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2015

Banking Law and Operations

BANKING LAW AND OPERATIONS

Unit 1: BANKER AND CUSTOMER RELATIONSHIP


Introduction Meaning of Banker Meaning of Customer General & Special Relationships.

Unit 2: NEGOTIABLE INSTRUMENTS


Introduction Meaning & Definition Features Kinds of Negotiable Instruments: Meaning, Definition
& Features of Promissory Notes, Bills of Exchange, Cheques -Crossing of cheques types of crossing
Endorsements: Meaning, Essentials & Kinds of Endorsement.

Unit 3: BANKING OPERATIONS

Collecting Banker Meaning Duties & Responsibilities of Collecting Banker Holder for Value Holder
in Due Course - Statutory Protection to Collecting Banker.

Paying Banker Meaning Precautions Statutory Protection to the Paying Banker Dishonor of
Cheques Grounds of Dishonor Consequences of wrongful dishonor cheque.

Lending Banker: Principles of Bank Lending Kinds of lending facilities such as Loans, Cash Credit,
Overdraft, Bills Discounting, Letters of Credit NPA: meaning, circumstances & impact regulations of
priority lending for commercial banks.

Unit 4: CUSTOMERS AND ACCOUNT HOLDERS


Types of Customers and Account Holders - Procedure and Practice in opening and conducting of account
of different customers including minors - meaning & operation of Joint Account Holders, Partnership
Firms, Joint Stock companies, executors and trustees, clubs and associations and joint Hindu family.

Unit 5: BANKING INNOVATIONS


New technology in Banking E-services Debit and Credit cards. Internet Banking, ATM, Electronic
Fund Transfer, MICR, RTGC, DEMAT.

International Academy of Management and Entrepreneurship Mr. Shree Harsha C , Asst Professor 1
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Banking Law and Operations

CHAPTER -1
BANKER AND CUSTOMER RELATIONSHIP

INTRODUCTION TO BANKING
Banks and financial institutions (FIs) are in the process of great change in the context of the ongoing
financial sector reforms and the emerging competitive financial system within and outside the country.
With the widening and deepening of markets for long-term funds, the justification for further prolonging
the role of subsidized credit from banks and FIs has weakened; more so because prolonged concessional
Finance by the Government has been deemed to be neither sustainable nor desirable. This is consistent
with the process of financial sector reforms, with its focus to allocate efficiency and stability. With the
withdrawal of concessional sources of finance of banks and FIs and blurring of distinction between FIs
and banks, FIs not only have to raise resources at market-related rates but also have to face a
competitive environment on both asset and liability sides. Moreover, structural changes in the financial
system coupled with the industrial slowdown in recent years have adversely affected the volume of
business and profitability of FIs.

Banks are becoming increasingly complex organizations. Investors are finding it harder to understand
the quality of financial performance and risk exposures of banks. The traditional set of information as
contained in banks balance sheet often fails to convey information to readers of financial statements
that can enable them to ascertain the quality of earnings. Accordingly, supervisors world-wide are
making conscious efforts towards increasing the quality and quantity of disclosures in banks balance
sheets. Transparency challenges are met where market participants not only provide information, but
also place the information in a context that makes it meaningful to accurately reflect risks. The quest for
transparency has, therefore, to be continuous and persistent.

Increasing competition among banks, emanating not only from peers, but also from new entrants and
other intermediaries, has been exerting pressure on bank spreads. The technology-intensive new private
and foreign banks are positioning themselves as one-stop-shop financial services and providing
customers greater convenience and high quality services backed by appropriate investments in
technology and other infrastructure. Therefore, the future profitability of public sector banks would
depend on their ability to generate greater non-interest income and control operating expenses.

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Approaches are expected to provide a more standardized but tighter framework for the banking sector.
Simultaneously, the banking industry is undergoing a change driven by technological advancements.
Since retail customers is fast becoming more demanding, in the competitive environment, banks have to
offer the value-added services. Harnessing technology to improve productivity so as to produce highly
competitive types of banking and generating greater non-interest income by diversifying into non-fund
based activities will be important features of the Indian banking of tomorrow.

In view of this changed environment, banks FIs are in the process of adjusting business relationship with
their customer. The bank customer relationship is an emerging area that has attracted the attention of
many stakeholders in this regard. Before we take up the relationship that exists between a banker and
his customer, let us understand the definitions of the terms banker and customer.

DEFINITION OF BANKER

There has been much controversy regarding the definition of the term banker. The essential function
of a banker is the acceptance of deposits of funds with drawable on demand.
Section 5(a) of the Banking Regulation Act defines banking company as a company, which transacts the
business the business of banking. In order to understand the nature of a banking company, one will have
to look into the definition of the term banking. In simple words it can be defined as trading in money
and instruments of credit.
According to section 5(b) Banking means the accepting for the purpose of lending or investment of
deposit of money from the public, repayable on demand or otherwise and withdrawal by cheque, draft,
order or otherwise. Sir John Paget another well-known authority on banking considers that no person
or body, corporate or otherwise, can be a banker who does not (1) Take deposits accounts (2) Take
current accounts (3) Issue and pay cheques and (4) Collect cheques crossed and uncrossed for his
customers. Besides Sir Paget maintains that a banker should progress himself to be a banker and the
public should accept him as such. Banking should be his main source of income.
According to section 7of the Banking Regulation Act, 1949, No company other than a banking
company shall use as part of its name any of the words bank, banker or banking and no company
shall carry on the business of banking in India unless it uses as part of its name at least one such.

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The functions of a banker are: -


Accepting of deposits
Lending of money
Undertaking to honor cheques drawn upon it by customers and
To work in the capacity of an agent etc.

These additional functions can be grouped under two broad heads

(a) Agency service.


The agency services comprise of payment and collection of cheques, bills, promissory notes,
salary and pension bills, purchase and sale of stock and share, etc.
(b) General utility services.
The general utility services of the banker include the issue of credit instruments, letters of
credit, traveler cheques, transactions of foreign exchange, acceptance of valuable and documents for
safe custody, provision of facilities for safe deposit lockers, administration of estates as trustees,
executors etc. Now a bank can be distinguished from any other commercial institutions of the basis of
the following features: -
A. Deposit Accounts: The bank receives deposits from the public in the form of saving accounts,
fixed deposit accounts, recurring deposit accounts pigmy deposit accounts etc.

B. Current Accounts: The bank receives deposits on current accounts from the businessperson.
A current account is a running account. There is no limit on the number of times the account holder can
withdraw his money.

C. Cheque Facility: The saving and current account holders enjoy the cheque facility. They can
withdraw money by drawing cheques on their bank. The saving account holders who dont enjoy cheque
facility can withdraw money with the help of withdrawal slips. It may be noted that the account holder
may issue a cheque in favour of any person. The bank will honor it if there is sufficient balance in the
account.

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Meaning of a customer:
Law does not define the term customer of a bank. Ordinarily a person who has an account in a bank is
considered its customer. In chambers dictionary, it is written, A customer is one who is accomplished to
frequent a certain place of business.
According to Dr. Hart, A customer is one who has an account with a banker or for whom a banker
habitually undertakes to act as such.
Therefore, neither the number of transactions nor the period during which business has been conducted
between the parties is material in determining whether a person is a customer. The accepted position at
present recognizes a customer as one who satisfies the following conditions: -
1. Duration not of essence: The duration of dealing is no of essence. Even a single transaction can
constitute a customer.
2. Frequency anticipated: Although frequency of transactions is not essential to constitute a person as
customer, still his position must be such that transactions are likely to become frequent.
3. Dealings to be of banking nature: He should have dealing with the bank, which should be in the
nature of regular banking business. That is, the person should have some type of account with the bank-
either deposit, current or loan account. A person having dealings with the bank only in respect of its
utility service viz. Safe deposit lockers, safe custody, remittances etc. does not constitute a customer.
4. Introduction necessary: The banker must have taken due care to satisfy him about the bonfires and
repeatability of the customers. This is necessary to institute the persons as 98 customers for the
purpose of protection of the banker under Negotiable Instruments Act.
5. Commencement of relation of from first transaction: As soon as the banker accepts money from any
person on the footing that he will honor his cheques up to the amount standing to his credit, the person
becomes his customer. The money accepted can even be by way of cheque. The relation of banker and
customer begins as soon as the first cheque is paid in and accepted for collection.

GENERAL RELATIONSHIP BETWEEN BANKER AND CUSTOMER

The relationship between a banker and his customer is basically contractual. It is regulated by:
The general rules of contract
The rules of agency where applicable
Banking practice.

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Of the several possible relationships between a banker and his customer, the primary one is that of
debtor and creditor. But who is what at a particular moment depends on the state of customers
accounts. If the account shows a credit balance, obviously the banker is a debtor and the customer a
creditor. Reverse shall be the position when the customers account shows an overdrawing.
There are three are tree possible other relationships depending upon the receptive state of
circumstances.

Bailer and bailee


Principal and agent and
Trustee and beneficiary.

Debtor and creditor relationship: The general relationship between a banker and his customer is
basically that of debtor and creditor. If the account shows a credit balance, the banker will be a debtor
and the customer a creditor. But in case of debit balance or overdraft, the banker will be the creditor
and the customer the debtor. When the customer deposits money in the bank by opening an account,
it amounts to lending money to the banker. The bank can make use of this money as it is absolutely at
the disposal of the bank. The bank undertakes to repay the amount on demand. It has been rightly said
that a banker is normally a debtor of his customer and is bound to discharge his indebtedness by
honoring his customers cheque.
The banker only undertakes to ray a sum equivalent to the amount deposited with his and the customer
has no right whatsoever to claim the identical coins or notes deposited with him.
The usual debtor-creditor relationship between a banker and a customer is governed by the following
conditions, which are not applicable to similar commercial debts:
1. Demand for Payment: A bank is not an ordinary debtor in the sense that it is under no obligation to
refund the customers deposits unless demand is made. Even in case of fixed deposit the bank is not
required to return the money on its own accord. The customer must make a demand for repayment of
funds deposited except when the bank is being wound up.
2. Proper place and time: The obligation to repay the amount deposited is limited to the branches
where the account is kept. The customer can issue cheques only on the branch of the bank where the
account is kept. The demand for payment must be made during the working hours and on working days
of the branch concerned.

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3. Demand in proper manner: The demand for payment should be made in proper manner as allowed
by the law or custom. The demand should not be made verbally or through a telephonic message. The
proper manner may be cheque; draft or anything, which may prove the geniuses of demand buy the
customer whose identity, must be disclosed and authenticated to the satisfaction of the bank.
4. No time bar: The depositor with a bank does not become time barred on the expiry of three years as
in the case of other commercial debts. This is because of the reason that the amount does not be come
due unless it is demanded.

Banker as a trustee:
The banker assumes the position of trustee when they accepts securities or valuables from the
customer for safe custody. The articles deposited with the bank for safe custody continue to be owned
by the customer. The banker is to deal with the articles as per the instructions of the customer. The
banker is a trustee of the customer in respect of cheques and bills deposited buy the customer for
collection till they are collected. He becomes the debtor once it is collected and credited to the account
of the customer. If the bank is liquidated before the cheques is realized the bank remains a trustee of
the customer. Therefore, the customer can claim back the cheque or the proceeds of the cheque in full.

Banker as agent:
A banker acts as an agent of his customer and performs a number agency function for the convenience
of his customer.
For example: some banks have established tax service departments to take up the tax problems of their
customers.

Bailee and bailer:


Another relation between the banker and the customer is that of bailee and bailor. The bank functions
as bailee when it keeps valuable articles, diamond, gold, securities and other documents of its
customers. The bank works, as the custodian of these things and it is implied responsibility of the bank
to return these things safely. Thus the bank is a bailee and the customer is a bailor or beneficiary.

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SPECIAL RELATIONSHIP BETWEEN BANKER AND CUSTOMER

The relationship between the banker and the customer creates certain obligations on the part of the
banker. These obligations along with the rights of the banker create special relationship. The various
special features of the relationship are detailed below:
1. Banker has an obligation to honor the cheques of the customer up to the amount standing to the
credit of the customers account
2. The banker has to maintain the secrecy of his customers account.
3. The banker can charge interest all compound rates for defaults in payments of loan by the
customer or for overdrawn amounts.
4. Banker is allowed to produce certified copies of the entries made in the original books of account as
proof of transaction in legal proceedings under certain circumstances and cases in accordance
with the provisions of bankers book evidence act, 1891.
5. A banker is under the obligation of law to suspend the operation of accounts by the customer in
case of receipt of garnishee order from the court.

Obligations of a banker:

Though the primary relationship between a banker and his customer is that of a debtor and creditor or
vice-versa the special features of this relationship as noted above impose the Following additional
obligations on the banker:
1. Obligation to honor the cheques: Section 31 of Negotiable Instrument act, 1881 imposes upon
bank the obligation to honor the cheques. The text of the act is as follows:
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 so to do and in default of such
payment must compensate the drawer for any less or damage caused buy such default.
2. Time and Place of Payment: The demand of payment by the creditor must be made to the debtor
at the proper palace and in proper time. Transactions in the banks are carried out upto 2 p.m. on
working days and up to 12 noon on every Saturday. A commercial bank, having a number of branches is
considered to be one entity but the depositor enter into relationship with only that branch where an
account is opened in his name.

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3. Demand made in proper order: The statutory definition of banking system explains that deposits
are withdrawal by cheque, drafts, order or otherwise. This is to be done as per the common usage
amongst the bankers.

Cases in which the Banker Refuses Customers Cheques

(A) When may a banker refuse to honour a customers cheque:-


When the balance to the credit of the customer not sufficient to meet the cheque.
When money deposited by the customer cannot be withdrawn on demand e.g., fixed deposits.
When the cheque is state i.e. it has become older than six months and has not been presented for
Payment within reasonable time of the date of the issue.
When the account is in joint names and all the persons have not signed the cheque.

(B) When the banker must reuse to honour customers cheque:-


When the customer has stopped the payment of the cheque.
When the banker is served with garnishee order or a prohibitory order by any court.
When the bank comes to know of the defect in the title of the person presenting the cheque before
the bank.
When the holder of the cheque gives a notice of its loss to the bank.
When the cheque is post-dated and is presented for payment before its ostensible date.

Garnishee Order:

A garnishee order INS an order issued by the court under order 21 rules 46 of the code of civil
Procedure, 1908, generally served on banks. Such order prohibits a banker from making payments from
a particular account named therein. When a debtor does not repay the debt owed by him to his
creditor, the latter may apply to the court for the issue of a Garnishee Order on the banker of his
debtor. Such order attaches the debts not secured by a negotiable instrument.

It attaches only the balance in the account at the time the order is received. Cheques etc. are
sent for collection and the amounts deposited by the customer after the order is received are not
attached. However, uncleared effects already placed to customers credit are attached.

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A Garnishee order is issued in two parts. In the first instance the court issue an order, called order nisi
directing the banker to stop payments from the accounts of the judgment-debtor. The banker is also
required to submit explanation, if any, as to why the funds in the said account should not be utilized for
meeting the claim or the judgment. After the receipt of order nisi, the banker stops all payments from
the said accounts and informs his customer accordingly.

RIGHTS OF BANKER

1. Right of Set off or the right to combine accounts: A banker can combine two or more accounts of a
Customer and shoe the net balance as the amount due to from him.
2. Bankers General Lien: The banker has a right of general lien against the customer; the right to retain
as security for a general balances of accounts any goods and securities bailee to him.
3. Right of Application: Where customer has not directed the bank to appropriate a deposit against a
Particular debt, it is the banks right to appropriate the Payment to any debt.
4. Law of Limitation: Under article 22 of part 2 of the schedule to the limitation act 1963 the period of
Limitation for the refund of bank deposits is there years from the date the customer demand
repayment.

TERMINATION OF RELATIONSHIP

The relationship of a banker and customer may be terminated in any of the following ways:
1. Mutual Agreement: This is clear enough. The balance at the credit of the customer will have to be paid off
and the overdraft, if any cleared.
2. Notice to Terminate: In case of a current account, no such notice appears necessary. But if its a
deposit account, the banker could insist on the notice period specified on the fixed deposit.
3. Death of Customer: This is an obvious method of terminating the relationship. But it is the notice of
death, which revokes the bankers authority to pay Cheques.
4. Lunacy of Customer: The lunacy of a customer automatically terminates relationships though here
again the bankers authority to pay cheques is revoked by notice of insanity.
5. Bankruptcy: Bankruptcy or winding up is a sufficient ground for terminating the relationship. The
customer will be entitled to a dividend in respect of any balance standing to the credit of his account
calculated in the ordinary ways and will be entitled to the return of any articles bartered.

