Professional Documents
Culture Documents
Unit – I
Definition of banker and customer – Relationships between banker and customer – special
feature of RBI, Banking regulation Act 1949. RBI credit control Measure – Secrecy of
customer Account.
Unit – II
Opening of account – special types of customer – types of deposit – Bank Pass book –
collection of banker – banker lien.
Unit – III
Cheque – features essentials of valid cheque – crossing – making and endorsement – payment
of cheques statutory protection duties to paying banker and collective banker - refusal of
payment cheques Duties holder & holder in due course.
Unit – IV
Loan and advances by commercial bank -lending policies of commercial bank - Forms of
securities – lien pledge hypothecation and advance against the documents of title to goods –
mortgage.
Unit – V
Position of surety – Letter of credit – Bills and supply bill. Purchase and discounting bill
Travelling cheque, credit card, Teller system.
Books for Reference:
1. Sundharam and Varshney, Banking theory Law & Practice, Sultan Chand & Sons., New
Delhi.
2. Banking Regulation Act, 1949.
3. Reserve Bank of India, Report on currency and Finance 2003-2004.
4. Basu : Theory and Practice of Development Banking
5. Reddy & Appanniah : Banking Theory and Practice
6. Natarajan & Gordon : Banking Theory and Practice
Unit – I
Definition of banker and customer – Relationships between banker and customer – special
feature of RBI, Banking regulation Act 1949. RBI credit control Measure – Secrecy of
customerAccount.
I. Quantitative Method:
(i) Bank Rate:
The bank rate, also known as the discount rate, is the rate payable by commercial banks on
the loans from or rediscounts of the Central Bank. A change in bank rate affects other market
rates of interest. An increase in bank rate leads to an increase in other rates of interest and
conversely, a decrease in bank rate results in a fall in other rates of interest.
A deliberate manipulation of the bank rate by the Central Bank to influence the flow of credit
created by the commercial banks is known as bank rate policy. It does so by affecting the
demand for credit the cost of the credit and the availability of the credit.
An increase in bank rate results in an increase in the cost of credit; this is expected to lead to
a contraction in demand for credit. In as much as bank credit is an important component of
aggregate money supply in the economy, a contraction in demand for credit consequent on an
increase in the cost of credit restricts the total availability of money in the economy, and
hence may prove an anti-inflationary measure of control.
Likewise, a fall in the bank rate causes other rates of interest to come down. The cost of
credit falls, i. e., and credit becomes cheaper. Cheap credit may induce a higher demand both
for investment and consumption purposes. More money, through increased flow of credit,
comes into circulation.
A fall in bank rate may, thus, prove an anti-deflationary instrument of control. The
effectiveness of bank rate as an instrument of control is, however, restricted primarily by the
fact that both in inflationary and recessionary conditions, the cost of credit may not be a very
significant factor influencing the investment decisions of the firms.
A fall in the total cash reserves is leads to a cut in the credit creation power of the commercial
banks. With reduced cash reserves at their command the commercial banks can only create
lower volume of credit. Thus, a sale of securities by the Central Bank serves as an anti-
inflationary measure of control.
Likewise, a purchase of securities by the Central Bank results in more cash flowing to the
commercials banks. With increased cash in their hands, the commercial banks can create
more credit, and make more finance available. Thus, purchase of securities may work as an
anti-deflationary measure of control.
The Reserve Bank of India has frequently resorted to the sale of government securities to
which the commercial banks have been generously contributing. Thus, open market
operations in India have served, on the one hand as an instrument to make available more
budgetary resources and on the other as an instrument to siphon off the excess liquidity in the
system.
A rise in the cash reserve ratio results in a fall in the value of the deposit multiplier.
Conversely, a fall in the cash reserve ratio leads to a rise in the value of the deposit multiplier.
A fall in the value of deposit multiplier amounts to a contraction in the availability of credit,
and, thus, it may serve as an anti-inflationary measure.
A rise in the value of deposit multiplier, on the other hand, amounts to the fact that the
commercial banks can create more credit, and make available more finance for consumption
and investment expenditure. A fall in the reserve ratios may, thus, work as anti-deflationary
method of monetary control.
The Reserve Bank of India is empowered to change the reserve requirements of the
commercial banks.
The Reserve Bank employs two types of reserve ratio for this purpose, viz. the Statutory
Liquidity Ratio (SLR) and the Cash Reserve Ratio (CRR).
The statutory liquidity ratio refers to that proportion of aggregate deposits which the
commercial banks are required to keep with themselves in a liquid form. The commercial
banks generally make use of this money to purchase the government securities. Thus, the
statutory liquidity ratio, on the one hand is used to siphon off the excess liquidity of the
banking system, and on the other it is used to mobilise revenue for the government.
The Reserve Bank of India is empowered to raise this ratio up to 40 per cent of aggregate
deposits of commercial banks. Presently, this ratio stands at 25 per cent.
The cash reserve ratio refers to that proportion of the aggregate deposits which the
commercial banks are required to keep with the Reserve Bank of India. Presently, this ratio
stands at 9 percent.
More generally, the commercial banks do not lend up to the full amount of the security but
lend an amount less than its value. The margin requirements against specific securities are
determined by the Central Bank. A change in margin requirements will influence the flow of
credit.
A rise in the margin requirement results in a contraction in the borrowing value of the
security and similarly, a fall in the margin requirement results in expansion in the borrowing
value of the security.
(ii) Credit Rationing:
Rationing of credit is a method by which the Central Bank seeks to limit the maximum
amount of loans and advances and, also in certain cases, fix ceiling for specific categories of
loans and advances.
