Unit - 1

BANKER AND CUSTOMER RELATIONSHIP

Banking Company
U/s 5(c) of the Banking Regulation Act, 1949, defined Banking Company as – “any
company which transacts the business of Banking in India”.

Banking
U/s 5(b) of the Banking Regulation Act, 1949, defined Banking as – “accepting, for
the purpose of lending or investment of deposits of money from the public, repayable on
demand or otherwise, and withdrawable by cheque, draft, and order or otherwise”.

Bank
The term bank refers to a financial institution which deals with deposits and advances
and other related services. Bank receives money from those who want to save in the form of
deposits and it lends money to those who need it.

Features of Bank
 Bank should deals with money.
 Individual / Firm / Company.
 Acceptance of deposit.
 Lending loan.
 Agency and utility services.
 Ever increasing function.
 Payment and withdrawals.
 Name Identity – “Bank”.
 Banking business
 Bridge gap between savers and borrowers.
 Profit motive through services.

Banker
A person, who performs various banking operations which are specified as conducting
savings account, current account or term deposit account for his customers, collects cheques
or bills amount, paying cheques amount on behalf of his customers.

Customer
The word ‘Customer’ has been derived from the word ‘Custom’ which means a
‘Habit of tendency’, ‘to do things in a regular or a particular manner’.
A person who has an account either, savings, current, term deposit account or
maintains any relationship with a banker such as deposit cash to others account, makes
Demand Draft, deposits cheques to other account, etc.,.
Central Bank of India – “A customer is a person who has the habit of resorting to
the same place or person to do business”.

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 Features of Customer
 He must have any type of account with the bank.
 He should deal at least single transaction to be called as a customer.
 The transactions must be of banking in nature.

Relationship between Banker and Customer

Banker and Customer Relationship
Primary Secondary Special
1. Debtor and 1. Bailee & Bailor Obligations Rights
Creditor 2. Trustee & 1. Honour Customer 1. Lien
Relationship Beneficiary Cheque 2. Charge Interest
2. Creditor and 3. Agent & Principal 2. Maintain Customer 3. Charge Commission
Debtor 4. Pledgee & Secrecy 4. Incidental Charges
Relationship Pledgor
3. Receive the cheque 5. Commitment
(Mortgagee &
and other instruments Charges
Mortgagor)
5. Advisor & Client
for collection 6. Set-off
6. Guarantor & 4. Give reasonable 7. Apportionment of
Guarantee notice before closing Payments
the customer’s a/c 8. Not to produce the
5. Honour the cheques of books of accounts
customer across the 9. Garnishee Order
counter

Primary Relationship
1. Debtor and Creditor Relationship
Banker – Debtor
Customer – Creditor
When a Customer opens any kind of account with a bank and deposits money
in his account, the banker becomes the debtor of the customer and the customer
becomes the creditor.
Here Bank owes money to the customer and customer has the right to receive
the money by demand. Hence, in this situation Debtor (Bank) & Creditor (Customer)
relationship forms between Banker and Customer.
The money so deposited by customer becomes bank’s property and the baner
has a right to use the money. The bank is not bound to inform the depositor, the
manner of utilization of funds deposited by him.
The creditor does not get any hold or control over the assets of the Debtor
(Bank) and the Creditor (Customer) will be an unsecured Creditor.

“Bank is considered as privileged Debtor” / Special features of Debtor and Creditor

Relationship
a) Banker is Dignified Debtor – Banker borrows money from the customer through
various schemes and while borrowing money customer goes to banker and deposit
money with him, but banker never goes and ask customer to lend. Moreover, the
customer will have full confidence on banker, hence, Banker is a dignified Debtor.

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 b) Repayment of amount on demand – Banker can utilize borrowed amount for further
investment purpose and banker can retain the amount with bank until customer
demands for the amount.
c) Customer is unsecured creditor – customer is not having any charge on any asset of
the bank. He if only an unsecured creditor. (But today bank deposits are insured to
the certain extent)
d) Demand must be in right place – as mentioned before customer fund should be
repayable on demand and the demand must be made in right place, here banker no
need to pay amount to his customer in any other place except bank location. Reason –
any bank branch other than the one in which the amount deposited cannot know the
proper position of the account. The other branches cannot identify the customers as
they do not have specimen signature.
e) Demand must be made in right time – the demand should be made by the customer
in working days and during the business hours. If any payment is made on holidays
and in non-business it will not be a payment in due-course.
f) Demand must be in proper form – the demand should be made in proper form, i.e.,
in writing and in the stipulated form, cheque, or pay order. Oral demand will not be
accepted.

2. Creditor and Debtor Relationship

Banker – Creditor
Customer – Debtor
Lending money is the primary activity of the banker, the resources mobilized
by banks are utilized for lending operations. In case any loans/advances account, the
banker becomes the Creditor and the customer becomes the Debtor.
The relationship in the first case will reverses when he borrows money from
the bank or borrower executes documents and offers security to the bank before
utilizing the credit facility.
The creditor and debtor relationship remains between two parties, until the
customer repays the full loan amount along with the interest.

Secondary Relationship
1. Bailee & Bailor
Bank – Bailee
Customer – Bailor
Bailment is a contract for delivering goods by one party to another to be held
in trust for a specific period and returned when the purpose is ended.
Bailor a person who give the possession of the goods to another person
(Bailee) under Bailment agreement.
Bailee a person who possess the goods which belongs to other called Bailer.
When customer takes Safe Locker Facility of gold jewellery or any other
ornament with Bank, Bailee and Bailor relationship lies between Banker and
Customer. Here customer just give up the possession of goods to bank, but not the
ownership and this relationship ends when customer gets back the possession of his
goods.

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2. Trustee & Beneficiary
Bank – Trustee
Customer – Father
Beneficiary – Son
Trustee, a person or an entity who takes care or administrates the assets or
fund and performs certain functions for the gain or benefit of other person, called
Beneficiary.
Beneficiary, a person who receives benefits from trustee as per the
instructions provided by the customer.
When a person gives certain standing instructions to the banker about the
usage of certain sum of money, say for his son’s educational purpose.
Bank should use deposited fund only for his son’s educational purpose.
Benefit of the third person.
3. Agent & Principal
Bank – Agent
Customer – Principal
Sec. 182 of the ‘Indian Contract, 1872, - Agent – a person employed to do any
act for another or to represent another in dealing with third persons.
Principal, the person for whom such act is done or who is so represented.
Thus, the Bank provides various agency functions to its customer. It collects
cheques, dividends, hundies, bill on behalf of customer
It makes payment of electricity bill, insurance premium, tax, telephone bills on
behalf of his its customers. It sells and purchases securities on behalf of customer.
During these circumstances Agent and Principal relationship form between Banker
and Customer.
Therefore, the Banker acts as an Agent and functions for its client, and the
customer becomes principal and instructs to act in a particular manner.
4. Pledgee & Pledgor / Mortgagee & Mortgagor
Bank – Pledgee
Customer – Pledgor
The relationship between customer and banker can be that of pledgee and
pledger / Mortgagee and Mortgagor as well. This happens when a customer pledges
(promises) certain assets or security with a banker in order to get a loan.
In this case, the customer becomes the pledger / Mortgagor and the banker
becomes the pledge / Mortgagee.
Under this agreement, the assets or security will remain with banker until the
customer repays the loan.
5. Advisor & Client
Bank – Advisor
Customer – Client
The banker acts as an advisor when a customer invests in securities, while
giving advice the banker has to take maximum care and caution. Here, the banker
becomes an advisor and the customer becomes the client.
6. Guarantor & Guarantee
Bank – Guarantee
Customer – Guarantor
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 At the time of International trade importer needs guarantee to receive goods
from the exporter. Here, bank gives guarantee to its customer. Bank issues “Letter
of Credit” to exporter by stating strength of importer financial position, so that it
strengthens the customer international trade.

Special Relationship
When customer opens any account with the Bank, both customer and banker get some
rights and obligations. These rights and obligations are reciprocal,
 Customers Rights are Bankers Obligations,
 Banker Rights are Customer Obligations.

A. Obligations of a Banker
1) Obligations to Honour Customer Cheque
The banker has to oblige the cheque presented by the customer for payment
without fail. The basic contract between the banker and customer is that whenever
the customer demand, payment needs to be made.
The Drawee (Banker) of a cheque having sufficient funds of the Drawer
(Customer) in his hands.
Sec. 31 of Negotiable Instrument Act, 1881, “the drawee of a cheque having
sufficient funds in his hands, properly applicable to the payment of such cheques,
must pay the cheque when duly required to do so and in default of such payment must
compensate the drawer for any loss or damage caused by such default”.
The Banker must honour the customer cheque in the following situations-
i. When there is credit balance with customer account
The customer should have credit balance in his account which should be equal to
the amount stated in the cheque. But the cheque cannot be dishonoured, even
when there is a Debit balances in the current account under overdraft facilities.
The banker is bound to honour the cheques up-to the sanction limit.
If so O.D facility is not given, the cheque can be dishonoured when sufficient fund
is not available in the credit of the customer’s account.
Even the credit balance in another current account in another branch of the bank
also cannot be considered. Similarly, the bank need not wait for the collection of
bills or cheques to be credited to the account.
ii. Applicability of funds
The balance of amount in customer account should be applicable to the
presented cheque. If the availability of funds is not applicable to the payment
of cheque then the banker need not to honour the cheque.
iii. Correctness of cheque
To honour the cheque there should be some requirement and the same has to
be filled i.e., name, amount in words and rupees, date, signature without fail.
iv. Presented within a reasonable time
The banker must accept the cheque presented in working hours of bank and
working day of the bank. A cheque becomes stale in case it is not presented
within 3 months of its issue. Similarly, the cheque must not be presented
before due date in case of post-date cheques.

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 v. Legal restriction
The banker must honour the cheque if there is no legal restriction on customer
cheque. Say in case of the Garnishee order when restrictions are imposed on
the account.
vi. Outstanding cheques for collection
If there is sufficient amount in account then the banker should accept the
cheque, if there is no sufficient balance but if there is any outstanding cheque
which is deposited for collection in such circumstances the banker no need to
accept the cheque.

Dishonour of Cheque
Rejection of cheque by not making payment by the banker due to specific
reason is called dishonour of cheque.

