2.

5 BANKING LAW AND OPERATIONS

OBJECTIVE
The objective is to familiarize the students with the law and operations of Banking.

Unit 1: NEGOTIABLE INSTRUMENTS 10 Hrs

Introduction – Meaning & Definition – Features – Kinds of Negotiable Instruments:
Meaning,Definition & Features of Promissory Notes, Bills of Exchange, Cheques - Crossing
of Cheques –Types of Crossing – Endorsements: Meaning, Essentials & Kinds of
Endorsement.

Unit 2: BANKER AND CUSTOMER RELATIONSHIP 10 Hrs

Introduction – Meaning of Banker – Bank - Meaning of Customer – General & Special
Relationships.

Unit 3: BANKING OPERATIONS 18 Hrs

Collecting Banker: Meaning – Duties & Responsibilities of Collecting Banker – Holder for
Value –Holder in Due Course - Statutory Protection to Collecting Banker
Paying Banker: Meaning – Precautions – Statutory Protection to the Paying Banker –
Dishonor of Cheques – Grounds of Dishonor – Consequences of wrongful dishonor of
Cheques. Lending Operations: Principles of Bank Lending – Kinds of lending facilities such
as Loans, Cash Credit, Overdraft, Bills Discounting, Letters of Credit – NPA: Meaning,
circumstances & impact – regulations of priority lending for commercial banks.

Unit 4: CUSTOMERS AND ACCOUNT HOLDERS 12Hrs

Types of Customers and Account Holders - Procedure and Practice in opening and
operating accounts of different customers including Minors - Meaning & Operations of
Joint Account Holders, Partnership Firms, Joint Stock companies, Executors and Trustees,
Clubs and Associations and Joint Hindu Undivided Family.

Unit 5: BANKING INNOVATIONS 06 Hrs

New technology in Banking – E-services – Debit and Credit cards. Internet Banking, ATM,
Electronic Fund Transfer, MICR, RTGS, NEFT, DEMAT.

SKILL DEVELOPMENT:
Collect and fill account opening form of SB A/c or Current A/c
Collect and fill pay in slip of SB A/c or Current A/c.
Draw specimen of Demand Draft.
Draw different types of endorsement of cheques.
Draw specimen of Travellers Cheques / Gift cheques / Credit cheques.
List various customer services offered by atleast 2 banks of your choice.

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Unit 1: NEGOTIABLE INSTRUMENTS 10 Hrs

Introduction – Meaning & Definition – Features – Kinds of Negotiable

Instruments: Meaning, Definition & Features of Promissory Notes, Bills
of Exchange, Cheques - Crossing of Cheques –
Types of Crossing – Endorsements: Meaning, Essentials & Kinds of
Endorsement.

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Introduction –Negotiable Instruments Introduction
• A document that promises payment to a specified person or the assignee

• This type of instrument is a transferable, signed document that promises to pay the
bearer a sum of money at a future date or on demand.

• Examples are bills of exchange, promissory notes, drafts and certificates of deposit.

Meaning :What are Negotiable Instruments?

A negotiable instrument is actually a written document. This document specifies payment to a
specific person or the bearer of the instrument at a specific date. So we can define a bill of
exchange as “a document signifying an unconditional promise signed by the person giving
promise, requiring the person to whom it is addressed to pay on demand, or at a fixed date or
time, a certain sum to or to the order of a specified person, or to bearer.”

Negotiation refers to transfer of title (right to receive payment) from one person to another. The
instruments that help the person to achieve this transfer are called negotiable instruments.

Definition: The Negotiable instruments act does not define the negotiable
instrument but as per section 13, a “Negotiable instrument” means a promissory
note, bill of exchange and cheque payable either to order or bearer.

Features of Negotiable Instruments

 Easily Transferable: A negotiable instrument is easily and freely transferable. There are
no formalities or much paperwork involved in such a transfer. The ownership of an
instrument can transfer simply by delivery or by a valid endorsement.

 Must be Written: All negotiable instruments must be in writing. This includes

handwritten notes, printed, engraved, typed, etc.

 Time of Payment must be Certain: If the order is to pay when convenient then such an
order is not a negotiable instrument. Here the time period has to be certain even if it is not a
specific date. For example, it is acceptable if the time of payment is linked with the death of a
specific individual. As death is a certain event.

 Payee also must be certain: The person to whom the payment is to be made must be a
specific person or persons. Also, there can be more than one payee for a negotiable
instrument. And “person” includes artificial persons as well, like body corporates, trade
unions, chairman, secretary etc.
 Transfer free from defect: It confers an absolute and good title on the transferee. Even
if the transferor has a bad title to the instrument, he can still pass on a good title to any

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 holder who takes it in good faith and without negligence and for valuable consideration.
Thus it cuts off prior defects in the instruments.
 Right to sue: It confers a right on the holder to sue in his own name, in case of need.
 No notice of transfer: The transferor of a negotiable instrument can simply transfer the
document, without serving any notice of transfer to the party who liable on the instrument to
pay.
 Presumptions regarding negotiable instrument: It is presumed that the instrument has
been obtained for consideration. Also, there are other presumptions regarding date, time of
acceptance, time of transfer, order of endorsement, stamp, holder to be holder in due
course. (Section 118-119 of the NI Act).

Presumptions about Negotiable instruments:

118. Until the contrary is proved, the following presumptions shall be made :—
of consideration
(a) that every negotiable instrument was made or drawn for consideration, and that every
such instrument, when it has been accepted, indorsed, negotiated or transferred, was
accepted, indorsed, negotiated or transferred for consideration;
as to date
(b) that every negotiable instrument bearing a date was made or drawn on such date;
as to time of acceptance
(c) that every accepted bill of exchange was accepted within a reasonable time after its
date and before its maturity;
as to time of transfer
(d) that every transfer of a negotiable instrument was made before its maturity;
as to order of indorsements
(e) that the indorsements appearing upon a negotiable instrument were made in the order in
which they appear thereon;
as to stamp
(f) that a lost promissory note, bill of exchange or cheque was duly stamped;
that holder is a holder in due course
(g) that the holder of a negotiable instrument is a holder in due course : provided that,
where the instrument has been obtained from its lawful owner, or from any person in
lawful custody thereof, by means of an offence or fraud, or has been obtained from the
maker or acceptor thereof by means of an offence or fraud, or for unlawful
consideration, the burden of proving that the holder is a holder in due course lies upon
him.

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Kinds of Negotiable Instruments:

A. Negoriable by statute:

1. Promissory note
2. Bill of exchange
3. Cheque

1. Promissory Notes

Meaning: A Promissory Note is an instrument in writing. It contains an unconditional undertaking

or promise, signed by the maker to pay a certain sum of money to a certain person. Unlike, Bills of
exchange, there is no need of acceptance of Promissory Notes as here the payer is himself the maker
of the note. He, himself promises to make the payment. Hence, only two parties are involved here,
one is the maker and another one is the payee.

Definition:The promissory note is a signed document of written promise to pay a stated sum to a
specified person or the bearer at a specified date or on demand.

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For instance, A has to pay ₹ 10000 to B. A makes a promissory note in which he promises to pay ₹
10000 to B on 25th September 2018. Therefore, A is the maker, payer or the drawer of the
promissory note whereas B is the receiver or the payee of the promissory note.

Thus a promissory note contains a promise by the debtor to the creditor to pay a certain sum of
money after a certain date. The debtor is the maker of the instrument.

Features of a Promissory Note

 The promissory note must be in writing- Mere verbal promises or oral undertaking does not
constitute a promissory note. The intention of the maker of the note should be signified by
writing in clear words on the instrument itself that he undertakes to pay a particular sum of
money to the payee or order or to the bearer

 It must contain an express promise or clear undertaking to pay- The promise to pay must be
expressed. It cannot be implied or inferred. A mere acknowledgment of indebtness is not
enough.

 The promise to pay must be definite and unconditional- The promise to pay contained in the
note must be unconditional. If the promise to pay is coupled with a condition, it is not a
promissory note.

 The maker of the pro-note must be certain- The instrument should show on the fact of it as
to who exactly is liable to pay. The name of the maker should be written clearly and
ascertainable on seeing the document.

 It should be signed by the maker- Unless the maker signs the instrument, it is incomplete
and of no legal effect. Therefore, the person who promises to pay must sign the instrument
even though it might have been written by the promisor himself.

 The amount must be certain- The amount undertaken to be paid must be definite or certain
or not vague. That is, it must not be capable of contingent additions or subtractions.

 The promise should be to pay money- The promissory note should contain a promise to pay
money and money only, i.e., legal tender money. The promise cannot be extended to
payments in the form of goods, shares, bonds, foreign exchange, etc.

 The payee must be certain- The money must be payable to a definite person or according to
his order. The payee must be ascertained by name or by designation. But it cannot be made
payable either to bearer or to the maker himself.

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 It should bear the required stamping- The promissory note should, necessarily, bear
sufficient stamp as required by the Indian Stamp Act, 1889.

 It should be dated- The date of a promissory note is not material unless the amount is made
payable at particular time after date. Even then, the absence of date does not invalidate the
pro-note and the date of execution can be independently proved. However to calculate the
interest or fixing the date of maturity or lm\imitation period the date is essential. It may be
ante-dated or post-dated. If post-dated, it cannot be sued upon till ostensible date.

 Demand- The promissory note may be payable on demand or after a certain definite period
of time.

 The rate of interest- It is unusual to mention in it the rated of interest per annum. When the
instrument itself specifies the rate of interest payable on the amount mentioned it, interest
must be paid at the rate from the date of the instrument.

Parties to a promissory note:

To a promissory note, there are two parties viz. ‘Maker’ and the ‘Payee’.

(i) Maker or Drawer:

The maker is the person who makes and signs the note. He agrees to pay a certain amount on the
date of maturity.

(ii) Payee or Drawee:

The person in whose favour the promissory note is drawn is called payee. He is also known as
drawee or promisee. Usually, the drawee is also the payee. In the above case, the payee is the
person to whom the amount due on promissory note is payable.

Example:

As per format of promissory note, Hari Das is the drawer or maker who promises to pay Rs.
1,00,000 to Shri Vinay Pujari who is the drawee or payee. However, if this promissory note is
transferred in favour of Ghanshyam Das, then Ghanshyam Das will be the payee.

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Specimen of a promissory note:

Related Articles:

 Bills of Exchange: This is an order from the creditor to the debtor. This instrument
instructs the drawee (debtor) to pay the payee a certain amount of money. The bill will be
made by the drawer (creditor)

 Cheque: This is just another form of a bill of exchange. Here the drawer is a bank. And
such a cheque is only payable on demand. It is basically the depositor instructing the bank to
pay a certain amount of money to the payee or the bearer of the cheque.

