Banking & Ni

BANKING – 5th Semester
Harinath Janumpally Practicing Advocate

Advocate in Civil & Criminal Matters
B.Com; MBA; LLB & Medchal & Other Courts
(Studying LLM in OU Campus) Mob: 94406 29864
Mail: Harinath0012@gmail.com
LLB 5 t h SEMESTER
LAW OF BANKING AND NEGOTIABLE INSTRUMENTS
PAPER- III: SYLLABUS
LAW OF BANKING AND NEGOTIABLE INSTRUMENTS
Unit-I: History of the Banking Regulation Act — Salient features — Banking Business and its importance in
modern times – Different kinds of Banking – impact of Information Technology on Banking.
Unit-II: Relationship between Banker and Customer — Debtor and Creditor Relationship - Fiduciary
Relationship — Trustee and Beneficiary — Principal and Agent — Bail and Bailee — Guarantor.
Unit-III: Cheques — Crossed Cheques — Account Payee — Banker's Drafts — Dividend Warrants, etc. —
Negotiable instruments and deemed negotiable instruments — Salient features of The Negotiable
Instruments Act.
Unit-IV: The Paying Banker — Statutory protection to Bankers — Collecting Banker – Statutory protection
– Rights and obligations of paying and collecting bankers.
Unit-V: Banker's lien and set off -- Advances - Pledge - Land - Stocks - Shares - Life Policies - Document of
title to Goods - Bank Guarantees - Letters of Credit – Recovery of Bank loans and position under the
SARFAESI Act, 2002 – Jurisdiction and powers of Debt Recovery Tribunal.
Suggested Readings: 1. Tannan: Banking Law & Practice in India, Orient Law House, New Delhi.
2. Avtar Singh: Negotiable Instruments, Eastern Book Company, Lucknow.
3. P.N.Varshney: Banking Law & Practice, Sultan Chand & Sons, New Delhi.
4. Taxman: Law of Banking, India Law House
5. B.R. Sharma and Dr.R.P. Nainta: Principles of Banking Law and Negotiable Instruments Act, Allahabad
Law Agency.
6. Mukherjee's Banking Law and Practice, Premier Publications Company.
7. Bashyam and Adiga: Negotiable Instruments Act, Bharat Law House.
8. S.R. Myneni, Law of Banking, Asia Law House.
Harinath Janumpally – harinath0012@gmail.com – 94406 29864 1

SL NO BANKING AND NEGOTIABLE INSTRUMENTS - 5th SEMESTER - IMPORTANT QUESTIONS REP

1 Explain the concept of banking and discuss the objectives and salient features of the Banking Regulation Act 3
2 Define banking and trace the history of banking system in India and its importance in modern times 5
3 Banker's obligation to maintain the secrecy of customers account is not absolute 2
Case - Can an Income Tax Officer demand the details of an account from the banker? 1
4 Who is banker? General relationship between banker and customer 6
Fiduciary Relationship 2
Banker as Trustee 2
5 Define cheque and discuss Crossed Cheque (2 times) / Account Payee (2 times) 5
6 Bill of Exchange 4
7 Describe Promissory/Pronote Notes and when it expires 3
8 What is NI and describe the main characteristics? Is a cheque a negotiable instrument? Explain 4
9 Discuss the law relating to NI and deemed NI 2
Travellers Cheques 3
Dividend Warrants 2
Circular Notes 1
Demand Draft 1
Postal Order 1
Banker's Draft 1
10 Define paying banker and discuss the statutory protection available to the paying banker 4
11 Collecting Banker 3
12 Banker's Lien 3
13 Banker's setoff 3
14 Bank Guarantees 3
15 What is letter of credit? What are the different kinds of letters of credit? 3
16 Reserve Bank of India / Bankers' Bank 2
IMPORTANT CASES
17 Is this a Negotiable Instrument?
Case - An instrument "I promise to pay B, Rs. 500/- when he delivers the goods" is it a pronote? 1
Case - 'I promise to pay B or order Rs. 500' what is this instrument? 1
Case - Bill of Exchange 1
Case - A bill without any name 1
Case - Discrepancy between figures and words on NI 1
18 Holder in due course
Case - 'A' the holder of a bill, endorses it to 'B', 'B' negotiates the bill to 'C' 1
Case - Mr. Srinu draws and handovers a cheque of Rs. 2000 as gift to Mr. Balu is Balu a holder in due course? 1
Case - 'A' on point of pistol forces 'B' to issue a bearer cheque, after collecting it hands over to 'C', is 'C' holder in due course? 1
19 Endorsing fewer amount
Case - Endorsing fewer amounts on the Promissory note, what are the consequences? 1
Case - Holder of a Promissory note for Rs. 1000 writes on it "pay B Rs. 500" and endorses the note 1
20 Forged/Stolen Negotiable Instrument
Case - A bill which was obtained by fraud was endorsed to third party 1
Case - A bill was stolen, Y forged it and endorsed to 'Z' 1
Case - Stolen cheque 1
Case - Forged cheques encashing 1
Case - Obtaining acceptance to a Bill of Exchange by fraud 1
Case - A cheque was stolen and encashed by forging the cheque. 1
21 Stolen cheque was encashed, is the paying banker responsible? 1
22 Dishonour of a cheque by the banker without any valid reasons:
When a banker refuses payment of a cheque, what is the legal position? 1
A cheque is dishonoured due to bank's fault 1
IMPORTANT SECTIONS:
NEGOTIABLE INSTRUMENTS ACT
1. Sec 4 Promissory Note,
2. Sec 5 Bill of Exchange,
3. Sec 6 Cheque,
4. Sec 9 Holder in Due Course,
5. Sec 10: Payment in Due Course.
6. Sec 13(a) Definition of NI,
7. Sec 15 Endorsement,

8. Sec 31 Liability for dishonouring a cheque.

9. Sec 56: Partial Endorsement.
10. Sec 58 Stolen/Lost/Fraud/Forgery Instruments,
11. Sec 123 General Crossing,
12. Sec 124 Special Crossing.
13. Sec 131 of Income Tax Act for obtaining bank accounts.
Answers to important questions

1. Explain the concept of banking and discuss the objectives and salient features of the Banking
Regulation Act
Answer: Definition of a Bank:
A bank is a financial institution that performs the deposit and lending function. A bank allows a person
with excess money (Saver) to deposit his money in the bank and earn an interest rate. Similarly, the bank
lends to a person who needs money (investor/borrower) at an interest rate. Thus, the banks act as an
intermediary between the saver and the borrower.
The bank usually takes a deposit from the public at a much lower rate called deposit rate and lends the
money to the borrower at a higher interest rate called lending rate.
The difference between the deposit and lending rate is called ‘net interest spread’, and the interest
spread constitutes the banks' income.
Meaning of Banking
Banking is a business activity that involves accepting money from the public in the form of deposits and
lending it as loans for earning profit. Banking institutions mainly serves the purpose of safeguarding
people’s money and fulfilling their fund requirements by providing them with loan facilities. These
institutions pay interest on deposits to savers and charge higher rates of interest from borrowers.
The difference between these two rates of interest is the bank profit. Apart from accepting and lending
money, banks also provide many other services such as lockers, ATM services, online fund transfers,
cheque payments, foreign currency exchange, issuing debit/credit cards, providing bank guarantees,
insurance services, letters of credits etc. Banks accept deposits from the public under different categories
of accounts like saving account, current account, fixed deposit and recurring deposit account.
In the same way, these institutions lend money to the public as overdraft facilities, personal loans,
business loans, vehicle loans, home loans and mortgage loans etc. Banking institutions play a key role in
the economic development of a country as it ensures liquidity of funds by the movement of funds among
people.
Objectives of Banking
1. Safeguard Deposits
Bank serves the main purpose of accepting deposits from public and safeguarding it. It guarantees the
safety of funds to customers for depositing their money in their accounts.
2. Provide Loans
It advances loans to customers at both a short-term and long-term basis as per their needs. Bank provides
loans out of the deposits that they receive and charges interest on the amount from customers.
3. Encourage Savings
Banking institutions have an efficient role in encouraging saving habits among people. It motivates people
for saving and depositing their earnings in bank accounts by paying them a fixed rate of interest on their
deposited amount regularly.
4. Capital Formation
Banking accelerates the capital formation rate within the country. It extends credit to various sectors of
the economy from time to time which helps in uninterrupted continuation of all growth and development
activities. Different industries and businesses approach banks for fulfilling their financial needs.
5. Currency Issue
Banking organizations does the purpose of issuing currency which is served as a legal tender in country.
Central bank of our country (i.e. RBI) prints and issues all currency notes for the public.
6. Enhances Living Standards

It assists the people in improving their quality of life by providing them credit. Bank enables customers in
purchasing high quality and costly goods on credit basis or hire purchase system.
7. Generates Employment
Banking organizations also helps in generating large employment opportunities within the country. It
helps companies in extending their activities by providing them credit as per their needs. This will result in
increase in human resource requirement for various positions. In addition to this, a large section of
economy is working within the banking sector and provides self-employment loans to the needy people
those who deserve it.
Importance of Banking
1. Bring Economic Stability
Banking sector plays a crucial role in attaining the economic stability. They are the one who assists in
controlling the depression and inflation phases. During depression, banks adopt cheap money policy and
increase the flow of money in economy, at the time of inflation; it follows strict money policy to decrease
the flow of money. It increases the interest rate on borrowings to control the people’s spending during
inflation.
2. Creates Money
Banks generates money in an economy by advancing loans to all those who are in need of funds. It is one
which grants credit out of the money collected by it from public. These institutions aim at maintaining
sufficient flow of funds.
3. Facilitates Trade
It helps in doing both internal and external trade. Banks enable merchants in conducting trade by provide
them proper payment facility, issuing letter of credit, discounting bill of exchange and providing them
other guarantee documents.
4. Money Transfer
It enables people to transfer their funds rapidly even to far distant places. It has facilitated the payment
system by providing various instruments such as draft, cheque and bill of exchange. Payment done via
these instruments is more safe and convenient instead of paying in cash. Nowadays banks are providing
electronic transfers through RTGS, IMPS AND NEFT for easy, speedy and efficient transfer.
5. Transfer Savings Into Investment
Banking serves as the medium of transferring money from those who have excess of it to those who are in
need of it. It collects people savings and provides loan out of these savings to entrepreneurs and
companies for their expansion programs. Bank converts the people’s ideal lying funds into productive
means.
6. Ensures Liquidity
Maintaining a proper liquidity in the economy is another important role played by banks. Banks regulate
the money flows by adopting an efficient monetary policy. During inflation it decreases the money supply
whereas at the time of deflation it increases the flow of money.
Features of banking regulation act 1949:

The main features of the banking regulation act are as follows:
1. The Banking Regulation Act was passed to consolidate and amend the law relating to banking
companies.
2. Banking Regulation Act controls the Banking institutions since their birth to death.
3. The Banking Regulation Act came into effect from 16 th March, 1949 and applies to the whole of
India.
4. The Act was further amended by Banking Laws (Amendment) Act, 1983, the Banking Public
Financial Institutions and Negotiable Instrument Laws (Amendment) Act, 1988, the banking
Regulation (Amendment) Act, 1994 and the Banking Regulation (Amendment) Bill, 2020.

