SYLLABUS
SEM:IV/EVEN
II B.COM
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Banking theory law and practice (CCR8C41) UNIT-I Introduction – Introduction – Origin Origin of banking – banking – Definition Definition- Banker and Customer relationship Gene ral and special types of customers – customers – Types Types of custome r – r – Types Types of deposits – deposits – – Gene Origin and growth of comme rcial Banks in India. UNIT-II Cheques – Cheques – Crossing – Crossing – Endorsement – Endorsement – Meaning – Meaning – Definition – Definition – Types – Types – Rules. Rules. UNIT-III Paying Banker – Banker – Duties – Duties – Statutory Statutory protection in due course.ollcting Banke rs – rs – duties - Statutory protection holder in due course – course – Concept Concept of negligence UNIT-IV Banking lending – lending – Principles Principles of Sound lending – lending – Secured Secured VS Unsecured advances – advances – Types Types of advances – advances – Advances Advances against various securities. UNIT – UNIT – V V E- Banking – Banking – Meaning – Meaning – Benefits – Benefits – Internet Internet Banking – Banking – Home Home banking – banking – Mobile banking – banking – Virtual Virtual Banking – Banking – E E- payments – payments – ATM ATM Card/ Biometric card Debit/credit Smart card, EFT, ECS (credit/debit) E-money – E-money – Electronic Electronic purse, Digital cash.
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UNIT – UNIT – I I BANK – BANK – MEANING MEANING Band have become a part and parcel of our life. Banks cater to the needs of agriculturists, industrialists, industrialists, traders and be all the other sections of the society. They accelerate the growth of economy. The word, „Bank is said to have derived from the French word „Banco , or „Bancus or „Banc or Banque which means a „bench . ‟
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According to Banking Regulation Act,-1949,therm banking means accepting for the purpose of lending or investment of deposits d eposits of money from the public repayable repa yable of demand (or) order (or) other ways. BANKER – BANKER – MEANING MEANING AND DEFINITION: A pe rson who in doing the banking business is called a banker. bank er. But, it is not at all easy to define the term „banker precisely because a banker performs multifarious functions. ‟
Bill of Exchange act of 1882 defines, “the term banker thus, banker includes a body of persons whether incorporated or not who carry on the the business of banking” SECTION 3 of the Negotiable instrument act defines that “the term banker includes a person or a corporation or a company acting as a banker” CUSTOMER – CUSTOMER – MEANING MEANING AND DEFINITION: There is no exact definition or meaning for customer. But Sir. John Paget defines that, “to constitute a customer there must be some recognizable course or habit of dealing in nature of regular banking business.” The following are the re quisites to constitute a person an a custome r, He must have some sort of an account Even a single transaction may constitute con stitute him as a customer Frequency of transaction is anticipated but not insisted upon. The dealings must be of a banking nature RELATIONSHIP BETWEEN BANKER AND CUSTOMER: The relationship fails under two broad categories, namely
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1. General relations hip 2. Special relationship
1. General relationship: I) II)
Primary Relationship Subsidiary Relationship
I)PRIMARY RELATIONSHIP (Debtor and creditor relationship) If customer s account shows a credit balance, the banker becomes a debtor and the customer becomes a creditor. ‟
If customer account shows a debit balance, the banker becomes a creditor and the customer becomes a debtor.
The banker is under an obligation to repay the debt as and when de manded by the custome r. The banker may use of deposited money of customer according to his discretion.
The following are the aspects in which the relationship between banker and customer differs from the ordinary debtors and creditor relationship.
1)DEMAND FOR REPAYMENT: Banker, being a debtor, has to repay the deposits whenever the re is a demand from the customer. Hence a banker is considered to be a privileged debtors. 2)DEMAND AT PROPER TIME AND PLACE: a. Time for making de mand: Payment must be made by customer during the normal working hours on any working day of the bank. Otherwise banker will be liable. b. Place for making payment: The demand for re payment must be made by the customer at the branch of the bank whe re he is keeping the account.
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3)DEMAND IN PROPER MANNER: The demand for repayme nt must be made through a cheque or any other written order as commonly used among the bankers. II)SUBSIDIARY RELATIONSHIP: Trustee and beneficiary relationship: A trustee is a person who holds assets and perform certain services for the benefits of another person called the beneficiary. Points regarding relationship are as follows; Ownership of the articles of deposited for safe custody. Such articles are not available for distribution
Position of banker as a trustee and debtor a)If special instructions given, banker will be trustee and debtor. b)If special instructions are not given, the banke r will be a debtor and not trustee c)When a cheque or bill is deposited for collection, before collection the banker will be trustee. d)When a cheque or bill is deposited for collection, after collection the banker will be debtor. 2.Agent and Principal Relationship: In all cases, the customer is the principal and the banke r is the agent. Collection of cheques and bills, purchase and sale of securities, payment of customer s dues like insurance premium etc. are the service done by banker. ‟
A nominal charges are provided by banker and a customer cannot compel a banker to provide these services. Special Relationship: [I] Obligations of a Banker:
a. Obligation to honor cheque: The banker has the obligation to honor cheques drawn on him by the customer. The following conditions subjects to obligations.