 Others: There are other instruments such as government promissory notes, railway
receipts, delivery orders, etc. These can be negotiable instruments by custom or practice of
the trade.

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2.Bill of Exchange:

Definition of Bills of Exchange:

A bill of exchange is an instrument in writing containing an unconditional order, signed by the
maker, directing a certain person to pay a certain sum of money only to, or to the order of, a
certain person, or to the bearer of the instrument.

—Section 5 of the Negotiable Instruments Act, 1881.

Meaning:
Bill of exchange is a negotiable instrument which is payable either to order or to the bearer.
Section 13 (1) of the Negotiable Instruments Act, 1881 defines negotiable instruments as “A
promissory note, bill of exchange or cheque payable either to order or to bearer”.

A bill of exchange is generally drawn by the creditor on his debtor. It should be accepted either
by the debtor or any person(s) on his/her behalf. It is worth mentioning that before its acceptance
by the debtor, it is just a draft. It should be accepted either by a person upon whom it is drawn or
someone else on his/her behalf. The stage at which the purchaser of goods signs the draft and
writes ‘Accepted’ on it, it becomes a bill of exchange.

Example:

On 1.1.2011, Pawan sold goods to Harish on credit for Rs. 25,000. Pawan drew a bill for the
same amount for two months and sent it to Harish for his acceptance on the same day. On
5.1.2011 Pawan got the acceptance of Harish. In this case, before 5.1.2011 it is known as mere
draft. It becomes a bill of exchange only on 5.1.2011 when Harish accepted the bill.

Features of Bills of Exchange:

1. It should be in writing.

2. It is an order to make payment.

3. The order of payment is unconditional.

4. It should contain a certain amount to be paid.

5. The date of payment should be certain.

6. The amount must be payable either to a certain person or to his order or to the bearer of the
bills of exchange.

7. It should be paid either on the expiry of a fixed period of time or on demand.

8. Bill of exchange must be signed by its maker.

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9. In certain cases, it must be stamped also.

Parties to a Bill of Exchange:

There are three parties viz. ‘Drawer’, ‘Drawee’ and ‘Payee’ to a bill of exchange.

(i) Drawer:
A bill of exchange is drawn upon the buyer/debtor by the seller/creditor and the drawer is the person
who makes and draws the bill. The drawer is entitled to receive money from the debtor.

(ii) Drawee:
The person upon whom the bill of exchange is drawn is known as drawee. Bill of exchange is drawn on
the drawee who is the purchaser of goods. The drawee of a bill is called the acceptor when he writes the
words “accepted” and puts his signatures on it. This process is known as acceptance.

After acceptance, the bill of exchange becomes a legal document. This document now binds the drawee
to honour the bill on due date. This acceptance may be general or qualified. In the case of general
acceptance, without stating any conditions, only signature of the accepter is required. However, in the
case of qualified acceptance, name of the bank or specified place for payment is mentioned.

(iii) Payee:
The person to whom the payment is made is known as payee. In some cases, the drawer of the bill also
becomes the payee when he himself keeps the bill till the date of maturity.

Drawer and Payee is usually the same person.

However, in the following cases drawer and payee are two different persons:

(i) When the bill is discounted by the drawer, the person who discounted the bill becomes the payee.

(ii) When the bill is endorsed to a creditor, the endorsee will become the payee.

Contents of Bills of Exchange:

The contents of bills of exchange are as under:

(i) Date:
The date of the bill on which it is drawn should be written on the top right comer of the bill. This aspect is
very important to determine the maturity date of the bill.

(ii) Term:
This is the tenure of the bill and runs from the date of the bill. This should be specified in the body of the
bill. Grace period of three days should be given after the expiry of the term from the date of the bill.

(iii) Amount:
Amount of the bill should be given both in figures and words. Amount in figures should be mentioned on
the top left corner of the bill and amount in words should be mentioned in the body of the bill.

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(iv) Stamp:
Stamp of proper value which depends on the amount of bill shall be affixed on the bills of exchange.

(v) Parties:
There may be three parties to the bills of exchange, drawer, drawee and payee. However, in some cases
drawer and payee may be the same person. All the names of the parties and their addresses should also
be invariably mentioned in the bills of exchange.

(vi) For Value Received:

This aspect is most important in the sense that law does not consider those agreements which have been
made without consideration. Consideration means in lieu of and in the context of bills of exchange, it
means that the bill has been issued in exchange of some consideration i.e., benefit has already been
received.

Advantages of Bills of Exchange:

The bills of exchange are used frequently in business as an instrument of credit due to the
following reasons:

(i) Legal Relationship:

Issuing bills of exchange provides a framework which converts and establishes a legal
relationship between seller and buyer, from creditor and debtor to drawer and drawee. In the case
of any dispute between the parties, this relationship provides a conclusive proof in the court of
law.

(ii) Terms and Conditions:

Bill of exchange contains all terms and conditions of payments viz., amount of the bill, date of
payment, place of payment, interest to be paid, if any. The maturity date of the bill is also known
to the parties of the bill so they can make necessary arrangement for funds

(iii) Mode of Credit:

Bill of exchange has been defined as a negotiable instrument under the Negotiable Instruments
Act, 1881. The buyer can buy the goods on credit and pay after the period of credit with the help
of bill of exchange. In case of urgency, the drawer can also get the payment through discounting
the bill from the bank and without waiting for the maturity period.

(iv) Easy Transferability:

Bill of exchange can be used for settling the debt of the creditors. Mere delivery and
endorsement of the bill give a valid title to the endorsee.

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(v) Wider Acceptance:
In case of foreign bill, wider acceptance is given to the parties through which payments can be
received and made easily.

(vi) Mutual Accommodation:

Sometimes, bill can be issued for mutually accommodating the parties so that financial help can
be given to each other.

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Types of Bill of Exchange on the Basis of Period:

On the basis of period bills are of two types:

 Demand bills
 Term bills

Demand Bills of Exchange:

There is no fixed date for the payment of such bill. They become payable at ay time, when they
are presented before payee by the holder.

Tem Bills of Exchange:

These bills are payable after specified period of time. The period after which these bill become
due for payment is called tenor.

Types of Bill of Exchange on the Basis of Object:

On the basis of purpose of writing the bills, the bills can be classified as:

 Trade Bills
 Accommodation Bills

Trade Bills:

These bills are drawn and accepted against the sale and purchase of goods on credit. These are
drawn by the seller (creditor) and accepted by the buyer (debtor).

Accommodation Bills:

Such bills do not involve any sale and purchase of goods, rather they are drawn without any
consideration. The purpose of such bills is to help one party or both the parties financially.

Classification of Bills of Exchange:

The bills can be classified into two classes given as under:

Inland Bill:

These bills are drawn in a country upon person living in the same country or made payable in the
same country. Both drawer and the drawee reside in the same country.

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Foreign Bills:

These bills are drawn in one country and accepted and payable in another country, e.g. a bill
drawn in England and accepted and payable in India

Speciman of Bill of Exchange

In the above example:

 Mr C is the creditor and drawer of the bill

 Mr D is the debtor and drawee of the bill
 Tenure of Bill is two months
 A certain amount i.e Rs 30000 is to be paid by the drawee
 Mr C is the payee here. The words “or his order” after Mr C in the bill denotes
that Mr C can endorse the bill in favour of someone who will, upon such
endorsement, become the payee of the bill.

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Now assume that Mr C has also written the name of Mr G (the mutual friend who assured the
creditworthiness of Mr D) on the bill as Drawee in case of need. In such case, if the bill is not
accepted or dishonoured by Mr D (original drawee) then it would be presented to Mr G for
acceptance and payment. If Mr G also refuses to accept or pay then the bill will be
considered as dishonoured.

2. Cheque:
Meaning of Cheque – Different Types of Cheque : Cheque is a negotiable instrument used to
make payment in day to day business transaction minimizing the risk and possibility of loss. It is
used by individuals, businesses, corporate and others to transact for making and receiving
payment.

Definition of Cheque – What is a Cheque ?

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.

Parties in cheque Transaction:

There are three parties in Cheque Transaction – Drawer, Drawee and Payee.

 Drawer (Maker of Cheque) – The person who issue the cheque or hold the account
with bank.
 Drawee – The Person who is directed to make the payment against cheque. In case of
cheque, it is bank.
 Payee – A person whose name is mentioned in the cheque or to whom the drawee
makes payment. If drawer has drawn the cheque in favour of self then drawer is
payee.

Payment by Cheque is safest way to conduct business transactions as it helps to maintain record
in account statement to whom the payment is made by whom payment is received. So it becomes
easier to track the transactions through bank account statement.

Types of Cheque:
There may be different types of Cheques depending on how the drawer has issued the Cheque.

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1. Open / Bearer Cheque
2. Order Cheque
3. Crossed Cheque
4. Anti Dated Cheque
5. Post Dated Cheque
6. Stale Cheque
7. Mutilated Cheque

1. Open Bearer Cheque:

This type of Cheques are risky in nature for drawer. When the word “Bearer” on the cheque is not
crossed or cancelled, the cheque is called a bearer cheque. Open / Bearer Cheques are payable to
person specified in the instrument or any person who posses it and present for payment over the
counter. In case of cheque is lost, person who find it can collect payment from the bank.

2.Order Cheque

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When the word “Bearer” written on cheque is crossed or cancelled it becomes an order cheque.
An order Cheque is payable to a specified person named in the cheque or any other to whom it is
endorsed.

3.Crossed Cheque or Account Payee Cheque

The person who issue or write the cheque specify its as account payee by simply making two
parallel lines on top left or middle or right hand corner of the cheque. This type of cheque can not
be encashed over the counter. Considered as safest type of cheque, it can only be credited to
payee’s account whose name is mentioned in the Cheque.

4.Anti Dated Cheque

Cheque bearing the date earlier than the date of presentation for payment is known as anti dated
cheque.

Note : All Types of Cheque are valid for three month from the date of issue (or written on cheque).

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5.Post Dated Cheque
Cheque bearing the date which is yet to come in future is called Post Dated Cheque. Cheque is honored
only on or after the date (upto three months) written on cheque.

6.Stale Cheque
A Cheque turns stale after three months of the date written on cheque. A Stale Cheque can not be
honored by the bank.

7.Mutilated Cheque

When cheque gets torn into two or more pieces and presented in bank for payment.
Such cheques are called mutilated cheque. Bank requires confirmation by the
drawer before honoring such cheques.

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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

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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.

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(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.

Who May cross a Cheque?

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Endorsement:

Meaning:
Endorsement is made for the purpose of negotiation of a negotiable instrument by the maker or
holder of a negotiable instrument by signing on the face or backside of an instrument or on a lip
of paper called ‘allonge’#. Endorsement is explained under section 15 of Negotiable Instrument
Act, 1881.

