LAW AND PRACTICE

OF BANKING
MODULE 2 – PAYING AND COLLECTING BANKER
MODULE – 2: PAYING AND COLLECTING BANKER
SYLLABUS
1. Paying banker:
• Introduction - Meaning – Role – Functions - Duties
• Precautions and Statutory Protection and rights
• Dishonor of Cheques – Grounds of Dishonor – Consequences of wrongful
dishonor of Cheques
2. Collecting Banker:
• Introduction – Meaning, Duties & Responsibilities
• Legal status of collecting banker
• Holder for value and Holder in due course
• Precautions and Statutory Protection to Collecting Banker.
 • Meaning of Paying Banker

• The term "paying banker" refers to a bank or financial institution that undertakes the
responsibility of making payments on behalf of its customers. In this context, the paying
banker acts as an agent for its account holders and carries out various payment
functions, such as honoring cheques, making electronic fund transfers, processing direct
deposits, and executing other payment instructions.
• When an individual or a company issues a cheque or provides payment instructions to
their bank, the paying banker ensures that the requested funds are transferred from the
customer's account to the designated recipient. The paying banker verifies the
availability of funds and initiates the payment process, either by debiting the
customer's account or by issuing a bank draft or cashier's cheque.
• The paying banker plays a crucial role in facilitating financial transactions and ensuring
the secure and efficient transfer of funds. They are responsible for maintaining accurate
records of transactions, safeguarding customer funds, and adhering to applicable banking
regulations and industry standards.
• Overall, the paying banker acts as a trusted intermediary between the customer and the
recipient of the funds, providing a reliable and convenient means of making payments.
 Role of a paying banker

1. Payment Processing: The primary duty of a paying banker is to process payments on behalf of their customers. This
includes honoring cheques, facilitating electronic fund transfers, and executing other payment instructions. The paying
banker ensures that the funds are transferred accurately and promptly to the designated recipients.
2. Verification of Funds: Before making a payment, the paying banker verifies the availability of funds in the customer's
account. They assess the account balance to ensure that there are sufficient funds to cover the requested payment. This
verification helps prevent overdrafts and ensures that payments are made within the customer's financial means.
3. Account Management: Paying bankers are responsible for managing their customers' accounts. This includes maintaining
accurate records of account balances, transactions, and payment instructions. They update account information, process
account closures or openings, and provide statements and reports to customers as required.
4. Transaction Security: Paying bankers have a duty to maintain the security of financial transactions. They employ various
security measures to protect customer accounts and sensitive information from unauthorized access or fraudulent
activities. This may involve implementing encryption technologies, monitoring transactions for suspicious activity, and
complying with data protection regulations.
5. Compliance and Regulatory Obligations: Paying bankers must adhere to banking regulations and compliance standards.
They are responsible for implementing and following anti-money laundering (AML) and know your customer (KYC)
procedures. Paying bankers also have reporting obligations to regulatory authorities and must comply with laws and
regulations related to customer privacy and financial transactions.
6. Customer Service: Providing excellent customer service is an essential duty of a paying banker. They assist customers with
payment-related inquiries, address any issues or concerns, and offer guidance on payment methods and procedures.
Paying bankers strive to ensure a positive customer experience and build long-term relationships with their clients.
7. Reconciliation and Record Keeping: Paying bankers maintain accurate records of transactions and reconcile accounts
regularly. They ensure that the records align with the transactions processed, enabling easy identification of discrepancies
and effective resolution of any issues. Accurate record-keeping is crucial for financial reporting and audit purposes.
 Precautions while making payment of cheques

1. Verify Sufficient Funds: Before accepting a cheque for payment, verify that the account has sufficient funds to
cover the amount. Contact the paying banker to confirm the availability of funds or consider using electronic
means of verifying funds, such as online banking or a real-time cheque verification service.
2. Examine the cheque: Carefully examine the cheque for any signs of tampering or alterations. Ensure that the
cheque is properly filled out, including the date, payee name, and the amount written in both numbers and
words. If anything seems suspicious, contact the paying banker for further verification.
