module 4 banking

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Module 4 –Collecting Banker - Jain University- CMS V Semester

Banking & Insurance

For Private circulation only Module prepared by Vanitha J Deepak and Lakshman

Meaning: Collecting banker means the banker who collects the cheques and bills onbehalf of the customers. In other words, every crossed cheque is necessarily to be

collected through any bank, which is known as collecting banker.

As Sir John Paget has rightly said “Looking at the restriction on the encashment of

crossed cheques, save through a bank and the universal and legally encouraged use of crossed cheques the collection of such cheques must be regarded as

an inherent part of banker‟s business.”

Definition of Collecting Banker: One of the principal functions of a banker is toreceive instruments from his customer in order to collect the proceeds and credit them

to his customer's account. When acting in this capacity he is called a "collecting

banker". While collecting the cheques of a customer, the banker may act in the capacityof either (a) as a holder for value, or (b) as an agent of the customer.

Functions of a collecting BankerWhile collecting his customer's cheques, a banker acts either:

(i) Banker as Holder for value - When, to oblige a customer, a bank pays the proceeds

of a cheque drawn upon another banker, before collection, he is treated as a holder for

value. Similarly, where, a customer pays in a cheque and the banker expressly orimpliedly permits him to draw against it before it is cleared, the banker will be regarded

as a holder for value.

(ii) Banker as Agent - A collecting banker acts, as an agent of the customer if he creditsthe customer's account with the amount of the cheque after it is actually realised

A collecting banker becomes an holder for value in the following ways:

(a) by lending further on the strength of the cheque;(b) by paying the amount of the cheque or part of it in cash or in account before it is

cleared;

(c) by agreeing that the customer may draw before the cheque is cleared;

(d) by accepting the cheque in a reduction of an existing overdraft;(e) by giving cash over the counter for the cheque at the time it is deposited in for

collection.

Objectives of the study: Duties/ Responsibilities of the Collecting banker

Functions

Protection

Negotiable Instruments




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Duties and Responsibilities of a Collecting Banker:

The duties and responsibilities of a collecting banker are discussed below:1. Due care and diligence in the collection of cheque.

2. Serving notice of dishonour.3. Agent for collection.4. Remittance of proceeds to the customer.

5. Collection of bill of exchange.

1. Due Care and Diligence in the Collection of Cheques: The collecting banker is

bound to show due care and diligence in the collection of cheques presented to him. In

case a cheque is entrusted with the banker for collection, he is expected to show it to the

drawee banker within a reasonable time. According to Section 84 of the Negotiable

Instruments Act, 1881, “Whereas a cheque is not presented for payment within a

reasonable time of its issue, and the drawer or person in whose account it is drawn had

the right, at the time when presentment ought to have been made, as between himself and the banker, to have the cheque paid and suffers actual damage, through the delay,he is discharged to the extent of such damage, that is to say, to the

extent to which such drawer or person is a creditor of the banker to a large amount

than he would have been if such cheque had been paid.”In case a collecting banker doesnot present the cheque for collection through proper channel within a reasonable time,

the customer may suffer loss. In case the collecting banker and the paying banker are in

the same bank or where the collecting branch is also the drawee branch, in such a casethe collecting banker should present the cheque by the next day. In case the cheque is

drawn on a bank in another place, it should be presented on the day after receipt.

2. Serving Notice of Dishonour: When the cheque is dishonoured, the collectingbanker is bound to give notice of the same to his customer within a reasonable time.

It may be noted here, when a cheque is returned for confirmation of endorsement,

notice must be sent to his customer. If he fails to give such a notice, the collectingbanker will be liable to the customer for any loss that the customer may have suffered

on account of such failure.Whereas a cheque is returned by the drawee banker for

confirmation of endorsement, it is not called dishonour. But in such a case, notice must

be givento the customer. In the absence of such a notice, if the cheque is returned for the

second time and the customer suffers a loss, the collecting banker will be liable for

the loss.

3. Agent for Collection: In case a cheque is drawn on a place where the banker is not

a member of the „clearing-house‟, he may employ another banker who is a member of

the clearing-house for the purpose of collecting the cheque .In such a case the bankerbecomes a substituted agent. According to Section 194 of the Indian Contract Act,

1872, “Whereas an agent, holding an express or implied authority to name another

person to act in the business of the agency has accordingly named another person,such a person is a substituted agent. Such an agent shall be taken as the agent of a




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principal for such part of the work as is entrusted to him.”

4. Remittance of Proceeds to the Customer: In case a collecting banker has realised

the cheque, he should pay the proceeds to the customer as per his (customer‟s) direction. Generally, the amount is credited to the account of the customer on the

customer‟s request in writing, the proceeds may be remitted to him by a demand

draft. In such circumstances, if the customer gives instructions to his banker, the

draft may be forwarded. By doing so, the relationship between principal and agentcomes to an end and the new relationship between debtor and creditor will begin.

5. Collection of Bills of Exchange: There is no legal obligation for a banker to collect

the bills of exchange for its customer. But, generally, bank gives such facility to itscustomers. In collection of bills, a banker should examine the title of the depositor as

the statutory protection under Section 131 of the Negotiable Instruments Act, 1881.

Thus, the collecting banker must examine very carefully the title of his customertowards the bill. In case a new customer comes, the banker should extend this facilityto him with a trusted reference.