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QUESTIONS

2 Marks

1. What is particular lien?


2. What is right of set off?
3. Who is customer?
4. State the ruling in Claytons case?
5. Define the term banker
6. What is lien?
7. Who is Bailee and who is Bailor?
8. What is Garnishee order?

8 Marks

1. Banker is called dignified debtor. Discuss


2. Distinguish between general lien and particular lien.
3. Explain how the termination of relationship can be terminated?

16 Marks

1. Explain briefly special relationship between banker and customer?


2. Explain the function of modern commercial banks?
3. Explain the various subsidiary services of a modern banker?
4. Explain the relationship between banker and customer?
5. Explain the obligation to maintain secrecy. What are the consequences of wrongful
disclosure?

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CHAPTER-2
NEGOTIABLE INSTRUMENTS
INTRODUCTION

The Negotiable Instruments Act was enacted, in India, in 1881. Prior to its enactment, the provision of
the English Negotiable Instrument Act were applicable in India, and the present Act is also based on the
English Act with certain modifications. It extends to the whole of India except the State of Jammu and
Kashmir. The Act operates subject to the provisions of Sections 31 and 32 of the Reserve Bank of India
Act, 1934.
Section 31 of the Reserve Bank of India Act provides that no person in India other than the Bank or as
expressly authorised by this Act, the Central Government shall draw, accept, make or issue any bill of
exchange, hundi, promissory note or engagement for the payment of money payable to bearer on
demand. This Section further provides that no one except the RBI or the Central Government can make
or issue a promissory note expressed to be payable or demand or after a certain time.
Section 32 of the Reserve Bank of India Act makes issue of such bills or notes punishable with fine
which may extend to the amount of the instrument.
The effect or the consequences of these provisions are:
1. A promissory note cannot be made payable to the bearer, no matter whether it is payable on
demand or after a certain time.
2. A bill of exchange cannot be made payable to the bearer on demand though it can be made payable
to the bearer after a certain time.
3. But a cheque {though a bill of exchange} payable to bearer or demand can be drawn on a persons
account with a banker.

MEANING OF NEGOTIABLE INSTRUMENTS


According to Section 13 (a) of the Act, Negotiable instrument means a promissory note, bill of
exchange or cheque payable either to order or to bearer, whether the word order or bearer appear
on the Instrument or not.
In the words of Justice, Willis, A negotiable instrument is one, the property in which is acquired by
anyone who takes it bonafide and for value notwithstanding any defects of the title in the person from
whom he took it.

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CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT

1. Property: The possessor of the negotiable instrument is presumed to be the owner of the property
Contained therein. A negotiable instrument does not merely give possession of the instrument but
right to property also. The property in a negotiable instrument can be transferred without any
formality. In the case of bearer instrument, the property passes by mere delivery to the transferee. In
the case of an order instrument, endorsement and deli very are required for the transfer of property.

2. Title: The transferee of a negotiable le instrument is known as holder in due course. A bona fide
transferee for value is not affected by any defect of title on the part of the transferor or of any of the
previous holders of the instrument.

3. Rights: The transferee of the negotiable instrument can sue in his own name, in case of dishonour. A
negotiable instrument can be transferred any number of times till it is at maturity. The holder of the
instrument need not give notice of transfer to the party liable on the instrument to pay.

4. Presumptions: Certain presumptions apply to all negotiable instruments e.g., a presumption that
consideration has been paid under it. It is not necessary to write in a promissory note the words for
value received or similar expressions because the payment of consideration is presumed. The words are
usually included to create additional evidence of consideration.

6. Prompt payment: A negotiable instrument enables the holder to expect prompt payment because
dishonour means the ruin of the credit of all persons who are parties to the instrument.

PRESUMPTIONS TO NEGOTIABLE INSTRUMENT

1. Consideration: It shall be presumed that every negotiable instrument was made drawn, accepted or
endorsed for consideration. Its presumed that, consideration is present in every negotiable
instrument until the contrary is presumed. The presumption of consideration, however may be
rebutted by proof that the instrument had been obtained from, its lawful owner by means of fraud or
undue influence.

2. Date: Where a negotiable instrument is dated, the presumption is that it has been made or drawn on
such date, unless the contrary is proved.

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3. Time of acceptance: Unless the contrary is proved, every accepted bill of exchange is presumed to
have been accepted within a reasonable time after its issue and before its maturity. This presumption
only applies when the acceptance is not dated; if the acceptance bears a date, it will prima facie be
taken as evidence of the date on which it was made.

4. Time of transfer: Unless the contrary is presumed it shall be presumed that every transfer of a
negotiable instrument was made before its maturity.

5. Order of endorsement: Until the contrary is proved it shall be presumed that the endorsements
appearing upon a negotiable instrument were made in the order in which they appear thereon.

6. Stamp: Unless the contrary is proved, it shall be presumed that a lost promissory note, bill of
exchange or cheque was duly stamped.

7. Holder in due course: Until the contrary is proved, it shall be presumed that the holder of a
negotiable instrument is the holder in due course. Every holder of a negotiable instrument is
presumed to have paid consideration for it and to have taken it in good faith. But if the instrument
was obtained from its lawful owner by means of an offence or fraud, the holder has to prove that he
is a holder in due course.

8. Proof of protest: Section 119 lays down that in a suit upon an instrument which has been
dishonored, the court shall on proof of the protest, presume the fact of dishonour, unless and until
such fact is disproved.

TYPES OF NEGOTIABLE INSTRUMENT


1. Negotiable instruments recognized by statute or by law are:
(i) Promissory notes
(ii) Bills of exchange
(iii) Cheques.
2. Negotiable instruments recognised by usage or custom are:
(i) Hundis
(ii) Share warrants
(iii) Dividend warrants
(iv) Bankers draft

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(v) Circular notes


(vi) Bearer debentures
(vii) Debentures of Bombay Port Trust
(viii)Railway receipts
(ix) Delivery orders.

Promissory notes

Section 4 of the Act defines, A promissory note is an instrument in writing (note being a bank-
note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain
sum of money to or to the order of a certain person, or to the bearer of the instruments.

Essential elements of Promissory note

1. It must be in writing:
A mere verbal promise to pay is not a promissory note. The method of writing (either in ink or
pencil or printing, etc.) is unimportant, but it must be in any form that cannot be altered easily.

2. It must certainly an express promise or clear understanding to pay:


There must be an express undertaking to pay. A mere acknowledgment is not enough.

(3) Promise to pay must be unconditional:


A conditional undertaking destroys the negotiable character of another wise negotiable
instrument. Therefore, the promise to pay must not depend upon the happening of some outside
contingency or event. It must be payable absolutely.

(4) It should be signed by the maker:


The people who promise to pay must sign the instrument even though it might have been
written by the promisor himself. There are no restrictions regarding the form or place of signatures in
the instrument. It may be in any part of the instrument. It may be in pencil or ink, a thumb mark or
initials. The pro note can be signed by the authorised agent of the maker, but the agent must expressly
state as to on whose behalf he is signing, otherwise he himself may be held liable as a maker .The only
legal requirement is that it should indicate with certainty the identity of the person and his intention to
be bound by the terms of the agreement.

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(5) The maker must be certain:


The note self must show clearly who the person is agreeing to undertake the liability to pay
the amount. In case a person signs in an assumed name, he is liable as a maker because a maker is taken
ascertain if from his description sufficient indication follows about his identity. In case two or more
persons promise to pay, they may bind themselves jointly or jointly and severally, but their liability
cannot be in the alternative.

(6) The payee must be certain:


The instrument must point out with certainty the person to whom the promise has been
made. The payee may be ascertained by name or by designation. A note payable to the maker himself is
not pronating unless it is indorsed by him. In case, there is a mistake in the name of the payee or his
designation; the note is valid, if the payee can be ascertained by evidence. Even where the name of a
dead person is entered as payee in ignorance of his death, his legal representative can enforce payment.

(7) The promise should be to pay money and money only:


Money means legal tender money and not old and rare coins .A promise to deliver paddy either
in the alternative or in addition to money does not constitute a promissory note.

(8) The amount should be certain:


One of the important characteristics of a promissory note is certaintynot only regarding the
person to whom or by whom payment is to be made but also regarding the amount.
However, paragraph 3 of Section 5 provides that the sum does not become indefinite merely because
(a) There is a promise to pay amount with interest at a specified rate.
(b) The amount is to be paid at an indicated rate of exchange.
(c) The amount is payable by installments with a condition that the whole balance shall fall due for
payment on a default being committed in the payment of anyone installment.

(9) Other formalities:


The other formalities regarding number, place, date, consideration etc. though usually found
given in the promissory notes but are not essential in law. The date of instrument is not material unless
the amount is made payable at a certain time after date. Even in such a case, omission of date does not
invalidate the instrument and the date of execution can be independently ascertained and proved.

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Bill of exchange

Section 5 of the Act defines, A bill of exchange is an instrument in writing containing an unconditional
order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the
order of a certain person or to the bearer of the instrument.

A bill of exchange, therefore, is a written acknowledgement of the debt, written by the creditor
and accepted by the debtor. There are usually three parties to a bill of exchange drawer, acceptor or
drawee and payee. Drawer himself may be the payee.

Essential conditions of a bill of exchange

(1) It must be in writing.


(2) It must be signed by the drawer.
(3) The drawer, drawee and payee must be certain.
(4) The sum payable must also be certain.
(5) It should be properly stamped.
(6) The order must be unconditional.

Distinction between bill of exchange and Promissory Note


1. Number of parties:
In a promissory note there are only two parties the maker (debtor) and the payee (creditor).
In a bill of exchange, there are three parties; drawer, drawee and payee; although any two out
of the three may be filled by one and the same person,

2. Payment to the maker:


A promissory note cannot be made payable the maker himself, while in a bill of exchange to
the drawer and payee or drawee and payee may be same person.

3. Unconditional promise:
A promissory note contains an unconditional promise by the maker to pay to the payee or
his order, whereas in a bill of exchange, there is an unconditional order to the drawee to pay
according to the direction of the drawer.

4. Prior acceptance:
A note is presented for payment without any prior acceptance by the maker. A bill of
exchange is payable after sight must be accepted by the drawee or someone else on his behalf,
before it can be presented for payment.

5. Primary or absolute liability:


The liability of the maker of a promissory note is primary and absolute, but the liability of
the drawer of a bill of exchange is secondary and conditional.

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6. Relation:
The maker of the promissory note stands in immediate relation with the payee, while the maker
or drawer of an accepted bill stands in immediate relations with the acceptor and not the payee.

7. Protest for dishonour:


Foreign bill of exchange must be protested for dishonour when such protest is required
to be made by the law of the country where they are drawn, but no such protest is needed in
the case of a promissory note.

8. Notice of dishonour:
When a bill is dishonoured, due notice of dishonour is to be given by the holder to the
drawer and the intermediate indorsers, but no such notice need be given in the case of a note.

Classification of Bills
Bills can be classified as:
(1) Inland and foreign bills.
(2) Time and demand bills.
(3) Trade and accommodation bills.

(1) Inland and Foreign Bills

Inland bill:
A bill is, named as an inland bill if:
(a) It is drawn in India on a person residing in India, whether payable in or outside India, or
(b) It is drawn in India on a person residing outside India but payable in India.

The following are the Inland bills

i. A bill is drawn by a merchant in Delhi on a merchant in Madras. It is payable in Bombay. The bill is
an inland bill.
ii. A bill is drawn by a Delhi merchant on a person in London, but is made payable in India. This is an
inland bill.
iii. A bill is drawn by a merchant in Delhi on a merchant in Madras. It is accepted for payment in Japan.
The bill is an inland bill.

Foreign Bill: A bill which is not an inland bill is a foreign bill. The following are the foreign bills:
1. A bill drawn outside India and made payable in India.
2. A bill drawn outside India on any person residing outside India.
3. A bill drawn in India on a person residing outside India and made payable outside India.
4. A bill drawn outside India on a person residing in India.
5. A bill drawn outside India and made payable outside India.

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Rules: Sections 132 and 133 provide for the rules of the foreign bills:

(i) A bill of exchange may be drawn in parts, each part being numbered and containing a provision
that it shall continue payable only so long as the others remain unpaid. All parts make one bill and
the entire bill is extinguished, i.e. when payment is made on one part- the other parts will become
inoperative (Section 132).

(ii) The drawer should sign and deliver all the parts but the acceptance is to be conveyed only on one
of the parts. In case a person accepts or endorses different parts of the bill in favour of different
persons, he and the subsequent endorsers of each part are liable on such part as if it were a
separate bill (Sec. 132).

(iii) As between holders in due course of the different parts of the same bill, he who first acquired title
to anyone part is entitled to the other parts and is also entitled to claim the money represented by
bill (Sec. 133).

(2) Time and Demand Bill

Time bill: A bill payable after a fixed time is termed as a time bill. In other words, bill payable
after date is a time bill.

Demand bill: A bill payable at sight or on demand is termed as a demand bill.

(3) Trade and Accommodation Bill

Trade bill: A bill drawn and accepted for a genuine trade transaction is termed as a trade bill.

Accommodation bill: A bill drawn and accepted not for a genuine trade transaction but only to
provide financial help to some party is termed as an accommodation bill.

Rules regarding accommodation bills are:

(i) In case the patty accommodated continues to hold the bill till maturity, the accommodating party
shall not be liable to him for payment of, the bill since the contract between them is not based on any
consideration (Section 43).

(ii) But the accommodating party shall be liable to any subsequent holder for value who may know the
exact position that the bill is an accommodation bill and that the full consideration has not been
received by the acceptor. The accommodating party can, in turn, claim compensation from the
accommodated party for the amount it has been asked to pay the holder for value.

(iii) An accommodation bill may be negotiated after maturity. The holder or such a bill after maturity
is in the same position as a holder before maturity, provided he takes it in good faith and for
value (Sec. 59)

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Parties to Bill of Exchange

1. Drawer: The maker of a bill of exchange is called the drawer.

2. Drawee: The person directed to pay the money by the drawer is called the drawee,

3. Acceptor: After a drawee of a bill has signed his assent upon the bill, or if there are more parts than
one, upon one of such pares and delivered the same, or given notice of such signing to the holder or to
some person on his behalf, he is called the acceptor.

4. Payee: The person named in the instrument, to whom or to whose order the money is directed to be
paid by the instrument is called the payee. He is the real beneficiary under the instrument. Where he
signs his name and makes the instrument payable to some other person, that other person does not
become the payee.

5. Indorser: When the holder transfers or indorses the instrument to anyone else, the holder becomes
the indorser.

6. Indorsee: The person to whom the bill is indorsed is called an indorsee.

7. Holder: A person who is legally entitled to the possession of the negotiable instrument in his own
name and to receive the amount thereof, is called a holder. He is either the original payee, or the
indorsee. In case the bill is payable to the bearer, the person in possession of the negotiable instrument
is called the holder.

Parties to a Promissory Note

1. Maker. He is the person who promises to pay the amount stated in the note. He is the debtor.

2. Payee. He is the person to whom the amount is payable i.e. the creditor.

3. Holder. He is the payee or the person to whom the note might have been indorsed.

4. The indorser and indorsee (the same as in the case of a bill).

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Cheques

Section 6 of the Act defines A cheque is a bill of exchange drawn on a specified banker, and not
expressed to be payable otherwise than on demand.

A cheque is bill of exchange with two more qualifications, namely,

(i) it is always drawn on a specified banker, and


(ii) It is always payable on demand. Consequently, all cheque are bill of exchange, but all bills
are not cheque. A cheque must satisfy all the requirements of a bill of exchange; that is, it
must be signed by the drawer, and must contain an unconditional order on a specified
banker to pay a certain sum of money to or to the order of a certain person or to the bearer
of the cheque. It does not require acceptance.

Distinction between Bills of Exchange and Cheque

1. A bill of exchange is usually drawn on some person or firm, while a cheque is always drawn on a bank.

2. It is essential that a bill of exchange must be accepted before its payment can be claimed A cheque
does not require any such acceptance.

3. A cheque can only be drawn payable on demand; a bill may be also drawn payable on demand, or on
the expiry of a certain period after date or sight.

4. A grace of three days is allowed in the case of time bills while no grace is given in the case of cheque.

5. The drawer of the bill is discharged from his liability, if it is not presented for payment, but the drawer
of a cheque is discharged only if he suffers any damage by delay in presenting the cheque for payment.