3. Cross-check Signatures: Compare the signature on the cheque with the authorized signature on file. Look for
any discrepancies or irregularities that may indicate forgery. If there are doubts about the authenticity of the
signature, contact the paying banker or the account holder for verification.
4. Consider Validity Period: Cheques often have a validity period, typically six months or a specified time frame.
Ensure that the cheque is still within the validity period before accepting it for payment. Expired cheques may
not be honored by the paying banker.
5. Maintain Secure Handling: Treat cheques with care and maintain secure handling throughout the payment
process. Keep cheques in a secure location to prevent loss or unauthorized access. Limit access to cheque
processing areas and ensure proper shredding or disposal of canceled or unused cheques.
6. Document the Transaction: Maintain a clear record of the cheque payment, including the cheque number,
date, amount, payee, and any other relevant details. This documentation serves as a reference for future
reconciliation and dispute resolution.
7. Verify Account Status: Verify that the account from which the cheque is drawn is active and in good standing.
If there are any concerns about the account's status, contact the paying banker to confirm before accepting the
 Rights of a paying banker

1. Right to Verify Funds: A paying banker has the right to verify the availability of funds in a customer's account before
processing a payment. This is crucial to ensure that the customer has sufficient funds to cover the payment and to
prevent overdrafts or non-sufficient funds (NSF) situations.
2. Right to Verify Payment Instructions: The paying banker has the right to verify the accuracy and authenticity of
payment instructions provided by the customer. This includes confirming the payee's details, payment amount, and
any other relevant information to ensure the transaction is valid and authorized.
3. Right to Refuse Payment: In certain circumstances, a paying banker has the right to refuse payment. This may occur if
the paying banker suspects fraudulent activity, if the account has been frozen or flagged for suspicious transactions,
or if the payment instructions are incomplete or unclear. Refusing payment helps protect the interests of the
customer and the paying banker.
4. Right to Charge Fees: Paying bankers have the right to charge fees for their services. These fees may include
transaction fees, account maintenance fees, cheque processing fees, or other charges associated with payment
processing and account management. The specific fee structure and amounts are typically disclosed to customers in
advance.
5. Right to Set Policies and Procedures: Paying bankers have the right to establish policies and procedures governing
their operations. This includes setting limits on transaction amounts, establishing cut-off times for processing
payments, and implementing security measures to protect customer accounts and sensitive information. These
policies and procedures help ensure efficient and secure payment processing.
6. Right to Exercise Lien: In some cases, a paying banker may have the right to exercise a lien over a customer's account.
This means that the paying banker can hold funds in the account to satisfy outstanding debts or obligations owed by
 Dishonor of cheque
• The dishonor of a cheque, also known as a bounced or returned cheque, occurs when a cheque is not
honored by the paying banker. This typically happens due to insufficient funds in the account or other
reasons that render the cheque unpayable. Here are the key aspects related to the dishonor of a cheque:
1. Insufficient Funds: The most common reason for dishonoring a cheque is insufficient funds in the account
of the drawer (the person who wrote the cheque). When the paying banker receives the cheque for
payment and verifies that the account does not have enough funds to cover the cheque amount, they will
dishonor the cheque.
2. Non-Sufficient Funds (NSF) Fee: When a cheque is dishonored due to insufficient funds, the paying banker
may charge the account holder a non-sufficient funds fee. This fee is levied to cover the administrative costs
associated with the failed transaction.
3. Notification of Dishonor: The paying banker is required to notify both the account holder (drawer) and the
payee (recipient of the cheque) about the dishonor. This notification is typically done by returning the
dishonored cheque along with a "cheque return memo" that provides details about the reason for dishonor.
4. Legal Consequences: The dishonor of a cheque can have legal consequences for the drawer. In many
jurisdictions, writing a cheque with insufficient funds can be considered a criminal offense, subject to
penalties and potential legal action. The specific legal consequences vary based on the jurisdiction's laws.
5. Rectification and Representation: Following the dishonor of a cheque, the payee may request the drawer to
rectify the situation by providing an alternate form of payment or by depositing sufficient funds into the
account. The payee can also choose to represent the cheque for payment at a later date, assuming the
drawer can provide the necessary funds.