Cheque, Bill of Exchange and promissory note can be endorsed and an endorsement is made by
maker or holder of an Negotiable Instrument. There is no limitation on number of instruments. A
minor (defined under section 3 of Majority Act, 1875) can endorse a negotiable instrument
under section 26 of negotiable instrument act but he will not be liable as an endorser.

Essentials of a Valid Endorsement:

1. It must be on the instrument. The endorsement may be on the back or the face of the
instrument and if no space is left on the instrument, it may be made on a separate paper attached
to it called along.

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2. It must be an endorsement of the entire bill. A partial endorsement that is which purports to
transfer to the endorse a part only of the amount payable does not operate as a valid
endorsement.

3. It must be made by the maker or holder of the instrument. A stranger cannot endorse it.

4. It may be made either by the endorser merely signing his name on the instrument or by any
words showing an intention to endorse or transfer the instrument to a specified person.

5. It must be signed by the endorser. It is not necessary to write the full name initial may be
sufficient. Thumb- impression should be attested.

6. It must be completed by delivery of the instrument. The delivery must be made by the
endorser himself or by somebody on his behalf with the intention of passing property therein.

Effects of endorsement

The endorsement of a negotiable instrument followed by delivery transfers to the endorsee the property
therein with the right of further negotiation, but the endorsement may by express words, restrict or
exclude such right, or may merely constitute the endorsee an agent to endorse the instrument, or to
receive its contents for the endorser, or for some other specified person.

Illustrations

B signs the following endorsement on different negotiable instruments payable to bearer,-

(a) "pay the contents to C only".

(b) "pay C for my use".

(c) "pay C on order for the account to B".

(d) "the within must be credited to C".

These endorsements exclude the right of further negotiation by C.

(e) "pay C".

(f) "pay C value in account with the Oriental Bank".

(g) "pay the contents to C, bring part of the consideration in a certain deed of assignment executed by C
to endorser and others".

These endorsements do not exclude the right of further negotiation by C.

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Types of Endorsement:
Different Types of Endorsements:

Blank Endorsement (Section 16(1) of NI Act): If the endorser sign his name only without
adding any words or direction, the endorsement is said to be blank. This makes the instrument
payable to bearer as per section 54 of NI Act.

Full Endorsement: Where the endorser signs his name and adds the name of endorsee
specifically, the endorsement is called full. Paying bank gets valid discharge if the endorsement
is regular. Example: “Pay to Mr. Bahubali or Order”

Restrictive Endorsement (Section 50 of NI Act): When the endorser add words like ‘Pay the
Contents to Kattappa only’. The endorsee cannot endorse the instrument further.

Partial Endorsement (Section 56 of NI Act.): When an endorser transfers only a part of the
amount of the negotiable instrument to the endorsee. Its not a valid endorsement for the purpose
of negotiation and such instrument should not be paid.

Conditional Endorsement: An endorsement which stipulates some condition is called

conditional endorsement. Example – ‘Pay to Mr Mahendra Bahubali when he visits
Mahishmati ‘. The fulfillment of condition is binding between endorser and endorsee only. The
paying bank is not bound to verify the fulfillment of such conditions.

Sans Recourse Endorsement: By adding the words like “Pay Bhallaladeva or order without
recourse to me”the endorser excludes his liability. It is caution to endorsee.

Facultative Endorsement: When an endorser waives the condition of notice of dishonor.

Forged Endorsement: Endorsement made by a person other that the holder, by signing the
name of holder, is called forged endorsement. All endorsees including a Holder or Holder in due
course or holder for value subsequent to the forged endorsement do not derive any title to the
instrument. The paying banker gets protection as per section 85 (I) provided the endorsement is
regular.

Note #allonge – a slip of paper attached to the end of a document to give room
for further endorsements.

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Cancellation of Endorsement:
Section 40 in The Negotiable Instruments Act, 1881

Discharge of indorser’s liability.—Where the holder of a negotiable instrument, without the

consent of the indorser, destroys or impairs the indorser’s remedy against a prior party, the
indorser is discharged from liability to the holder to the same extent as if the instrument had been
paid at maturity. Illustration A is the holder of a bill of exchange made payable to the order of B,
which contains the following indorsements in blank:— First indorsement, “B”. Second
indorsement, “Peter Williams”. Third indorsement “Wright & Co.”. Fourth indorsement, “John
Rozario”. This bill A puts in suit against John Rozario and strikes out, without John Rozario’s
consent, the indorsements by Peter Williams and Wright & Co. A is not entitled to recover
anything from John Rozario.

B. Negotiable by Custom or Usage

1. Hundis:

Meaning of Hundis:An age-old tradition of business transactions, peculiar to India, Hundis are
negotiable instruments written in various vernacular local languages in the country. The term is
derived from the Sanskrit word hundi which means ‘to collect’. These are generally in the form
of bills of exchange but may sometimes look like promissory notes in shape and contents.

In other words, a hundi, though a negotiable instrument, is not necessarily a bill of exchange as
defined in the Act per se. Hundis are popular among Indian merchants, especially those operating
in sub-urban areas, even today, and are governed by the Negotiable Instrument Act,1881 unless
there is a local usage to the contrary.

For example, contrary to the Act, if the custom or usage in a particular area or part of the country
allows interest on hundis drawn and payable for as many days after sight, it would be recognized
as lawful.

Forms or Types of Hundis

The following are some of the popular forms of hundis.

 1. Darshani hundi: A hundi payable at sight is called darshani hundi. It is negotiable and is
like a demand bill. It may be sold at par or at premium or at discount. A darshani hundi
should be presented for payment within a reasonable time of its receipt by the holder. If the
drawer suffers a loss due to delay in presentment, holder shall be responsible for it.

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 2. Miadi hundi: Also known as muddati hundi, miadi hundi is one which is payable after a
specified period of time like a ‘time bill’. Banks usually provide loans against the security of
such hundis.

 3. Shahjog hundi: This is a hundi made payable only to a Shah (a respectable person of
financial worth and substance in the market). It may be miadi or darshani and can be
transferred freely from one person to another by mere delivery but it is not payable to bearer.
In some respects it is similar to a crossed cheque.

 4. Namjog hundi: It is a hundi payable to the party named in the hundi or his order. Such a
hundi is similar to a bill of exchange payable to order.

 5. Dhanijog hundi: ‘Dhani’ in vernacular language means owner. Thus, a dhanijog hundi is
one which is made payable to the owner, or a holder or bearer-owner. It is just like a bearer
cheque and the holder of it becomes holder in due course if he takes it bona fide and for
value.

 6. Jokhmi hundi: The term ‘Jokhmi’ has been derived from the Hindi word ‘jokhim’
meaning ‘risk’. Such a hundi is usually drawn against goods shipped on a vessel and implies
a certain risk involved in the shipment of goods. Jokhmi hundi, in fact, is a combination of
bill of exchange and insurance policy and payable only when the goods arrive in safe and
sound condition. If the goods are lost in transit, the consignor cannot claim payment of the
hundi from the consignee, i.e., the drawee. Thus, a jokhmi hundi safeguards the interests of
both, consignor and the consignee. It acts as a bill of exchange if the goods arrive safely and
if the goods are lost or destroyed en route, such a bill works like an insurance coverage

 7. Jawabee hundi: A hundi, which is in the form of letter or recommendation to a banker

for payment of a certain sum of money to a specified person, is termed as jawabi hundi.

 8. Zikri hundi: This is a hundi accepted for honour in writing on a Zikri chit (letter of
protection) without being protested. It is drawn in the name of a specified person residing in
the town or city where the hundi is payable. In case, acceptance is refused by the drawee or
when a refusal is likely to occur, the hundi is furnished to the holder by some prior party to
it.

 9. Firmanjog hundi: The term Firman refers to order in vernacular language and therefore,
a firmanjog hundi is made payable to the order of payee. It is just opposite of dhanijog hundi
which is payable to the bearer only.

2. Share warrant

Meaningof share warrant : A Share Warrant is a document issued by the company under its
common seal, stating that its bearer is entitled to the shares or stock specified therein. Share

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warrants are negotiable instruments. They are transferable by mere delivery without registration
of transfer.

3. Dividend Warrant

Meaning of Dividend Warrant:A Dividend Warrant is an instrument by which a company pays

dividend in the form of cash (money) back to its shareholders from the profits it has made out of
its business operations.

4.Bank Draft
Meaning:A bank draft is a payment on behalf of a payer that is guaranteed by the issuing bank.
Typically, banks will review the bank draft requester's account to see if sufficient funds are
available for the check to clear. Once it has been confirmed that sufficient funds are available,
the bank effectively sets aside the funds from the person's account to be given out when the bank
draft is used. A draft ensures the payee a secure form of payment. And the payer's bank account
balance will be decreased by the money withdrawn from the account.

5.Circular Notes:
Meaning:A circular note is a written request by a bank to its foreign correspondents to pay a
specified sum of money to a named person. When presenting the note for payment, the person to
be paid must produce a letter (containing the signature of an official of the bank and the person
named) called a letter of indication, which is usually referred to in the circular note. Circular
notes are generally issued against a payment of cash to the amount of the notes, but the notes
need not necessarily be cashed, but may be returned to the banker in exchange for the amount for
which they were originally issued.

6. Bearer Debentures:
Meaning:The debentures which are payable to bearer and whose names do not appear in the
register of debenture holders are known as “Bearer Debentures”. Coupons for interest are
attached to the document and interest is paid to the holders as it falls due. Bearer Debentures are
transferably by mere delivery.

7. Debentures of Bombay Port Trust

Meaning:The debentures which are payable to bearer and whose names do not appear in the
register of debenture holders are known as “Bearer Debentures”. Coupons for interest are
attached to the document and interest is paid to the holders as it falls due. Bearer Debentures are
transferably by mere delivery.

8. Railway receipts
Meaning:Railway receipt means the receipt issued under section 65 of the Railways Act.1989.
These are also a type of negotiable instruments issued with monetary values.means the receipt
issued by Railway Administration on acceptance of goods and which entitles the consignee to
take delivery of the goods at the Private Terminal at which the train terminates;

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2
Unit 2: BANKER AND CUSTOMER RELATIONSHIP 10 Hrs
Introduction – Meaning of Banker – Bank - Meaning of
Customer – General & Special Relationships.

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Introduction :
Banking is a service-oriented activity. The main functions of a bank are to accept deposits and lend
money, in addition to taking care of investments. As per the Banking Regulation Act, 1949, Sec 5(b),
banking means: “Accepting deposits for the purpose of lending or investment, deposits of money from
the public, repayable on demand or otherwise and withdrawable by cheque, drafts, and orders or any
other acceptable mode”.

WHAT IS A BANK?