Statutory Protection to Collecting BankerSection 131 of the Negotiable Instruments Act provides protection to a collecting

banker

who receives payment of a crossed cheque or draft on behalf of his customers.According to Section 131 of the Act “a banker who has, in good faith and withoutnegligence, received payment for a customer of a cheque crossed generally or specially

to himself shall not, in case the title to the cheque proves defective, incur any liability to

the true owner of the cheque by reason only of having received such payment.” The protection provided by Section 131 is not absolute but qualified. A collecting

banker

can claim protection against conversion if the following conditions are fulfilled.1. Good Faith and Without Negligence: Statutory protection is available to a

collecting banker when he receives payment in good faith and without negligence. The

phrase in “good faith” means honestly and without notice or interest of deceit or

fraud and does necessarily require carefulness. Negligence means failure to exercisereasonable care. It is not for the customer or the true owner to prove negligence on

the part of the banker. The burden of proving that he collected in good faith and

without negligence is on the banker. The banker should have exercised reasonable

care and deligence. What constitutes negligence depends upon facts of each case.

Following are a few examples which constitute negligence:

(a) Failure to obtain reference for a new customer at the time of opening the account.

(b) Collection of cheques payable to „trust accounts‟ for crediting to personal accounts

of a trustee.

(c) Collecting for the private accounts of partners, cheques payable to the partnershipfirms.




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(d) Omission to verify the correctness of endorsements on cheques payable to order.

(e) Failure to pay attention to the crossing particularly the “not negotiable

crossing.”

2. Collection for a Customer: Statutory protection is available to a collecting bankerif he collects on behalf of his customer only. If he collects for a stranger ornoncustomer,

he does not get such protection. As Jones aptly puts if “duly crossed

cheques are only protected in their collection, if handled for the customer.” A bank cannot get protection when he collects a cheque as holder for value. In Great Western

Railway Vs London and Country Bank it was held that “the bank is entitled for

protection as it received collection for an employee of the customer and not for the

customer.” 3. Acts as an Agent: A collecting banker must act as an agent of the customer in

order to get protection. He must receive the payment as an agent of the customer

and not as a holder under independent title. The banker as a holder for value is notcompetent to claim protection from liability in conversion. In case of forgery, theholder for value is liable to the true owner of the cheque.

4. Crossed Cheques: Statutory protection is available only in case of crossed cheques.

It is not available in case uncrossed or open cheques because there is no need tocollect them through a banker. Cheques, therefore, must be crossed prior to their

presentment to the collecting banker for clearance. In other words, the crossing

must have been made before it reached the hands of the banker for collection. If thecheque is crossed after it is received by the banker, protection is not available. Even

drafts are covered by this protection.

Banks should, therefore, ensure that only crossed cheques are accepted for collection.For this, customer should be educated/advised to cross the cheques before tendering for

collections.

Protection given to collecting banksi) The cheque must be crossed before it is presented for payment by the customer who

presents it for collection.

ii) An open cheque cannot be collected or when sent for collection after crossing by the

collecting banker, he will not get statutory protection.iii) It is duty of the banker to ascertain the name of the husband and his employer when

the banker has to open an account in the name of the married woman. It amounts to

negligence when he opens the account without ascertaining the details of her husband.

Protection given:iv) Wrong credit of customer‟s private account of the proceeds of a cheque whichshould have been credited to the account in an official capacity of the customer.

iv) Eg.An ordinary account holder presenting a cheque for a huge amount leads tosuspicion and if the banker fails to make an enquiry it amounts to negligence.

v) Wrong credit of customer‟s private account of the proceeds of a cheque which

should have been credited to the account in an official capacity of the customer.




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It is possible that the branches may be having un-introduced savings bank accounts, in

which case sufficient care must be exercised to ensure that the cheques are accepted forcollection only after the accounts are properly introduced.

In collecting third party cheques, a banker should take extra precautions to safeguardthe interests of the true owner. In the case of collection of bills, a banker does not get

the statutory protection afforded to collection bankers by Section 131 of the Negotiable

Instruments Act, 1881.The sole director of one-man company endorsed, in the name of the company, cheques drawn by third parties in favour of the company which is

collected on his behalf and credited his account with their proceeds

A cheque, which was made payable to a partnership firm, was endorsed by one partner

on behalf of the firm and was paid into his account, his private account for collectionwith the bank.

Negligence:The following acts would generally constitute negligence :(i) To collect cheques which contain irregular endorsements. It is the duty of the Bank

to verify the correctness of endorsements on a cheque and to satisfy that the cheques are

in order in all respects without any reason to doubt the title of the lodger.(ii) To collect cheques for customers, whose accounts are not properly introduced.

(iii) To collect cheques crossed "A/c Payee" for an account other than that of the payee.

However, there may be exceptional circumstances when a banker can collect a chequecrossed "A/c Payee" for an account other than that of the payee

Presentment for Acceptance

Presentment for acceptance is not necessary in case of a bill payable on demand or on a

fixed date. However, it is always desirable to get a bill accepted as early as possible.

The "A/c Payee" crossing is a direction to the collecting banker for appropriation in

terms of the crossing. Generally, if a banker collects a bearer or order cheque crossed"A/c Payee" on account of a third party, who has no title to it, the banker would be

guilty of negligence and, therefore, of conversion and would lose the protection under

Section 131 of the Negotiable Instruments Act, 1881.