6. Notice of dishonour of a bill is necessary, but no such notice is necessary in the case of cheque.

7. A cheque may be crossed, but not needed in the case of bill.

8. A bill of exchange must be properly stamped, while a cheque does not require any stamp.

9. A cheque drawn to bearer payable on demand shall be valid but a bill payable on demand can never
be drawn to bearer.

10. Unlike cheques, the payment of a bill cannot be countermanded by the drawer.

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Different Kinds / Types of Cheques


1. Bearer Cheque
When the words "or bearer" appearing on the face of the cheque are not cancelled, the cheque
is called a bearer cheque. The bearer cheque is payable to the person specified therein or to any
other else who presents it to the bank for payment. However, such cheques are risky, this is
because if such cheques are lost, the finder of the cheque can collect payment from the bank.

2. Order Cheque
When the word "bearer" appearing on the face of a cheque is cancelled and when in its place
the word "or order" is written on the face of the cheque, the cheque is called an order cheque.
Such a cheque is payable to the person specified therein as the payee, or to any one else to
whom it is endorsed (transferred).

3. Uncrossed / Open Cheque


When a cheque is not crossed, it is known as an "Open Cheque" or an "Uncrossed Cheque". The
payment of such a cheque can be obtained at the counter of the bank. An open cheque may be
a bearer cheque or an order one.

4. Crossed Cheque
Crossing of cheque means drawing two parallel lines on the face of the cheque with or without
additional words like "& CO." or "Account Payee" or "Not Negotiable". A crossed cheque cannot
be cashed at the cash counter of a bank but it can only be credited to the payee's account.

5. Anti-Dated Cheque
If a cheque bears a date earlier than the date on which it is presented to the bank, it is called as
"anti-dated cheque". Such a cheque is valid up to three months from the date of the cheque.

6. Post-Dated Cheque
If a cheque bears a date which is yet to come (future date) then it is known as post-dated
cheque. A postdated cheque cannot be honoured earlier than the date on the cheque.

7. Stale Cheque
If a cheque is presented for payment after three months from the date of the cheque it is called
stale cheque. A stale cheque is not honoured by the bank.

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Parties to a Cheque

1. Drawer. He is the person who draws the cheque, i.e., the depositor of money in the bank.
2. Drawee. It is the drawers banker on whom the cheque has been drawn.
3. Payee. He is the person who is entitled to receive the payment of the cheque.
4. The holder, indorser and indorsee (the same as in the case of a bill or note).

(Example of cheque)

CROSSING
Crossing of a cheque means "Drawing Two Parallel Lines" across the face of the cheque. Thus,
crossing is necessary in order to have safety. Crossed cheques must be presented through the bank only
because they are not paid at the counter.

Different Types of Crossing

1. General Crossing:-

Generally, cheques are crossed when

1. There are two transverse parallel lines, marked across its face or
2. The cheque bears an abbreviation "& Co. "between the two parallel lines or
3. The cheque bears the words "Not Negotiable" between the two parallel lines or
4. The cheque bears the words "A/c. Payee" between the two parallel lines.

A crossed cheque can be made bearer cheque by cancelling the crossing and writing that the crossing is
cancelled and affixing the full signature of drawer.

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Specimen of General Crossing

2. Special or Restrictive Crossing:-

When a particular bank's name is written in between the two parallel lines the cheque is said to be
specially crossed.

Specimen of Special or Restrictive Crossing

In addition to the word bank, the words "A/c. Payee Only", "Not Negotiable" may also be written. The
payment of such cheque is not made unless the bank named in crossing is presenting the cheque. The
effect of special crossing is that the bank makes payment only to the banker whose name is written in
the crossing. Specially crossed cheques are safer than a generally crossed cheque.

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ENDORSEMENT

The word endorsement in its literal sense means, writing on the back of an instrument. But under
the Negotiable Instruments Act it means, the writing of ones name on the back of the instrument or any
Paper attached to it with the intention of transferring the rights therein. Thus, endorsement is signing a
negotiable instrument for the purpose of negotiation. The person who effects an endorsement is called
an endorser, and the person to whom negotiable instrument is transferred by endorsement is called
the endorsee.

Essentials of a valid endorsement

The following are the essentials of a valid endorsement:


1. It must be on the instrument. The endorsement may be on the back or face of the instrument and if
no space is left on the instrument, it may be made on a separate paper attached to it called allonage. It
should usually be in ink.
2. It must be made by the maker or holder of the instrument. A stranger cannot endorse it.
3. It must be signed by the endorser. Full name is not essential. Initials may suffice. Thumb impression
should be attested. Signature may be made on any part of the instrument. A rubber stamp is not
accepted but the designation of the holder can be done by a rubber stamp.
4. It may be made either by the endorser merely signing his name on the instrument (it is a blank
endorsement) or by any words showing an intention to endorse or transfer the instrument to a specified
person (it is an endorsement in full). No specific form of words is prescribed for an endorsement. But
intention to transfer must be present. When in a bill or note payable to order the endorsees name is
wrongly spelt, he should when he endorses it, sign the name as spelt in the instrument and write the
correct spelling within brackets after his endorsement.
5. It must be completed by delivery of the instrument. The delivery must be made by the endorser
himself or by somebody on his behalf with the intention of passing property therein. Thus, where a
person endorses an instrument to another and keeps it in his papers where it is found after his death
and then delivered to the endorsee, the latter gets no right on the instrument.
6. It must be an endorsement of the entire bill. A partial endorsement i.e. which purports to transfer to
the endorse a part only of the amount payable does not operate as a valid endorsement. If delivery is
conditional, endorsement is not complete until the condition is fulfilled.

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Who may endorse?

The payee of an instrument is the rightful person to make the first endorsement. Thereafter
the instrument may be endorsed by any person who has become the holder of the instrument. The
maker or the drawer cannot endorse the instrument but if any of them has become the holder thereof
he may endorse the instrument (Sec.51).

The maker or drawer cannot endorse or negotiate an instrument unless he is in lawful possession of
instrument or is the holder there of. A payee or indorsee cannot endorse or negotiate unless he is the
holder there of.

Classes of endorsement

An endorsement may be:


(1) Blank or general.
(2) Special or full.
(3) Partial.
(4) Restrictive.
(5) Conditional.

(a) Blank or general endorsement (Sections 16 and 54).

It is an endorsement when the endorser merely signs on the instrument without


mentioning the name of the person in whose favour the endorsement is made. Endorsement in blank
specifies no endorsee. It simply consists of the signature of the endorser on the endorsement. A
negotiable instrument even though payable to order becomes a bearer instrument if endorsed in blank.
Then it is transferable by mere delivery. An endorsement in blank may be followed by an endorsement
in full.

Example: A bill is payable to X. X endorses the bill by simply affixing his signature. This is an
endorsement in blank by X. In this case the bill becomes payable to bearer. There is no difference
between a bill or note indorsed in blank and one payable to bearer. They can both be negotiated by
delivery.

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(b) Special or full endorsement (Section 16)

When the endorsement contains not only the signature of the endorser but also the name of
the person in whose favour the endorsement is made, then it is an endorsement in full. Thus, when
endorsement is made by writing the words Pay to A or As order, Followed by the signature of the
endorser, it is an endorsement in full. In such an endorsement, it is only the endorsee who can transfer
the instrument.

Conversion of endorsement in blank into endorsement in full:


When a person receives a negotiable instrument in blank, he may without signing his own name,
convert the blank endorsement into an endorsement in full by writing above the endorsers signature a
direction to pay to or to the order of himself or some other person. In such a case the person is not
liable as the endorser on the bill. In other words, the person transferring such an instrument does not
incur all the liabilities of an endorser (Section 49).

Example: A is the holder of a bill endorsed by B in blank. A writes over Bs signature the words
Pay to C or order. A is not liable as endorser but the writing operates as an endorsement in full from B
to C. Where a bill is endorsed in blank, or is payable to bearer and is afterwards endorsed by another in
full, the bill remains transferable by delivery with regard to all parties prior to such endorser in full. But
such endorser in full cannot be sued by anyone except the person in whose favour the endorsement in
full is made (Section 55).
Example: C the payee of a bill endorses it in blank and delivers it to D, who specially endorses it to
E or order. E without endorsement transfers the bill to F. F as the bearer is entitled to receive payment
or to sue the drawer, the acceptor, or C who endorsed the bill in blank but he cannot sue D or E.

(c) Partial endorsement (Section 56)

A partial endorsement is one which purports to transfer to the endorsee a part only of the amount
payable on the instrument. Such an endorsement does not operate as a negotiation of the instrument.
Example: A is the holder of a bill for Rs.1000. He endorses it pay to B or order Rs.500. This is a
partial endorsement and invalid for the purpose of negotiation.

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(d) Restrictive endorsement (Section 50)

The endorsement of an instrument may contain terms making it restrictive. Restrictive


endorsement is one which either by express words restricts or prohibits the further negotiation of a bill
or which expresses that it is not a complete and unconditional transfer of the instrument but is a mere
authority to the endorsee to deal with bill as directed by such endorsement.
Pay C, Pay C for my use, Pay C for the account of B are instances of restrictive endorsement. The
endorsee under a restrictive endorsement acquires all the rights of the endorser except the right of
negotiation.

Conditional or qualified endorsement

It is open to the endorser to annex some condition to his owner liability on the endorsement.
An endorsement where the endorsee limits or negatives his liability by putting some condition in the
instrument is called a conditional endorsement. A condition imposed by the endorser may be a
condition precedent or a condition subsequent. An endorsement which says that the amount will
become payable if the endorsee attains majority embodies a condition precedent. A conditional
endorsement unlike the restrictive endorsement does not affect the negotiability of the instrument. It is
also sometimes called qualified endorsement. An endorsement may be made conditional or qualified in
any of the following forms:

(i) Sans recourse endorsement: An endorser may be express word exclude his own liability thereon to
the endorser or any subsequent holder in case of dishonour of the instrument. Such an endorsement is
called an endorsement sans recourse (without recourse). Here if the instrument is dishonoured, the
subsequent holder or the indorsee cannot look to the indorser for payment of the same. An agent
signing a negotiable instrument may exclude his personal liability by using words to indicate that he is
signing as agent only. The same rule applies to directors of a company signing instruments on behalf of a
company. The intention to exclude personal liability must be clear. Where an endorser so excludes his
liability and afterwards becomes the holder of the instrument, all intermediate endorsers are liable to
him.
Example: A is the holder of a negotiable instrument. Excluding personal liability by an
endorsement without recourse, he transfers the instrument to B, and B endorses it to C, who endorses it
to A. A can recover the amount of the bill from B and C.

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(ii) Facultative endorsement: An endorsement where the endorser extends his liability or abandons
some right under a negotiable instrument, is called a facultative endorsement. Pay A or order, Notice of
dishonour waived is an example of facultative endorsement.
(iii) Sans frais endorsement: Where the endorser does not want the endorsee or any subsequent
holder, to incur any expense on his account on the instrument, the endorsement is sans frais.
(iv) Liability dependent upon a contingency: Where an endorser makes his liability depend upon the
happening of a contingent event, or makes the rights of the endorsee to receive the amount depend
upon any contingent event, in such a case the liability of the endorser will arise only on the happening of
that contingent event. Thus, an endorser may write Pay A or order on his marriage with B. In such a
case, the endorser will not be liable until the marriage takes place and if the marriage becomes
impossible, the liability of the endorser comes to an end.

Effects of endorsement

The legal effect of negotiation by endorsement and delivery is:


(i) To transfer property in the instrument from the endorser to the endorsee.
(ii) To vest in the latter the right of further negotiation, and
(iii) A right to sue on the instrument in his own name against all the other parties (Section 50).

Cancellation of endorsement

When the holder of a negotiable instrument, without the consent of the endorser destroys or
impairs the endorsers remedy against prior party, the endorser is discharged from liability to the holder
to the same extent as if the instrument had been paid at maturity (Section 40).

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Important questions

1. Define endorsement?
2. What are the negotiable instruments?
3. What is payment in due course?
4. What is general crossing?
5. What is stale cheque?
6. Define promissory note?
7. Define cheque?
8. What is blank endorsement?

Section B

1. What are the legal provisions regarding endorsement?


2. Who is a holder for value? Explain.
3. Define cheque. Explain the characteristics of a cheque?
4. Write a short note on marking or a cheque?
5. Explain the features of negotiable instruments.
6. Distinguish between promissory note and bill of exchange?
7. Explain the differences between discounting of bills and purchase of bills?
8. Briefly explain different types of cheque?
9. Distinguish between general crossing and special crossing?
10. Can a cheque be crossed twice? State the consequences?

Section C

1. What are the essential of a valid endorsement? Mention the types.


2. What is negotiable instrument? Briefly explain the different types of negotiable
instruments?

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CHAPTER-3
PAYING BANKER AND COLLECTING BANKER

Paying Banker Meaning Precautions Statutory Protection to the Paying Banker Dishonor of
Cheques Grounds of Dishonor Consequences of wrongful dishonor of Cheque.

Collecting Banker Meaning Duties & Responsibilities of Collecting Banker Holder for Value
Holder in Due Course, Statutory Protection to Collecting Banker.

PAYING BANKER

The bank on which a cheque is drawn (the bank whose name is printed on the cheque) and which pays the
amount for which the cheque is written and deducts that sum from the customer's account.

MEANING OF BANKER

A banker on whom the cheque is drawn should pay the cheque, when it is presented for payment. It is his
obligation by section 31 of the NI Act. A banker is bound to honour his customers cheque to the extent
of the fund available & the existence of no legal bar for payment. The paying banker should use
reasonable care and diligence in paying a cheque so as to abstain from any action likely to damage his
customers credit.

PRECAUTIONS-

The relation between a banker and his customer is that of a debtor and creditor. Money deposited with a
banker is always belongs to the customer and the bank obliged to return its equivalent to the customer or
to any person to his order on demand. This obligation has been imposed on the bank by sec. 31 of the N.I.
Act. 1881. Wherein it is stated that The drawee of a cheque having sufficient funds of drawer in his
hands, properly applicable to the payment of such, 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.

Precautions to honor Cheque

Analysis of sec.31 of the N.I.Act.1881 reveals that a banker should be very cautious both at the time of
honoring as well as dishonoring his customers cheque. Thus, in order to safeguard its as well as the
customers interests, the paying banker has to observe the following precautions before honoring a
cheque:

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1. Precaution regarding Form of the Cheque

The cheque should be in proper form. According to banking practice the cheque must be drawn in the
printed forms supplied by the banks and the bank reserve the right of dishonoring a cheque in case it is
not in the prescribed form. Beside this, the cheque should not contain any condition, as a cheque is an
unconditional order to pay on a specified banker.

2. Precaution regarding Branch

The paying banker should see whether the cheque is drawn on the branch where the account is
maintained. If it is drawn on another branch, without any prior arrangement, the banker can safely return
the cheque.

3. Precautions regarding Account

Even in the same branch, a customer might have opened two or more accounts. For each account, a
separate checkbook would have been issued. Hence, the paying banker should see that the cheque of one
account is not used for withdrawing money from another account.

4. Precaution regarding Date

Before honoring a cheque, the paying banker must see whether there is a date on the instrument. If it is
undated it cannot be regarded as a valid instrument. If a cheque is ante dated, it may be paid if it has not
become stale by that time. A cheque becomes stale after six months of its issue and requires drawers
revalidation/confirmation. The paying banker should also not honor a cheque containing future date. A
future dated cheque is known as post-dated cheque and it should not be honored before its ostensible date.

5. Precaution regarding Amount

The banker should see whether the amount stated in the cheque, both in words and figures, agree with
each other. If the amount is stated only in figures the banker should not honor it. However, if the amount
is stated only in words, the banker may honor it. If there is any difference between the amount in figures
and words, the banker can return the cheque, since, the amount is not certain. On the other hand, sec. 18
of the N.I. Act, 1881 permits the banker to honor the cheque to the extent of the amount stated in words.
However, in practice, if the difference is insignificant, payment of the smaller amount sometimes made.
But, usually the paying banker returns the cheque under such circumstance with a return memo containing
the remarks words and figures differ since, there is an audit objection to the practice of honoring such
cheque.

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6. Precaution regarding Funds of the Customer

There should be sufficient balance/funds in the account of the customer to meet the cheque. Cheque has to
be paid in full and not in part and therefore, if the funds are not sufficient to honor the cheque in full, the
paying banker is justified in returning it. The paying banker, however, honor the cheque if he has an O/D
arrangement with the customer to that extent or more than the amount of deficit.

