Module 4 Collecting Banker - Jain University- CMS V Semester Banking & Insurance

Objectives of the study:

Duties/ Responsibilities of the Collecting banker Functions Protection Negotiable Instruments

Meaning: Collecting banker means the banker who collects the cheques and bills on behalf of the customers. In other words, every crossed cheque is necessarily to be collected through any bank, which is known as collecting banker. As Sir John Paget has rightly said Looking at the restriction on the encashment of crossed cheques, save through a bank and the universal and legally encouraged use of crossed cheques the collection of such cheques must be regarded as an inherent part of bankers business. Definition of Collecting Banker: One of the principal functions of a banker is to receive instruments from his customer in order to collect the proceeds and credit them to his customer's account. When acting in this capacity he is called a "collecting banker". While collecting the cheques of a customer, the banker may act in the capacity of either (a) as a holder for value, or (b) as an agent of the customer. Functions of a collecting Banker While collecting his customer's cheques, a banker acts either: (i) Banker as Holder for value - When, to oblige a customer, a bank pays the proceeds of a cheque drawn upon another banker, before collection, he is treated as a holder for value. Similarly, where, a customer pays in a cheque and the banker expressly or impliedly permits him to draw against it before it is cleared, the banker will be regarded as a holder for value. (ii) Banker as Agent - A collecting banker acts, as an agent of the customer if he credits the customer's account with the amount of the cheque after it is actually realised A collecting banker becomes an holder for value in the following ways: (a) by lending further on the strength of the cheque; (b) by paying the amount of the cheque or part of it in cash or in account before it is cleared; (c) by agreeing that the customer may draw before the cheque is cleared; (d) by accepting the cheque in a reduction of an existing overdraft; (e) by giving cash over the counter for the cheque at the time it is deposited in for collection.

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Module 4 Collecting Banker - Jain University- CMS V Semester Banking & Insurance

Duties and Responsibilities of a Collecting Banker: The duties and responsibilities of a collecting banker are discussed below: 1. Due care and diligence in the collection of cheque. 2. Serving notice of dishonour. 3. Agent for collection. 4. Remittance of proceeds to the customer. 5. Collection of bill of exchange. 1. Due Care and Diligence in the Collection of Cheques: The collecting banker is bound to show due care and diligence in the collection of cheques presented to him. In case a cheque is entrusted with the banker for collection, he is expected to show it to the drawee banker within a reasonable time. According to Section 84 of the Negotiable Instruments Act, 1881, Whereas a cheque is not presented for payment within a reasonable time of its issue, and the drawer or person in whose account it is drawn had the right, at the time when presentment ought to have been made, as between himself and the banker, to have the cheque paid and suffers actual damage, through the delay, he is discharged to the extent of such damage, that is to say, to the extent to which such drawer or person is a creditor of the banker to a large amount than he would have been if such cheque had been paid.In case a collecting banker 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 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
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Module 4 Collecting Banker - Jain University- CMS V Semester Banking & Insurance
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 (customers) direction. Generally, the amount is credited to the account of the customer on the customers 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. Statutory Protection to Collecting Banker Section 131 of the Negotiable Instruments Act provides protection to a collecting banker who receives payment of a crossed cheque or draft on behalf of his customers. According to Section 131 of the Act a banker who has, in good faith and 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 protection provided by Section 131 is not absolute but qualified. A collecting banker can claim protection against conversion if the following conditions are fulfilled. 1. Good Faith and Without Negligence: Statutory protection is available to a collecting banker when he receives payment in good faith and without negligence. The phrase in good faith means honestly and without notice or interest of deceit or fraud and does necessarily require carefulness. Negligence means failure to exercise reasonable care. It is not for the customer or the true owner to prove negligence on the part of the banker. The burden of proving that he collected in good faith and without negligence is on the banker. The banker should have exercised reasonable care and deligence. What constitutes negligence depends upon facts of each case. Following are a few examples which constitute negligence: (a) Failure to obtain reference for a new customer at the time of opening the account. (b) Collection of cheques payable to trust accounts for crediting to personal accounts of a trustee. (c) Collecting for the private accounts of partners, cheques payable to the partnership firms.
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Module 4 Collecting Banker - Jain University- CMS V Semester Banking & Insurance
(d) Omission to verify the correctness of endorsements on cheques payable to order. (e) Failure to pay attention to the crossing particularly the not negotiable crossing. 2. Collection for a Customer: Statutory protection is available to a collecting banker if he collects on behalf of his customer only. If he collects for a stranger or noncustomer, he does not get such protection. As Jones aptly puts if duly crossed cheques are only protected in their collection, if handled for the customer. A bank cannot get protection when he collects a cheque as holder for value. In Great Western Railway Vs London and Country Bank it was held that the bank is entitled for protection as it received collection for an employee of the customer and not for the customer. 3. Acts as an Agent: A collecting banker must act as an agent of the customer in order to get protection. He must receive the payment as an agent of the customer and not as a holder under independent title. The banker as a holder for value is not competent to claim protection from liability in conversion. In case of forgery, the holder for value is liable to the true owner of the cheque. 4. Crossed Cheques: Statutory protection is available only in case of crossed cheques. It is not available in case uncrossed or open cheques because there is no need to collect them through a banker. Cheques, therefore, must be crossed prior to their presentment to the collecting banker for clearance. In other words, the crossing must have been made before it reached the hands of the banker for collection. If the cheque is crossed after it is received by the banker, protection is not available. Even drafts are covered by this protection. Banks should, therefore, ensure that only crossed cheques are accepted for collection. For this, customer should be educated/advised to cross the cheques before tendering for collections. Protection given to collecting banks i) The cheque must be crossed before it is presented for payment by the customer who presents it for collection. ii) An open cheque cannot be collected or when sent for collection after crossing by the collecting banker, he will not get statutory protection. iii) It is duty of the banker to ascertain the name of the husband and his employer when the banker has to open an account in the name of the married woman. It amounts to negligence when he opens the account without ascertaining the details of her husband. Protection given: iv) Wrong credit of customers private account of the proceeds of a cheque which should have been credited to the account in an official capacity of the customer. iv) Eg.An ordinary account holder presenting a cheque for a huge amount leads to suspicion and if the banker fails to make an enquiry it amounts to negligence. v) Wrong credit of customers private account of the proceeds of a cheque which should have been credited to the account in an official capacity of the customer.