The bank would be liable to the true owner of the cheque and not to the drawer of thecheque. The true owner of the cheque is the payee or the endorsee, when it is properly

endorsed.Further, a cheque is a bill of exchange drawn on a specified banker and not

expressed to be payable otherwise than on demand.

.Marking of Cheque The marking of cheque means “a cheque which is marked or certified by the drawee

banker,to the effect, that it is good for payment.” The drawee bank certifies that thedrawer of the cheque has sufficient balance in his account and the cheque will not be

dishonoured due to lack of funds. Such a certificate is known as “Marking of Cheques.”




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Generally, the marking of a cheque is done by drawee in writing the words “good for

payment” across one corner of the cheque, with the signature of the bank‟s authorised

official and the bank‟s stamp.

The marked cheques are very useful for businessmen as they can purchase the goodsrequired by them, and the sellers will accept the marked cheques like currency-notes. Itis to be noted here that marking post-dated cheques is not valid.

Who Can Get the Cheque Marked? The marking of cheques may be done at the request of:(a) the drawer

(b) the holder, and

(c) another banker.

(a) Marking at the Request of the Drawer: Whereas a cheque is marked by the

Drawee bank at the request of the drawer, the latter cannot stop payment. In such case,

the banker is bound to honour the cheque so marked by it.In case the drawer dies or becomes insane, the banker will have to make the paymentbecause of the cheque having been marked at the request of the drawer.

In such case, the banker has statutory protection in refusing other cheques of the

customer if there are not sufficient funds in his account.(b) Marking at the Request of the Holder: The marking of a cheque at the request of

the holder or payee does not virtually place any liability on the paying banker.

It simply means that at the time of marking, the drawee banker has sufficient funds tothe credit of the drawer to meet the cheque.

In such circumstances, there is no guarantee to the holder that the amount of the cheque

will be paid to him when he presents it for payment. If a customer has sufficient funds

in his account and he presents a cheque for payment, the banker will honour the chequeimmediately.

(c) Marking at the Request of Another Banker: When a banker marks a cheque at the

request of another banker for clearance purposes, the paying banker is undertaking anobligation to honour it. In actual practice, marking a cheque for

clearance purposes entitles the paying banker to earmark the necessary funds to meet

the cheque.

Types of Negotiable Instruments:

Negotiable instrument is a document guaranteeing the payment of a specific amount of

money, either on demand, or at a set time. According to the Section 13 of the

Negotiable Instruments Act, 1881 in India, a negotiable instrument means a promissorynote, bill of exchange or cheque payable either to order or to bearer

Functions of Negotiable InstrumentsNegotiable instruments serve the following functions:

Substitute for money

Credit deviceRecord-keeping device




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Most purchases by businesses and many individuals are made by negotiable instruments

instead of cash.According to Uniform Commercial Code 3-104(a), a negotiable instrument must:

Be in writing Be signed by the maker or drawer

Be an unconditional promise or order to pay

State a fixed amount of money

Not require any undertaking in addition to the payment of money

Be payable on demand or at a definite time

Be payable to order or to bearer

HundiesHundis refer to financial instruments evolved on the Indian sub-continent used in trade

and credit transactions. They were used as remittance instruments (to transfer fundsfrom one place to another), as credit instruments (to borrow money [IOUs]), for trade

transactions (as bills of exchange).Technically, a Hundi is an unconditional order in writing made by a person directinganother to pay a certain sum of money to a person named in the order. Hundis, being a

part of the informal system have no legal status and are not covered under the

Negotiable Instruments Act, 1881. Though normally regarded as bills of exchange, they

were more often used as equivalents of cheques issued by indigenous bankers.

HUNDIS

Drawn in any local language in accordance with the custom of the placeFor transfer of money without its actual physical movement

BILL OF EXCHANGE[Section 5]A 'bill of exchange' is defined by 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.A Bill of Exchange is an instrument in writing, containing an unconditional order,

signed by the maker (drawer), directing a certain person (drawee) to pay a certain sum

of money only to a certain person (Payee) or to his order or bearer

The Parties:

The drawer (or customer of the bank)

The drawee (the bank)

The payee or bearerThe Banks

Paying Bank

Collecting Bank




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A bill of exchange involves three parties, viz. the drawer, drawee and payee.

Banks act as collecting agents on behalf of these parties.Section 131 of Negotiable Instruments Act gives protection to the collecting banker, if

the crossed instruments are collected on behalf of a customer who is properlyintroduced and in good faith and without negligence

Characteristic Features of a Bill of Exchange

1. It must be in writing.2. It must contain an order to pay and not a promise or request.

3. The order must be unconditional.

4. There must be three parties, viz., drawer, drawee and payee.

5. The parties must be certain.6. It must be signed by the drawer.

7. The sum payable must be certain or capable of being made certain.

8. The order must be to pay money and money alone.9. It must be duly stamped as per the Indian Stamp Act.10. Number, date and place are not essential.

Bill of Exchange

Writing, signed, accepted, stampedUnconditional order to pay

Money only

Certain partyCertain sum

Parties – Drawer, Drawee & Payee

DraftDrafts: A draft is a three-party instrument that is an unconditional written order by one

party that orders the second party to pay money to a third party.Drawer of a draft

Drawee of a draft

Payee of a draft

Time Draft A draft payable at a designated future date

Sight Draft

A draft payable on sight.,Also called ademand

draft.Trade Acceptance – a sight draft that arises when credit is extended with the sale of

goods

Promissory noteA written, dated and signed two-party instrument containing an unconditional promise

by the maker to pay a definite sum of money to a payee on demand or at a specifiedfuture date.