2) Obligations to maintain secrecy of customer’s account

The banker has an implied obligation to maintain secrecy of the customer’s
account. Banker should not disclose customer account information to outsiders
because it may affects the reputation of customer credit worthiness or it even badly
damage the business of customer. This obligation continues even after the account of
the customer is closed.
Exceptions to Banker’s obligation (or) failure to maintain secrecy of
customers
According to Sec. 27(1) the Central Bank may require any institution to
furnish to it, at any time and in such a manner as it may direct, such information as the
central bank may reasonably require for the proper discharge of its functions.
i. Where the customer consent has been obtained
Banker must disclose the customer accounting information with the consent
and will of the customer. At the time of auditing, auditor can fully examine
the accounting information of the customer. When the customer get any loan
by naming guarantor.
ii. Disclosure of information under Banking practices
The banker can disclose the customer’s information by his own interest where
a banker has to recover money from the customer, the banker can disclose the
information regarding the customer’s account to its lawyers, etc.,.
iii. Disclosure of information under Compulsion of Law
The banker can disclose the accounts of the customer as and when demanded
by the authorities as per the law. They are namely –
 Sec 4 of Banker’s Book Evidence Act, 1891.
 Sec 94(3) of Code of Civil Procedure Act, 1908.
 Sec 45 (B) of RBI Act, 1934.
 Sec 26 of Banking Regulation Act, 1949.
 Sec 36 of Gift Tax Act, 1958.
 Sec 131, 133 of Income Tax, 1961.
 Indian Companies Act, 1956.
 Industrial Disputes Act, 1946.

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 iv. Disclosure of the interest of the nation
If the customer is dealing with any illegal activity it is dangerous for the nation
and to safeguard the public and nation. It is a duty of Bankers to disclose the
customer information to concerned authority.
v. Disclosure as common courtesy
If a fellow banker asks about the credit worthiness of a customer, the banker is
obliged to disclose by answering credit enquiries. This is known as a
‘Common Courtesy’. Under the few circumstances like – Issuing Letter of
Credit, Discounting Bills, etc.,.

Wrongful Disclosure
When a banker discloses information about a customer’s account to an
outsider in an unjustifiable ground, it is known as wrongful disclosure. The Banker be sued
for liable by his customer for wrongful disclose of the information.

3) Obligations to receive cheques and other instruments for collection

The business of banking comprises acceptance of money on deposit
account and payment the cheques. It may rightly be contended that anyone
who does not perform these essential services, is not a Banker. They must be
collected as speedily as possible through the accepted channels.
If banker failures exercise proper care, the bank will be liable for any
loss which the customer may sustain.
4) Obligations to honour the cheques of customers across the counter
When a customer presents an open cheque for withdrawal of cash across
the counter in a Bank, it makes the obligation to banker to honour the customer
cheque.
5) Obligations to give reasonable notice before closing the customer accounts
According to law, a Debtor and a Creditor may terminate the relationship
without notice by the debtor paying off the balance or the creditor recalling the
debt. If this obligation could be terminated by the banker without notice the
customer might be faced with an embarrassing situation.

B. Rights of a Banker
It is not that the bank has only duties towards its customers; it too has certain
rights towards his customers.
1) Right to Lien
A Lien is the right of creditor to posses the goods and securities belongs to
borrower with him until the debt is repaid. Lien is a term used to identify the right
to retain a property belonging to a debtor till such time he discharges the debt due
to the retainer of the property. In simple, “A right to possess a property”.
Types of Lien
a. Particular Lien – particular lien is one under which the creditor can
retain the goods of debtor relating to particular loan or particular
amount due only. (or) the particular lien refers to a particular property
which is retained by the lender or creditor against a specific or
particular loan. Eg., Radio – TV repair, Dress – Saree Stitch.
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 Here the lender can enjoy the possession of goods on particular
debt only and offer the clearance of particular debt the goods will be
repossessed.
b. General Lien – general lien states creditor’s right to retain all the
goods and assets against general amount due i.e., all amount due by the
debtor. Under this lien, the creditor can retain all the goods of debtor
against total amount. Bank can enjoy right of General Lien.

Following requirements are necessary for Bank to enjoy Lien

 The assets should be under possession of bank
 The asset which is there with the banker as security should belongs to
customer (debtor) only
 When bank holds possession of property, the banker must acts his capacity
as banker only
 The possession of goods must be lawful
 There should be amount due by the customer to the banker to get the right
of lien
Banker cannot enjoy the right of lien / When the Banker cannot exercise
General Lien?
a. Safe custody deposit
Under this circumstances banker acts as bailee to the customer’s property
and not as the capacity of banker. So as per law the banker cannot
exercise the lien on safe custody deposits.
b. Bills or instruments deposited for collection or any other specific
purpose
The banker cannot exercise the right of lien because here, it is implied
agreement between banker and customer that the fund must be utilized for
specific purpose and banker acts as agent of customer not in the capacity
of banker.
c. Trust amount or property
Banker should not possess the right of lien on trust amount which lays
certain instruction for the banker to usage of fund regarding specific
manner. Here, never acts in the capacity of banker but acts as a trustee.
d. Illegal possession of goods
Illegal possession of goods do not entrust banker’s right lien, if the
customer left the securities by mistake or properties come to the banker
without awareness of customer.
e. Prior due date of loan
Bank can exercise lien after the completion of loans due date but not
before the period of returning the loan.
f. Bonds and coupons
Lien is not applicable for bonds and coupons which are received for
collection. Here banker merely acts as an agent of the customer.

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 g. Stolen goods
If customer pledges any assets which is stolen and has been granted loan
by the bank, in such circumstances banker cannot has the right of lien.
h. No simultaneous right to bank
When right of set-off is available to bank then bank cannot posses the right
of lien. Generally, at a time bank cannot posses both the right.
2) Right to charge interest
As a creditor, the banker has the implied right to charge interest on the
advances granted to the customer. Bankers normally charge interest on a monthly
basis. When customer avails bank overdraft facility, in that circumstances also
banker charge the interest to the extent of overdrawn amount.
3) Right to charge commission
A banker renders several services to the customers and they cannot be
offered free, hence, the banker has an implied right to levy certain charges known
as commission. The various services provided by the banks are, safe custody
facility, purchase and sale of shares, debentures, factoring, ATM services, etc.,.
4) Right to commitment charges
Commitment charges refer to the fee charged by a lender to a borrower for
an unused credit line or unused loan. When banker provides bank overdraft and
cash credit to customer, it transfers entire sanctioned amount to customer’s
account and charges interest on utilized amount. If customer does not utilize
maximum amount, banker may not get more profit so he charged commitment
charges.
 As per RBI, Indian commercial banks are allowed to charge
commitment charges from 1970
 As per RBI guidelines customer must utilize 95% and more
sanctioned amount
 Commitment charges is applicable when the credit limit exceeds
Rs. 25 Lakhs
5) Right to incidental charges
Incidental charges are levied by banker on the in-operative or un-
remunerative current account of the customers. Incidental charges rates are
revised by the bank from time to time.
6) Right to set-off
Right to set-off is a right to adjust the accounts of one against the other
between the debtor and the creditor to determine the net balance due to
either debtor or creditor. It is a statutory right of a banker to combine
two or more accounts of a customer, to know the debt owed to him or
he owed to others.
The right of set-off facilities of the banker to know the net amount due
him from the customer and ensures the safety of funds.
The essential conditions to exercise Right to set-off
a) Two or more accounts should be in the name of the same customer
b) The amount of debts must be certain and due immediately
c) There should not be any specific agreement relating account and fund
d) Funds should not be held in the capacity of the trustee
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 e) The banker has the right to exercise set-off before a garnishee order is
received
f) If the customer hold the account in an official capacity, then the funds
cannot be used to combine with the personal accounts
g) If the customer is acting as a guardian to a minor’s account, the funds
cannot of set-off
Conditions under which the right to set-off cannot be exercised
a) The right of set-off is not applicable for trust account
b) The right of set-off cannot be extended to a future / contingent debt
c) The right of set-off is not applicable for partnership account and
account of one partner
d) Trust account and personal account of the customer cannot be
combined
e) The account balance of an individual cannot be set-off against a joint
account balances in which he is one of the account holders
f) Account of guardian and minor account cannot be combined and set-
off is not applicable because of different parties
g) Right of set-off is not applicable for dividend account of company and
loan account of the same company
h) The banker cannot exercise the right of set-off without giving a
previous notice to the customer
i) In case of inter-branch account’s the right of set-off can be exercised
Automatic rights to set-off
Depending on the situation, sometimes the set-off takes places
automatically without the permission from the customer.
a) On the death of the customer
b) On customer becoming insolvent
c) On receipt of a garnishee order on customer’s account by court
d) When customer becomes mental incapacity
e) At the time of winding up of a company
f) On receipt of a notice assignment of credit balance by the customer to
the banker
g) On receipt of notice of second charge on the securities already charged
to the bank
Differences between Lien and Set-off
Lien Set-off
Banker lien is recognized under Sec. 171 Set- off is a right under customary law of
of the Contract Act banker
Lien is related to goods and security of Set – off is related to money claims
customer
Lien is a right of banker to retain Set – off is a right of a banker to combine
customer goods and security more than one account of customer to
ascertain final balance due to him by or
due by him
Notice is not required to exercise lien Notice is required in some of the case of
set-off
Lien proceeds set-off Set-off follows lien
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 7) Right to apportionment of payments
When a customer borrows more than one loan, owes several debts to the
banker and makes insufficient payment to clear all the loans, the question emerges
as to which loan account the payment should be made i.e., appropriated.
The general rules are that the Debtor (Customer) has the first choice or
right and he can appropriate the funds according to his desire. Thus, he can
reduce or close any debt he wants.
If the customer does not take any decision about the appropriation, then
the banker gets the right to appropriate payments.
The banker can exercise the right of appropriation and apply in the
payment of any debt.
Sec. 59 – says about application of payment where debt to be discharged is
indicated i.e., as per borrowers instructions.
Sec. 60 – says about application of payment where debt to be discharged is
not indicated i.e., in the absence of express or implied intention of debtor.
Sec. 61 – says about application of payment where neither party
appropriates, i.e., where neither party makes any appropriation of payment shall
be applied in discharge of the debts in order of time.

Clayton’s Case (or) Devaynes v/s Noble Case

If the choice of appropriation is not made either by the customer or banker,
then Clayton’s case law will come into force. The rule in the case of - “Devyanes v/s
Noble”. According to this rule, the appropriation takes place on the basis of “First
Debt, First Liquidation”.
Clayton’s Law – Clayton’s Law is applicable when there is no implied and
expressed instructions on discharge of debt by the customer and even no action by the
banker to discharge the various debt of the customer.
The Law states on apportionment of debt, as per law the apportionment of debt
should be chronological one i.e., first side of the debt should be cleared by the first
side of the credit amount. If the debts are of the same date, the apportionment should
be made proportionately. Keeping this point in view, Sec. 61 was incorporated in the
Contract Act, 1872.
Certain conditions have to be fulfilled to apply the rule in Clayton’s Case.
a) Neither the customer nor the banker should not have any other
intention of appropriation
b) If two separate accounts are maintained the rule is not applicable
c) The rule cannot be applied to the accounts which stopped in the middle
and revived after a certain date
d) The rule is not applicable for broken accounts
e) The rule is not applicable for trust funds

8) Right not to produce the books of accounts

According to the provisions of the Bankers Book Evidence Act, 1891, the
banker need not produce the original books of accounts as evidence in the cases in
which the banker is not a party.
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 He can issue only an attested copy of the required portion of the account
which can be utilized as evidence before the court. When the court is not satisfied
with the certified copy, the court can summon for the original books.
But when a banker is a party to the suit, the court can force the banker to
produce the original records in support of the claim. This act helped the banker to
a greater extent.