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b. Sufficiency of Funds: There must be sufficient funds of the customer in the hards of the banke r for honouring the cheques drawn by the former. c. Applicability of Funds: The funds in the account must be properly applicable to the payme nt of a cheque. d. Proper require ment for payment: The banker must honour the cheque only when he is duly re quired to pay. e. No Garnishee of Attachment order: A banke r may refuse payment on a customer s a/c whe n a Garnishee order has been issued against that account. ‟
2. Obligation to maintain secrecy of accounts: The banker has the obligation to maintain secrecy of custome r s account otherwise customer may to have supper loser. The following circumstances are those the banker is justified in disclosing secrecy of customer s account. ‟
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[i] Legal Necessity: A banker may disclose the secrecy of customer s account when required by ‟
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[ii] Banking practices: The practices and customer aiming the bankers may also permit the disclosure of information about the customer s account under the following circumstances. ‟
[a] Disclosure with customer s consent: ‟
A banker is justified in disclosing any information relating to his customer s account with the consent of the customer. Such consent may be express or implied. ‟
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[b] Disclosure with banker s own interest: ‟
A banker may disclose the customer s a/c in order to protect his own inte rest legally. ‟
[c] Disclosure on request by other banks: The exchange of information [i.e.] credit information to other banks must be confidential. [d] Disclosure with public inte rest: A Banker is justified to disclose info mating relating to his customer s a/c for public inte rest in some specific cases. ‟
[ii] Rights of a Banker: 1. Right of Lien: Lien is a right of a person who can retain the goods of another in his possession until a debt due to his is paid it is of two kinds: Particular Lien: Particular property retail. General Lien: Any property retain. 2.Right of set Off: It means that a debtor has the right to set off any amount due to his by a creditor making payment on the creditor s claim. ‟
3.Right of Appropriation: It arisen when a customer owes several debts to a banker and makes a payment which is not s ufficient to discharge all his debits. Provisions regarding payments of appropriations are as follows: [i] Appropriation by the debtors [sec.59]: The creditor must apply the money received from a debtor according to his choice when the debtor falls to exercise his option. [ii] Appropriation by the creditor[sec.60]: The creditor may apply the money received from a debtor according to his choice when the debtor Falls to exercise his option.
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[iii] No option of appropriation by the debtor and creditor: If neither party has given the option to appropriate the money, the appropriation shall be made to discharge debts in the order of time.
3. Right to charge inte rest, incidental charges, etc. A banker has the right to charge interest on the advances made by his. The banker may collect some amount from their custo mers as incidental charges an current accounts. Commercial Banks Banks that accept deposits form the general public and make short-term loans to custome rs and trade rs, are called „comme rcial banks . Such banks usually lend for a short pe riod of 3 to 6 months. A large majority of banks in India fall in the category of comme rcial banking. ‟
FOUNCTIONS OF COMMERCILA BANKS In the modern world, banks perform such a variety of functions that it is not possible to make all-inclusive list of their functions and services. However, some basic functions performe d by the bank discussed below. 1. Accepting Deposits: The first important function of a bank is to accept deposits from those who can save but cannot profitably utilize this saving the mselves. People consider it more rational to deposit their savings in a bank because by doing so they, on the one hand, earn interest, and on the other, avoid the danger of theft. To attract savings from all sorts of individuals, the banks maintain diffe rent types of accounts: (i)
Fixed Deposit Account. Money in these accounts is deposited for fixed period of time(say one,two,or five years) and cannot be withdrawn before the expiry of that period. The rate o inte rest on this account is higher than that on other types of deposits. The longe r the period, the higher will be the rate of interest. Fixed deposits are also called time deposits or time liabilities.
(ii)
Curre nt Deposit Account. These accounts are generally maintained by the traders and businessmen who have to make a numbe r of payme nts every day. Money form these accounts can be withdrawn in as ma ny times and in as much amount as desired by the depositors. Normally, no interest is paid on these accounts. Rather, the depositors have to pay certain incidental charges to the bank for the services rendered by it. Curre nt deposits are also called demand deposits or de mand liabilities/
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(iii)
Saving Deposit Account. The aim of these accounts is to encourage and mobilize small savings of the public. Certain restrictions are imposed on the depositors regarding the number of withdrawals and the amount to be with drawn in a given period. Cheque facility is provided to the depositors. Rate of inte rest paid on these deposits is low as co mpared to that on fixed deposits.
(iv)
Recurring Deposit Account. The purpose of these accounts is to encourage regular savings by the public, particularly by the fixed income group. Generally money in these accounts is deposited in monthly instalme nts for a fixed pe riod and is repaid to the depositors along with interest on maturity. The rate of interest on these deposits on these deposits is nearly the same as on fixed deposits.
(v)
Home Safe Account. Home safe account is another sche me aiming at promoting saving habits among the people. Under this scheme a safe is supplied to the de positor to keep it at home and to put his small savings in it. Periodically, the safe is taken to the bank whe re the amount of safe is credited to his account.