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It is possible that the branches may be having un-introduced savings bank accounts, in which case sufficient care must be exercised to ensure that the cheques are accepted for collection only after the accounts are properly introduced. In collecting third party cheques, a banker should take extra precautions to safeguard the interests of the true owner. In the case of collection of bills, a banker does not get the statutory protection afforded to collection bankers by Section 131 of the Negotiable Instruments Act, 1881.The sole director of one-man company endorsed, in the name of the company, cheques drawn by third parties in favour of the company which is collected on his behalf and credited his account with their proceeds A cheque, which was made payable to a partnership firm, was endorsed by one partner on behalf of the firm and was paid into his account, his private account for collection with the bank. Negligence: The following acts would generally constitute negligence : (i) To collect cheques which contain irregular endorsements. It is the duty of the Bank to verify the correctness of endorsements on a cheque and to satisfy that the cheques are in order in all respects without any reason to doubt the title of the lodger. (ii) To collect cheques for customers, whose accounts are not properly introduced. (iii) To collect cheques crossed "A/c Payee" for an account other than that of the payee. However, there may be exceptional circumstances when a banker can collect a cheque crossed "A/c Payee" for an account other than that of the payee Presentment for Acceptance Presentment for acceptance is not necessary in case of a bill payable on demand or on a fixed date. However, it is always desirable to get a bill accepted as early as possible. The "A/c Payee" crossing is a direction to the collecting banker for appropriation in terms of the crossing. Generally, if a banker collects a bearer or order cheque crossed "A/c Payee" on account of a third party, who has no title to it, the banker would be guilty of negligence and, therefore, of conversion and would lose the protection under Section 131 of the Negotiable Instruments Act, 1881. The bank would be liable to the true owner of the cheque and not to the drawer of the cheque. The true owner of the cheque is the payee or the endorsee, when it is properly endorsed.Further, a cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. . Marking of Cheque The marking of cheque means a cheque which is marked or certified by the drawee banker,to the effect, that it is good for payment. The drawee bank certifies that the drawer of the cheque has sufficient balance in his account and the cheque will not be dishonoured due to lack of funds. Such a certificate is known as Marking of Cheques.