6. Impact on Credit and Reputation: Consistent dishonor of cheques or a history of insufficient funds can
negatively impact the drawer's credit history and reputation. It can affect the drawer's ability to obtain
credit in the future and may lead to a loss of trust from potential business partners and financial
institutions.
TYPES OF DISHONOUR
• RIGHTFUL DISHONOUR
• WRONGFUL DISHONOUR
 Rightful dishonour (I)
Rightful dishonor of a cheque refers to the legitimate and justified refusal of a paying banker to honor a
cheque presented for payment. It occurs when the paying banker has valid reasons to dishonor the cheque
based on legal or contractual obligations. Here are some scenarios that may result in rightful dishonor:
1. Insufficient Funds: If the drawer's account does not have enough funds to cover the amount specified on
the cheque, the paying banker has the right to dishonor the cheque. This is a legitimate reason as the
paying banker is obligated to ensure that funds are available for payment.
2. Stop Payment Order: If the drawer issues a valid stop payment order to the paying banker before the
cheque is presented for payment, the paying banker has the right to dishonor the cheque. The stop
payment order could be due to a lost or stolen cheque, a dispute with the payee, or a change in payment
arrangements.
3. Breach of Agreement: If the cheque payment violates the terms of a contract or agreement between the
drawer and the payee, the paying banker may rightfully dishonor the cheque. For example, if the
payment is contingent on certain conditions that have not been met, the paying banker can refuse
payment.
4. Incomplete or Altered cheque: If the cheque is incomplete or contains alterations that raise suspicion of
fraud or unauthorized changes, the paying banker can rightfully dishonor the cheque. This is done to
protect the interests of the account holder and prevent fraudulent activities.
5. Irregular Signature: If the signature on the cheque does not match the authorized signature on file or
raises doubts about its authenticity, the paying banker has the right to dishonor the cheque. This helps
 Wrongful dishonour (II)

Wrongful dishonor of a cheque occurs when a paying banker erroneously refuses to honor a cheque that
should have been payable. It refers to a situation where the paying banker does not have valid grounds to
dishonor the cheque, either due to a mistake or a failure to comply with legal and contractual obligations.
Here are some instances that may lead to wrongful dishonor:
1. Sufficient Funds Available: If the drawer's account has enough funds to cover the cheque amount, but
the paying banker incorrectly determines that there are insufficient funds, it results in wrongful
dishonor. This could be due to errors in account balance calculations or failure to properly update
account information.
2. Failure to Properly Verify Signature: If the paying banker wrongly determines that the signature on
the cheque does not match the authorized signature on file, resulting in dishonor, it can be considered
a wrongful dishonor. This may occur due to mistakes in signature verification or inadequate procedures
for verifying signatures.
3. Breach of Contractual Obligations: If the paying banker dishonors a cheque without a valid reason,
breaching the terms of a contractual agreement between the drawer and the bank, it is a wrongful
dishonor. This could occur when the paying banker fails to fulfill its obligations to process valid cheque
payments.
4. Violation of Legal Requirements: Dishonoring a cheque in violation of legal requirements, such as
applicable banking laws or regulations, can be classified as wrongful dishonor. This may include failure
to comply with proper notification procedures or incorrect application of legal restrictions on
 Consequences of wrongful dishonour of cheques
1. Legal Liability: The paying banker may face legal liability for wrongfully dishonoring a cheque. The drawer
or the payee of the cheque may take legal action against the paying banker for damages resulting from
the wrongful dishonor. This can include financial losses, damages to reputation, and legal expenses.
2. Damages and Compensation: If it is determined that the paying banker wrongfully dishonored the
cheque, they may be required to compensate the affected parties for any losses incurred as a result. This
can include reimbursing the drawer for any resulting fees, penalties, or financial harm, as well as
compensating the payee for any damages suffered.
3. Legal and Regulatory Consequences: Wrongful dishonor can lead to regulatory scrutiny and potential
penalties from regulatory authorities overseeing banking operations. The paying banker may be subject
to fines, sanctions, or other disciplinary actions for violating banking regulations or consumer protection
laws.