5. Prohibition of trading (Section 8): According to Section 8 of the Banking Regulation Act, a bank
cannot directly or indirectly deal with buying or selling or bartering of goods. However it may
barter the transactions relating to bills of exchange received for collection or negotiation.
1. Non-banking asset (Section 9): A bank cannot hold any immovable property, howsoever acquired,
except for its own use, for any period exceeding seven years from the date of acquisition thereof.
The company is permitted, within a period of seven years, to deal or trade in any such property for
facilitating its disposal.
2. Management (Section 10): This rule states that every bank shall have one of its directors as
Chairman on its Board of Directors. It also states that not less than 51% of the total number of
members of the Board of Directors of a bank shall consist of persons who have special knowledge
or practical experience in accountancy, agriculture, banking, economics, finance, law and co-
operatives.
3. Minimum capital (Section 11): Section 11 (2) of the Banking Regulation Act, 1949, states that no
bank shall commence or carry on business in India, unless it has minimum paid-up capital and cash
reserve prescribed by the RBI.
4. Payment of commission (Section 13): According to Section 13, a bank is not permitted to pay
directly or indirectly by way of commission, brokerage, discount or remuneration on issues of its
shares in excess of 2.5% of the paid-up value of such shares.
5. Payment of dividend (Section 15): According to Section 15, no bank shall pay any dividend on its
shares until all its capital expenses(including preliminary expenses, organisation expenses, share
selling commission, brokerage, amount of losses incurred and other items of expenditure not
represented by tangible assets) have been completely written-off.
2. Define banking and trace the history of banking system in India and its importance in modern times.
Answer:
What is banking?
Banking is directly or indirectly connected with the trade of a country and the life of each and every
individual. It is an industry that manages credit, cash, and other financial transactions. In banking, the
commercial bank is the most influential institution for any country’s economy or for providing any credit
to its customers. In India, banking company is responsible for transacting all the business transactions
including withdrawal of cheques, payments, and investments, etc. In other words, the bank is involved in
the deposit and withdrawal of money, repayable on demand, savings and earning a decent amount of
profits by lending money.
Bank also helps to mobilize the savings of an individual, making funds accessible to business and help
them to start a new venture.
However, unlike the commercial bank, the private sector banks are owned, operated and regulated by
private investors and have the right to operate according to the market forces.
History of banking system in India:

Banking is considered to be the “Backbone of a Nation’s Economy”. The Indian Banking, today, is divided
into commercial banks which are Private, Public scheduled and non-scheduled banks, Regional and Rural,
and Cooperative Banks. Banking Companies Act of 1949 defined banking as accepting for the purpose of
lending or investment of depositing money from the public, repayable on demand or otherwise and
withdrawable by cheque draft or otherwise. Let us learn more about the History of Banking System in
India.
Phases of Indian Banking System
The advancement in the Indian banking system is classified into 3 distinct phases:
1. The Pre-Independence Phase i.e. before 1947

2. Second Phase from 1947 to 1991
3. Third Phase 1991 and beyond

1. The Pre-Independence Phase i.e. before 1947

 This phase is characterized by the presence of a large number of banks (more than 600).
 Banking system commenced in India with the foundation of Bank of Hindustan in Calcutta (now
Kolkata) in 1770 which ceased to operate in 1832.
 After that many banks came but were not successful like:
(1) General Bank of India (1786-1791)
(2) Oudh Commercial Bank (1881-1958) – the first commercial bank of India.
 Whereas some are successful and continue to lead even now like:
(1) Allahabad Bank (est. 1865)
(2) Punjab National Bank (est. 1894, with HQ in Lahore (that time))
(3) Bank of India (est. 1906)
(4) Bank of Baroda (est. 1908)
(5) Central Bank of India (est. 1911)
 While some others like Bank of Bengal (est. 1806), Bank of Bombay (est. 1840), Bank of Madras
(est. 1843) merged into a single entity in 1921 which came to be known as Imperial Bank of India.
 Imperial Bank of India was later renamed in 1955 as the State Bank of India.
 In April 1935, Reserve Bank of India was formed based on the recommendation of Hilton Young
Commission (set up in 1926).
 In this time period, most of the banks were small in size and suffered from a high rate of failures.
As a result, public confidence is low in these banks and deposit mobilization was also very slow.
People continued to rely on the unorganized sector (moneylenders and indigenous bankers).
2. The second phase from 1947 to 1991
 Broadly the main characteristic feature of this phase is the Nationalization of the banks.
 With the view of economic planning, nationalization emerged as an effective measure.
Need for nationalization in India:
(a) The banks mostly catered to the needs of large industries, big business houses.
(b) Sectors such as agriculture, small-scale industries and exports were lagging behind.
(c) The poor masses continued to be exploited by the moneylenders.
 Following this, in the year 1949, 1st January the Reserve Bank of India was nationalized.
 Fourteen commercial banks were nationalized on 19th July 1969. Smt. Indira Gandhi was the
Prime Minister of India, during in 1969. The following banks are nationalized:
1. Central Bank of India
2. Bank of India
3. Punjab National Bank
4. Bank of Baroda
5. United Commercial Bank
6. Canara Bank
7. Dena Bank
8. United Bank
9. Syndicate Bank
10. Allahabad Bank
11. Indian Bank
12. Union Bank of India
13. Bank of Maharashtra
14. Indian Overseas Bank
 Six more commercial banks were nationalized in April 1980. These are mentioned below:
1. Andhra Bank
2. Corporation Bank
3. New Bank of India
4. Oriental Bank of Commerce

5. Punjab & Sindh Bank

6. Vijaya Bank.
 Meanwhile, on the recommendation of the Narasimham Committee, Regional Rural Banks (RRBs)
were formed on Oct 2, 1975. The objective behind the formation of RRBs was to serve the large
unserved population of rural areas and promoting financial inclusion.
 With a view to meet the specific requirement from the different sector (i.e. agriculture, housing,
foreign trade, industry) some apex level banking institutions were also set up like: (a) NABARD
(est. 1982), (b) EXIM (est. 1982), (c) NHB (est. 1988) and (d) SIDBI (est. 1990).
Impact of Nationalization:
 Improved efficiency in the Banking system – since the public‘s confidence got boosted.
 Sectors such as Agriculture, small and medium industries started getting funds which led to
economic growth.
 Increased penetration of Bank branches in rural areas.
3. Third phase 1991 and beyond
 This period saw remarkable growth in the process of development of banks with the liberalization
of economic policies.
 Even after nationalization and the subsequent regulations that followed, a large portion of masses
is untouched by the banking services.
 Considering this, in 1991, the Narasimham committee gave its recommendation i.e. to allow the
entry of private sector players into the banking system.
 Following this, RBI gave license to 10 private entities, out of which few survived the market
demands, which are- ICICI, HDFC, Axis Bank, IndusInd Bank, DCB.
 In 1998, the Narsimham committee again recommended the entry of more private players. As a
result, RBI gave a license to the following newbies:
(a) Kotak Mahindra Bank (2001)
(b)Yes Bank (2004)
 In 2013-14, the third round of bank licensing took place and in 2015, IDFC bank and Bandhan Bank
emerged.
 In order to further financial inclusion, RBI also proposed to set up 2 new kinds of banks i.e.
Payment Banks and Small Banks.
 In 2015, RBI gave in-principle licence to 11 entities to launch Payments Bank and granted 'in-
principle' approval to the 10 applicants to set up Small Finance Banks.
List the Importance of Banks in Detail

Importance of Bank: Banking plays an important role in the financial life of a business, and the importance
of banks can be seen from the fact that they are considered to be the life-blood of the modern economy.
Although no wealth is created by banks, their essential activities facilitate the process of production,
exchange and distribution of wealth.
1. Collections of Savings and Advancing Loans
Acceptance of deposit and advancing the loans is the basic function of commercial banks. On this function,
all other functions depend accordingly. Bank operates different types of accounts for its customers.
2. Money Transfer
Banks have facilitated the making of payments from one place or persons to another by means of
cheques, bill of exchange and drafts, instead of cash. Payment through cheques, the draft is more safe and
convenient, especially in case of huge payments, this facility is a great help for traders and businessmen. It
really enhances the importance of banks for the business community.
3. Encourages Savings
Banks perform an invaluable service by encouraging savings among the people. They induce them to save
for profitable investment for themselves and for the national interest. These savings help in capital
formation.
4. Transfer Savings into Investment

Bank transfer the savings collected from the people into investment and thus increase the amount of
effective capital, which helps the process of economic growth.
5. Overdraft Facilities
The banks allow the overdraft facilities to their trusted customers and thus help them in overcoming
temporary financial difficulties.
6. Discounting bill of exchange
The importance of banks can be seen through the facility of discounting the bill of exchange. Banks
discount their bill of exchange of consumers and help them in financial difficulties. By discounting a bill of
exchange, they able to get the desired amount for the investment they want.
7. Financing Internal & External Trade
Banks help merchants and traders in financing internal and external trade by discounting a foreign bill of
exchange, issuing of letters of credit and other guarantees for their customers.
8. Act as an Agent
The bank act as an agent and help their customers in the purchase and sales of shares, provision of lockers
payment of monthly subscriptions, payment of rents and salaries and collection of dividends on the stock.
9. Issue of Traveller’s Cheques
For the convenience and security of money for travellers and tourists, the bank provides the facility of
traveller’s cheques. These cheques enable travellers and tourists to meet their expenses during their
journey, as these are accepted by issuing bankers, restaurants, and other businessmen both at home and
abroad. No doubt, this is also one of the great functions of banks and shows the importance of banks for
us in more precise ways.
10. General Utility Services
The existence of commercial banks is essential for contribution to general prosperity. Banks are the main
factors in raising the level of economic development of the world. In addition to the above-cited
advantages, banks also provide many services of general utilities to the customers and the general public.
For e.g. providing safe deposit lockers, ATM facility, Debit/Credit cards
3. Banker's obligation to maintain the secrecy of customers’ account is not absolute.

Case: An Income Tax Officer directly writes to a banker to disclose certain details relating to his
customers accounts. Examine whether the banker can legally disclose information. (Dec-2015).
Answer: A banker is expected to maintain secrecy of his customer’s account. The banker should not
disclose his customer’s financial position and the nature and the details of his account.
The bank owes a duty of secrecy in respect of its customer’s affairs, but there are exceptions to this
general duty.
The general rule about the secrecy of customer’s accounts may be dispensed within the following
circumstances:
(i). When the law requires such disclosure to be made; and
(ii). When the practices and usages amongst the bankers permit such disclosure.
Disclosure of Information required by Law:

A banker will be justified in disclosing information about his customer’s account on reasonable and
proper occasions and is under statutory obligations to disclose the information relating to his customer’s
account when the law specifically requires him to do so. The banker would, therefore, be justified in
disclosing information to meet the following statutory requirements:
1. Under the Income Tax Act, 1961:
According to Section 131, the Income Tax authorities possess the same powers as are vested in a court
under the Code of Civil Procedure, 1908 for enforcing the attendance of any person including any officer of
banking company and examining him on oath and compelling the production of books of accounts and
other documents and issuing commissions. Section 133 empowers the income tax authorities to require
any person, including a banking company or any officer thereof, to furnish information in relation to such
points or matter, or to furnish statements of accounts and affairs giving information in relation to such

points or matters, as in the opinion of the income tax authorities will be useful for or relevant to any
proceedings under the Act. The income tax authorities are thus authorized to call for necessary
information from the banker for the purpose of assessment of the bank’s customers.
2. Under the Companies Act, 1956:
When the Central Government appoints an inspector to investigate the affairs of any joint stock company
under Section 235 or 237 of the Companies Act, 1956, it shall be the duty of all officers and other
employees and agents (including the bankers) of the company to –
a. Produce all books and papers of, or relating to, the company, which are in their custody or power,
and
b. Otherwise to give to the inspector all assistance in connection with investigation which they are
reasonably able to give.
3. By order of the Court under the Banker’s Book Evidence Act, 1891:
When the court orders the banker to disclose information relating to a customer’s account, the banker is
bound to do so. In order to avoid the inconvenience likely to be caused to the bankers from attending the
courts and producing their account books as evidence, the Banker’s Books Evidence Act, 1891, provides
that certified copies of the entries in the banker’s books are to be treated as sufficient evidence and
production of the books in the courts cannot be forced upon the bankers.
4. Under the Reserve Bank of India Act, 1934:
The Reserve Bank of India collects credit information from the banking companies and also furnishes
consolidated credit information from the banking company. Every banking company is under a statutory
obligation under Section 45-B of the Reserve Bank of India Act, 1934, to furnish such credit information to
the Reserve Bank. The Act, however, provides that the credit information supplied to the Reserve Bank by
the banking companies shall be kept confidential.
5. Under the Banking Regulation Act, 1949:
Under Section 26 of the Banking regulation Act, every banking company is required to submit a return
annually of all such accounts in India, which have not been operated upon for 10 years. Banks are
required to give particulars of the deposits standing to the credit of each such account.
6. Under the Gift Tax Act, 1958:
Section 36 of the Gift Tax Act, 1958, confers on the Gift Tax authorities powers similar to those conferred
on income tax authorities under Section 131 of the Income Tax Act.
7. Disclosure to Police:
Under Section 94(3) of the Criminal Procedure Code, 1973, the banker is not exempted from producing the
account books before the police. The police officers conducting an investigation may also inspect the
banker’s books for the purpose of such investigations.
8. Under the Foreign Exchange Management Act, 1999:
Banking companies dealing in foreign exchange business are designated as authorized dealers in foreign
exchange. Section 43 of this Act empowers the officer of the Directorate of Enforcement and the Reserve
Bank to inspect the books and accounts and other documents of any authorized dealer and also to
examine on oath such dealer or its Director or officials in relation to its business.
9. Under the Industrial Development Bank of India Act, 1964:
After the insertion of sub-section 1A in Section 29 of this Act in 1975, the Industrial Development Bank of
India is authorized to collect from or furnish to the Central Government, the State Bank, any subsidiary
bank, nationalized bank or other scheduled bank, State Cooperative Bank, State Financial Corporation
credit information or other information as it may consider useful for the purpose of efficient discharge of
its function. The term ‘credit information’ shall have the same meaning as under the Reserve Bank of
India Act, 1934.
Disclosure Permitted by the Banker’s practices and Usages:

The practices and usages customary amongst bankers permit the disclosure of certain information under
the following circumstances:
1. With Express or Implied Consent of the Customer:

The banker will be justified in disclosing any information relating to his customer’s account with the
latter’s consent. In fact, the implied term of the contract between the banker and his customer is that the
former enters into a qualified obligation with the latter to abstain from disclosing information as to his
affairs without his consent. It is very important that the banker must be very careful in disclosing the
required information to the customer or his authorized representative. The consent of the customer may
be express or implied.
2. Banker’s Reference:
Bankers follow the practice of making necessary enquiries about the customers, their sureties or the
acceptors of the bills from other bankers. This is an established practice amongst the bankers and is
justified on the ground that an implied consent of the customer is presumed to exist. By custom and
practice necessary information or opinion about the customer is furnished by the banker confidentially.
The banker may disclose the state of his customer’s account in order to legally protect his own interest.
For example, if the banker has to recover the dues from the customer or the guarantor, disclosure of
necessary facts to the guarantor or the solicitor becomes necessary and is quite justified.
3. Duty to the Public to Disclose:
A banker may justifiably disclose any information relating to his customer’s account when it is his duty to
the public to disclose such information. When a bank is asked for information by a government official
concerning the commission of a crime and the bank has reasonable cause to believe that a crime has been
committed and that the information in the bank’s possession may lead to the apprehension of the culprit.
4. Who is banker? General relationship between banker and customer.