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Promissory Note:In writing, signed, stamped, Unconditional promise to pay

Money only,Certain party,On demand or certain date,Certain sum

What is a Promissory Note?

When you borrow money from a bank they make you sign a promissory note that setsout the terms or the loan, including the initial amount, rate and how long you have topay it off. This is the same document, but to be used, perhaps, when someone wants to

borrow money from you.

Necessary information for Promissory Note:Name and addresses of all people named in the Note.

The amount of the loan, interest rate and repayment information

Any other document related to the loan such as a security agreement

Parties to a Promissory Note

1. The Maker - the person who makes the note promising 'to pay the amount statedtherein.2. The Payee - the person to whom the amount of the note is payable.

3. The Holder - is either the original payee or any other person in whose favour the note

been endorsed.

What is Cheque?Cheque is an important negotiable instrument which can be transferred by mere hand

delivery. Cheque is used to make safe and convenient payment. It is less risky and thedanger of loss is minimised.

Definition of a Cheque ↓ "Cheque is an instrument in writing containing an unconditional order, addressed to a

banker, sign by the person who has deposited money with the banker, requiring him topay on demand a certain sum of money only to or to the order of certain person or to the

bearer of instrument."

Features of a Cheques

Cheque is an instrument in writing: A cheque must be in writing. It can be written inink pen, ball point pen, typed or even printed. Oral orders are not considered as

cheques.

Cheque contains an unconditional order: Every cheque contains an unconditional

order issued by the customer to his bank. It does not contains a request for payment. Acheque containing conditional orders is dishonoured by the bank.

Cheque is drawn by a customer on his bank: A cheque is always drawn on a specific

bank mentioned therein. Cheque drawn by stranger are of no meaning. Cheque book facility is made available only to account holder who are supposed to maintain certain

minimum balance in the account.




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Cheque must be signed by customer: A cheque must be signed by customer (Account

holder) . Unsigned cheques or signed by persons other than customers are not regardedas cheque.

Types of ChequesCheques are of the following types:

1. Order Cheque: A cheque which is payable to a particular person or his order is

called an order cheque.2. Bearer Cheque: A cheque which is payable to a person whosoever bears, is called

bearer cheque.

3. Blank Cheque: A cheque on which the drawer puts his signature and leaves all

other columns blank is called a blank cheque.4. Stale Cheque: The cheque which is more than six months old is a stale cheque.

5. Mutilated Cheque: If a cheque is torn into two or more pieces, it is termed as

mutilated cheque.6. Post Dated Cheque: If a cheque bears a date later than the date of issue, it is termedas post dated cheque.

7. Open Cheque: A cheque which has not been crossed is called an open cheque.Even if a cheque is crossed and subsequently the drawer has cancelled the crossing at

the request of the payee and affixes his full signature with the words “crossing cancelled

pay cash”, it becomes an open cheque. 8. Crossed Cheque: A cheque which carries too parallel transverse lines across the face

of the cheque with or without the words “I and co”, is said to be crossed.

9. Gift Cheques: Gift cheques are used for offering presentations on occasions like

birthday, weddings and such other situations. It is available in variousdenominations.

10. Traveller’s Cheques: It is an instrument issued by a bank for remittance of money

from one place to another.

Uses of a Cheque

1. If payment is made by means of a crossed cheque, receipt need not be obtained.

2. It is also convenient to receive money.

3. Payment can be made to a particular person by drawing up crossed “Account payee”cheques.

4. The cheque is „near money‟ and hence is endorsable from one person to another to

settle the effects.5. It minimizes the operation of legal tender money and the bankers can operate with a

less amount of cash reserves.

6. No need of counting cash while making payment.7. If a crossed cheque is lost, only a piece of paper is lost, i.e., the amount remains

intact.

8. If payments are made by cheques an automatic record of the account is also

maintained in the banker‟s books.




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Writing, signed

Unconditional order

Issued by specified banker, certain payee On demand

Certain amount

Must bear a date

Major Parties in Cheque Transaction

Cheque has 3 parties : Drawer, Drawee & Payee

Drawer : A drawer is a person, who draws a cheque.

Drawee : A drawee is a bank on whom a cheque is drawn.

Payee : A payee is a person in whose favour a cheque is drawn.

Meaning of CrossingCrossing of cheques means drawing two parallel transverse lines on the left hand topcorner

of a cheque. Sometimes, it is also done in the centre of the cheque.

The Negotiable Instruments Act 1881, recognises crossing of cheques. A crossing is adirection to the paying banker that the cheques should be paid only to a banker and if

the banker is named in the crossing, only to that banker.

This ensures the safety of payment by means of cheques. The holder of the cheque is

not allowed to cash it across the counter

Cheque Truncation Solution is a big milestone in the Indian banking industry. It

enables cheque clearing on the same day, reducing floating time available for funds.

The technology, being implemented from February 1, 2010 in the National Capital

Region, enables banks to send images instead of paper cheques for clearing andsettlement.