2. Advancing of loans. The second important function of a bank is advancing of loans to the public. After keeping ce rtain cas h reserves, the banks lend their deposits to the needy borrowe rs. Before advancing loans, the banks satisfy themselves about the credits worthness of the borrowe rs. Various types of loans granted by the banks are discussed below: (i)
Money at Call. Such loans are very short period loans and can be called back by the bank at a very short notice of say one day to fourteen days. These loans are generally made to other banks or financial institutions.
(ii)
Cash Credit. It is a type of loan which is given to the borrowe r against his current assets, such as shares, stocks, bonds, etc. such loans are not based on personal security. The bank opens the account in the name of the borrowe rs and allows him to withdraw bo rrowed money from time to time up to a certain limit as determined by the value of his current assets. Inte rest is charged only on the amount actually withdrawn form the account.
(iii)
Overdraft. Sometimes, the bank provides overdraft facilities to its customers though which they are allowe d to withdraw more than their deposits. Inte rest is charged from the custome rs on the overdrawn amount.
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(iv)
Discounting of Bills of Exchange. This is another popular type of lending by the modern banks. Through this method, a holder of a bill of exchange can get it discounted by the bank. In a bill of exchange the debtor accepts the bill drawn upon him by the creditor(i.e., holder of the bill) and agrees to pay the amount me ntioned on maturity. After making some marginal deductions(in the form of commission),the bank pays the value of the bill to the holder. When the bill of exchange matures, the bank gets its payment from the party which had accepted the bill. Thus, such a loan is self-liquidating.
(v)
Term Loans. The banks have also started advancing me dium-term loans. The maturity period for such loans is more than one year. The amount sanctioned is either paid or credited to the account of the borrowe r. The interest is charged on the entire amount of the loan and the loan is repaid either on maturity or in instalme nts.
3. Credit Creation. A unique function of the bank is to create credit. In fact, credit creation is the natural outcome of the process of advancing loan as adopted by the banks. When a bank advances a loan to its customer, it does not lend cash but opens an account in the borrowe r s name and credits the amount of loan to this account. Thus, whenever a bank grants a loan, it creates an equal amount of bank deposit. Creation of such deposits is called credit creation which results in a net increase in the money stock of the economy. Banks have the ability to create credit many times more than their deposits and this ability of multiple credit creation depends upon the cash-reserve ratio of the banks. ‟
4. Promoting Cheque System. Banks also render a very useful medium of exchange in the form of cheques. Through a cheque, the depositor directs the bankers to make payment to the payee. Cheque is the most developed credit instrument in the money market. In the modern business transactions, cheques have become mus h more convenient method of settling debts than the use of cash.
5. Agency Functions. Banks also perform ce rtain agency functions for and on behalf of their customers: (i) (ii)
(iii)
Remittance of Funds. Banks help their custome rs in transferring funds from one place to another through cheques, drafts, etc. Collection and Payment of Credit Instruments. Banks collect and pay various credit instruments like cheques, bills of exchange, promissory notes, etc. Execution of Standing Orders. Banks execute the standing instructions of their customers for making various periodic
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payments. They pay subscriptions, rents, insurance pre mia, etc. on behalf on their custome rs. (iv)
Purchasing and Sale of Securities. Banks undertake purchase and scale of various securities like shares, stocks, bonds, debentures etc. on behalf of their customers. Banks neithe r give any advice to their customers regarding these investments nor levy any charge on them for their service, but simply perform the function of a broker. (v) Collection of Divide nds on Shares. Banks collect dividends, interest on shares and debentures of their customers. (vi) Income Tax Consultancy. Banks may also employ income -tax experts to prepare income-tax returns for their custome rs and to help them to get refund of income-tax. (vii) Acting as Trustee and Executor. Banks preserve the wills of their customers and execute them after their death. (viii) Acting as Representative and Correspondent. Sometimes the banks act as representatives and correspondents of their customers. They get passports, traveller s tickets, books vehicles, plots for their customers and receive letters on their behalf. ‟
6. General Utility Function. In addition to agency services, the modern banks provide many general utility services as given below: (i)
Locker Facility. Bank provide locker facility to their customers. The customers can keep their valuables and important document in these lockers for safe custody.
(ii)
Traveller s cheques. Banks issue traveller s cheques to help their customers to travel without the fear of theft or loss of money. With this facility, the customers need not take the risk of carrying cash with them during their travels.
(iii)
Letter of Credit. Letters of credit statistics giving important information relating to industry, trade and commerce, money and banking. They also publish journals and bulletins containing research articles on economic and financial matters.
(iv)
Unde rwriting Securities. Banks underwrite the securities issued by the government, public or private bodies. Because of its full faith in banks, the public will not hesitate in buying securities carrying the signatures of a bank.
(v)
Gift Cheques. Some banks issue cheques of various denomination(say of Rs.11,21,31,51,101,etc.) to be used on auspicious occasions.
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(vi)
Acting as Reference. Banks may be referred for seeking information regarding the financial position, business reputation and respectability of their custome rs.
