. Bearer Cheque:

A cheque payable to a certain person or to the bearer is known as bearer cheque.

2. Order Cheque: A cheque payable to a certain person or to his order is an order cheque which can be negotiated by endorsement ( i.e. the transferor should sign his name)

3. Crossed cheque:

A cheque is known as a crossed cheque when two parallel lines, with or without the words & co, and company etc. are drawn across the face of the cheque. A crossed cheque is payable through another bank and not payable over the counter. There are various types of crossing in practice, as given below

a)General crossing: Where a cheque bears across its face an addition on the words and company or any abbreviation thereof (& CO) between two parallel transverse lines or two simple parallel transverse lines with or without the words Not Negotiable, it is known to be crossed generally.

b)Special Crossing: Where a cheque bears across its face an addition of the name of a bank with or without the words Not Negotiable, the cheque is said to be crossed specially.

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c)Restrictive Crossing: Where a cheque bears across its face such words Account Payee or A/C Payee only along with general or special crossing it is known as Restrictive crossing or Account payee crossing.

d)Not Negotiable Crossing: Where a cheque bears across its face the words Not Negotiable in addition to a general or special crossing, it is known as Not Negotiable Crossing.

e)Stale Cheque: If a cheque is not presented for payment within a reasonable time, it becomes stale or out-of-date cheque.

f)Mutilated Cheque: Mutilated cheques are those cheques which have been damaged or mutilated in course of circulation. Such cheques are not honored by the bankers, in general, for payment.

CROSSING OF CHEQUES
MEANING OF CROSSING:

Crossing of cheque means drawing two parallel transverse lines on the left hand top corner of a cheque. Crossing on a cheque is a direction to the paying banker by the drawer that payment should not be made across the counter. The payment on a crossed cheque can be collected only through a banker. Therefore, crossing protects the holder of the cheque and reduces the possibilities of fraud.

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OBJECT OF CROSSING:

The main object or purpose of crossing is to ensure that the money should be transmitted safely through the cheque and the amount of the cheque should reach the hands of the rightful owner. In case it is enchased by unauthorized persons, it helps to detect the parties to whom the amount has been paid. Therefore, crossing, in short, protects the holder of the cheque and reduces the possibilities of fraud.

PARTIES ELIGIBLE TO CROSS THE CHEQUE:

The following persons are eligible to cross a cheque: 1. Drawer of the cheque 2. Payee of the cheque 3. Holder of the cheque

i)Drawer: The drawer of the cheque can make a general, special or restrictive crossing in a cheque before issuing it.

ii)Holder: a) Where the cheque specially. b) Where a cheque is crossed generally, the holder may cross it specially. c) Where a cheque is crossed generally or specially, the holder may add the words not negotiable. iii)Banker: Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker, or his agent for collection. (sec 125) A cheque can be crossing is to a banker as agent for collection. is uncrossed, the holder may cross it generally or

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TYPES OF CROSSING
There are two types of crossing:

A)General Crossing

b)Special Crossing

A) General Crossing: According to Section 123 of the Negotiable Instruments Act, 1881. where a cheque bears across its face an addition of the words and company or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines simply, either with or without the words not negotiable, that addition shall be deemed a crossing and the cheque shall be deemed to be crossed generally.

The following are examples of general crossing:

1)

2)

3)

4)

5)

6)

Significance of General Crossing: A crossed cheque should not be paid across the counter. Even if the payee of a crossed cheque is well known, the paying banker is directed to make payment only through another banker.

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b) Special Crossing:

DOUBLE CROSSING A specially crossed cheque is to be collected only through the banker specified therein. Therefore, a specially crossed cheque cannot be crossed specially again to another banker that is a cheque cannot be crossed specially twice, because the very purpose of first special crossing is frustrated by the second one. --------------------------------For example, State Bank of India To Bank of India As agent for collection ---------------------------------It is necessary, that the words as agent for collection must be included in the special crossing.

------------------------------------State Bank of India Bank of India -------------------------------------

OBLITERATING A CROSSING Were a cheque is presented for payment which does not at the time of presentation appear to be crossed or to have had a crossing which has been obliterated, payment thereof by a banker liable to pay and paying the same according to the apparent tenor thereof at the time of payment and other wise in due course, shall discharge such banker form liability thereon and such payment shall not be questioned by reason of the cheque having been crossed.

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ADVANTAGES OF CROSSING 1. If payment is made by means of a crossed cheque, receipt need not be obtained. 2. Account payee crossed cheque makes sure that only the particular person to whom the cheques are drawn can receive payment. 3. If a crossed made through cheques particularly crossed cheques enable an automatic record of the amount in the pass book. 4. Payments made through cheques particularly crossed cheques enable an automatic record of the amount in the pass book.

ENFORSEMENT
DEFINITION OF ENDORSEMENT When the maker of holder of a negotiable instrument signs the same otherwise than as such maker, for the purpose of negotiation on the back or face thereof or on a slip of paper annexed thereto.he is said to endorse the same and is called the endorser.

The person who signs the instruments for the purpose of negotiation is called the endorser and the person in whose favour instrument is transferred is called the endorsee. The endorser may sign either on the face or on the back of the negotiable instrument.