A bank is a firm or a joint stock company formed for the purpose of dealing in money or credits.
Again, under the United Dominions Trust vs. Kirkwood (1966) which case occurred in the United
Kingdom, a bank was defined as an organization that operated with the following objectives:

a) Accepting deposits from customers

b) Honouring cheques and other withdrawals from customers.
c) Maintaining all sorts of accounts and being recognized as a bank in the financial community

Definition of Bank

Section 5B of Banking Regulation Act, 1949 defines Banking.

'Banking means the accepting for the purpose of lending or investing, of deposits of money from
the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or
otherwise.

Features of Bank:

1. Dealing in Money

Bank is a financial institution which deals with other people's money i.e. money given by
depositors.

2. Individual / Firm / Company

A bank may be a person, firm or a company. A banking company means a company which is in
the business of banking.

3. Acceptance of Deposit

A bank accepts money from the people in the form of deposits which are usually repayable on
demand or after the expiry of a fixed period. It gives safety to the deposits of its customers. It also
acts as a custodian of funds of its customers.

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4. Giving Advances

A bank lends out money in the form of loans to those who require it for different purposes.

5. Payment and Withdrawal

A bank provides easy payment and withdrawal facility to its customers in the form of cheques
and drafts, It also brings bank money in circulation. This money is in the form of cheques, drafts,
etc.

6. Agency and Utility Services

A bank provides various banking facilities to its customers. They include general utility services
and agency services.

7. Profit and Service Orientation

A bank is a profit seeking institution having service oriented approach.

8. Ever increasing Functions

Banking is an evolutionary concept. There is continuous expansion and diversification as regards

the functions, services and activities of a bank.

9. Connecting Link

A bank acts as a connecting link between borrowers and lenders of money. Banks collect money
from those who have surplus money and give the same to those who are in need of money.

10. Banking Business

A bank's main activity should be to do business of banking which should not be subsidiary to any
other business.

11. Name Identity

A bank should always add the word "bank" to its name to enable people to know that it is a bank
and that it is dealing in money.

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Functions of Bank
THE MAIN FUNCTIONS OF A BANK

Primary Functions of Commercial Banks

Commercial Banks performs various primary functions some of them are given below:

Accepting Deposits : Commercial bank accepts various types of deposits from public especially from its
clients. It includes saving account deposits, recurring account deposits, fixed deposits, etc. These
deposits are payable after a certain time period.
Making Advances : The commercial banks provide loans and advances of various forms. It includes an
over draft facility, cash credit, bill discounting, etc. They also give demand and demand and term loans to
all types of clients against proper security.
Credit creation : It is most significant function of the commercial banks. While sanctioning a loan to a
customer, a bank does not provide cash to the borrower Instead it opens a deposit account from where
the borrower can withdraw. In other words while sanctioning a loan a bank automatically creates
deposits. This is known as a credit creation from commercial bank.

Secondary Functions of Commercial Banks

Along with the primary functions each commercial bank has to perform several secondary functions too.
It includes many agency functions or general utility functions. The secondary functions of commercial
banks can be divided into agency functions and utility functions.
Agency Functions : Various agency functions of commercial banks are:
1. To collect and clear cheque, dividends and interest warrant.
2. To make payment of rent, insurance premium, etc.
3. To deal in foreign exchange transactions.
4. To purchase and sell securities.
5. To act as trusty, attorney, correspondent and executor.
6. To accept tax proceeds and tax returns.
7. General Utility Functions : The general utility functions of the commercial banks include
8. To provide safety locker facility to customers.

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9. To provide money transfer facility.
10. To issue traveller's cheque.
11. To act as referees.
12. To accept various bills for payment e.g phone bills, gas bills, water bills, etc.
13. To provide merchant banking facility.
14. To provide various cards such as credit cards, debit cards, Smart cards, etc.

Banker and customer Relationship:

The relationship between banker and customer is mainly that of a debtor and creditor. However,
they also share other relationships.
Some of the important relationships they share are depicted below.

The banker-customer relationship is that of a:

1. Debtor and Creditor,

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

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Discussed below are important banker-customer relationships.

1. Relationship of Debtor and Creditor

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

In case of savings / fixed deposit / current account (with credit balance), the banker is the debtor,
and the customer is the creditor. This is because the banker owes money to the customer. The
customer has the right to demand back his money whenever he wants it from the banker, and the
banker must repay the balance to the customer.

In case of loan / advance accounts, banker is the creditor, and the customer is the debtor because
the customer owes money to the banker. The banker can demand the repayment of loan / advance
on the due date, and the customer has to repay the debt.

A customer remains a creditor until there is credit balance in his account with the banker. A
customer (creditor) does not get any charge over the assets of the banker (debtor). The customer's
status is that of an unsecured creditor of the banker.

The debtor-creditor relationship of banker and customer differs from other commercial
debts in the following ways:

1) The creditor (the customer) must demand payment. On his own, the debtor (banker) will not
repay the debt. However, in case of fixed deposits, the bank must inform a customer about
maturity.

2) The creditor must demand the payment at the right time and place. The depositor or creditor
must demand the payment at the branch of the bank, where he has opened the account.
However, today, some banks allow payment at all their branches and ATM centres. The
depositor must demand the payment at the right time (during the working hours) and on the
date of maturity in the case of fixed deposits. Today, banks also allow pre-mature
withdrawals.

3) The creditor must make the demand for payment in a proper manner. The demand must be
in form of cheques; withdrawal slips, or pay order. Now-a-days, banks allow e-banking,
ATM, mobile-banking, etc.

2. Relationship of Pledger and Pledgee

The relationship between customer and banker can be that of Pledger and Pledgee. This happens
when customer pledges (promises) certain assets or security with the bank in order to get a loan.
In this case, the customer becomes the Pledger, and the bank becomes the Pledgee. Under this
agreement, the assets or security will remain with the bank until a customer repays the loan.

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3. Relationship of Licensor and Licensee
The relationship between banker and customer can be that of a Licensor and Licensee. This
happens when the banker gives a sale deposit locker to the customer. So, the banker will become
the Licensor, and the customer will become the Licensee.

4. Relationship of Bailor and Bailee

The relationship between banker and customer can be that of Bailor and Bailee.

1. Bailment is a contract for delivering goods by one party to another to be held in trust for a
specific period and returned when the purpose is ended.

2. Bailor is the party that delivers property to another.

3. Bailee is the party to whom the property is delivered.

So, when a customer gives a sealed box to the bank for safe keeping, the customer became the
bailor, and the bank became the bailee.

5. Relationship of Hypothecator and Hypothecatee

The relationship between customer and banker can be that of Hypothecator and Hypotheatee.
This happens when the customer hypothecates (pledges) certain movable or non-movable
property or assets with the banker in order to get a loan. In this case, the customer became the
Hypothecator, and the Banker became the Hypothecatee.

6. Relationship of Trustee and Beneficiary

A trustee holds property for the beneficiary, and the profit earned from this property belongs to
the beneficiary. If the customer deposits securities or valuables with the banker for safe custody,
banker becomes a trustee of his customer. The customer is the beneficiary so the ownership
remains with the customer.

7. Relationship of Agent and Principal

The banker acts as an agent of the customer (principal) by providing the following agency
services:

1) Buying and selling securities on his behalf,

2) Collection of cheques, dividends, bills or promissory notes on his behalf, and
3) Acting as a trustee, attorney, executor, correspondent or representative of a customer.

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Banker as an agent performs many other functions such as payment of insurance premium,
electricity and gas bills, handling tax problems, etc.

8. Relationship of Advisor and Client

When a customer invests in securities, the banker acts as an advisor. The advice can be given
officially or unofficially. While giving advice the banker has to take maximum care and caution.
Here, the banker is an Advisor, and the customer is a Client.

9. Other Relationships

Other miscellaneous banker-customer relationships are as follows:

Obligation to honour cheques : As long as there is sufficient balance in the account of the
customer, the banker must honour all his cheques. The cheques must be complete and in proper
order. They must be presented within six months from the date of issue. However, the banker can
refuse to honour the cheques only in certain cases.

Secrecy of customer's account : When a customer opens an account in a bank, the banker must
not give information about the customer's account to others.

Banker's right to claim incidental charges : A banker has a right to charge a commission,
interest or other charges for the various services given by him to the customer. For e.g. an
overdraft facility.

Law of limitation on bank deposits : Under the law of limitation, generally, a customer gives up
the right to recover the amount due at a banker if he has not operated his account since last 10
years.

Special Relationship:

The special features of relation between banker customer give rise to certain rights and obligations
which are mutual in character. The rights of the banker are the obligations
of the customer and vice versa.

Rights of a Banker
Following are some of the statutory- rights wtìich are entrusted upon a banker against the
customer:
The important featured the relationship between a banker and a customer is that a-banker may, in
the absence of an agreement to the contrary, retain as Šeairity fm a general
balance of accounts any goods. and securities bailed to him (Section 17 of Indian Contract
Act, .1872)

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(1) Right of General Lien

Lien has been defined as” the right to retain or detain the property of another person for non-
fulfillment of certain obligations”. Thus, lien may be called the right of a person in possession of
goods to retain them until the debts due to him have been paid. Lien confers upon the creditor the
right to retain the security and not to sell or use it. Once the obligations are cleared, it is an
obligation on the pait of the creditor to return back his goods immediately.

There are two kinds of lien viz., (a) General lien and (b) Particular lien. General lien enables a
person to retain possession of goods belonging to another person for a general balance of
account. Here the goods are not specific or particular.

This right of general lien can be exercised only by persons such as bankers, factors, wharfingers
and attorneys of high courts. A banker has a general lien which confers upon him
the right to retain securities deposited with him by a customer unless there is an express contract
or unless there are circumstances showing an implied contract inconsistent with
the lien (Brando Vs Barnett, 1864).

Particular lien is a specific lien which confers a right to retain those goods for which the amount
is to be paid.
Craftsman and mechanics enjoy specific lien. For example, a tailor has a particular lien for his
stitching charges.
The banker’s right of general lien is an implied pledge and can be exercised in respect of the
following:
(j) Bills, notes, cheques, bonds, coupons and dividend warrants belonging to the customer
deposited for collection.
(ii) All properties and securities belonging to a customer in the hands of the banker, except the
title deeds of immovable property which cannot be sold. But a banker has a right to
retain even the title deeds.

Exceptions to the Rights of Lien

However, a banker cannot exercise his rights of lien in certain cases:

(a) If the goods and securities have been entrusted to him as a trustee or as an agent of the
customer, the banker cannot daim the right of lien on those properties.

(b) When a customer sends a cheque or a bill with clear instruction to utilise its proceeds for a
specific purpose, the banker cannot exercise his right of lien on them.