9) Right under Garnishee order

Garnishee Order – a direction given by the court to a third party or
Garnishee, who is due to the judgement debtor and not to make any payment
till it gives a verdict regarding the paid money. This order is issued at the
request of the judgement creditor.
When a person (Debtor) obtain any loan from bank or institution and
not paid the debt even after specified period, the lender (Creditor) can
approach to issue Garnishee Order.
Borrower – Judgement Debtor
Lender – Judgement Creditor
Bank (Third party) – Garnishee
Here is court issue order to Judgement Debtor’s Bank, stating not to
make payment to the Debtor. By the receipt of Garnishee order, Garnishee
must suspend the account of the Customer (Debtor) and same to be informed.
Then the court decides the amount attaches to the Judgement Creditor
from Garnishee Account, and then the bank must discharge the attached
amount if any left after payment to the Judgement Creditor.
Banker occupies two positions –
 As ‘Garnishee’, holding the funds of Judgement Debtor
 As ‘Judgement Creditor’, filing his own case in the court.
Therefore, a Garnishee is a Debtor’s Debtor.
Process of Garnishee Order
I. First phase – Order Nisi (Unless)
This order nisi, means unless, directs the garnishee not to pay the
money of judgement debtor laying in his (garnishee) hands till the
court directs.
II. Second phase – Order Absolute
After the explanations files from garnishee, the court issued him a final
order i.e., called ‘order absolute’. If the garnishee has no objection, the
court will pass an order directing the garnishee to make payment to
satisfy the judgement debt. This order is called ‘order absolute’,

Circumstances under the Garnishee Order would not be applicable

a) Where the account of the judgement debtor is a joint account holder
with another person
b) Where the identity of the judgement debtor is doubtful
c) Where the account of the judgement debtor is held by him in the
capacity of a trustee
d) Not applicable to deceased and insolvent
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 e) Where the judgement debtor has previously made an official
assignment of his balance in favour of a third party and the banker is
informed about it in writing
Application of Garnishee Order
a) Where there is a credit balance in bank
b) All bank branches of a bank are treated as one entity
c) Attaches joint account is issued so
d) Attaches future maturity term deposits
e) The amount should belong to the customer in his own right and
capacity
f) The debt under the order must be due

Know Your Customer (KYC)

KYC refers to due diligence activities that financial institutions and other regulated
companies must perform to ascertain relevant information from their clients for the purpose
of doing business with them.
KYC policies are becoming increasingly important globally to prevent identity theft,
financial fraud, money laundering and terrorist financing.

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 Unit - 2
NEGOTIABLE INSTRUMENTS

Negotiable Instruments

Definition
Sec.13(a0 of the Negotiable Instrument Act, 1881, - “Negotiable Instruments 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”.

Meaning
Negotiable instrument is a transferable signed document that promises to pay to a
certain person or to the bearer of the instrument, a certain sum of money at a future date or on
demand. Eg., Cheques, Bills of Exchange, Promissory Notes.

Features / Characteristics of Negotiable Instruments

1. Property – Negotiable instruments is the property like other valuable assets, the
person for whom the instrument is drawn is the holder and owner of the property.
2. Payable to order – all the negotiable instruments are payable to order which is
expressed to a particular person.
3. Defects in title – the holder in good faith and for value called the ‘Holder in due-
course’ gets the instruments free from all defects of any previous holder.
4. Payable to certain person – certain person is a person whose name is mentioned in
Negotiable instruments. In case of a bill or cheque the drawee must be named or
described with reasonable certainty.
5. Right – the Holder in due-course is not affected by certain defences which might be
available against previous holder. Eg., Fraud, to which he is not a party.
6. Payable to bearer – the negotiable instruments is expressed to be payable to bearer
when it is blank endorsement (payable to anyone)
7. In written – it must be in writing, which includes typing, printing, engraving.
8. Payable at a time – it must be payable at a time which is certain to arrive. If it is
payable “when convenient”, the instruments is not negotiable.

Presumptions of Negotiable Instruments

For deciding cases in respect of rights of parties on the basis of a Negotiable
Instrument Act, 1881, u/s 118 and 119, court is entitled to make certain presumptions.
1. Consideration (Sec.118(a)) – every NI is made or drawn for the consideration,
moreover, when a NI is accepted, negotiated, it is also presumed that it was so
accepted, for a consideration.
2. Date (Sec.118(b)) – it is presumed that, NI is drawn on the date shown on the face of
it.
3. Time of acceptance (Sec. 118(c)) – it is presumed that, the NI is accepted within a
reasonable time or before its maturity i.e., before it became overdue.
4. Time of transfer (Sec.118(d)) – it is also presumed that every transfer of a NI has
been made before its maturity.

14
 5. Order of Endorsement (Sec. 118(e)) – the endorsements appearing upon a NI were
made in the order in which they appear.
6. Stamp (Sec.118(f)) – if the NI is last or destroyed, in such cases it is presumed that it
was duly stamped.
7. Holder in due-course (Sec.118(g)) - when a NI is obtained by a person form its
lawful holder by means of an offence or fraud or for unlawful consideration, the
holder will have to prove that he is a holder in due-course.
He needs to prove it –
 That there was consideration for it
 That the defect, if any, in the instrument was no know to him
 That he become its holder before, its due date
8. Proof of Protest – (Sec. 119) – in a suit upon an instrument, which has been
dishonoured, the court on proof of protest, presumes the face of dishonour unless and
until such facts is disapproved.

Kinds / Types / Classification of Negotiable Instruments

Negotiable Instruments
a) Instrument Negotiable by Law / Statue b) Instrument Negotiable by customer / usage
of trade
 Promissory Notes  Hundies
 Bills of Exchange  Share warrants
 Cheque  Dividend warrants
 Banker’s draft
 Circular notes
 Bearer debentures
 Certificate of deposits
 Commercial papers
 Debenture of Bombay Port Trust
 Railway receipts delivery order

Promissory Notes
Sec. 4 of the NI Act, 1881, - “ a promissory note is an instrument in writing
containing an unconditional undertaking signed by the maker to pay a certain sum of money
only to, or to the order of a certain person, or to the bearer of the instrument”,

Parties of Promissory Notes

 Maker – a person who makes the promissory note and also promise to pay the money
stated therein.
 Payee – a person to whom the promissory note is payable (to whom the promise to
pay is made) and finally receive the money.

Essentials elements / Features / Characteristics of Promissory Notes

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 1. Instrument in writing – The PN must be in writing, oral or verbal engagement or
promise is excluded or not valid.
2. Undertaking to pay – it is not necessary to use the word ‘Promise’ but the intention
must clearly shown an unconditional undertaking to pay the amount.
3. Unconditional – the promise made under PN must be unconditional, it states that the
promise to pay must not depend upon the happening of same outside event.
4. Signed by the maker – the instrument must be signed by the maker thereof, person
must sign with his consent (it may expressed by thumb-mark or any other mark).
5. Payable to a certain person – the maker should pay to a definite person, a note may
be made by several people to bind them jointly, it cannot be made by two persons.
6. Certain sum of money – the maker of PN promises to pay a certain sum of money
only and it should clearly reveals to whom the payment has to be made on a particular
date.
7. Payable on demand – the amount is payable on demand of payment.
8. Payment must be in legal money of the country – the promise to pay must be
money only.
9. Stamping – PN’s are chargeable with stamp duty. No suit can be maintained upon an
unstamped PN.
10. Others – Date, Sl. No., Place, Consideration, etc.,

Bills of Exchange
Sec. 5 of NI Act, 1881 – “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”.

Parties of Bills of Exchange

 Drawer – the person who draws a bills of exchange
 Drawee – the person who is directed to pay
 Payee – the person to whom the amount of the bill is payable
 Holder – the drawer or the payee who is in possession of the bill
 Acceptor – the person who accepts the bill
 Endorser – the person who transfer the bill to other person
 Endorsee - the person to whom the bill is endorsed

Features / Essentials of Bills of Exchange

1. It should be in writing
2. It should be in an order to pay to a certain person
3. It should contain an unconditional order
4. Signed by the drawer
5. Sum payable must be certain
6. Bill must contain an order to pay money only
7. It should be properly stamped

Types of Bills of Exchange

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 Bills of Exchange
On the basis of On the basis of object On the basis of Others
period  Trade bills location  Fictitious
 Demand  Accommodation  Inland bills
bills bills bills  Forged
 Term bills  Foreign bills
bills
 Demand bills – these bills have no fixed date for the payment, they become payable
at any time, when they are presented before payee by the holder.
 Term bills – these bills are payable after specified period of time, the period after
which these bills become due for payment is called tenor.
 Trade bills – these bills are drawn and accepted against the sale and purchase of
goods on credit.
 Accommodation bills – these bills do not involve in sale and purchases of goods,
rather they are drawn without any consideration. The intention is to help one party or
both the parties financially.
 Inland bills – these are the bills drawn in a country upon the person living in the
same country or made payable in the same country. Both the drawee and drawer
reside in the same country.
 Foreign bills – these bills are drawn in one country and accepted, payable in another
country.
 Fictitious bills – a bills refers to a bill of exchange in which the name of both the
drawer and the payee are fictitious (imaginary).
 Forged bills – a bill in which name of the drawer or the payee has been forged, such a
bill cannot be enforced by law.

Cheque
Sec. 6 of NI Act, 1881 – “a cheque is a bill of exchange drawn on a specified banker
and not expressed to be payable otherwise than on demand”.

