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Banking Law and Practice

Banking Law and Practice

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Published by: Anil Namoshe on May 20, 2013
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  • UNIT – II
  • UNIT – IV
  • UNIT – V


Banking theory law and practice UNIT-I Meaning and definition of banker – Meaning and definition of customer – general relationship between banker and customer – obligation to honour cheques – obligation to maintain secrecy of customer‟s accounts- Banker Rights –Lien ,Set off, Appropriation of payments.

UNIT-II Types of Deposits –current account ,savings account-fixed deposits – recurring deposit-fixed deposit receipts and its legal implications – general precautions for opening account. Pass book – meaning –legal aspects of entries in the pass book –effects of wrong entries favorable to customers – effects of wrong entries favorable to banker. Special types of customers ,general procedure for opening accounts in the name of minor, married woman , illiterate lunatic, partnership firm,joint stock company , non trading concern and join account.

UNIT-III Negotiable instruments : Definition – types – essential features of negotiable instruments. Cheque : meaning definition essentials of cheque vs Bill of exchange – proper drawing of cheques – Bouncing of cheques . offence under sec 138 of negotiable instruments ACT – MICR cheque material Alteration : meaning - effects of material alteration – banker‟s duty – immently alteration. Making : meaning significance cases. Crossing : meaning – forms of crossing – significance of various forms of crossing . Endorsement : meaning and definition – kinds and significanceregularly of endorsement.


UNIT-IV Paying Banker – Meaning – Duties of a paying banker – circumstances for dis honoring a cheque –Statutory protection under sec 85 of the negotiable instruments act. – Forgery of customer‟s singnature – payment in due course – holder in due course. Collecting banker : meaning – capacity of the collecting banker – duties of collecting banker – statutory protection concept of negligence – conversion. UNIT – V General principle of Banking lending –secured advances and unsecured advance secured vs unsecured advances – types of advances – loan cash credit . overdraft and Bill discounting – model of creating charge – Lien ,Pledge ,Mortgage and Hypothecatio . types of mortgage- connons of goods banking security.


UNIT – I BANK – MEANING Bank have become a part and parcel of our life. Banks cater to the needs of agriculturists, 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‟.

According to Banking Regulation Act,-1949,therm banking means accepting for the purpose of lending or investment of deposits of money from the public repayable of demand (or) order (or) other ways. BANKER – MEANING AND DEFINITION:

A person who in doing the banking business is called a banker. 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 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”


“to constitute a customer there must be some recognizable course or habit of dealing in nature of regular banking business. Special relationship 1. General relationship: I) II) Primary Relationship Subsidiary Relationship I)PRIMARY RELATIONSHIP (Debtor and creditor relationship) 4 . namely 1. He must have some sort of an account Even a single transaction may constitute him as a customer Frequency of transaction is anticipated but not insisted upon.CUSTOMER – MEANING AND DEFINITION: There is no exact definition or meaning for customer.” The following are the requisites to constitute a person an a customer. John Paget defines that. General relationship 2. The dealings must be of a banking nature RELATIONSHIP BETWEEN BANKER AND CUSTOMER: The relationship fails under two broad categories. But Sir.

If customer‟s account shows a credit balance. Hence a banker is considered to be a privileged debtors. The banker may use of deposited money of customer according to his discretion. has to repay the deposits whenever there is a demand from the customer. The following are the aspects in which the relationship between banker and customer differs from the ordinary debtors and creditor relationship. Place for making payment: The demand for repayment must be made by the customer at the branch of the bank where he is keeping the account. Otherwise banker will be liable. 1)DEMAND FOR REPAYMENT: Banker. . Time for making demand: Payment must be made by customer during the normal working hours on any working day of the bank. 2)DEMAND AT PROPER TIME AND PLACE: a. the banker becomes a creditor and the customer becomes a debtor. being a debtor. the banker becomes a debtor and the customer becomes a creditor. The banker is under an obligation to repay the debt as and when demanded by the customer. If customer account shows a debit balance. b.


banker will be trustee and debtor.The demand for repayment must be made through a cheque or any other written order as commonly used among the bankers. Such articles are not available for distribution Position of banker as a trustee and debtor a)If special instructions given. 6 . the banker will be a debtor and not trustee c)When a cheque or bill is deposited for collection.Agent and Principal Relationship: In all cases. b)If special instructions are not given. Points regarding relationship are as follows. d)When a cheque or bill is deposited for collection. Ownership of the articles of deposited for safe custody. 2. the customer is the principal and the banker is the agent. 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. before collection the banker will be trustee. after collection the banker will be debtor.

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. b. Sufficiency of Funds: There must be sufficient funds of the customer in the hards of the banker for honouring the cheques drawn by the former. c. Applicability of Funds: The funds in the account must be properly applicable to the payment of a cheque. d. Proper requirement for payment: The banker must honour the cheque only when he is duly required to pay. e. No Garnishee of Attachment order: A banker may refuse payment on a customer‟s a/c when 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 customer‟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.

[i] Legal Necessity: A banker may disclose the secrecy of customer‟s account when required by low.

[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.

[b] Disclosure with banker‟s own interest: A banker may disclose the customer‟s a/c in order to protect his own interest legally. [c] Disclosure on request by other banks: The exchange of information [ie] credit information to other banks must be confidential. [d] Disclosure with public interest: A Banker is justified to disclose info mating relating to his customer‟s a/c for public interest 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 sufficient 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. [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 interest, 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 customers as incidental charges an current accounts.


Initially all the accounts are open-ended with a deposit of money by the customer and rice this accounts are called deposit accounts. Recurring deposit accounts. Heavy with drawls are pomaded 10 . it is properly known as „time deposits‟ are „time liabilities‟. 3. Earning deposit accounts.UNIT – II Deposit Account : The relationship between the banker and his customer begins with the opening of account by the customer in a bank. Fixed deposit Account :A fixed deposit is one which is repayable after the expiry of a preen determined period fixed by the customer himself. and 4. Different types of deposit account :Deposit Accounts are classifier into caprices types. 2. A deposit Account can be opened for a period of more then three years and in that care the rate of interest remains the same level. ii) Savings deposit Accounts :A saving banks Account is mint for the people of the lower and middle classes who wish to save a part of this current incomes to meet tier futures needs and also intent to earned an income from this savings. This is restoration on with drawls in a month. Final deposit Accounts. Current accounts. 1. Hence. Some of fee classified are as follows. This deposits are not repayable on demand but they are with drabble subject to a period of notice.

Many people would not have sawed if this deposits had not b introduced. Money can deposited an withdrawn at any time. Even then. iii) Current deposit Accounts :A current Accounts is on Account which is opened for their convenueiens. Money can be withdrawn by only by means of cheques usually a hank does not allowed any interest an this account. Interest is not allowed with expirer of the deposit period unless it. Geneva the rate of interest and other terms and conditions on which the Bank accept is deposits are Regulated by the RBI. The number of with drawls is permitted is 50% per half year. This will enable the depositors to meet contingent expenses. Gendering agency and gendered utility services. iv) Recurring deposit Account : It is one of the farm of saving deposit. Opening and operating of fixed deposit Accounts :i) Rate of Interest :Interest at a specified Rate is admissible on the amount hold in the deposit account for the contract period. people come formed to deposit money on current Account because of two important pricilegeges which type can enjoy in a current A/c.only against prior notes gently. Interested will be payable by the Bankers on the deposits for the over due period 11 . ii) Payment of Interest :The banker usually pay interest quarterly or half yearly. Depositor save and deposit regularly even month a fixed installment so that they assured of the sizeable amount at a later period. This deposit works on the maxim „little drops of water make a big ocean‟. b) Other facilities like close of cheques gofer of money. a) over draft facilities.