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Module 4 Collecting Banker - Jain University- CMS V Semester Banking & Insurance
Generally, the marking of a cheque is done by drawee in writing the words good for payment across one corner of the cheque, with the signature of the banks authorised official and the banks stamp. The marked cheques are very useful for businessmen as they can purchase the goods required by them, and the sellers will accept the marked cheques like currency-notes. It is to be noted here that marking post-dated cheques is not valid. Who Can Get the Cheque Marked? The marking of cheques may be done at the request of: (a) the drawer (b) the holder, and (c) another banker. (a) Marking at the Request of the Drawer: Whereas a cheque is marked by the Drawee bank at the request of the drawer, the latter cannot stop payment. In such case, the banker is bound to honour the cheque so marked by it. In case the drawer dies or becomes insane, the banker will have to make the payment because of the cheque having been marked at the request of the drawer. In such case, the banker has statutory protection in refusing other cheques of the customer if there are not sufficient funds in his account. (b) Marking at the Request of the Holder: The marking of a cheque at the request of the holder or payee does not virtually place any liability on the paying banker. It simply means that at the time of marking, the drawee banker has sufficient funds to the credit of the drawer to meet the cheque. In such circumstances, there is no guarantee to the holder that the amount of the cheque will be paid to him when he presents it for payment. If a customer has sufficient funds in his account and he presents a cheque for payment, the banker will honour the cheque immediately. (c) Marking at the Request of Another Banker: When a banker marks a cheque at the request of another banker for clearance purposes, the paying banker is undertaking an obligation to honour it. In actual practice, marking a cheque for clearance purposes entitles the paying banker to earmark the necessary funds to meet the cheque. Types of Negotiable Instruments: Negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Section 13 of the Negotiable Instruments Act, 1881 in India, a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer Functions of Negotiable Instruments Negotiable instruments serve the following functions: Substitute for money Credit device Record-keeping device
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Module 4 Collecting Banker - Jain University- CMS V Semester Banking & Insurance
Most purchases by businesses and many individuals are made by negotiable instruments instead of cash. According to Uniform Commercial Code 3-104(a), a negotiable instrument must: Be in writing Be signed by the maker or drawer Be an unconditional promise or order to pay State a fixed amount of money Not require any undertaking in addition to the payment of money Be payable on demand or at a definite time Be payable to order or to bearer Hundies Hundis refer to financial instruments evolved on the Indian sub-continent used in trade and credit transactions. They were used as remittance instruments (to transfer funds from one place to another), as credit instruments (to borrow money [IOUs]), for trade transactions (as bills of exchange). Technically, a Hundi is an unconditional order in writing made by a person directing another to pay a certain sum of money to a person named in the order. Hundis, being a part of the informal system have no legal status and are not covered under the Negotiable Instruments Act, 1881. Though normally regarded as bills of exchange, they were more often used as equivalents of cheques issued by indigenous bankers. HUNDIS Drawn in any local language in accordance with the custom of the place For transfer of money without its actual physical movement BILL OF EXCHANGE [Section 5] A 'bill of exchange' is defined by as an instrument in writing, containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of, a certain person, or to the bearer of the instrument. A Bill of Exchange is an instrument in writing, containing an unconditional order, signed by the maker (drawer), directing a certain person (drawee) to pay a certain sum of money only to a certain person (Payee) or to his order or bearer The Parties: The drawer (or customer of the bank) The drawee (the bank) The payee or bearer The Banks Paying Bank Collecting Bank

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A bill of exchange involves three parties, viz. the drawer, drawee and payee. Banks act as collecting agents on behalf of these parties. Section 131 of Negotiable Instruments Act gives protection to the collecting banker, if the crossed instruments are collected on behalf of a customer who is properly introduced and in good faith and without negligence Characteristic Features of a Bill of Exchange 1. It must be in writing. 2. It must contain an order to pay and not a promise or request. 3. The order must be unconditional. 4. There must be three parties, viz., drawer, drawee and payee. 5. The parties must be certain. 6. It must be signed by the drawer. 7. The sum payable must be certain or capable of being made certain. 8. The order must be to pay money and money alone. 9. It must be duly stamped as per the Indian Stamp Act. 10. Number, date and place are not essential. Bill of Exchange Writing, signed, accepted, stamped Unconditional order to pay Money only Certain party Certain sum Parties Drawer, Drawee & Payee

Draft Drafts: A draft is a three-party instrument that is an unconditional written order by one party that orders the second party to pay money to a third party. Drawer of a draft Drawee of a draft Payee of a draft Time Draft A draft payable at a designated future date Sight Draft A draft payable on sight.,Also called a demand draft. Trade Acceptance a sight draft that arises when credit is extended with the sale of goods Promissory note A written, dated and signed two-party instrument containing an unconditional promise by the maker to pay a definite sum of money to a payee on demand or at a specified future date.
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Module 4 Collecting Banker - Jain University- CMS V Semester Banking & Insurance
Promissory Note:In writing, signed, stamped, Unconditional promise to pay Money only,Certain party,On demand or certain date,Certain sum What is a Promissory Note? When you borrow money from a bank they make you sign a promissory note that sets out the terms or the loan, including the initial amount, rate and how long you have to pay it off. This is the same document, but to be used, perhaps, when someone wants to borrow money from you. Necessary information for Promissory Note: Name and addresses of all people named in the Note. The amount of the loan, interest rate and repayment information Any other document related to the loan such as a security agreement Parties to a Promissory Note 1. The Maker - the person who makes the note promising 'to pay the amount stated therein. 2. The Payee - the person to whom the amount of the note is payable. 3. The Holder - is either the original payee or any other person in whose favour the note been endorsed. What is Cheque? Cheque is an important negotiable instrument which can be transferred by mere hand delivery. Cheque is used to make safe and convenient payment. It is less risky and the danger of loss is minimised. Definition of a Cheque "Cheque is an instrument in writing containing an unconditional order, addressed to a banker, sign by the person who has deposited money with the banker, requiring him to pay on demand a certain sum of money only to or to the order of certain person or to the bearer of instrument."