Fiduciary Relationship and Banker as a Trustee.
Answer: Who is banker: The term ‘banker’ refers to a person or company carrying on the business of
receiving moneys, and collecting drafts, for customers subject to the obligation of honouring cheques
drawn upon them from time to time by the customers to the extent of the amounts available on their
current accounts. Banker is one who conducts the business of banking; one who, individually, or as a
member of a company, keeps an establishment for the deposit or loan of money, or for traffic in money,
bills of exchange, etc.
Relationship between Banker and Customer:
The relationship between the banker and the customer arises out of the contract between them and
cannot be created except by mutual consent. A contract that exists between a banker and its customer is
a loan contract because if the customer’s account is in credit, the bank owes him that money and vice-
versa if the account is overdrawn. The relationship between a banker and his customer is basically the
contractual relationship of debtor and creditor and is regulated by the provisions contained in the
Negotiable Instruments Act, 1881, and the Indian Contract Act, 1872. The relationship between the banker
and the customer is vital.
The banker-customer relationship is that of a:
1. Debtor and Creditor,

2. Pledger and Pledgee,
3. Licensor and Licensee,
4. Bailor and Bailee,
5. Hypothecator and Hypothecatee,
6. Trustee and Beneficiary,
7. Agent and Principal,
8. Advisor and Client, and
9. Other miscellaneous relationships
1. Relationship of Debtor and Creditor

When a customer opens an account with a bank and if the account has a credit balance, then the
relationship is that of debtor (banker / bank) and creditor (customer).

In case of savings / fixed deposit / current account (with credit balance), the banker is the debtor, and
the customer is the creditor. This is because the banker owes money to the customer. The customer has
the right to demand back his money whenever he wants it from the banker, and the banker must repay
the balance to the customer.
In case of loan / advance accounts, banker is the creditor, and the customer is the debtor because the
customer owes money to the banker. The banker can demand the repayment of loan / advance on the
due date, and the customer has to repay the debt.
A customer remains a creditor until there is credit balance in his account with the banker. A customer
(creditor) does not get any charge over the assets of the banker (debtor). The customer's status is that of
an unsecured creditor of the banker.
The debtor-creditor relationship of banker and customer differs from other commercial debts in the
following ways:
A. The creditor (the customer) must demand payment. On his own, the debtor (banker) will not repay
the debt. However, in case of fixed deposits, the bank must inform a customer about maturity.
B. The creditor must demand the payment at the right time and place. The depositor or creditor must
demand the payment at the branch of the bank, where he has opened the account. However, today,
some banks allow payment at all their branches and ATM centres. The depositor must demand the
payment at the right time (during the working hours) and on the date of maturity in the case of
fixed deposits. Today, banks also allow pre-mature withdrawals.
C. The creditor must make the demand for payment in a proper manner. The demand must be in form
of cheques; withdrawal slips, or pay order. Now-a-days, banks allow e-banking, ATM, mobile-
banking, etc.
2. Relationship of Pledger and Pledgee
The relationship between customer and banker can be that of Pledger and Pledgee. This happens when
customer pledges (promises) certain assets or security with the bank in order to get a loan. In this case,
the customer becomes the Pledger, and the bank becomes the Pledgee. Under this agreement, the assets
or security will remain with the bank until a customer repays the loan.
3. Relationship of Licensor and Licensee
The relationship between banker and customer can be that of a Licensor and Licensee. This happens when
the banker gives a safe deposit locker to the customer. So, the banker will become the Licensor, and the
customer will become the Licensee.
4. Relationship of Bailor and Bailee
The relationship between banker and customer can be that of a Bailor and Bailee.
A. 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.
B. Bailor is the party that delivers property to another.
C. Bailee is the party to whom the property is delivered.
So, when a customer gives a sealed box to the bank for safe keeping, the customer became the bailor, and
the bank became the bailee.
5. Relationship of Hypothecator and Hypothecatee
The relationship between customer and banker can be that of Hypothecator and Hypothecatee. This
happens when the customer hypothecates (pledges) certain movable or non-movable property or assets
with the banker in order to get a loan. In this case, the customer became the Hypothecator, and the
Banker became the Hypothecatee and banks provide loans for home appliances and vehicles on hire-
purchase basis.
6. Relationship of Trustee and Beneficiary
A trustee holds property for the beneficiary, and the profit earned from this property belongs to the
beneficiary. If the customer deposits securities or valuables with the banker for safe custody, banker
becomes a trustee of his customer. The customer is the beneficiary so the ownership remains with the
customer.

7. Relationship of Agent and Principal

The banker acts as an agent of the customer (principal) by providing the following agency services:
 Buying and selling securities on his behalf,
 Collection of cheques, dividends, bills or promissory notes on his behalf, and
 Acting as a trustee, attorney, executor, correspondent or representative of a customer.
Banker as an agent performs many other functions such as payment of insurance premium, electricity
and gas bills, handling tax problems, etc.
9. Other Relationships
Other miscellaneous banker-customer relationships are as follows:
 Obligation to honour cheques: As long as there is sufficient balance in the account of the
customer, the banker must honour all his cheques. The cheques must be complete and in proper
order. They must be presented within six months from the date of issue. However, the banker can
refuse to honour the cheques only in certain cases.
 Secrecy of customer's account: When a customer opens an account in a bank, the banker must not
give information about the customer's account to others.
 Banker's right to claim incidental charges: A banker has a right to charge a commission, interest or
other charges for the various services given by him to the customer. For e.g. an overdraft facility.
 Law of limitation on bank deposits: Under the law of limitation, generally, a customer gives up the
right to recover the amount due at a banker if he has not operated his account since last 10 years.
5. Define Cheque and discuss Crossed Cheque (2 times) / Account Payee (2 times).
Answer: Meaning of Cheque: A Cheque is a document which orders a bank to pay a particular amount of
money from a person’s account to another individual’s or company’s account in whose name the cheque
has been made or issued. The cheque is utilised to make safe, secure and convenient payments. It serves
as a secure option since hard cash is not involved during the transfer process; hence the fear of loss or
theft is minimised.
 An order to a bank to pay a stated sum from the drawer's account, written on a specially printed
form.
 Cheque refers to a negotiable instrument that contains an unconditional order to the bank to pay
a certain sum mentioned in the instrument, from the drawer’s account, to the person to whom it
is issued, or to the order of the specified person or the bearer.
As per the Section 13 of the Negotiable Instruments Act, 1881, a cheque is a Negotiable Instrument:
A “negotiable instrument” means a promissory note, bill of exchange or cheque payable either to order or
to bearer.
Crossing of Cheque
Definition: Crossing of a cheque is nothing but instructing the banker to pay the specified sum through the
banker only, i.e. the amount on the cheque has to be deposited directly to the bank account of the payee.
Hence, it is not instantly encashed by the holder presenting the cheque at the bank counter. If any
cheque contains such an instruction, it is called a crossed cheque.
The crossing of a cheque is done by making two transverse parallel lines at the top left corner across the
face of the cheque.
Who can cross a cheque?

Anyone with physical access to the cheque can cross the cheque. Crossing the cheque ensures that the
cheque cannot be paid out to cash.
Importance of Crossing of Cheque:

The significance of crossing of a cheque is that a crossed cheque cannot be encashed by the bearer but can
only be collected from the drawee bank in the bank account. (Sec. 123 and 126 of the Negotiable
Instruments Act) Therefore, Crossing of cheque provides protection and safeguard to the issuer of the
cheque. In case of a crossed cheque one can easily detect who encashed the said cheque, unlike the case

of non-crossed cheque. Hence, Crossing protects both payer and the payee of the cheque. Also, both
bearer and order cheques can be crossed.
Rules of Crossing of Cheque
Negotiable Cheques are generally crossed as a measure of safety.
 A cheque can be crossed generally, may be crossed specially by the holder.
 The Cheque holder has the right to add the words “not negotiable” to it.
 When an uncrossed cheque or a crossed cheque generally is sent to a banker for the collection, the
person may cross it specially to himself. In this case, he does not enjoy the statutory protection
against being sued for conversion.
Types of Cheque Crossing:

There are two types of crossing of cheques – General and Special crossing of cheques.
General Crossing of Cheque
Section 123 of the Negotiable Instruments Act has defined General Crossing – “where a cheque bears
across its face an addition of the words ‘And Company’ or any abbreviation thereof, between two parallel
transverse lines or of two parallel transverse lines simply, and either with or without the words ‘not
negotiable’, that addition shall be deemed to be a crossing of cheque and the cheque shall be deemed to
be crossed generally”.
General Crossing involves two parallel transverse lines across the face of the cheque with or without ‘not
negotiable’ written on it. Such addition shall be considered to be a crossing.
To summaries, a cheque is considered to be generally crossed in the following cases:
 When there are two transverse parallel lines marked across the face of cheque
 When the cheque bears an abbreviation “& Co.” between the two transverse parallel lines
 When the cheque bears the words “A/c. Payee” between the two transverse parallel lines.
 When the cheque bears the words “Not Negotiable” written between the two parallel lines
Specimen of General crossing of cheque
Effect of General Crossing: Over the counter payment cannot be made in case of generally crossed
cheque, it can be made only through a bank account.
Special and Restrictive Crossing of Cheque

A cheque is said to be specially crossed when a particular bank’s name is written in between the two
transverse parallel lines on the cheque.

According to the Section 124 of the Negotiable Instruments Act, Special Crossing is defined as, the
cheque which “bears across its face an addition of the name of a banker, with or without the words “not
negotiable”, that addition shall be deemed a crossing and the cheque shall be deemed to be crossed
specially and to be crossed to that banker”.
In a special crossed cheque, the amount written in cheque is payable by the drawee only, and only to
the bank named in the crossing.
Effect of Special Crossing: The money is paid only to the bank whose name is mentioned on the cheque.
Not negotiable Crossing of Cheque:
The effect of writing ‘not negotiable’ crossing of a cheque is that the cheque can be transferred but
transferee will not be able to acquire a better title to the cheque. Thus, such a cheque is deprived of its
essential feature of negotiability.
One of the important features of a negotiable instrument is that a person, who receives it in good faith,
without negligence, for value, before maturity and without knowing the defect in the title of the
transferor, gets a good title to the instrument.
Thus, he becomes the holder in due course and acquires an indisputable title to it. Also, when the
instrument passes through a holder in due course, all the subsequent holders also receive a good title.
But, Not Negotiable Crossing takes away this important feature. In this case, the transferee does not
get the rights of the holder in due course.
6. Bill of Exchange.
Answer: Meaning of Bill of Exchange:
According to Section 5 of the Negotiable Instruments Act 1881, ‘a bill of exchange is defined as 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.’
Features of bill of exchange:
 It is important to have a bill of exchange in writing
 It must contain a confirm order to make a payment and not just the request
 The order should not have any condition
 The bill of exchange amount should be definite
 Fixed date for the amount to be paid
 The bill must be signed by both the drawee and the drawer
 The amount stated on the bill should be paid on-demand or on the expiry of a fixed time
 The amount is paid to the beneficiary of the bill, specific person, or against a definite order
 Acceptance of the drawee (debtor) on the Bill of Exchange is essential.
Advantages of bill of exchange:

 Legal Document- It is a legal document, and if the drawee fails to make the payment, it will be
easier for the drawer to recover the amount legally.
 Discounting Facility- In cases where the drawer is in immediate need of money, the bill can be
converted into cash by discounting it from a bank by paying some nominal charges.
 Endorsement Possible- This bill of exchange can be exchanged from one individual to another for
the adjustment of the debt.
Bill of Exchange Format
In the above-mentioned bill of exchange format, Kunal Singh is the drawer as well as the payee of the bill.
Raj Kiran is the Drawee and accepter.
Parties of Bill of Exchange: A bill of exchange has three parties:
(1) Drawer:
 The drawer is the maker of a bill of exchange.
 The bill is signed by Drawer.
 A creditor who is entitled to receive payment from the debtor can draw a bill of exchange.
(2) Drawee:
 Drawee is the person upon whom the bill of exchange is drawn.
 Drawee is the debtor who has to pay the money to the drawer.
 He is also known as ‘Acceptor’.
(3) Payee:
 The payee is the person to whom payment has to be made.
 The payee may be the drawer himself or a third party.