The US-based NCR Corp was mandated by the Reserve Bank of India to prepare the

truncation project for the capital region. Instead of manually moving the cheque from

one bank to another for payment, we would now use images. This will bring down thetime required for processing. Earlier, it would take two to three days. Cheques would

now be cleared on the same day or the next day, thereby bringing efficiency into the

entire banking system.

Types of Crossing

Cheques can be crossed in two ways (1) General Crossing (2) Special Crossing.

1. General Crossing: Section 123 of the Negotiable Instruments Act 1881, defines ageneral crossing as follows:

“Where a cheque bears a cross its face an addition of the words „& company‟ or any

abbreviation thereof, between two parallel transverse lines, or of two parallel transverse

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lines simply either with or without the words „not negotiable‟ that addition shall be

deemed a crossing and the cheque shall be deemed to be crossed generally

ENDORSEMENT

Endorsement literally means “writing on the back of the instrument.” But under Negotiable Instruments Act, it means “writing of a person‟s name on the back of the

instrument or on any paper attached to it for the purpose of negotiation.”

The person who signs the instrument for the purpose of negotiation is called the

“endorser.” The person to whom the instrument is endorsed or transferred is called the

“endorsee.” Mere endorsement is not sufficient unless the instrument is delivered to theendorsee. The endorsement is completed by delivering the signed instrument to the

endorsee. The purpose or object of endorsement is negotiation or transfer of theinstrument

Definition of Endorsement

According to Section 15 of the Negotiable Instruments Act “when the maker or holder of a negotiable instrument signs his name, otherwise than as such maker, for the purposeof negotiation, on the back or face thereof or on a slip of paper attached thereto, he is

said to have endorsed the instrument.”

Thus a person entitled to get money on a negotiable instrument can transfer his right toanother. He may be a maker or holder of the instrument. If he wants to transfer his right

to another, he must sign the instrument. The signature is usually made on the bank of

the instrument.

Essentials of a Valid Endorsement The following are the essentials of a valid endorsement:

(a) Endorsement must be on the back or face of the instrument.If no space is left on the instrument, it must be made on a separate paper attached to it.

(b) It should be made in ink. An endorsement in pencil or rubber stamp is invalid.

(c) It must be made by the marker or holder of the instrument. A stranger cannotendorse it.

(d) It must be signed by the endorser.

(e) It must be completed by delivery of the instrument.

(f) It must be an endorsement of the entire bill. A partial endorsement does not operateas a valid endorsement

Types of Endorsement

1. Endorsement of blank: In the case of an endorsement in blank it means there will be

no endorsee at all, only the endorser put his signature and then the cheques becomepayable to bearer is another name is general endorsement.

Example: A bill is payable to swaroop . Swaroop signs on the back of the bill.

2. Endorsement of full: The blank endorsement can be converted into endorsement of full. Under section 49 of the negotiable instrument act, a holder of a cheque endorsed in

blank may convert the endorsement in blank into full, by writing above the endorser‟s

signature with a director to pay the instrument to another person or his order.

example: a) “ Pay to x or order” b) Pay to the order of X




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3. Restrictive endorsement: It prohibit or restrict further negotiation of the instrument or

which express that it is only authority to deal with the instrument as directed. As an

example if it is written on the instrument “pay X only or pay X for the account of A” or

“pay X or order for collection” or “the within must be credited to X” or pay X for mayuse.”

4. 4. Partial endorsement: A partial endorsement is one whose purpose is to transfer to

the endorsee a part only of the amount payable. In terms of section 56 of the negotiable

instrument act, the partial endorsement does not operate as a negotiable of the bill.5. Example : the holder of a promissory for Rs 1000 writes on it pay B Rs 500 and endorse

the note .

6. 5. Conditional endorsement: It excludes the liability of the endorser. Thus, if an

endorser wants to get ride of his liability in the event of cheque being dishonored, hecan do so by writing the words same recourse, or without recourse to me, after his

endorsement. Here endorser excludes his liability.

Differences between a Bill of Exchange and Cheque All cheques are bills of exchange, but all bills of exchange are not cheques. The

following arethe main differences between a bill and a cheque:

1. Drawee: A cheque is always drawn on a banker. But a bill can be drawn on any

person including a banker.2. Payable on Demand: A cheque is always payable on demand. As a matter of fact, a

cheque is meant for immediate payment. But a bill of exchange may be payable on

demand or on the expiry of a fixed period.

3. Days of Grace: Three days of grace are allowed on bills payable after a certainperiod of time. No grace days are allowed in the case of a cheque since a cheque is

payable on demand.

4. Acceptance: A bill of exchange requires acceptance of drawee. But a cheque requiresno acceptance and is intended for immediate payment.

5. Payable to Bearer on Demand: A cheque can be made payable to bearer on

demand, but a bill of exchange cannot be drawn payable to bearer on demand.

6. Notice of Dishonour: Notice of dishonour of a bill is necessary. No such notice isrequired in the case of a cheque

7. Stopping the Payment: The payment of cheque may be countermanded or stopped

by the customer or drawer. But payment of a bill after acceptance cannot be

countermanded or stopped by the drawer.8. Crossing: A cheque can be crossed generally or specially. But a bill of exchange

cannot be crossed. There is no provision for “Crossing a bill of exchange.”

9. Stamping: A bill of exchange must be properly stamped. But a cheque does notrequire any stamp.

10. Statutory Protection: A banker is given statutory protection with regard to

payment of cheques in certain cases. No such protection is available to the drawee oracceptor of a bill of exchange.