Features of a Cheques Cheque is an instrument in writing: A cheque must be in writing. It can be written in ink pen, ball point pen, typed or even printed. Oral orders are not considered as cheques. Cheque contains an unconditional order: Every cheque contains an unconditional order issued by the customer to his bank. It does not contains a request for payment. A cheque containing conditional orders is dishonoured by the bank. Cheque is drawn by a customer on his bank: A cheque is always drawn on a specific bank mentioned therein. Cheque drawn by stranger are of no meaning. Cheque book facility is made available only to account holder who are supposed to maintain certain minimum balance in the account.

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Cheque must be signed by customer: A cheque must be signed by customer (Account holder) . Unsigned cheques or signed by persons other than customers are not regarded as cheque. Types of Cheques Cheques are of the following types: 1. Order Cheque: A cheque which is payable to a particular person or his order is called an order cheque. 2. Bearer Cheque: A cheque which is payable to a person whosoever bears, is called bearer cheque. 3. Blank Cheque: A cheque on which the drawer puts his signature and leaves all other columns blank is called a blank cheque. 4. Stale Cheque: The cheque which is more than six months old is a stale cheque. 5. Mutilated Cheque: If a cheque is torn into two or more pieces, it is termed as mutilated cheque. 6. Post Dated Cheque: If a cheque bears a date later than the date of issue, it is termed as post dated cheque. 7. Open Cheque: A cheque which has not been crossed is called an open cheque. Even if a cheque is crossed and subsequently the drawer has cancelled the crossing at the request of the payee and affixes his full signature with the words crossing cancelled pay cash, it becomes an open cheque. 8. Crossed Cheque: A cheque which carries too parallel transverse lines across the face of the cheque with or without the words I and co, is said to be crossed. 9. Gift Cheques: Gift cheques are used for offering presentations on occasions like birthday, weddings and such other situations. It is available in various denominations. 10. Travellers Cheques: It is an instrument issued by a bank for remittance of money from one place to another. Uses of a Cheque 1. If payment is made by means of a crossed cheque, receipt need not be obtained. 2. It is also convenient to receive money. 3. Payment can be made to a particular person by drawing up crossed Account payee cheques. 4. The cheque is near money and hence is endorsable from one person to another to settle the effects. 5. It minimizes the operation of legal tender money and the bankers can operate with a less amount of cash reserves. 6. No need of counting cash while making payment. 7. If a crossed cheque is lost, only a piece of paper is lost, i.e., the amount remains intact. 8. If payments are made by cheques an automatic record of the account is also maintained in the bankers books.
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Module 4 Collecting Banker - Jain University- CMS V Semester Banking & Insurance

Writing, signed Unconditional order Issued by specified banker, certain payee On demand Certain amount Must bear a date Major Parties in Cheque Transaction Cheque has 3 parties : Drawer, Drawee & Payee Drawer : A drawer is a person, who draws a cheque. Drawee : A drawee is a bank on whom a cheque is drawn. Payee : A payee is a person in whose favour a cheque is drawn. Meaning of Crossing Crossing of cheques means drawing two parallel transverse lines on the left hand top corner of a cheque. Sometimes, it is also done in the centre of the cheque. The Negotiable Instruments Act 1881, recognises crossing of cheques. A crossing is a direction to the paying banker that the cheques should be paid only to a banker and if the banker is named in the crossing, only to that banker. This ensures the safety of payment by means of cheques. The holder of the cheque is not allowed to cash it across the counter Cheque Truncation Solution is a big milestone in the Indian banking industry. It enables cheque clearing on the same day, reducing floating time available for funds. The technology, being implemented from February 1, 2010 in the National Capital Region, enables banks to send images instead of paper cheques for clearing and settlement. The US-based NCR Corp was mandated by the Reserve Bank of India to prepare the truncation project for the capital region. Instead of manually moving the cheque from one bank to another for payment, we would now use images. This will bring down the time required for processing. Earlier, it would take two to three days. Cheques would now be cleared on the same day or the next day, thereby bringing efficiency into the entire banking system. Types of Crossing Cheques can be crossed in two ways (1) General Crossing (2) Special Crossing. 1. General Crossing: Section 123 of the Negotiable Instruments Act 1881, defines a general crossing as follows: Where a cheque bears a cross its face an addition of the words & company or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse

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lines simply either with or without the words not negotiable that addition shall be deemed a crossing and the cheque shall be deemed to be crossed generally ENDORSEMENT Endorsement literally means writing on the back of the instrument. But under Negotiable Instruments Act, it means writing of a persons name on the back of the instrument or on any paper attached to it for the purpose of negotiation. The person who signs the instrument for the purpose of negotiation is called the endorser. The person to whom the instrument is endorsed or transferred is called the endorsee. Mere endorsement is not sufficient unless the instrument is delivered to the endorsee. The endorsement is completed by delivering the signed instrument to the endorsee. The purpose or object of endorsement is negotiation or transfer of the instrument Definition of Endorsement According to Section 15 of the Negotiable Instruments Act when the maker or holder of a negotiable instrument signs his name, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper attached thereto, he is said to have endorsed the instrument. Thus a person entitled to get money on a negotiable instrument can transfer his right to another. He may be a maker or holder of the instrument. If he wants to transfer his right to another, he must sign the instrument. The signature is usually made on the bank of the instrument. Essentials of a Valid Endorsement The following are the essentials of a valid endorsement: (a) Endorsement must be on the back or face of the instrument. If no space is left on the instrument, it must be made on a separate paper attached to it. (b) It should be made in ink. An endorsement in pencil or rubber stamp is invalid. (c) It must be made by the marker or holder of the instrument. A stranger cannot endorse it. (d) It must be signed by the endorser. (e) It must be completed by delivery of the instrument. (f) It must be an endorsement of the entire bill. A partial endorsement does not operate as a valid endorsement Types of Endorsement 1. Endorsement of blank: In the case of an endorsement in blank it means there will be no endorsee at all, only the endorser put his signature and then the cheques become payable to bearer is another name is general endorsement. Example: A bill is payable to swaroop . Swaroop signs on the back of the bill. 2. Endorsement of full: The blank endorsement can be converted into endorsement of full. Under section 49 of the negotiable instrument act, a holder of a cheque endorsed in blank may convert the endorsement in blank into full, by writing above the endorsers signature with a director to pay the instrument to another person or his order. example: a) Pay to x or order b) Pay to the order of X
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3. Restrictive endorsement: It prohibit or restrict further negotiation of the instrument or which express that it is only authority to deal with the instrument as directed. As an example if it is written on the instrument pay X only or pay X for the account of A or pay X or order for collection or the within must be credited to X or pay X for may use. 4. 4. Partial endorsement: A partial endorsement is one whose purpose is to transfer to the endorsee a part only of the amount payable. In terms of section 56 of the negotiable instrument act, the partial endorsement does not operate as a negotiable of the bill. 5. Example : the holder of a promissory for Rs 1000 writes on it pay B Rs 500 and endorse the note . 6. 5. Conditional endorsement: It excludes the liability of the endorser. Thus, if an endorser wants to get ride of his liability in the event of cheque being dishonored, he can do so by writing the words same recourse, or without recourse to me, after his endorsement. Here endorser excludes his liability.

Differences between a Bill of Exchange and Cheque All cheques are bills of exchange, but all bills of exchange are not cheques. The following are the main differences between a bill and a cheque: 1. Drawee: A cheque is always drawn on a banker. But a bill can be drawn on any person including a banker. 2. Payable on Demand: A cheque is always payable on demand. As a matter of fact, a cheque is meant for immediate payment. But a bill of exchange may be payable on demand or on the expiry of a fixed period. 3. Days of Grace: Three days of grace are allowed on bills payable after a certain period of time. No grace days are allowed in the case of a cheque since a cheque is payable on demand. 4. Acceptance: A bill of exchange requires acceptance of drawee. But a cheque requires no acceptance and is intended for immediate payment. 5. Payable to Bearer on Demand: A cheque can be made payable to bearer on demand, but a bill of exchange cannot be drawn payable to bearer on demand. 6. Notice of Dishonour: Notice of dishonour of a bill is necessary. No such notice is required in the case of a cheque 7. Stopping the Payment: The payment of cheque may be countermanded or stopped by the customer or drawer. But payment of a bill after acceptance cannot be countermanded or stopped by the drawer. 8. Crossing: A cheque can be crossed generally or specially. But a bill of exchange cannot be crossed. There is no provision for Crossing a bill of exchange. 9. Stamping: A bill of exchange must be properly stamped. But a cheque does not require any stamp. 10. Statutory Protection: A banker is given statutory protection with regard to payment of cheques in certain cases. No such protection is available to the drawee or acceptor of a bill of exchange.
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11. Discounting: A cheque cannot be discounted. But a bill can be discounted and rediscounted with the banks. 12. Circulation: A cheque is not intended for circulation but for immediate payment. But a bill is circulated by endorsing it. Certificates of Deposits Certificates of Deposits: A two-party negotiable instrument that is a special form of note created when a depositor deposits money at a financial institution in exchange for the institutions promise to pay back the amount of the deposit plus an agreed-upon rate of interest upon the expiration of a set time period agreed upon by the parties. The consumer who opens a CD may receive a passbook or paper certificate. It is now common for a CD to consist simply of a book entry and an item shown in the consumer's periodic bank statements; that is, there is usually no "certificate" as such. Commercial papers are unsecured money market instruments issued in the form of a promissory note As part of efforts to develop the money market, Commercial Paper (CP) was introduced in India in 1990 with a view to enabling highly rated corporate borrowers to diversify their sources of short- term borrowings and also provide an additional financial instrument to investors. Commercial paper is not usually backed by any form of collateral, so only firms with high-quality debt ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt issue. A major benefit of commercial paper is that it does not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months (270 days), making it a very cost-effective means of financing. The proceeds from this type of financing can only be used on current assets (inventories) and are not allowed to be used on fixed assets. Types of customers: Meaning and Definition of a Customer The term customer of a bank is not defined by law. In the ordinary language, a person who has an account in a bank is considered its customer.The term customer also presents some difficulty in the matter of definition. There is no statutory definition of the term either in India or in England. However, the legal decisions on the matter throw some light on the meaning of the term. In order to constitute a customer of a bank, two conditions are to be fulfilled: (a) There must be some recognizable course or habit of dealing between the customer and the banker. (b) The transactions must be in the form of regular banking business.