Rules for endorsement or essentials of a valid endorsement. The rules regarding valid endorsements are given below: 1. The endorsement must be written on the instrument itself or on a slip of paper annexed thereto. 2. It must be made by the holder of the instrument and not by a stranger.

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3. It must be signed by the endorser. The endorser must sign his name in the same spellings as spearing on the face of the cheque. 4. An endorsement written on an allonge is deemed to be written on the instrument itself. 5. The endorser should endorse the instrument in full and not in part. 6. If an instrument is payable to the order or two or more payees or endorsees who are not partners, all must endorse unless the one endorsing has authority to endorse for all others. 7. Endorsement is complete only when the instrument is delivered. The delivery must be made by the endorser himself. If the delivery is conditional, endorsement is snot complete untill the condition is fulfilled. 8. Endorsements can be made by the endorser merely by singning his name on the instrument or by adding the name of a specified person to whom the endorser likes to endorse.

KINDS OF ENDORSEMENTS
1. General or Blank Endorsement: If the endorse just puts his signature without specifying the name of the endorsee, the endorsement is said to be blank. The effect of such an endorsement makes the instrument payable to bearer even though originally payable to order and negotiation takes place at mere delivery.

2. Special of Full Endorsement:

If the name of the endorsee is specified in whose favour it is being endorsed, along with the signature of the endorser, the endorsement is called endorsement in full.

3. Conditional Endorsement:

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It is an endorsement under which the endorser lays down some condition to be fulfilled by the payee before making the payment. The type of endorsement involves a special problem because, according to the definition of a cheque, it is an unconditional order payable on demand. 4. Scans Recourse Endorsement:

In this case, the endorser makes it clear to the endorsee that the endorser would not be liable in case the instrument is dishonored. This means that further recourse cannot be taken against the endorser. For example: Pay to X without recourse to me.

5. Restrictive Endorsement:

Restrictive endorsement, by the written words, restricts the right of further negotiation. In this case, an endorser specifies that the banker should pay the amount to a particular endorsee only. Example: Pay to X only.

6. Facultative Endorsement: The endorser waiving the right of notice of dishonor of the instrument, while making the endorsement is called facultative to the endorser who has made such facultative endorsement.

7. Partial Endorsement:

If an endorsement is made for the part of the amount of the instrument, if is called partial endorsement. endorsement is not valid. But such an

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FORGED ENDORSEMENTS

If an instrument is endorsed in full, it cannot be further endorsed or negotiated except by an instrument is negotiated by way of a forged endorsement, the endorses will acquire no title even though the instrument is purchased for value and it good faith, because the endorsements nullifies further negotiation.

UNIT IV
1. Meaning of Paying Banker A Paying banker is one who is a drawee of a cheque. He takes the responsibility of making payment on a cheque to the true owner. Any wrong payment will make the paying banker liable to the true owner of cheque and also to the drawer of the cheque (one who has drawn the cheque). 2. Payment in due course (Section 10) Section 10 of the Negotiable Instruments Act, 1881 clearly mentions the manner in which the paying banker should make payment on a cheque when presented to him and demanded payment. Section 10 defines Payment in

accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned. 3. Conditions given under payment in due course

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(i) Payment in accordance with apparent tenor: When a paying banker receives cheques, he has to carefully go through the instructions given by the drawer. For example, if the drawer has issued a cheque dated 10th June 2000, Payment cannot be made before the date. If the cheque is crossed, then the banker cannot make payment across the counter. (ii) In good faith : The paying banker will make payment to a person whose ownership is certain. In other words, the person presenting the cheque

creates absolute good faith in the minds of the banker regarding the ownership. (iii) Without negligence : The paying banker has to go through the contents of cheque before making payment. If the cheque contains any alteration, Sometimes, the

overwriting or cancellation, payment cannot be made. cheque may also contain material alteration.

(iv) To the person in possession: Paying banker can make payment to a holder in due course only when he is in possession of the instrument. Possession is a must for a holder in due course. For a holder it is not a must. Thus, a paying banker should make payment only to that person who is in possession and presents the cheque for payment. (v) Circumstances : Even though the person presenting the cheque may fulfils all conditions, but still creates a doubt in the minds of the paying banker at the time of making payment, the paying banker must get it clarified before making payment. There are instances where the amount of the cheque and the status of the presenting the cheque are inconsistent. Duties and Responsibilities of a Paying Banker Section 31 of the Negotiable Instruments Act provides that the drawee of a cheque having sufficient funds of the drawer in his hands, properly applicable to the payment of such cheque must pay the cheque when duly required to do so, and in default of such payment must compensate the drawer for any loss or damage caused by such default. Obligation of Paying Banker to Honour Cheques