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11. Discounting: A cheque cannot be discounted. But a bill can be discounted andrediscounted with the banks.

12. Circulation: A cheque is not intended for circulation but for immediate payment.But a bill is circulated by endorsing it.

Certificates of Deposits

Certificates of Deposits: A two-party negotiable instrument that is a special form of notecreated when a depositor deposits money at a financial institution in exchange for the

institution‟s promise to pay back the amount of the deposit plus an agreed-upon rate of

interest upon the expiration of a set time period agreed upon by the parties.

The consumer who opens a CD may receive a passbook or paper certificate. It is nowcommon for a CD to consist simply of a book entry and an item shown in the

consumer's periodic bank statements; that is, there is usually no "certificate" as such.

Commercial papers are unsecured money market instruments issued in the form of apromissory note As part of efforts to develop the money market, Commercial Paper

(CP) was introduced in India in 1990 with a view to enabling highly rated corporate

borrowers to diversify their sources of short- term borrowings and also provide anadditional financial instrument to investors. Commercial paper is not usually backed by

any form of collateral, so only firms with high-quality debt ratings will easily find

buyers without having to offer a substantial discount (higher cost) for the debt issue.

A major benefit of commercial paper is that it does not need to be registered with the

Securities and Exchange Commission (SEC) as long as it matures before nine months

(270 days), making it a very cost-effective means of financing. The proceeds from thistype of financing can only be used on current assets (inventories) and are not allowed to

be used on fixed assets.

Types of customers:

Meaning and Definition of a Customer

The term „customer‟ of a bank is not defined by law. In the ordinary language, a personwho has an account in a bank is considered its customer.The term customer also

presents some difficulty in the matter of definition. There is no statutory definition of

the term either in India or in England. However, the legal decisions on the matter throwsome light on the meaning of the term.

In order to constitute a customer of a bank, two conditions are to be fulfilled:(a) There must be some recognizable course or habit of dealing between the customer

and the banker.

(b) The transactions must be in the form of regular banking business.




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The Bonafide Customer

In order to constitute a person as a customer, he must satisfy the following conditions:1. He must have an account with the bank – i.e., saving bank account, current deposit

account, or fixed deposit account.2. The transactions between the banker and the customer should be of banking naturei.e., a person who approaches the banker for operating Safe Deposit Locker or

purchasing travelers cheques is not a customer of the bank since such transactions

do not come under the orbit of banking transactions.3. Frequency of transactions is not quite necessary though anticipated.

Special Types of Customers Special types of customers are those who are distinguished from other types of ordinarycustomers by some special features.

Hence, they are called special types of customers. They are to be dealt with carefully

while operating and opening the accounts.

1. Minors:

Under the Indian law, a minor is a person who has not completed 18 years of age. The

period of minority is extended to 21 years in case of guardian of this person or propertyis appointed by a court of law before he completes the age of 18 years

According to Indian Contract Act, a minor is recognised as a highly incompetent partyto enter into legal contracts and any contract entered into with a minor is not only

invalid but voidable at the option of the minor.

The law has specially protected a minor merely because his mental faculty has not fully

developed and as such, he is likely to commit mistakes or even blunders which willaffect his interests adversely.

It is for this reason, the law has come to the rescue of a minor.

A banker can very well open a bank account in the name of a minor.

But the banker has to be careful to ensure that he does not open a current account.

The conditions for opening and maintaining accounts in the names of the minors

are:1. The minor should have attained the age of discretion, i.e., he must be about 14 years

of age. He must be capable of understanding what he does.

2. The minor should be able to read and write.

3. The minor should be properly introduced. The account opening form should besigned by the minor in the presence of a bank officer who should be able to identify the

minor. The date of birth of the minor should be recorded in the account opening form.

4. Banks usually stipulate limits up to which deposits in such accounts can be accepted.5. Amount tendered by the minor should as far as possible be in cash.

6. In case of time deposits, the amount should be paid in cash on maturity.

Prepayment cannot be allowed. Periodical payment of interest on deposits may be madeto the minor.




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According to Hindu Minority and Guardianship Act, 1956, a Guardian is one who is

recognised by law to be one of the following:(a) Natural Guardian: According to Section 6 of the Hindu Minority and Guardianship

Act, 1956, in case of a minor boy or an unmarried girl, his/her father and after him themother shall be the natural guardian. In case of a married girl (minor),her husband shallbe the natural guardian. The terms father or mother do not include step-father or step-

mother.

(b) Testamentary Guardian: A Hindu father, who is entitle to act as the naturalguardian of his minor legitimate children may, by will, appoint a guardian for any of

them in respect of the minor‟s person or property. Such guardian acts after the death of the father or the mother.

(c) Guardian Appointed by Court: A guardian may be appointed by the court underthe Guardians and Wards Act, 1890, but the court shall not be authorised to appoint or

declare a guardian of the person of a minor, if his father is alive and is not, in the

opinion of the court, unfit to be guardian of the person of the minor.Similar is the case of a minor girl, whose husband is not, in the opinion of the court,unfit to be guardian of her person.

Thus the father is exclusively entitled to be the guardian.

2.Lunatics: A lunatic or an insane person is one who, on account of mental

derangement, is incapable of understanding his interests and thereby, arriving at rational

judgement.Since a lunatic does not understand what is right and what is wrong, it isquite likely that the public may exploit the weakness of a lunatic to their advantage and

thus deprive him of his legitimate claims.