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The Bonafide Customer In order to constitute a person as a customer, he must satisfy the following conditions: 1. He must have an account with the bank i.e., saving bank account, current deposit account, or fixed deposit account. 2. The transactions between the banker and the customer should be of banking nature i.e., a person who approaches the banker for operating Safe Deposit Locker or purchasing travelers cheques is not a customer of the bank since such transactions do not come under the orbit of banking transactions. 3. Frequency of transactions is not quite necessary though anticipated. Special Types of Customers Special types of customers are those who are distinguished from other types of ordinary customers by some special features. Hence, they are called special types of customers. They are to be dealt with carefully while operating and opening the accounts. 1. Minors: Under the Indian law, a minor is a person who has not completed 18 years of age. The period of minority is extended to 21 years in case of guardian of this person or property is appointed by a court of law before he completes the age of 18 years According to Indian Contract Act, a minor is recognised as a highly incompetent party to enter into legal contracts and any contract entered into with a minor is not only invalid but voidable at the option of the minor. The law has specially protected a minor merely because his mental faculty has not fully developed and as such, he is likely to commit mistakes or even blunders which will affect his interests adversely. It is for this reason, the law has come to the rescue of a minor. A banker can very well open a bank account in the name of a minor. But the banker has to be careful to ensure that he does not open a current account. The conditions for opening and maintaining accounts in the names of the minors are: 1. The minor should have attained the age of discretion, i.e., he must be about 14 years of age. He must be capable of understanding what he does. 2. The minor should be able to read and write. 3. The minor should be properly introduced. The account opening form should be signed by the minor in the presence of a bank officer who should be able to identify the minor. The date of birth of the minor should be recorded in the account opening form. 4. Banks usually stipulate limits up to which deposits in such accounts can be accepted. 5. Amount tendered by the minor should as far as possible be in cash. 6. In case of time deposits, the amount should be paid in cash on maturity. Prepayment cannot be allowed. Periodical payment of interest on deposits may be made to the minor.
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Module 4 Collecting Banker - Jain University- CMS V Semester Banking & Insurance
According to Hindu Minority and Guardianship Act, 1956, a Guardian is one who is recognised by law to be one of the following: (a) Natural Guardian: According to Section 6 of the Hindu Minority and Guardianship Act, 1956, in case of a minor boy or an unmarried girl, his/her father and after him the mother shall be the natural guardian. In case of a married girl (minor),her husband shall be the natural guardian. The terms father or mother do not include step-father or stepmother. (b) Testamentary Guardian: A Hindu father, who is entitle to act as the natural guardian of his minor legitimate children may, by will, appoint a guardian for any of them in respect of the minors person or property. Such guardian acts after the death of the father or the mother. (c) Guardian Appointed by Court: A guardian may be appointed by the court under the Guardians and Wards Act, 1890, but the court shall not be authorised to appoint or declare a guardian of the person of a minor, if his father is alive and is not, in the opinion of the court, unfit to be guardian of the person of the minor. Similar is the case of a minor girl, whose husband is not, in the opinion of the court, unfit to be guardian of her person. Thus the father is exclusively entitled to be the guardian. 2.Lunatics: A lunatic or an insane person is one who, on account of mental derangement, is incapable of understanding his interests and thereby, arriving at rational judgement.Since a lunatic does not understand what is right and what is wrong, it is quite likely that the public may exploit the weakness of a lunatic to their advantage and thus deprive him of his legitimate claims. On account of this, the Indian Contract Act recognises that a lunatic is incompetent to enter into any contract and any such contract, if entered into, is not only invalid but voidable at the option of the lunatic. On coming to know of a customers insanity, the banker should stop all operations on the account and await a court order appointing a receiver. It would be dangerous to rely on hearsay information. The bank should take sufficient care to verify the information and should not stop the account unless it is fully satisfied about the correctness of the information. In case a person suffers from a temporary mental disorder, the banker must obtain a certificate from two medical officers regarding his mental soundness at the time of operation on the account 3. Drunkards: A drunkard is a person who on account of consumption of alcoholic drinks get himself intoxicated and thereby, loses the balance over his mental faculty and hence, is incapable of forming rational judgement. The law is quite considerable towards a person who is in drunken state. A lawful contract with such a person is invalid. This is for the simple reason that it is quite likely that the public may exploit the weakness of such a person to their advantage and thus, deprive him of his legitimate claims.