(vii)
Foreign Exchange Business. Banks also deal in the business of foreign curre ncies. Again, they may finance foreign trade by discounting foreign bills of exchange.
UNIT - II DEFINITION OF THE CHEQUE: Section 6 of the Negotiable Instruments Act defines a cheque as follows: “A bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on de mand.”
A better unde rstanding of the concept of cheque entails the definition of a Bill of Exchange, since, a cheque is nothing but a Bill of Exchange. THE SALIENT FEATURES OF A CHEQUE: 1. Instrument in writing: A cheque must necessarily be an instrument in writing Oral orders therefore do not constitute a cheque. The re is no specific rule regarding the writing material to be used. It may be done by means of a nib, a pencil, a type write r or any other printed characte r. 2. An unconditional order: A cheque is an orde r to pay and it is not a request. In the indigenous bill of exchange, words of courtesy with little monetary implications were generously employed. 3. On a s pecific banker: A cheque is always drawn only on a particular banke r. Usually the name and address of the banker is clearly printed on the cheque leaf itself.
4. Payee to be certain:
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In order that a cheque may be a valid one, it must be made payable to the order to the order of a certain specified person or to his agent or the bearer thereof. 5. A certain sum of money: A cheque is usually drawn for a definite sum of money. Indefiniteness has no place in monetary transactions. Any phrase like „less than Rupee One hundred only or „Above rupees two hundred only does not give a clear and concrete idea to the parties concerned and it will render the cheque invalid. ‟
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6. Payable on demand: A cheque is payable only on de mand. It is not necessary to use the word „on demand as in the case of a demand bill. The cheque is always payable on demand. ‟
7. To be signed by the drawer: The cheque must be signed by the drawe r, i.e. the customer. The drawe r normally puts his signature at the bottom right hand corner of the cheque. The signature must be that of the person in whose name the account is kept or his authorized agent. When the signature differs from the specimen or it is slightly different, the banker nee not honour the cheque. PAYING BANKER Meaning: The banke r who makes payment of a negotiable instrument is called a „Paying Banker PRECAUTIONS BY THE PAYING BANKER ‟
While making payme nt of a cheque, the banker has to be extremely vigilant while handling cheques on a payment basis. No doubt, in the absence of preexisting arrangements between the banker and th e custome r that is, in case, the account of the customer shows a debit balance, the banke r is under n obligation to pay such cheques. This regularity has to be examined, apart form the sufficiency of funds with regard to the following: 1. Crossing of the cheque 2. Drawing branch of the bank 3. Presentation of the cheque 4. Proper form of the cheque 5. Drawer s signature 6. Correctness of the amount stated both in words and figures 7. Material alte rations, if any 8. Whether the cheque is mutilated or torn 9. Balance in the customer s account 10. Time of presentation after its is drawn ‟
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11. If it is endorsed-its regularity 12. Other relevant items The banke r will have to examine all the points mentioned above very carefully. The banker s responsibility in the matter of honoring cheques is a difficult one. On the one hand, the ba nker may lose the money if he makes an irregular payme nt. On the other hand, he may be held liable for wrongful dishonor. Therefore the banker must carefully examine the cheques presented to him for payment. ‟
STATUTORY PROTECTION TO THE PAYING BANKER It is the duty of the paying banke r to honour the cheques issued by his custome rs as and when they are presented for payment. Payme nt should be made to the right person and also the banker should have the orders form his customer for debiting his account. But he cannot make detailed enquiries before making the payment. Therefore, the Act provides him some legal protection provided the banker fulfils the obligations laid down in the Act. Section 85,85A, and 128 of the Negotiable Instrume nts Act accord protection to the paying banker. A banker cannot be expected to know the signatures of all the persons who may deal with a cheque. All that he has to do is to see that the endorsements that are appearing on the cheque are regular. He is protected even if one of the endorsement is a forgery provided the endorsements appear to be regular and the banker has taken due care in paying the cheque. Section 85 of the Act provide rs:
1. Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course. 2. Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof notwithstanding any endorsement the reon, and notwithstanding that any such endorsement purports to restrict or exclude further negotiation. PAYM ENT IN DUE IN COURSE: “payment in due course means payment in accordance with the apparent tenor of the instrument, in good faith and without negligence to any person possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned.” This concept of payment in due course has three essential features: i. Apparent tenor of the instrument ii. Payment in good faith and without negligence iii. Payment to a person who is entitled to receive payment RIGHTS AND PRIVILAGES OF A HOLDER IN DUE COURSE:
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The following are some of the important rights an d privileges of a holder in due course:
He obtain a better title to the instrume nt than that of a true owne r. The defective title of the previous endorsers will not adversely affect his rights.
He can pass on a better title to others, since once the instrument passes through his hands, it is purged of all defects. Until the instrument is finally discharged, every party to that instrument is liable to him. Even the drawe r of a negotiable instrume nt cannot claim invalidity of the instrument against him. His claim cannot be denied on the ground that the payee has no capital to endorse. The principle of estoppel is applicable against the endorser to deny the capacity of previous parties.