Parties to a Cheque
 Drawer – person who draws the cheque or writes out the cheque
 Drawee – always the drawer’s banker on whom the cheque is drawn
 Payee – person who receives the money through cheque, whose name written on it
 Holder – a person in whose legal possession the instrument is or the bearer
 Holder for Value – the holder for a bill for which value as at any time been given
 Holder in due-course – person who takes for a value without knowledge of neither
any apparent defect in the instrument nor any notice of dishonour

Features / Characteristics of Cheque

1. Cheque is an instrument in writing – a cheque must be in writing, in ink pen, ball
point pen, typed or even printed.
2. Contains an unconditional order – it must contain an unconditional order on a
specified banker to pay a certain sum of money to require acceptance.
3. Cheque is drawn on a specified banker – it is always drawn on a specific banker.
14
 4. Signed by the drawer
5. Drawn by customer
6. Order must be for payment of money only
7. Payable on demand
8. Drawer, drawee and payee must be certain
9. Payable to a certain person
10. Certain formalities

Parts of Cheque
 Drawer
 Payee
 Date of issue
 Amount of currency
 Signature of the drawer
 Machine readable routing and account information

Types / Kinds of Cheques

Cheque
Open Cheque Crossed cheque Others
 Bearer cheque  General crossing  Anti-dated cheque
 Order cheque cheque  Post-dated cheque
 Special crossing  Stale cheque
cheque  Duly-dated cheque
 Double crossing
cheque
 Open cheque – when a particular cheque is not crossed it is known as open cheque /
uncrossed cheque. The payment of cheque can be obtained at the counter of the bank.
 Bearer cheque – a bearer cheque is the one which is issued without the name of the
payee and the same can be encashed by any one. It is made payable to the bearer, i.e,
payable to the person who presents it to the bank for encashment, such cheques are
associated with risk.
 Order cheque – a cheque which is paid to a named person with words ‘or order’ after
the payee’s name, showing that he or she can endorse it and pass it to someone else if
desired.
 Crossed cheque – when a particular cheque in which two parallel lines are drawn on
the face of a cheque with or without additional words like “and co.”, or “a/c payee”,
or “not negotiable”. Such cheques payable only through a collecting banker and not
directly at the counter of the bank, and directly credited to the payee’s account only.
 Anti-dated cheque – when an particular cheque which bears a date earlier than the
date on which it is presented to the bank.
 Post-dated cheque – a cheque bears date which is yet to come (future date) then it is
known as post-dated cheque. It cannot be honour earlier than the date on the cheque.
 Stale cheque – if a cheque is presented for payment after 3 months (6 months) from
the date of the cheque. It cannot be honoured by the bank.

14
  Duly-dated cheque – if a cheque is presented for payment on the same day
mentioned on the face of the cheque. It should honour by the bank.

Types of Crossing of Cheque

1. General crossing
2. Special crossing
3. Double crossing
4. Restrictive crossing
 General Crossing – Sec. 123 of NI Act, 1881, “where a cheque bears across face
traverse lines with or without the words, “and co.”, or any abbreviations thereof or the
words “not negotiable”, the cheque is said to have been crossed generally”.

 Special Crossing – Sec. 124 of NI Act, 1881 “where a cheque bears across its face on
additions of the name of a banker with or without the words ‘Not negotiable’, that
additional shall be deemed a crossing and the cheque shall be deemed to be crossed
specially and to be crossed to that banker”.
Thus, a special crossing requires the name of the banker to whom or to whose
collecting agent payment of the cheque should be made to be written on the face of
cheque.

 Double Crossing – crossing the cheque specially to more than one banker. Its a form
of special crossing of cheque under which two collecting banker’s name is mentioned
between two parallel lines. One is the collecting banker of the payee and another is
the agent for collection of cheque. This has been prohibited by the NA Act, 1881 u/s
127.

 Restrictive Crossing – same additional forms of crossing have been adopted by

commercial and other banks in order to avoid the risk of a thief, obtaining payment.
These forms consist in adding to the general crossing, the words,”a/c payee”, “a/c
payee Mr.A only”.
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Who can cross a cheque?
 Drawer
 Drawee
 Banker

Obliterating a Crossing
The activity which involved in erasing the parallel line drawn on the face of the
cheque.
Opening of Crossing
Removing the crossing made by the drawer or drawee or banker.
Marking of Cheques
Marking means giving a certificate by the banker to a cheque that it is good for
payment.

Material Alterations
Altering the contents of the instrument in such a way that is becomes an invalid
instrument.
Mutilated Cheque
If a cheque is torn in such a way by the customer, as to sufficient evidence of his
intention to cancel it, the cheque becomes mutilated. It cannot be debited to customer’s
account.
MICR – Magnetic Ink Character Recognition
A process of mechanical sorting of cheques, the relevant information is printed or
encoded in a specific place of the cheque which is known as MICR.

ENDORSEMENT / INDORSEMENT
Definition
Sec. 15 of NI Act, 1881, “where the maker or holder of a NI signs the same, otherwise
than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of
paper annexed there to or so signs for the same purpose a stamped paper intended to be
completed as a NI, he is said to indorse the same and is called the indorsee”.

Meaning
The writing of one’s name on the back of the instrument or any paper attached to it
with the intention of transferring the rights therein. In simple, endorsement is signing a NI
for the purpose of negotiation.
The person who effects endorsements is called an “Endorser”.
The person to whom the NI is transferred by endorsement is called an “Endorsee”.
The back of the cheque is full with many endorsements, an additional slip has to be
attached called “Allonge”, for further endorsement.

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Effects of Endorsements – u/s 50 of NI Act, 1881
1. The person who signs on the back of instrument to transfer the right, title and interest
in the instrument
2. The endorsee will get the entire possession of the instrument
3. The endorser will certify or make authentication that all the signs made previous are
valid
4. The endorse will prove that the instrument is free from defects by making
endorsement
5. The endorser will compensate the endorsee or other person after endorsing the
instrument if it is in defective manner or nature

Essentials of Valid Endorsement / Rules of Endorsement

1. It should be on the instrument, if there is no space on it, it may be on a separate slip of
paper annexed to the instrument called ‘allonge’
2. The endorser should sign the endorsement in the same style and with the same
spelling as written in the instrument
3. Signature should be in ink and not by pencil or rubber stamp
4. It should be made by the holder or the banker, it cannot be endorsed by a stranger
5. The delivery of the instrument with the intention of passing the property in it to the
endorsee is important
6. An endorsement may be made in blank or full, it may also be restrictive
7. The name of a married women should be accomplished by the name of her husband
8. It must be an endorsement of the entire bill, not for a partial endorsement
9. Mere signature of the holder, without any words, also constitutes endorsement
10. Any number of endorsement may be made on the instrument
11. No particular form if words is necessary to create a contractual relationship between
endorser and endorsee

An endorsement becomes complete only when –

 The holder signs on the face or back of the instrument
 The instrument is delivered to the endorsee
 It is signed and delivered with the intention of vesting the endorsee with the rights of
the holder

Types / kind of Endorsements

1. Blank / General endorsement – Sec 16(1) & 54 – the endorsement in which the
endorser merely signs his name on the back of the instrument without mentioning the
name of the person to whom the instrument is endorsed.
2. Full / Special endorsement – Sec 16(1) – if an endorser, adds a direction to pay the
amount specified in the instrument to, or to the order of a certain person, the
endorsement becomes full. Eg., ‘Pay Mr.A or order’.
3. Partial endorsement – Sec 56 – it purports to transfer to the endorsee only a part of
the amount payable on the instruments such an endorsement does not operate as a
negotiation of the instrument and in invalid.

14
 4. Conditional / Qualified endorsement – Sec 52 – an endorsement which contains a
condition made by endorser, and that do the order to pay. The endorsee can receive
the amount only on the fulfilment of the condition or events.
5. Restrictive endorsement – Sec. 50 – an endorsement in which the endorser restricts
the further transferability in express words to some specified person only.
6. Sans Recourse endorsement – the endorser free himself from any such liability
arising from the dishonour of the instrument. It is done by adding the words ‘Sans
Recourse’.
7. Facultative endorsement – an endorsement binds the endorser to pay the value of
cheque in case of dishonour, even when the notice of dishonour is not served on the
endorsee by writing the words ‘notice dishonour waived’ after writing the name of the
endorsee.
8. Sans Frays endorsement – the endorser makes it clear that no one should incur any
expense on his account in respect of the negotiable instrument.
9. Liability depended upon a contingency – an endorser endorses an instrument in
such a way that his liability dependent upon the happening of some specified event,
which may or may not happen.
10. Forged endorsement – forgery sign on the endorser.

Cancellation of Endorsement – Sec 40

When the holder of the NI, without the consent of the endorser, destroys / impairs the
endorser’s remedy against a prior party, the endorser is discharged from liability to the holder
to the same extent as if the instrument had been paid at maturity.

Legal provisions regarding Endorsement

1. The endorsement may be cancelled before delivery
2. It will be complete by delivery, it may be actual or constructive
3. The endorsement should be made for the full value of the instrument, if the value of
the instrument is partially cleared the endorsement shall be made for the balance
amount
4. It is implied that the endorsement is made in the order in which it is shown on the face
or back of the instrument
5. Endorsement may be made on the back or on the face or on a separate slip of the
instrument
6. It should be in writing and the endorser should sign the instrument

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 Unit – 4
CUSTOMERS AND ACCOUNT HOLDERS
Types of Bank Accounts in India
Bank Accounts
Demand Deposit Time Deposit Other Types
 Savings Account  Fixed Deposit  DEMAT Account
 Current Account  Recurring Deposit  NRE Account
 NRO Account

Procedure to open an Bank Account

1. Selection of type of account
2. Selection of Bank
3. Filling up application form
4. Introducer to open an account
5. Submission of application form
6. Verification of the application form
7. Initial deposit
8. Receiving the Specimen signatures
9. Handover the Passbook, Chequebook, etc., to the customer

Types of Customer Accounts

 Minor account
 Joint account
 Joint Hindu Family account
 Partnership account
 Joint Stock Company account
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  Clubs and Associations account
 Trustee accounts
 Lunatics account
 Illiterate account
 Accounts of Married Women
 Deceased Customer account
 Non-Resident account
 Government Department account

Minor Account
Indian Majority Act, 1875 – Every other person who is under the age of 18 years and
he will be called as major when he attains his age of 18. In simple, Minor is a person who
has not completed the age of 18 years.
Guardian – a person having the care of the person of a minor or of his property or of
both his person and property. Guardians are classified into 3 types-
 Natural Guardian
 Testamentary Guardian
 Guardian appointed by a court

Precautions and Operations of Minor Account

a) Banker can open only an SB account (Not a current account) in the name of a
minor in any of the following way-
 In the name of a minor operated by a natural guardian appointed by the
court
 In the name of the minor operated by himself when he attains 12 years
of age
b) The banker has to record the date of birth of the minor as given by the
guardian and he should also record the date of majority of such a person and
when minor attains majority. The banker has to inform the holder of that
account to take some necessary actions to convert that account.
c) If a minor dies, the balance in the account may be withdrawn by the guardian
and in case of joint account, the balance will be held at absolute disposal of
guardian.
d) It is to be noted that when an OD or Loan advanced to a minor by mistake or
unintentionally the banker has no legal remedy to recover the amount from the
minor.
e) Even if assets of a minor are taken as a security to grant such loan, these
securities are not legally available to banker as the primary contract with the
minor is void.
f) If the advance granted to a minor on a guarantee of the 3rd party, the amount
can be recovered only from the guarantor.
g) A minor may draw, endorse, negotiate any NI but he cannot be liable on such
instruments.
h) A minor can be admitted to the benefit of partnership by the consent of all the
other partners and the minor is not liable for the losses and debts of the firm.
14
 i) A minor can be appointed as an agent to act on behalf of the principal and as a
minor cannot be held responsible to the 3 rd parties in respect to the acts
performed by him as an agent.