20 Requires to be stamped. vii) Dictation of the at source : Section 194 (A) of the Income tax Act provinces for deduction of take at source from Interest on time deposit. iii) Payment before due date :Through a fixed deposits is payable at the expiry of the specified period. if the depositors so distress. Wit drawl of Interest or the principal through cheque of is not permitted through cheques is not permitted. iv) Renewable before maturity :The reserve Bank as permitted the Banker to renew an existing term deposit before maturate. vi) Exception from stamp duty :A fixed deposit Receipt. 12 . At the request of the customer the Banker may credit the amount of Interest of the principal who is savings or current Accounts from which he may with draw the same through cheques. a Banker demands the customer to sign an identity Bond with a guarantee. thought an Important document is excepted from stamp duty under the Indian stamp Act this is just to popularized the deposits Accounts other wise any Receipt exceeding Rs. generally.onyx the deposits Renewed. Banker also permit encased of such deposits even before he due date. 5000 in a financial gear. the courtiers may be asked to go though the court and seek its authorization. with out involving tee penalty provided. v) Loss of fixed deposit receipt :Were a deposit Receipt is lost. it will pretext the Banker against losses in future. payment by a Bank o co-operative security where it exits Rs. In extra ordinary cases. If a customer to want to with draw a fixed deposit before maturity be should for go 1% less then the Rake of applicable interest to the period for which deposit as remind in the Bank.

v) Safety against wrong full over draft granted :It a Banker grants an overdraft even by mistake. the customer mention is named. specimen signature and the name and signature of a person for References. which are filed alphabetically for Ready Referees. to a customer who is not prosperity introduction the risk of losing case it is not repaid by the 13 . iii) Specimen signature : Every new customer is excepted to give three on more specimen signatures. trust. occupations. i) Application on the presented from : The Request for opening a savings a or current A/c is made on the present from the Bank concerned Banks provide separate Application forms of opening savings and current Accounts for individual. Each bank maintains a signature Book for this purpose thus specimen signature protect the bankers against forgery. ii) Introductions of the application :It is always advisable on the part of the Banker to always the prospective customer to open an account only with a proper instruct the usual practice for the banker is to demand a letter of instructions from a responsible person know to both the particles. In opening of new Account. prater ship forms and companies. iv) Past port size photo graph :Now—days Banks incite upon the prospective customer‟s to abele their passport size photo graph on the application firm at the time of opening Accounts. usually they are obtained on cards.Opening of current and savings Account :Before opening a new Accounts a Banker should take certain prevention the following are the general precaution to taken by a Bank.

the specimen signature of the authorized person and the power delegated to him. The cheque may be in favor of the customer himself of in favor of third party. the Banker should demand a mandate from his customers in writing the man date contains the agreement between the two regarding he operation of the account. 500 with cheque and 250 for with out cheques facility for savings Bank accounts. calques. i) ii) iii) Cheque book. he must write the amount both in words and figures the book will dishonor a cheque if there is any defect in it. vi) Mad date writing :If a new party wants in accounts to be operated by come party else. ii) Pay – in – slip :The pay-in-slip contains with counter foils to be failed in by the deposit for himself on by his agent at the time of depositing cash. The minimum amount is Rs. 14 . vii) Amount in cash :After the above calamities are over the time of opening an account. Paying-in-slip book and Pass Book i) Cheque Book :The cheque Book contains Bank forms of cheques which are used as an Instrument to with draw money form the Bank. cheques etc into the bank and with dreams money according to his need on convenience so the Banker hands over to the customer.customer. In such a care the amount can be creative only is the customer is a respectable solvent party. Operating of current and savings account :Operating a bank means that the customer deposits for there sums of money.

i) Minor or infant :A person who has not completed 18 years of age is a minor. it is called a pass Book because it passes between the hands of customer and banker. Some different special types of customers are as follows. he remains manor till he completes his 21st year. According Indian counteract act 1872.draft. of his person are property appointed by the court before he completes 18th years . 15 . Special Types Of Banker’s Customers :When a Banker opens an account in the name of customer this arises a counteract between the two. A minor his not capably of entering into a valid counteract and a contact entered into by a minor his void. If refuels the customer‟s A/c in the banker‟s laager. society and Non trading associations. however. to the credit of his account. Though the size and define such slips by from bank to bank. This contract will be valued one only when the Both the parties are component to enter into counteracts. bills. A counteract for he supply of necessary of life to a minor. if a guardian. i) ii) iii) iv) v) vi) vii) viii) ix) Minor (or) infant Married women illiterate person lunatics executions. administrators and urinates Joint account Partnership form Joint stock companies Club. etc. and credit returns a Baker and his courtier. iii) Pass Book : The Pas Book is a small handy book which count ions the record of transitions in depts. a valid counteract..

While drawing cash from the bank such person should to the bank and get cash in the presents of a ditties in the office of the bank manager.ii) Married women :A Bank may open an account in the married women. The married women were allowed to open accounts only after getting consent of their husband moreover. since a lunatic does not understand what is right? and what is wrong? so. 4) Lunatic :Lunatic is a person of an unfound mind and hears he is incompetent into enter into a valid contract under the Indian counteract act. then the husband can be made liable for the debts in the follow cases. 3) Illiterate person :The bankers can open account in the name of illiterate person who cannot sign but banker can take his thump impression as a substitute for signature. When a person know as dictator. The banker should also take session potlograntr attended by a first class magistrate for the purpose of Indintification. 5) Executors. If she is authorized to act has on agent of other husband. all their became the properties of her husband on her husband. A married women cannot make her husband responsible for the debts incurred by her expect in some cases. she was not allowed to hold property in her hold name. the counter enter into him is void. a) If the loan taken with his contend of authority and. if the will of the testator does not mention the name of 16 . [maker of will] appoints another person for this purpose through a will. administers and trustee :Exactors and ammoniates are persons who are appointed to content the faired of a person after his death. b) If the debts is taken for the supply of necessary of life to the wife incase the husband defaults in supply in the same to her. 1872. he is know as a exactors.

how the account is to be apprised.the exactor. Unit – III NEGOTIABLE INSTRUMENTS: Many documents are rued in the mordent commercial world. In the assertion of a man date. Definitions: The negotiable stunts in India are governed by the Negotiable Instruments act of 1881. all joint holders must jointly opportunity the account. but. the Banker must get a clear man date in writing. While opening the joint Account. A partnership is „The relaxation between persons who have agreed to share the profit of a business. the court appoints the person. This Act does not define a negotiable Instruments reaction 13 of negotiable instrument simply states that @ A 17 . 6) Joint Accounts :A joint Account is one which is opened by two or more indigos. certain documents are freely used in commercial transfer which are called Negotiable Instruments. A trustee is a person in whose care he control of an estate is placed under an instrument of trust on trust deed. 1932. The Banker should get specific interactions regarding the operate of the account and the major of the powers delegated to the authorized person. 7) Partnership form :According to section 4 of the Indian partnership Act. For the purpose that is know as administered. carried by on by all (or) any of them acting for all‟. who are not partners in a farm (or) who are not joint trustee. (or) if the person appointed as executer dies (or) refuses to act. countering instructions as to.