(c) When some securities or documents are left with the banker by mistake or negligently, he
cannot exercise the right of lien over such securities or documents.

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(d) The banker has no lien on the credit balancç in the personal account of the partner for a debt
due from the partnership firm . The reason is that credit balance on the one hand and debit
balance on the other do not exist in the same capacity.

No Agreement for Creation of Lien Necessary : No agreement to create the right of general
lien for a banker is necessary under the Indian law because such an agreement is implied under
the terms of Section 171 of the Indian Contract Act, 1872 so long as the same is expressly
excluded. In order that the lien should arise, the following conditions should
have been fulfilled:
(a) The property must come into the hands of the banker in his capacity as a banker.
(b) There should be no entrustment for a special purpose inconsistent with the lien.

(c) The possession of the property must be lawfully obtained in his capacity as a banker and
(d) There must be no agreement inconsistent with the lien.
The above position is confirmed in the case Of Halesown Vs Westminster Bank Ltd, (1970).
What conditions should be fulfilled to exercise the right of set-off?
It is s statutory right which enables a banker to combine two accounts in the name of the same
customer and to adjust the debit balance in one account with the credit balance of the
other account. A banker may exercise the right of Set-off or combine the two accounts of a
customer not only in the same branch of the bank but also in the case of two or more accounts of
the same customer in different branches of the same bank, as was decided in the case of Garnett
Vs Mckervan (1872). However, this right of Set-off may be exercised subject
to the fulfillment of the following conditions:

(a) Both the accounts of the customer must be in the same name and in the same right. The same
right means that funds belonging to someone else but standing in the name of the account holder
should not be made available to satisfy his personal debts.

(b) The fuñds in a Trust account are deemed to be in different rights and therefore, a debit
balance in a personal account cannot be set-off against the credit balance in the Trust account
which may be in the name of the customer.

(c) This right of set-off may, however, be applicable to existing debts due from the customer and
not to contingent debts or liabilities falling due at a future date.

(d) It may be exercised by a bank only if there is no agreement to the contrary.

(e) The right of Set-off would be exercised better if the banker had given due notice of his
intention to set-off in order to avoid inviting the trouble of returning a cheque drawn on the
credit balance of one of them as was decided in the case of Greenhaigh Vs Union Bank of
Manchester (1924). Though the judgment in the above case is not considered as a binding
judgment, it is better a notice of intention to set-off is given by the banker in support of his
action.

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Classification of Banks

Based on types of banks and the products and services offered, the banks can be further classified
as banking industry sectors in the following four ways:

1. Retail Banking
2. Commercial Banking
3. Investment Banking
4. Central Banks

This classification into sectors is based on the customer profile and products and services offered
by each type of bank.

Banking Industry Sector 1: Retail Banking

Retail banks are the banks that cater to the needs of individuals and the most common format of
banking that we experience. They include deposit oriented banking institutions like saving banks,
loan associations, credit unions, thrifts, and other savings banks like postal.

Individuals are the targeted consumers for retail banking and banks offers variety of products and
services to this clientele including savings accounts, safe lockers, fixed & recurring deposits,
housing loans, consumer loans, personal loans and unsecured and revolving loans, such as credit
cards.

Banking Industry Sector 2: Commercial Banking:

This category represents corporate and business banking and includes commercial and foreign
banks. Commercial banks offer similar kind of products and services as retail banks, however, as
retail banks target individual consumers, commercial banks are focused on corporates and
commercial businesses. Products and services include consumer and commercial deposits,
business loans, mortgage and real estate loans, overseas operations, investment in high-grade
securities, and industrial loans.

Banking Industry Sector 3: Investment Banking:

The products and services of this category include managing portfolios of financial assets, trading
in securities, fixed income, commodity and currency, corporate advisory services for mergers and
acquisitions, corporate finance, and debt and equity underwriting. Trading activities include
trading both on behalf of clients or on the bank's own account.

Banking Industry Sector 4: Central Banks:

Central banks are bankers’ banks, and every country generally has one central bank that occupies
a central position in the banking system and acts as the highest financial authority. The main
function of this bank is to regulate and supervise the whole banking system in the country. It is a
banker's bank and controller of credit in the country.

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Types of Bank:

Banks can be classified in a variety of ways, according to applicable law and regulations, based on their
domicile, on basis of ownership, on basis of function and structure.

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Central Banks:

Every country has a Central Bank of its own generally regulated by a special act. Central banks
are bankers’ banks, and these banks trace their history from the Bank of England. It is called a
Central Bank because it occupies a central position in the banking system and acts as the highest
financial authority. The main function of this bank is to regulate and supervise the whole banking
system in the country. It is a banker's bank and controller of credit in the country. They guarantee
stable monetary and financial policy from country to country and play an important role in the
economy of the country. Typical functions include implementing monetary policy, managing
foreign exchange and gold reserves, making decisions regarding official interest rates, acting as
banker to the government and other banks, and regulating and supervising the banking industry.
These banks buy government debt, have a monopoly on the issuance of paper money, and often

2
 act as a lender of last resort to commercial banks. The Central bank of any country supervises
controls and regulates the activities of all the commercial banks of that country. It also acts as a
government banker. It controls and coordinates currency and credit policies of any country. In
India, Reserve Bank of India is the central bank. It is the apex bank and the statutory institution in
the money market of the country.

Scheduled & Non-Scheduled Banks:

Scheduled Banks in India are those banks which have been included in the Second Schedule of
Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule
which satisfy the criteria laid down vide section 42 (6) (a) of the Act. As on 30 June 1999, there
were 300 scheduled banks in India having a total network of 64,918 branches.

Scheduled banks can be further classified as:

1) Public Sector
2) Private Sector
3) Foreign Banks
4) Regional Rural Banks
5) Co-operative Banks

Commercial Banks:
Banking means accepting deposits of money from the public for the purpose of lending or
investment. Deposit-taking institutions take the form of commercial banks, when they use the
deposits for making commercial, real estate, and other loans. Commercial banks in modern
capitalist societies act as financial intermediaries, raising funds from depositors and lending the
same funds to borrowers. The commercial bank serves the interests of its depositors by utilizing
the funds collected in profitable ventures and in-return offers variety of services to its customers.
Services provided by commercial banks include, credit and debit cards, bank accounts, deposits
and loans, and deposit mobilization. They also provide secured and unsecured loans. These
commercial banks are the oldest institutions in banking history and generally have a wide
network of branches spread throughout the area of their operations. Commercial banks may
either be owned by the government or may be run in the private sector. Based on their ownership
structure they can be classified as:

1. Public Sector
2. Private Sector
3. Foreign Banks

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4. Regional Rural Banks

Public Sector Banks

Public sectors banks are those in which the government has a major stake and they usually need
to emphasize on social objectives than on profitability. The main objectives of public sector
banks is to ensure there is no monopoly and control of banking and financial services by few
individuals or business houses and to ensure compliance with regulations and promote the needs
of the underprivileged and weaker sections of society, cater to the needs of agriculture and other
priority sectors and prevent concentration of wealth and economic power. These banks play a
revolutionary role in lending, particularly to the priority sector, constituting of agriculture, small
scale industries and small businesses. In India, there are 27 public sector banks that have been
nationalized by the government to protect the interests of majority of the citizens. Some examples
are State Bank of India, Union Bank of India etc.

Public Sector banks can be further classified as:

1. SBI & Associates:

2. Other Nationalized Banks:
3. Other Public Sector Banks

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 SBI & Associates

State Bank of India is the oldest and the largest bank of India. State Bank of India (SBI) is a
multinational banking and financial services company based in India. It is a government-owned
Bank with its headquarters in Mumbai, Maharashtra. As of December 2012, it had 15,003
branches, including 157 foreign offices, making it the largest banking and financial services
company in India by assets.

Associates of State Bank of India:

SBI has five associate banks, which all use State Bank of India logo and "State Bank of" name,
followed by the regional headquarters' name. There has been a proposal to merge all the
associate banks into SBI to create a "mega bank" and streamline the group's operations which
has not taken shape till date. The current five associates are:

1. State Bank of Bikaner & Jaipur

2. State Bank of Hyderabad
3. State Bank of Mysore
4. State Bank of Patiala
5. State Bank of Travancore

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Nationalized Banks

Even after Independence, there were many banks which were held privately. At that point of
time, these private banks mostly concentrated on providing financial services. By the 1960s, the
Indian banking industry has become an important tool to facilitate the development of the Indian
economy. At the same time, it has emerged as a large employer, and a debate has ensured about
the possibility to nationalize the banking industry. Government of India issued an ordinance and
nationalized the 14 largest commercial banks with effect from the midnight of July 19, 1969.
Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies
(Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9
August, 1969. Second step of nationalization of 6 more commercial banks followed in 1980.
The stated reason for the nationalization was to give the government more control of credit
delivery. With the second step of nationalization, the GOI controlled around 91% of the banking
business in India. Later on, in the year 1993, the government merged New Bank of India with
Punjab National Bank. It was the only merger between nationalized banks and resulted in the
reduction of the number of nati

Other Public Sector Banks

There are a total of 27 Public Sector Banks in India. The can be further classified as nationalized
banks(19) + SBI(1) & SBI Associates(5)+ Other Public Sector Banks (2). The rest two are IDBI
Bank and Bharatiya Mahila Bank, which are categorized as other public sector banks.

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Private Sector Banks

The private-sector banks are banks where majority of their ownership is held by private
shareholders and not by the government. Private sector banks are owned, managed and
controlled by private promoters and they are free to operate as per market forces. To ensure their
safety and smooth functioning there are generally entry barriers and regulatory criteria set like
the minimum net worth etc. This ensures safety of public deposits entrusted with such
institutions and they are also regulated by guidelines issued by Central Banks from time to time.
Some examples of private sector banks in India are ICICI Bank, Yes Bank and Axis Bank.
Private sector banks in India can be classified as Private Indian Banks & Private Foreign Banks.
Private Indian banks can be further classified as old and new private sector banks. They are
defined below:

Old Private Sector Banks:

Not all private sector banks were nationalized in 1969, and 1980. The private banks which were
not nationalized are collectively known as the old private sector banks and include banks such as
The Jammu and Kashmir Bank Ltd., Lord Krishna Bank Ltd etc.

New Private Sector Banks:

Entry of private sector banks was however prohibited during the post-nationalization period. In
July 1993, as part of the banking reform process and as a measure to induce competition in the
banking sector, RBI permitted the private sector to enter into the banking system. This resulted
in the creation of a new set of private sector banks, which are collectively known as the new
private sector banks. As at end March, 2009 there were 7 new private sector banks and 15 old
private sector banks operating in India.