Example of a Bill of Exchange

Let's say Company ABC purchases auto parts from Car Supply XYZ for Rs. 25,000. Car Supply XYZ draws a
bill of exchange, becoming the drawer and payee in this case. The bill of exchange stipulates that
Company ABC will pay Car Supply XYZ Rs. 25,000 in 90 days. Company ABC becomes the drawee and
accepts the bill of exchange and the goods are shipped. In 90 days, Car Supply XYZ will present the bill of
exchange to Company ABC for payment. The bill of exchange was an acknowledgment created by Car
Supply XYZ, which was also the creditor in this case, to show the indebtedness of Company ABC, the
debtor.
7. Describe Promissory/Pronote Notes and when it expires.

Answer: Definition: A Promissory Note, as the name itself gives a brief description, is a legal financial
instrument issued by one party, promising to pay the debt owed to another party.
It is a written negotiable instrument duly signed by the maker that contains an unconditional promise
to pay the stated sum of money to a particular person or to any other person, on the order of that
particular person, either on-demand or on a specified date, under given terms.
Promissory note is defined by Section 4 of the Act. It says, “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”.
It is a short-term credit instrument which does not amount to a banknote or a currency note.
Characteristics of Promissory Note

 It is a written document.
 There must be a clear and unconditional promise to pay a certain sum to a specified person or on-
demand.
 It must contain due date or payment on demand stipulation.
 It must be drawn and duly signed by the maker.
 It must be properly stamped.
 It specifies the name of the maker and payee
 The amount to be paid must be certain, given in both figures and words.
 Payment is to be made in the country’s legal currency.
 Payee should also be a certain person
 Must contain the signature of the promisors.
 Date of the transaction.
 Acknowledgment of the debt.
A promissory note may consist of various terms and conditions related to indebtedness like the
principal amount, date of maturity, the rate of interest, terms of repayment, issue date, name and
signature of the drawer, name of the drawee and so forth. A promissory note needs no acceptance.
Parties to Promissory Note: All promissory notes constitute three primary parties. These include the
drawee, drawer and payee.
1. Drawer: The one who makes the promise to another, to pay the debt is the drawer of the
instrument. He/she is the debtor or borrower. A drawer is a person who agrees to pay the drawee
a certain amount of money on the maturity of the promissory note. He/she is also known as
maker.
2. Drawee: The one, in whose favour the note is drawn, is the drawee. He/she is the creditor who
provides goods on credit or lender, who lends money. She/he is an individual, in whose favour the
note is prepared. In usual cases the drawee is also the payee until and unless the promissory note
is transferred specifically in favour of the payee. For e.g. Ram is considered a drawer if he

promises to pay Shyam Rs 5000 (Shyam is the drawee). However, if the same promissory note is
transferred in favour of Rohan, then Rohan becomes the payee.
3. Payee: The one, to whom the payment is made, is the payee of the negotiable instrument. The
payee is someone to whom the payment is made; sometimes drawee and payee both are same.
The drawee and payee can be the same person when the amount is to be paid to the person in whose
favour the note is drawn. However, when the amount is to be paid to another person, on the order of the
drawee, meaning that if the drawee transfers the instrument in favour of another person then, in that
case, the payee would be different.
Further, the party that owes money to another party holds the promissory note and after discharging
the obligation completely, the drawee or payee (whatever the case may be) cancels the note and returns
to the drawer.
In Y.Veeraiah v. M/S Margadarsi Chit Fund (P) Ltd, the court held that to make a document a
“Promissory Note” within the meaning of Section 4 of the Act, it must substantially consist of a promise to
pay on demand a defined sum and must not be something else and if it is a document guaranteeing
payment of a fixed sum on a certain date after certain period, it becomes a “Promissory note payable
otherwise than on demand”, as contemplated within the meaning of Section 49 of the Stamp Act.
Important Points to Remember about Promissory Notes

 A Promissory Note is issued under Section 4 of the Negotiable Instruments Act, 1881
 Promissory Notes issued in one Indian state can be presented in another state provided that the
note bears the valid stamp. There is no requirement for additional stamp duty to be paid.
 A Promissory Note must always be written by hand. It must include all the mandatory elements
such as the legal names of the payee and maker’s name, amount being loaned / to be repaid, full
terms of the agreement and the full amount of liability, beside other elements.
 The note must clearly mention only the promise of making the repayment and no other
conditions.
 After issuance, a Promissory Note must be stamped according to the regulations of the Indian
Stamp Act. The common practice is to use a revenue stamp on the note which is then signed by
the promissory and/or cross signed by the borrower.
 A Promissory Note can also be issued on a Stamp paper in case revenue stamps are unavailable.
 The ideal way to lend money is via issuing crossed account cheques. Details of the cheques can be
mentioned in the note.
 All Promissory Notes are valid only for a period of 3 years starting from the date of execution,
after which they will be invalid, when no payment date is mentioned on the note, if any future
payment date is mentioned on note the limitation of 3 years starts from that date not from the
date of the execution of the instrument.
 There is no maximum limit in terms of the amount which can be lent or borrowed.
 The lender of the funds is normally the one who will hold the Promissory Note. When the loan
amount has been disbursed or repaid fully, the Promissory Note must be cancelled and marked as
“Paid in Full”, after which it can be returned to the borrower / payee.
 While the signature of a witness is not a mandatory requirement, it is advisable to have a note
signed by a witness who is independent from the transaction.
 The term maturity refers to the date on which a bill of exchange or promissory note becomes due
for payment. In arriving at maturity date, three days, known as days of grace, must be added to
the date on which the period of credit expires.
 Acknowledgement of Debt: When payment is made with respect to a debt over a promissory note,
the repayment is considered as acknowledgment of debt and the limitation period is renewed to a
fresh three year period from the date of such partial payment. This kind of written
acknowledgement of payment is accepted as renewal of limitation.
 S. 35 of Indian Stamps Act lays down that no instrument chargeable with duty is admissible as
evidence in law even if there is consent of parties. Kuruvilla Markose v. Varkey AIR 1966 Ker 315,

this case emphasizes the importance of affixing a stamp and signing across it for validity of the
promissory note.
Promissory Note Format
8. What is NI and describe the main characteristics? Is a cheque a negotiable instrument? Explain.
Answer: What is Negotiable Instrument: As per Section 13(a) of the Act, “Negotiable instrument means a
promissory note, bill of exchange or cheque payable either to order or to bearer, whether the word
“order” or “ bearer” appear on the instrument or not.”
A negotiable instrument is actually a written document. This document specifies payment to a specific
person or the bearer of the instrument at a specific date. So we can define a bill of exchange as “a
document signifying an unconditional promise signed by the person giving the promise, requiring the
person to whom it is addressed to pay on demand or at a fixed date or time”.
Important characteristics of Negotiable Instruments are:
1. Property: The possessor of negotiable instrument is acknowledged to be the owner of property

contained therein. Negotiable instrument does not simply give ownership of the instrument but
right to property as well. The property in negotiable instrument can be moved without any
formality. In the case of bearer instrument, the possessions pass by meagre delivery to the
transferee. In case of order instrument, endorsement & delivery are necessary for transfer of
property.
2. Title: The transferee of negotiable instrument is called ‘holder in due course.’ A genuine transferee
for value is not affected by any flaw of title on the part of transferor or of any of the previous
holders of instrument.
3. Rights: The transferee of negotiable instrument can take legal action in his own name, in case of
dishonour. A negotiable instrument can be reassigned any number of times till it is attains
maturity. The holder of instrument need not give notice of transfer to the party legally responsible
on the instrument to pay.
4. Prompt payment: A negotiable instrument facilitates the holder to anticipate prompt payment
because dishonour refers to the ruin of credit of all persons who are parties to the instrument.
5. Presumptions: The Certain presumption applies to all negotiable instruments unless the contrary
is provided. This presumption is dealt in Sections, 118 and 119 and are as follows:
(a) Consideration. Every negotiable is presumed to have been made drawn, accepted, indorsed,
negotiable or transferred for consideration. This would help a holder to get a decree from a court without
any difficulty.
(b) Date. Every negotiable instrument bearing a date is presumed to have been made or drawn on such
date.
(c) Time of acceptance. When a bill of exchange has been accepted, it is presumed that it was accepted
within a reasonable time of its date and before its maturity

(d) Time of transfer. Every transfer of negotiable instrument is presumed to have been made before its
maturity.
(e) Order of endorsements. The endorsement appearing upon a negotiable are presumed to have been
made in the order in which they appear thereon
(f) Stamp. When an instrument has been lost it is presumed that it duly stamped.
(g) Holder a holder in due course. Every holder of a negotiable instrument is presumed to be holder in due
course (Sec 118)
(h) Proof of protest. In a suit upon an instrument which has been dishonour, the court, on proof of the
protest presumes the fact of dishonour, unless and such fact is disproved (sec 119).
The above presumption is rebuttable by evidence. If any one challenges any of this presumption,
he has to prove his allegation again; this presumption would not arise where an instrument has been
obtained by any offense, fraud or unlawful consideration.
Types of Negotiable Instruments

Let us take a look at some of the most common types of negotiable instruments.
1. Promissory Note (Sec 4): In this case, the debtor is the one who makes the instrument. And he
promises unconditionally to the creditor (or the bearer of the document) a certain sum of money
on a specific date.
2. Bills of Exchange (Sec 5): This is an order from the creditor to the debtor. This instrument instructs
the drawee (debtor) to pay the payee a certain amount of money. The bill will be made by the
drawer (creditor)
3. Cheque (Sec 6): This is just another form of a bill of exchange. Here the drawer is a bank. And such
a cheque is only payable on demand. It is basically the depositor instructing the bank to pay a
certain amount of money to the payee or the bearer of the cheque.
4. Other/deemed Negotiable Instruments Examples: There are other instruments such as
government promissory notes, railway receipts, delivery orders, etc. These can be negotiable
instruments by custom or practice of the trade.
9. Discuss the law relating to Negotiable Instrument and deemed Negotiable Instrument.
Travellers Cheques, Dividend Warrants, Circular Notes, Demand Draft, Postal Order and Banker’s
Draft.
Answer: Refer previous question for law relating to Negotiable Instrument.
Deemed Negotiable Instrument:
As per Section 13 of Negotiable Instruments Act, 1881 “promissory note, cheque and bill of exchange are
called negotiable instruments but any other instrument which is having all the essential characteristics of
a negotiable instrument, occupied the character of negotiability as a result of usage or custom of trade, is
called deemed negotiable instrument for example:
1. Bank Drafts, 2. Dividend Warrants, 3. Postal Orders and Money Orders, 4. Traveller’s Cheque, Circular
Notes, 6. Government Promissory Notes, 7. A fixed deposit receipt, 8. Railway Receipt, 9. Life Insurance
Policies, 10. Exchequer Bills, 11. Bank Notes, 12. Share Warrants, 13. Bearer Debentures, 14. Share
certificates with transfer deeds, 15. Demand Drafts, 16. Banker’s Draft etc.
Following are the short questions which are asked frequently and while answering write the above answer
and followed by defining the given topic, Travellers Cheques, Dividend Warrants, Circular Notes, Demand
Draft, Postal Order and Banker’s Draft.
Traveller’s Cheque:
A traveller’s cheque is a once-popular but now largely outmoded medium of exchange utilized as an
alternative to hard currency. The product typically is used by people on vacation in foreign countries. It
offers a safe way to travel overseas without cash. The issuing party, usually a bank, provides security
against lost or stolen cheques. Beginning in the late 1980s, traveller’s cheques have increasingly been
supplanted by credit and debit cards.