On account of this, the Indian Contract Act recognises that a lunatic is incompetent to

enter into any contract and any such contract, if entered into, is not only invalid butvoidable at the option of the lunatic.

On coming to know of a customer‟s insanity, the banker should stop all operations on

the account and await a court order appointing a receiver.It would be dangerous to rely on hearsay information. The bank should take sufficient

care to verify the information and should not stop the account unless it is fully satisfied

about the correctness of the information.

In case a person suffers from a temporary mental disorder, the banker must obtain acertificate from two medical officers regarding his mental soundness at the time of

operation on the account

3. Drunkards: A drunkard is a person who on account of consumption of alcoholicdrinks get himself intoxicated and thereby, loses the balance over his mental faculty and

hence, is incapable of forming rational judgement.

The law is quite considerable towards a person who is in drunken state. A lawfulcontract with such a person is invalid. This is for the simple reason that it is quite likely

that the public may exploit the weakness of such a person to their advantage and thus,

deprive him of his legitimate claims.




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A banker has to be very careful in dealing with such customers. There cannot be any

objection by a banker to open an account.In case a customer approaches the banker for encashment of his cheque especially when

he is drunk, the banker should not make immediate payment.This is because the customer may afterwards argue that the banker has not madepayment at all.

4.Married Women: An account may be opened by the bank in the name of a marriedwoman as she has the power to draw cheques and give valid discharge.

At the time of opening an account in the name of a married woman, it is advisable to

obtain the name and occupation of her husband and name of her employer, if any, and

record the same to enable detection if the account is misused by the husband forcrediting therein cheques drawn in favour of her employer.

In case of an unmarried lady, the occupation of her father and name and address of heremployer, if any, may be obtained and noted in the account opening form. If a ladycustomer requests the bankers to change the name of her account opened in her maiden

name to her married name, the banker may do so after obtaining a written request from

her. A fresh specimen signature has also to be obtained for records.

While opening an account of a purdah lady, the bank obtains her signature on the

account opening form duly attested by a responsible person known to the bank. It isadvisable to have withdrawals also similarly attested. In view of practical difficulties

involved, it would be better not to open accounts in the names of purdah ladies

5. Insolvents: When a person is unable to pay his debts in full, his property in certaincircumstances is taken possession of by official receiver or official assignee, under

orders of the court. He realises the debtor‟s property and reliably distributes the

proceeds amongst his creditors. Such a proceeding is called „insolvency‟ and the debtor

is known as an „insolvent‟.If an account holder becomes insolvent, his authority to thebank to pay cheques drawn by him is revoked and the balance in the account vests in

the official receiver or official assignee.

6. Illiterate Persons: A person is said to be illiterate when he does not know to read

and write. No current account should be opened in the name of an illiterate person.

However, a savings bank account may be opened in the name of such a person. On the

account opening form the bank should obtain his thumb mark in the presence of twopersons known to the bank and the depositor. Withdrawal from the account by the

account holder should be permitted after proper identification every time.

The person who identifies the drawer must be known to the bank and he should

preferably not be a member of the bank‟s staff.




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7. Joint Stock Company: A joint stock company has been defined as an artificial

person, invisible, intangible and existing only in contemplation of law. It has separatelegal existence and it has a perpetual succession. The banker must satisfy himself about

the following while opening an account in the name of a company:(a) Memorandum of Association: Memorandum of Association is the main document f the company, which embodies its constitution and is called the charter of the company.

It gives details, especially regarding objects and capital of the company. A copy of this

document should be insisted upon while opening an account.(b) Articles of Association: The Articles of Association contain the rules and

regulations of the company regarding its internal management. It contains in detail all

matters which are concerned with the conduct of day-to-day business of the company.

The Articles of Association is also another document that a banker insists upon. It

enables the banker to know the details of company‟s borrowing powers quantum,

persons authorised to borrow etc. This will also enable the banker to understand

whether the acts of the officers are within the orbit of the Company‟s Memorandum andArticles.

(c) Certificate of Incorporation: This is another vital document the banker has to

verify and insist upon receiving a copy. This document signifies that the company cancommence its business activities as soon as it gets this certificate which is not the case

with a public company.

(d) Certificate to Commence Business: Only for public companies, the banker insistsupon this document for verification. This document gives the clearance to public

companies to commence their business activities. A company can borrow funds

provided it has obtained this certificate.

(e) Application Form and Copy of the Board’s Resolution: A copy of the prescribed

application form duly completed in all respects has to be submitted in the beginning and

that too duly signed by the company‟s authorised officers. Along with this, a copy of the

resolution passed at the meeting of the board regarding appointment of company‟sbankers is quite necessary to make everything lawful.

(f) A Written Mandate: This is also another document that a banker insists upon. Itcontains all the details regarding operation, overdrawing of the account and giving

security to the bank by the officers of the company. This document is useful to the bank

for opening as well as for operating the account of the company.