4. Damage to Reputation: Wrongful dishonor can damage the reputation of the paying banker. It can lead
to a loss of trust and confidence from customers and the general public. Negative publicity and word-of-
mouth can impact the bank's image and customer perception, potentially resulting in a loss of business.
5. Customer Dissatisfaction: Wrongful dishonor can result in dissatisfaction among customers who
experience inconvenience and financial difficulties due to the refusal to honor their valid cheques. This
can lead to customer complaints, negative reviews, and a decline in customer loyalty.
6. Legal Obligations and Remedies: The paying banker may be required to rectify the situation by honoring
the cheque, compensating the affected parties, and taking appropriate measures to prevent similar
incidents in the future. This may involve revising internal procedures, providing employee training, or
 Grounds of dishonor of cheques

1. Insufficient Funds: One of the primary reasons for dishonoring a cheque is insufficient funds in the drawer's
account. If the account does not have enough funds to cover the cheque amount, the paying banker will
dishonor the cheque.
2. Account Closed: If the drawer's account is closed or has been terminated, the paying banker will dishonor any
cheques presented for payment from that account.
3. Irregular Signature: Dishonor may occur if the signature on the cheque does not match the authorized
signature on file with the paying banker. This could indicate potential forgery or unauthorized use of the
account.
4. Stale or Post-Dated cheque: A cheque may be dishonored if it is presented after a specified period, typically
six months, from the date it was issued (stale cheque). Similarly, a post-dated cheque presented before the
specified date may also be dishonored.
5. Alterations or Incomplete Information: Dishonor can result from alterations made to the cheque, such as
changes to the payee name, the amount, or the date. Additionally, if essential information on the cheque is
incomplete or missing, such as the payee's name or the amount in words, the cheque may be dishonored.
6. Payment Stop: The paying banker may dishonor a cheque if a valid stop payment order has been issued by
the drawer. A stop payment order instructs the bank not to honor a specific cheque, typically due to a
dispute, loss of the cheque, or a change in payment arrangements.
7. Legal Requirements or Court Orders: Dishonor may occur if the payment of a cheque is in violation of legal
requirements or court orders. For example, if a court has issued an injunction or freeze order on the drawer's
account, the paying banker may dishonor cheques drawn from that account.
 MEANING OF COLLECTING BANKER
• The term "collecting banker" refers to a bank that acts as an intermediary in the collection
of funds on behalf of its customers. When a customer receives payments in the form of
cheques, drafts, or other negotiable instruments, they can deposit these instruments with their
bank for collection.
• The collecting banker assumes the responsibility of presenting the instruments to the
respective issuing banks and ensuring the collection of funds on behalf of the customer.
The collecting banker follows the necessary procedures and protocols to facilitate the
collection process, which may include presenting the instrument for payment, handling any
necessary endorsements, and following up on any discrepancies or issues that may arise during
the collection process.
• The collecting banker typically charges a fee for its services, which can vary depending on
factors such as the amount of the instrument, the complexity of the collection process, and any
additional services provided.
• Overall, the role of a collecting banker is to assist customers in collecting funds owed to them
through negotiable instruments, simplifying the collection process and providing convenience
 Duties of a collecting banker
1. Collection of Funds: The primary duty of a collecting banker is to collect funds or negotiable instruments,
such as cheques, drafts, or promissory notes, on behalf of its customers. This involves receiving the
instruments from the customer or a third party and initiating the collection process.
2. Exercise of Reasonable Care: A collecting banker is expected to exercise reasonable care and skill in
handling the funds or negotiable instruments entrusted to it for collection. This includes following proper
procedures, adhering to banking regulations, and taking appropriate measures to ensure the integrity
and security of the collection process.
3. Prompt Presentation: The collecting banker has a duty to promptly present the negotiable instruments for
payment or collection to the issuing bank or relevant parties. Timely presentation is crucial to ensure the
collection process is carried out efficiently and within legal timelines.