In India, from 1949 onwards, the Reserve Bank has been successful in using the method of
moral suasion to bring the commercial banks to fall in line with its policies regarding credit.
Publicity is another method, whereby the Reserve Bank marks direct appeal to the public and
publishes data which will have sobering effect on other banks and the commercial circles.
Opening of Account
1. Decide what kind of account you need
Choose a savings account if you’re looking for a place to save money over a short period of
time, but still keep it readily accessible. Choose a chequing account to keep money that you
plan to use for day-to-day spending or to pay bills over the short term. You’ll earn less
interest than with a savings account.
2. Look for an account with the services you’ll use most
In particular, think about how you’re likely to put money in and take it out:
Branch – make deposits and withdrawals using a teller or ATM
Debit card – buy something or get cash at a store
Cheques – pay bills
Direct debit – pay bills automatically from your account each month
Direct deposit – have your pay put into your account
Internet or telephone banking – for a range of transactions
3. Shop around to compare rates and fees
Understand the service fees you can be charged before you open an account. Look for
accounts that charge the lowest fees for the services you need. And compare interest rates.
They will vary across financial institutions.
4. Choose a financial institution and location
Choose one that has branches or bank machines located close to where you live or work.
5. Open your account
You’ll have to give personal information such as your address, date of birth, social insurance
number, job title and phone numbers when you complete the account application. You’ll also
need to show 2 pieces of acceptable identification. One of them must be from the
government. Then make your first deposit.
1. Minors
A minor is a person who has not completed 18 years of age. In case a guardian of his person
or property is appointed by a court of law before he completes his 18 years, the period of
minority is extended to the completion of 21 years. As per section 11 of the contract act a
minor is incompetent to contract but section 26 of the Negotiable Instrument Act allows a
minor to draw, endorse, deliver and negotiate a negotiable instrument.
2. Lunatics
A person of unsound mind cannot make a valid contract. So, the bankers should not open an
account in the name of a person of unsound mind. But a customer may become lunatic after
opening an account with the bank.
3. Illiterate persons
An illiterate person means a person who can’t sign his name. While opening of an account of
such a person is unavoidable, the banker should obtain ( 1) Left thumb impression on the
account opening form and specimen signature card in the presence of an authorized bank
official (2) Details of identification marks should be noted on the account opening form and
specimen signature card (3) At least two copies of photograph duly attested by any account
holder/authorized bank official.
4. Married women
A married woman can enter into contract and bind her personal (separate) estate. A banker
may, therefore, open an account in the name of a married woman
5. Executors and administrators:
Executors and Administrators are allowed to open bank account. Formalities are to be
observed while opening the account in the name of executor/administrator:
6. Trustees
A banker must be cautions in opening/operating a trust account as the trustees are responsible
for public money.
7. Joint accounts
Joint account means account of two or more persons who are not partners.
8. Partnership firm
A firms account should always be opened in the name of the firm and not in the name(s) of
the individual partner (s) because a partner does not have (implied) authority to open a bank
account on behalf of the firm in his own name.
9. Joint stock companies
A joint stock company is an artificial person and it has a separate legal entity. So, a bank
account may be opened on its own name. A joint stock company may either be a Private
Limited Company or a Public Limited Company.
10. Societies and other non- trading institutions
The society, be it a club, school, hospital or any institution must be registered as a corporate
body. Societies, unless registered are not recognized by the law and have no contracting
powers
11. Customer’s attorneys
A person may by a written and stamped document appoint a person as his attorney to deal on
his behalf with third parties. This power may be general (to act in more than one transaction)
or special (to act in a single transaction). The power of attorney can authorize a person to sign
cheques (i.e. operate the account) on behalf of the customer.
Types of Deposit
Traditionally in India, we have four major types of Bank Deposits namely Current Account,
Savings Accounts, Recurring Deposits and Fixed Deposits.
1.Savings Account
It offers high liquidity and is very popular among the masses. They provide a lot of flexibility
for deposits and withdrawal of funds from the account and also have cheque facility. The
interest provided by Public sector bank is only 4%, however, some of the private banks like
Yes Bank and Kotak Bank offers interest between 6-7%.
2.Recurring Deposit
It is a special type of term deposit where you do not need to deposit a lump sum savings
rather a person has to deposit a fixed sum of money every month (which can be as low as Rs
100 per month). These accounts have maturities ranging from 6 months to 120 months. You
can also give a standing order to the bank to withdraw a fixed sum of money from your
saving account on every fixed date and the same is credited to RD account. However, the
bank may charge some penalty for delay in paying the installments.
3. Current Account
It is a demand deposit and is meant for businessmen to conduct their business transactions
smoothly. These are the most liquid deposits and there are no restrictions on the number and
the number of transactions in a day. Moreover, banks do not pay any interest on these
accounts.
4. Fixed deposit
It is an instrument offered by banks which gives a higher interest than a regular savings
account and offers a wide range of tenures ranging from 7 days to 10 years. The rate of
interest varies from bank to bank, usually, it lies between 6-10%. You may or may not have a
separate bank account to open a fixed deposit with the bank. You may be charged some
penalty in case of early closure of FD account. However, with the focus of government to
have a bank account for everyone under the scheme of Pradhan Mantri Jan DhanYojana,
you can open up a bank account for free if you do not have one and enjoy various facilities
offered by banks.