(g) Registration of Charges: Whenever a company borrows, it has to give certainassets by way of security and in case the banker accepts them as security, it has to be

properly recorded in the company‟s books, register of charges and duly registered

(h) Any Change in the Company’s Constitution or Offices: Whenever there is any

change in the constitution like Memorandum or in respect of company‟s offices, it hasto be communicated in writing to the bank and it should not in any way affect the earlier

contracts entered into by the company with the bank. To this effect, the bankers usuallytake an undertaking from the company




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9. Clubs, Associations and Educational Institutions: Clubs, Associations andEducational Institutions are non-trading institutions interested in serving noble causes of

education, sports etc. The banker should observe the following precautions in dealingwith them:o Certificate of registration in original,

o A list of the Managing Committee members

o Copies of resolutions electing them as Committee members duly certified by theChairman .Bank keeps a copy of the above-mentioned document for its record.

10.Partnership Firm: A partnership is not regarded as an entity separate from the

partners. The Indian Partnership Act, 1932, defines partnership as the “relation betweenpersons who have agreed to share the profits of the business, carried on by all or any of

them acting for all.”

Partnership is formed or constituted on account of agreement between the partners andwith the sole intention of earning and sharing profits in a particular ratio. Further, thebusiness is carried on either by all the partners or some partners acting for all. The

partners carry joint and several liability and the partnership does not posses any legal

entity.

A banker should take the following precautions while opening an account in the name

of a partnership firm:(a) Application Form: A prescribed application form duly completed in all respects

along with specimen signatures of the partners of firm is quite essential for operation of

the account

(b)Partnership Deed: The banker should, very carefully examine the partnership deed,which is the charter of the firm, to acquaint himself with the constitution and business

of the firm. This will help him to know his position while advancing funds to the firm.

(c) A Mandate: A mandate giving specific instructions to the banker regardingoperations, over-drawing etc., is quite necessary. It will enable the banker to handle the

accounts according to the needs of the firm.

(d) Transfer of Funds: The banker has to be very careful to see that the funds

belonging to the firm should not be credited to the personal or private accounts of thepartners.

(e) Sanctioning of Overdraft: While sanctioning funds by way of overdraft, the banker

has to check up the partnership deed and examine the borrowing powers of the partners

empowered to borrow and he can even ask for the financial statements of the previousyears for information and perusal.

11. Joint Accounts: When two or more persons open an account jointly, it is called a joint account. The banker should take the following precautions in opening and dealing

with a joint account:

(a) The application for opening a joint account must be signed by all the personsintending to open a joint account.




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(b) A mandate containing name or names of persons authorised to operate an account.

(c) The full name of the account must be given in all the documents furnished to thebanker, even if the account is to be operated upon by one or a few of the joint account

holders.(d) Banker must stop operating an account as soon as a notice of death, insolvency,insanity etc., of any one account holder is received.

(e) The joint account holder, who is authorised to operate the joint account, himself

alone cannot appoint an agent or attorney to operate the account on his behalf.Suchattorney or agent may be appointed with the consent of all the joint account holders.

(f) If all the persons are operating the account, then banker must see that any cheque

drawn on him is duly signed by all.

(g) Banker must stop making payments as soon as letter of revocation is obtained.(h) Banker must see that no loan or overdraft is granted without proper security.

12.Joint Hindu family is an undivided Hindu family which comprises of all malemembers descended from a common ancestor. They may be sons, grand sons and greatgrand sons, their wives and unmarried daughters. “A joint, Hindu family is a familywhich consists of more than one male member, possesses ancestral property and carries

on family business.” Therefore, joint Hindu family is a legal institution. It is managedand represented in its dealings and transactions with others by the Kartha who is the

head of the family. Other members of the family do not have this right to manage unless

a particular member is given certain rights and responsibilities with common consent of the Kartha.

The banker has to exercise greater care in dealing with this account.

(a) He must get complete information about the joint Hindu family including the namesof major and minor coparceners and get a declaration from the Kartha to this effect

along with specimen signatures and signatures of all coparceners.

(b) The account should be opened either in the personal name of the Kartha or in thename of the family business.

(c) The documents should be signed by the Kartha and major coparceners.

(d) The account should be operated on only by the Kartha and the authorised major

coparceners.(e) While making advances, the banker should ascertain the purpose for which the loan

is obtained and whether the loan is really needed by the joint Hindu family for business.

14.Trustees: According to the Indian Trusts Act, 1882, “a trust is an obligation annexedto the ownership of property and arising out of a confidence reposed in an accepted by

the owner, or declared and accepted by him, for the benefit of another, or of another and

the owner.” As per this definition, a trustee is a person in whom the author or settler reposes confidence and entrusts the management of his property for the benefit of a

person or an organisation who is called beneficiary.




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A trust is usually f ormed by means of document called the “Trust Deed.” While opening

an account in the names of persons in their capacity as trustees the banker should takethe following precautions:

(a) The banker should thoroughly examine the trust deed appointing the applicants asthe trustees.

(b) A trust deed which states the powers and functions of trustees must be obtained by

the banker.(c) In case of two or more trustees, the banker should ask for clear instructions

regarding the person or persons who shall operate the account.

(d) In case of death or retirement of one or more trustees, banker must see the provision

of the trust deed.(e) The banker should not allow the transfer of funds from trust account to the personal

account of trustee

(f) The banker should take all possible precautions to safeguard the interest of thebeneficiaries of a trust, failing which he shall be liable to compensate the latter for anyfraud on the part of the trustee.

(g) The insolvency of a trustee does not affect the trust property and the creditors of the

trustee cannot recover their claims from trust property.(h) A copy of the resolution passed in the meeting of trustees open the account should

be obtained.

END

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