The cheque should be paid in chronological order of their receipt by the bank. The date of their issue or
serial number is not significant in this respect. Therefore, in case of inadequacy of funds, the cheque will
be paid in the order in which they are received by the bank to the extent of the funds permit and the rest
will be dishonored. When several cheque are received at the same time (for example, cheque received by
post) the usual practice is to honor the cheque of bigger amount unless it is for tax liability etc. where the
cheque is honored first though it must be of a smaller amount. In case of two or more cheque of equal
amount, the bank has the discretion to honor any of them to the extent the funds of the drawer permit.

7. Precaution regarding Drawers Signature

Before honoring any cheque, a paying banker is required to compare the drawers signature on the cheque
with that of his specimen signature. If the banker fail to do so and pays a cheque containing forged
signature of the drawer, then, the payment will not be a payment in due course. When there is a joint
account, both or all the signatures on the cheque should be genuine. If any one of the signatures is forged
the bank should not make payment. If the signature has been too, skillfully forged for the banker to find
it out, even then the banker is liable. However, if the customer facilitates the forgery of his signature by
his conduct, then the banker will be relieved from his liability.

8. Precaution regarding Material Alteration

A paying banker should be very cautious in finding out the alterations that may appear on a cheque. A
banker will be held liable for paying any materially altered cheque. If there is any material alteration, the
banker should return it with a memorandum Alteration requires drawers confirmation. A materially
altered cheque can only be honored if the alteration is confirmed by the drawer by means of his full
signature. However, in case a cheque is materially altered and the banker makes payment, he shall be
discharged from liability only when he proves the following:

(i) The alteration could not be detected with reasonable care, prudence & scrutiny, and

(ii) The payment had been made in due course.

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9. Precaution regarding Crossing

Before honoring any cheque the paying banker must find out whether the cheque is open or crossed. If it
is an open one, the payment may be made at the counter. If the cheque is a crossed one, the payment
should be through a collecting banker. If it is specially crossed, the payment must be specifically made to
that banker in whose favor it has been crossed. If there are A/C payee and Not Negotiable crossing, the
paying banker need not worry, as they are directions to the holder and to the collecting banker.

10. Precaution regarding Endorsement

Before honoring a cheque, the banker must verify the regularity of endorsement, if any, that appears on
the instrument. An order cheque requires endorsement for delivery as well as payment. If there is per pro
endorsement, the banker must find out the existence of authority. Failure to do so constitutes negligence
on the part of the paying banker.

11. Precaution regarding Mutilated Cheques

A cheque is said to be mutilated when it is torn into two or more pieces. Such a cheque should not be paid
unless the banker is satisfied that mutilation was unintentional and it also requires confirmations of the
drawer.

12. Precaution regarding Legal Bar

The existence of legal bar like garnishee order limits the duty of the banker to pay a cheque. So, the
paying banker should be cautious while paying cheque against any account on which any legal bar is
imposed.

13. Precaution regarding banking hours

The paying banker should make payment of only such cheques which have been presented (to it for
payment) during the banking hours on a business/working day. Payment outside the banking hours does
not amount to payment in due course. However, a banker is justified in extending the time during peak
days, for those, who are still waiting for enchasing a cheque.

14. Minor Precautions-

A paying banker should look into the following minor details also, before honoring a cheque:

a) He must see whether there is any order of the customer not to pay a cheque.

b) He must see whether there is any evidence of misappropriation of money. If so, the cheque should be
returned.

c) He must see whether he has got any information about the death or bankruptcy or insanity of his
customer. Failure to note those instructions will land him on trouble.

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Statutory Protection to the Paying Banker-

1. Protection in case of order cheque:

In case of an order cheque, Section -85(1) provides statutory protection to the paying banker as follows:
"Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee
is discharged by payment in due course". However, two conditions must be fulfilled to avail of such
protection.

(a) Endorsement must be regular: To avail of the statutory protection, the banker must confirm that the
endorsement is regular.

(b) Payment must be made in Due Course: The paying banker must make payment in due course. If
not, the paying banker will be deprived of statutory protection.

2. Protection in case of Bearer Cheque:

Section -85(2) provides protection to the paying banker in respect of bearer cheques as follows: "Where
a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in
due course to the bearer thereof, notwithstanding any endorsement whether in full or blank
appearing thereon and notwithstanding that any such endorsement purports to restrict or exclude
further negotiation". This section implies that a cheque originally issued as a bearer cheque remains
always bearer. In other words it retains its bearer character irrespective of whether it bears endorsement in
full or in blank or whether any endorsement restricts further negotiation or not. So the banks are not
required to verify the regularity of the endorsement on bearer cheque, even if the instruments bears
endorsement in full. The banker shall free from any liability (discharged) if he makes payment of an
uncrossed bearer cheque to the bearer in due course. If such cheque is a stolen one and the banker makes
its payment without the knowledge of such theft, he will be discharged of his obligation and will be
protected under Section -85(2).

3. Protection in case of Crossed cheque:

The paying banker has to make payment of the crossed cheques as per the instruction of the drawer
reflected through the crossing. If it is done, he is protected by Section -128. This section states "Where
the banker on whom a crossed cheque is drawn has paid the same in due course, the banker paying
the cheque and (in case such cheque has come to the hands of the payee) the drawer thereof shall
respectively be entitled to the same rights, and be placed in if the amount of the cheque had been
paid to and received by the true owner thereof".

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It is clear that the banker who makes payment of a crossed cheque is by the Section -128 given protection
if he fulfills two requirements-

(a) That he has made payment in deuce course under Section -10 i.e. in good faith and without
negligence and according to the apparent tenor of the cheque, and

(b) That the payment has been made in accordance with the requirement of crossing (Section -126), i.e.
through any banker in case of general crossing and through the specified banker in case of special
crossing.

Thus, the paying banker is free from any liability on a crossed cheque even if the payment was received
by the collecting banker on behalf of a person who was not a true owner. For example, a cheque in favour
of X is stolen by Y. He endorses it in his own favour by forging the signature of X and deposits it in his
bank for collection . In this case, the paying banker shall be discharged if he makes payment as mentioned
above and shall not be liable to pay the same to X, the true owner of the cheque.

The drawer of the cheque is also discharged since protection is also granted to him under this Section.
There is, however, one limitation to the protection granted under this Section. If the banker cannot avail
of the protection granted by other Section of the Act, the protection under Section -128 shall not be
available to him.

For example, if the paying banker makes payment of a cheque crossed with

(a) Irregular endorsement or

(b) A material alteration or

(c) Forged signature of the drawer, he loses statutory protection granted to him under the Act for these
lapses on his part.

Hence he cannot avail of the statutory protection under Section -1289, even if he pays the cheque in
accordance with the crossing.

DISHONOUR OF CHEQUE

Meaning-

The bank should pay the amount mentioned on the cheque as soon as it is presented. If the amount of
cheque is paid by the bank to the payee, the cheque is said to be honored. If the bank refuses to pay the
amount of cheque, then the cheque is said to be dishonored. Thus the dishonored of the cheque means the

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refusal by the bank to pay the amount of cheque to the payee. It is a condition in which the bank does not
pay the amount of the cheque to the payee. In fact, when the drawer draws the cheque without following
all the rules of issuing cheque or when he/she draws the cheque exceeding the bank balance then the bank
dishonors the cheque.

Following are the some important reasons for dishonoring a cheque

* If the date is not written or written incorrectly or the date given is of three months before or if the
advance date is given.

* If the name of the payee is not written or not written clearly.

* If the ordered or crossed cheques are transferred without proper endorsement and delivery.

* If the amount is not written in words and figures or written incorrectly or if the amount written in words
and figures does not match with each other.

* If the alteration made on the cheque is not proved by the drawer giving signature.

* If the account number is not mentioned or if it is not clear or if it is not mentioned clearly.

* If the signature is not given or if the signature given in the cheque does not match with the signature
given on the signature specification card kept by the bank.

* If the amount mentioned on the cheque is more than the amount that the drawer has in his bank account
or if as per bank's rule the minimum balance in the account of the drawer cannot remain.

* If the cheque is overwritten.

* If the cheque is not found in proper condition or it is found wet, torn or spotted.

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* If the drawer has given order to the bank to stop payment of the cheque.

* If the bank has got the information regarding the death or insolvency or lunacy of the drawer of
depositor.

* If the court of law orders the bank to stop payment of the cheque.

* If the bank balance remains shortage on account of not collecting the cheque deposited.

* If the drawer has closed his/her account before presenting the cheque.

GROUNDS FOR DISHONOUR OF CHEQUE-

Funds Insufficient

Section 138 describes the above ground of insufficient funds in the account of the drawer of the cheque in
the following words:

The amount of money standing to the credit of the account of the drawer on which the cheque is drawn is
insufficient to honour the cheque, or

1. The cheque amount exceeds the amount that can be paid by the bank under an arrangement entered into
between the bank and the drawer of the cheque.

However, besides the above, the Courts have also accepted some other heads which though expressly do
not say insufficient funds but are implied to mean the same and a cheque dishonoured on any of these
grounds can be used for the purpose of prosecution under section 138 Negotiable Instruments Act. Some
of these grounds are:

1. Account Closed: It is an offence under section 138 of the Act Closure of account would be an
eventuality after the entire amount in the account is withdrawn It means that there was no amount in the
credit of that account on the relevant date when the cheque was presented for honouring the same

This has been held by the Honble Supreme Court of India in-

NEPS MICON LTD. AND OTHERS VS. MAGMA LEASING LTD.

1999 ISJ (BANKING) 0433; 1999 (1) APEX C.J. 0624; 1999 AIR (SCW) 1637

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2. Stop Payment instructions:

Once the cheque has been drawn and issued to the payee and the payee has presented the cheque, stop
payment instructions will amount to dishonour of cheque.

MAHENDR S. DADIA VS. STATE OF MAHARASHTRA

I (1999) BANKING CASES (BC) 133 (17/03/1998)

3. Refer to drawer:

. makes out a case under section 138 of the Negotiable Instruments Act, 1881 which expression
means that there were not sufficient funds with the bank in the account of the respondent

LILY HIRE PURCHASE LTD. VS. DARSHAN LAL,

(1997) 89 COMPANY CASES 663 (10/01/1997)

4. Not a clearing member:

Cheque returned with endorsement not a clearing member. To attract the provisions of section 138 NI
Act, the cheque should be presented with the bank on which it I drawn- If the cheque is not presented to
the bank on which it is drawn, then provisions of sec 138 would not be attracted. If bank on which the
cheque is drawn is not a clearing member of the Reserve Bank of India unpaid return of the cheque
would not attract section 138.

CHAIRMAN, JAWAHAR COOPERATIVE URBAN BANK LTD. ANDOTHERS VS.


RAMANJANEYA ENTERPRISES, HYD. AND ANOTHER

2005 (5) CRIMINAL REPORTED JUDGEMENTS (CRJ) 0591

2005 (2) DISHONOUR OF CHEQUE REPORTER (DCR) 0169

5. Effect of other endorsements:

It has been repeatedly held by courts that manifest dishonest intention of the drawer resulting in dishonour
of the cheque would lead to prosecution under section 138 Negotiable Instruments Act regardless of the
actual ground of dishonour.

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Consequences for wrongful Dishonour of Cheques-

Incase a bank fails to honour a customer s cheque, it can be held liable by the
customer to pay him the damage. The damages will not only be the pecuniary loss that the
customer might have suffered but also to his reputation.

The amount of damages claimed by the customer need not depend on the amount of the cheque. As a
matter of fact reverse is true. It means the smaller is the amount of the cheque dishonoured, the greater
will be the amount of damages. This is because it is presumed that the dishonour of a cheque of a
smaller amount will result in greater loss to the credit of the customer.

Collecting Banker-

A Collecting Banker is one who undertakes to collect various types of instruments representing money in
favour of his customer or his own behalf from the drawers of these instruments; some are negotiable
instruments as provided for in the negotiable instruments Act. 1881 and some are quasi negotiable
instruments.

Duties & Responsibilities of Collecting Bankers:

Acting as agent: While collecting an instrument, whether for credit to customers account or for
himself, the Bankers works as agent of his customer. As an agent he has generally to take such
steps & precautions to protect the interest or his customer as a man of ordinary prudence would
take to safe-guard his own interest.

Scrutinizing the instruments: Name of the holder, Branch name, date, amount in world and
figure, any cutting without signature, material alteration of any to be checked carefully.

Checking the endorsement: Bankers has to check the instrument whether it has been endorsed
properly.

Presenting the instrument in due time: It is the responsibility of the collecting bank to present
the instrument in due time to the paying bank.

Collecting the proceeds in the payees account: It is the duty of collecting banks to collect and
credit the proceed of the instruments to the proper/correct account.

Notice of dishonor and returning the instruments: If any instrument is dishonored by the
paying bank it should be informed to the customer on the business day following the receipt of
the unpaid instruments.

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Collecting Bankers Protection:

Under section 131 of negotiable instrument Act the collecting banker is not liable to the true owner of a
cheque or a bankers draft if his title to the instrument proves defective provided the cheque or draft was
one crossed generally or specially to himself and collected for a customer is good faith and without
negligence.

The above statutory protection is available to the collecting banker only if he fulfills the following
conditions:

i. The cheque he collected is a crossed cheque.

ii. He collected such crossed cheque only for his customer as an agent & not as a holder for value.

iii. He collected such crossed cheque in good faith and without negligence.

No Protection:

Opening of A/c without satisfactory references/ introduction.


Crediting the proceeds of cheque to an endorsee with irregular endorsement.
Crediting the proceed of a cheque to the personal A/c of director, partners or any employee when
it is payable to the company.
Crediting the proceeds of charge to personal name of the official when it is payable to a govt.
agency, autonomous body, or corporation.
Crediting the amount of a cheque in the personal A/c which is drawn by an agent on behalf of its
principal.
When the customer depositing the cheque is of little means and the cheque deposited suddenly is
of sizable amount and the banker credited the proceeds there to without making proper enquiry.
Cheque drawn by customer is dishonored very often and crediting such account with the proceeds
of collecting cheque without making proper enquiry.
If the crossed cheque is collected and credited the proceed to the other account.

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Holder for Value-

Meaning-

One who has given a legal consideration for a negotiable instrument is a holder for value. The holder of a
negotiable note taken as collateral security for a preexisting debt is a holder for value in due course of
business. Similarly, an endorsee of a negotiable note taken as collateral security for a preexisting debt,
there being no extension of time of payment or other new consideration except such as may be deemed to
arise from the acceptance of the paper, is a holder for value. [Birket v. Elward, 68 Kan. 295 (Kan. 1904)].

Course in Due course-

Meaning-

Legal term for an original or any subsequent holder of a negotiable instrument (check, draft, note, etc.)
who has accepted it in good-faith and has exchanged something valuable for it. For example, anyone who
accepts a third-party check is a holder in due course. He or she has certain legal rights, and is presumed to
be unaware that (if such were the case) the instrument was at any time overdue, dishonored when
presented for payment, had any claims against it, or the party required to pay it has valid reason for not
doing so. It can be also called protected holder, or bonafide holder for value.

Statutory Protection to Collecting Banker.

1. Crossed cheque only:

The statutory protection is available to the banker only in case of cheque crossed generally or specially to
himself. He can not avail this protection in case of uncrossed cheque.

2. Collection as an Agent: The statutory protection is available to the banker if he collects the cheque as
an agent of the customer and not as its holder for value.

3. Good faith and without negligence:

The most essential prerequisite for availing of the statutory protection is that the banker must receive
payment in good faith and without negligence. A thing is deemed to be done in good faith when it is in
fact done honestly irrespective of whether negligently or not . He should not be negligent in receiving the
payment. The onus of proving that he was not negligent in collecting the cheque lies, however, on the
banker himself.

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LENDING BANKER

One of the primary functions of a bank is to grant loans. Whatever money the bank receives by way
of deposits, it lends a major part of it to its customers by way of loans, advances, cash credit and
overdraft. Interest received on such loans and advances is the major source of its income. The banks make
a major contribution to the economic development of the country by granting loans to the industrial and
agricultural sectors.
The banks make loans and advances out of deposits, received from their customers. Most of these
deposits are payable on demand. As such the bank owes a greater responsibility to the depositors. Hence
he should be extremely careful while granting loans.