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Foreign Banks

Foreign banks have their registered and head offices in a foreign country but operate their
branches in India. The RBI permits these banks to operate either through branches; or through
wholly-owned subsidiaries. The primary activity of most foreign banks in India has been in the
corporate segment. However, some of the larger foreign banks have also made consumer
financing a significant part of their portfolios. These banks offer products such as automobile
finance, home loans, credit cards, household consumer finance etc. Foreign banks in India are
required to adhere to all banking regulations, including priority-sector lending norms as
applicable to domestic banks. In addition to the entry of the new private banks in the mid-90s,
the increased presence of foreign banks in India has also contributed to boosting competition in
the banking sector.

Regional Rural Banks

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The government of India set up Regional Rural Banks (RRBs) on October 2, 1975. These are the
banking organizations being operated in different states of India. They have been created to serve
the rural areas with banking and financial services. These banks support small and marginal
farmers by extending credit to them in rural areas. They cater to the credit needs of small and
marginal farmers, agricultural laborers, artisans and small entrepreneurs. The RRB's are
sponsored by scheduled banks, usually a nationalized commercial bank. Each RRB is owned
jointly by the Central Government, concerned State Government and a sponsoring public sector
commercial bank. However, RRB's may have branches set up for urban operations and their area
of operation may include urban areas too. They are also referred to as Grameen Banks/ Gramin
Banks. Over the years, the Government has introduced a number of measures of improve
viability and profitability of RRBs, one of them being the amalgamation of the RRBs of the same
sponsored bank within a State. This process of consolidation has resulted in a steep decline in the
total number of RRBs to 56, as compared to 196 at the end of March 2005.

Cooperative Banks

Cooperative banks are private sector banks. Co-operative banks are also mutual savings banks
meant essentially for providing cheap credit to their members. A cooperative bank is a voluntary
association of members for self-help and caters to their financial needs on a mutual basis. They
accept deposits and make mortgage and other types of loans to its members. These banks are also
subject to control and inspection by the Reserve Bank of India but they are generally governed
by a different statue, which is more flexible and easy to comply with compared to central bank
acts. In India, they are governed by the provisions of State Cooperative Societies Act. Another
type is credit unions, which are cooperative organizations that issue share certificates and make
member (consumer) and other loans. These institutions are an important source of rural credit
i.e., agricultural financing in India. Co-operative banks get their resources from issuance of their
shares, accepting public deposits and also taking loans from the state cooperative banks. They
also get short and medium term loans from the Reserve Bank of India. To enhance safety and
public confidence in cooperative banks, the Reserve Bank of India has extended the Credit
Guarantee Scheme to cooperative banks. Cooperative banks can be further classified as:

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1. State Co-operative Banks
2. Central Co-operative Banks
3. Primary Agricultural Credit Societies

State Co-operative Banks

At present, there are 31 state co-operative banks in India. State co-operative banks are part of the
short-term cooperative credit structure. These are registered and governed by state governments
under the respective co-operative societies acts of the concerned states. Since they are also
covered by the provisions of the Banking Regulation Act, 1949, they come under the control of
the RBI as well. These banks are also included in the Second Schedule of the RBI Act 1934.

Central Co-operative Banks

These banks are located at district headquarters or prominent towns. The accept deposits from
public, have a share capital and can take loans and advances from state co-operative banks. They
perform banking functions and fulfill the credit requirements of member societies.

Primary Agricultural Credit Societies

This is the smallest unit in the entire co-operative credit structure prevalent in India. It works at
village level and depends on central co-operative and state co-operative banks for its funding
requirements. We currently have more than 90000 credit societies operative in India.

Specialized Banks:
Specialized banks are dedicated banks that excel in a particular product, service or sector and
provide mission-based services to a section of society. Some examples of specialized banks are
industrial banks, land development banks, regional rural banks, foreign exchange banks, and
export-import banks etc. addressing specific needs of these unique areas. These banks provide
distinctive services or products like financial aid to industries, heavy turnkey projects and foreign
trade. Some specialized banks are discussed below:

Investment Banks:

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An investment bank is a financial institution that assists individuals, corporations and
governments in raising capital by underwriting and/or acting as the client's agent in the issuance
of securities. An investment bank may also assist companies involved in mergers and
acquisitions, and provide ancillary services such as market making, trading of derivatives, fixed
income instruments, foreign exchange, commodities, and equity securities. Investment banks aid
companies in acquiring funds and they provide advice for a wide range of transactions. These
banks also offer financial consulting services to companies and give advice on mergers and
acquisitions and management of public assets.

Industrial Banks:

Industrial banks target to promote rapid industrial development. They provide specialized
medium and long term loans to industrial sector backed by consultancy, supervision and
expertise. They support industrial growth by rendering other services like project identification,
preparation of project reports, providing technical advice and managerial services etc. They also
do underwriting of public issues by corporate sector or help industrial units get finance through
consortium or provide guarantee to other financial institutions. We have a number of such banks
in India like Industrial Development Bank of India (IDB), Industrial Finance Corporation of
India (IFCI), Industrial Credit and Investment Corporation of India Ltd. (ICICI), Industrial
Reconstruction Bank of India (IRBI), etc.

Retail Banks:

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Retail banks provide basic banking services to individual consumers. Examples include savings
accounts, recurring and fixed deposits and secured and unsecured loans. Products and services
offered by retail banks include safe deposit boxes, checks and savings accounting, certificates of
deposit (CDs), mortgages, consumer and car loans, personal credit cards etc. Retail Banks can be
further classified as:

Community Development Banks:

Provide services to underserved markets or populations, example Rural Banks in India, generally
incentivized and regulated by the government.

Private Banks:
Some private retail banks manage the assets of high-net-worth individuals and provide
specialized services like wealth management.

Savings Banks:
These are deposit oriented branches, also could be an extension counter of an existing bank
branch that accept savings deposits and provide basic banking.

Postal savings Banks:

Postal banks are the banks operated and controlled by National Postal Departments and provide
basic banking services to retail customers. These banks are very effective in small towns and
villages and provide financial inclusion to a section of society which otherwise would not have
been catered by other banks.

Land Development Banks:

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These banks support the development of agriculture and land. They provide long-term credit to
agriculture for purposes such as pump sets, tractors, digging up wells, land improvement,
etc. These banks get funding by issuing debentures, which are generally subscribed by the State
Bank Group, other commercial banks, LIC and Reserve Bank of India. These banks grant loans
to farmers against the security of their land.

Import – Export Banks:

Import-Export banks are generally setup by government like central banks to promote trade
activities in import and export. They support exporters and importers by providing financial
assistance, acting as principal financial institution, coordinating working of other institutions
engaged in export and import to facilitate the growth of international trade. They provide
traditional export finance and also do financing of export oriented units. The bank finances and
insures foreign purchases of goods for customers unable or unwilling to accept credit risk. Some
examples are Export-Import Bank of India (Exim Bank), Export–Import Bank of the United
States etc.

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Unit 3: BANKING OPERATIONS 18 Hrs
Collecting Banker: Meaning – Duties & Responsibilities of Collecting Banker: – Holder for
Value – Holder in Due Course - Statutory Protection to Collecting Banker
Paying Banker: Meaning – Precautions – Statutory Protection to the Paying Banker – Dishonor of
Cheques – Grounds of Dishonor – Consequences of wrongful dishonor of Cheques.
Lending Operations: Principles of Bank Lending – Kinds of lending facilities such as Loans,
Cash Credit, Overdraft, Bills Discounting, Letters of Credit – NPA: Meaning, circumstances &
impact – regulations of priority lending for commercial banks.

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Unit 3: BANKING OPERATIONS

Collecting Banker:

Meaning :Also called receiving banker, who collects on instruments like a cheque, draft or
bill of exchange, lodged with himself for the credit of his customer's account.

The collecting banker is a banker who collects cheques drawn upon other bankers for and
on behalf of his customer. He is called the collecting banker as he undertakes the work of
collection of cheques.

Duties & Responsibilities of 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 dishonor.
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 does not 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 case the 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 collecting banker 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 collecting banker 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 given to the customer. In the absence of such

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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 banker becomes 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 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 agent comes 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 its customers. 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 customer towards the bill.
In case a new customer comes, the banker should extend this facility to him with a trusted
reference.

When Client submits the Drafts for Collection, Banker acts in 2 capacities they are:
1. Holder of Value
2. Holder in due course

Holder for Value :A collecting banker becomes a holder for value if he has paid the value of the
cheque to the customer before the cheque is already collected.

A banker becomes a holder for value of a cheque as soon a he makes a payment to his customer,
i.e. when the cheque value is been paid before the cheque drawn upon another bank is collected
or realized. This service is rendered by the banker specially incase of outstation cheques
presented for collection which takes time and the customer is urgently in need of funds for his
business.

Collecting banker becomes a holder for value under following circumstances:

 When the banker makes cash payment in exchange of cheque drawn on another bank.

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 When the banker credits his customers account with the amount of the cheque as soon as it is
presented for collection and allowing him to draw against it.
 When the banker agrees to pay the amount of the cheque deposited for collection, partly by
cash and through account before it is collected.
 When the banker expressly agrees to reduce the amount of an existing loan or overdraft of
the customer, form the cheque deposited for collection and before it is collected.

In such circumstances the banker has the rights to,

 Receive the amount of the cheque in his own name and retain amount for his self, as the
banker has already paid the value of cheque.
 Recover the amount of the cheque from his customer in the event of dishonour and also if
his customer has defective title to the cheque accepted for collection.
 Conversion by the collecting banker: Sometimes a banker is charged for having wrongful
converted cheques to which his customer had no title or had defective title. Conversion
means wrongful or unlawful interference with another person’s property which is not
consistent with the owner’s right of possession. I.e., the banker is charges for conversion if
he collects cheques for a customer who has no title or defective title to the instrument.

As an agent of his customer for collection:

A collecting banker collects a cheque value draw on another banker, which is deposited by the
customer without making payment until it is realized, thus collecting banker is said to be acting
as an agent to his customer for collection of cheques.
A collecting banker acts as an Agent of the customer when the customer’s cheque is collected and
actually realized from the drawee banker. The customer is entitled to draw the amount from his
account when the amount of cheque has been credited to his account. Thus the bank is acting
as an agent of the customer and charges him the commission for collecting the amount from
outstation bank. If the cheque collected by the bank does not belong to his customer , he will
be held liable for ‘Conversion of money’.

1) Crossed Cheque 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. So, a banker when collecting an open cheque, in which his customer
has no title, becomes liable for conversion.
Protection can be claimed only for those cheques which are crossed before they
reach the hands of a banker. If a cheque is crossed only after it has reached the hands of a banker,
protection unders Sec. 131 cannot be claimed because it cannot be called a crossed cheque within
the meaning of the Sec. 131.