Bank Pass book
Meaning of Bank Pass Book:
Passbook or Bank Statement is a copy of the account of the customer as it appears in
the bank’s books. When a customer deposits money and cheques into his bank
account or withdraws money, he records these transactions in the bank column of his
cashbook immediately.
Correspondingly, the bank records them in the customer’s account maintained in its
books. Then they are copied in a passbook and given to the customer. With the
computerization of banking operations, bank statements (in lieu of passbook) are
issued to the customers periodically.
Thus passbook is a record of the banking transactions of a customer with a bank. All
entries made by a customer in his cashbook (bank column) must be entered by the
bank in the passbook.
Hence, the balances as per bank column of the cashbook must agree with the balance as per
passbook. Of course the balances will be equal and opposite in nature. For example, if the
cash book shows a debit balance of Rs.5000, then the passbook must show a credit balance of
Rs.5000 and vice versa. But in most cases, these two balances may disagree on account of
various reasons.
Format of a Bank Passbook or Bank Statement:
Name of the bank__________
Address of the bank____________
Account No._________________
Customer Name:_______________
Address of the customer.___________
Format of a Bank Passbook
Collection of banker
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 & 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.
Explanation: A banker receives payment of a crossed cheque for a customer within the
meaning of this section notwithstanding that he credits his customer's account with the
amount of-the cheque before receiving payment thereof."
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.
Banker lien
Lien is defined as the right of a creditor to retain the procession 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 as 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
the watch 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
This is available to bankers, factors, and 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 a giving a notice to the debtor
Features of general lien – Banker’s
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.
Unit – III
Cheque – features essentials of valid cheque – crossing – making and endorsement – payment
of cheques statutory protection duties to paying banker and collective banker - refusal of
payment cheques Duties holder & holder id due course.
What is a Cheque? Meaning
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 the danger
of loss is minimised.
Definition of a Cheque
(1)As per negotiable instrument act 1881, A “cheque” is a bill of exchange drawn on a
specified banker and not expressed to be payable otherwise than on demand.
CROSSING OF CHEQUES
Crossing of Cheques means to draw two lines transverse parallel on left hand corner of the
cheque.It directs the bank to deposit the money directly into the account and not to be pay
cash at the bank counter.
MODES OF CROSSING
Below are the modes of crossing of cheques and the effect of crossing of cheques:
(1) GENERAL CROSSING - When a cheque bears two transverse parallel lines at the left
hand of its top corner. Words such as 'and company' or any other abbreviation (such as & co.)
may be written between these two parallel lines, either with or without words 'not negotiable',
is called General Crossing.
Effect - Payment can be paid through bank account only, and should not be made at counter
of paying bank.
(2) SPECIAL CROSSING - When a cheque bears the name of the bank in between the two
parallel lines, with or without the words 'not negotiable' is called Special Crossing.
Effect - The bank will pay to the banker whose name is written in between the crossing lines.
(3) RESTRICTIVE CROSSING / ACCOUNT PAYEE CROSSING - In this, crossing of
cheques is done by writing Account Payee or Account Payee only in between the crossing
lines.
Effect - Payment will be credited to the account of payee named in the cheque.
(4) DOUBLE CROSSING - When a cheque bears two special crossing, is called Double
Crossing. In this second bank act as agent of the first collecting banker. It is made when the
banker in whose favour the cheque is crossed does not have branch where the cheque is paid.
An endorsement in order to operate as mode of negotiation must comply with the following
conditions, namely:
1. It must be written on the instrument itself and be signed by the endorser. The simple
signature of the endorser, without additional words, is sufficient. An endorsement written on
an allonge is deemed to be written on the instrument itself.
2. The endorsement must be of the entire instrument. A partial endorsement, that is to say, an
endorsement, which purports to transfer to the endorsee a part only of the amount payable, or
which purports to transfer the instrument to two or more endorsees severally (i.e. separately),
does not operate as a negotiation of the instrument.
3. Where a negotiable instrument is payable to the order of two or more payees or endorsees
who are not partners, all must endorse unless the one endorsee has authority to endorse for
the others.
4. Wherein a negotiable instrument payable to order, the payee or endorsee is wrongly
designated or his name is misspelt, he should sign the instrument in the same manner as given
in the instrument. Though, he may add, if he thinks fit, his proper signature.
5. Where there are two or more endorsements on an instrument, each endorsement is deemed
to have been made in the order in which it appears on the instrument, until contrary is
provided.
6. An endorsement may be made in blank or special. It may also be restrictive.
Types of Endorsement:
According to the N.I. Act, 1881 endorsement may take any of the following forms:
4. Partial Endorsement:
If only a part of the amount of the instrument is endorsed, it is a case of partial endorsement.
An endorsement which purports to transfer to the endorsee only a part of the amount payable,
or which purports to transfer the instrument to two or more endorsees severally, is not valid.
5. Conditional Endorsement:
If the endorser of a negotiable instrument, by express words in the endorsement, makes his
liability or the right of the endorsee to receive the amount due thereon, dependent on the
happening of a specified event, although such event may never happen, such endorsement is
called a conditional endorsement (Section 52 of NI Act). Such an endorser gets the following
rights:
He may make his liability on the instrument conditional on the happening of a particular
event. He will not be liable to the subsequent holder if the specified event does not take place
to the instrument even before the particular event takes place.
For example, “pay C if he returns from London”. Thus C gets the right to receive payment
only on the happening of a particular event, i.e. if he returns from London.
Effect of Endorsement
Section 50 of NI Act also permits that an instrument may also be endorsed so as to constitute
the endorsee an agent of the endorser.