General Rules of Sound Lending

A banker should use his third eye and third ear (although the God has given him only two eyes
and two ears) while granting loans. In other words, he must be extra careful while granting loans. A
banker should take the following precautions:

Principles of Sound Lending

1. Safety
2. Liquidity
3. Profitability
4. Diversification
5. Object of loan
6. Security
7. Margin Money
8. National Interest
9. Character of the borrower money interest

These are discussed below.

1. Safety: The most important golden rule for granting loans is the safety of funds. The main reason for this
is that the very existence of the bank is dependent upon the loans granted by him. In case the bank does not
get back the loans granted by it, it might fail. A bank cannot and must not sacrifice the safety of its funds to
get higher rate of interest. For example, if a reputed credit-worthy businessman offers to pay 10% interest

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per annum and on the other hand a pauper offers 15% rate of interest per annum. Obviously as per safety
rule, the banker should not grant loan to the pauper although paying 5% higher rate of interest.
2. Liquidity: The second important golden rule of granting loan is liquidity. Liquidity means possibility
of converting loans into cash without loss of time and money. Needless to say, that the funds with the
bank out of which he lends money are payable on demand or short notice. As such a bank cannot afford to
block its funds for a long time. Hence the bank should lend only for short-term requirements like
working capital. The bank cannot and should not lend for long-term requirements, like fixed capital.

3. Return or Profitability: Return or profitability is another important principle. The funds of the bank
should be invested to earn highest return, so that it may pay a reasonable rate of interest to its customers
on their deposits, reasonably good salaries to its employees and a good return to its shareholders.
However, a bank should not sacrifice either safety or liquidity to earn a high rate of interest. Of course, if
safety and liquidity in a particular case are equal, the banker should lend its funds to a person who offers
higher rate of interest.

4. Diversification: One should not put all his eggs in one basket is an old proverb which very clearly
explains this principle. A bank should not invest all its funds in one industry. In case that industry fails,
the banker will not be able to recover his loans. Hence, the bank may also fail. According to the principle
of diversification, the bank should diversify its investments in different industries and should give
loans to different borrowers in one industry. It is less probable that all the borrowers and industries will
fail at one and the same time.

5. Object of Loan: A banker should thoroughly examine the object for which his client is taking loans.
This will enable the bank to assess the safety and liquidity of its investment. A banker should not grant
loan for unproductive purposes or to buy fixed asset. The bank may grant loan to meet working capital
requirements. However, after nationalization of banks, the banks have started granting loans to meet loan-
term requirements. As per prudent banking policy, it is not desirable because of term lending by banks a
large number of banks had failed in Germany.

6. Security: A banker should grant secured loans only. In case the borrower fails to return the loan, the
banker may recover his loan after realising the security. In case of unsecured loans, the chances of bad
debts will be very high. However, the bank may have to relax the condition of security in order to comply
with the economic. Banking policy of the government. For example, loans to weaker sections of society
may be given without security if so directed by the government.

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7. Margin Money: In case of secured loans, the bank should carefully examine and value the security.
There should be sufficient margin between the amount of loan and the value of the security. If adequate
margin is not maintained, the loan might become unsecured in case the borrower fails to pay the interest
and return the loan. The amount of loan, should not exceed 60 to 70% of the value of the security. If the
value of the security is falling, the bank should demand further security without delay. In case he fails to
do so, the loan might become unsecured and the bank may have to suffer loss on account of bad debt.

8. National Interest: Banks were nationalised in India to have social control over them. As such, they are
required to invest a certain percentage of loans and advances in priority sectors viz., agriculture, small
scale and tiny sector, and export-oriented industries etc. Again, the Reserve Bank also gives directives in
this respect to the scheduled banks from time to time. The banks are under obligations to comply with
those directives.
9. Character of the Borrower: Last but not the least, the bank should carefully examine the character of
the borrower. Character implies honesty, integrity, creditworthiness and capacity of the borrower to return
the loan. In case he fails to verify the character of the borrower, the loans and advances might become bad
debts for the bank.

Kinds /Forms of Lending (Advances)

Banks lend for working capital requirements in the form of:


1. Loans
2. Cash credit
3. Overdraft
4. Purchase and discounting of bills of exchange.

1. Loans: This is the oldest and very popular form of lending by the banks. In case of loans, financial
assistance is given for a specific purpose and for a fixed period. The customer can withdraw the entire
amount of loan in a single installment. As such, interest is payable on the entire amount. In case he needs
the funds again, he has to make a fresh application for a new loan or renewal of the existing one.
Ordinarily, the loan is repayable in one installment. However, a customer may return the loan
in more than one installment also.

Merits of Granting Loans

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A. Simplicity
The method is very simple. Interest is payable on the entire amount of the loan.
B. Better Recovery of Interest and Loan
The customer knows in advance the time of return of the loan. Therefore, he makes arrangement for its
return. In case he does not return the loan in time, the bank will not grant loans and advances to him in
future. It acts as an automatic regulator to discipline the borrower.
C. Profitability
From the point of view of the bank, the method is economical. The customer has to pay interest on the
entire amount of the loan even if he has not withdrawn the entire loan. To that extent funds can be used by
the bank.

Demerits

A. Inflexibility
The method is simple but inflexible. Borrower has to make a fresh request for the loan every time he
requires the loan.
B. Over borrowing
Since the loan method is inflexible a customer takes a loan in excess of his needs to meet any
contingency. This results in over borrowing.
C. More Formalities
As compared to cash credit and overdraft methods, loan documentation is more complicated.

2. Cash Credit: Cash credit is the most popular method of lending by the banks in India. It accounts for
more than two third of total bank credit. Under cash credit system, a limit, called the credit limit is
specified by the bank. A borrower is entitled to borrow upto that limit. It is granted against the security of
tangible assets or guarantee. The borrower can withdraw money, any number of times upto that limit. He
can also deposit any amount of surplus funds with him from time to time. He is charged interest on the
actual amount withdrawn and for the period such amount is drawn.
Commitment Charges: To discourage the borrower from keeping large funds idle within the sanctioned
limit bank levies commitment charges. This also helps the bank in two ways. Firstly, it compensates him
for the loss on idle funds kept by him within the credit limit sanctioned. Secondly, it facilitates better
credit funds management. It will be applicable to borrower having a working capital limit of Rs. one crore
or more. The rate of commitment charges is 1% per annum on the un utilised portion of cash credit limit
sanctioned. However, no such charges will belevied, if the unutilised quarterly operating limit is upto

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15%.Again, it will not be applicable to sick units, export credit or export incentives, inland bills and credit
limits granted to commercial banks, cooperative banks and financial institutions.

Merits of Cash Credit

A. Flexibility
The greatest advantage of cash credit method is that it is flexible. A customer can withdraw and deposit
money any number of times.
B. Economical
The scheme is economical. A borrower has to pay interest only on the amount borrowed and that too for
the period the amount is actually withdrawn. Unlike a loan he is not required to pay interest on the entire
amounts of the loan.
C. Less Formalities
As compared to the loan method, there are less formalities, and frequent documentation is avoided.
Moreover, documentation in this method is less complicated.

Demerits

A. Over Borrowing
Credit limits are fixed one in a year. It gives rise to the tendency of fixing higher limits to cover
contingencies. Thus it encourages over-borrowing.
B. Division of Funds
The bank has control over the amount of credit sanctioned. It does not have any control over the use of
such funds. Consequently the borrower diverts the funds, without the knowledge of the bank, for
unapproved purposes.
C. Non-utilisation of Funds
In practice a large amount of sanctioned cash credit limit remains unutilised. Levy of commitment
charges has failed to put an end to this weakness because it is levied on cash credit limit of Rs. one crore
or more.

.
Distinction between Loan and Cash Credit

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(a) Amount: In case of loan a fixed amount is sanctioned, whereas in case of cash credit a limit is fixed.

(b) Period: Loan can be granted for a short, medium and long-term but cash credit is granted only for a
short period upto one year only.

(c) Withdrawal: The entire amount of loan is credited to the customers account. In case of cash credit
the customer can withdraw the amount upto the limit when he needs.

(d) Interest: In case of loan, interest is payable on the entire loan, whereas in case of cash credit, interest
is payable only on the amount actually withdrawn and for the period the amount is withdrawn.

(e) Repayment: Ordinarily a loan is repayable in one lump sum. However, it may be paid in installments
also. On the other hand in case of cash credit, the borrower may repay any surplus amount from time to
time.

3. Overdraft: One of the main advantages of a current account is that, its holder can avail of the facility
of overdraft. An overdraft facility is granted to a customer on a written request. Sometimes, it may be
implied where a customer overdraws his account and the bank honour his cheque. [Bank of Maharashtra
Vs. M/s United Construction Co. and Others (1985) Boom. 432 A.I.R.] The bank should obtain a written
request from the customer. He should also settle the terms and conditions and the rate of interest
chargeable. It is usual to obtain a promissory note from the customer to cover the overdraft

Distinction between Cash Credit and Overdraft


Ordinarily, in practice no distinction is made between cash credit and overdraft. The reason is that their
purpose and nature is almost the same. Inspite of this there are the following points of distinction between
them:
(a) Period: The main difference between cash credit and overdraft is that the former is granted
comparatively, for a longer period, whereas overdraft is a temporary facility.
(b) Opening Separate Account: For granting cash credit it is necessary to open a new account. No new
account is necessary for overdraft.
(c) Current Account: Overdraft facility is granted to a current account holder only. It is not necessary to
be a current account holder, to avail of the facility of cash credit.
(d) Control of Central Government: The Central Government exercises strict control over cash credit.
There is no such control on overdraft.

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(e) Commitment Charges: In case of under-utilisation of cash credit a customer has to pay commitment
charges. No commitment charges are payable in case of overdraft.
(f) Form of Security: Cash credit is ordinarily granted on the security of goods by way of pledge or
hypothecation. Overdraft is granted on the personal security of the borrower or financial securities viz.,
shares, bonds etc.

4. Purchase and Discounting of Bills of Exchange: The bank provides the customers with the facility of
purchasing and discounting their bills receivable. This is a method of financial accommodation offered by
the banker to the customer. The bank permits the customer to discount his bills receivable and have the
value of the bills credited to his account. The bank charges discounting charges on the face value of the
bills. It waits till the maturity of the bill and presents it on the due date to the drawee for payment. After
collection, the proceeds of the bill are appropriated towards the loan and interest due by the customer. If
the bill is discounted, the amount will be recovered from the customer.

LETTER OF CREDIT

A Letter of Credit has been defined by the International Chamber of Commerce as an arrangement,
however, named or described whereby a bank (the issuing bank) acting at the request and in accordance
with the instructions of a customer (the applicant of the credit), is to make payment or to the order of a
third party (the beneficiary) or is to pay, accept or negotiate Bills of Exchange (Drafts) drawn by the
beneficiary or authorised such payments to be made or such drafts to be paid, accepted or negotiated by
another bank, against stipulated documents and compliance with stipulated terms and conditions.

These are following parties to a Letter of Credit.

(1) The buyer.


(2) The beneficiary.
(3) The issuing bank.
(4) The notifying bank.
(5) The negotiating bank.
(6) The confirming bank.
(7) The paying bank.

1. The Buyer: The buyer who is the importer, applies to the bank for the opening of a Letter of Credit.
2. The Beneficiary: The seller, who is the exporter, is the beneficiary of the Letter of Credit.

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3. The Issuing Bank: The bank which issues the Letter of Credit at the request of the buyer is the issuing
bank.
4. The Notifying Bank: The notifying bank is the correspondent bank situated in the same place as that
of the seller which advises the credit to the beneficiary.
5. The Negotiating Bank: It is the bank which negotiates the Bills or Drafts under the Letter of Credit.
6. The Confirming Bank: It is the bank the seller insists that the credit must be confirmed by it.
7. The Paying Bank: The paying bank is the bank on which the bill or draft is drawn. It can be the
confirming bank, the issuing bank or the notifying bank.

Types of Letters of Credit

The Letter of Credit can be divided into two broad categories:


1. Travellers Letter of Credit.
2. Commercial Letter of Credit.
Types of Letters of Credit
I. Travellers Letter of Credit
Such types of Letters of Credit are issued by the banks for the convenience of the travellers. The travellers
are saved from the risk of travelling with heavy cash with them. The facility of such Letters of Credit can
be available both for travelling in and outside the country. The characteristics of such Letters of Credit are
as under:
(a) A Travellers Letter of Credit is issued by a bank on its own branch/ branches or correspondent
bank/banks situated anywhere in the world.
(b) It contains a request by the issuing bank to make payment up to the amount to the person named
therein.
(c) The issuing banker may issue a Letter of Identification to the holder of the Letter of Credit. The
signature of the holder must be attested therein.
Types of Travellers Letter of Credit: The Travellers Letter of Credit can be divided into the following
forms:
1. Travellers Cheque: It is issued and drawn by a bank upon its own branch or another bank. It is a
request by the issuing bank to the paying bank to pay a specified amount to the holder. It also contains the
specimen signature of the holder for the purpose of identification.
2. Circular Letter of Credit: It is addressed to more than one banker. Details of the amount paid by the
various bankers are entered in the proforma, printed on the back of the letter of credit. The holder is to

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deposit the required amount for which he wants a letter of credit with the issuing bank. The issuing bank
charges its commission for the service.
In case of a letter of credit, the banker issues an identification slip which bears the signature of the holder
attested by the issuing banker. In a travellers cheque these signatures are on the travellers cheque itself.

3. Circular Note: It is like a travellers cheque. Unlike a letter of credit it is of specified denomination. In
a letter of credit the banker has to make and entry at the time of the making payment. However, in a
circular note, payment is made by the bank on surrender of the circular note.

4. Circular Cheques: These are like travellers cheques. However, these are not of specified
denominations. The maximum amount payable is indicated on the circular cheque. No separate
identification slip or letter is issued along with it. The holders signatures are on the circular cheques like
those on the travellers cheques.

5. Guarantee Letter of Credit: In case of other letters of credit the holder has to pay in advance the
required amount of the credit to the banker who issues letter of credit. In case of guarantee letter of credit,
the holder is not required to deposit any amount in advance; he is only required to give guarantee of the
amount required.

6. Bank Draft or Demand Draft: A bank draft or a demand draft is a bill of exchange drawn by one
bank on its own branch or any other bank. The essential features of a bank draft are:
(a) It is always drawn by a bank upon its own branch or another bank.
(b) It is always payable on demand and it cannot be made payable to bearer.
(c) Ordinarily, payment of a demand draft cannot be stopped or countermanded. It is because of this
reason payment is demanded through a bank draft.

II. Commercial Letter of Credit

Such letters of credit are issued to facilitate trade and commerce particularly the international trade. An
exporter is reluctant to send goods to the importer because he wants to minimize the risk for the payment.
Similarly, the importer is also reluctant to send the payment in advance to the exporter. He is afraid that
the exporter may not send the goods even after receiving payment in advance. The bank comes to the
rescue (help) of both the parties. The documents of goods are sent through the bank with the instructions
that the bank should deliver the documents viz., Bill of Lading or Freight Bill to the importer against

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payment or acceptance of the bill. The importer can get the delivery of the goods by surrendering the bill
of lading to the shipping company and the exporter will get the payment from the bank.
However, in the above case a risk is involved. The importer may not pay or accept the bill. The exporter
will have to spend unnecessary money in getting the goods back. Such risks can be avoided if a letter of
credit is opened by the importer.
A letter of credit issued by the importers bank guarantees the exporter that the bank will pay or accept
the bill accompanying the documents sent through the bank.
The letter of credit specifies what goods have to be despatcher and also the date by which the goods must
be dispatched. The exporter should strictly comply with the terms and conditions of the letter of credit. In
case he fails to do so, the bank issuing the letter of credit will not liable to pay or accept the bill drawn by
the exporter.

Types of Letters of Commercial Credit

1. Documentary Letter of Credit: When a clause is inserted in the letter of credit that the document of
title to goods viz., bill of lading, insurance policy, invoice etc. Must be attached to the bill of exchange
drawn under the letter of credit. It is called a documentary letter of credit.

2. Clean Letter of Credit: If no such clause (as in documentary letter of credit) is inserted in the letter of
credit, it is called a clean letter of credit. The documents of title in that case are sent directly to the
importer. In a clean letter of credit there is greater risk for the banker. As such a banker issues clean letter
of credit only to those customers, who have good reputation and credit in the market.

3. Fixed Letter of Credit: If the banker specifies in the letter of credit the amount of the bill to be drawn
within the time fixed, it is called a fixed letter of credit. Such a letter remains valid until the specified
amount is utilized within the specified time.