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The paying banker is under an obligation to honour cheques subject to the fact that certain conditions are satisfied. (a). There must be sufficient funds in the customers account and only in the account on which the cheque is drawn. The amounts in the credit of the customers account in other branches will not be considered. (b). The funds should be properly applicable to the payment of such cheques. (c). The cheque should be properly drawn and should not be irregular or

ambiguous. (d). Cheques should be presented during the banking hours of the bank. (e). Cheques should be presented for payment within a reasonable time. They should be presented within six months of their issue. presented after six months of their issue are considered stale. CONDITIONS FOR DISHONOUR OF A CHEQUE BY A PAYING BANKER (i) Open or crossed cheques: When a cheque is presented for payment, the banker should verify as to whether it is an open cheque or a crossed one and whether the cheque is in printed from. There is no provision in the Banking Regulation Act preventing a customer from drawing his own cheque. (ii) Drawn on the specific branch: Cheques should be drawn on the particular branch at which they are presented. If they are presented at a different Usually, cheques

branch were an account is not maintained by a customer, the banker should refuse payment, because he/she has no means of knowing the state of the customers account and cannot verify the genuineness of the customers signature. (iii) Mutilated cheque: The banker should also verify whether a cheque is If it is torn in such a way as to give an

mutilated, torn or cancelled.

impression that the customer had desired its cancellation, the banker should return the cheque with the remark, Mutilated Cheque. When a cheque is torn accidentally, the banker can pass it for payment after obtaining the drawers confirmation on the cheque.

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(iv) Date of the cheque: A cheque must also ways bear a date because the mandate of the customers to the banker given in the form of cheque becomes legally valid on the date mentioned therein. If no date is written and still presented for payment, the banker must refuse payment. (v) Words and figures differ: When the amount stated in words and figures

differs in a cheque, the banker follows the practice of returning the cheque with a remark to that effect. (vi) Material alteration: Changing the date, amount, name of the payee, removal of crossing, etc., affect the credibility of the instrument. The banker should refuse payment of a materially altered cheque unless it is confirmed by the drawer. (vii) Proper endorsement: It should be ensured whether the cheque presented

for payment requires endorsement or not and if so, whether the endorsement made thereon is regular or not. (viii) Chronological order of payment : The banker generally follows the rule of

making payment of the cheques in the chronological order of their receipt. It means that the cheque received first on an account will be paid first and the rule for making payment is not based on the serial member of the cheque or the date of its issue. (ix) Garnishee order: The banker should not honour a cheque received by him after the issue of the Garnishee order by the court authorities. Section 31 of the Negotiable Instruments Act, 1881 provides that The drawee of a cheque having sufficient funds of the drawer in his hands, properly applicable to the payment of such cheques must pay the cheque when duly required to do so, and in default of such payment, must compensate the drawer for any loss or damage caused by such default.

CONSEQUENCES OF WRONGFUL DISHONOR OF CUSTOMERS CHEQUE

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(i) Gibbons vs. Westminster Bank A Housewife issued a cheque to a departmental store for purchases made by her. When the cheque was

presented by the departmental store, the banker negligently dishonored the cheque. When the account holder sued the bank, it was held that the bank must pay the cheque, dishonored negligently. (ii) Davidson vs. Barclays Bank: Davidson is a book maker and he issued a cheque for 15sh-10d to a client as part of dividend. When the cheque was presented by the client, the banker, negligently dishonored it. Davidson sued the bank for negligence. The court observed that the bank by dishonoring the cheque with a paltry sum of {}{}{15sh-10d has brought damage toe the reputation of the businessman. dishonored. I.V.RAJAGOPAL VS. CANARA BANK In this case, Raja opal was employed as a liaison officer by a group of companies at Delhi. He gave a cheque for Rest. 294.40 towards telephone charges to the telephone department. When the cheque was presented to The smaller the amount of the cheque

Canada Bank, it was dishonored negligently. Consequently, the telephone line was disconnected for non-payment and the employers of I.V Raja opal dismissed him from service, taking it as his negligence. GROUNDS FOR REFUSING PAYMENT OF A CUSTOMERS CHEQUE Dishonoring a cheque is different from refusing payment on a cheque. Dishonour takes place when there is defect in the instrument or when there are insufficient funds in the accounts. Refusing payment of a cheque takes place on the happening of certain events. We can see the grounds under which a bank refuses payment. (1) Countermanding of payment: When a customer after having issued the

cheque to third party, instructs the banker to stop payment on the cheque before the instrument is presented, it is called countermanding of payment. It is the responsibility o f the customer to inform the banker before the payment is effected.

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(2) Death of customer: Notice of death of customer has to be given by the close relative of the deceased. On receipt of the notice, banker will close the

account and any cheque received thereafter, payment will be refused. (3) Insolvency of the customer: When the court adjudged the customer of a bank as insolvent, the account of that customer will be taken over by an official assignee appointed by the court. Hence, any cheque received thereafter will be refused payment. (4) Lunacy: When a customer is of unsound mind, hi account cannot be

operated. But the lunacy of the customer has to be certified by a doctor and the nature of the lunacy must also be stated. If it is of a temporary nature, the account may be suspended till such time the lunacy is cured. But when the lunacy is of a permanent nature, on the advice of the doctor, the account will lobe closed and cheques received thereafter will be refused payment. (5) Garnishee order: Here, the court gives order to the bank to close the account of the customer partially or completely and according to that order cheques will be refused payment. (6) Closing of account voluntarily: When the customer on his own accord, closes the account b y giving a written declaration, the bank will close the account. But, the customer has to surrender all the unused cheques and the passbook. The banker will close the account after arriving at the balance. The amount will be paid to the customer. (7) Assigning the entire balance to a third party: When a customer gives in writing to the bank to assign his entire credit balance to a third parties account, the bank will close the account automatically. (8) Undesirable customer: When a customer issues cheques frequently with

insufficient funds, these are dishonored causing embarrassment, both to the banker and customer. Such a customer will be intimated by the banker to close the account, failing which the banker on his own will close the account and will send the balance, if any, to the customer.