Joint Account
Joint account is a bank account registered in the name of two or more person and one
of the account holder can operate it. The persons may be a family members, close relatives,
business partners, friends, couples, etc.,

Precautions and Operations of Joint Account

a) The joint account must be opened only in the name of 2 adults and never in the
names of minor.
b) The banker must ascertain the names of the Joint account holders along with
their specimen signature.
c) The banker must also ascertain the titles and styles of the account to be
opened.
d) The banker must obtain clear instructions as to who is going to operate the
account.
e) In absence of any such information, all cheques must be honoured bearing the
signatures of all the account holders.
f) The authority of operating a joint account can be dedicated to a 2 nd party but
this authority cannot be further dedicated to a 3rd party.
g) The authority to operate the account can be revoked by anyone of the joint
account holders and in such a case the banker must stop operations of the joint
account.
h) The authority to operate an account is only general and does not extend to
special functions like locker facilities, purchase and sale of securities, etc.,.
i) In the case of insolvency of any of the joint account holders, the banker must
suspend the operation and hand over the balance to official receiver with the
consent of the other joint account holders.
j) In the case of the death of a joint account holder the banker must suspend all
operations and handover the funds to the remaining joint account holders.
k) In the case of an account of husband and wife, if the wife dies the funds are
handed over to the husband and if the husband dies, the funds are to be
released not only to wife but also to the legal heirs of the deceased customer.

Joint Hindu Family / HUF Account

A Joint Hindu Family is a form of business organization comprising of the male
members lineally descended from 3 successive generation, ancestor, including their wives,
unmarried daughter, who are staying together jointly.
Karta, the eldest member of HUF, who manages the affairs of the family.
Coparceners, the all other members of HUF.

Precautions and Operations of HUF

14
 a) The banker must obtain the names of all coparceners and the Karta and also all
relevant details of the HUF before opening of an account.
b) The application form must be signed by all the coparceners along with the
karta and if the coparcener is a minor a form must be signed by his natural
guardian.
c) The banker must obtain the style and title in which the account can be opened.
The title of the account may be HUF account of Ram’s or it can be Krishna
Karta of Ram HUF.
d) Although it is implied that the karta has the power to operate account, if
necessary that the banker must obtain a mandate from all the coparceners
giving authority to the karta to operate the account.
e) On the death of the karta the eldest coparcener becomes the karta and the
banker must demand the fresh mandate from all the other members giving
authority to the new karta to operate the account.
f) It is the responsibility of the banker to see that any loan given to the HUF is
not for the benefit of any person but from the entire JUF.

Partnership Firm Account

A partnership firm is an association of persons who undertake to do some bunnies
activities by investing the capital for the purpose of making profits and share accordingly.
The Partnership is governed by the Indian Partnership Act, 1932.

Precautions and Operations of Partnership Account

a) The banker must obtain a copy of the partnership deed before opening the
account and check all the details to his satisfaction.
b) In case there is no partnership deed, the banker must obtain a letter of
partnership giving the details of the partners and firm.
c) The application form for the opening of account must be signed by all the
partners.
d) The banker must obtain clear instructions in the form of a mandate which
clearly mentions the name of the partners who are authorised to operate the
account.
e) The bank must never open the account in the name of the partners but it
should be in the name of the firm.
f) In the absence of any clear instruction, the banker must honour only those
cheques which are signed by all the partners of the firm.
g) Any partner can revoke or cancel the cheque even though he is not an
authorised person to operate the account.
h) The banker must insist on the registration of the firm and hence obtain the
certificate of registration.
i) In case of any loan or advance given to the firm, the banker must check the
credit worthiness of the firm by examining the balance sheet and profit and
loss account of the previous two years.

14
 j) If the loan or OD is given, the banker must obtain an undertaking from the
partners stating that they are jointly liable.
k) The partners can pledge the property of the undertaking only a letter of mutual
concern is given by all the partners.
l) In the case of admission of a partner the banker can continue the operation in
the same account after obtaining a fresh mandate from the partners.
m) In case of death, insolvency, lunacy of any of the partners, the bank must close
the account and open a fresh account to avoid the operation of the rule in
Clayton’s case.

Joint Stock Company Account

A company is an artificial person created by law having a common seal and perpetual
succession. It is a form of business organization in which a number of persons associate to
form an artificial legal entity.

Precautions and Operations of Joint Stock Company Account

a) The banker must obtain the certificate of incorporation to verify the
company’s registration is under the registrar of the companies.
b) The banker must obtain the certificate of commencement of business, in such
case of public limited companies.
c) The banker must obtain the Memorandum of Association which will gives
details of the name, objectives, location, liability of shareholders and
company, etc.,.
d) The banker must obtain the Articles of Association in order to get internal
functioning details of the company.
e) The banker must obtain a list of all the directors along with their specimen
signature.
f) The banker should also obtain a copy of resolution of the BOD resolving the
opening of an account along with the resolution of the directors empowering
to operate the account.
g) The banker must verify whether AOA empower the company to borrow.
h) The banker must assess the credit worthiness of the company by scrutinizing
the profit and loss account and the balance sheet of the previous year.
i) The banker must see that the BOD must have passed the resolution to borrow
funds.
j) The banker must see that the loan sanctioned is not exceeding the total paid up
capital and free reserves.
k) The banker should see that if a charge is created on any asset, the asset must
be free from any other charge and he should obtain letter of negative lien.
l) In case of liquidation of a company the banker must stop all operation of the
account and transfer fund in the name of the liquidator.
m) The banker must see that no amount is transferred from the company’s
account to the personal account of director in any circumstances.

Trustee Account

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 A trust is an obligation annexed to the ownership of a property and arising out of a
confidence reposed in, by the owner for the benefit of others.
The person who reposes the confidence is called the Author. The person for whose
benefit the trust is formed is called a Beneficiary. A person in whom the confidence is
reposed is called Trustee. A trust is usually formed by a means of a document called Trust
Deed.
Precautions and Operations of Trustee Account
a) Banker should thoroughly examine the trust deed appointing the applicants as
trustee.
b) In case of two or more trustees, he should ask for clear instruction regarding
the persons who shall operate the account.
c) If one or more trustee dies or retires the authority vested in the remaining
Trustees depends upon the provisions of the deed.
d) The insolvency of a trustee does not affect the trust property.
e) The banker should take all the precautions to safe guard the interest of the
Beneficiary failing which he will be held to compensate him.
f) The banker should observe that the Trustees may borrow money or pledge the
property of a Trust as a security only if the Trust Deed specifically confers
such power on them.
g) Banker should receive specimen signature of all trustee who operate the
account.

Clubs and Associations Account

A club, an educational institution, or any society which renders services to the society,
which may be registered or unregistered, can have an account with the bank.
Precautions and Operations of Clubs and Association Account
a) The banker must obtain a copy of the certificate of registration of the club or
association. It may be obtained bearing the seal of either the registrar of
companies or registrar of co-operative societies.
b) Banker should obtain the copy of by laws of the organization.
c) Banker should obtain a resolution copy form the organization stating that they
have resolved to open an account in the bank and also authorized signatory,
etc.,
d) Banker should never sanction any OD or loan to an unregistered organization.
e) If at all any loan is to be sanctioned, banker should check whether the
organization has power to borrow as per its memorandum or by law and it will
be still safe if he can make some person or director of the organization to be
personally liable for the loan.
f) In case any notice or information on death of operator bank must stop the
operation.
Lunatics
A person of unsound mind is not competent enter into a contract, but the
disqualification does not apply to contract entered by lunatics prior to period of lunacy.
Precautions and Operations of Lunatic Account
a) Lunatics are not competent to enter into contract.

14
 b) Banker should not allow lunatics to open the bank account in their names.
c) The customer becomes insane in that moment only bank must stop his banking
operations.
d) The banker must confirm the information about the fact and should not stop
the banking operations on the basis of rumours or hearsay.
e) Banker should not dishonour the cheques without confirming about the
lunacy, if he so, he is liable for wrongful dishonour.
f) In case of insanity, account can be operated by the person who is appointed by
the court.
Illiterate Account
Illiterate refers to situation of a person who is unable to read and write.
Precautions and Operations of Illiterate Account
a) The account of an illiterate person may be provided he calls the bank
personally along with a witness.
b) A passport size photograph of the illiterate person is identified before the
banker in presence of the account holder and should be attested.
c) Banker has to obtain a left hand thumb impression of the illiterate customers.
d) While opening illiterate account banker should collect few identification
marks from the customer
e) While withdrawing amount, banker should take the thumb impression across
the counter.

Accounts of Married Women

The Hindu married women are governed by the Hindu Succession Act and other
married women by Indian Succession Act.
Precautions and Operations of Married Women Account
a) While opening bank account for married women banker should collect the
information of her husband.
b) When any married women opens account with bank and ask for OD facility
bank should examine the worthiness.
c) Banker must ensure to have credit balance in married women account.
d) When married women provide surety for any other person banker should
accept that surety only when she ensure her own property otherwise not.
e) In case the married women in illiterate banker must obtain her thumb
impression on account form and identification of her.

Deceased Customer Account

In case death of customer the bank has to discharge the credit balance or properties of
customer to his executors / administrators.
Precautions and Operations of Executors / Administrators Account
a) On the death of a customer, the banker should stop all the payments from that
account.
b) In case of two or more persons appointed as executors they shall have joint
interest in the estate of the deceased customer.

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 c) The banker should take lot of case, even by mistake from the estate account to
the personal account of executors or administrators.
d) In case of death of one executor, the cheque issued on the account should not
be dishonoured, because his powers will be vested in the surviving executors.
e) If the executor requires OD or Loan before he gets the letter of probate, the
banker usually advances such a loan the personal guarantee.
f) After the court grants probate, the executor may pledge specific assets of the
testator to obtain OD or loan from the banker.
g) The banker cannot exercise the right to set-off here.