4. Revolving Letter of Credit: In case of revolving letter of credit, the banker specifies the total amount
upto which the bills drawn may remain outstanding at a time. For example, X opens a letter of credit with
City Bank for a total sum of Rs. one lakh valid for a period of 3 months. The beneficiary (exporter) can
draw bills under the letter of credit with the condition that the value of such outstanding bills should not
exceed Rs. one lakh at any given time.

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The main advantage of revolving credit is that the beneficiary may draw a bill for an amount higher, than
the one specified in the letter of credit. Again there is no need of renewal again and again. However, it is
complicated. It is difficult to ascertain how much amount is outstanding at a particular time.

5. Revocable Letter of Credit: Unless specified otherwise, a letter of credit will be deemed revocable
(Art. 1 Uniform Custom and Practice). In case of revocable letter of credit, the issuing banker resumes the
right to cancel or modify the credit at any time without notice. Therefore, such a letter of credit is hardly
of any use. However, as per Article 2 of Uniform Custom and Practice, in the above case modification or
cancellation will become effective only on receipt of the notice by the negotiating banker.

6. Irrevocable Letter of Credit: Such a letter cannot be modified or cancelled without the consent of the
applicant and the beneficiary. As per Article 3 of Uniform Custom and Practice the issuing banker will be
liable in case of irrevocable letter of credit if the exporter strictly complies with the terms and conditions
of the letter of credit.

7. Confirmed Letter of Credit: When the banker issuing the letter of credit requests the advising bank in
the exporters country to signify his confirmation to an irrevocable credit and the advising bank accepts
the request, it is called irrevocable and confirmed letter of credit. The advising banker is called
confirming banker. He cannot cancel or modify his undertaking without the consent of the parties
concerned.

8. Unconfirmed Letter of Credit: In case the issuing banker does not ask the advising banker to confirm
the letter of credit, it remains unconfirmed letter of credit.

9. With Recourse Letter of Credit: You might recall that a bill of exchange may be drawn with recourse
to the drawer. If such a bill is drawn under a letter of credit, it is called with recourse letter of credit. In
case of such a bill, if the drawee does not honour the bill, the banker as a holder can recover the payment
of the bill from the drawer.

10. Without Recourse Letter of Credit: If an exporter wants to avoid his liability (as in the case of with
recourse letter of credit) he can ask the importer to open a letter of credit without recourse to the drawer.
If the importer fails to honour the bill, the issuing banker cannot hold the drawer liable. He can hold only
the drawee liable in such a case. The banker may realize the amount by selling the goods if the documents
of title have not been given to the importer.

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11. Transferable Letter of Credit: Where the goods are exported through middle men, the exporter may
ask the importer to open a transferable letter of credit. Under a transferable letter of credit, the beneficiary
will be able to transfer his right to draw a bill to a third party.

12. Non-transferable Letter of Credit: Every letter of credit unless stated otherwise is non-transferable.
Hence the beneficiary cannot transfer such a letter of credit to a third party.

13. Back to Back Letter of Credit: A beneficiary of a non-transferable letter of credit may request the
bank to open a new letter of credit in favour of some third party on the security of letter of credit issued in
his favour, it is called a back to back letter of credit.

14. Red Clause Letter of Credit: If the exporter wants financial assistance in advance against his export
for purchase of materials, packing etc., he can ask the importer to arrange a Packing Credit. This
packing credit is made available through the letter of credit by inserting a clause in red ink. Such a clause
is called Red Clause. The negotiating banker can advance specified money to the exporter. Such
accommodation is of temporary nature and is adjusted at the time of final payment.

NON- PERFORMING ASSETS

In the normal course, borrowers repay their dues to the bank by their respective due dates. Some debts,
however, turn sticky. The borrower is unable or unwilling to pay. If such debt is shown as a regular debt,
and interest is accrued on such debt as a regular income, then the financial statements would give an
incorrect picture of the financial status of the bank.
Therefore, RBI has laid down strict requirements regarding recognition of Non-Performing Assets (NPA).
An NPA is a loan or advance where:
Term Loan interest and / or installment of principal remains overdue for more than 90days.
Overdraft / Cash credit - account is out of order i.e. Outstanding balance remains continuously in excess
of the sanctioned limit / drawing power; or Outstanding balance is within the sanctioned limit / drawing
power, but there are no credits continuously for 90 days as on the date of balance sheet, or the credits are
not enough to cover the interest debited during the same period.
Bills purchased and discounted bill remains overdue for more than 90 days.

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Short duration crops (crop season is up to a year) installment of principal or the interest there on
remains overdue for two crop seasons.
Long duration crops - installment of principal or the interest thereon remains overdue for one crop
season.
A few more relevant points
Banks are supposed to classify an account as NPA only if the interest charged during any quarter is not
serviced fully within 90 days from the end of the quarter.
If an advance is covered by term deposits, National Savings Certificates eligible for surrender, Indira
Vikas Patras, Kisan Vikas Patras and Life policies, then it need not be treated as NPA. This exemption
however does not extend to government securities and gold ornaments.
Drawing power should be determined based on stocks statements that are not older than 3 months. Else,
it would be treated as irregular.
If irregular drawings are permitted in the working capital account for a continuous period

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QUESTIONS:

1. What is letter of credit? Briefly explain the types of letter of credit?


2. Who is a holder for value? explain
3. Differentiate between bank debt and ordinary debt.
4. Explain then difference between overdraft and cash credit?
5. Briefly explain different types of advances by banker?
6. Explain the duties of collecting banker?
7. State any five circumstances to refuse the payment of a cheque?
8. What is letter of credit? State the types of letter of credit.
9. State the five mandatory functions of a paying banker.
10. What are the different kinds of short term borrowings facilities granted by the banker.

1. Explain in details, the obligations of a banker to honour his customers mandate and
consequences wrongful dishonour of a cheque?
2. Who is a paying banker? What are the precautions to be taken by him while honoring cheque?
3. Explain the various types of bank loans and advances?
4. Analyze the principles of sound lending by commercial bank?
5. Who is collecting banker? Briefly discuss the statutory protection given to him.
6. What are the duties of collecting banker? Discuss the statutory protection given to a collecting
banker?
7. Under the circumstances Cheques are dishonored? what are the consequences of dishonor a
cheque?

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CHAPTER-4

TYPES OF CUSTOMERS AND ACCOUNT HOLDERS

Types of Customers and Account Holders - Procedure and Practice is opening and conducting the
accounts of customers particularly individuals including minors - Joint Account Holders.
Partnership Firms - Joint Stock companies with limited liability-executors and trustees-clubs and
associations- joint Hindu family

Types of Customers and Account Holders

Opening of an account binds the banker and customer into a contractual relationship. Every person who is
competent to contract can open an account with a bank. The capacity of certain classes of person, to make
valid agreement is subject to certain legal restrictions, as is the case with minors, lunatics, drunkards,
married women, un discharged insolvents, trustees, executors, administrators etc. Extra care is also
needed for the banker while he deals with customers like public authorities, societies, joint stock
companies, partnership firms etc.

1. Minors

A minor is a person who has not completed 18 years of age. In case a guardian of his person or property is
appointed by a court of law before he completes his 18 years, the period of minority is extended to the
completion of 21 years. As per section 11 of the contract act a minor is incompetent to contract but
section 26 of the Negotiable Instrument Act allows a minor to draw, endorse, deliver and negotiate a
negotiable instrument. So, a banker can open an account in a minors name and the banker will be safe if
the account runs with credit balance. So, it is suggested to open a savings bank account in the minors
name and not to open a current account as because an overdraft may be created at any time in a 2 current
account and money lent to a minor cannot be recovered from him as he is free from personal liability. The
minors savings bank account may be opened in any of the following ways:

(i) In the name of minor himself:- This account will be operated by the minor alone. In his personal
presence (in the bank) he can withdraw the money from his account.

(ii) In the joint names of the minor and his/her guardian:- This account will be operated jointly by
minor and his/her guardian.

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(iii) In the name of guardian:- This account will be operated by the guardian on behalf of the minor.
In case of (i) and (ii) stated above the minor must have at least attained the age of 10 years or above and
able to sign his name uniformly. Like savings bank account, a fixed deposit account or a recurring deposit
account in the name of a minor (along a with guardian) may also be opened. It should be noted that in the
event of death of a minor the money will be payable to his guardian. In case the guardian dies before the
minor attains majority and the account is a joint account or operated by the guardian only, the money
should be paid by the banker to the minor on attaining majority or to someone else who has appointed as
guardian of the minor by the court. While opening a minors account the banker should record the date of
birth of the minor as disclosed by his/her guardian. The account in the name of minor can be continued on
minors attaining the age of majority and at that time the banker will have to obtain a confirmation
regarding the balance standing in his account.

2. Lunatics

A person of unsound mind cannot make a valid contract. So, the bankers should not open an account in
the name of a person of unsound mind. But a customer may become lunatic after opening an account with
the bank. However, a banker will not be liable if it honour the cheque or bill of an account holder unless it
comes to know of his lunacy at the time of honouring cheque/bill. Where a customer becomes insane and
the banker comes to know of it, he must stop all the operations on the account immediately. However, the
banker should carefully verify the information about customers lunacy. Sometimes, the court may issue a
lunacy order and the banker must follow this order. Before resuming operations on the account, the
banker must obtain a certificate from two medical officers certifying his mental soundness or get an order
of the court to that effect.

3. Illiterate persons

An illiterate person means a person who cant sign his name. While opening of an account of such a
person is unavoidable, the banker should obtain ( 1) Left thumb impression on the account opening form
and specimen signature card in the presence of an authorized bank official (2) Details of identification
marks should be noted on the account opening form and specimen signature card (3) At least two copies
of photograph duly attested by any account holder/authorized bank official.

Except his physical presence (in the bank) any withdrawals from the account of an illiterate person will
not be allowed.

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4. Married women

A married woman can enter into contract and bind her personal (separate) estate. A banker may,
therefore, open an account in the name of a married woman. The bank should observe extra precautions
regarding sanction of overdraft/loan to a married woman because it will have no remedy against her if she
does not have any personal estate. It should be noted that the husband will not be liable for any debt of his
wife except the following cases:

(1) Where the loan is taken with his consent or where she acts as the agent of her husband.

(2) Where the loan has taken for the purchase of necessities which the husband has failed to provide.

5. Executors and administrators:

Executors and Administrators are allowed to open bank account. Following formalities are to be observed
while opening the account in the name of executor/administrator:

(I) An executor should submit a probate, and an administrator should submit the letter of
administrator to the bank as a proof of their authority to operate the account of a deceased person.

(2) The banker should thoroughly examine the probate/letter of administration to acquaint himself with
the power and functions of executors/ administrators.

(3) An account may be opened in the name of executor/administrator in the following style: ABC
executors (or Administrators) of the estate of X, the deceased.

(4) In case of joint executor/administrator a mandate signed by all of them should be obtained regarding
the operation of the account.

(5) The insolvency of the executor/administrator will terminate his authority to operate the account
(unless it has been overdrawn) but the lunacy of the executor/administrator will not terminate his
authority to) operate the account.

7. Trustees

A banker must be cautions in opening/operating a trust account as the trustees are responsible for public
money.

(1) While opening the trust account a banker should thoroughly study the trust deed as it contains the
name of trustees, their powers, details of the trust properties and other terms.

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(2) If there are several trustees and account is opened for two or more trustees the banker should obtain
a mandate signed by all the trustees as to how cheques and bills are to be signed and endorsed. In the
absence of such instructions all trustees must sign the instrument(s) on each occasion.

(3) The bank must not knowingly permit the misuse of trust fund (e.g. fraudulent transfer of trust fund
by the trustees to his personal account).

8. Joint accounts

Joint account means account of two or more persons who are not partners. A banker should keep in view
the following provisions while opening and operating joint accounts:

The account should be opened only on receiving application signed by all persons interested in
that account.

A mandate signed by all the parties containing clear instructions as to how the account is to be
operated should be obtained. The mandate should mention the name(s) of the person (s)
authorized to operate the account and clear instructions as to whom the balance in the account
shall be payable must be obtained. In absence of such instructions banker will honour only those
cheques signed by all the parties.

Instructions regarding the operation of account must be clearly written in the account opening
form/specimen signature card.

In absence of either or survivor instruction the balance will be payable to all the joint account
holders including legal representative/heirs of the deceased but in case of either or survivor
instruction the balance will be payable to the survivor (s).

It is wise to stop the operation of a joint account after the death of anyone of the joint account
holders and a new account be opened in the name of surviving account holder(s).

Joint Account in the name of Husband and Wife:

In case of joint account of husband and wife their position differs from those of other joint account
holders. Where the account is opened by the husband for his convenience the balance can not be claimed
by the widow but has to be brought to the estate of the deceased. But where the intention of the husband
(by opening a joint account) was to make a provision for his wife in case of his untimely death, the widow
would receive the money.

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9. Partnership firm:

A firms account should always be opened in the name of the firm and not in the name(s) of the individual
partner (s) because a partner does not have (implied) authority to open a bank account on behalf of the
firm in his own name. Before opening the account, a banker must obtain the partnership
agreement/deed and thoroughly acquaint itself with the clauses. While opening an account of a
partnership firm the banker should take a letter signed by all the partners containing the following
particulars:

(a) The name and address of all the partners

(b) The nature of the firms business

(c) The name of the partners authorized to operate the account.

It should be noted that any partner may by notice in writing to the banker, revoke the authority given to
any other partner regarding operation of the firms account. Similarly any partner can stop the payment of
a cheque already issued and the banker will be bound to honour such instructions. The banker should not
credit a cheque in the firms name to the personal account of a partner without the consent of other
partners. It fails to do so; the banker will be liable to other persons for wrongful conversion of funds.

10. Joint stock companies

A joint stock company is an artificial person and it has a separate legal entity. So, a bank account may be
opened on its own name. A joint stock company may either be a Private Limited Company or a Public
Limited Company. Following documents are required while opening an account of a joint stock company:

(i) Certificate of incorporation

(i) Certificate of commencement of business (in case of Public Ltd. Co. only).

(iii) Memorandum of association

(iv) Articles of Association

(v) Copies of annual accounts

(vi) Certified copy of the Boards resolution regarding appointing the bank concerned as the bank of
the company. This also specifies the persons authorized to operate the account on behalf of the company.
The resolution should be signed by the chairman of the meeting and countersigned by the secretary of the

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company. As Memorandum of Association is the main document of the company the Banker must go
through it very carefully because if a company done anything beyond its object is ultra vires and does not
bind the company. The banker should also examine the Articles of Association as it contains the
procedure and authority to draw and endorse cheques, bills etc. on behalf of the company. It is necessary
to obtain printed copies of companys Memorandum and the Articles with a confirmation from the
company that they are up-to-date.

11. Societies and other non- trading institutions

The society, be it a club, school, hospital or any institution must be registered as a corporate body.
Societies, unless registered are not recognized by the law and have no contracting powers. While opening
and operating an account of any society the following procedures be followed by a banker:

(a) Copies of Memorandum, Articles of Association of the society must be obtained to acquaint with its
broad objectives, its rules & by-laws.

(b) The banker should call for a duly certified copy of resolution passed by the managing committee of
the society authorizing the bank for opening the societys account. The resolution should also state the
name (s) of persons authorized to operate the account. In case of death or resignation of the person (s)
entitled to operate the account, the banker should stop operations on the account till the
nomination/appointment of other person(s).

(c) If the office bearer (i.e. the person authorized to operate the account) of the society has a personal
account in the bank the banker should exercise precautionary measure so that the society money does not
find its way into the personal account of the office bearer.

12. Customers attorneys

A person may by a written and stamped document appoint a person as his attorney to deal on his behalf
with third parties. This power may be general (to act in more than one transaction) or special (to act in a
single transaction). The power of attorney can authorize a person to sign cheques (i.e. operate the
account) on behalf of the customer. The banker, while dealing with customers attorney should carefully
examine the document regarding power of attorney. It should be properly stamped and still in force. The
banker should keep a copy of the document with it for reference. It should keep in view that power to
operate an account does not automatically imply the power to overdraw. Such power should be
specifically given. The customer may revoke the authority of the attorney and the authority of the attorney
shall stand terminate in the event of death, insolvency and insanity of the principal.