Thus the title of a holde r in due course is supre me. RECOVERY OF MONEY PAID BY MISTAKES: Money can be recovered Money can not be recovered
Money can be recovered: Money received mala fide is recoverable. Money paid under a mistake of fact is irrecoverable Mistake between the party paying and the party receiving. Money can not be recovered Money paid under a mistake of law is not recoverable Money paid on a negotiable instrume nt to an innocent holde r is recoverable Money paid to an agent by mistake COLLECTING BANKER: A collecting banker is one who undertakes to collect the amount of a cheque for his customer from the paying banker. BANKER AS A HOLDER FOR VALUE In collecting a cheque the banker can act in two capacities namely;
As a holder for value As an agent for collection
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If he allows his customers to withdraw money before cheques paid in for collection are actually collected and credited. If any open cheque is accepted and the value is paid before collection If there is a reduction in the overdraft account of the customer before the cheque is collected and credited in the respective account. STATUTORY ROTECTION: According to sec.131 of the Act, “ a banke r who has in good faith and without negligence received payment for a custome r 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 owne r of the cheque, by reason only of having received such payment”. The above statutory protection is available to the collecting banker only if he fulfils the following conditions: The cheque he collects must be a crossed cheque He must collect such crossed cheques only for his customer as an agent and not as a holder for value He must collect such crossed cheques in good faith and without negligence.
BASIS OF NEGLIGENCE i. ii. iii. iv.
Gross negligence Negligence connected with the immediate collection of cheque Negligence unde r remote grounds Contributory negligence
DUTIES OF A COLLECTING BANKER: Exercise reasonable care and diligence in his collection work Present the cheque for collection without any delay Notice to customer in the case of dishonor of a cheque Present the bill for acceptance at an early date Present the bill for payme nt Protest and note a foreign bill for non-acceptance
UNIT IV
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LOANS AND ADVANCES: Profit is the pivot on which the entire business activit y rotates. Banking essentially a business dealing with money and credit. Like every other business activity banks are profit oriented. A bank invests its funds in many ways to earn income. The bulk of its income is derived from loans and advances. PRINCIPLES OF SOUND LENDING Safety Liquidity Profitability Security Purpose of the loan Sources of repayment Diversification of risks Recent concepts of sound lending SECURED AND UNSECURED ADVANCES: Loans and advances may be made eithe r on the personal security of the borrowe rs or on the security of some tangible assets. The forme r is called unsecured or clean or personal advances and the latter is called secured advances. Section 5(i) (n) of the Banking Regulation Act defines unsecured loan as unsecured loan or advance means a loan or advance not so secured, SECURED ADVANCES: Secured advances mean loans made on the security of tangible assets of land building, machinery goods and documents of title to goods. Such loans provide absolute safety to a banker by creating charge on the assets in favorable of him. The advances must be made against tangible security. The market value of the security must not be less than the amount of loan granted. Security may be classified as PRIMARY SECURITIES COLLATERAL SECURITY FORMS OF ADVANCES Loans Cash credit system Overdraft Bills purchased and discounted.
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TYPES OF CHEQUES: 1. Bearer Cheque: A cheque payable to a certain person or to the bearer is known as bearer cheque. 2. Orde r Cheque: A cheque payable to a certain person or to his order is an order cheque which can be negotiated by endorsement ( i.e. the transferor should sign his name) 3. Crossed cheque: A cheque is known as a crossed cheque when two parallel lines, with or without the words “& co”, “and company” etc. are drawn across the face of the cheque. A crossed cheque is payable through anothe r bank and not payable over the counte r. There are various types of crossing in practice, as given below a)General crossing: Where a cheque bears across its face an addition on the words “and company” or any abbreviation thereof (& CO) between two parallel transverse lines or two simple parallel transverse lines with or without the words “Not Negotiable”, it is known to be crossed generally. b)Special Crossing: Where a cheque bears across its face an addition of the name of a bank with or without the words “Not Negotiable”, the cheque is said to be crossed specially. c)Restrictive Crossing: Where a cheque bears across its face such words “Account Payee” or A/C Payee only along with general or special crossing it is known as Restrictive crossing or Account payee crossing. d)Not Negotiable Crossing: Where a cheque bears across its face the words “Not Negotiable” in addition to a general or special crossing, it is known as “Not Negotiable Crossing”. e)Stale Cheque: If a cheque is not presented for payme nt within a reasonable time, it becomes stale or out-of-date cheque.
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f)Mutilated Cheque: Mutilated cheques are those cheques which have been damaged or mutilated in course of circulation. Such cheques are not honored by the bankers, in general, for payment.