KEY TAKEAWAYS
 Traveller’s cheques are generally used by people traveling to foreign countries.
 They are purchased for set amounts and can be used to buy goods or services or be exchanged for
cash.
 Once widely used, traveller’s cheques have largely been supplanted today by debit cards and
credit cards, and it can be hard to find places that will accept them.
Dividend Warrants:
DIVIDEND WARRANT is an order, or warrant, issued by a company, and drawn upon its bankers, in favour
of a member of the company, for payment of the interest or dividend due to him upon his holding of
shares or stock in the company.
Section 96 of the Bills of Exchange Act, 1882, is:—" The provisions of this Act as to crossed cheques shall
apply to a warrant for payment of dividend."
A dividend warrant must be signed by the person to whom it is payable, and, unless authorised by the
company, as per procuration signature should not be accepted. If payable to John Brown or bearer, it
never the less requires John Brown's discharge.
Where a dividend warrant is payable to several persons, it is the custom to pay it on being signed by
one of them. But in the case of an interest warrant all the persons named should sign.
Many Dividend Warrants are crossed & Co. and the effect is the same as when a cheque is so crossed
(Section 95).
Circular Notes:
In banking, a circular note is a document request by a bank to its foreign correspondents to pay a
specified sum of money to a named person. The person in whose favour a circular note is issued is
furnished with a letter (containing the signature of an official of the bank and the person named) called a
letter of indication, which is usually referred to in the circular note, and must be produced on presentation
of the note. Circular notes are generally issued against a payment of cash to the amount of the notes, but
the notes need not necessarily be cashed, but may be returned to the banker in exchange for the amount
for which they were originally issued.
It is the duty of the payer to see that payment is made to the proper person and that the signature is
valid; he cannot recover the amount of a forged note from the banker who issued the note.
Demand Draft:
A demand draft or a DD is a negotiable instrument issued by the bank. The meaning of negotiable
instrument is that it guarantees a certain amount of payment mentioning the name of the payee. It cannot
be transferred to another person in any situation.
 The bank issues the draft to a client (drawer) directing another bank or own branch to pay the
specific amount to the payee
 Demand drafts can be compared to cheques but these are hard to counterfeit and more secure.
This is because the drawer has to pay before issuing a demand draft to the bank whereas cheque
can be issued without ensuring the sufficient funds in your bank account. Therefore, cheques can
bounce but drafts assure a safe and on-time payment
 The drafts are payable on demand. It cannot be paid to the bearer but the beneficiary has to
present the instrument directly to the branch. It can also be collected by the clearing mechanism
of the bank
 Mostly, demand drafts are issued in situations where the parties are unknown to each other and
lack trust. It comes handy in such situations as there are almost no chances of fraud and
counterfeiting
 The draft facility is available for people regardless of them having a bank account or not. Anyone
who wants to pay a certain amount to an institution or to someone with a proof of payment can

issue a demand draft. Individuals can visit the bank and ask for a draft form or they can also fill the
form online.
Postal Order:
The Indian Postal Orders are available in all the Post Offices across India. You can buy IPO from
Head Post Office, Sub-Post Office or from the rural post office called Branch Post Office. They are not
available at other places. They are also available from any of the Army Post Offices. Postal Orders
have regained popularity, especially as a form of payment for shopping on the Internet, as they are
drawn on the Post Offices accounts so a vendor can be certain that they will not bounce.
The most popular use is to pay fees under Right to Information (RTI) and is one of the most
acceptance modes of deposition of fees. It is also useful for students to send fee required for different
competition examinations. Can also be purchased & sent as “crossed” If a Postal Order be crossed,
payment will be made only through that Bank. There are eight types of IPO denomination available in
India.
Banker’s Draft:
A bank draft, also called a bank cheque, is a method of payment that involves a document issued by a
bank guaranteeing that the amount stated on the certificate will be paid to the recipient of the
document. A bank draft is used as a type of cheque which is more reliable than a personal cheque as it
is backed by the bank itself on behalf of the payer; hence, it ensures that the person who the draft is
addressed to, will receive the money.
This kind of cheque is usually employed when the amount of money being paid is large, or when the
two parties do not know each other that well. Therefore, a secure form of payment is required to
complete the transaction. Drafts are also used when one of the parties does not accept personal
cheques in doubt that the funds may not actually be available.
A bank issues a bank draft when one of its depositors (a person who holds an account in such bank)
requests one using the following steps. First, the bank cheques to depositor’s account to make sure
the funds are available for transfer. After the funds have been validated, the bank transfers the money
from the depositor’s account to the bank. This is what makes these drafts more reliable than other
forms of payments; as the bank already has the money that will be paid and the document is backed
by a reputed financial institution. The draft is then issued and handed to the client who will afterwards
deliver it to the seller or recipient.
These drafts are commonly used as method of payment for real estate transactions or used vehicle
purchases.
10. Define paying banker and discuss the statutory protection available to the paying banker.
Answer: Banker customer relationship is a contractual relationship with a super-head obligation on the
part of the banker to honour the customer’s cheques as and when they are presented provided, of course,
certain conditions are satisfied before payment is made by a banker.
Definition of Paying Banker:
A banker on whom cheques are drawn by his customers for payment is called the “paying banker”. A
banker’s primary function and duty is to honour his customer’s cheques which is an implied term of the
contract entered into by the banker and his customer, when the account is opened. This duty is, however,
subject to the limitations imposed by Section 31 of the Negotiable Instruments Act, 1881, which provides:
“The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the
payment of such cheque must pay the cheque when duly required so to do, and, in default of such
payments, must compensate the drawer for any loss of damage caused by such default”.
Thus, the terms of Section 31 limit the banker’s duty to pay cheques on the existence of:
1. Sufficiency of funds of the drawer in the hands of the banker, or as per agreed borrowing facilities
on the account;
2. Availability of funds, that is, the funds are properly applicable to the payment of such cheques and
there is no legal bar prohibiting payment; and

3. Technical regularity of the cheque, that is, the cheques are drawn in the regular form and properly
presented for payment in the ordinary course of business.
Other terms:
4. Stop Payment of that cheque number is not requested by the customer.
5. Not a post-dated cheque.
6. The cheque has not crossed the expiry period of 3 months (not a stale cheque).
7. No corrections or modifications on the cheque.
8. It is not a mutilated cheque.
All these conditions must be satisfied for honouring a cheque. If any of these conditions is not fulfilled,
the paying banker would be within his right to return the cheque as unpaid.
Protection to Paying Banker:
For a paying banker to claim protection under the negotiable Instruments Act, one of the criteria he has
to satisfy, is that the payment should be in due course. As to what is payment in due course, has been
stated in Section 10 of the negotiable Instrument Act, which reads as follows:
“Payment in due course” means payment in accordance with the apparent tenor of the instrument in
good faith and without negligence to any person in possession thereof under circumstances which does
not afford a reasonable ground for believing that he is not entitled to receive payment of the amount
therein mentioned.
From the above definition, it can be observed that payment in due course has to qualify the payment to
be made on the basis of following principles:
1. In accordance with the apparent tenor of the instrument;
2. In good faith;
3. Without negligence;
4. To the person in possession of the instrument; and
5. While making payment the banker should not have reasons to ‘believe’ that the person in
possession of the instrument is not entitled to receive payment of the amount mentioned in the
instrument.
Further, it is also important to understand that Section 85 of the Negotiable Instrument Act, grants
protection to a banker on his making payment of a cheque.
1. Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.
2. Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in
due course to the bearer thereof, notwithstanding any endorsement whether in full or in blank appearing
thereon, and notwithstanding that any such endorsement purports to restrict its further negotiation.
Paying banker should ensure that the cheque is regular in all respects and should take the precautions
while making payment of the cheque:
1. The cheque must have been drawn properly. It is interesting to note that Negotiable Instruments Act
defines a cheque but does not prescribe it’s from. It does not even say that it should be drawn on the
printed form issued by the bank. Strictly speaking, a banker cannot refuse to honour a cheque drawn on
piece of paper provided it carries an unconditional order to the banker and fulfills other requirements of a
cheque. But by tradition and custom, banks all over recognize only the cheque drawn on the printed form
issued by the bank. Accordingly, if customer demands that the payment be made on the basis of a letter
other than by way of a cheque, the banker should permit such request. However he can demand stamped
discharge. We are aware that in the case of cheque, it need not be stamped. This exemption is accorded to
cheques; if they are in the prescribed format.
2. A cheque must bear a date because the mandate of the customer to the banker becomes legally
effective on the date mentioned therein. The date should not be incomplete. If the drawer mentions a
date earlier to the date of writing then it is called an ante-dated cheque. In India, a cheque is treated as
stale cheque after the expiry of three months from the date of the cheque.

If the drawer mentions a date on the cheque, which is subsequent to the date on which it is drawn, it is
called a post-dated cheque. Paying banker should not make payment of a post-dated cheque before the
date mentioned therein. Otherwise, he will be liable as follows:
– If the drawer instructs the banker, before the date mentioned in the cheque, not to make payment of
the post-dated cheque, the banker cannot debit his account with the amount of the cheque. If the banker
had paid the cheque, it would be deemed as payment made without authority of the drawer.
– If as a consequence of payment of a post-dated cheque by the bank, any other cheque issued by the
drawer is dishonoured on the ground of insufficiency of funds, the drawer will be entitled to claim
damages for its dishonour under Section 31 of Negotiable Instrument Act.
– If the customer unfortunately dies, becomes insolvent after the banker has made the payment but
before the date mentioned in the cheque, the amount cannot be debited to the customer’s amount
account because his mandate becomes ineffective on his demise.
– Payment of a post-dated cheque before the date of the cheque is not considered as payment in due
course. The banker, therefore, can not avail the statutory protection under Section 85. But its payment on
or after the date of the cheque is valid and the banker will bear no liability in this regard.
Liability of a Paying Banker if the Customer’s Signature is forged:

In case of forgery, the banker has no protection. In Canara Bank v. Canara Scheduled Co-operative &
Others, the Supreme Court held that “since the relationship between the customer and bank is that of the
creditor and debtor, the bank had no authority to make payment of the cheque containing a forged
signature”. The bank would be acting against the law in debiting the customer with the amount of the
forged cheque as there would be no mandate on the bank to pay.
Paying banker must refuse payment of the cheque under the following circumstances:
1. When the drawer countermands the payment: A cheque is an unconditional order of the drawer to the
baker. The drawer is competent to cancel or withdraw such order at any time before its payment is made.
The drawer need not explain the reason for stopping payment of a cheque.
2. Death of the drawer: On receipt of reliable information about the death of the customer, the banker
must stop payment of the cheques signed by him because the order of the customer to the bank ceases to
operate on the occurrence of his death.
3. Insolvency of the drawer: If the debtor commits an act of insolvency as defined in the insolvency Law,
either he or any of his creditors may present a petition in the court of law for an order of adjudication.
When the court issues an order of adjudication, the whole property of the insolvent person (with certain
exceptions) vests in the court or an official receiver and becomes available for distribution among the
creditors;
4. When the cheques is post-dated or stale;
5. When the cheque is expired, i.e. the limit of three months is crossed;
6. When the cheque is incomplete;
7. If the cheque is drawn on some other branch;
8. If the cheque contains a material alteration or is mutilated;
9. If the signature of the drawer differs;
10. If the balance in the account is insufficient.
11. When the cheque is altered without authorisation.
11. Collecting Banker.

Answer: Collecting Banker is the one who accumulates the proceeds of a cheque for the customer. Even
though a banker gathers the proceeds of a cheque for the customer solely as a matter of service, hitherto
the Negotiable Instruments Act, 1881 ultimately inflicts obligation, statutory in nature. This is evident
from Section 126 of Negotiable Instruments Act which presents that a cheque having a "general crossing"
shall not be paid to anyone other than banker and a cheque which is "specially crossed" shall not be paid

to a person other than the banker to whom it is crossed. Therefore, a paying banker must pay a crossed
cheque only to a banker thus signifying that it should be collected by another banker.
As per Section 131 of Negotiable Instruments Act 1881, "A banker who has in good faith and without
negligence received payment for a customer of a cheque crossed generally or specifically to himself -shall
not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by
reason of only having received such payment.
The fundamentals of claiming protection under Section 131 of Negotiable Instruments Act 1881 are as
follows:
(i) The collecting banker should have acted in good faith & without negligence. Acted in good faith refers
that the act that is done honestly. The plea of good faith can be refuted on the ground of unruliness
indicative of want of proper care & attention.
(ii) The banker should have accumulated a crossed cheque
(iii) The proceeds should have been gathered for a customer, i.e., a person who has an account with him.
(iv) That the collecting banker has acted as an agent of the customer. If he had developed into the holder
for value, the protection available in Section 131 of Negotiable Instruments Act 1881 is forfeited.
12. Banker's Lien.