18 .e. [i. iv) Right of action :A holder of a Negotiable instrument being a holder in due course gets the Right of action to such open the instrument in his own name. who had stolen it from somebody heals. He rescues the same for value. (or) cheque payable either to order (or) to Bearer‟.WILLS FEATURES OF NEGOTIABLE INSTRUMENTS :i) Free transfer :There is know formality to he complied with the transfer of Negotiable Instruments. The transferee is called the holder in due course and his interest in the instrument his well proceed by the law. ii) Free from defects :A person who takes Negotiable instrument from another person. But all transaxle Instruments are not negotiable instruments. It can be crassly either by more delivery or by endorsement and delivery… Transplant is on geranial feature of a amegable instrument . with out shrilling any notes of transform to the party who is liable on the instrument to pay. Negotiable instrument classifier into three. Bill of exchange. „ One the property in which is acquired by any one who takes it benefited and for value notwith-standing any defect of title in the person from where he took it? ---. Types of Negotiable instruments :In India. will have absolute and dispute little to instrument provide.C. viz.Negotiable Instrument means priming note. i) Promissory Note.JUSTICE K.. after paying its full value]. iii) No notes to Transfer :The transferor of a negotiable transmit can simply transfer the documents.

(or) „ acceptor‟ and the person to whom the amount is payable is called the payee‟ some times the drawer himself is the payee. „ i) Promissory Note :- promissory Note is all instrument in writing containing an unconditional under taking. righted by the Maker to pay a certain some of money only to (or) to the order of a certain person. 10. Specimen of a profiling Note : Rs. person on whom it is drawn is called „ drawee‟. According to section (4) of negotiable Instrument Act of 1881. signed by me matter. Rs.ii) iii) Bill of exchange Cheque. (or) to the Bearer of the Instrument‟. (or) to order of. the promise not count ions promise by the detour to the creditor to pay certain sum of money after a certain date. he is called the matter of the Instrument.000/Chennai-600 082 20th July 2007 Three months after date. A person or to the bearer of the Instrument@. else it is always drawn by the holder. for To Maha Stamp II Bill of exchange :According to section (S) A bill of exchange is a An installment in writing count ion an uncoundiral order. A bill of exchange continued an order from the creditor to the editor to pay a specified amount to a person mentioned therein. 10. Specimen of a ill o exchange. Thus. I promise to pay maha (or ) order the sum of Rupees ten thousand.000/Chennai-600 082 19 . The maker of a Bill is called the „drawer‟. Directing a certain person to pay a certain sum of Money only to.

preferably. Eany.000 days after x is retirement is not conditional. by the seller n his courtier. But promise (or) order to pay at a partum place (or) after a specie time (or) on the happening an event retuning to happen his moot conditioner.. for value revised. 4) A certain sum of money :The order have o the drawer of a Bill and the promise by the written of a promise note must be to pay a retain sum of money and not any thing heals. hence the drawee must be a sorting person. 1.7 promise to pay Rs. (ex. 20 . Accepted To G. 7th Cross.20th July 2007 Three months after date. Corn example :. Krishnagiri Features Of A Bill Of Exchange And Promises Note :i) Instrument in written :A bill of exchange are promisser note must be in writing only. ) foods and sectary. pay to Mr. ii) Un conditional order :The promise (or) order must be unconditinal if any condign are Stamp applied destroys the Negotiable crater of an instrument. 3) Drawn on a certain person :A Bill is always drawn on a certain person.Ram (or) order the sum of Rupees ten thousand. oral order (or) promise don‟t make a value instrument.

acceptance is essential and usually three days grace is allowed in the case of payment of a Bill. THE SALIENT FEATURES OF A CHEQUE: 21 .” A better understanding of the concept of cheque entails the definition of a Bill of Exchange. since. 6) Payable on demand (or) after certain date :A Bill (or) promise note may be payable on demand in which care it is called „ demand Bill‟ (or) it may be payable afar a refaced period and such bill are called „Time Bills‟. 7) Signature of the drawn (or) Promising :A bill of exchange (or) a provision note is valid only it if hears the signature of the drawn (or) the provision. Thus the payee his certain. In case of time bill. 8) Stamping of promission Notes and Bills :The Indian Stamp act 1899 requires that the promiser note and the Bill of exchange must be stamped. otherwise it cannot be addimtted in evidence. a cheque is nothing but a Bill of Exchange. however promise note are Bill of exchange or not the made payable to bazaar on demand. 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 demand.5) Payee to be certain:A bill or promising note is drawn payable to a certain person or to his order (or) to the Berea of the instrument.

In the indigenous bill of exchange. 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. a pencil. A certain sum of money: A cheque is usually drawn for a definite sum of money. There is no specific rule regarding the writing material to be used. An unconditional order: A cheque is an order to pay and it is not a request.1. On a specific banker: A cheque is always drawn only on a particular banker. Indefiniteness has no place in monetary transactions. 3. words of courtesy with little monetary implications were generously employed. Instrument in writing: A cheque must necessarily be an instrument in writing Oral orders therefore do not constitute a cheque. it must be made payable to the order to the order of a certain specified person or to his agent or the bearer thereof. 2. Usually the name and address of the banker is clearly printed on the cheque leaf itself. Payee to be certain: In order that a cheque may be a valid one. It may be done by means of a nib. a type writer or any other printed character. Payable on demand: 22 . 4. 6. 5.

The cheque is always payable on demand. When the signature differs from the specimen or it is slightly different. 23 . the banker nee not honour the cheque. The drawer normally puts his signature at the bottom right hand corner of the cheque.A cheque is payable only on demand. It is not necessary to use the word „on demand‟ as in the case of a demand bill.e. 7. the customer. To be signed by the drawer: The cheque must be signed by the drawer. i. The signature must be that of the person in whose name the account is kept or his authorized agent.

Bearer Cheque: A cheque payable to a certain person or to the bearer is known as bearer cheque.TYPES OF CHEQUES: 1. 24 . A crossed cheque is payable through another bank and not payable over the counter. Crossed cheque: A cheque is known as a crossed cheque when two parallel lines. 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”. 2. “and company” etc. the cheque is said to be crossed specially. the transferor should sign his name) 3. are drawn across the face of the cheque. 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”. it is known to be crossed generally. There are various types of crossing in practice. Order Cheque: A cheque payable to a certain person or to his order is an order cheque which can be negotiated by endorsement ( i. with or without the words “& co”.e.

Crossing on a cheque is a direction to the paying banker by the drawer that payment should not be made across the counter. Therefore. d)Not Negotiable Crossing: Where a cheque bears across its face the words “Not Negotiable” in addition to a general or special crossing. f)Mutilated Cheque: Mutilated cheques are those cheques which have been damaged or mutilated in course of circulation. it becomes stale or out-of-date cheque. 25 . it is known as “Not Negotiable Crossing”. 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. Such cheques are not honored by the bankers. in general. The payment on a crossed cheque can be collected only through a banker. crossing protects the holder of the cheque and reduces the possibilities of fraud.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. e)Stale Cheque: If a cheque is not presented for payment within a reasonable time.

iii)Banker: Where a cheque is crossed specially. In case it is enchased by unauthorized persons. the holder may cross it specially. crossing.OBJECT OF CROSSING: The main object or purpose of crossing is to ensure that the money should be transmitted safely through the cheque and the amount of the cheque should reach the hands of the rightful owner. the holder may add the words „not negotiable‟. c) Where a cheque is crossed generally or specially. the banker to whom it is crossed may again cross it specially to another banker. protects the holder of the cheque and reduces the possibilities of fraud. Therefore. the holder may cross it generally or 26 . ii)Holder: a) Where the cheque specially. Holder of the cheque i)Drawer: The drawer of the cheque can make a general. in short. b) Where a cheque is crossed generally. (sec 125) A cheque can be crossing is to a banker as agent for collection. Drawer of the cheque 2. Payee of the cheque 3. or his agent for collection. is uncrossed. special or restrictive crossing in a cheque before issuing it. PARTIES ELIGIBLE TO CROSS THE CHEQUE: The following persons are eligible to cross a cheque: 1. it helps to detect the parties to whom the amount has been paid.