CROSSING OF CHEQUES MEANING OF CROSSING: Crossing of cheque means drawing two parallel transverse lines on the left hand top corner of a cheque. Crossing on a cheque is a direction to the paying banker by the drawer that payment should not be made across the counter. The payment on a crossed cheque can be collected only through a banke r. The refore, crossing protects the holder of the cheque and re duces the possibilities of fraud. OBJECT OF CROSSING: The main object or purpose of crossing is to ensure that the money should be trans mitted safely through the cheque and the amount of the cheque should reach the hands of the rightful owner. In case it is enchased by unauthorized persons, it helps to detect the parties to whom the amount has been paid. Therefore, crossing, in short, protects the holder of the cheque and reduces the possibilities of fraud. PARTIES ELIGIBLE TO CROSS THE CHEQUE: The following persons are eligible to cross a cheque: 1. Drawer of the cheque 2. Payee of the cheque 3. Holder of the cheque i)Drawe r: The drawe r of the cheque can make a general, special or restrictive crossing in a cheque before issuing it. ii)Holder: a) Where the cheque is uncrossed, the holder may cross it generally or specially. b) Where a cheque is crossed generally, the holde r may cross it specially. c) Where a cheque is crossed generally or specially, the holder may add the words „not negotiable . iii)Banker: Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to anothe r banker, or his agent for collection. (sec 125) A cheque can be crossing is to a banker as agent for collected cheques. ‟
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TYPES OF CROSSING There are two types of crossing: A)General Crossing
b)Special Crossing
A) General Crossing: According to Section 123 of the Negotiable Instruments Act, 1881. “where a cheque bears across its face an addition of the words “and company” or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines simply, either with or without the words “not negotiable”, that addition shall be deemed a crossing and the cheque shall be deemed to be crossed generally”. Significance of General Crossing: A crossed cheque should not be paid across the counter. Even if the payee of a crossed cheque is well known, the paying banker is directed to make payment only through another banker. b) Special Crossing: Section 124 defines special crossing as follows: Where a cheque bears across its face an addition of the name of a banker with or without the words “not negotiable”, that addition shall be deemed a crossing and the cheque shall be deemed to be crossed specially and to be crossed to that banker. Significance of Special crossing: Here the paying banker should make payment only to the particular banker named as a part of special crossing or to his agent for collection. Thus special crossing is safer than general crossing. 3)Not negotiable crossing: Section 130 of the Indian Negotiable Instrume nts Act lays down that “a person taking a cheque crossed generally or specially, bearing in eithe r case the words ,Not negotiable, shall not have and shall not be capable of giving, a better title to the cheque than that which the person form whom he took it in the first instance had . ‟
4)Cheque with Account Payee crossing: The inclusion of the words „Account Payee or „Payee s Account ensures greater safety to the cheque. The words „Account Payee are not recognized by Negotiable Instruments Act, but are in usage as a matter of practice. Such words are directions to the collecting bank, to collect the cheque to payee s account only. ‟
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DOUBLE CROSSING A specially crossed cheque is to be collected only through the banker specified therein. Therefore, a specially crossed cheque cannot be crossed specially again to another banke r that is a cheque cannot be crossed specially twice, because the very purpose of first special crossing is frustrated by the second one. --------------------------------For example, State Bank of India To Bank of India As agent for collection ---------------------------------It is necessary, that the words “as agent for collection” must be included in the special crossing.
OBLITERATING A CROSSING “Were a cheque is presented for payment which does not at the time of presentation appear to be crossed or to have had a crossing which has been obliterated, payment thereof by a banker liable to pay and paying the same according to the apparent tenor thereof at the time of payment and other wise in due course, shall discharge such banker form liability thereon and s uch payment shall not be questioned by reason of the cheque having been c rossed”. ADVANTAGES OF CROSSING 1. If payment is made by means of a crossed cheque, receipt need not be obtained. 2. „Account payee crossed cheque makes sure that only the particular person to whom the cheques are drawn can receive payment. 3. If a crossed made through cheques particularly crossed cheques enable an automatic record of the amount in the pass book. 4. Payments made through cheques particularly crossed cheques enable an automatic record of the amount in the pass book. ‟
ENDORSEMENT DEFINITION OF ENDORSEMENT When the maker of holder of a negotiable instrument signs the same otherwise than as such maker, for the purpose of negotiation on the back or face thereof or on a slip of paper annexed thereto……….he is said to endorse the same and is called the endorser. The person who signs the instruments for the purpose of negotiation is called the “endorser” and the person in whose favour instrument is transferred is called the “endorsee”. The endorser may sign either on the face or on the back of the negotiable instrument.