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Module 4 Collecting Banker - Jain University- CMS V Semester Banking & Insurance
A banker has to be very careful in dealing with such customers. There cannot be any objection by a banker to open an account. In case a customer approaches the banker for encashment of his cheque especially when he is drunk, the banker should not make immediate payment. This is because the customer may afterwards argue that the banker has not made payment at all. 4.Married Women: An account may be opened by the bank in the name of a married woman as she has the power to draw cheques and give valid discharge. At the time of opening an account in the name of a married woman, it is advisable to obtain the name and occupation of her husband and name of her employer, if any, and record the same to enable detection if the account is misused by the husband for crediting therein cheques drawn in favour of her employer. In case of an unmarried lady, the occupation of her father and name and address of her employer, if any, may be obtained and noted in the account opening form. If a lady customer requests the bankers to change the name of her account opened in her maiden name to her married name, the banker may do so after obtaining a written request from her. A fresh specimen signature has also to be obtained for records. While opening an account of a purdah lady, the bank obtains her signature on the account opening form duly attested by a responsible person known to the bank. It is advisable to have withdrawals also similarly attested. In view of practical difficulties involved, it would be better not to open accounts in the names of purdah ladies 5. Insolvents: When a person is unable to pay his debts in full, his property in certain circumstances is taken possession of by official receiver or official assignee, under orders of the court. He realises the debtors property and reliably distributes the proceeds amongst his creditors. Such a proceeding is called insolvency and the debtor is known as an insolvent.If an account holder becomes insolvent, his authority to the bank to pay cheques drawn by him is revoked and the balance in the account vests in the official receiver or official assignee. 6. Illiterate Persons: A person is said to be illiterate when he does not know to read and write. No current account should be opened in the name of an illiterate person. However, a savings bank account may be opened in the name of such a person. On the account opening form the bank should obtain his thumb mark in the presence of two persons known to the bank and the depositor. Withdrawal from the account by the account holder should be permitted after proper identification every time. The person who identifies the drawer must be known to the bank and he should preferably not be a member of the banks staff.

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Module 4 Collecting Banker - Jain University- CMS V Semester Banking & Insurance
7. Joint Stock Company: A joint stock company has been defined as an artificial person, invisible, intangible and existing only in contemplation of law. It has separate legal existence and it has a perpetual succession. The banker must satisfy himself about the following while opening an account in the name of a company: (a) Memorandum of Association: Memorandum of Association is the main document f the company, which embodies its constitution and is called the charter of the company. It gives details, especially regarding objects and capital of the company. A copy of this document should be insisted upon while opening an account. (b) Articles of Association: The Articles of Association contain the rules and regulations of the company regarding its internal management. It contains in detail all matters which are concerned with the conduct of day-to-day business of the company. The Articles of Association is also another document that a banker insists upon. It enables the banker to know the details of companys borrowing powers quantum, persons authorised to borrow etc. This will also enable the banker to understand whether the acts of the officers are within the orbit of the Companys Memorandum and Articles. (c) Certificate of Incorporation: This is another vital document the banker has to verify and insist upon receiving a copy. This document signifies that the company can commence its business activities as soon as it gets this certificate which is not the case with a public company. (d) Certificate to Commence Business: Only for public companies, the banker insists upon this document for verification. This document gives the clearance to public companies to commence their business activities. A company can borrow funds provided it has obtained this certificate. (e) Application Form and Copy of the Boards Resolution: A copy of the prescribed application form duly completed in all respects has to be submitted in the beginning and that too duly signed by the companys authorised officers. Along with this, a copy of the resolution passed at the meeting of the board regarding appointment of companys bankers is quite necessary to make everything lawful. (f) A Written Mandate: This is also another document that a banker insists upon. It contains all the details regarding operation, overdrawing of the account and giving security to the bank by the officers of the company. This document is useful to the bank for opening as well as for operating the account of the company. (g) Registration of Charges: Whenever a company borrows, it has to give certain assets by way of security and in case the banker accepts them as security, it has to be properly recorded in the companys books, register of charges and duly registered (h) Any Change in the Companys Constitution or Offices: Whenever there is any change in the constitution like Memorandum or in respect of companys offices, it has to be communicated in writing to the bank and it should not in any way affect the earlier contracts entered into by the company with the bank. To this effect, the bankers usually take an undertaking from the company
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Module 4 Collecting Banker - Jain University- CMS V Semester Banking & Insurance