1881. The following are examples of general crossing: 1) 2) 3) 4) 5) 6) .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. that addition shall be deemed a crossing and the cheque shall be deemed to be crossed generally”. between two parallel transverse lines. either with or without the words “not negotiable”. or of two parallel transverse lines simply. “where a cheque bears across its face an addition of the words “and company” or any abbreviation thereof.

the paying banker is directed to make payment only through another banker. 27 .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.

that the words “as agent for collection” must be included in the special crossing.b) Special Crossing: DOUBLE CROSSING A specially crossed cheque is to be collected only through the banker specified therein. because the very purpose of first special crossing is frustrated by the second one. State Bank of India To Bank of India As agent for collection ---------------------------------It is necessary. --------------------------------For example. Therefore. shall discharge such banker form liability thereon and such payment shall not be questioned by reason of the cheque having been crossed”. ------------------------------------State Bank of India Bank of India ------------------------------------- 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. a specially crossed cheque cannot be crossed specially again to another banker that is a cheque cannot be crossed specially twice. 28 . 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.

Rules for endorsement or essentials of a valid endorsement. 2. Payments made through cheques particularly crossed cheques enable an automatic record of the amount in the pass book.ADVANTAGES OF CROSSING 1. 3. 29 . It must be made by the holder of the instrument and not by a stranger. The endorser may sign either on the face or on the back of the negotiable instrument. „Account payee‟ crossed cheque makes sure that only the particular person to whom the cheques are drawn can receive payment. The endorsement must be written on the instrument itself or on a slip of paper annexed thereto. If a crossed made through cheques particularly crossed cheques enable an automatic record of the amount in the pass book. receipt need not be obtained. ENFORSEMENT DEFINITION OF ENDORSEMENT When the maker of holder of a negotiable instrument signs the same otherwise than as such maker. 2. If payment is made by means of a crossed cheque.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 rules regarding valid endorsements are given below: 1. 4. for the purpose of negotiation on the back or face thereof or on a slip of paper annexed thereto……….

3.3. It must be signed by the endorser. endorsement is snot complete untill the condition is fulfilled. 2. 5. Special of Full Endorsement: If the name of the endorsee is specified in whose favour it is being endorsed. KINDS OF ENDORSEMENTS 1. along with the signature of the endorser. 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. Endorsements can be made by the endorser merely by singning his name on the instrument or by adding the name of a specified person to whom the endorser likes to endorse. Conditional Endorsement: 30 . The delivery must be made by the endorser himself. The endorser must sign his name in the same spellings as spearing on the face of the cheque. If the delivery is conditional. 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. 4. Endorsement is complete only when the instrument is delivered. The endorser should endorse the instrument in full and not in part. all must endorse unless the one endorsing has authority to endorse for all others. 8. 7. 6. the endorsement is called endorsement in full. If an instrument is payable to the order or two or more payees or endorsees who are not partners. An endorsement written on an allonge is deemed to be written on the instrument itself.

7. Partial Endorsement: If an endorsement is made for the part of the amount of the instrument. it is an unconditional order payable on demand. 5. by the written words. Example: Pay to X only.It is an endorsement under which the endorser lays down some condition to be fulfilled by the payee before making the payment. the endorser makes it clear to the endorsee that the endorser would not be liable in case the instrument is dishonored. But such an 31 . Facultative Endorsement: The endorser waiving the right of „notice of dishonor‟ of the instrument. Restrictive Endorsement: Restrictive endorsement. 6. 4. while making the endorsement is called facultative to the endorser who has made such facultative endorsement. endorsement is not valid. an endorser specifies that the banker should pay the amount to a particular endorsee only. if is called “partial endorsement”. Scans Recourse Endorsement: In this case. For example: Pay to X without recourse to me. The type of endorsement involves a special problem because. according to the definition of a cheque. This means that further recourse cannot be taken against the endorser. restricts the right of further negotiation. In this case.

because the endorsements nullifies further negotiation. Any wrong payment will make the paying banker liable to the true owner of cheque and also to the drawer of the cheque (one who has drawn the cheque). Section 10 defines “Payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in 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”. He takes the responsibility of making payment on a cheque to the true owner. Payment in due course (Section 10) Section 10 of the Negotiable Instruments Act.` FORGED ENDORSEMENTS If an instrument is endorsed in full. 1881 clearly mentions the manner in which the paying banker should make payment on a cheque when presented to him and demanded payment. Meaning of Paying Banker A Paying banker is one who is a drawee of a cheque. the endorses will acquire no title even though the instrument is purchased for value and it good faith. UNIT – IV 1. it cannot be further endorsed or negotiated except by an instrument is negotiated by way of a forged endorsement. 3. 2. Conditions given under payment in due course 32 .

If the cheque contains any alteration. Thus. (v) Circumstances : Even though the person presenting the cheque may fulfils all conditions. In other words. he has to carefully go through the instructions given by the drawer. Possession is a must for a holder in due course. (iii) Without negligence : The paying banker has to go through the contents of cheque before making payment. Duties and Responsibilities of a Paying Banker Section 31 of the Negotiable Instruments Act provides that “ the drawee of a cheque having sufficient funds of the drawer in his hands. If the cheque is crossed. if the drawer has issued a cheque dated 10th June 2000. a paying banker should make payment only to that person who is in possession and presents the cheque for payment. Sometimes. payment cannot be made. There are instances where the amount of the cheque and the status of the presenting the cheque are inconsistent. Payment cannot be made before the date. For example. and in default of such payment must compensate the drawer for any loss or damage caused by such default. the overwriting or cancellation. but still creates a doubt in the minds of the paying banker at the time of making payment.(i) Payment in accordance with apparent tenor: When a paying banker receives cheques. properly applicable to the payment of such cheque must pay the cheque when duly required to do so. cheque may also contain “ material alteration”. (ii) In good faith : The paying banker will make payment to a person whose ownership is certain. For a holder it is not a must. the person presenting the cheque creates absolute good faith in the minds of the banker regarding the ownership. then the banker cannot make payment across the counter. (iv) To the person in possession: Paying banker can make payment to a holder in due course only when he is in possession of the instrument. the paying banker must get it clarified before making payment.” Obligation of Paying Banker to Honour Cheques 33 .

CONDITIONS FOR DISHONOUR OF A CHEQUE BY A PAYING BANKER (i) Open or crossed cheques: When a cheque is presented for payment. (b). impression that the customer had desired its cancellation. The funds should be properly applicable to the payment of such cheques. “Mutilated Cheque”. 34 . presented after six months of their issue are considered stale. torn or cancelled. The amounts in the credit of the customer‟s account in other branches will not be considered. (c). the banker should refuse payment. If they are presented at a different Usually. the banker should verify as to whether it is an open cheque or a crossed one and whether the cheque is in printed from. (a). There is no provision in the Banking Regulation Act preventing a customer from drawing his own cheque. cheques branch were an account is not maintained by a customer. Cheques should be presented during the banking hours of the bank. because he/she has no means of knowing the state of the customer‟s account and cannot verify the genuineness of the customer‟s signature. the banker can pass it for payment after obtaining the drawer‟s confirmation on the cheque. the banker should return the cheque with the remark. (d). They should be presented within six months of their issue. When a cheque is torn accidentally. There must be sufficient funds in the customer‟s account and only in the account on which the cheque is drawn. (e). Cheques should be presented for payment within a reasonable time.The paying banker is under an obligation to honour cheques subject to the fact that certain conditions are satisfied. The cheque should be properly drawn and should not be irregular or ambiguous. (iii) Mutilated cheque: The banker should also verify whether a cheque is If it is torn in such a way as to give an mutilated. (ii) Drawn on the specific branch: Cheques should be drawn on the particular branch at which they are presented.