Rules for endorsement or essentials of a valid endorsement. The rules regarding valid endorsements are given below: 1. The endorsement must be written on the instrument itself or on a slip of paper annexed thereto. 2. It must be made by the holder of the instrument and not by a stranger. 3. It must be signed by the endorser. The endorser must sign his name in the same spellings as spearing on the face of the cheque. 4. An endorsement written on an allonge is deemed to be written o n the instrument itself. 5. The endorser should endorse the instrument in full and not in part. 6. If an instrume nt is payable to the order or two or more payees or endorsees who are not partners, all must endorse u nless the one endorsing has authority to endorse for all others. 7. Endorsement is complete only when the instrument is delivered. The delivery must be made by the endorser himself. If the delivery is conditional, endorsement is snot complete untill the condition is fulfilled. 8. Endorsements can be made by the endorser merely by singning his name on the instrume nt or by adding the name of a specified person to whom the endorser likes to endorse. KINDS OF ENDORSEMENTS 1. General or Blank Endorsement: If the endorse just puts his signature without specifying the name of the endorsee, the endorsement is said to be blank. The effect of such an endorsement makes the instrument payable to bearer even though originally payable to order and negotiation takes place at mere delivery. 2. Special of Full Endorsement: If the name of the endorsee is specified in whos e favour it is being endorsed, along with the signature of the endorser, the endorsement is called endorsement in full. 3. Conditional Endorsement: It is an endorsement under which the endorser lays down some condition to be fulfilled by the payee before making the payment. The type of endorsement involves a special proble m because, according to the definition of a cheque, it is an unconditional order payable on demand. 4. Scans Recourse Endorsement: In this case, the endorser makes it clear to the endorsee that the endorser would not be liable in case the instrument is dishonored. This means that further recourse cannot be taken against the endorser. For example: Pay to X without recourse to me.
5. Restrictive Endorsement: Restrictive endorsement, by the written words, restricts the right of further negotiation. In this case, an endorser specifies that the banker should pay the amount to a particular endorsee only. Example: Pay to X only. 6. Facultative Endorsement: The endorser waiving the right of „notice of dishonor of the instrument, while making the endorsement is called facultative to the endorser who has made such facultative endorsement. ‟
7. Partial Endorsement: If an endorsement is made for the part of the amount of the instrument, if is called “partial endorsement”. But such an endorsement is not valid. FORGED ENDORSEMENTS If an instrume nt is endorsed in full, it cannot be further endorsed or negotiated except by an instrume nt is negotiated by way of a forged endorsement, the endorses will acquire no title even though the instrument is purchased for value and it good faith, because the endorsements nullifies further negotiation. PAYING BANKER Meaning: The banke r who makes payment of a negotiable instrument is called a „Paying Banker PRECAUTIONS BY THE PAYING BANKER ‟
While making payme nt of a cheque, the banker has to be extremely vigilant while handling cheques on a payment basis. No doubt, in the absence of preexisting arrangements between the banker and th e custome r that is, in case, the account of the customer shows a debit balance, the banke r is under n obligation to pay such cheques. This regularity has to be examined, apart form the sufficiency of funds with regard to the following: 13. Crossing of the cheque
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14. Drawing branch of the bank 15. Presentation of the cheque 16. Proper form of the cheque 17. Drawer’s signature 18. Correctness of the amount stated both in words and figures 19. Material alterations, if any 20. Whether the cheque is mutilated or torn 21. Balance in the customer’s account 22. Time of presentation after its is drawn 23. If it is endorsed-its regularity 24. Other relevant items The banker will have to examine all the points mentioned above very carefully. The banker’s responsibility in the matter of honoring cheques is a difficult one. On the one hand, the banker may lose the money if he makes an irregular payment. On the other hand, he may be held liable for wrongful dishonor. Therefore the banker must carefully examine the cheques presented to him for payment. STATUTORY PROTECTION TO THE PAYING BANKER It is the duty of the paying banker to honour the cheques issued by his customers as and when they are presented for payment. Payment should be made to the right person and also the banker should have the orders form his customer for debiting his account. But he cannot make detailed enquiries before making the payment. Therefore, the Act provides him some legal protection provided the banker fulfils the obligations laid down in the Act. Section 85,85A, and 128 of the Negotiable Instruments Act accord protection to the paying banker. A banker cannot be expected to know the signatures of all the persons who may deal with a cheque. All that he has to do is to see that the endorsements that are appearing on the cheque are regular. He is protected even if one of the endorsement is a forgery provided the endorsements appear to be regular and the banker has taken due care in paying the cheque. Section 85 of the Act providers: 3. Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course. 4. Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof notwithstanding any endorsement thereon, and no twithstanding that any such endorsement purports to restrict or exclude further negotiation. PAYM ENT IN DUE IN COURSE: “payment in due course means payment in accordance with the apparent tenor of the instrument, in good faith and without negligence to any person possession thereof under circumstances which do not afford a reasonable ground for
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believing that he is not entitled to receive payment of the amount therein mentioned.” This concept of payment in due course has three essential features: iv. Apparent tenor of the instrument v. Payment in good faith and without negligence vi. Payment to a person who is entitled to receive payment RIGHTS AND PRIVILAGES OF A HOLDER IN DUE COURSE: The following are some of the important rights an d privileges of a holder in due course:
He obtain a better title to the instrument than that of a true owner. The defective title of the previous endorsers will not adversely affect his rights. He can pass on a better title to others, since once the instrument passes through his hands, it is purged of all defects. Until the instrument is finally discharged, every party to that instrument is liable to him. Even the drawer of a negotiable instrument cannot claim invalidity of the instrument against him.
His claim cannot be denied on the ground that the payee has no capital to endorse. The principle of estoppel is applicable against the endorser to deny the capacity of previous parties.