Answer: What is lien?
A lien is the right of a creditor in possession of goods, securities or any other assets belonging to the
debtor to retain them until the debt is repaid, provided that there is no contract express or implied, to the
contrary. It is a right to retain possession of specific goods or securities or other movables of which the
ownership vests in some other person and the possession can be retained till the owner discharges the
debt or obligation to the possessor.
It is a legal claim by one person on the property of another as security for payment of a debt. A legal
claim or attachment against property as security (right) for payment of an obligation.
 Lien is defined as the right of a creditor to retain the possession of the goods and securities owned
by the debtor until the debt has been paid.
 It does not include the right of sale of goods and securities.
 Lien is available on bills, cheques, promissory notes, share certificates, bonds and debentures.
 Lien is not available on deposits, since deposits are neither good nor securities.
Types of Lien
Particular Lien
 In case of a particular lien the creditor gets the right to retain possessions only of goods or
securities for which the dues have arisen and not for other dues
 Example: A laptop-repairer can withhold the delivery of laptop until his charges of repairing it are
paid to him.
General Lien
 A general Lien gives the right to the creditor to retain the possession till all amounts due from
debtor are paid or discharged.
 A general lien is a right to retain the possession for the payment of the sum which is owed and
even if the payment is not connected with the property in possession.
 This is available to bankers, factors, wharfingers, attorneys of High Court and Policy Brokers only
Banker’s Lien
 Banker has right of general lien
 To exercise the right of lien the bank must lawfully take over its possession
 A banker should sell the securities only after giving a notice to the debtor
Features of general lien of Banker
Implied pledge and right of sale

 To create general lien, no special contract is required. The right to sell the property is also
available under bank’s right of lien because a banker’s general lien tantamount to an implied
pledge
Limitation
 The right is not restricted by law of limitation. The act only restricts the remedy through court and
not discharges the debt. Hence, bank can recover debts even when time have exceeded also.
Ownership/possession
 The possession is with the bank but the ownership remains the same
Conversion to particular lien
 If it is indicated that a particular security was obtained for one particular debt only, then the
general lien gets converted into a particular lien.
Criminal Action
 When the banker exercises his right of general lien, no criminal action is available because there is
no criminal act behind it.
Where Lien can be exercised:

 The right of general lien is available and is always entrusted to bank in the capacity as a banker
 The right is available for goods and securities that are in the name of the borrower or in the name
of guarantor
 Right can be exercised for other dues of same borrower, on goods and securities remaining in its
procession even after the other loan taken against them, has been paid
 Lien can be used by giving a reasonable period notice. Sale Without notice, even if there is an
agreement, is unlawful
Where Lien cannot be exercised:

 Where there is any contract inconsistent with this right between banker and the customer
 Where the goods and securities are entrusted to the bank as a trustee or as an agent
 Where the goods and securities are entrusted for some specific purpose
 Where the loan is granted to one person and the goods and securities are owned by more than
one person.
 Goods/securities handed over for safe custody
 Where the bills of exchange or other documents have been handed over by the customer with
specific instructions to utilize their proceeds for the specific purpose
 In case of shares that are given for selling them in a future and apply the sale proceeds for a
specific purpose
 Where some documents or valuables are left in bank’s possession by the customer by mistake or
negligence
 Where securities are given to bank to secure a loan, but that has not been granted as yet.
Case Laws
In the matter of Firm Jaikishen Dass Jinda Ram v. Central Bank of India Ltd. AIR 1960 Punjab, two
partnership firms with the same set off partners had two separate accounts with the Bank. The Court held
that the bank was entitled to appropriate the monies belonging to a firm for payment of an overdraft of
another firm. Because although two separate firms are involved they are not two separate legal entities
and cannot be 'distinguished from the members who compose them.
13. Banker's setoff.

Answer: The right of set off is also known as the right of combination of accounts .A bank has a right to
set off a debt owing to a customer against a debt due from him.

"A legal set-off is where there are mutual debts between the plaintiff and defendant, or if either party
sue or be sued as executor or administrator one debt may be set against the other "(Section 13 of the
Insolvent Debtors Relied Act 1728)
From a commercial standpoint, a right of set-off is a form of security (right) for a lender. It is an
attractive security because its realization does not involve the sale of an asset to a third party.
A set-off must be in the form of a cross claim for a liquidated amount and it can be pleaded only in
respect of a liquidated claim. Both the claim and the set-off must be mutual debts, due from and to the
same parties, under the same right A claim by a person in a representative capacity cannot be set off
against a personal claim. Even a claim against the estate of a deceased customer cannot be set off against
a debt, which was due to the customer from his banker, during the former's lifetime, whether the
accounts are with one or more offices of the banker, it does not materially affect the position in any way.
A banker's right of set off cannot be exercised after the money in his hands has been validly assigned or in
any case after he has been notified of the fact of an assignment. (Official Liquidator ,Hanuman Bank Ltd. v.
K.P.T. Nadar and Others 26
Punjab National Bank v. Arunamal Durgadas ,AIR 1960 Punj.632 State Bank of India v. Javed Akhtar
Hussain ,AIR 1993 Bombay ,87 where it has been established that:
(1) Mutuality is essential to the validity of a right of exercising set-off
(2) It must be between the same periods.
There is a distinction between a banker's lien and the bank's right to set-off. A lien is confined to
securities and property in bank's custody. Set-off is in relation to money and may arise from a contract or
from mercantile usage or by operation of law.
14. Bank Guarantees.

Answer:
What is the Meaning of Bank Guarantee?
A guarantee means giving something as security. A bank guarantee is when a bank offers surety and
guarantees for different business obligation on behalf of their customers within certain regulations. It is
generally a promise made by the bank to any third person to undertake the payment risk on behalf of its
customers.
Bank guarantee is given on a contractual obligation between the bank and its customers. Such
guarantees are widely used in business and personal transactions to protect the third party from financial
losses.
What are the Uses of Bank Guarantee?
 When large companies purchases from small vendors, they generally require the vendors to
provide guarantee certificate from banks before providing such business opportunities.
 Predominantly used in the purchase and sale of goods on credit basis, where the seller is assured
of payment from the bank in case of default by the buyer.
 Helps in certifying the credibility of individuals, which in turn, enables them in obtaining loans and
also assists in business activities.
Though there are lots of uses from a bank guarantee for the applicant, the bank should process the
same only after ensuring the financial stability of the applicant/business. The risk involved in providing
such a guarantee must be analysed thoroughly by the bank.
What are the Advantages and Disadvantages of Bank Guarantees?

Bank guarantee has its own advantages and disadvantages. The advantages are:
 Bank guarantee reduces the financial risk involved in the business transaction.
 Due to low risk, it encourages the seller/beneficiaries to expand their business on a credit basis.
 Banks generally charge low fees for guarantees, which is beneficial to even small-scale business.
 When banks analyse and certify the financial stability of the business, its credibility increases and
this, in turn, increase business opportunities.

 Mostly, the guarantee requires fewer documents and is processed quickly by the banks (if all the
documents are submitted).
On the flip side, there are some disadvantages such as:

 Sometimes, the banks are so rigid in assessing the financial position of the business. This makes
the process complicated and time-consuming.
 With the strict assessment of banks, it is very difficult to obtain a bank guarantee by loss-making
entities.
 For certain guarantees involving high-value or high-risk transactions, banks will require collateral
security to process the guarantee.
What are the Types of Bank Guarantee?
There are two major types of bank guarantee used in businesses, which are as follows:
 Financial Guarantee – These guarantees are generally issued in lieu of security deposits. Some
contracts may require a financial commitment from the buyer such as a security deposit. In such
cases, instead of depositing the money, the buyer can provide the seller with a financial bank
guarantee using which the seller can be compensated in case of any loss.
 Performance Guarantee – These guarantees are issued for the performance of a contract or an
obligation. In case, there is a default in the performance, non-performance or short performance
of a contract, the beneficiary’s loss will be made good by the bank. For example, A enters into a
contract with B for completion of a certain project and the contract is supported by a bank
guarantee. If A does not complete the project on time and does not compensate B for the loss, B
can claim the loss from the bank with the bank guarantee provided.
15. What is letter of credit? What are the different kinds of letters of credit?
Answer: What is a Letter of Credit?
Letter of credit is a payment instrument used majorly in international trade in which a bank provides
monetary guarantee to enterprises which deal in import and export of goods. Letter of credit can be used
for both import and export purposes. Enterprises doing businesses overseas have to deal with unknown
suppliers and they require assurance of payment before performing any transaction. Therefore, letter of
credit is important to provide payment assurance to the suppliers or exporters.
A letter of credit or "credit letter" is a letter from a bank guaranteeing that a buyer's payment to a seller
will be received on time and for the correct amount. In the event that the buyer is unable to make a
payment on the purchase, the bank will be required to cover the full or remaining amount of the
purchase. It may be offered as a facility.
Due to the nature of international dealings, including factors such as distance, differing laws in each
country, and difficulty in knowing each party personally, the use of letters of credit has become a very
important aspect of international trade.
KEY TAKEAWAYS
 A letter of credit is a document sent from a bank or financial institute that guarantees that a seller
will receive a buyer's payment on time and for the full amount.
 Letters of credit are often used within the international trade industry.
 There are many different letters of credit including one called a revolving letter of credit.
 Banks collect a fee for issuing a letter of credit.
How a Letter of Credit Works
Because a letter of credit is typically a negotiable instrument, the issuing bank pays the beneficiary or
any bank nominated by the beneficiary. If a letter of credit is transferable, the beneficiary may assign
another entity, such as a corporate parent or a third party, the right to draw.
Banks also collect a fee for service, typically a percentage of the size of the letter of credit. There are
several types of letters of credit available.

Types of Letters of Credit

1. Commercial Letter of Credit
This is a direct payment method in which the issuing bank makes the payments to the beneficiary. In
contrast, a standby letter of credit is a secondary payment method in which the bank pays the beneficiary
only when the holder cannot.
2. Revolving Letter of Credit
This kind of letter allows a customer to make any number of draws within a certain limit during a specific
time period.
3. Traveller's Letter of Credit
For those going abroad, this letter will guarantee that issuing banks will honour drafts made at certain
foreign banks.
4. Confirmed Letter of Credit
A confirmed letter of credit involves a bank other than the issuing bank guaranteeing the letter of credit.
The second bank is the confirming bank, typically the seller’s bank. The confirming bank ensures payment
under the letter of credit if the holder and the issuing bank default. The issuing bank in international
transactions typically requests this arrangement.
5. Standby Letter of Credit (SBLC)
Standby Letter of Credit (SBLC) is a credit mechanism in which importer can get foreign currency funds
internationally by providing the issuance of SBLC from domestic bank that guarantees payment to the
international bank, if the borrower fails to repay the amount before on the due date.
16. Reserve Bank of India / Bankers Bank.

Answer: RBI Functions: 7 Main Functions of the RBI
The following points highlight the seven main functions of the RBI. The functions are:
1. Monopoly of Note Issue
2. Banker’s Bank
3. Banker to the Government
4. Controller of Credit
5. Exchange Management and Control
6. Miscellaneous Functions
7. Promotional and Developmental Functions.
Function # 1. Monopoly of Note Issue:

Like any other central bank, the RBI acts as a sole currency authority of the country. It issues notes of
every denomination, except one-rupee note and coins and small coins, through the Issue Department of
the Bank.
One-rupee notes and coins and small coins are issued by the Government of India. In actuality, the RBI
also issues these coins on behalf of the Government of India. At present, notes of denominations of
rupees two, five, ten, twenty, fifty, one hundred, two hundred, five hundred and two thousand are issued
by the RBI.
Prior to 1956, the principle of note issue of the RBI was based on proportional reserve system. This
system was replaced by the minimum reserve system in 1956 under which the RBI was required to hold at
least Rs. 115 crores worth of gold as backing against the currency issued.
The rest (Rs. 85 crores) should be in foreign securities, so that together with gold and foreign exchange
reserve the minimum value of these assets is Rs. 200 crores.
Function # 2. Banker’s Bank:

As bankers’ bank, the RBI holds a part of the cash reserves of commercial banks and lends them funds for
short periods. All banks are required to maintain a certain percentage (lying between 3 per cent and 15
per cent) of their total liabilities. The main objective of changing this cash reserve ratio by the RBI is to
control credit.

The RBI provides financial assistance to commercial banks and State cooperative banks through
rediscounting of bills of exchange. As the RBI meets the need of funds of commercial banks, the RBI
functions as the Tender of the last resort’.
The RBI has been empowered by law to supervise, regulate and control the activities of commercial and
cooperative banks. The RBI periodically inspects banks and asks them for returns and necessary
information.
There are usually hundreds of banks in a country. There should be some agency to regulate and
supervise their proper functioning. This duty is discharged by the central bank.
Central bank acts as banker’s bank in three capacities:

(i) It is the custodian of their cash reserves. Banks of the country are required to keep a certain percentage
of their deposits with the central bank; and in this way the central bank is the ultimate holder of the cash
reserves of commercial banks,
(ii) Central bank is lender of last resort. Whenever banks are short of funds, they can take loans from the
central bank and get their trade bills discounted. The central bank is a source of great strength to the
banking system,
(iii) It acts as a bank of central clearance, settlements and transfers. Its moral persuasion is usually very
effective so far as commercial banks are concerned.
Function # 3. Banker to the Government:

The RBI acts as the banker to the government of India and State Governments. As such it transacts all
banking business of these Governments.
They are:
(i) Accepts and pays money on behalf of the Government.
(ii) It carries out exchange remittances and other banking operations.
As the Government’s banker, the RBI provides short-term credit to the Government of India. This short-
term credit is obtainable through the sale of treasury bills. Not only this, the RBI also provides ways and
means of advances (repayable within 90 days) to State Government. It may be noted that the Central
Government is empowered to borrow any amount it likes from the RBI.
The RBI also acts as the agent of the Government in respect of membership of the IMF and World Bank.
Furthermore, the RBI acts as the adviser of the Government not only on banking and financial matters
but also on a wide range of economic issues (like financing patterns, mobilisation of resources,
institutional arrangements with regard to banking and credit matters, arrangements with regard to
banking and credit matters, international finance) etc.
Function # 4. Controller of Credit:

The RBI controls the total supply of money and bank credit to sub serve the country’s interest. The RBI
controls credit to ensure price and exchange rate stability.
To achieve this, the RBI uses all types of credit control instruments, quantitative, qualitative and
selective. The most extensively used credit instrument of the RBI is the bank rate. The RBI also relies
greatly on the selective methods of credit control. This function is so important that it requires special
treatment.
Fiscal policy, as a prime lever of economic stabilisation policy, seeks to influence the level of aggregate
demand in the economy in pursuit of the larger societal goals of higher economic growth, full employment
and price stability.
Function # 5. Exchange Management and Control:

One of the essential central banking functions performed by the Bank is that of maintaining the external
value of rupee. The external stability of the currency is closely related to its internal stability the inherent
economic strength of the country and the way it conducts its economic and monetary affairs.
Domestic, fiscal and monetary policies have, therefore, an important role in maintaining the external
value of the currency. Reserve Bank of India has a very important role to play in this area.
The RBI has the authority to enter into foreign exchange transactions both on its own account and on
behalf of the Government.
The official external reserves of the country consist of monetary gold and foreign assets of the Reserve
Bank, besides SDR holdings. The Reserve Bank, as the custodian of the country’s foreign exchange
reserves, is vested with the duty of managing the investment and utilisation of the reserves in the most
advantageous manner.
Function # 6. Miscellaneous Functions:

The RBI collects, collates and publishes all monetary and banking data regularly in its weekly statements in
the RBI Bulletin (monthly) and in the Report on Currency and Finance (annually).
Function # 7. Promotional and Developmental Functions:

Apart from these traditional functions, the RBI performs various activities of promotional and
developmental nature. It attempts to mobilise savings for productive purposes. This is done in various
ways. For instance, RBI has helped a lot in building the huge financial infrastructure that we see now.
‘This consists of such institutions as the Deposit Insurance Corporation (to safeguard the interests of
depositors against bank failure), the Agricultural Refinance and Development Corporation (to meet the
needs of agriculturists), IFCI, SFCs, IDBI, UTI (to meet the long and medium term needs of industry), etc.
As for the cooperative credit movement, the RBI’s performance is really commendable. This has
resulted in curbing the activities of moneylenders in the rural economy.
Thus, it is clear that RBI is not a typical Central Bank as is traditionally understood. It is something more
than a Central Bank. It regulates not only currency and credit but aids the development of the Indian
economy by conducting various types of promotional activities. As such, in RBI we see many activities
combined into one.
Important Cases
17. Is this a Negotiable Instrument?
A. The instrument speaks of “I promise to pay B, Rs. 500/- when B delivers the goods” signed by A.
Discuss the nature of the transaction between A and B and will the instrument become a pronote?
(Jan-2020).
B. “Mr. ‘P’ please let bearer have Rs. 500/- and oblige” signed by ‘Q’ in this bill of exchange, whether
the document comes under Bill of Exchange or not? Explain. (May-2019).
C. A bill is drawn a “pay to X or order the sum of ten thousand rupees”. In this margin the amount
stated is Rs. 1000/-. Discuss the legal position. (May-2019).
D. ‘A’ signs an instrument in the following terms: “I promise to pay B or order Rs.500/-“. What is this
instrument? (Dec-2015).
E. A bill is drawn payable at 50 Lucknow Road, but does not contain the name of the drawer. ‘B’ who
resides at 10 Lucknow Road, accepts the bill. Is it a valid bill? (Jan-2015).
Issue:
Case A: Whether this is a Negotiable Instrument? No, this is not a Negotiable Instrument.
Case B: Whether this is a Negotiable Instrument? No, this is not a Negotiable Instrument.
Case C: Whether this is a Negotiable Instrument? No, this is not a Negotiable Instrument.
Case D: Whether this is a Negotiable Instrument? Yes, this is a Negotiable Instrument (pronote).
Case E: Whether this is a valid NI? No, this is a not a valid NI (Bill of Exchange).

Rule:
What is Negotiable Instrument: As per Section 13(a) of the Act, “Negotiable instrument means a
promissory note, bill of exchange or cheque payable either to order or to bearer, whether the word
“order” or “ bearer” appear on the instrument or not.”
A negotiable instrument is actually a written document. This document specifies payment to a specific
person or the bearer of the instrument at a specific date. So we can define a bill of exchange as “a
document signifying an unconditional promise signed by the person giving the promise, requiring the
person to whom it is addressed to pay on demand or at a fixed date or time”.
ELEMENTS OF NEGOTIABLE INSTRUMENTS: For a negotiable instrument the following essential elements
are required:
1. Written: Negotiable instrument must be in writing
2. Signed: Instrument must be signed by maker.
3. Must be a definite order or promise to pay.
 A promise must be more than a mere acknowledgement of a debt.
 The words “I/We Promise” or “Pay” meet this criterion.
4. Unconditional: It must contain unconditional promise or order to pay
5. Certain sum: Instrument must require payment of a certain sum of money only and nothing else.
6. Certain time: Instrument must be payable at a time which is certain to arrive.
7. Certain payee: Drawee of a bill or cheque must with reasonable certainty be named or desired.
8. Mere delivery: Instrument must be transferable by simple delivery like cash.
9. Legal Provisions: Pronote must be stamped with revenue stamps that are available from the post
offices. In case of a pronote executed for a large sum of money, a non-judicial stamp paper can
also be used. It is important for all pronote to be stamped with the proper revenue stamp or non-
judicial stamp paper as per the Indian Stamp Act. Pronote that is improperly stamped or
insufficient stamped becomes an invalid document and not admissible in Court.
Application:
In Y.Veeraiah v. M/S Margadarsi Chit Fund (P) Ltd, the court held that to make a document a
“Promissory Note” within the meaning of Section 4 of the Act, it must substantially consist of a promise to
pay on demand a defined sum and must not be something else and if it is a document guaranteeing
payment of a fixed sum on a certain date after certain period, it becomes a “Promissory note payable
otherwise than on demand”, as contemplated within the meaning of Section 49 of the Stamp Act.
Conclusion:
Case A: In this case a condition is involved, the instrument is not unconditional, hence as per above
discussed Rule No.4 it is not a Negotiable Instrument.
Case B: This is an order, where ‘Q’ ordering ‘P’ to pay money to the bearer of that note, this is not a Bill of
Exchange because in Bill of Exchange at the time of execution two parties are required here ‘P’ is a third
person hence it is not a Negotiable Instrument.
Case C: In this instrument the amount in figures and letters differ, as per the above stated Rule Number 5
the amount should be certain; hence it is not a Negotiable Instrument.
Case D: This is a Promissory Note/Pronote having all the required elements hence it is a valid Negotiable
Instrument.
Case E: As per the details given in the case the drawer name is not there, without the drawer name and
his signature it is not a valid Negotiable Instrument (Bill of Exchange).
18. Holder in due course:

A. ‘A’ the holder of a bill, endorses it to “B or order” for the express purpose that ‘B’ get it
discounted. ‘B’ negotiates the bill to ‘C’ who takes it bona fide and for value. Explain the position
of ‘C’. (May-2016).

B. Mr. Srinu draws a cheque for Rs. 2000/- and hands it over to Balu by way of gift. Is Balu a holder
in due course? Discuss the interest of Balu to receive the proceeds of the cheque. (Jan-2018).
C. A, on point of pistol, forces ‘B’ to issue a bearer cheque in the name of ‘A’. ‘A’ afterwards hands
over the cheque to ‘C’ who takes it in good faith and for valuable consideration. Is ‘C’ a holder in
due course? (May-2016).
Issue:
Case A: Is ‘C’ holder in due course? Yes, he is holder in due course.
Case B: Is Balu holder in due course? No, he is the holder not holder in due course.
Case C: Is ‘C’ a holder in due course? Yes
Rule:
As per Section 9 of the Negotiable Instruments Act, 1881
"Holder in due course" means any person who for consideration became the possessor of a promissory
note, bill of exchange or cheque if payable to bearer, or the payee or endorsee thereof, if payable to
order, before the amount mentioned in it became payable, and without having sufficient cause to believe
that any defect existed in the title of the person from whom he derived his title.
Requirements for Holder in Due Course (HDC) Status
 To qualify as an HDC, the transferee must meet the requirements established by the Negotiable
Instrument Act.
 The person must be the holder of a negotiable instrument that was taken:
o For value.
o In good faith.
o Without notice that it is overdue, dishonoured, or encumbered in any way, and
o Bearing no apparent evidence of forgery, alterations, or irregularity.
Application:
In Banking or Commercial law, a holder in due course is a person who accepts a negotiable instrument in a
value-for-value exchange without doubting its legitimacy so ultimately in a good faith. Now the person
who took it for value in good faith now becomes a real owner of the instrument and is known as “holder
in due consideration”. According to Section 9, “Holder in due course means any person who for
consideration became the possessor of a promissory note, bill of exchange or cheque is payable to bearer,
or the payee or endorsee thereof, if payable to order before the amount mentioned in it became 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 phrase “in good faith and for value” has split into 4 rudiments under Section 9-
 The instrument taken by the holder should be for value.
 It’s necessary to obtain the instrument before its maturity.
 The instrument should be complete and regular on its face.
 The instrument should have been received in a good faith without noticing any defect or error
neither in the instrument, title nor in the person negotiating it to him.
Case- SukhanRajkhim Raja a Firm of Merchants, Bombay V. N. Raja Gopalan-
The Hon’ble court held that the plaintiff was cognizant that the cheque had been dishonoured and
endorsement in his favour was only after it was returned by the bank. Furthermore, it has lost its
negotiability. Hence, the plaintiff cannot be holder in due course.
Conclusion:
Case A: In this case ‘C’ is the holder in due course and he got it in good faith and for value.
Case B: In this case ‘Balu’ is the holder and not Holder in Due Course, and he is a legal holder and
consideration is not required.
Case C: In this case ‘C’ is the ‘holder in due course’ even though the cheque was stolen and ‘A’ was not
having the good title over it.

19. Endorsing fewer amount:

A. The holder of a promissory note for Rs. 10000 writes on it “pay Rs.6000/- and endorses the note.
Examine the consequences of such an endorsement. (Jan-2019).
B. The holder of a promissory note for Rs. 1000 writes on it “Pay ‘B’ Rs. 500” and endorses the note.
Explain the consequential developments. (Jan-2017).
Issue:
Is endorsing fewer amounts on a promissory not valid? Yes, but it should be as per Section 56 of NI Act.
Rule:
Endorsement of Instruments
Section 15 of Negotiable Instruments Act 1881 defines "Endorsement" as under:
When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for
the purpose of negotiation on the back or face thereof or on a slip of paper annexed thereto, or so signs
for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to
endorse the same, and is called the "endorser".
The act of a person who is a holder of a negotiable instrument in signing his or her name on the back of
that instrument, thereby transferring title or ownership is an endorsement. An endorsement may be in
favour of another individual or legal entity. An endorsement provides a transfer of the property to that
other individual or legal entity. The person to whom the instrument is endorsed is called the endorsee.
The person making the endorsement is the endorser. Let us discuss the Endorsement of Instruments here
in detail.
Types of Endorsement
1. Blank Endorsement or General Endorsement
An endorsement is blank or general where the endorser signs his name only, and it becomes payable to
bearer. Thus, where a bill is payable to “Ram or order”, and he writes on its back “Ram”, it is an
endorsement in blank by Ram and the property in the bill can pass by a mere presentation.
We can convert a blank endorsement into an endorsement in full. We can do so by writing above the
endorser’s signature, a direction to pay the instrument to another person or his order.
2. Special or Full Endorsement
An endorsement “in full” or a special endorsement is one where the endorser puts his signature on the
instrument as well as writes the name of a person to whom order the payment is to be made.
A bill made payable to Ram or order, and endorsed “pay to the order of Shyam” would be specially
endorsed and Shyam endorses it further. We can turn a blank endorsement into a special one by adding
an order making the bill payable to the transferee.
3. Restrictive Endorsement
An endorsement is restrictive which restricts the further negotiation of an instrument.
Example of restrictive endorsement: “Pay to Mrs. Geeta only” or “Pay to Mrs Geeta for my use” or “Pay to
Mrs Geeta on account of Reeta” or “Pay to Mrs. Geeta or order for collection”.
4. Partial Endorsement
Section 56 deals with partial endorsement, which says that an instrument cannot be indorsed for a part of
its amount only. An endorsement partial is one which allows transferring to the endorsee a part only of
the amount payable on the instrument. This does not operate as a negotiation of the instrument.
Example: A. Mr. Mohan holds a bill for Rs. 5,000 and endorses it as “Pay Sohan or order Rs. 2500”. The
endorsement is partial and invalid.
B. If the instrument is for Rs.100, it cannot be indorsed for Rs. 50 only. But if the amount due has already
been partly paid, a note to that effect may be indorsed on the instrument and it may then be negotiated
for the balance.
5. Conditional or Qualified Endorsement
Where the endorser puts his signature under such writing which makes the transfer of title subject to
fulfilment of some conditions of the happening of some events, it is a conditional endorsement.