Non – Resident Indian’s Account

A NRI is a person who does not satisfy any of the 2 conditions, ie., a person who is
not physically present in India for 182 days during relevant previous year and a person who is
not physically present in India for 60 days during the relevant year and 365 days during the 4
years preceding the relevant previous year, laid by the Income Tax Act, 1961. Bank accounts
are usually opened only for Indian citizens of Indian origin.
Types of accounts opened in the name of NRI
 Non Resident Ordinary Rupee Account (NRO)
 Non Resident External Rupee Account (NRE)
 Foreign Currency Non Resident Account (FCNR)
 Non Resident Non Repartiable Account (NRNR)
 SBI’s Home coming account

Precautions and Operations of NRI Account

a) NRI can appoint a resident to operate the account for local payment through
the power attorney on through the letter of authority.
b) Repartition of NRI Account – amount outstanding in the account can be
repatriated at ruling rate of exchange.
c) Nomination facilities are available.
d) Tax benefits, Income Tax, exemption for interest earned, Gift tax exemption
for gift giving and not eligible for wealth tax.
e) Whenever a NRI opens an account, he must submit a photocopy of the
passport.
f) The application form must be certified by the High Commissioner /
Ambassador or any other officer of the bank of the branch situated in the
foreign country.
g) He must submit two latest photographs.
h) He should open the account according to the guidelines specified by the
exchange control manual.

Government Department Account

All the accounts of the State or Central Government’s under the various ministers are
considered as Government accounts.

Precautions and Operations of Government Department Account

14
a) All government accounts have to be opened with the SBI banks.
b) The bank must take a specimen signature of the head of the department and
also obtain letter from the department giving an authorization to a certain
person to operate the account.
c) All cheques must be honoured only if they contain the signature of the head of
the department along with the seal of the institution.
d) If the head of department is changed / transferred then the new head must send
a letter to the bank stating his appointment and requesting further cheques to
be honoured in his name.

14
 Unit – 5
BANKING INNOVATION

Banking innovation stands for making something new in banking operations by using
electronic devices and internet. The technology has scattered in all the sectors and all over
the world, technology made for banking is to strengthen the operations by putting the services
faster, easy, cheaper and accurate.
The following are the list of new banking technology (Electronic Banking Services)
developed to meet the same.
 Electronic services
 Internet banking
 Mobile banking
 Debit and Credit cards
 Automated Teller Machine ( ATM) Banking
 Electronic Fund Transfer
 National Electronic Fund Transfer
 Magnetic Ink Character Recognition (MICR) Technology
 Real Time Gross Settlement System (RTGC)
 De-Materialized Account (DEMAT) Services

Electronic Services
Electronic service are those service capable of delivery form a remote location which
are supplied over the internet or other electronic network and which cannot be obtained
without the use of information technology, and where delivery of the services is essentially
automated.

Advantages of E-services
 Better opportunities to react to market changes and changes in the demand of
consumers, as well as creating a stronger brand
 Profit maximization due to lower costs of automatic services compared with manual
routine.
 Reduce costs of banking services
 Increase service convenience and save time.
 Provide fast and perpetual connection with the bank
 Provide a more successful management of the cash flow by accelerating the cash flow
turnover.
 It also provide complementary services, like, travel information, downloading
software, financial services, financial advice and supply of medicine.
 It provides facilitating services which entails archives, search facilities, help
functions, online account and browsing.

14
Internet Banking
Internet banking is also called as online banking or web banking. Internet banking
services is an additional delivery channel just like tele-banking, ATM with internet as the
medium of operation.

Advantages of Internet Banking

 Convenience banking – one stop financial shop for customers
 24/7X365
 Low cost, unlimited access and lesser hassles
 Better customer relationship
 Integrated customer data
 Wider reach to public, competitive edge for banks
 An effective marketing tool for promotion of various schemes of bank

Mobile Banking
Mobile banking is a system that allows customers of a financial institution to conduct
a number of financial transactions through a mobile device such as a mobile phone or
personal digit assistant.

List of Mobile Banking Services

 Mini-statements and checking of account history
 Alerts on account activity or passing of set thresholds
 Monitoring of term deposits
 Access to loan statements
 Access to card statements
 Insurance policy management
 Pension plan management
 Status on cheque, stop payment on cheque
 Ordering cheque books
 Balance checking in the account
 Recent transactions
 PIN Provisions
 Domestic and International fund transfers
 Mobile recharging

Advantages of Mobile Banking

 Saves a lot of time
 User friendly
 Cost effective
 Reduces the risk of fraud
 Cuts down on the cost of tele-banking and is more economical
 Improve their customer care services
 Promote and sell their products and services

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  Instant money transfer
Debit Card
An electronic card issued by a banker which allows bank clients access to their
account to withdraw cash or pay for goods and services.

Types of Debit Card

 Online Debit system
 Offline Debit system
 Electronic purse card system
 Prepaid debit cards

Advantages of Debit Card

1. 24 hour access to cash
2. View account balances and mini-statements
3. Request a cheque book / account statement
4. Transfer funds between accounts
5. Refill your prepaid mobile
6. Deposit cash or cheques
7. VISA money transfer

Disadvantages of debit card

1. There is no grace period to pay the bill
2. No protection as such as credit cards
3. Not all the debit cards builds to raise credit score
4. Can withdraw the money if sufficient balances are in the account

Credit Card
Credit card, small plastic card containing a means of identification, such as a
signature of picture, that authorises the person named on it to charge goods or services to an
account, for which the cardholder is billed periodically.

Advantages of credit card

1. Make purchase on credit
2. Accurate record keeping
3. Allow customer to withhold payment
4. Cheaper for short-term borrowing
5. Additional benefits

Disadvantages of credit card

1. Impulsive buyer
2. Relatively expensive
3. Lost or stolen cards
4. Use a large number of credit cards
5. Element of risk

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Differences between Debit and Credit cards
Basis Debit card Credit card
Nature Pay now product Pay later product
Mode of operation Money is automatically Money has to be paid
deducted from the a/c afterwards
Requirement of a bank a/c Bank account is compile Bank account is optional
Financing Owned money Consumer loan
Alternative Alternative to a cheque or No such alternatives
cash

ATM Banking (Automated Teller Machine)

ATM Banking is a banking operation through a machine at a bank branch or other
location which enables a customer to perform basic banking activities, like checking one’s
balance, withdrawing or transferring funds, even when the bank is closed.

Advantages of ATM Banking

1. 24/7X365
2. Consistency of service
3. Easy availability
4. Security of transaction due to use of PIN
5. Availability of good quality of currency notes
6. Enhanced interest earnings
7. Reduction in staff workload
8. Reduction in transaction costs
9. Improved customer satisfaction
10. Advertising possibility on the screen of ATM
11. Increase in miscellaneous business

Electronic Fund Transfer (EFT)

A transaction that takes place over a computerised network, either among accounts at
the same bank or to different accounts at separate financial institutions.

Advantages of EFT
1. EFT is faster mode of transfer of funds
2. Customer – savvy, no paper work
3. Beneficiary account is credited automatically
4. In-built security systems ensure safer mode of transfer of funds
5. Avoiding postage
6. Avoiding postal delays
7. Avoiding of printing MICR cheques
8. Avoiding loss of instrument
9. Reduction in paper work

National Electronic Fund Transfer (NEFT)

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 NEFT is a nation-wide payment system facilitating one-to-one funds transfer. Under
this scheme, individuals can electronically transfer funds from any bank branch to any
individual having an account with any other bank branch in the country participating in the
scheme.
Advantages of NEFT
1. NEFT facilitates an efficient, secure, economical, and reliable and expedition system
of fund transfer.
2. NEFT relieves the stress on the existing paper-based fund transfer and clearing
system.

Real Time Gross Settlement (RTGS)

RTGS system is a funds transfer mechanism where transfer of money takes place
from one bank branch to another bank branch on a ‘real time’ and on ‘gross basis’.

Advantages of RTGS
1. Certainty of payment
2. Faster collection of funds
3. No settlement risk
4. Improved liquidity management
5. Less fraud and less processing cost
6. Better inventory management

Requirements under RTGS process

 Amount to be remitted
 Account number to be debited
 Name of the Beneficiary bank
 Name of the Beneficiary customer
 Account number of the beneficiary customer
 IFSC of the receiving bank branch

Magnetic Ink Character Recognition/Reader (MICR)

MICR is a character recognition technology used primarily by the banking industry to
facilitate the procession of cheques. MICR characters are printed in special typefaces with a
magnetic ink or toner, usually containing iron oxide.

Advantages of MICR
1. Ease of readability and high security
2. Small deciphering error rate
3. Enhances security

Disadvantages of MICR
1. Expensive
2. Accept few different character sets
3. Requires special printing device
4. MICR characters are very limited
14
DEMAT Account (Dematerialized Account)
DEMAT account is an account which is electronically maintained by the banks or is
provided by broker agencies where you can keep money for transactions in shares, mutual
funds, purchase of gold, etc.,.
Advantages of DEMAT Account
1. Up to date knowledge of the market
2. Eliminates the delay and problems in script based system
3. No space of risk, loss, theft, fraud, etc.,
4. Genuineness is always guaranteed
5. Increases the confidence in the investors
6. No stamp duty
7. Ensure greater profits

Disadvantages of DEMAT Account

1. Become uncontrolled
2. Capability of manipulating the market
3. Cause anxiety to the investor

14
 Unit – 3
BANKING OPERATIONS

Collecting Banker

Collecting Banker
A collecting banker is one who undertakes to collect the amount of cheques and bills
for his customer from the paying banker. (or) Every crossed cheque is necessarily to be
collected through any bank, who is known as collecting banker.

Duties and responsibilities of Collecting Banker

1. Due care and diligence in the collection of cheque
The collecting banker is bound to show due care and diligence in the
collection of cheque presented to him, within a reasonable time. According to Sec. 84
of the NI Act, 1881, the collecting banker should bear the damage for negligence.
2. Agent for collection
In case a cheque is drawn on a place where the banker is not a member of the
clearing house, he may employ another banker who is a member of the clearing house
for the purpose of collecting the cheque. As per Sec.194 of Indian Contract Act,
1872, it may appoint any other bank who is member of that clearing house. In the
case banker becomes a substitute agent.
3. Present the cheque with in stipulated time
When the bank receives cheque for collection, it should be sent for collection
without any delay and the cheque should be sent in right channel quickly. If any
delay caused by him, his customer may suffer loss and he can claim for that loss from
his banker.
4. Serving notice for dishonour of cheque
When the cheque is dishonoured, the collection banker is bound to give notice
of the same of his customer within a reasonable time. It may be noted that, when a
cheque is returned for confirmation of endorsement, notice must be sent to his
customer.
Whereas, a cheque is returned by the drawee banker for confirmation of
endorsement it is not called dishonour. In the absence of such a notice, if the cheque
is returned for first or second time, and the customer suffers a loss, the collecting
banker will be liable.
5. Collection of bills of exchange
There is no legal obligation for a banker to collect the bills of exchange for its
customer. But generally, bank gives such facilities to its customer. In collection of
bills, a banker should examine the title of depositor as the statutory protection u/s 131
of the NI Act, 1881.
6. Remittance of proceeds to the customer

14
 In case a collecting banker has realised the cheque, he should pay the proceeds
to the customer as per his direction. Generally, the amount is credited to the account
of the customer on the customer’s request in writing. By doing so, the principal and
agent relationship will come to an end.
Capacities of a Collecting Banker
 Collecting Banker as Holder of Value
 Collecting Banker as an agent of the customer

Collecting Banker as Holder for Value

A collecting banker is holder for value if he gives the value of the cheque in
any form to its customer before collecting the proceeds of the cheque deposited by the
later. He does not remain as an agent, but he becomes an owner of the cheque and has
acquired the ownership right in good faith. In such a situation, the banker is holder for
value and he is also the holder in due-course.