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(9) Partnership firms, companies and institutions: Their account will be operated according to the bye-law. In the case of death of a partner, winding up of companies or dissolution of institutions, the account will be closed. (10) In public interest: When a banker comes to know that the account holder is building an account by cheating the public, he may close the account by giving notice to the party. The bank does this in the interest of the public and prevents the public from incurring any monetary loss.

COLLECTING BANKER 1. Meaning of Collecting Banker A Collecting banker is one who undertakes to collect cheques, drafts, bill, pay order, traveler cheque, letter of credit, documents such as lottery chits, dividend warrants, debenture interest, etc., on behalf of the customer. undertaking this collection, the collecting banker will be charging commission. 2. Capacity of Collecting banker While collecting the instrument on behalf of the customer, the collecting banker acts (a) as holder for value (b) as agent for collection (a) As holder for value : The collecting banker is said to be acting as holder for value. For

(i)

When the collecting banker advances money to the customer before the realization of the cheques given for collection.

(ii)

When the collecting banker settles the loan amount due from the customer with the cheque amount given for collection, even before its realization.

(iii)

Where a collecting banker reduces an overdraft with the amount for collection before its realization.

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(iv)

Where a part of the amount is given by the collecting banker to the customer even before the realization of the cheque.

(v)

By allowing the customer to draw the full amount of the cheque before its realization

(b) As agent for collection: When the banker undertakes to collect the cheques and credits the account of the customer only on realization. Thus, in acting as agent for collection, there is no risk for the collection, there is no risk for the collecting banker whereas in the case of holder for value, the collecting banker has enormous risks, especially when the cheque is dishonored or payment has been made to the wrongful owner of the cheque. Statutory protection to collecting banker under Section 131 of the Negotiable Instrument Act According to this Section, A Banker who has in good faith received payment for a customer of a cheque crossed generally or specially to himself shall not, in case the title to the cheque proves defective incur any liability to the true owner of the cheque by reason only of having received such payment. CONDITIONS UNDER SECTION 131 (i) Collecting for a customer: A collecting banker must collect the cheque or draft or any other instrument only for a customer. A customer is one who has an account opened with the bank which may be a savings or a current

account. A savings account can be opened by any person, only when that person is introduced by another savings account holder of the same branch of the bank. (ii) The cheque presented to the bank for collection should be crossed generally or specially: That is, the banker is collecting the cheque only on behalf of a customer. If a customer gives an open cheque which is uncrossed, the

banker will cross the cheque before it is sent for collection. (iii) In good faith: A collecting banker should accept the cheque for collection from the customer on good faith. i.e., there should not be any ambiguity with

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regard to the ownership of the cheque. If any doubt arises, the banker should clarify the same before the collection of the cheque. (iv) Without negligence: Negligence pertains not only with regard to the the circumstance under which the

instrument but also the manner and

cheque is given for collection. However, the fact of negligence will be seen under the duties of collecting banker. There are number of instances

revealing the negligence of the collecting banker. (v) Agent for collection: Section 131 gives statutory protection to the collecting banker acts agent for collection and not as holder for value.

DUTIES OF A COLLECTING BANKER

A Collecting banker has three major duties to perform towards the customer:

1. Quick clearance of cheques or other instruments given for collection

Whenever the customer gives ay instrument for collection, the collecting banker should immediately send the same for collection. Any delay on the part of the collecting banker may lead to either the drawer declaring insolvent or the winding up of the paying banker.

2. Acting as bailee
When a cheque is given for collecting banker is bailee until the cheque is realized and the proceeds are credited to the account of the customer. Sometimes, the cheque given for collection may bounce and gets dishonored due to insufficient funds. In such a case, the collecting banker has a duty to return the cheque which has been dishonored to the customer and by doing so he discharges his duty as a bailee.

3. To Collect cheques without negligence

Negligence of a collecting banker is of different nature. We can state the following negligence of collecting banker. (i) Negligence while opening account for a customer where in the banker has failed to obtain letter of introduction and has opened the current account. (ii) A cheque crossed but payment made across the counter by oversight.

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(iii) A cheque crossed account payee and payment credited to the account of a person other than the payee. For example, a cheque is drawn in the name of pay to Mr. and crossed account payee. The bank should credit the account of only Mr. But if the bank credits the account of Mr. or Z, it is negligence. (iv) A Cheque crossed not negotiable. Here, the collecting banker should take due precaution before making any payment. But if a collecting banker makes payment without any precaution, it amounts to negligence. (v) Opening of accounts without proper enquiry. As stated already in the two case laws, where banker has not made proper enquiries with the employer of the intending customer. (vi) A cheque belonging to a partnership firm endorsed to the personal account of the customer and if the banker, without proper enquiries, credited the personal account of the partner it is ground for negligence.