2. Collection 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. If he acts as a holder for value, he will acquire a
personal interest in them, and so he cannot claim protection under Sec. 131 . So also, if he

2
collects a cheque for a person other than a customer, he will not be protected. That is, if the
stranger for whom he collects a cheque has no title then the banker will be liable for conversion.

3. In good faith and without negligence:

In order to get the protection under the Section, a collecting banker must act in
good faith and without negligence. This applies to the whole transaction from the receipt of the
cheque from the customer to the receipt of the proceeds from the paying banker.

Precautions to be taken by collecting Banker:

Crossed Cheques only: To avail the protection under section 131, the collecting banker should
only accept crossed cheques. Open or bearer cheques generally do not require the service from
the collecting bank. (Drawee bank becomes the collecting bank) The banker cannot cross the
cheque afterwards, it must be a crossed cheque before it is presented at the counter for
encashment. Payment collected must be for a customer: Section 131 provides protection to the
banker if he is working as an agent of the banker and not a holder for value. If the banker is
having interest in the collection of cheque and is acting as a holder, i.e. not collecting cheque as
an agent then the banker cannot avail protection against the conversion

Liability of collecting banker as an agent of customer:

1. Collecting cheques with due care and presenting it to drawee banker in reasonable time.
2. Presenting the cheque to drawee banker on next working day in case if both the banks are
located in same area.
3. Sending the cheque through clearing house or post to drawee bank in case of outstation bank.
4. Taking due care and precaution for the interest of true owner of a cheque.
5. Verify the endorsement properly on order cheque.
6. Proper investigation of ‘Per Pro’ endorsements to avoid negligence on the part of collecting
banker and to avail statutory protection.
7. Providing the information of dishonor of the cheque to the customer without delay. In case of
failure, any consequent loss will have to born by bank.
8. Obtaining introduction of the customer, in case if the account is being open without proper
introduction.
9. In case of open cheque, the collecting banker should ask the drawee to cross the same to avail
the protection under section 131.
10. Verifying the detail in case of any doubt regarding the true ownership of the cheque.

Holder in Due Course: -

Definition of Holder:
As per Negotiable Instrument Act, 1881, a holder is a party who is entitled in his own name and
has legally obtained the possession of the negotiable instrument, i.e. bill, note or cheque, from a
party who transferred it, by delivery or endorsement, to recover the amount from the parties liable
to meet it.

2
The party transferring the negotiable instrument should be legally capable. It does not include the
someone who finds the lost instrument payable to bearer and the one who is in wrongful
possession of the negotiable instrument.

Definition of Holder in Due Course (HDC)

Holder in Due Course is defined as a holder who acquires the negotiable instrument in good faith
for consideration before it becomes due for payment and without any idea of a defective title of
the party who transfers the instrument to him. Therefore, a holder in due course.

Right of a holder in due course

1. Once a negotiable instrument passes through the hands of a holder in due course, it get
cleansed of all defects, unless he himself was a party to fraud or illegality committed regarding
the instrument (S. 53).
2. The maker of a note, or drawer of a bill or cheque, and no accepts of a bill for the honour of
the drawer, will be permitted to deny the validity of the instrument, as originally drawn, in a suit
thereon by a holder in due course.
3. In case of a suit by holder in due course, no maker of a note, or acceptor of a bill payable to
order, will be permitted to deny the validity of the payee’s capacity at the date of the note of a
bill to endorse the same (S.121).
4. Upon a suit by a holder in due course the acceptor cannot take the defence or accommodation
acceptance (S. 36).
5. The holder in due course gets a better title than that of the transferor of the instrument, even if
the title of the transferor was defective, the holder in due course will get a good title. But in case
of a forged instrument, even a holder in due course will get no title, as it is a case of total absence
of title and not a mere defect of title (S. 58).
6. If a note or a bill is negotiated to a holder in due course the liable parties cannot avoid liability
on the ground, that delivery of the instrument was conditional or for a special purpose (S. 46,
47).
7. When a bill is drawn payable to the drawer’s order on a fictitious name, and is endorsed by
the same hand as drawer’s signature, the acceptor cannot take the plea that the payee was a
fictitious person (S. 42).
8. Where a duly stamped and signed instrument is either left wholly blank or in complete in
some material requirements such as date, amount, payee’s name, and is delivered by one person
to another for the purpose of filling it up. If such a person or any holder fills up more amount,
than what he was authorized to do. The holder in due course of such an instrument can recover
the whole amount, provided the stamp affixed upon it is sufficient to cover the filled sum (S.20).

The essential qualifications of a “holder in due course” may be summed up as

follows:

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1. He must be a holder for valuable consideration. All the prerequisite of consideration should
be met so as to result in a valuable consideration.
2. That he became the holder of the instrument before its maturity. Thus the person who takes a
negotiable instrument after maturity does not become a holder in due course.
3. That the instrument should be complete and regular on the fact of it. Face here includes the
back also.
4. The last requirement is that the holder should have received the instrument in “good faith”.
There are two methods of ascertaining a person’s good faith, “subjective” and objective”. In
subjective test the Court has to see the holder’s own mind and the only question is “did he take
the instrument honestly”? In objective test, on the other hand, we have to go beyond the holder’s
mind and see whether he exercised as much care in taking the security as a reasonably careful
person ought to have done. Subjective test requires “honesty”, objective “due care and caution”.
Good faith indicates a person takes the instrument without sufficient cause to believe that any
defect existed in the title of the person from whom he derived his title.

Statutory protection to collecting banker:

A collecting banker is protected against the risk of conversion as follows according to section 131
“a banker who has in good faith and without negligence received payment for 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.” That is,

1. The cheque must be crossed cheque generally or specially to himself

2. The banker cannot avail protection in case of uncrossed cheque and uncrossed cheque
crossed to himself after having received it, if the title proves to be defective.
3. The banker is protected only when the payment is received for a customer, i.e. the banker
collects cheques on behalf of his customer as an agent.
4. Customer is on who has an account with the banker and the dealings must be in banking
nature only, then the banker is protected.
5. Banker can avail protection only when he acts as an agent for collection of his customer
cheques but not as its holder for value.
6. The payment must be in good faith and without negligence.
7. The banker is protected for crediting customer’s account before a cheque is collected and the
customer is allowed to withdraw the amount only after its realization if not, the banker
losses statutory protection.

In order to be called a ‘holder’ a person must satisfy the following two conditions : (Sec. 8).
1. He must be entitled to the possession of the instrument in his own Name. Actual possession of
the instrument is not essential. What is required is a right to possession under some legal or valid
title. He should be a ‘de jure holder’ and not necessarily ‘de facto holder’. It means that the
person must be named in the instrument as the payee or the indorsee, or he must be the bearer
thereof, if it is a bearer instrument. However, the heir of a deceased holder or any other person

2
becoming entitled by operation of law is a holder although he is not the payee or indorsee or
bearer thereof.
If a person is in possession of a negotiable instrument without having a right to possess the same
he cannot be called the holder. Thus, a thief, or a finder on the road, or an indorsee under a
forged endorsement, although may be having the possession of the instrument, cannot be called
its holder because he does not acquire legal title thereto and hence is not entitled in his own to
the possession thereof. Similarly, a beneficial owner claiming through a ‘benamidar’ in whose
favour the instrument had been made or drawn is not a holder because he is not entitled to the
possession in his own name and cannot by himself maintain an action on the instrument.
(2) He must be entitled to receive or recover the amount due there on from the parties liable
thereto. In order to be called a holder, besides being entitled to the possession of the instrument
in his own name, the person must also have the right to receive or recover the amount of the
instrument and give a valid discharge to the payer. Thus, one may be the bearer or the payee or
the indorsee of an instrument but he may not be called a holder if he is prohibited by a Court
order from receiving the amount due on the instrument.
Where a person obtains possession of an instrument by theft, fraud or under a forged
endorsement, he is not a holder and can not a holder and cannot claim payment from liable
parties.

Paying Banker:
Meaning:The banker on whom a cheque is drawn or the banker who is
required to pay the cheque drawn on him by a customer is called the paying
banker.

The banker who is liable to pay the value of a cheque of a customer as per the contract, when the
amount is due from him to the customer is called “Paying Banker” or “Drawee Bank.”

The payment to be made by him has arisen due to the contractual obligation. He is also called
drawee bank as the cheque is drawn on him.

The payment has to be made by the banker as per the legal obligation also. Section 31 of
Negotiable Instrument Act 1881, says that “the drawee of a cheque, having sufficient funds of
the drawer in his hands properly applicable to the payment of such a cheque, must pay the
cheque, when duly required to do so, and in default of such payment, must compensate the
drawer for any loss or damage caused by such default.” According to this provision, the drawee
of a cheque, i.e., paying banker has a legal obligations to honour the demand of the drawer or
customer. If he fails to pay the money held, he is liable for damages. Thus paying banker has
certain obligations to discharge

Precautions to be taken by the Paying Banker:

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1) Cheque should be in proper form: the cheque presented for payment should be in proper for
m.The banker should see that the cheque satisfies all the requirements of a valid cheque. Th
e cheque must be in printed form supplied by the banker.
2) Physical conditions of the cheque: the cheque should be in good physical condition. The in
strument should not be torn, cancelled.

3) Crossing of cheque: if the cheque is a crossed one, the payment cannot be made across the c
ounter. It as to pass through the account holder.
4) Office of drawing: the cheque should be presented for payment same bank where he as acco
unt. If the customer presents a cheque in a bank where he doesn’t hold an account, the man
ager cannot make payment.
5) Date of the cheque : the cheque should possess a date for payment and only on that date or
within three months from that date, the payment should be made.
6) Time of presentation: the cheque should be presented for payment during the banking hours
.
7) Amount: the amount of the cheque presented for payment has to be recorded in both words
and figures and they should tally with each other.
8) Material alteration: if material alteration is apparent the banker should get confirmation fro
m the drawer by obtaining full signature at the place of material alteration.
9) Signature of the drawer: the banker has to examine the signature of the drawer on the chequ
e before he makes payment with the specimen he has.
10) Endorsement
11) Legal Restrictions: in case of death, insolvency lunacy.

Statutory Protection to the Paying Banker :

1. Bearer Cheques : the drawee is discharged by payment in due course to the bearer thereof, not
with standing any endorsement whether in full or blank appearing there on. The banker shall be
free from any liability if the payment in respect of a bearer cheque is payment is due course.

3. Order Draft with Forged Endorsement: this Provision gives protection to the paying banker
regarding the draft having a forged endorsement. Again the conditions to be satisfied are:
The endorsement should be regular The payment should be made in due course.

3. Protection in respect of a crossed cheque: The paying banker has to make payment of the cros
sed cheque as per the instruction of the drawer refuted through the crossing

4. Materially Altered Cheques if material alteration is apparent the banker should get confirmati
on from the drawer by obtaining full signature at the place of material alteration.