• To endorse the instrument further or
• To receive its amount for the endorser or for some other specified person.
Supposing, a paying banker pays a cheque which bears a forged signature of the payee or
endorsee, he is liable to the true owner of the cheque. But, it is quite unjustifiable to make the
banker responsible for such errors. It is so because, he is not expected to know the signature
of the payee or the endorsee.
Therefore, law relieves the paying banker from his liability to the true owner in such cases,
This relief is known as ‘statutory protection.’
To claim protection under Sec.85 of the Nl. Act, 1881, the banker should have fulfilled the
following conditions:
He should have paid an order cheque.
Such a cheque should have been endorsed by the payee or his order.
It should have been paid in due course.
Payment in due course
The cheque should have been paid in due course as per Sec. 10 of the N.l. Act. This
concept of payment in due course has three essential feature :
(I) Apparent tenor of the instrument: To avail of the statutory protection, the payment
should have been made according to the apparent tenor of the instrument. The apparent tenor
refers to the intention of the parties as it is evident from the face of the instrument.
Example: If a drawer draws a cheque with a post —date, his intention is to make payment
only after a certain date. If it is paid before the due date, this payment does not amount to
payment in due course. So also, the payment of a countermanded cheque does not amount to
payment in due course.
(ii) Payment in good faith and without negligence: Good faith forms the basis of all
banking transactions. As regards negligence, the banker may sometimes be careless in his
duties which constitutes an act of negligence. If negligence is proved, the banker will loss the
statutory protection given under Sec. 85.
Example:
(a) Payment of a crossed cheque over the counter.
(b) Payment of a post-dated cheque before maturity.
(c) Failure to verify the regularity of an endorsement.
(iii) Payment to a person who is entitled to receive payment: The banker must see that the
person, who presents the cheque, is in possession of the instrument and he is entitled to
receive the amount of the cheque.
Protection to a bearer cheque: Now this protection has .been extended to bearer cheques
also under sec. 85(2). If a bearer cheque is paid in due course, the banker is entitled to get
protection.
Statutory Protection in the case of a Materially Altered Cheque: A paying banker cannot
normally claim any statutory protection for a materially altered cheque. However; Sec. 89 of
the Negotiable instrument Act. Gives protection in the case of a materially altered cheque
provided,
Recovery of Money Paid by Mistake: Under the following circumstances, money wrongly
paid can be recovered:
(I) Money received mala fide is recoverable: When a person receives money by mistake in
bad faith, knowing that he is not entitled to receive that money then the banker is entitled to
recover the same.
(ii) Money paid under a mistake of fact is recoverable: For instance, a banker pays money
to X, thinking that he is Y. This is a mistake of fact regarding the identity of the parties. Y is
under a legal duty to pay the money back to the banker.
Collecting Banker
A collecting banker is one who undertakes to collect the amount of a cheque for his customer
from the paying banker. In collecting a cheque, the banker can act in two capacities namely
(1) as a holder for value, and (2) as an agent for collection. The banker would be regarded as
a holder for value:
(a) If he allows his customers to withdraw money before cheques paid In for collection are
actually collected and credited.
(b) If any open cheque’ is accepted and the value is paid before collection, and
(c) If there is a reduction in the overdraft account of the customer before the cheque is
collected and credited in the respective account.
In all these cases, the banker acquires a personal interest.
A Banker as an agent: In practice, no banker credits a customer account even before a cheque
is collected. He collects a cheque on behalf of a customer. So, he cannot acquire any of the
rights of a holder for value, He has to act only as an agent of the customer.
According to sec. 131 of the N. I. Act, statutory protection is available to the collecting
Banker in the following cases:
(I) Crossed cheques only: Statutory protection can be claimed by a collecting banker only
for crossed cheques It is so because, in the case of an open cheque it is not absolutely
necessary for a person to seek the service of a bank.
(ii) Collections on behalf of customers as an agent: The above protection can be claimed
by a banker only for those cheques collected by him as agent of his customers.
(iii) In good faith and without negligence: In order to get the protection under this section,
a collecting banker must act in good faith and without negligence.
The basis of negligence: When a collecting banker wants to claim protection under Sec. 131
he has the burden of proving that he has acted without negligence.
(I) Gross negligence: If a banker is completely careless in collecting a cheque, then, h will
be held liable under the ground of ‘gross negligence.’ Examples:
(a) Collecting a cheque crossed A/C payee’ for other than the payee’s account:
Account payee crossing is a direction to the collecting banker. If he collects a cheque crossed
‘A/C payee’ for any person other than the payee, then, this fact will be proved as an evidence
of gross negligence.
(b) Failure to verify the correctness of endorsement: If a banker omits to verify the
correctness of endorsements on cheques payable to order, he will be deprived of the statutory
protection.
(c) Failure to verify the existence of authority in the case bf per pro signatures: If a
collecting banker fails to verify the existence of authority in the case of per pro signatures, if
any, will be paid as an evidence of gross negligence.
(ii) Negligence connected with the immediate collection: If, on the face of a cheque there is
a warning that there is the misappropriation of money, the collecting banker should make
some reasonable enquiry and only after getting some satisfactory explanations, he can
proceed to collect cheques.
Examples:
(a) collecting a cheque drawn against the principal’s A/c, to the private A/c of the agent
without enquiry.
(b) Collecting a cheque payable to the firm to the private Nc of a partner without enquiry.
(c) Collecting a cheque payable to the company to the private account of a direction or any
other officer without enquiry.