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Procedure and Practice is opening and conducting the accounts of customers particularly individuals
including minors-

One of the important functions of the Bank is to accept deposits from the public for the purpose of
lending. In fact, depositors are the major stakeholders of the Banking System. The depositors and their
interests form the key area of the regulatory framework for banking in India and this has been enshrined
in the Banking Regulation Act, 1949. The Reserve Bank of India is empowered to issue directives /
advices on interest rates on deposits and other aspects regarding conduct of deposit accounts from time to
time. With liberalization in the financial system and deregulation of interest rates, banks are now free to
formulate deposit products within the broad guidelines issued by RBI.

This policy document on deposits outlines the guiding principles in respect of formulation of
various deposit products offered by the Bank and terms and conditions governing the conduct of the
account. The document recognizes the rights of depositors and aims at dissemination of information with
regard to various aspects of acceptance of deposits from the members of the public, conduct and
operations of various deposits accounts, payment of interest on various deposit accounts, closure of
deposit accounts, method of disposal of deposits of deceased depositors, etc., for the benefit of customers.
It is expected that this document will impart greater transparency in dealing with the individual customers
and create awareness among customers of their rights. The ultimate objective is that the customer will get
services they are rightfully entitled to receive without demand.

While adopting this policy, the bank reiterates its commitments to individual customers outlined in
Bankers Fair Practice Code of Indian Banks Association. This document is a broad framework under
which the rights of common depositors are recognized.

KNOW YOUR CUSTOMER (KYC) GUIDELINES:

Know Your Customer (KYC) is the platform on which banking system operates to avoid the pitfalls of
operational, legal and reputation risks and consequential losses by scrupulously adhering to the various
procedures laid down for opening and conduct of accounts. The Bank shall follow appropriate Know
Your Customer Policies, procedures and internal control mechanism designed to :

1. Establish and document the true identity and address of the customers who maintain/establish
relationships, open accounts or conduct business transactions.

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2. Obtain background information on existing and/or new customers;

3. Safeguard the Bank from the risks of doing business with any individual or entity whose identity
cannot be determined.

4. Protect the Bank from the risks of having business relationships with any individual or entity who
refuses to provide information, or who has provided information that contains significant
inconsistencies which cannot be resolved after due investigation.

IDENTIFICATION THROUGH DOCUMENTS PROVIDED BY THE CUSTOMER:

The bank shall establish customers identity (true name, residential and mailing address) with the
help of certain official documents as may be provided by the customer concern in original. The
indicative lists of identity and address proof documents to be submitted in case of individuals are
as under :

Proof of Identity

1. Passport

2. PAN card

3. Voters Identity Card

4. Driving license

5. Job card issued by NREGA duly signed by an officer of the State Government

6. The letter issued by UIDAI containing details of name, address and Aadhaar number

7. Identity card (subject to the banks satisfaction)

8. Letter from a recognized public authority or public servant verifying the identity and
residence of the customer to the satisfaction of bank

9. Letter issued by UIDAI containing details of name, address and Aadhaar number
(Aadhaar Card)

The Bank shall not rely upon Ration Card as a document to establish ones identity

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Address Proof

o Telephone bill

o Bank account statement

o Letter from any recognized public authority

o Electricity bill

o Ration card

o Letter from employer (subject to satisfaction of the bank)

o Any proof of identity providing the address as declared in account opening form.

o Letter issued by UIDAI containing details of name, address and Aadhaar number
(Aadhaar Card)

MINORS ACCOUNTS -

i. In terms of Indian Majority Act, a minor is a person below the age of 18 years, but in case of
minor whose guardian is appointed by the Court, he/she attains the majority at the age of 21
years.

ii. The minor can open Savings Bank Account and the same can be operated by the natural
guardian/guardian. It is permissible to open any type of deposit account in the name of a minor
within the framework for minor account but no current account should be opened, in the name of
the minor.

iii. On attaining majority, the erstwhile minor should confirm the balance in his/her account and if
the account is operated by the natural guardian /guardian, fresh specimen signature of erstwhile
minor duly verified by the natural guardian would be obtained and kept on record for all
operational purposes.

iv. The Bank shall normally allow a literate minor over the age of 10 years to operate a Savings Bank
account and also Recurring Deposit account. The Bank shall take adequate care to see that the
minor is receiving payment himself/herself when such account is opened. No cheque book will be
issued in these accounts.

Joint Account Holders-

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Joint account is a bank account shared by two or more individuals. Any individual who is a member of
the joint account can withdraw from the account and deposit to it. Usually, joint accounts are shared
between close relatives or business partners.

Joint accounts are often created in order to avoid probate. If two individuals open a joint account and one
of them dies, the other person is entitled to the remaining balance and liable for the debt of that account.

Sometimes a temporary joint account is opened by two parties entering into a transaction where one party
needs a security for the fulfillment of the transaction and the other party has to pay the sum (deposit),
being the security for the other party. Any payment from the joint account, or return of the deposit from
the joint account, will only be possible if both parties sign a joint written instruction to the bank. It is not
possible that only one of the parties gives instruction for payments of the joint account.

Because (European) banks are not very interested in opening temporary joint accounts, as they are
normally used for one transaction only, there are specialized parties or companies taking care of such
accounts as trustees. A temporary joint account is normally closed after the transaction for which it was
opened has been concluded. Temporary joint accounts are used in transactions in which large sums of
money are involved as an alternative to letters of credit or escrow accounts.

Partnership Firms-

Partnership is defined as a relation between two or more persons who have agreed to share the profits of a
business carried on by all of them or any of them acting for all. The owners of a partnership business are
individually known as the "partners" and collectively as a "firm". Its main features are:-

A partnership is easy to form as no cumbersome legal formalities are involved. Its registration is
also not essential. However, if the firm is not registered, it will be deprived of certain legal
benefits. The Registrar of Firms is responsible for registering partnership firms.

The minimum number of partners must be two, while the maximum number can be 10 in case of
banking business and 20 in all other types of business.

The firm has no separate legal existence of its own i.e., the firm and the partners are one and the
same in the eyes of law.

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In the absence of any agreement to the contrary, all partners have a right to participate in the
activities of the business.

Ownership of property usually carries with it the right of management. Every partner, therefore,
has a right to share in the management of the business firm.

Liability of the partners is unlimited. Legally, the partners are said to be jointly and severally
liable for the liabilities of the firm. This means that if the assets and property of the firm is
insufficient to meet the debts of the firm, the creditors can recover their loans from the personal
property of the individual partners.

Restrictions are there on the transfer of interest i.e. none of the partners can transfer his interest in
the firm to any person (except to the existing partners) without the unanimous consent of all other
partners.

The firm has a limited span of life i.e. legally; the firm must be dissolved on the retirement,
lunacy, bankruptcy, or death of any partner.

A partnership is formed by an agreement, which may be either written or oral. When the written
agreement is duly stamped and registered, it is known as "Partnership Deed". Ordinarily, the rights, duties
and liabilities of partners are laid down in the deed. But in the case where the deed does not specify the
rights and obligations, the provisions of THE INDIAN PARTNERSHIP ACT, 1932 will apply. The deed
generally contains the following particulars:-

Name of the firm.

Nature of the business to be carried out.

Names of the partners.

The town and the place where business will be carried on.

The amount of capital to be contributed by each partner.

Loans and advances by partners and the interest payable on them.

The amount of drawings by each partner and the rate of interest allowed thereon.

Duties and powers of each partner.

Any other terms and conditions to run the business.

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Advantages

Ease of formation

Greater capital and credit resources

Better judgment and more managerial abilities

Disadvantages

Absence of ultimate authority

Liability for the actions of other partners

Limited life

Unlimited liability

Partnership is an appropriate form of ownership for medium sized business involving limited capital. This
may include small scale industries, wholesale and retail trade; small service concerns like transport
agencies, real estate brokers; professional firms like charted accountants, doctors' clinic, attorney or law
firms etc.

Stock companies with limited liability-

Many states allow a business form called the limited liability company (LLC). The LLC arose from
business owners' desire to adopt a business structure permitting them to operate like a traditional
partnership. Their goal was to distribute income to the partners (who reported it on their individual
income tax returns) but also to protect themselves from personal liability for the business's debts, as with
the corporate business form. In general, unless the business owner establishes a separate corporation, the
owner and partners (if any) assume complete liability for all debts of the business. Under the LLC rules,
however, an individual isn't responsible for the firm's debt, provided he or she didn't secure them
personally, as with a second mortgage, a personal credit card or by putting personal assets on the line.

The LLC offers a number of advantages over subchapter S corporations. For example, while S
corporations can issue only one class of the company stock, LLCs can offer several different classes with
different rights. In addition, S corporations are limited to a maximum of 75 individual shareholders (who
must be U.S. residents), whereas an unlimited number of individuals, corporations, and partnerships may
participate in an LLC.

The LLC also carries significant tax advantages over the limited partnership. For instance, unless the
partner in a limited partnership assumes an active role, his or her losses are considered passive losses and

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cannot be used as tax deductions to offset active income. But if the partner takes an active role in the
firm's management, he or she becomes liable for the firm's debt. It's a catch-22 situation. The owners of
an LLC, on the other hand, do not assume liability for the business' debt, and any losses the LLC incurs
can be used as tax deductions against active income.

However, in exchange for these two considerable benefits, the owners of LLCs must meet the
"transferability restriction test," which means the ownership interests in the LLC are not transferable
without restriction. This restriction makes the LLC structure unworkable for major corporations. For
corporations to attract large sums of capital, their corporate stock must be easily transferable in the stock
exchanges. However, this restriction isn't as problematic for smaller companies, where stock ownership
transfers take place relatively infrequently.

Since the LLC is a relatively new legal form for businesses, federal and state governments are still
looking at ways to tighten regulations concerning them. Unfortunately, some investment promoters use
LLCs to evade securities laws. That's why it's imperative to consult with your attorney and CPA before
deciding which corporate structure makes sense for your business.

Executors and Trustee-

1. Executor Role

o As required by law, the executor guides your will through probate, gathers the estate's
assets, safeguards estate property, fulfills all valid claims against the estate and distributes
the estate property to beneficiaries. The executor can employ professional help to assist
with these tasks, especially those that require financial expertise. Keep in mind that since
the executor can use the estate's assets to pay the professional for their services, the
distributions available for beneficiaries may be reduced.

2. Trustee Role

o Leaving your estate to a trust limits the executor's role to passing on the assets to the
trustee. The trustee manages and distributes funds and assets of the trust. In addition to
duties such as collecting assets and paying claims against the estate, trustees must consult
regularly with the beneficiaries on various issues such as investments and withdrawals.
The trustee is responsible for "reasonable and prudent" management of the trust funds,
and the beneficiaries have the power to sue the trustee for any mismanagement.

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3. Executors vs. Trustees

o Although the functions of an executor and trustee are similar, there are slight differences
in their roles. For example, while an executor's role may last for a couple of years, a
trustee's duties can go on for generations which is why a bank or trust company should be
appointed the successor trustee. Many estates do not require the executor to possess legal
or financial expertise; trustees, however, are the official managers of the estate and must
possess the expertise to this end.

Whom to Appoint

o There are certain factors you should consider when appointing an executor or trustee for
your will. The candidate should have sufficient time and capability to fulfill your wishes.
Family members may not be appropriate for the executor role because they may have
conflicts of interest. Also, family members may lack the necessary expertise to execute
your will. Executors who are older than you are also not the best choice as the older
individual may predecease you. Appointing trustees and executors who live overseas is
also not advisable; this can cause delays and complications in the execution process.

Joint Hindu Family-

A Hindu Joint Family or Joint Family is an extended family arrangement prevalent among Hindus of the
Indian subcontinent, consisting of many generations living under the same roof. All the male members are
blood relatives and all the women are either mothers, wives, unmarried daughters, or widowed relatives,
all bound by the common [sapinda] relationship. The joint family status being the result of birth,
possession of joint cord that knits the members of the family together is not property but the relationship.
The family is headed by a patriarch, usually the oldest male called "[Karta]", who makes decisions on
economic and social matters on behalf of the entire family. The patriarch's wife generally exerts control
over the kitchen, child rearing and minor religious practices. All money goes to the common pool and all
property is held jointly.

There are several schools of Hindu Law, such as Mitakshra, the Dayabhaga, the Marumakkathayam, the
Santayana etc. Broadly, Mitakshra and Dayabhaga systems of laws are very common. Family ties are
given more importance than marital ties. The arrangement provides a kind of social security in a familial
atmosphere.

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Key aspects of a joint family are:

Head of the family (Karatha) takes all decision regarding financial and economic aspects of
family.

All members live under one roof.

Share the same kitchen.

Three generations living together (though often two or more brothers live together, or father and
son live together or all the descendants of male live together).

A common place of worship.

All decisions are made by the male head of the family- patrilineal, patriarchal.

No division of property until the death of the Karta (head of family or older male person).

Income earned by the HUF and expenses incurred by the HUF are of the whole family and not of
any specific individual. All Incomes are also taxed in the hands of the HUF and not any specific
individual.

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CHAPTER-5

BANKING INNOVATIONS

E-Banking:

E-banking made its debut in UK and USA 1920s. It becomes prominently popular during
1960, through electronic funds transfer and credit cards. The concept of web-based baking came into
existence in Europe and USA in the beginning of 1980.

In India e-banking is of recent origin. The traditional model for growth has been through
branch banking. Only in the early 1990s has there been a start in the non-branch banking services. The
new private sector banks and the foreign banks are handicapped by the lack of a strong branch network in
comparison with the public sector banks. In the absence of such networks, the market place has been the
emergence of a lot of innovative services by these players through direct distribution strategies of non-
branch delivery. All these banks are using home banking as a key pull factor to remove customers away
from the well entered public sector banks.

Many banks have modernized their services with the facilities of computer and electronic
equipments. The electronics revolution has made it possible to provide ease and flexibility in banking
operations to the benefit of the customer. The e-banking has made the customer say good-bye to huge
account registers and large paper bank accounts. The e-banks, which may call as easy bank offers the
following services to its customers:

Credit Cards Debit Cards


ATM
E-Cheques
EFT (Electronic Funds Transfer)
D-MAT Accounts
Mobile Banking
Telephone Banking
Internet Banking
EDI (Electronic Data Interchange)

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Benefits of E-banking:

To the Customer:
Anywhere Banking no matter wherever the customer is in the world. Balance enquiry,
request for services, issuing instructions etc., from anywhere in the world is possible.
Anytime Banking Managing funds in real time and most importantly, 24 hours a day,
7days a week.
Convenience acts as a tremendous psychological benefit all the time.
Brings down Cost of Banking to the customer over a period a period of time.
Cash withdrawal from any branch / ATM
On-line purchase of goods and services including online payment for the same.
To the Bank:
Innovative, scheme, addresses competition and present the bank as technology driven in
the banking sector market
Reduces customer visits to the branch and thereby human intervention
Inter-branch reconciliation is immediate thereby reducing chances of fraud and
misappropriation
On-line banking is an effective medium of promotion of various schemes of the bank, a
marketing tool indeed.
Integrated customer data paves way for individualized and customized services.

Internet Banking:

Internet banking involves use of internet for delivery of banking products and services. With
internet banking is now no longer confirmed to the branches where one has to approach the branch in
person, to withdraw cash or deposits a cheque or request a statement of accounts. In internet banking, any
inquiry or transaction is processed online without any reference to the branch (anywhere banking) at any
time.

The Internet Banking now is more of a normal rather than an exception due to the fact
that it is the cheapest way of providing banking services. As indicated by McKinsey Quarterly research,
presently traditional banking costs the banks, more than a dollar per person, ATM banking costs 27 cents
and internet banking costs below 4 cents approximately. ICICI bank was the first one to offer Internet
Banking in India.

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Benefits of Internet Banking:

Reduce the transaction costs of offering several banking services and diminishes the need for
longer numbers of expensive brick and mortar branches and staff.
Increase convenience for customers, since they can conduct many banking transaction 24 hours a
day.
Increase customer loyalty.
Improve customer access.
Attract new customers.
Easy online application for all accounts, including personal loans and mortgages

Financial Transaction on the Internet:

Electronic Cash: Companies are developing electronic replicas of all existing payment system: cash,
cheque, credit cards and coins.

Automatic Payments: Utility companies, loans payments, and other businesses use on automatic
payment system with bills paid through direct withdrawal from a bank account.

Direct Deposits: Earnings (or Government payments) automatically deposited into bank accounts, saving
time, effort and money.

Stored Value Cards: Prepaid cards for telephone service, transit fares, highway tolls, laundry service,
library fees and school lunches.

Point of Sale transactions: Acceptance of ATM/Cheque at retail stores and restaurants for payment of
goods and services. This system has made functioning of the stock Market very smooth and efficient.