the banker follows the practice of returning the cheque with a remark to that effect.. whether the endorsement made thereon is regular or not. (v) Words and figures differ: When the amount stated in words and figures differs in a cheque. properly applicable to the payment of such cheques must pay the cheque when duly required to do so. The banker should refuse payment of a materially altered cheque unless it is confirmed by the drawer.(iv) Date of the cheque: A cheque must also ways bear a date because the mandate of the customers to the banker given in the form of cheque becomes legally valid on the date mentioned therein. (viii) Chronological order of payment : The banker generally follows the rule of making payment of the cheques in the chronological order of their receipt. the banker must refuse payment. 1881 provides that “The drawee of a cheque having sufficient funds of the drawer in his hands. etc. affect the credibility of the instrument. amount. (vii) Proper endorsement: It should be ensured whether the cheque presented for payment requires endorsement or not and if so. If no date is written and still presented for payment. CONSEQUENCES OF WRONGFUL DISHONOR OF CUSTOMER’S CHEQUE 35 . and in default of such payment. (vi) Material alteration: Changing the date. It means that the cheque received first on an account will be paid first and the rule for making payment is not based on the serial member of the cheque or the date of its issue. name of the payee. must compensate the drawer for any loss or damage caused by such default”. removal of crossing. (ix) Garnishee order: The banker should not honour a cheque received by him after the issue of the Garnishee order by the court authorities. Section 31 of the Negotiable Instruments Act.

taking it as his negligence. Consequently. it was held that the bank must pay the cheque. instructs the banker to stop payment on the cheque before the instrument is presented. Barclays Bank: Davidson is a book maker and he issued a cheque for 15sh-10d to a client as part of dividend. It is the responsibility o f the customer to inform the banker before the payment is effected. the banker negligently dishonored the cheque.V.RAJAGOPAL VS. dishonored negligently. When the cheque was presented by the departmental store. He gave a cheque for Rest. Raja opal was employed as a liaison officer by a group of companies at Delhi. When the cheque was presented by the client. (ii) Davidson vs.(i) Gibbons vs.40 towards telephone charges to the telephone department. it was dishonored negligently. 294. Refusing payment of a cheque takes place on the happening of certain events. 36 .V Raja opal dismissed him from service. Westminster Bank A Housewife issued a cheque to a departmental store for purchases made by her. Dishonour takes place when there is defect in the instrument or when there are insufficient funds in the accounts. When the cheque was presented to The smaller the amount of the cheque Canada Bank. GROUNDS FOR REFUSING PAYMENT OF A CUSTOMER’S CHEQUE Dishonoring a cheque is different from refusing payment on a cheque. The court observed that the bank by dishonoring the cheque with a paltry sum of {}{}{15sh-10d has brought damage toe the reputation of the businessman. it is called countermanding of payment. (1) Countermanding of payment: When a customer after having issued the cheque to third party. the banker. I. dishonored. Davidson sued the bank for negligence. the telephone line was disconnected for non-payment and the employers of I. CANARA BANK In this case. When the account holder sued the bank. We can see the grounds under which a bank refuses payment. negligently dishonored it.

The banker will close the account after arriving at the balance. any cheque received thereafter will be refused payment. to the customer. The amount will be paid to the customer. if any. But when the lunacy is of a permanent nature. both to the banker and customer. the customer has to surrender all the unused cheques and the passbook. Such a customer will be intimated by the banker to close the account. On receipt of the notice. the account will lobe closed and cheques received thereafter will be refused payment. (8) Undesirable customer: When a customer issues cheques frequently with insufficient funds. But. failing which the banker on his own will close the account and will send the balance. these are dishonored causing embarrassment. (4) Lunacy: When a customer is of unsound mind. But the lunacy of the customer has to be certified by a doctor and the nature of the lunacy must also be stated. the account of that customer will be taken over by an official assignee appointed by the court. 37 . the account may be suspended till such time the lunacy is cured.(2) Death of customer: Notice of death of customer has to be given by the close relative of the deceased. (7) Assigning the entire balance to a third party: When a customer gives in writing to the bank to assign his entire credit balance to a third parties‟ account. hi‟ account cannot be operated. the bank will close the account. (3) Insolvency of the customer: When the court adjudged the customer of a bank as insolvent. banker will close the account and any cheque received thereafter. payment will be refused. closes the account b y giving a written declaration. (6) Closing of account voluntarily: When the customer on his own accord. the bank will close the account automatically. the court gives order to the bank to close the account of the customer partially or completely and according to that order cheques will be refused payment. Hence. on the advice of the doctor. (5) Garnishee order: Here. If it is of a temporary nature.

Meaning of Collecting Banker A Collecting banker is one who undertakes to collect cheques. undertaking this collection. COLLECTING BANKER 1.(9) Partnership firms. pay order.. Capacity of Collecting banker While collecting the instrument on behalf of the customer. (ii) When the collecting banker settles the loan amount due from the customer with the cheque amount given for collection. etc. traveler cheque. 38 . winding up of companies or dissolution of institutions. For (i) When the collecting banker advances money to the customer before the realization of the cheques given for collection. on behalf of the customer. (10) In public interest: When a banker comes to know that the account holder is building an account by cheating the public. 2. debenture interest. he may close the account by giving notice to the party. (iii) Where a collecting banker reduces an overdraft with the amount for collection before its realization. the account will be closed. bill. documents such as lottery chits. even before its realization. The bank does this in the interest of the public and prevents the public from incurring any monetary loss. letter of credit. dividend warrants. the collecting banker acts (a) as holder for value (b) as agent for collection (a) As holder for value : The collecting banker is said to be acting as holder for value. the collecting banker will be charging commission. companies and institutions: Their account will be operated according to the byelaw. In the case of death of a partner. drafts.

only when that person is introduced by another savings account holder of the same branch of the bank. A customer is one who has an account opened with the bank which may be a savings or a current account. (ii) The cheque presented to the bank for collection should be crossed generally or specially: That is. there is no risk for the collection. A savings account can be opened by any person. (v) By allowing the customer to draw the full amount of the cheque before its realization (b) As agent for collection: When the banker undertakes to collect the cheques and credits the account of the customer only on realization. i. there should not be any ambiguity with 39 .(iv) Where a part of the amount is given by the collecting banker to the customer even before the realization of the cheque. CONDITIONS UNDER SECTION 131 (i) Collecting for a customer: A collecting banker must collect the cheque or draft or any other instrument only for a customer. (iii) In good faith: A collecting banker should accept the cheque for collection from the customer on good faith. the collecting banker has enormous risks.. the banker is collecting the cheque only on behalf of a customer. Statutory protection to collecting banker under Section 131 of the Negotiable Instrument Act According to this Section. If a customer gives an open cheque which is uncrossed. especially when the cheque is dishonored or payment has been made to the wrongful owner of the cheque. Thus. 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”. there is no risk for the collecting banker whereas in the case of holder for value. the banker will cross the cheque before it is sent for collection. “A Banker who has in good faith received payment for a customer of a cheque crossed generally or specially to himself shall not. in acting as agent for collection.e.