Thus the title of a holder in due course is supreme. RECOVERY OF MONEY PAID BY MISTAKES: Money can be recovered Money can not be recovered Money can be recovered: Money received mala fide is recoverable. Money paid under a mistake of fact is irrecoverable Mistake between the party paying and the party receiving. Money can not be recovered Money paid under a mistake of law is not recoverable Money paid on a negotiable instrument to an innocent holder is recoverable Money paid to an agent by mistake
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COLLECTING BANKER: A collecting banker is one who undertakes to collect the amount of a cheque for his customer from the paying banker. BANKER AS A HOLDER FOR VALUE In collecting a cheque the banker can act in two capacities namely;
As a holder for value As an agent for collection
If he allows his customers to withdraw money before cheques paid in for collection are actually collected and credited. If any open cheque is accepted and the value is paid before collection If there is a reduction in the overdraft account of the customer before the cheque is collected and credited in the respective account. STATUTORY ROTECTION: According to sec.131 of the Act, “ a banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself, shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque, by reason only of having received such payment”. The above statutory protection is available to the collecting banker only if he fulfils the following conditions: The cheque he collects must be a crossed cheque He must collect such crossed cheques only for his customer as an agent and not as a holder for value He must collect such crossed cheques in good faith and without negligence. BASIS OF NEGLIGENCE v. vi. vii. viii.
Gross negligence Negligence connected with the immediate collection of cheque Negligence under remote grounds Contributory negligence
DUTIES OF A COLLECTING BANKER: Exercise reasonable care and diligence in his collection work Present the cheque for collection without any delay Notice to customer in the case of dishonor of a cheque Present the bill for acceptance at an early date
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Present the bill for payment Protest and note a foreign bill for non-acceptance UNIT IV LOANS AND ADVANCES: Profit is the pivot on which the entire business activit y rotates. Banking essentially a business dealing with money and credit. Like every other business activity banks are profit oriented. A bank invests its funds in many ways to earn income. The bulk of its income is derived from loans and advances. PRINCIPLES OF SOUND LENDING Safety Liquidity Profitability Security Purpose of the loan Sources of repayment Diversification of risks Recent concepts of sound lending SECURED AND UNSECURED ADVANCES: Loans and advances may be made either on the personal security of the borrowers or on the security of some tangible assets. The former is called unsecured or clean or personal advances and the latter is called secured advances. Section 5(i) (n) of the Banking Regulation Act defines unsecured loan as unsecured loan or advance means a loan or advance not so secured, SECURED ADVANCES: Secured advances mean loans made on the security of tangible assets of land building, machinery goods and documents of title to goods. Such loans provide absolute safety to a banker by creating charge on the assets in favorable of him.
The advances must be made against tangible security. The market value of the security must not be less than the amount of loan granted. Security may be classified as PRIMARY SECURITIES COLLATERAL SECURITY
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FORMS OF ADVANCES Loans Cash credit system Overdraft Bills purchased and discounted. Unit – V E banking: In simple words banking done electronically is electronic b anking. According to the bank for international settlements (BGS) electronic banking refers to “ the provisions of retail and small value banking products and services through electronic channels”. Objectives: To handle the expanded customer base easily. To reduce the cost of handling transactions. To free the banks from the traditional restrictions on time and place of business The range of products and services offered by the e banking includes the following: Automated teller machines : It is an electronic device located in the banks or important places. By operating this machine, the customer can Draw money from his account whenever required: Deposit money into his account Get mini statement of account View the balance in his account. Request for a cheque book Transfer funds between different accounts in the same branch Electronic funds transfer (EFT): It facilitates the transfer of funds from any branch of a bank to any other branch of any bank in the shortest time. Personal computer banking: With PC banking, the customers can access information on their accounts through a dial-up connection with their bank. Internet banking: It is an improvement over personal computer bank ing. It is done over a highly accessible public network. Electronic clearing service: It includes the following Electronic credit clearing Electronic debit clearing Benefits of e-banking: Benefits to the customer: Any time banking: It provides 24 hours, 365 days a year service to the customer of the bank. Anywhere banking:
The customer can make some of the permitted transactions from his office or from his house or while travelling via mobile telephone. Cash free banking: It provides less risk and greater security to the cu stomer as they can avoid travelling with cash. Reduction in cost of transaction: It will bring down the cost of banking transactions to the customers over a period of time. Easy to make utility payments: With the use of electronic debit clearing, it is easy for the customer to make utility payments like electricity bills, telephone bills etc. On line purchase: It facilitates online purchase of goods and services including on-line payments for the same. Benefits to the banks: Competitive advantage: It provides innovative, security and competitive advantage to the banks. Unlimited network: It provides unlimited network to the banks by way of ATM. Lesser work load: The work load on banks can be reduced considerably by establishing centralized database. Lesser establishment cost: It reduces customer visits to the branches and thereby reduces the establishment costs of the bank. Better profitability: It provides the scope and potential for better profitability. DRAWBACKS OF E-BANKING: Difficulty in the adoption of technology Fear of technology High cost of technology Lack of preparedness Restrictions on usage of technology