(d) Collecting a cheque payable to the employer to the private account of the employee would
constitute negligence under sec.131 of the Nl. Act.
(e) Collecting a cheque payable to the trustee, to the private account of the person operating
the trust account is another instance of negligence of a banker. .
(iii) Negligence under Remote Grounds: Normally we can not expect a banker to be liable
under certain circumstances. But, the bankers have been held negligent under those situations
which are branded as remote grounds.’ Examples: .
(a) Omission to obtain a letter of introduction from a new customer causes negligence. .
(b) Failure to enquire into the source of supply of large funds into an account which has been
kept in a poor condition for a long time constitutes negligence.
Duties of a collecting banker
(I) Exercise reasonable care and diligence in his collection work: When a banker collects
a cheque for his customer, he acts only as an agent of the customer. He should exercise
reasonable care, diligence and skill in collection work.
(ii) Present the cheque for collection without any delay: The banker must present the
cheque for payment without any delay. If there is the delay in presentment the customer may
suffer losses due to the insolvency of the drawer or insufficiency of funds in the account of
the drawer or insolvency of the banker himself. In all such cases, the banker should bear the
loss.
(iii) Notice to customer in the case of dishonor of a cheque: The N.l. Act has prescribed a
reasonable time for giving the notice of dishonor. If he fails to do so, and consequently, any
loss arises to the customer, the banker has to bear the loss.
(iv) Present the bill for acceptance at an early date: As per sec.61of the Nl. Act, a bill of
exchange must be accepted, If a banker undertakes to collect bills, it is his duty to present
them for acceptance at an early date.
(v) Present the bill for payment: The banker should present the bills for payment ¡n proper
time and at proper place. If he fails to do so and if any loss occurs to the customer, then, the
banker will be liable. According to Sec.66 of N,I Act a bill must be presented for payment on
maturity. .
(vi) Protest and note a foreign bill for non-acceptance: In case of dishonor of a bill by
non-acceptance or non-payment, it is the duty of the collecting banker to inform the customer
immediately. Generally he returns the bill to the customer. In the absence of specific
instructions, collecting bankers do not get the inland bills noted and protested for dishonor. If
the bill in question happens to be a foreign bill, the banker should have it protested and noted
by a notary public and then forwarded it to the customer.
Various types of loans and advances given by banks: Banks lend money in various
forms for various purposes which are given below:
1. Cash Credit: Cash Credit is a type of advance wherein a banker permits his customer to
borrow money upto a particular limit by a bond of credit with one or more securities. The
advantage associated with this system is that a customer can withdrawn money as and when
required. The bank will charge interest only on the actual amount withdrawn by the customer.
Many industrial concerns and business houses borrow money in this form.
2. Overdraft: An overdraft is an arrangement by which the customer is allowed to overdraw
his account. It is granted against some collateral securities. The facility to overdraw is
allowed through current account only. Interest is charged on the exact amount of overdrawn
subject to the payment of minimum amount by way of interest.
3. Loan: Loan is an advance in lump sum amount the whole of which is withdrawn and is
supported to be rapid generally wholly at one time. It is made with or without security. It is
given for a fixed period at in agreed rate of interest. Repayments may be made in instalments
or at the expiry of a certain period.
4. Discounting bill of exchange: The bank also gives advances to their customers by
discounting their bills. The net amount after deducting the amount of discount is credited to
the account of customer. The bank may discount the bills with or without any security from
the debtor in addition to the personal security of one or more person already liable on the bill.
Banks should follow some basic principles at the time of lending. This ensures efficient
and long term working of the banks. Some of the basic principles of lending are as
follows:
1. Safety of principal: The first and foremost principle of lending is to ensure the safety of
the funds lent. It means that the borrower is in a position to repay the loans, along with
interest, according to the terms of the loan contract. The repayment of the loan depends upon
the borrower’s
i. capacity to pay and
ii. willingness to pay.
The banker should, therefore, take utmost care in ensuring that the enterprise or business to
which a loan in to be granted is a sound one and the borrower is capable to repay it
successfully.
2. Profitability: Commercial banks are profit earning institutions. They must employ their
funds profitably so as to earn sufficient income out of which to pay interest to the depositors,
salaries to the staff and to meet various other establishment expenses and distribute dividends
to the shareholder. The sound principle of lending does not sacrifice safety or liquidity for the
sake of higher profitability.
3. Marketability or Liquidity: Liquidity of loans is another principle of sound lending. The
term liquidity of loan indicates quick realisation of loans from the borrowers. Banks are
essentially dealers in short term funds and therefore, they lend money mainly for short term
period. The banker should see that the borrower is able to repay the loan on demand or within
a short notice.
4. Purpose of the loan: Before granting loans, the banker should examine the purpose for
which the loan is demanded. If the loan is granted for productive purpose, thereby the
borrower will make much profit and he will be able to pay back the loan. In no case, loan is
granted for unproductive purpose.
5. Diversification: The element of risk in relation to loans cannot be totally eliminated, it can
only be reduced. Risks of lending can be reduced by diversifying the loans. While granting
loans, the banker should not grant a major part of the loan to one single particular person or
particular firm or an industry. If the banker grants loans and advances to a number of firms,
persons or industries, the banker will not suffer a heavy loss even if a particular firm or
industry does not repay the loan.
6. National policies: Banks have certain social responsibilities towards society also. The
banks have to take into account the economic and social priorities of the country beside
safety, liquidity and profitability. While formulating the lending policy, the banks are guided
by the government policies in relation to disbursal of credit. Thus, national interest and
policies are influence the lending decisions of banks.