Dishonor of Cheques:
Dishonouring of a Cheque u/s 138 :

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 A cheque is a type of bill of exchange and is a negotiable instrument. It is used for making
payments without any need to carry cash. A Dishonored Cheque is a Cheque that is not credited
by the Bank for numerous reasons including: The signature does not match; the account on which
the cheque is drawn has insufficient funds, the date is invalid – i.e. the presentation of the cheque
6 months from the date on the cheque.

– Grounds of Dishonor:

7 Reasons Why Your Cheque Is Dishonored

If your cheque has been bounced, then one of the following could possibly be a reason. Also
remember these reasons while writing a cheque next time to avoid dishonour of your cheque by
bank in future.

1. Insufficient Funds
Salaries sometimes reach late in accounts leaving insufficient funds in your account which may
lead to bouncing of cheque. While writing a cheque, make sure that you have sufficient funds in
your bank account.
2. Irregular Signature
Bank will not honour a cheque if the signature of the drawer on the cheque don’t match the
specimen signature available with the bank.
3. Alterations
Alterations on cheques are not allowed. Even if you sign the alteration to verify it, the cheque
will not be considered as valid and will not be honoured by the bank.
4. Post-dated Cheque
A post-dated cheque is the one on which the date which is mentioned is yet to come. Post-dated
cheques are to be presented to the banks on a future date. For instance, a cheque written on 15th
Jan 2016 bearing a date of 30th Jan 2016, is a post-dated cheque. A cheque will be dishonoured
if it is presented to the bank before the date mentioned on it.
5. Stale Cheque
If a cheque is presented to the bank for payment after three months from the date mentioned on
the cheque it is called stale cheque. After expiry of that period, the cheque will be dishounoured
and no payment will be made by banks against that cheque.
6. When Payment Is Stopped
If the drawer asks the bank to stop payment and not to pay for a cheque already issued, in that
case, the cheque will not be honoured by the bank.

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7. Frozen Account
If government or court has ordered that a person’s account has to be frozen, in such case, the
bank will dishonour all the cheques bearing that account number.

Consequences of wrongful dishonor of Cheques:

Law on the dishonour of cheque is mentioned from section 138 to 142 of the Negotiable
Instruments Act 1881 as amended by Negotiable Instruments ( Amendment )Act 2015 which is as
follows :

1. · A person must have drawn a cheque on an account maintained by him in a bank for
payment of a certain amount of money to another person from out of that account

2. · The cheque has been issued for the discharge in whole or in part of any debt or other
liability

3. · The cheque has been presented to the bank within the period of three months from the date
on which it is drawn or within the period of its validity whichever is earlier

4. · That the cheque is returned by the bank unpaid, either because of the amount of money
standing to the credit of the account id insufficient to honour the cheque or that it exceeds
the amount to be paid from that account by an agreement made with the bank

5. · The payee or the holder in due course of the cheque makes a demand of the said payment
by giving notice in writing to the drawer of the cheque within 30 days of the receipt of the
information by him from the bank regarding the return of the cheque as unpaid

6. · Drawee fails to make the payment within 15 days of the receipt of the said notice

When a cheque is presented in the concerned bank by the drawee within the stipulated time i.e
within the three months from the date of issue the drawee bank issue ‘ Check Return Memo’ to
the payee mentioning the reason for non – payment.

Lending Operations:

Meaning:LENDING BANK Lending of funds is the main business of a bank. The major
portion of bank fund is employed by way of lending Meaning of lending banker The lending
banker is the banker who lends funds to trade, commerce and industry etc to meet their
financial requirements.

Principles of Bank Lending:

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The business of lending is not without certain inherent risks largely depending on the borrowed
funds. A banker cannot afford to take undue risk in lending .

The principles are as below :

SAFETY : "Safety first" is when a banker lends, he must feel certain that the advance is safe;
that is, the money will definitely come back.

2) LIQUIDITY: Bankers advance loans on the security of such assets which are easily
marketable and convertible into cash at a short notice.

3)PROFITABILITY :A bank must earn sufficient profits. It should, therefore, invest in such
securities which will give a sure, fair and stable return on the funds invested.

4)PRODUCTIVE PURPOSES : The banker must closely inspect the purpose for which the
money is required, which should be productive so that the money not only remains safe but also
provides a definite source of repayment.

5)DIVERSIFICATION OF RISKS : Spreading the risks involved in lending, over a large number
of borrowers, over a large number of industries and areas, and over different types of securities.

6) SECURITY : Security is considered as an insurance or a cushion to fall back upon in case

of an emergency . It is only to provide against such contingencies that he takes security so
that he may realize it and reimburse himself if the well calculated and almost certain source
of repayment unexpectedly fails.

PRINCIPLE OF LENDING

A banker is always concerned with the money which he has lent, and to ensure that what he has lent is
repaid he has to follow certain cardinal principles of lending which have evolved over a period of time.
These lending principles are:

Principle of Safety of Funds:

Safety of funds is ensured when money lent comes back through repayment as per sanction terms. This
depends upon the willingness of the borrower to repay, his honesty and integrity and his financial
standing.

Principle of Profitability:

The objective of giving a loan is to earn sufficient income that will not only take care of the cost of money
raised but also the cost of operation and premium of loan default. The pricing of loan is done keeping
these aspects in mind.

Principle of Liquidity:

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If the money lent is not received back as per terms, a bank may face liquidity problem in meeting its
commitments to depositors. The other reason affecting liquidity is the account turning into NPA and
asset-liability mismatch due to leveraging of short-term sources for financing of long-term assets.

Principle of Purpose:

Traditionally, banks lend only for productive purposes so that enough surplus is generated by the activity
to repay the loan. Of late, banks have started granting loan for consumption purposes like loan for the
purchase of consumer goods, education, housing, etc where quantum of loan is decided upon by the
capacity of the borrower to repay.

Principle of Risk Spread:

This risk is managed by financing borrowers of different strata of society, residing in a wide geographical
area and engaged in different types of industries and trades.

Principle of Security:

Here, it is attempted to make an in-built arrangement in the loan process to fall back on, in case a
borrower turns willful defaulter or fails to repay due to failure of his business. For loans granted to
weaker sections of society or to tiny and village industry for social consideration, banks are prohibited
from insisting on security. All loans are usually backed by third-party guarantee and collateral security,
which banks insist upon before sanctioning loans.

While accepting security, the bank is required to satisfy itself that the security is marketable (can be sold
with least delay and / or inconvenience), stable (non-perishable), ascertainable (can be identified) and is
transferable (can be transferred to intended buyer both physically and legally). To further safeguard its
interest, the bank generally stipulates insurance against various risks, so that in case of any unforeseen
eventuality or loss of security, the money can be realized from the insurance company.

Secured and unsecured advances:

Section 5 (I) (n) in Banking Regulation Act, 1949

Defines unsecured loan as ‘Unsecured loan or advance means a loan or advance not so
secured.

Character
From your credit history, the lender attempts to determine if you possess the honesty and
reliability to repay the debt.

In pursuit of that assessment, they might ask the following questions:

1) Have you used credit before?

2) Do you pay your bills on time?
3) Do you have a good credit report?
4) Can you provide character references?

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5) How long have you lived at your present address?
6) How long have you been at your present job?

Capital
The lender will want to know if you have any valuable assets such as real estate, personal
property like an automobile, or savings and investments that could be used to repay credit debts if
income is unavailable.

They might ask these questions with regard to capital:

1. What property do you own that can secure the loan?

2. Do you have a savings account?
3. Do you have investments to use as collateral?

Capacity
This refers to your ability to repay the debt. The lender will look to see if you have been working
regularly in an occupation that is likely to provide enough income to support your credit use.

The following questions will help the lender determine this:

1) Do you have a steady job? If so, what is your salary?

2) How many other loan payments do you have?
3) What are your current living expenses?
4) What are your current debts?
5) How many dependents do you have?
6) Kinds of lending facilities such as:
7) Loans, Cash Credit, Overdraft, Bills Discounting, Letters of Credit – NPA: Meaning,
circumstances & impact – regulations of priority lending for commercial banks.

Section 5(n) in BANKING REGULATION ACT,1949

(n) “secured loan or advance” means a loan or advance made on the security of assets the
market value of which is not at any time less than the amount of such loan or advance; and
“unsecured loan or advance” means a loan or advance not so secured;

A secured loan is a loan given out by a financial institution wherein an asset is used as collateral
or security for the loan. For example, you can use your house, gold, etc., to avail a loan amount
that corresponds to the asset’s value. In the case of a secured loan, the bank or financial
institution that is dispensing the loan will hold on to the ownership deed of the asset until the
loan is paid off.

Examples of secured loans

1. Loan against property

2. Home equity line of credit
3. Car loan

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Important features of the Secured Loan
Let’s look at the most important characteristics of these loans –

 Asset backing: In every secured loan, the lender gets backing of the asset. As a result, a
loan from the lender side becomes secured.
 Lower interest rate: Since the loan is backed by the asset, the interest rate is much
lower. As a result, the borrower pays less interest in the case of a secured than in the case
of an unsecured loan.
 Huge amount: This loans are usually huge in amount. If the amount is not huge, why the
borrower would be ready to share his property for the collateral? In the case of a secured
loan, the amount of loan that’s why is much larger than an unsecured loan.
 Loan against the same thing the buyers are buying: Usually, the borrowers of secured
loans are those who are also buying a property. And in the most case like housing loans,
car loans, auto loans, the buyers let the lender use the house, the car, the auto respectively
for securing the secured loans. This arrangement helps the buyers buy the
asset/equipment easily and at the end of the day, the lender also remains secured.
 Secured business loan: In the case of business, the conditions of these loans are bit
different. Since the businesses have more money to pay off, the loan amount is usually
higher than housing loan, car loan. And a business lets the bank/financial institution use
one of their assets/machinery/furniture/raw materials as collaterals for the loans.

Kinds of lending facilities:

Loans:

Cash Credit:

Overdraft:

Bills Discounting:

Letters of Credit

NPA: Meaning, circumstances & impact – regulations of priority lending for commercial
banks.

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Unit 4: CUSTOMERS AND ACCOUNT HOLDERS 12Hrs
Types of Customers and Account Holders - Procedure and Practice in opening and operating
accounts
of different customers including Minors - Meaning & Operations of Joint Account Holders,
Partnership Firms, Joint Stock companies, Executors and Trustees, Clubs and Associations and
Joint
Hindu Undivided Family.

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Unit 5: BANKING INNOVATIONS 06 Hrs
New technology in Banking – E-services – Debit and Credit cards. Internet Banking, ATM,
Electronic Fund Transfer, MICR, RTGS, NEFT, DEMAT.