Acting as bailee When a cheque is given for collecting banker is bailee until the cheque is realized and the proceeds are credited to the account of the customer. (v) Agent for collection: Section 131 gives statutory protection to the collecting banker acts agent for collection and not as holder for value. the collecting banker should immediately send the same for collection. To Collect cheques without negligence Negligence of a collecting banker is of different nature. Quick clearance of cheques or other instruments given for collection Whenever the customer gives ay instrument for collection. Any delay on the part of the collecting banker may lead to either the drawer declaring insolvent or the winding up of the paying banker. the fact of negligence will be seen under the duties of collecting banker. However. 2. DUTIES OF A COLLECTING BANKER A Collecting banker has three major duties to perform towards the customer: 1. We can state the following negligence of collecting banker. (iv) Without negligence: Negligence pertains not only with regard to the the circumstance under which the instrument but also the manner and cheque is given for collection. If any doubt arises. the cheque given for collection may bounce and gets dishonored due to insufficient funds. the banker should clarify the same before the collection of the cheque. 3. There are number of instances revealing the negligence of the collecting banker. the collecting banker has a duty to return the cheque which has been dishonored to the customer and by doing so he discharges his duty as a bailee.regard to the ownership of the cheque. (i) Negligence while opening account for a customer where in the banker has failed to . In such a case. Sometimes.

(ii) A cheque crossed but payment made across the counter by oversight.obtain letter of introduction and has opened the current account. 40 .

For deposits received under savings account and fixed deposits. it is negligence. (v) Opening of accounts without proper enquiry. where banker has not made proper enquiries with the employer of the intending customer. As stated already in the two case laws. For 41 . the bank earns a good return. such as government. the banker will have to ensure that the money advanced is returned by the borrower along with interest within the stipulated period. Here. This. without proper enquiries. (vi) A cheque belonging to a partnership firm endorsed to the personal account of the customer and if the banker. the collecting banker should take due precaution before making any payment. But if the bank credits the account of Mr. But if a collecting banker makes payment without any precaution. the bank has to pay an agreed interest rate. (iv) A Cheque crossed not negotiable. UNIT – V LOANS AND ADVANCES: After accepting deposits from the customer. the bank has to pay only from its earnings. From out of the return on investments and from the interest earned on loans. The difference between the interest offered on deposits. it earns a higher interest rate. a cheque is drawn in the name of pay to Mr. Similarly. company etc. it amounts to negligence. (a) Safety: When a loan or investment is made. a bank goes for lending or for investment in different types of securities. credited the personal account of the partner it is ground for negligence. and crossed account payee. For example. when the bank lends. the bank will be able to offer interest for the deposits.(iii) A cheque crossed account payee and payment credited to the account of a person other than the payee. The bank should credit the account of only Mr. This is possible only when the borrower does not face any risk and strictly adheres to the terms and conditions of the loan. On the investments. and the interest earned on lending will be the profit of the bank. or Z.

in case of bad debts. 4. unemployment. The depositor may demand his/her money at any time and the bank must be in a position to repay the same. if the bank is able to achieve this. when a country is faced with food problem. the bank must earn higher interest or higher return. the bank will have to keep sufficient safety margin. (d) Shift ability: As the bank is giving loan against the security. with out loss. Similarly. 6. the bank must give more loans to employment oriented industries. the loan amount will be Rest. (c) Profitability: When a bank is undertaking lending or investment. So. 10. the bank must be able to sell the security and realize the loan amount. it has to take more precaution while doing so. The bank has profit as its main business motive. (f) Safety Margin: While granting loan against security.000/.now even if the market value of the jewel fluctuates to Rest. the banker will have to chose such type of borrowers who are prompt in repayment of the principal and interest amount. For example.000/. As the bank is investing or lending the depositors‟ money. the bank will not sell the security. 42 . food production can be increased. This means that a bank will land only unto 50 or 60% of the value of security as loan by keeping a safety margin of 4 or 50%. Mostly treasury bills can be shifted to Central bank and the commercial bank can raise additional funds. so that the problem of unemployment can be reduced. (b) Liquidity: An asset is said to be liquid when it can be converted into cash within a short notice.and the safety margin Rest. In some cases. it has to earn a good return. it will be deploying its funds in such ventures which give a higher return. but will shift the same to the Central bank which will grant the commercial bank additional fund against the security. more loans should be given for agriculture so that.this purpose.000/-. (e) National Interest: The bank must keep in mind national interest while When a country is facing lending or investing depositor‟s money. while lending or investing the depositor‟s money. when loan is given against a jewel whose market value is Rest.

43 .9.8. The credit facilities may be broadly classified into four types. (g) Diversification: As the banker lends or invests. (i) Primary Security Prime security and collateral security.still the banker will be able to realize the loan amount in case the borrower defaults.000/. it is the security which is taken by the banker as the main security for the loan.or Rs. (ii) Collateral Security Collateral Security is that additional Security offered by the customer over and above the existing security. In the case of prime security . In fact. A collateral security is demanded by the bank when the main security does not cover the loan fully or where the value of the main or prime security fluctuates. SECURED ADVANCES Section 5(i) of the banking regulation Act. THERE ARE TWO TYPES OF SECURITIES. LOANS OVERDRAFTS OF CASH CREDITS. It is likely that these industries may face depression and the banker will find it difficult to recover the loan or realize his investment. The house is mortgaged to the creditor. defines secured advances as “Secured loan or advance means a loan or advance made on the security of assets the market value of which is not at any time left than the amount of loan or advance”. he cannot invest all his resources in a single industry or with a single borrower. the banker is inviting more risks. FORMS OF ADVANCES Bank offer different kinds of borrowing facilities to their customers.000/. the prime security is obtained by the borrower with the help of the loan. By choosing a single industry such as iron and steel or sugar. 1949. Example: House in a housing loan. The banker should not keep all the eggs in the same basket. It may be like insurance policy or any other immovable property.

The interest is charged for the full amount sanctioned whether he withdraws the money from his account or not. Over draft Over draft is an arrangement between a banker and his customer by which the latter is allowed to withdraw over and above his credit balance in the current account unto an agreed limit.1. The interest is charged only for the amount drawn and not for the whole amount sanctioned. 3. In case a borrower wants further loan. Thus cash credit is an active and running account tow which deposits and withdrawals maybe effected frequently. 1. provided the total amount overdrawn does not exceed the agreed limit. He can put back any surplus amount which he may find with him. This is only a temporary accommodation usually granted against securities. The borrower is permitted to draw an repay any number of times. Cash Credit System. Loans. grant unsecured overdraft for small amounts to customers having current account with them. Sometimes. Loans In case of loan. The entire amount is paid on an occasion either in cash or by credit in his current account which he can draw at any time. TEMPORARY OVERDRAFT Bank. the banker advances a lump sum for a certain period at an agreed rate of interest. The loan may be repaid in installments or at the empery of a certain period. Such customers may be 44 . he has to arrange for a fresh loan. 4. This is a permanent arrangement and tube customer need not draw the sanctioned amount at once. The loan may be made with or without security. Overdraft. Cash Credit A cash credit is an arrangement by which the customer is allowed to borrow money up to a certain limit. 2. 2. 3. Bills Purchased and Discounted. A loan once repaid in full or in part cannot be withdrawn again by the customer. but draw the amount as and when required.

A person who possesses most of the above qualities is considered as a man of character and bank can extent credit to him without any reservation. responsibility. The amount. In this form of lending. SECURED AND UNSECURED ADVANCES Loans and advances may be made either on the personal security of the borrower or on the security of some tangible assets. character. Capacity The capacity of a borrower refers to his ability to manage the business. is credited in the account of the customer. The former is called unsecured or clean or personal advances and the latter is called secured advances. after deducting the interest from the amount of the instrument. capacity and capital usually referred to as the three C‟s.government employees with fixed income or traders. Bills Discounted and Purchased Banks grant advances to their customers by discounting bill of exchange or promote. Discounting of bill constitutes a clean advance and banks rely on the credit worthiness of the parties to the bill. promptness. The distinguishing feature of this type of loan. according to the definition is that no tangible security is offered to the bank. Temporary overdrafts are permitted only where reliable source of funds are available to a borrower for repayment 3. The confidence is judged by three considerations. The word character implies personal qualities like honesty. experience 45 . reputation and goodwill. Character Character constitutes the best asset of a man. the interest is received by the banker in advance. Unsecured 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”. Success of the enterprise depends mainly on the initiative. interest.