In conclusion, it may be said that due consideration of all the principles are necessary, while
evaluating a loan proposal.
Forms of Loans
Bankers, whenever advancing loans, first ask for the security to be put for the loans
requested. Different types of securities are used depending upon the nature of the advances
issued by the banks. A good security must be enough to cover the risk, highly liquid, free
from any encumbrance, clean in ownership and easy to handle.
Types of Securities
There are four types of securities which are as under:-
1. Lien
2. Pledge
3. Mortgage
4. Hypothecation
1. Lien
Lien is first kind of security which is the right of holdings the goods of the borrower until the
loan is repaid. The borrower remains the owner of the goods but the possession is given to the
lender. The agreement of lien explains whether it relates a particular debt or debts in general.
In ordinary lien creditor has only the right of possession of goods. He has no right to sell it,
but the banker’s lien is not the same. The banker has a right to sell the good after a proper
notice. The banker gets the property of the customer as his banker. Thus papers of money or
goods with the banker are not for the purpose other than lien. The banker takes the possession
lawfully. There must not imply or expressed agreement against lien.
2. Pledge
Pledge is also from one of the types of securities. It can be defines as “Bailment of goods as
protection for payment of a money owing or act of a promise”. The borrower is called pledger
and the banker is called pledge. In case of pledge there should be bailment of goods and the
bailment should be on behalf of the debtor or an intending debtor. The delivery of goods is
necessary for the contract of bailment. The delivery may be actual or constructive. The
constructive delivery is made when the bailee puts his lock on the doors of Godowns storing
the pledged goods or merely key of the lock on the Godowns door is received. It is essential
that the bailee should return the same goods to the bailer or dispose them of according to his
instructions.
3. Mortgage
Mortgage another type of security which can be defines as “A mortgage is the reassigning of
interest in particular fixed property for the reason of protection of payment of funds advanced
by means of loan, an presenting of future balanced due, or the act of commitment which
maybe rise to a financial liability”. The transferor may be known as mortgager. The transferee
may be known as mortgagee. The contract is treated as mortgage deed.
4. Hypothecation
Hypothecation is also from one of the types of securities and can be defines as “A lawful
transaction and essential goods are always accessible as security for a balance due without
transferring either the property or the possession to the lender”. It is clear that possession and
ownership of the goods remain with the borrower and an equitable charge is created in favor
of the lender. The borrower agrees to give the possession of the goods to the banker whenever
the banker requires him to do so. It is possible when the transfer of possession is either
inconvenient or impracticable. If the borrower offers raw material or goods in possession as
security, the transfer of possession will stop the functioning of borrowers business. The
creditor possesses the right of a pledge under the hypothecation deed. The position of the
banker under hypothecation is not as safe as under a pledge. If the borrower fails to give the
possession of eth goods hypothecated, the bank can file a suit in the court of law for the
recovery of amount lent. The advances against hypothecation are risky. The bank should
make sure that the party has a good reputation, should check property regularly and asks the
hypothecator to submit periodical reports.
Advance against the documents of title to goods
Documents of Title to Goods
Meaning:
• Section 2 (4) of the sale of Goods Act defines a Document of title to goods as “A
document used in the ordinary course of business as a proof of possession or control of goods
authorizing or purporting to authorize either by endorsement or delivery, the possessor of the
documents to transfer or to receive the goods thereby represented.”
Precautions to be taken by the banker at the time of Advancing against the documents
of title to goods:
1. Integrity of the customer: In order to avoid risk of fraud the banker should take into
account the character, capacity and capital of the customer. Banker should only accept the
documents as security from honest, reliable and trustworthy customers.
2. Certificate of Packing: Banker should always ask for the certificate to ascertain the
content of the packages or bags.
3. Supervise the Packing: The banker should depute a representative to supervise the
packing.
4. No Onerous Condition: If the document of the title to goods contains any onerous
remark, it make it unfit to be a security. The banker should avoid to advance against such
documents.
5. Endorsement in Blank: The banker should get the document endorsed in blank, or
the liability to pat the freights will be on the part of banker and not of the customers.
6. Insurance against Risk: The goods must be insured against the risks like Fire and
theft for its full value. The banker should ask for the insurance policy before granting
advances against such documents.
7. Special care in realizing the goods: It is advisable on the part of the banker, not to
part with the security before repayment of advances.
8. Other Precautions:
• Proper examination to ensure the originality and recent origin of
the document.
• Insurer must be a reliable person or firm for the goods in the document.
• To obtain a general stamped letter for the purpose of Hypothecation.
1. Bill of Lading:
Documents of Title to Goods
• Meaning: “A document issued by the shipping company acknowledging the receipt
of goods to be transported to a specified port. It also contains the conditions for such
transportation of goods and full description of the goods, i.e., their markings and contents as
declared by the consignor.”
• Contents/Items in Bill of Lading:
1. Names of Consignor and consignee
2. Names of the ports of departure and destination
3. Name of Vessel
4. Date of departure and arrival
5. List of goods being transferred
6. Number of packages and kind of packaging
7. Marks and numbers on packages.
8. Weight of the goods
9. Freight and amount
10. Description of goods
3. Dock- warrant:
• Meaning:
• “A Dock- Warrant is the document issued by a dock company in exchange of goods
received.”
• Key points of Dock-warrant;
1. The document possesses title to goods and the person
named in can obtain the possession of the goods stored at the dock.