Cyber Banking: It refers to banking through online services. Banks with web site Cyber branches
allowed customers to check balances, pay bills, transfer funds, and apply for loans on the Internet.

Credit Card:

Credit Card is postpaid or pay later card that draws from a credit line-money made
available by the card issuer (bank) and gives one a grace period to pay. If the amount is not paid
full by the end of the period, one is charged interest.

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A credit card is nothing but a very small card containing a means of identification,
such as a signature and a small photo. It authorizes the holder to change goods or services to his
account, on which he is billed. The bank receives the bills from the merchants and pays on behalf
of the card holder.

These bills are assembled in the bank and the amount is paid to the bank by the card holder
totally or by installments. The bank charges the customer a small amount for these services. The
card holder need not have to carry money/cash with him when he travels or goes for purchasing.

Credit cards have found wide spread acceptance in the metros and big cities.
Credit cards are joining popularity for online payments. The major players in the Credit Card
market are the foreign banks and some big public sector banks like SBI and Bank of Baroda.
India at present has about 3 million credit cards in circulation.

Advantages

1. Buy now and pay later


2. The temporary interest-free loan that a customer has access to even if he or she pays in full a few
days or weeks later.
3. Cards are safer than cash.
4. Cards are accepted almost everywhere today, including the Olympics.
5. Cards help out in emergencies.
6. Cards help guarantee reservations when you are especially vulnerable, such as when you are
traveling away from home.
7. Cards immediately identify you as a qualified buyer and give you status with merchants and
friends.
8. Cards may protect the consumer who receives faulty merchandise (i.e., the customer can delay
payment under the terms of many plans until a problem with a previously charged purchase has
been worked out satisfactorily.

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Disadvantages

1. Consumers may overuse them because they are so easy to use and so readily accepted in so
many places. Moreover, credit card offers to households have reached record levels in recent
years; more than 25 per family per year, on average.
2. Many consumers think of them as extra income, not debt, but debt is what you take on when you
use your credit card.
3. Delay in paying can hurt your credit bureau report (credit rating) and make future borrowing
more costly as well as create other problems (e.g., in getting a job or qualifying for insurance
coverage). Many people dont realize that credit bureaus scattered around the United States and
other countries as well usually have a record of every card account as well as any other borrowing
that we take on. When we go to borrow more, a lender may see all of the debt we have already
taken on and refuse to make us a new loan.
4. Credit cards commit our future income will our future income be enough? Its easy to get
overwhelmed with credit card debt. U.S. household bankruptcies have averaged more than a
million per year in every year since 1995. Moreover, most credit card charges.

Debit Cards:

Debit Card is a prepaid or pay now card with some stored value. Debit Cards quickly debit or
subtract money from ones savings account, or if one were taking out cash.

Every time a person uses the card, the merchant who in turn can get the money
transferred to his account from the bank of the buyers, by debiting an exact amount of purchase from the
card along with a Personal Identification Number (PIN).

When he makes a purchase, he enters this number on the shops PIN pad. When the card
is swiped through the electronic terminal, it dials the acquiring bank system either Master Card or Visa
that validates the PIN and finds out from the issuing bank whether to accept or decline the transaction.
The customer never overspread because the amount spent is debited immediately from the customers
account. So, for the debit card to work, one must already have the money in the account to cover the
transaction. There is no grace period for a debit card purchase. Some debit cards have monthly or per
transaction fees.

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1. Prepaid card

Debit card acts as a type of prepaid card. It is so, since it already has a sufficient amount of cash
balance in its holders bank account. It permits to carry on the value of the transaction (i.e. purchases)
to the extent of available balance in its holders bank account.

2. Nominal fee

Bank issuing a debit card charges an annual fee for the issuance and maintenance of card. This fee
charged is very nominal in nature. Generally, bank charges the fee on a per annum or yearly basis.
Such a fee gets automatically debited (deducted) from the debit-cardholders bank account.

3. Alternative to cash

Debit card acts as an alternative mode of payment for executing various cash-related financial
transactions. It can be used for the purchases of goods and receipt of services. In its presence, there is
no need to carry a large amount of cash. Thus, it helps to avoid carrying huge amount of cash while
traveling and minimize risk of loss due to theft, damage, etc.

4. Immediate transfer of funds

Debit card ensures immediate transfer of funds in the merchants or dealers bank account. Such a
transfer of funds takes place almost instantly at the moment of purchases of goods and receipts of

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services. With its use, there is no need to visit banks office premise and do a manual transfer of cash in
the merchants or dealers bank account.

Thus, it saves precious time and gives ease, safety, and comfort to its holder in his or hers finance-
related activities.

5. Instant withdrawal of cash

The debit card facilitates instant withdrawal of cash from any nearest ATM. This helps its holder to
avoid a personal visit to banks office premise and wait in a long time-consuming queue.

In short, it also acts as an ATM card to meet its holders cash-related needs, anytime and anywhere.

6. Easy to manage

Debit card is very easy to carry, handle and manage while traveling to outstations or overseas. Being
small, thin, and flat and having a negligible weight it easily fits in any pocket. It can be handled very
freely even with just two fingers. Managing it is also not a big problem.

A cardholder must just take enough care to see to it that:

1. Debit card is always covered with a thick plastic cover to avoid scratching of its sensitive surface.
2. It doesnt come in contact with contaminated water and heat.
3. It doesnt get folded accidentally; this helps to prevent its breakage.
4. It is placed safely in a convenient location which one remembers. This helps to avoid it getting
misplaced and lost due to negligence.

Earns bonus points

Now-a-days, the competition among debit card providers (banks) is challenging. Today, most banks
offer bonus points to encourage their cardholders (customers) to make purchases using their debit
cards. Banks are able to offer such points to their cardholders as its merchants and not them who
actually run the reward program.

After every successful sale, a merchant gives the bank a small cut-off or percentage as a commission.
This commission is further shared or divided by the bank with its holder (as a reward) who did the
original purchase. Thus, in return, it finally also helps the cardholder earn bonus points on selected
financial transactions executed by him or her via a debit card.

In this cycle, all, viz., bank, merchant, and cardholder are directly benefited. Bank offers an incentive
like this to improve the sale of the products in the ordinary course of business and contribute in the
economic growth.

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Gifts on redeeming points

As we have seen above, debit card helps to accumulate bonus points through a reward program. These
points can be redeemed by the cardholder (within cards expiration date) at any merchant website
and/or outlet that bank has already authorised. While redeeming accrued points, cardholder gets an idea
of its worthiness in terms of amount, and so he/she proceeds to claim gifts nearly equal to that amount.

Cash back

In cash back, cardholder gets a percentage of the total amount spent on purchases made using his card.
In other words, when a holder use his debit card to buy something then a percentage of entire money he
spent usually in a month is credited-back to his account once every following month.

Consider for an example, a debit-cardholder spends 100 dollars three times a month on shopping and
the cash-back offer on shopping is 10 percent. In such a case, cardholder will get back $30, which is
10% of $300 ($100 3) returned to his account in the coming month.

However, to avail this offer some minimal amount must be spent on some minimum number of
transactions at least once a month in a specific currency by eligible cardholders only.

Free insurance coverage

Debit-cardholders also get free insurance coverage. The bankers provide such insurance facilities to
attract new customers and to maintain their current customer strength.

They provide various types of insurances for free to their cardholders:

0. Insurance on loss of debit card.


1. Purchase insurance.
2. Personal insurance.
3. Accidental insurance.
4. Travel insurance.

However, these types of insurances are given freely to cardholders depending on which type of debit
card they have possessed.

The cost of insurance premium is borne by the bankers who provide debit cards to their customers.

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DEMAT

Demat refers to a dematerialised account. Demat account is just like a bank account where actual money
is replaced by shares. A Demat Account is required to buy or sell stocks.
A Demat Account holds portfolio of shares in electronic form and obviates the need to hold shares in
physical form. IN India, the government has mandated two entities National Securities Depository, or
NSDL, and Central Depository Services (India), or CDSL to be the custodian of dematerialized
securities. As of April 2006, it became mandatory that any person holding a demat account should
possess a permanent Account number (PAN).

Procedure for getting Demat account:-

1. Fill demats request form (DRF) (obtained from a depository participant or DP with whom your
depository account is opened).

2. Deface the share certificate(s) you want to dematerialize by writing across Surrendered for
dematerialization.

3. Submit the DRF & share certificate(s) to DP. DP would forward them to the issuer / their R&T Agent.

4. After dematerialization, your depository account with your DP, would be credited with the
dematerialised securities.

ADVANTAGES OF DEMAT ACCOUNT

A Demat Account offers a secure and convenient way to keep track of shares.

It provides the immediate transfer of securities.

On transfer of security there is no stamp duty.

Cost reduction on transaction.

Nomination facility is available.

Reduction in paperwork involved in transfer of securities.

Elimination of risks associated with physical certificates such as bad delivery, fake securities,
delays, thefts etc.

Any change in address recorded with DP gets registered electronically with all companies in
which investor holds securities eliminating the need to correspond with each of them separately.

Transmission of securities is done by DP eliminating correspondence with companies

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Automatic credit into demat account of shares, arising out of bonus/split/consolidation/merger


etc.

Holding investments in equity and debt instruments in a single account.

You will receive the statement of account of your transactions/holdings periodically.

Automatic Teller Machine:

The introduction of ATMs has given the customers the facility of round the clock banking. The
ATMs are used by banks for making the customers dealing easier. ATM card is a device that allows
customer who has an ATM card to perform routine banking transaction at any time without interacting
with human teller. It provides exchange services. This service helps the customer to withdraw money
even when the banks ate closed. This can be done by inserting the card in the ATM and entering the
Personal Identification Number and secret Password.

ATMs are currently becoming popular in India that enables the customer to withdraw
their money 24 hours a day and 365 days. It provides the customers with the ability to withdraw or
deposit funds, check account balances, transfer funds and check statement information. The advantages of
ATMs are many. It increases existing business and generates new business. It allows the customers.

To transfer money to and from accounts.


To view account information.
To order cash.
To receive cash.

Advantages of ATMs:

To the Customers

ATMs provide 24 hrs. 7 days and 365 days a year service.


Service is quick and efficient
Privacy in transaction
Wider flexibility in place and time of withdrawals.
The transaction is completely secure you need to key in Personal Identification Number
(Unique number for every customer).

To Banks

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Alternative to extend banking hours.


Crowding at bank counters considerably reduced.
Alternative to new branches and to reduce operating expenses.
Relieves bank employees to focus on more analytical and innovative work.
Increased market penetration.

ATMs can be installed anywhere like Airports, Railway Stations, Petrol Pumps, Big
Business arcades, markets, etc. Hence, it gives easy access to the customers, for obtaining cash.

The ATM services provided first by the foreign banks like Citibank, Grind lays bank and
now by many private and public sector banks in India like ICICI Bank, HDFC Bank, SBI, UTI Bank etc.
The ICICI has launched ATM Services to its customers in all the Metropolitan Cities in India. By the end
of 1990 Indian Private Banks and public sector banks have come up with their own ATM Network in the
form of SWADHAN. Over the past year up to 44 banks in Mumbai, Vashi and Thane have become a
part of SWADHAN a system of shared payments networks, introduced by the Indian Bank Association
(IBA).

Electronic Funds Transfer (EFT):

Many modern banks have computerized their cheque handling process with computer networks and
other electronic equipments. These banks are dispensing with the use of paper Cheques. The system
called electronic fund transfer (EFT) automatically transfers money from one account to another. This
system facilitates speedier transfer of funds electronically from any branch to any other branch. In this
system the sender and the receiver of funds may be located in different cities and may even bank with
different banks. Funds transfer within the same city is also permitted. The scheme has been in operation
since February 7, 1996, in India.

The other important type of facility in the EFT system is automated clearing houses.
These are the computer centers that handle the bills meant for deposits and the bills meant for payment. In
big companies pay is not disbursed by issued Cheques or issuing cash. The payment office directs the
computer to credit an employees account with the persons pay.

MICR-Magnetic Ink Character Recognition

International Academy of Management and Entrepreneurship Mr. Shree Harsha C , Asst Professor 82
2015
Banking Law and Operations

Magnetic Ink Character Recognition, or MICR, is a character recognition technology


used primarily by the banking industry to facilitate the processing of cheques. MICR characters are
printed in special typefaces with a magnetic ink or toner, usually containing iron oxide. A special machine
is used to read these characters, which can be easily read by humans too. The characters are usually
printed on the bottom strip of cheque leaf. This MICR code is used By RBI (Reserve bank Of India)
clearing process to identify the branch and bank for clearing processes.

Advantage:

1. Ease of Readability and High Security


o The use of iron oxide-based ink ensures MICR characters are readable even if a document is
obscured by miscellaneous marks or overprinted. MICR systems provide a high level of security
since MICR characters are required to follow a stringent format and use precise iron oxide ink,
which makes the documents difficult to forge.

2. Small Deciphering Error Rate

o The error rate for reading MICR characters is small as compared to other character recognition
systems. MICR scanners precisely and accurately decipher the characters, provided they follow
standards set out by the American National Standards Institute (ANSI) and the American Bankers
Association (ABA). For example, there is typically only one read error for every 20,000 to 30,000
checks processed by a MICR scanner.

Disadvantage:

1. Time Consuming Standards


o The printing of MICR is demanding, setting precise but difficult-to-achieve standards, which is a
distinct disadvantage in terms of time consumption. The American National Standards Institute
(ANSI) implements and manages all MICR printing standards. It sets precise requirements for
MICR character fonts, MICR registration, paper-moisture content and grain and toner adhesion.
All MICR character fonts must meet ANSI requirements. Standard X9.27-1995 lays down font
standards while ANSI standard X9.7-1990 specifies line positioning of MICR characters.
Additionally, the two published standards currently used for MICR includes the American
Bankers Association (ABA) standards 092200 and ABA 092700, which stipulate how and where
the MICR characters are printed on the check. ABA 092200 specifies the printing requirements
for MICR and ABA 092700 stipulates printing locations and placement. MICR fonts that do not

International Academy of Management and Entrepreneurship Mr. Shree Harsha C , Asst Professor 83
2015
Banking Law and Operations

adhere to these standards will lead to rejected checks at banks and processing errors at other
institutions.

2. Expensive Equipment

o MICR readers are expensive and capable of recognizing only MICR fonts written in a specific
format. MICR printers run on cartridges that cost far more than plain ink toner cartridges. As of
March 2010, a single HP 05A MICR toner cartridge costs $110 and an HP 42X MICR toner
cartridge costs $248, as opposed to the price of a single HP 60XL inkjet toner cartridge that costs
$33.

REAL-TIME GROSS SETTLEMENT

Real time gross settlement systems (RTGS) are specialist funds transfer systems where
transfer of money or securities takes place from one bank to another on a "real time" and on
"gross" basis. Settlement in "real time" means payment transaction is not subjected to any
waiting period. The transactions are settled as soon as they are processed. "Gross settlement"
means the transaction is settled on one to one basis without bunching or netting with any other
transaction. Once processed, payments are final and irrevocable.

RTGS systems are typically used for high-value transactions that require immediate clearing, in
some countries the RTGS systems may be the only way to get same day cleared funds and so
may be used when payments need to be settled urgently such as when purchasing a house.
However most regular payments would not use a RTGS system, but instead would use a national
payment system or network that allows participants to batch and net payments.

RTGS systems are usually operated by a country's Central bank as it is seen as a critical
infrastructure for a countries economy. Economists view that an efficient national payment
system reduces the cost of exchanging goods and services, and is indispensable to the
functioning of the interbank, money, and capital markets. A weak payment system may severely
drag on the stability and developmental capacity of a national economy; its failures can result in
inefficient use of financial resources, inequitable risk-sharing among agents, actual losses for

Questions

International Academy of Management and Entrepreneurship Mr. Shree Harsha C , Asst Professor 84
2015
Banking Law and Operations

Section -A

1. What is banking innovations?


2. Enlist any four banking innovations?
3. Expand EFT?
4. Define Electronic banking?
5. What is internet banking?
6. What is mobile banking?
7. What is debit card?
8. What is credit card?
9. What is DEMAT services?
10. Expand RTGS and give meaning.

Section B

1. State the advantages of electronic Banking services?

2. Give the common features of internet banking?

3. List out the mobile banking services?

4. Explain the advantages of mobile banking, debit card, credit card, ATM banking?

5. Explain the procedure of opening demat account?

6. Differentiate between bank account and Demat account?

International Academy of Management and Entrepreneurship Mr. Shree Harsha C , Asst Professor 85