When collecting banker becomes the holder for value?

a) By lending further on the strength of the cheque
b) By paying the amount of the cheque or part of it in cash or in account before it is
cleared
c) When bank deliver cash over the counter for the cheque at the time it is presented
for the collection
d) By accepting the cheque in arrowed reduction of an existing OD
e) When bank grants advance payment against bills and takes title of the bills

Rights of collecting banker as holder for value

a) The proceeds of collection will be retained by the banker as he has already paid
the value to the customer
b) He has the right to recover the value of cheque sent for collection, when it is
dishonoured from the drawer as well as the endorsers
c) The collecting banker has the right to recover the amount from all concerning the
cheque or any of the endorses, subsequent to the forgery
d) The collecting banker finds that the cheque has a defective title, he can recover
the amount from the endorsers or from the drawer as holder in due-course

Liability of collecting banker as holder for value

a) If the cheque sent for collection bears a forged endorsement and if the collecting
banker collects the cheque for himself, he is liable to the real owner of the cheque
b) If the cheque presented for collection possesses defective title or having no title at
all and if it is crossed or uncrossed, the collecting banker is liable to the real
owner of the instrument

Precautions to be taken by collecting banker as holder for value

a) The collecting banker has to obtain consent letter from the person presenting the
cheque for collection that he will reimburse the amount to the banker (if he has
already received the value) in case the cheque is dishonoured

14
 b) Acting as holder for value banker should confirm, title of cheque. He should
ensure the customer is the true owner of the instrument to avoid the risk
c) Collecting banker should examine the state of the cheque and essential contents of
the cheque to avoid dishonour of the cheque
d) Collecting banker should advise the customer to repay money or damage caused
by the dishonour or defective title of the cheque
e) The banker should collect amount from paying banker with in stipulated time or
as soon as possible

Collecting banker as an agent of customer

Collecting banker becomes an agent of customer when he collects cheque
amount for his customer. He simply acts as an agent to the concerned branch. He
credits the account of the customer only when the value is collected for sends a notice
of dishonour, if it is dishonoured.
Here banker merely acts as an agent for his customer and follows his
instructions.

Rights of collecting banker as an agent

a) Here collecting banker acts as an agent of customer and possess no right on
cheque. Whatever, good or defective title his customer carries, the same title
he possess, as he acts as an agent

Liabilities of collecting banker as an agent

a) Collecting banker should collect the cheque amount with in stipulated time
and credit same to the customer
b) While collecting cheque banker must function in good faith and without
negligence
c) In case of any dishonour of cheque collecting banker must serve notice to
customer regarding dishonour of cheque with reason of dishonour
d) If any damages cause to customer by the negligence of collecting banker while
performing function, he will become liable to customer

Holder in due-course
Sec. 9 of NI Act, 1881, “a person whom for consideration became the possessor of a
promissory note, bill of exchange or cheque, if payable to bearer, or payee or endorsee
thereof, if payable to order, before the amount mentioned in it becomes payable and without
having sufficient cause to believe that any defect existed in the title of the person from whom
he derived his title”.
The person can become Holder in due-course, if he satisfies the following conditions-
 The person should possess the instrument
 The instrument should have come to the possession before maturity
 The instrument should have been acquired for a consideration or value
 The consideration value of to be received should be lawful
 The instrument should be regular and complete

14
 Rights and privilege of a Holder in due-course
a) He obtains a better title to the instrument than the transfer
b) The defective title of the previous endorsers (if any) will not adversely affects his
rights
c) All the parties (drawer, acceptor, payee, endorser) are liable to the holder in due-
course of NI until it is paid
d) Even the drawer of the NI cannot claim invalidity of the instrument against him
e) The principle of estoppels is applicable against the endorse to deny the capacity of
previous parties

Conversion
Unlawful taking, using, disposing or destroying of goods or property which is
inconsistent with the owner’s right of possession. Conversion is an unauthorised. The
‘Doctrine of Conversion’ applies only to tangible property and not to debts. NI is included in
the term ‘Property’.

Banker is liable for conversion to the true owner of the instrument

a) When he collects a cheque, a bill of exchange or a promissory note becoming
a forged endorsement or in respect of which the customer has no title at all
b) When he borrows for his customer the proceeds of a cheque on which the
customer has no title or only defective title
c) When he takes as holder for value, a cheque marked ‘not negotiable’
d) When he delivers to the wrong person the goods entrusted with him for safe
custody

Banker is not liable for conversion to the true owner of an instrument

a) Where there is no forgery and the instrument comes into the hands of the
holder in due-course
b) Where there is forgery and the instrument is a cheque, payment whereon has
been made in due course by the banker

Negligence
Negligence refers to careless of banker while performing its duties; it depends upon
the circumstances of each case. Generally speaking negligence indicates lack of care which
is necessarily to be taken in any circumstances.
The following are the examples of negligence –
 Failure to obtain introduction for an account
 Irregularity of endorsements
 Crediting company cheque to private account of an official of the company
 Crediting cheques in favour of a trust
 Crediting cheques payable to the holder of a public office to his personal account

Statutory Protections of Collecting Banker

1. Cheque

14
 a) Good faith and without negligence – statutory protection is available to a
collecting banker when he receives payment in good faith and without
negligence. The banker should have exercised reasonable care and diligence.
b) Protection is for crossed cheques only - statutory protection is available only
in case of crossed cheque. It is not available in case of uncrossed or open
cheques because there is no need to collect then through a banker. (or) the
crossing must have been before it reaches the hands of the banker for
collection.
c) Protections are available for banker in his capacity as agent of the
customer – a collecting banker must act as an agent of the customer in order
to get protections, he must receive the payment as an agent of the customer
and not as holder under independent title. The banker as a holder for value is
not competent to claim protection from liability in conversion. In case of
forgery, the holder for value is liable to the true owner of the cheque.
d) Collection for a customer – statutory protection is available to a collecting
banker if he collects on behalf of his customer only. If he collects for a
strange or non-customer, he does not get such protection. A bank cannot get
protection when he collects as holder for value.

2. Bank Drafts
Sec. 131A of NI Act, 1881, also gives protection to the collecting banker as
regards the draft collected by him having forged endorsement or the draft having
defective title or no title at all. However, all the conditions laid down in Sec.131
should be satisfied to get the protection.

3. Bills of Exchange
Provisions 131 and 131A of NI Act, 1881, do not apply to the bills of
exchange as they are not crossed. The collecting banker has no obligation to collects
the bills on behalf of customer. Because of the risks involved in collecting the bills,
the collecting banker should take the following precautions-
a) He must make sure that the bill presented for collection has genuine
and is free of defects
b) Only bills of trusted customers must be collected
c) The bill on realisation should be credited to the customer’s account and
he informed accordingly to the customer
d) If the bill is dishonoured on the due date, the customer should be
informed through a notice of dishonour within a reasonable time.

14
 Paying Banker

Paying Banker
Meaning
The banker who holds the account of the drawer of the cheque and is obliged to make
payment, if the funds to the customer are sufficient to cover the amount of his cheques drawn
or if overdrawing facility is given to the customer.
Definition
Sec. 31 of NI Act, -“the drawee of a cheque, having sufficient funds of the drawer in
his hands properly applicable to the payment of such a cheque, must pay the cheque, when
duly required to do so, and in default of such payment, must compensate the drawer for any
loss or damage caused by such default”.

Duties and precautions of Paying Banker while making of payment of cheque

1. Proper form of cheque – a banker should see whether the cheque is in the proper
form. That means cheques should be in a manner prescribed under the provisions of
the NI Act, 1881
2. Open or crossed cheque – the most important precaution that a banker take is about
crossed cheques. He should verify that cheque is open or crossed, if it is crossed no
payment of cash across the counter in respect of crossed cheque.
3. Date of the cheque the paying banker has to see the date of the cheque, it must be
properly dated. It should not be either a post-dated or stale cheque.
4. Amount of the cheque – the amount written on the cheque must certain and
expressed both in words and figures. Any difference between the amount expressed
in words and figures, the banker may send back the cheque to the drawer bank with
the remark, and ‘the amount in words and figure differ’.
5. Material alteration – the paying banker should see whether there is any alteration or
over writing on the cheque. If there is any alteration, it should be confirmed by the
drawer by putting his full signature. The banker should not pay the cheques,
containing material alterations, without confirmation by the drawer, he has to risk
otherwise.
6. Forgery of drawer’s signature – forgery of drawer’s signature stands for any
material alteration in the signature part of the original drawer on an instrument which
is unauthorised and illegal in nature.
7. Facsimile signature – it denotes any signature not made directly by hand, and
includes signature made by stamp, print or any signature writing frequently appear on
dividend and interest warrants. The bank will accept the facsimile only by taking the
consent of the customer gives a suitable indemnity against the risk of any loss that
might result from the unauthorised use of signing device.

14
 8. Mutilated cheque – a cheque is said to be mutilated when it has been cut or torn, or
when a part is missing, the banker should be careful when mutilated cheques are
presented for payment.
9. A cheque must be presented with in banking hours – a cheque must be presented
for payment within banking hours, there are damages in the part of the paying banker
to honour a cheque presented by the customer out of banking hours.
10. Legal restrictions – if the cheque might have lost its legal characters by that time and
will have become invalid. Eg., death, insolvency, lunacy, garnishee order,
countermanding by the customer.
11. Endorsements – before the cheque is honoured, the bankers should also see whether,
the endorsements, if any, on the cheque are regular. If any irregular in the cheque, the
banker cannot honour cheque in such cheques.