2. It is not a receipt, but it is a warranty only.
3. It can be transferred by endorsement and delivery.
• Precautions in the case of Dock-Warrant:
1. Before advancing against the dock-warrant, the banker must be satisfied
with the integrity and the financial condition of the customer.
2. It is to be verified that the dock company is having the authority of lien on goods or
not.
3. To prevent the unauthorized dealingof the goods, the
banker should get himself registered as owner of the goods.
4. Railway Receipt:
• It is a document issued by the Railway authority acknowledging the receipt of the
goods for the purpose of transportation to a space specified therein.
• It cannot be transferred by endorsement and delivery.
• Precautions to be taken by the banker in case of Railway Receipt:
1. Documentary bill of well –established parties only should be accepted/discounted.
2. To examine the authenticity of the railway receipt, banker should examine it carefully.
3. The railway receipt should be endorsed in favour of bank. (bank should be made
consignee by endorsement)
4. There should not be any alteration in the receipt other than the competent authority.
5. The goods must be covered by the insurance against fire, theft and damage in transit.
6. The banker should accept only ‘Freight Paid’ railway receipt, as banker would ot be
paying any freight due.
7. To ensure the validity and the availability of the goods the date of the receipt should
be checked carefully.
8. Advance should not be granted in case if the receipt contains the information
regarding the damaged goods or defective packing.
5. Delivery Order:
• Delivery order is an order issued by the owner of the goods to the warehouse keeper
to deliver the goods to a particular person.
• According to the Uniform Commercial Code, “A delivery order refers to an order
given by an owner of a goods to a person in possession of the warehouse keeper directing that
person to deliver the goods to a person named in the order.”
• it is the document issued by the transporter or the carrier of the goods directly if they
have their own office at the destination. The holder of the delivery order must either take
delivery of the goods or obtain a receipt or warrant from warehouse keeper or get his title of
goods registered in the books of the warehouse keeper.
• Precaution in case of Delivery Order:
1. Before accepting the delivery order as security, the banker should check the
authenticity of both the parties, customer offering the document and the company issuing the
order.
2. The banker should also check that the delivery order is issued for the same goods that
are stored in the warehouse.
3. The banker should also verify that the order contains the name of the pledger.
4. In order to avoid risk, the banker should register the delivery order with warehouse
keeper.
5. Special care has to be taken as the delivery order should not remain outstanding for
long period of time.
Unit – V
Position of surety – Letter of credit – Bills and supply bill. Purchase and discounting bill
Travelling cheque, credit card, Teller system.
What is Surety?
Surety bonds or guarantees secure the fulfilment of a contract or an obligation up to the limit
of the bond. They protect the beneficiary against acts or events which impair the underlying
obligations of the so called “principal”. Underlying obligations can either be negotiated or
can have a statutory (legal) character.
A surety bond provides the security to protect the creditor against the default or insolvency of
the principal up to the limit of the bond. For example, the failure of a contractor to complete
a contract in accordance with its terms and specifications or the failure of an enterprise to pay
taxes or customs duties to a government or department.
They play a vital part in domestic and international trade and in particular protect taxpayers
against the loss of public funds.
Position of Suriety
Rights of the Security
Rights of the surety can be classified under three heads: (i) Against the principal debtor.
(ii) Against the creditor. (iii) Against the co-sureties.
1. Rights of the surety against the principal debtor
(a) Rights to be subrogated: When the principal debtor had committed the default and the
surety pays the debt to the creditor, surety will stand in the shoes of the creditor and will be
invested with all the rights which the creditor had against the debtor (Sec. 140).
(b) Right to claim indemnity: In every contract of guarantee, there is an implied promise by
the principal debtor to indemnify the surety and the surety is to recover from the principal
debtor whatever sum he has rightfully paid under the guarantee but no sums which he has
paid wrongfully, e.g., cost of fruitless litigation (Sec. 145).
Examples : (i) B is indebted to C, and A is surety for the debt. C demands payments from A,
and on his refusal sues him for the amount. A defends the suit, having reasonable grounds for
doing so, but is compelled to pay the amount of the debt with costs. He can recover from B
the amount paid by him for costs, as well as the principal debt.
(ii) A guarantees to C, to the extent of 2000 rupees, payment for rice to be supplied by C to
B. C supplies rice to a less amount than 2000 rupees, but obtains from A payment of the sum
of 2,000 rupees in respect of the rice supplied. A cannot recover from B more than the price
of the rice actually supplied.
A surety is entitled to the benefit of every security which the creditor has against the debtor at
the time when the contract of suretyship is entered into, whether the surety knows of the
existence of such security or not and if the creditor loses or without the consent of the surety
parts with such security, the surety is discharged to the extent of the value of the security
(Sec. 141). But a surety, however, cannot claim the benefit of the securities only on the
payment of a part of the debt.
When two or more persons stand as sureties for the same debt or obligation they are termed
as co-sureties. The position of co-sureties is as follows.
Co-sureties liable to contribute equally (Sec. 146): Where two or more persons are co-sureties
for the same debt or duty, either jointly or severally, and whether under the same or different
contract, and whether with or without the knowledge of each other, the co-sureties in the
absence of any contract to the contrary, are liable, as between themselves, to pay each an
equal share of the whole debt, or of that part of it which remains unpaid by the principal
debtor.
Example: A, B and C are sureties to D for the sum of 3,000 rupees lent to E.E makes default
in payment. A, B and C are liable, as between themselves, to pay 1,000 rupees each.