3. So capacity is the next consideration in granting clean advances.e. capital. Lien. c. Assignment.and managerial ability of the entrepreneur. g. Character + Capacity + Capital Character + Capacity + Insufficient capital Character + Capacity Character + Capacity Character + Capacity Character + Capacity Character + Capacity Character + Capacity Capital Impaired character = = = = = = = = Safe credit Fair credit risk Limited success Doubtful credit risk Dangerous risk Fair credit risk Inferior credit risk Fraudulent one In this respect banks may follow the formula evolved by Dr. requirements of the business. a banker looks into another aspect i. Character Insufficient capital Capacity Capacity Modes of charging Security The important methods of charging a security are the following 1. It confers upon the 46 . Mortgage. b. C. B. e. a. 4. f.Memoria. Pledge. A banker‟s lien is a general lien which tantamount to an implied pledge. d. 5.. A bank provides mainly the working capital A borrower should have sufficient capital to conduct his business and adequate plant and machinery to carry out capital to production. Lien gives a person only a right to retain the possession of the goods and not the power to sell them. Hypothecation. Capital In addition to the character and capacity of borrower. LIEN Lien is the right of a creditor to retain the properties belonging to the debtor until the debt due to him is repaid. 2. h.

(i) Sell the goods pledged after the pledge for the amount due. (a) delivery of the key of the warehouse in which the goods are stored. Railway Receipt. the “bailment of goods as security for payment of a debt or performance of a promise. defines a pledge as. defines a mortgage as follows: “ A Mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan. pledge may. The delivery may be physical delivery refers to physical transfer of goods from a pledge to the pledge.banker the right to sell tee securities after serving reasonable notice to the borrower. The possession of the goods vests with pledge till the loan is repaid.” 47 If the pledge fails to repay within the . MORTGAGE A Mortgage is a method of creating charge on immovable properties like land and building. (iii) File a suit for the sale of the goods pledged and the realization of money due to him.” Essentials of Pledge (i) Delivery of goods: Delivery of goods is essential to complete a pledge. (ii) File a suit against the pledge for the amount due. 1882. or the performance of an engagement which may give rise to a pecuniary liability. (ii) Transfer of ownership: The ownership of goods remains with the pledge. (iii) Right in case of failure to repay: stipulated time. 1872. (c) Delivery of transferable warehouse warrant if the goods are kept in a public ware house. an existing or future debt. PLEDGE Section 172 of Indian Contract Act. Section 58 of the Transfer of Property Act. (b) Delivery of the document of title to goods like Bill of Lading. Warehouse Warrant etc.

3. 2. Usustructuary Mortgage Under this from of mortgage. The sale shall become void on payment of the mortgage money. English Mortgage 48 .FORMS OF MORTGAGES Section 58 of the Transfer of Property Act enumerates six kinds of mortgages: 1. Simple Mortgage. 4. 3. He binds himself personally to pay the mortgage money and agrees either expressly or impliedly. In a simple mortgage. the mortgager does not deliver the possession of the mortgaged property. The sale shall become absolute if the mortgager fails to repay the amount on a certain date. Anomalous mortgage. that in case of his failure to repay. Mortgage by Conditional Sale In this form of mortgager ostensibly sells the property to the mortgagee on the following conditions: 1. the mortgager delivers possession of the property or binds himself to deliver possession of the property to the property to the mortgagee. 5. 6. The mortgagee will retransfer the property on payment of the mortgage money. 2. Mortgage by conditional sale. The mortgager reserves the right to recover the property when the money is repaid. Mortgage by deposit of title deeds. Usufructuary mortgage. Simple mortgage. The mortgagee is authorized to retain the possession until the debt is repaid. English mortgage. the mortgagee shall have the right to cause the mortgaged property to be sold and apply the sale proceeds in payment of mortgage money.

Assignment may be of two types: 1.. Usually assignments are made of actionable claims such as book debts. In banking business. If the borrower 49 . with an intention to create a security there on. Though the borrower is the owner of the security. The mortgagee. Hypothecation: This is applicable to movable goods. Equitable Assignment. Such a mortgage can be effected according to the terms and conditions of the mortgagor and the mortgagee. therefore. The mortgager transfers the property absolutely to the mortgagee. Legal Assignment. the transaction is called mortgage by deposit of title deeds. insurance claims etc. The borrower is given loan for the purchase of goods or vehicles. Assignment Assignment means transfer of any existing or future right. The person who assigns the property is called assignor and the person to whom it is transferred is called assignee. property or debt by one person to another person. is entitle to take immediate possession of the property. 2. Anomalous Mortgage In terms of this definition an anomalous mortgage is one which does not fall under any one of the above five terms of mortgages. a borrower may assign to the banker (i) the book debits. the creditor has a charge on the security until the loan is repaid. 2. The transfer is subject to the condition that the property shall be transferred on repayment of the loan. (iii) insurance Policies.The English mortgage has the following characteristics: 1. (ii) money due from government department. Mortgage by Deposit of Title Deeds When a debtor delivers to a creditor or his agent document of title to immovable property. The mortgager also binds himself to pay the mortgage money on a certain date.

6. 3. the 7. Act. the pledge has to take care of the security. As a bailee. There is no such responsibility for the Mortgagee. Possession of security with the pledge or creditor. When there is a default. hypothecation provides a right for the creditor to take possession of the goods. There is no possession of property. Thus. 4.fails to pay. Under English mortgage. 5. DIFFERENCE BETWEEN PLEDGE AND MORTGAGE Pledge 1. There is pledgor-Pledgee relationship. The pledge has a lien on the security 6. There is no lien for the Mortgagee. Applicable to movable goods only. Governed by Indian Contract Act. the pledge can sell the security and recover the loan amount . the creditor will cease the goods from the borrower. Mortgage 1. 2. 2. 3. 4. Applicable to immovable property. 7. Governed by Transfer of Property. There is mortgagor-mortgagee relation ship 5.

10. There is surrender of the right of sale by the mortgagor to the mortgagee. A pledge can never take over the ownership of security pledged with him. There is no need for registration of pledge agreement. There is transfer of possession of security from pledgor to pledge. Mortgage deed has to be registered for making it a legal 9. 50 .ownership of property is transferred in favour of mortgagee when there is default by the mortgagor. 9. 8. Mortgagee can take over the ownership of the property in case of default. 10. 8.

There is no notification on the goods by a board so that no other creditor can which are under lien. 3. The goods have to be taken care of by the debtor. 4. but can also sell the security a pledge. Hypothecation 1. for the recovery of loan amount 5.mortgage. 2. It is a right exercised by the creditor on the debtor by retaining the security owned by the debtor. 4. after giving due notice to the debtor. The creditor is a bailee and hence has to take care of the goods which are in hi possession. The debtor is in the possession of the security. 2. Hypothecated goods will be notified. dock warehouse keeper‟s certificate. Difference between Lien and Hypothecation Lien 1. The creditor can not only retain the security. The creditor is not in possession but has a charge on the goods hypothecated. The debtor is not only in possession but can also use the goods which are hypothecated. The creditor has to first obtain the goods from the debtor and then can sell the goods. the creditor has a right to cease the goods. GOODS AND DOCUMENT OF TITLE TO GOODS Document of title to goods are defined by Section 2 of the Sale of Goods Act 1930 as “A bill of lading. railway receipt 51 . Though the debtor is the owner. 5. The creditor is in possession of the security belonging to the debtor. The creditor cannot use the goods which are in his possession and on which lien is exercised. from the debtor in case of default. extend credit against the hypothecated goods. 3.