UNIT V
LOANS AND ADVANCES: After accepting deposits from the customer, a bank goes for lending or for investment in different types of securities, such as government, company etc. For deposits received under savings account and fixed deposits, the bank has to pay an agreed interest rate. This, the bank has to pay only from its earnings. On the investments, the bank earns a good return. Similarly, when the bank lends, it earns a higher interest rate. From out of the return on investments and from the interest earned on loans, the bank will be able to offer interest for the deposits, The difference between the interest offered on deposits, and the interest earned on lending will be the profit of the bank. (a) Safety: When a loan or investment is made, the banker will have to ensure that the money advanced is returned by the borrower along with interest within the stipulated period. This is possible only when the borrower does not face any risk and strictly adheres to the terms and conditions of the loan. For 41

this purpose, the banker will have to chose such type of borrowers who are prompt in repayment of the principal and interest amount. (b) Liquidity: An asset is said to be liquid when it can be converted into cash within a short notice, with out loss. As the bank is investing or lending the depositors money, it has to take more precaution while doing so. The

depositor may demand his/her money at any time and the bank must be in a position to repay the same. (c) Profitability: When a bank is undertaking lending or investment, it has to earn a good return. The bank has profit as its main business motive. So, while lending or investing the depositors money, the bank must earn higher interest or higher return. if the bank is able to achieve this, it will be deploying its funds in such ventures which give a higher return. (d) Shift ability: As the bank is giving loan against the security, in case of bad debts, the bank must be able to sell the security and realize the loan amount. In some cases, the bank will not sell the security, but will shift the same to the Central bank which will grant the commercial bank additional fund against the security. Mostly treasury bills can be shifted to Central bank and the

commercial bank can raise additional funds. (e) National Interest: The bank must keep in mind national interest while When a country is facing lending or investing depositors money.

unemployment, the bank must give more loans to employment oriented industries, so that the problem of unemployment can be reduced. Similarly, when a country is faced with food problem, more loans should be given for agriculture so that, food production can be increased. (f) Safety Margin: While granting loan against security, the bank will have to keep sufficient safety margin. This means that a bank will land only unto 50 or 60% of the value of security as loan by keeping a safety margin of 4 or 50%. For example, when loan is given against a jewel whose market value is Rest. 10,000/-. the loan amount will be Rest. 6,000/- and the safety margin Rest. 4,000/- now even if the market value of the jewel fluctuates to Rest.

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9,000/- or Rs.8,000/- still the banker will be able to realize the loan amount in case the borrower defaults. (g) Diversification: As the banker lends or invests, he cannot invest all his resources in a single industry or with a single borrower. The banker should not keep all the eggs in the same basket. By choosing a single industry such as iron and steel or sugar, the banker is inviting more risks. It is likely that these industries may face depression and the banker will find it difficult to recover the loan or realize his investment. LOANS OVERDRAFTS OF CASH CREDITS, SECURED ADVANCES Section 5(i) of the banking regulation Act, 1949, defines secured advances as Secured loan or advance means a loan or advance made on the security of assets the market value of which is not at any time left than the amount of loan or advance. THERE ARE TWO TYPES OF SECURITIES. (i) Primary Security Prime security and collateral security. In the case of prime security , it is the security which is taken by the banker as the main security for the loan. In fact, the prime security is obtained by the borrower with the help of the loan. Example: House in a housing loan. The house is mortgaged to the creditor. (ii) Collateral Security Collateral Security is that additional Security offered by the customer over and above the existing security. It may be like insurance policy or any other immovable property. A collateral security is demanded by the bank when the main security does not cover the loan fully or where the value of the main or prime security fluctuates.

FORMS OF ADVANCES Bank offer different kinds of borrowing facilities to their customers. The credit facilities may be broadly classified into four types.

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1. Loans. 2. Cash Credit System. 3. Overdraft. 4. Bills Purchased and Discounted. 1. Loans In case of loan, the banker advances a lump sum for a certain period at an agreed rate of interest. The entire amount is paid on an occasion either in cash or by credit in his current account which he can draw at any time. The interest is charged for the full amount sanctioned whether he withdraws the money from his account or not. The loan may be repaid in installments or at the empery of a certain period. The loan may be made with or without security. A loan once repaid in full or in part cannot be withdrawn again by the customer. In case a borrower wants further loan, he has to arrange for a fresh loan. 2. Cash Credit A cash credit is an arrangement by which the customer is allowed to borrow money up to a certain limit. This is a permanent arrangement and tube customer need not draw the sanctioned amount at once, but draw the amount as and when required. He can put back any surplus amount which he may find with him. Thus cash credit is an active and running account tow which deposits and withdrawals maybe effected frequently. 3. Over draft Over draft is an arrangement between a banker and his customer by which the latter is allowed to withdraw over and above his credit balance in the current account unto an agreed limit. This is only a temporary accommodation usually granted against securities. The borrower is permitted to draw an repay any number of times, provided the total amount overdrawn does not exceed the agreed limit. The interest is charged only for the amount drawn and not for the whole amount sanctioned. TEMPORARY OVERDRAFT Bank, Sometimes, grant unsecured overdraft for small amounts to customers having current account with them. Such customers may be