The commercial letter of credit has been used for ages to facilitate the process of payment in
domestic as well as an international trade like import and export letter of credit. In fact, its
usage will increase with the development of global economy. All the international letters of
credit are governed by the regulatory body of International Chamber of Commerce under the
Uniform Customs and Practice for Documentary Credits.
FEATURES OF LETTER OF CREDIT
Since the letters of credit have been in use for centuries and there is a uniform regulatory
code for the letters of credit, there are certain characteristics of letter of credit that are
standard and are present uniformly in all the letters of credit:
1. Negotiability: The letter of credit is usually considered as a negotiable instrument and can
be passed freely as money among various parties. The letter of credit obligates the issuing
bank to pay the money not only to the beneficiary but also to any other bank nominated by
him. However, the letter of credit is considered as negotiable only when it includes an
unconditional promise of payment on demand or at a particular time.
2. Revocability: The letter of credit can be either revocable or irrevocable. The issuing bank
can revoke or modify a revocable letter of credit at any time without notification. In such a
scenario, the advising bank will not confirm the LC. However, it is very rare that a revocable
letter of credit is used. An irrevocable letter of credit is the most commonly used as it cannot
be modified or revoked without the agreement of all the parties involved.
Transfer and Assignment: The beneficiary of the letter of the credit can transfer or assign the
LC as many times as possible. The LC will remain effective.
3. Sight and Time Drafts: The letter of credit demands a payment be made through two
features: sight or time. A sight draft needs to be paid when the LC is presented and the time
draft needs to be paid after a certain duration of time. The bank will review the letter of credit
to be sure that it is valid in both the cases.
Purchase Bill
BILLS PURCHASED, in trade finance, allows a seller to obtain financing and receive
immediate funds in exchange for a sales document not drawn under a letter of credit. The
bank will send the sales documents to the buyers bank on behalf of the seller.
Bill Discounting
While discounting a bill, the Bank buys the bill (i.e. Bill of Exchange or Promissory Note)
before it is due and credits the value of the bill after a discount charge to the customer's
account. The transaction is practically an advance against the security of the bill and the
discount represents the interest on the advance from the date of purchase of the bill until it is
due for payment.
Usually, the Bank may want some conditions to be fulfilled to be able to discount a bill:
A bill must be a usance bill
It must have been accepted and bear at least two good signatures (e.g. of reputable
individuals, companies or banks etc.)
The Bank will normally only discount trade bills
Where a usance bill is drawn at a fixed period after sight, the bill must be accepted to
establish the maturity
There are bills drawn on sight basis. These are to be paid on presentation. If a bank lends
against such bills receivable, it is called as bill purchase.
Travelling cheque
Definition: The Traveler’s cheque is an exchange medium that can be used as a substitute for
the hard currency. As the name suggests, these cheques are issued to the individuals who
travel on vacations to overseas.
The Traveler’s cheque provides a lot of convenience to those who travel to foreign countries,
as they are not required to carry excess cash along with them and can use these cheques as a
currency to facilitate the purchases. The merchants and other business accept the traveler’s
cheque as a currency, provided the original signatures on the cheque (the cheque signed at the
time of its issue) matches the signature done at the time purchases are initiated.
Here, the issuer of the Traveler’s cheque unconditionally guarantees the payment of the
undersigned value, irrespective of the cheque being fraudulently issued or lost or stolen. This
means that the traveler’s cheques are never bounced unless the issuer becomes bankrupt or
goes out of business. The payee receiving the cheque, can deposit it with the Bank, as done in
the case of ordinary cheques and can get the payment credited to his account.
One of the advantages of traveler’s cheque is that it never expires, this means, the purchaser
can keep the unused cheque with him to use it anytime in the future. There are four parties
involved in the Traveler’s cheque transaction:
The Issuer or Obligor, an organization that produces the traveler’s cheque
An Agent, the bank or any other party that sells the cheque
The Purchaser, the person who buys it
The Payee or Merchant, a person to whom the cheque is handed over in exchange for
goods and services.
The Traveler’s cheque can be replaced by the issuer, in case it is lost or stolen. This requires
the purchaser of the cheque to maintain a copy of cheque receipt or its number in a safe
custody so that it can be produced to the issuer to get the cheque replaced. The traveler’s
cheques are available in varied currencies such as US Dollars, Great Britain Pounds (GBP),
Japanese Yen (JY), Australian Dollars (AUD) and Canadian Dollars (CAD).
Credit card
What is Credit Card?
A credit card allows you to borrow money to buy things. There can be a cost to borrowing
that money (you might pay interest and fees), but there can also be a benefit (you might earn
rewards and build your credit.
PROS and CONS
PROS CONS
You can make a large purchase now and pay You can easily dig yourself into debt if
it off in smaller amounts over time. you’re not careful about your spending.
Carrying credit cards is more convenient (and The ease of using credit cards can cause you
safer) than carrying a wad of cash, and credit to overspend.
cards are more widely accepted than personal
checks.
With responsible use, you can build your Missing payments or maxing out a card can
credit, which will be important later on. sink your credit score quickly.
Many credit cards give you rewards, Interest can make even a small debt become
essentially giving you back 1% or more of large over time.
the money you spend.
Teller system
A teller system is the integrated hardware and software used for retail or wholesale banking
transactions, most systems communicate with a core banking system or mainframe over a
secured network. The hardware may include a computer or terminal, Cash Drawers, Receipt
and Passbook Validator/Printers, magnetic strip readers, pin keypads, bill counters, and
bill/coin dispensers. The software is usually based on client/server where several clients
(teller stations) are networked to a server which communicates to the mainframe via a
dedicated line or satellite.