Bill of lading 2. he cannot obtain a favorable title as the captain will refuse to deliver the goods. 3.R. 1. even if he is a holder in due course. Warehouse keeper‟s Certificate. the captain of the ship will deliver the goods. and 5. A bill of lading is a quasi negotiable instrument. which is representing the goods sent by lorry or rail.R and to lorry authorities if it is L.” The following are some of the documents of title to goods. The retailer‟s bank will intimate him (the retailer) about the receipt of L. Dock warrant: After taking delivery of the goods from the ship. 4. 2. under the condition that documents are negotiable through the bank. if a person obtains the same. Dock warrant 3. The retailer after making payment into the bank. and take delivery of tools. Railway receipt(R. railway receipts or lorry receipts will be sent to the bank of the retailer.R. If the freight changes are due on a bill of lading.R) 4. That is. Delivery Order: 52 . the documents. will take delivery of these documents. it can be transferred but the transferee cannot get a better title than transferor and any defect in the instrument will also affect the transferee.R.R. or R. Delivery order. Railway Receipt or Lorry Receipt: When the wholesaler dispatches goods to the retailer.) or Lorry receipt (L. Only on production of the dock warrant. and without knowing this.and any other document used in the ordinary course of business as proof of the possession or control of goods or authorizing to either by endorsement and delivery. the possessor of the document to transfer or receive goods thereby represented. he will produce it to the railway authorities if it is R. Later. 1. the goods will be delivered. Bill of Lading: This represents goods sent by ship. Only on production of this document. the goods will be kept in the dock and the dock master will give a certificate which is a dock warrant.

normally the warehouse keeper. GOVERNMENT SECURITIES THE PRINCIPAL FORMS OF GOVERNMENT SECURITIES ARE: 1. on a specified date or after certain notice. The certificates are not transferable by endorsement. Bearer bonds and 3. possessor of goods. It is an instruction whereby either the whole goods or part of the goods kept in the warehouse to be delivered to particular person named in the document. Promissory Notes Promissory notes contain a promise by the President of India in case of Central Government and by the Governor of the State in case of State Government Securities to pay the specified sum of money to the holder of the note or the last endorsee whose name appears on the reverse. Promissory notes Stock A stock holder is given a certificate indicating the amount of a specified loan held by him. 53 . The title to the bonds is transferred by mere delivery without any formality. The title to the promissory note passes by endorsement and delivery. Warehouse keeper’s certificate: A warehouse is a scientific storage and licensed by the government and the quality of goods will remain the same in spite of a longer period of storage. Stock 2. The bearer of the bonds possesses the ownership. 5. Bearer Bonds A Bearer bond certifies that the bearer is entitled to certain sum specified on the date indicated. The name of the stock holder is entered in the books of the public debt office. according to the terms issue. The receipt given by the warehouse keeper on receipt of goods is called warehouse keeper‟s certificate which can be used for obtaining loan from the bank.It is a document which is addressed by the owner of the goods to the custodian or . A promissory note is negotiable one.

It is an acknowledgment of company‟s indebtedness to its holders. (4) Negotiable securities: Some of the securities such as bearer bonds bearer debentures. in times of recession the value of security may undergo fluctuations. The banker gets good title and from all defects if he acts bonfire. share warrants and government promissory notes are fully negotiable. Transfer of the securities requires no stamp duty and so is inexpensive. The existence of ready market provides liquidity to the security. But giltedged securities are less susceptible to the changes. Merits of stock Exchange Securities (1) Liquidity: Stock and shares can be easily realized if the borrower is unable to pay the debt. (5) Appropriation of income towards Loan: Income received on such securities by way of interest or dividend can be appropriated towards the debt which automatically reduces the liability of the borrower. The 54 . The formalities to be observed are few which facilitate easy transfer of securities and minimize the expenses. Nowadays even corporate securities are unaffected by business cycle. b. The securities empower the banker to dispose them of without customer‟s assistance. c. (6) Easier valuation: The market value of these securities can be easily ascertained from quotations given in stock exchange reports or newspapers. (3) Few legal formalities: Investigation of the title involves no complication as in the case of real estates. (2) Safety: In normal times the securities enjoy stability of value.Corporate securities The corporate securities comprise the ownership securities such as equity shares and preference shares and creditor ship securities such as debentures. a. Debentures A debenture is a document issued by a company as an evidence of debt.

2. to the person for whose benefit the insurance is made. Kinds of Insurance Policy A life insurance policy may be a. 3.debentures carry a predetermined rate of interest payable at regular intervals. 1. a certain sum of money or annuity on the death of the person whose life is insured. The amount of debenture is usually secured by a fixed or floating charge on the Merits Debentures as security are acceptable to bankers because of the following advantages. Life Insurance policy A life insurance is a contract between a person known as insured and the insurance company called insurer. 4. Debentures are easily marketable. The value and title of the borrower could be ascertained easily. The principal is generally payable on maturity varying upon 10 years. the insurance company undertakes to pay. (i) Whole life policy (ii) Endowment Policy Whole Life Policy In a whole life policy the premier are paid throughout the life of the insured person and the policy amount becomes payable on the death of the insured. company‟s assets. Debentures give prior claim on the profits and assets of the company. According to the contract. Transfer of debentures involves minimum expenses. Endowment Policy 55 .

(iv) Assignment made easy: The policy can be easily assigned in favour of the banker. (ii) Stability in value: A life policy is stable in value. The legal formalities connected with the The banker gets perfect title without much 56 . if it does not do so. (v) No supervision: The life policy remains in the custody of the bank. assignment is simple. If the e customer dies the insurance company would be ever ready to pay the amount covered by the policy. So life policy is a liquid security. provided the premier are paid regularly. Its surrender value continually increases. The surrender value is the minimum amount which will be paid by the insurance company if the policy is surrendered before its maturity. The security requires little supervision except that the bank must watch the regular payment of premiums. if earlier.In case of an endowment Policy premiere payable during the stated period or till death. the bank can surrender the policy and get payment of surrender value.e. the company will supply required information. If he borrower fails to repay the loan. contract mad in utmost good faith. Disadvantages (i) Evasion of facts when policy is effected: A contract of insurance is a contract of Uberriemae fide i. Sometimes. (iii) No problem in ascertaining the value: The value of the policy can be easily ascertained. The policy money is payable on the expiry of the period or on the death of the insured. the policy it self indicates how the surrender value is to be calculated. Advantages of Life Policy as Security (i) Liquid security: A life policy can be easily realized. This means the insured must disclose all material facts relating to his life at the time of taking the policy. difficulty.

(iv) Admission of age: The insured must have forwarded his birth certificate and this mist have been accepted by the insurance company. (iii) Risk in case of suicide: A life policy contains a number of conditions. In its absence the difficulty arises in claiming the amount of the policy. In such case the contract becomes void. The policy will lapse if the assured fails to pay the premia regularly. almost all policies have a „suicide clause‟ stating that if the assured commits suicide within the period from the date of insurance. 57 . There is a risk that the customer may not be able to pay future premiums. (v) Insurable interest: There is a slight risk that the person taking out the policy may have had no insurable interest in the life assured. For example. th e policy becomes void.(ii) Non-payment of premia: A life policy depends for its continued vaidity for the amount insured on the regular payment of premia.

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