44

government employees with fixed income or traders. Temporary overdrafts are permitted only where reliable source of funds are available to a borrower for repayment 3. Bills Discounted and Purchased Banks grant advances to their customers by discounting bill of exchange or promote. The amount, after deducting the interest from the amount of the instrument, is credited in the account of the customer. In this form of lending, the interest is received by the banker in advance. Discounting of bill

constitutes a clean advance and banks rely on the credit worthiness of the parties to the bill. SECURED AND UNSECURED ADVANCES Loans and advances may be made either on the personal security of the borrower or on the security of some tangible assets. The former is called

unsecured or clean or personal advances and the latter is called secured advances. Unsecured Advances Section 5(i) (n) of the Banking Regulation Act defines unsecured loan as unsecured loan or advance means a loan or advance not so secured. The distinguishing feature of this type of loan, according to the definition is that no tangible security is offered to the bank. The confidence is judged by three considerations, character, capacity and capital usually referred to as the three Cs. Character Character constitutes the best asset of a man. The word character implies personal qualities like honesty, responsibility, promptness, reputation and

goodwill. A person who possesses most of the above qualities is considered as a man of character and bank can extent credit to him without any reservation. Capacity The capacity of a borrower refers to his ability to manage the business. Success of the enterprise depends mainly on the initiative, interest, experience

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and managerial ability of the entrepreneur. So capacity is the next consideration in granting clean advances. Capital In addition to the character and capacity of borrower, a banker looks into another aspect i.e., capital. requirements of the business. A bank provides mainly the working capital A borrower should have sufficient capital to

conduct his business and adequate plant and machinery to carry out capital to production. B.Memoria. a. b. c. d. e. f. g. h. Character + Capacity + Capital Character + Capacity + Insufficient capital Character + Capacity Character + Capacity Character + Capacity Character + Capacity Character + Capacity Character + Capacity Capital Impaired character = = = = = = = = Safe credit Fair credit risk Limited success Doubtful credit risk Dangerous risk Fair credit risk Inferior credit risk Fraudulent one In this respect banks may follow the formula evolved by Dr. C.

Character Insufficient capital Capacity Capacity

Modes of charging Security The important methods of charging a security are the following 1. Lien. 2. Pledge. 3. Mortgage. 4. Assignment. 5. Hypothecation.

LIEN
Lien is the right of a creditor to retain the properties belonging to the debtor until the debt due to him is repaid. Lien gives a person only a right to retain the possession of the goods and not the power to sell them. A bankers lien is a general lien which tantamount to an implied pledge. It confers upon the

46

banker the right to sell tee securities after serving reasonable notice to the borrower.

PLEDGE
Section 172 of Indian Contract Act, 1872, defines a pledge as, the bailment of goods as security for payment of a debt or performance of a promise.

Essentials of Pledge
(i) Delivery of goods: Delivery of goods is essential to complete a pledge. The delivery may be physical delivery refers to physical transfer of goods from a pledge to the pledge. (a) delivery of the key of the warehouse in which the goods are stored. (b) Delivery of the document of title to goods like Bill of Lading, Railway Receipt, Warehouse Warrant etc. (c) Delivery of transferable warehouse warrant if the goods are kept in a public ware house. (ii) Transfer of ownership: The ownership of goods remains with the pledge. The possession of the goods vests with pledge till the loan is repaid. (iii) Right in case of failure to repay: stipulated time, pledge may, (i) Sell the goods pledged after the pledge for the amount due, (ii) File a suit against the pledge for the amount due, (iii) File a suit for the sale of the goods pledged and the realization of money due to him. MORTGAGE A Mortgage is a method of creating charge on immovable properties like land and building. Section 58 of the Transfer of Property Act, 1882, defines a mortgage as follows: A Mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability. 47 If the pledge fails to repay within the

FORMS OF MORTGAGES Section 58 of the Transfer of Property Act enumerates six kinds of mortgages: 1. Simple mortgage. 2. Mortgage by conditional sale. 3. Usufructuary mortgage. 4. English mortgage. 5. Mortgage by deposit of title deeds. 6. Anomalous mortgage. Simple Mortgage. In a simple mortgage, the mortgager does not deliver the possession of the mortgaged property. He binds himself personally to pay the mortgage money and agrees either expressly or impliedly, that in case of his failure to repay, the mortgagee shall have the right to cause the mortgaged property to be sold and apply the sale proceeds in payment of mortgage money.

Mortgage by Conditional Sale In this form of mortgager ostensibly sells the property to the mortgagee on the following conditions: 1. The sale shall become void on payment of the mortgage money. 2. The mortgagee will retransfer the property on payment of the mortgage money. 3. The sale shall become absolute if the mortgager fails to repay the amount on a certain date. Usustructuary Mortgage Under this from of mortgage, the mortgager delivers possession of the property or binds himself to deliver possession of the property to the property to the mortgagee. The mortgagee is authorized to retain the possession until the debt is repaid. The mortgager reserves the right to recover the property when the money is repaid. English Mortgage