9. Clubs, Associations and Educational Institutions: Clubs, Associations and Educational Institutions are non-trading institutions interested in serving noble causes of education, sports etc. The banker should observe the following precautions in dealing with them: o Certificate of registration in original, o A list of the Managing Committee members o Copies of resolutions electing them as Committee members duly certified by the Chairman .Bank keeps a copy of the above-mentioned document for its record. 10.Partnership Firm: A partnership is not regarded as an entity separate from the partners. The Indian Partnership Act, 1932, defines partnership as the relation between persons who have agreed to share the profits of the business, carried on by all or any of them acting for all. Partnership is formed or constituted on account of agreement between the partners and with the sole intention of earning and sharing profits in a particular ratio. Further, the business is carried on either by all the partners or some partners acting for all. The partners carry joint and several liability and the partnership does not posses any legal entity. A banker should take the following precautions while opening an account in the name of a partnership firm: (a) Application Form: A prescribed application form duly completed in all respects along with specimen signatures of the partners of firm is quite essential for operation of the account (b)Partnership Deed: The banker should, very carefully examine the partnership deed, which is the charter of the firm, to acquaint himself with the constitution and business of the firm. This will help him to know his position while advancing funds to the firm. (c) A Mandate: A mandate giving specific instructions to the banker regarding operations, over-drawing etc., is quite necessary. It will enable the banker to handle the accounts according to the needs of the firm. (d) Transfer of Funds: The banker has to be very careful to see that the funds belonging to the firm should not be credited to the personal or private accounts of the partners. (e) Sanctioning of Overdraft: While sanctioning funds by way of overdraft, the banker has to check up the partnership deed and examine the borrowing powers of the partners empowered to borrow and he can even ask for the financial statements of the previous years for information and perusal. 11. Joint Accounts: When two or more persons open an account jointly, it is called a joint account. The banker should take the following precautions in opening and dealing with a joint account: (a) The application for opening a joint account must be signed by all the persons intending to open a joint account.
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Module 4 Collecting Banker - Jain University- CMS V Semester Banking & Insurance
(b) A mandate containing name or names of persons authorised to operate an account. (c) The full name of the account must be given in all the documents furnished to the banker, even if the account is to be operated upon by one or a few of the joint account holders. (d) Banker must stop operating an account as soon as a notice of death, insolvency, insanity etc., of any one account holder is received. (e) The joint account holder, who is authorised to operate the joint account, himself alone cannot appoint an agent or attorney to operate the account on his behalf.Such attorney or agent may be appointed with the consent of all the joint account holders. (f) If all the persons are operating the account, then banker must see that any cheque drawn on him is duly signed by all. (g) Banker must stop making payments as soon as letter of revocation is obtained. (h) Banker must see that no loan or overdraft is granted without proper security. 12.Joint Hindu family is an undivided Hindu family which comprises of all male members descended from a common ancestor. They may be sons, grand sons and great grand sons, their wives and unmarried daughters. A joint, Hindu family is a family which consists of more than one male member, possesses ancestral property and carries on family business. Therefore, joint Hindu family is a legal institution. It is managed and represented in its dealings and transactions with others by the Kartha who is the head of the family. Other members of the family do not have this right to manage unless a particular member is given certain rights and responsibilities with common consent of the Kartha. The banker has to exercise greater care in dealing with this account. (a) He must get complete information about the joint Hindu family including the names of major and minor coparceners and get a declaration from the Kartha to this effect along with specimen signatures and signatures of all coparceners. (b) The account should be opened either in the personal name of the Kartha or in the name of the family business. (c) The documents should be signed by the Kartha and major coparceners. (d) The account should be operated on only by the Kartha and the authorised major coparceners. (e) While making advances, the banker should ascertain the purpose for which the loan is obtained and whether the loan is really needed by the joint Hindu family for business. 14.Trustees: According to the Indian Trusts Act, 1882, a trust is an obligation annexed to the ownership of property and arising out of a confidence reposed in an accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner. As per this definition, a trustee is a person in whom the author or settler reposes confidence and entrusts the management of his property for the benefit of a person or an organisation who is called beneficiary.

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Module 4 Collecting Banker - Jain University- CMS V Semester Banking & Insurance
A trust is usually formed by means of document called the Trust Deed. While opening an account in the names of persons in their capacity as trustees the banker should take the following precautions: (a) The banker should thoroughly examine the trust deed appointing the applicants as the trustees. (b) A trust deed which states the powers and functions of trustees must be obtained by the banker. (c) In case of two or more trustees, the banker should ask for clear instructions regarding the person or persons who shall operate the account. (d) In case of death or retirement of one or more trustees, banker must see the provision of the trust deed. (e) The banker should not allow the transfer of funds from trust account to the personal account of trustee (f) The banker should take all possible precautions to safeguard the interest of the beneficiaries of a trust, failing which he shall be liable to compensate the latter for any fraud on the part of the trustee. (g) The insolvency of a trustee does not affect the trust property and the creditors of the trustee cannot recover their claims from trust property. (h) A copy of the resolution passed in the meeting of trustees open the account should be obtained.

END

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