4. Disclosure of Material Information: The collecting banker has a duty to disclose any material information or
defects known to it that may affect the validity or collectability of the negotiable instruments. This includes
disclosing any known alterations, forgeries, or irregularities associated with the instruments.
5. Notification of Dishonor: If a negotiable instrument is dishonored (i.e., not paid or accepted) by the issuer or
drawee, the collecting banker has a duty to promptly notify the customer about the dishonor and provide
relevant information regarding the reason for dishonor.
6. Proper Accounting and Reporting: The collecting banker is responsible for maintaining accurate
records, accounting for the collected funds, and providing periodic reports to the customer regarding the status
and outcome of the collection process.
7. Confidentiality and Data Protection: The collecting banker has a duty to maintain the confidentiality and
privacy of customer information and ensure compliance with relevant data protection laws and regulations.
 Rights of collecting banker
1. Possession and Control: The collecting banker has the right to possess and exercise control over the
funds or negotiable instruments deposited for collection. This includes physical possession of the
instruments or control over electronic transactions.
2. Presentation for Payment: The collecting banker has the right to present the negotiable instruments to
the issuing bank or relevant parties for payment or collection. This involves following the necessary
procedures and timelines specified by banking regulations or agreed-upon terms.
3. Enforcement of Collection: The collecting banker has the right to take appropriate legal or
administrative actions to enforce the collection of funds represented by the negotiable instruments. This
may include pursuing legal remedies in case of dishonor or non-payment.
4. Deduction of Fees: The collecting banker typically has the right to deduct fees or charges for the services
provided during the collection process. The fees and charges are usually agreed upon and disclosed in the
contractual agreement between the bank and its customer.
5. Exercise of Set-Off: In some cases, a collecting banker may have the right to exercise set-off, which means
offsetting any outstanding debts or obligations owed by the customer against the funds being collected.
This right is usually governed by specific legal provisions and contractual agreements.
6. Defenses and Indemnification: The collecting banker has the right to raise valid defenses or seek
indemnification from the customer or other relevant parties in case of legal disputes or liabilities arising
from the collection process.
7. Lien or Security Interest: Depending on the jurisdiction and applicable laws, a collecting banker may have
a right to retain possession of the collected funds or negotiable instruments as security for any
 HOLDER FOR VALUE
A collecting banker is holder for value if he gives the value of the cheque in any
form to its customer before collecting the proceeds of the cheque deposited by
the latter. He does not remain an agent of the customer, but becomes the owner
of the cheque in his own right since he has paid value for it, and has acquired the
ownership right in good faith. In such a situation, the banker is called holder for
value and he is also the holder in due course
 Holder in due course

"Holder in due course" refers to a legal term used in the context of negotiable instruments, such as cheques or
promissory notes. A holder in due course is a person or entity who acquires the instrument in good
faith, for value, and without notice of any defects or claims against it. The concept of a holder in due
course provides certain legal protections and rights to the holder.
To be considered a holder in due course, the following criteria typically need to be met:
1. Good Faith: The holder must acquire the instrument honestly and without knowledge of any
circumstances that would indicate its invalidity or that the person transferring it has no authority to do
so.
2. Value: The holder must provide consideration (value) for the instrument, such as paying money or
giving something of value in exchange for it.
3. Without Notice: The holder must acquire the instrument without notice of any defect, claim, or defense
against it. This means the holder must not have any knowledge or reason to believe that there are
problems with the instrument, such as forgery, alteration, or fraud.
• When a person qualifies as a holder in due course, they are granted certain rights and protections. These
may include:
1. Protection against Defenses: A holder in due course generally takes the instrument free from most
defenses or claims that the original parties to the instrument may have against each other. This means the
holder's right to collect on the instrument is generally not affected by disputes between the original parties.
2. Priority over Prior Parties: A holder in due course typically has a higher priority over other parties who
STATUTORY PROTECTION FOR COLLECTING
BANKER
A collecting banker can claim protection if the following conditions are
fulfilled :
• Good Faith without Negligence
• Collection for a customer
• Acts as an Agent
• Crossed cheques