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The English mortgage has the following characteristics: 1. The mortgager transfers the property absolutely to the mortgagee. The mortgagee, therefore, is entitle to take immediate possession of the property. The transfer is subject to the condition that the property shall be transferred on repayment of the loan. 2. The mortgager also binds himself to pay the mortgage money on a certain date. Mortgage by Deposit of Title Deeds When a debtor delivers to a creditor or his agent document of title to immovable property, with an intention to create a security there on, the transaction is called mortgage by deposit of title deeds. Anomalous Mortgage In terms of this definition an anomalous mortgage is one which does not fall under any one of the above five terms of mortgages. Such a mortgage can be effected according to the terms and conditions of the mortgagor and the mortgagee. Assignment Assignment means transfer of any existing or future right, property or debt by one person to another person. The person who assigns the property is called assignor and the person to whom it is transferred is called assignee. Usually assignments are made of actionable claims such as book debts, insurance claims etc., In banking business, a borrower may assign to the banker (i) the book debits, (ii) money due from government department, (iii) insurance Policies. Assignment may be of two types: 1. Legal Assignment. 2. Equitable Assignment. Hypothecation: This is applicable to movable goods. The borrower is given loan for the purchase of goods or vehicles. Though the borrower is the owner of the security, the creditor has a charge on the security until the loan is repaid. If the borrower

49

fails to pay, the creditor will cease the goods from the borrower.

Thus,

hypothecation provides a right for the creditor to take possession of the goods.

DIFFERENCE BETWEEN PLEDGE AND MORTGAGE

Pledge
1. Applicable to movable goods only. 2. Governed by Indian Contract Act.

Mortgage
1. Applicable to immovable property. 2. Governed by Transfer of Property. Act.

3. Possession of security with the pledge or creditor. 3. There is no possession of property.

4. There is pledgor-Pledgee relationship. 5. As a bailee, the pledge has to take care of the security.

4. There is mortgagor-mortgagee relation ship 5. There is no such responsibility for the Mortgagee.

6. The pledge has a lien on the security

6. There is no lien for the Mortgagee. 7. Under English mortgage, the

7. When there is a default, the pledge can sell the security and recover the loan amount

ownership of property is transferred in favour of mortgagee when there is default by the mortgagor.

8. A pledge can never take over the ownership of security pledged with him.

8. Mortgagee can take over the ownership of the property in case of default. 9. There is surrender of the right of sale by the mortgagor to the mortgagee. 10. Mortgage deed has to be registered for making it a legal

9. There is transfer of possession of security from pledgor to pledge. 10. There is no need for registration of pledge agreement.

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mortgage.

Difference between Lien and Hypothecation Lien

1. It is a right exercised by the creditor on the debtor by retaining the security owned by the debtor. The creditor is in possession of the security belonging to the debtor. 2. The creditor cannot use the goods which are in his possession and on which lien is exercised. 3. The creditor is a bailee and hence has to take care of the goods which are in hi possession. 4. The creditor can not only retain the security, but can also sell the security a pledge, after giving due notice to the debtor.

Hypothecation
1. Though the debtor is the owner, the creditor has a right to cease the goods, from the debtor in case of default. The debtor is in the possession of the security. 2. The debtor is not only in possession but can also use the goods which are hypothecated. 3. The creditor is not in possession but has a charge on the goods hypothecated. The goods have to be taken care of by the debtor. 4. The creditor has to first obtain the goods from the debtor and then can sell the goods, for the recovery of loan amount 5. Hypothecated goods will be notified,

5. There is no notification on the goods by a board so that no other creditor can which are under lien. extend credit against the hypothecated goods.

GOODS AND DOCUMENT OF TITLE TO GOODS

Document of title to goods are defined by Section 2 of the Sale of Goods Act 1930 as A bill of lading, dock warehouse keepers certificate, railway receipt 51

and any other document used in the ordinary course of business as proof of the possession or control of goods or authorizing to either by endorsement and delivery, the possessor of the document to transfer or receive goods thereby represented. The following are some of the documents of title to goods. 1. Bill of lading 2. Dock warrant 3. Railway receipt(R.R.) or Lorry receipt (L.R) 4. Delivery order, and 5. Warehouse keepers Certificate. 1. Bill of Lading: This represents goods sent by ship. Only on production of this document, the captain of the ship will deliver the goods. A bill of lading is a quasi negotiable instrument. That is, it can be transferred but the transferee cannot get a better title than transferor and any defect in the instrument will also affect the transferee, even if he is a holder in due course. If the freight changes are due on a bill of lading, and without knowing this, if a person obtains the same, he cannot obtain a favorable title as the captain will refuse to deliver the goods. 2. Dock warrant: After taking delivery of the goods from the ship, the goods will be kept in the dock and the dock master will give a certificate which is a dock warrant. Only on production of the dock warrant, the goods will be delivered. 3. Railway Receipt or Lorry Receipt: When the wholesaler dispatches goods to the retailer, under the condition that documents are negotiable through the bank, the documents, railway receipts or lorry receipts will be sent to the bank of the retailer. The retailers bank will intimate him (the retailer) about the receipt of L.R. or R.R. which is representing the goods sent by lorry or rail. The retailer after making payment into the bank, will take delivery of these documents. Later, he will produce it to the railway authorities if it is R.R and to lorry authorities if it is L.R. and take delivery of tools. 4. Delivery Order:

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It is a document which is addressed by the owner of the goods to the custodian or . possessor of goods, normally the warehouse keeper. It is an instruction whereby either the whole goods or part of the goods kept in the warehouse to be delivered to particular person named in the document. 5. Warehouse keepers certificate: A warehouse is a scientific storage and licensed by the government and the quality of goods will remain the same in spite of a longer period of storage. The receipt given by the warehouse keeper on receipt of goods is called warehouse keepers certificate which can be used for obtaining loan from the bank. GOVERNMENT SECURITIES THE PRINCIPAL FORMS OF GOVERNMENT SECURITIES ARE: 1. Stock 2. Bearer bonds and 3. Promissory notes Stock A stock holder is given a certificate indicating the amount of a specified loan held by him. The name of the stock holder is entered in the books of the public debt office. The certificates are not transferable by endorsement. Bearer Bonds A Bearer bond certifies that the bearer is entitled to certain sum specified on the date indicated. The bearer of the bonds possesses the ownership. The title to the bonds is transferred by mere delivery without any formality. Promissory Notes Promissory notes contain a promise by the President of India in case of Central Government and by the Governor of the State in case of State Government Securities to pay the specified sum of money to the holder of the note or the last endorsee whose name appears on the reverse, on a specified date or after certain notice, according to the terms issue. A promissory note is negotiable one. The title to the promissory note passes by endorsement and delivery.

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Corporate securities The corporate securities comprise the ownership securities such as equity shares and preference shares and creditor ship securities such as debentures. Merits of stock Exchange Securities (1) Liquidity: Stock and shares can be easily realized if the borrower is unable to pay the debt. The existence of ready market provides liquidity to the security. (2) Safety: In normal times the securities enjoy stability of value. in times of recession the value of security may undergo fluctuations. But gilt-edged

securities are less susceptible to the changes. Nowadays even corporate securities are unaffected by business cycle. (3) Few legal formalities: Investigation of the title involves no complication as in the case of real estates. The formalities to be observed are few which

facilitate easy transfer of securities and minimize the expenses. (4) Negotiable securities: Some of the securities such as bearer bonds bearer debentures, share warrants and government promissory notes are fully negotiable. a. The banker gets good title and from all defects if he acts bonfire. b. The securities empower the banker to dispose them of without customers assistance. c. Transfer of the securities requires no stamp duty and so is inexpensive. (5) Appropriation of income towards Loan: Income received on such securities by way of interest or dividend can be appropriated towards the debt which automatically reduces the liability of the borrower. (6) Easier valuation: The market value of these securities can be easily

ascertained from quotations given in stock exchange reports or newspapers. Debentures A debenture is a document issued by a company as an evidence of debt. It is an acknowledgment of companys indebtedness to its holders. The

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debentures carry a predetermined rate of interest payable at regular intervals. The principal is generally payable on maturity varying upon 10 years. companys assets. The

amount of debenture is usually secured by a fixed or floating charge on the

Merits Debentures as security are acceptable to bankers because of the following advantages. 1. Debentures give prior claim on the profits and assets of the company. 2. Debentures are easily marketable. 3. The value and title of the borrower could be ascertained easily. 4. Transfer of debentures involves minimum expenses. Life Insurance policy A life insurance is a contract between a person known as insured and the insurance company called insurer. According to the contract, the insurance

company undertakes to pay, to the person for whose benefit the insurance is made, a certain sum of money or annuity on the death of the person whose life is insured. Kinds of Insurance Policy A life insurance policy may be a, (i) Whole life policy (ii) Endowment Policy Whole Life Policy In a whole life policy the premier are paid throughout the life of the insured person and the policy amount becomes payable on the death of the insured. Endowment Policy

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In case of an endowment Policy premiere payable during the stated period or till death, if earlier. The policy money is payable on the expiry of the period or on the death of the insured. Advantages of Life Policy as Security

(i)

Liquid security: A life policy can be easily realized. If he borrower fails to repay the loan, the bank can surrender the policy and get payment of surrender value. If the e customer dies the insurance

company would be ever ready to pay the amount covered by the policy. So life policy is a liquid security. (ii) Stability in value: A life policy is stable in value. Its surrender value continually increases, provided the premier are paid regularly. The surrender value is the minimum amount which will be paid by the insurance company if the policy is surrendered before its maturity. (iii) No problem in ascertaining the value: The value of the policy can be easily ascertained. Sometimes, the policy it self indicates how the surrender value is to be calculated, if it does not do so, the company will supply required information. (iv) Assignment made easy: The policy can be easily assigned in favour of the banker. assignment is simple. difficulty. (v) No supervision: The life policy remains in the custody of the bank. The security requires little supervision except that the bank must watch the regular payment of premiums. Disadvantages (i) Evasion of facts when policy is effected: A contract of insurance is a contract of Uberriemae fide i.e. contract mad in utmost good faith. This means the insured must disclose all material facts relating to his life at the time of taking the policy. The legal formalities connected with the The banker gets perfect title without much

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(ii) Non-payment of premia: A life policy depends for its continued vaidity for the amount insured on the regular payment of premia. There is a risk that the customer may not be able to pay future premiums. The policy will lapse if the assured fails to pay the premia regularly. (iii) Risk in case of suicide: A life policy contains a number of conditions. For example, almost all policies have a suicide clause stating that if the assured commits suicide within the period from the date of insurance, th e policy becomes void. (iv) Admission of age: The insured must have forwarded his birth

certificate and this mist have been accepted by the insurance company. In its absence the difficulty arises in claiming the amount of the policy. (v) Insurable interest: There is a slight risk that the person taking out the policy may have had no insurable interest in the life assured. In such case the contract becomes void.

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