Statutory protections of Paying Banker

The NI Act, 1881 has provides certain protections to the paying banker u/s 10, 16(2),
85(1), 85A, 87, 89(1)(8)(3), 85(1), 16(2), 85(2), 89 and 126 to 130. In the absence of these
protections, the paying banker has to satisfy himself that every payment made against each
cheque is made to the true owner.
1. Protection regarding the order cheque
In case of an order cheque, Sec.85(1) of NI Act, provides statutory protection
to the paying banker, regularity of enforsement. In case, payment is made to a wrong
person whose signature, the protection is given to a banker Sec.16(2) of NI Act. ‘it is
not possible for a banker to know each endorsers and their signature’
Regular endorsement – Sec. 85(1)
Payment in due-course –Sec. 10
2. Protection in case of bearer cheque
Sec. 85(2) of the NI Act, whereas a cheque is originally expressed to be
payable to bearer, the drawee is discharged by payment in due-course to the bearer
thereof, not with outstanding any endorsement whether in full or in blank appearing
thereon, no withstanding that any such endorsement purports to restrict or exclude
further negotiation.
3. Protection in case of crossed cheques
Regarding payment of crossed cheque, the paying banker gets the protection u/
128 of the NI Act, where the banker, on whom a crossed cheque is drawn, has paid
the same in due course, the payee, the drawer thereof, shall respectively be entitled to
the same rights, and be placed in the same position in all respects as they would
respectively be entitled to and placed in, if the amount of the cheque had been paid to
and received by the true owner thereof.
The paying banker makes payment in due-course regarding a crossed cheque
he is discharged of the liability as he is deemed to have paid the value to the true
owner.
4. Protection in case of drat
Sec. 85A of NI Act states that, ‘paying banker by laying down where any
draft, that it is an order to pay manner, drawn by the office of a bank upon another
office of the same bank for a sum of money payable to order on demand purports, to

14
 be endorsed by or on behalf of the payee, the bank is discharged by payment in due-
course’.

Payment in due-course – Sec 10 of NI Act, 1881

Payment in due-course is the process of giving funds to the holder of a NI when due,
without any knowledge that the document had been acquired by fraud or that the holder did
not have valid title.
Conditions
 Payment must be made at or after the date of maturity
 Payment must be made to the holder
 Payment must be made by the debtor in good faith and without notice that his title is
defective

Dishonour of Cheque
A cheque is said to be dishonoured when the payment is not made (to a customer) on
its presentment to the banker.

Circumstances of dishonour of cheque / Bank justify for refusing payment / Case of

dishonour
1. Insufficiency of funds
2. Notice of the customer’s death
3. Notice of customer’s insanity
4. Notice of the customer’s insolvency
5. Receipt of the garnishee order
6. Notice of assignment
7. Trust accounts
8. Suspicion about the title over the cheque
9. Presentation of stale or post dated cheque
10. Joint accounts
11. Material alterations
12. Drawer’s signature
13. Difference between words and figures of amount
14. Proper form of the cheque
15. Drawn on another branch

Types of Dishonour of cheque

1. Rightful dishonour
2. Wrongful dishonour

Consequences of wrongful dishonour of cheque

Dishonour of cheque by a banker without any justifiable reason is called wrongful
dishonour of cheque.
1. The damage that the banker has to pay will be more in case of wrongful dishonour of
cheques of the customer
2. In case of trustee account, normally substantially general damages will be awarded for
wrongful dishonour
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 3. The customer can disclose substantial damage without having monetary loss
4. The particular damages are awarded for the financial loss incurred by the customer as
a consequence of wrongful dishonour, provided the loss must be proved by the
customer

Mandate
Mandate means a simple, unstamped, written authority given by a customer to the
banker, authorising his agent to operate on his bank account.
The mandate is one instrument which legally permits the bank managers to honour
cheques signed by the mandatory (agent) or by the person to whom such power to sign in
granted by the customer.

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 Lending Banker

Bank Lending
The process of disposing of money or property with the expectation that the same
thing will be returned.

Principles of Lending
1. Liquidity – which means a ready convertibility to advances into cash meet the
customer’s demand across the counter. The liabilities of a bank are repayable on
demand or at a short notice. To meet the demand of the depositors in time, the banks
should keep its fund in liquid position. So, a bank should confine its lending to short
term against marketable securities.
2. Safety – the success of any bank will depends upon the confidence of the public
deposit, confidence could be infused in the depositors by investing the money in safe
and sound securities.
3. Profitability – it means earning profits on the assets acquired, here assets refers to the
bank loans and advances. In the process of making profit, banks cannot employ all
the funds in earning assets, it has to keep some funds to meet the liquidity.
4. Purpose of the loan – the purpose should be productive so that money not only
remain safe but also provides a definite source of repayment. The purpose should
also be short termed so that it ensures liquidity, banks should discourage advances for
hoarding stocks or for speculative business.
5. Security – it has been the practise of banks not to lend as far as possible except
against security. The banker should carefully examine all the different aspects of
advances before granting the advances or loans.
6. Consideration – a banker pins his faith on the ability and willingness of the
borrower. The confidence is judged by 3 considerations – Character, Capacity and
Capital.
7. Diversification of risk – the principle of good lending is the diversification of
advances. An element of risk is always present in every advance, however secure it
might appear to be. A successful banker is an expert in assessing such risks.
8. Public interest – even when an advance satisfies all good principles, it may still not
be suitable. The advance may run counter to national interest / public interest.

Kind of Lending facilities / Different form of Loans

1. Loans
2. Overdraft
3. Cash credit

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 4. Purchasing and discounting of bills of exchange
5. Issuing letter of credit

Loans
The banker advances a lumpusm for a certain period at an agreed rate of interest, and
the amount is paid in an occasion either in cash or by. Credit in his account which he can
withdraw anytime. The loan may be repaid in instalments or at the expiry of a certain
period.
 long term loan
 short term loan
 medium term loan
 security based loan
 unsecured loan

Overdraft
Overdraft is an arrangement between banker and his customer by which the latter is
allowed to withdraw over and above his credit balance in the current account up to an agreed
limit.
The interest is charged only for the amount drawn and not for the whole amount
sanctioned. Overdraft is made occasionally for short duration in the current account only.
 Clean OD – it may be permitted without any security as clean OD for temporary
period for some emergency financial difficulty.
 Secured OD – it may be permitted against fixed deposits, and other securities –
 OD against pledge of securities
 OD against Insurance policy
 OD against property
 OD against Receivables
 OD against Stock
 OD against Gold
 OD against Car

Cash Credit
A cash credit is an arrangement by which the customer is allowed to borrow money
up to a certain limit. This is a permanent arrangement and customer need not draw the
sanctioned amount at once, but draw the amount as an when he required. The interest will be
charged quarterly or half yearly on the amount actually used at an agreed rate.
When the cash credit is sanctioned, the banker should keep the amount at the credit of
the borrower, irrespective of the fact that he utilises the amount or not.
Thus, the banker will lose interest earnings on the unpaid balance, to compensate this
loss he incorporates ‘Minimum Interest Clause / Commitment charges’ according to which
the interest is to be paid on the amount unutilised at an agreed rate or on the portion of cash
credit sanctioned whichever is higher.

Purchasing and discounting of Bills of Exchange

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Purchasing of Bills
Obtaining a bill at sight for the consideration i.e., full value minus discount charges,
from a customer. The consideration will be credited to the customer’s account. The banker
then receives the face value of the bill, when the bill presented to the drawer of the bill.
Discounting of Bills
Trading or selling of a bill of exchange prior to the maturity date at a value less than
the par value of the bill. The amount of the discount will depend on the amount of time left
before the bill matures and on the perceived risk attached to the bill.

Letter of Credit
Letter issued by the importer’s bank in favour of the exporter authorising him to draw
bills for an amount specified in it and assuring him of payment against the delivery of the
prescribed documents in his own country.

Parties of Letter of Credit

 Applicant
 Issuing bank
 Beneficiary
 Advising bank
 Others – confirming bank, negotiating bank, paying bank and reimbursing bank

Types of Letter of Credit

1. Revocable Letter of Credit
2. Irrevocable Letter of Credit
3. Documentary / Secured Letter of Credit
4. Clean or Open Letter of Credit
5. Fixed Letter of Credit
6. Revolving Letter of Credit
7. Confirmed Letter of Credit
8. Unconfirmed Letter of Credit
9. With Recourse Letter of Credit
10. Without Recourse Letter of Credit
11. Transferable Letter of Credit
12. Non-transferable Letter of Credit
13. Bill of Lading
14. Travellers Letter of Credit

Non – Performing Assets (NPA)

NPA is an advance where the interest and / or instalment of principal remains unpaid
for a period of more than 90 days in respect of a loan, OD and cash credit.
NPA means an asset or account of borrower, which has been classified by a bank or
financial institution in accordance with the directions or guidelines relating to asset
classification issued by the RBI.

Types of NPA

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 1. Standard assets – those assets which do not cause any problem and do not carry
more than normal risk attached to the business are called standard assets.
2. Sub-standard assets – where instalments of term loans are overdue for a period
exceeding one year should be treated as sub-standard assets.
3. Doubtful assets – where instalments of term loans are overdue for a period exceeding
two years must be treated as doubtful assets.
4. Loss assets – when the loss on an asset is identified by the bank but the amount has
not been written off wholly or partly is known as loss assets.

Circumstances where NPA’s created

A Recent study conducted by RBI, the under laying reasons for NPA’s in India can be
classified into the following-
1. Internal Factors
a) Diversion of funds for expansion / modernization or for taking up new projects
b) Diversion of funds for assisting or promoting associate concerns
c) Time or cost overrun during the project implementation stage
d) Business failures due to product failure, failure in marketing
e) Inefficiency in management
f) Slackness in credit management and monitoring
g) Inappropriate technology or problems related to modern technology
2. External Factors
a) Recession in the economy as a whole
b) Impact or power shortage
c) Price escalation of inputs
d) Exchange rate fluctuation
e) Accidents and natural calamities
f) Changes in govt policies relating to excise and import duties, pollution control
orders, etc.,
g) Govt loan wairer scheme
3. Other Factors
a) Liberalisation of the economy and the consequent pressures
b) Poor monitoring of credits and the failure to recognize early warning signals
shown by standard assets
c) Sudden crashing of capital market and the failures to raise adequate funds
d) Granting of loans for certain sector
e) Mismatch of funding / using loans granted for short term for long term
transactions
f) High cost of borrowing
g) Commitment of wilful defaults sensing that the legal resource available to
collect debts is very slow

Impact of NPA
1. Profitability
2. Asset (Credit) Contraction
3. Liability Management
4. Capital adequacy
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 5. Shareholders confidence
6. Public confidence

Early Warning Signals (EWS)

It clearly indicates or shows some signs of credit deterioration in the loan amount.
They indicate the potential problems involved in the accounts so that remedial action can be
initiated immediately.

Regulation of Priority Lending for Commercial Banks

 Agriculture sector
 Small scale industries
 Retail trade
 Micro credit
 Education
 Housing
 Weaker sections
 Export oriented

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