Application:
The act of a person who is a holder of a negotiable instrument in signing his or her name on the back of
that instrument, thereby transferring title or ownership is an endorsement. An endorsement may be in
favour of another individual or legal entity. An endorsement provides a transfer of the property to that
other individual or legal entity. The person to whom the instrument is endorsed is called the endorsee.
The person making the endorsement is the endorser.
Conclusion:
As per the Section 56 of the Negotiable Instrument Act, a partial endorsement is invalid, but when the
payment is received in part and the endorsement is for the remaining part, in this case the partial
endorsement is valid.
20. Stolen/Lost Negotiable Instruments:

A. A cheque is drawn payable to ‘X’ or bearer. Y steals it and negotiates it to ‘Z’. Is it possible to ‘X’
to get back the cheque from ‘A’? (Jan-2017).
Issue:
Holder in due course of a stolen/lost NI gets good title? Yes
Rule:
As per Section 9 of the Negotiable Instruments Act, 1881
"Holder in due course" means any person who for consideration became the possessor of a promissory
note, bill of exchange or cheque if payable to bearer, or the payee or endorsee thereof, if payable to
order, before the amount mentioned in it became payable, and without having sufficient cause to believe
that any defect existed in the title of the person from whom he derived his title.
Requirements for Holder in Due Course (HDC) Status
 To qualify as an HDC, the transferee must meet the requirements established by the Negotiable
Instrument Act.
 The person must be the holder of a negotiable instrument that was taken:
o For value.
o In good faith.
o Without notice that it is overdue, dishonoured, or encumbered in any way, and
o Bearing no apparent evidence of forgery, alterations, or irregularity.
Section 58 of the Negotiable Instruments Act: 58. When a promissory note, bill of exchange or cheque has
been lost or has been obtained from any maker, drawer, acceptor or holder thereof by means of an
offence or fraud, or for an unlawful consideration, neither the person who finds or so obtains the
instrument nor any possessor or indorsee who claims through such person is entitled to receive the
amount due thereon from such maker, drawer, acceptor or holder, unless such possessor or indorsee is, or
some person through whom he claims was, a holder thereof in due course.
Application:
A stolen instrument stands on the same footing as an instrument lost by the true owner. The thief does
not acquire any title to the instrument nor can he enforce payment of the same from the party concerned.
But if the thief transfers a negotiable instrument payable to bearer to any person, who becomes its holder
in due course, the latter will get good title to the instrument and he himself can pass on good title to his
transferee. But if the transferee is aware of the transferor’s defective title, his own title cannot be better
than that of the transferor. The transferee acquires good title to the instrument against the thief or any
prior party provided –
 He became holder for value, and
 He acquires it without the knowledge that the title of the transfer is defective.

Conclusion:
As per the above mentioned points a stolen or lost negotiable instrument’s holder in due course will have
good title over it provided that the conditions are met.
21. Forged cheques:

A. The cheque is payable to ‘M’ or order. It is stolen and the thief forges M’s signature and presents
it to the banker, who makes the payment in due course. Can M recover the amount from the
bank? (Jan-2020).
B. ‘A’ drew cheques in favour of ‘B’. A’s clerk forged B’s endorsement and negotiated the cheques to
‘C’ who took in good faith and for value. ‘C’ received payment of the cheques. ‘A’ claims to
recover the amount from ‘C’. Will he succeed? (Dec-2015).
C. ‘B’ obtains A’s acceptance to a bill by fraud. B endorses it to ‘C’ who takes it as a holder in due
course. ‘C’ endorses the bill to ‘D’ who knows of the fraud. Can ‘D’ recover from ‘A’? (May-2016).
D. A bill payable to ‘X or order’ was stolen. Y forged X’s endorsement and endorsed it to ‘Z’, who
takes it for value and in good faith. Shall ‘Z’ acquire good title to it? (Jan-2017).
E. ‘B’ obtains A’s acceptance to a bill of exchange by fraud. ‘B’ endorses it to ‘C’ who is a holder in
due course; ‘C’ endorses the bill to ‘D’ who knows of the fraud. Can ‘D’ get a good title and
recover money from A? (Jan-2018).
Issue: Write the Issue according to the below explanation.

As per the analysis of the below given definition of Section 58 of Negotiable Instrument Act, 1818 it is very
clear that the forged Negotiable Instrument will not create any legal rights are duties, but when a holder
in due course gets it in good faith and for valid consideration then the amount cannot be recovered from
him provided that he encashed the instrument.
Rule:
Section 58 of the Negotiable Instruments Act, 1881
Instrument obtained by unlawful means or for unlawful consideration.—When a negotiable instrument
has been lost, or has been obtained from any maker, acceptor or holder thereof by means of an offence or
fraud, or for an unlawful consideration, no possessor or indorsee who claims through the person who
found or so obtained the instrument is entitled to receive the amount due thereon from such maker,
acceptor or holder, or from any party prior to such holder, unless such possessor or indorsee is, or some
person through whom he claims was, a holder thereof in due course.
Application:
An instrument (negotiable instrument like cheque/bill of exchange/promissory note) is called forged
instrument when forgery takes place in signature of the drawer, signature of the endorser, and alteration
in name of the payee, alteration in amount, alteration in date etc. validated by forged signature.
A forged instrument is meaningless as far as drawer/endorser whose signature is forged is concerned

because holder of such instruments is not protected under law. Forgery is void ab-initio and confers no
title to the holders. Therefore, transferee will not be able to enforce payment from parties to the bill,
cheque and promissory note. In case such transferee gets payment by mistake such payment can be
claimed back from him/her. For example, when the forged cheque is paid by the drawee bank, it is
deemed payment without actual mandate of the customer. The paying bank is required to make good of
loss to the customer. Similarly a bank which collected the cheque on the basis of forged endorsement will
be held responsible and may have to return the proceeds collected by it.
Conclusion:
The forged or stolen instruments will not create any rights and the instruments are void for the holder and
in case of Holder In Due Course who got it for consideration any in normal course of business in good faith
will get all the rights.

22. A customer of the Royal Bank drew an open cheque for Rs. 1000 payable to ‘P’ the cheque was stolen.
The thief forged the payee’s endorsement and presented the cheque for payment at the branch upon
which it was drawn. The bank cashier paid the cheque without asking for proof of his identity. To whom
is the bank liable for the cashier’s action? (May-2016).
Issue:
Is the bank responsible for the payment of the cheque? Yes, responsible for their negligence and the
customer will get back that amount.
Rule:
For a paying banker to claim protection under the negotiable Instruments Act, one of the criteria he has to
satisfy, is that the payment should be in due course. As to what is payment in due course, has been stated
in Section 10 of the negotiable Instrument Act, which reads as follows:
“Payment in due course” means payment in accordance with the apparent tenor of the instrument in
good faith and without negligence to any person in possession thereof under circumstances which does
not afford a reasonable ground for believing that he is not entitled to receive payment of the amount
therein mentioned.
From the above definition, it can be observed that payment in due course has to qualify the payment to
be made on the basis of following principles:
1. In accordance with the apparent tenor of the instrument;
2. In good faith;
3. Without negligence;
4. To the person in possession of the instrument; and
5. While making payment the banker should not have reasons to ‘believe’ that the person in possession of
the instrument is not entitled to receive payment of the amount mentioned in the instrument.
Application:
Canara Bank v. Canara Sales Corporation and Ors. 1987 AIR 1603 Also, the Apex Court observed that, the
relationship between the customer of a bank and the bank is that of a creditor and debtor. When a
cheque which presented for encashment contains a forged signature the bank has no authority to make
payment against such a cheque. The bank would be acting against law in debiting the customer with the
amounts covered by such cheques. When a customer demands payment for the amount covered by such
cheques, the bank would be liable to pay the amount to the customer.
Conclusion:
In this case the bank cashier performed his duty negligently and the bank is held responsible for the
negligence of its cashier under vicarious liability.
23. Dishonour of a cheque by bank:

A. A customer of the banker has a deposit of Rs. 150000/- in his account. He issues a cheque for Rs.
50000/- to the banker for payment. The banker refuses to honour the cheque of the customer. Examine
the legal position. (Jan-2019).
B. ‘A’ being indebted to ‘B’, given ‘B’ a cheque which the later presents in due time, payment is refused
because of the bank’s failure. What are B’s rights? (May-2019).
Issue:
Case A: As per the Section 31 of the NI Act, if the banker refused with valid reasons mentioned in that
Section, he cannot be sued otherwise the customer can sue the banker.
Case B: In the case itself it is mention that the cheque is dishonoured by the bank’s fault, u/s 31 of the
Negotiable Instruments Act, the client can sue the bank and may get compensation from the bank.

Rule:
A banker on whom cheques are drawn by his customers for payment is called the “paying banker”. A
banker’s primary function and duty is to honour his customer’s cheques which is an implied term of the
contract entered into by the banker and his customer, when the account is opened. This duty is, however,
subject to the limitations imposed by Section 31 of the Negotiable Instruments Act, 1881, which provides:
“The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the
payment of such cheque must pay the cheque when duly required so to do, and, in default of such
payments, must compensate the drawer for any loss of damage caused by such default”.
Thus, the terms of Section 31 limit the banker’s duty to pay cheques on the existence of:
1. Sufficiency of funds of the drawer in the hands of the banker, or as per agreed borrowing facilities
on the account;
2. Availability of funds, that is, the funds are properly applicable to the payment of such cheques and
there is no legal bar prohibiting payment; and
3. Technical regularity of the cheque, that is, the cheques are drawn in the regular form and properly
presented for payment in the ordinary course of business.
Other terms:
4. Stop Payment of that cheque number is not requested by the customer.
5. Not a post-dated cheque.
6. The cheque is not crossed the expiry period of 3 months.
Application:
A banker has the statutory obligation to honour his customer’s cheques unless there are valid reasons for
refusing payment of the same. In case, he dishonours a cheque, intentionally or by mistake, he is liable to
compensate the customer for the loss suffered by him. According, to section 31 of the negotiable
instruments act 1881 the banker is liable to compensate the drawer for any loss and damage caused by a
default on his part in dishonouring the cheques without sufficient reason. The word loss and damage
include:
 The monetary loss suffered by the customers.

 The loss of credit or reputation in the market.
Assessment of loss or damages:
The loss or damage suffered by the customer as a result of dishonouring his cheques by the banker can be
assessed in the following ways;
(1) The monetary loss; first is the monetary loss suffered by the customer for dishonouring cheque by the
banker. It is the actual loss due to the dishonour of a cheque.
(2) The loss of credit or reputation: Reputation or credit is a foundation of trading business. If the
customer lost his credit or reputation, it may result from a loss of a profitable contract or business.
Conclusion:
Case A: Assuming that the banker has failed to honour the cheque without any valid reasons, hence he is
liable for the loss to the customer.
Case B: In the given case the payment of cheque is refused by bank’s failure, hence the customer can sue
and get compensation from the bank.
*****

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BANKING – 5th Semester

Harinath Janumpally Practicing Advocate

Harinath Janumpally – harinath0012@gmail.com – 94406 29864 1

SL NO BANKING AND NEGOTIABLE INSTRUMENTS - 5th SEMESTER - IMPORTANT QUESTIONS REP

Harinath Janumpally – harinath0012@gmail.com – 94406 29864 2

8. Sec 31 Liability for dishonouring a cheque.

Answers to important questions

Harinath Janumpally – harinath0012@gmail.com – 94406 29864 3

Features of banking regulation act 1949:

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History of banking system in India:

1. The Pre-Independence Phase i.e. before 1947

Harinath Janumpally – harinath0012@gmail.com – 94406 29864 5

1. The Pre-Independence Phase i.e. before 1947

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5. Punjab & Sindh Bank

List the Importance of Banks in Detail

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3. Banker's obligation to maintain the secrecy of customers’ account is not absolute.

Disclosure of Information required by Law:

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Disclosure Permitted by the Banker’s practices and Usages:

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4. Who is banker? General relationship between banker and customer.

1. Debtor and Creditor,

1. Relationship of Debtor and Creditor

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Harinath Janumpally – harinath0012@gmail.com – 94406 29864 11

7. Relationship of Agent and Principal

Who can cross a cheque?

Importance of Crossing of Cheque:

Harinath Janumpally – harinath0012@gmail.com – 94406 29864 12

Types of Cheque Crossing:

Special and Restrictive Crossing of Cheque

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Harinath Janumpally – harinath0012@gmail.com – 94406 29864 14

Parties of Bill of Exchange: A bill of exchange has three parties:

Harinath Janumpally – harinath0012@gmail.com – 94406 29864 15

Example of a Bill of Exchange

7. Describe Promissory/Pronote Notes and when it expires.

Characteristics of Promissory Note

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Important Points to Remember about Promissory Notes

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Important characteristics of Negotiable Instruments are:

1. Property: The possessor of negotiable instrument is acknowledged to be the owner of property

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Types of Negotiable Instruments

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Harinath Janumpally – harinath0012@gmail.com – 94406 29864 20

Harinath Janumpally – harinath0012@gmail.com – 94406 29864 21

Harinath Janumpally – harinath0012@gmail.com – 94406 29864 22

Liability of a Paying Banker if the Customer’s Signature is forged:

11. Collecting Banker.

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12. Banker's Lien.

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Where Lien can be exercised:

Where Lien cannot be exercised:

13. Banker's setoff.

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14. Bank Guarantees.