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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”


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. The dealings must be of a banking nature RELATIONSHIP BETWEEN BANKER AND CUSTOMER: The relationship fails under two broad categories. General relationship 2. General relationship: I) II) Primary Relationship Subsidiary Relationship I)PRIMARY RELATIONSHIP (Debtor and creditor relationship) 4 .” The following are the requisites to constitute a person an a customer. But Sir. “to constitute a customer there must be some recognizable course or habit of dealing in nature of regular banking business.CUSTOMER – MEANING AND DEFINITION: There is no exact definition or meaning for customer. Special relationship 1. namely 1. John Paget defines that.

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


d)When a cheque or bill is deposited for collection.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. b)If special instructions are not given. 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. 6 . Ownership of the articles of deposited for safe custody. the customer is the principal and the banker is the agent. before collection the banker will be trustee. 2. Points regarding relationship are as follows. the banker will be a debtor and not trustee c)When a cheque or bill is deposited for collection. banker will be trustee and debtor.Agent and Principal Relationship: In all cases. 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.


Heavy with drawls are pomaded 10 . 2. Earning deposit accounts. 1.UNIT – II Deposit Account : The relationship between the banker and his customer begins with the opening of account by the customer in a bank. it is properly known as „time deposits‟ are „time liabilities‟. Final deposit Accounts. and 4. Current accounts. Recurring deposit accounts. Hence. Different types of deposit account :Deposit Accounts are classifier into caprices types. Fixed deposit Account :A fixed deposit is one which is repayable after the expiry of a preen determined period fixed by the customer himself. This is restoration on with drawls in a month. 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. 3. This deposits are not repayable on demand but they are with drabble subject to a period of notice. Some of fee classified are as follows. 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. Initially all the accounts are open-ended with a deposit of money by the customer and rice this accounts are called deposit accounts.

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

iv) Renewable before maturity :The reserve Bank as permitted the Banker to renew an existing term deposit before maturate. it will pretext the Banker against losses in future. the courtiers may be asked to go though the court and seek its authorization. In extra ordinary cases.20 Requires to be stamped. 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) Loss of fixed deposit receipt :Were a deposit Receipt is lost. vi) Exception from stamp duty :A fixed deposit Receipt. 12 . Wit drawl of Interest or the principal through cheque of is not permitted through cheques is not permitted. 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. payment by a Bank o co-operative security where it exits Rs. generally. 5000 in a financial gear. 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.onyx the deposits Renewed. Banker also permit encased of such deposits even before he due date. with out involving tee penalty provided. 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. iii) Payment before due date :Through a fixed deposits is payable at the expiry of the specified period. if the depositors so distress.

usually they are obtained on cards. 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. occupations.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. v) Safety against wrong full over draft granted :It a Banker grants an overdraft even by mistake. trust. which are filed alphabetically for Ready Referees. the customer mention is named. specimen signature and the name and signature of a person for References. In opening of new Account. Each bank maintains a signature Book for this purpose thus specimen signature protect the bankers against forgery. prater ship forms and companies. 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. iii) Specimen signature : Every new customer is excepted to give three on more specimen signatures. 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. to a customer who is not prosperity introduction the risk of losing case it is not repaid by the 13 .

customer. he must write the amount both in words and figures the book will dishonor a cheque if there is any defect in it. 500 with cheque and 250 for with out cheques facility for savings Bank accounts. In such a care the amount can be creative only is the customer is a respectable solvent party. The minimum amount is Rs. i) ii) iii) Cheque book. 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. calques. 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 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. cheques etc into the bank and with dreams money according to his need on convenience so the Banker hands over to the customer. vii) Amount in cash :After the above calamities are over the time of opening an account. vi) Mad date writing :If a new party wants in accounts to be operated by come party else. 14 . Operating of current and savings account :Operating a bank means that the customer deposits for there sums of money. the specimen signature of the authorized person and the power delegated to him.

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

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. If she is authorized to act has on agent of other husband. if the will of the testator does not mention the name of 16 . The banker should also take session potlograntr attended by a first class magistrate for the purpose of Indintification. The married women were allowed to open accounts only after getting consent of their husband moreover. she was not allowed to hold property in her hold name. 1872. the counter enter into him is void. all their became the properties of her husband on her husband. When a person know as dictator. then the husband can be made liable for the debts in the follow cases. 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. a) If the loan taken with his contend of authority and.ii) Married women :A Bank may open an account in the married women. administers and trustee :Exactors and ammoniates are persons who are appointed to content the faired of a person after his death. 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. [maker of will] appoints another person for this purpose through a will. 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. A married women cannot make her husband responsible for the debts incurred by her expect in some cases. 5) Executors. he is know as a exactors.

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

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

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

pay to Mr. 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.Ram (or) order the sum of Rupees ten thousand. 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. Eany. oral order (or) promise don‟t make a value instrument. ) foods and sectary.7 promise to pay Rs. hence the drawee must be a sorting person. 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. preferably.000 days after x is retirement is not conditional. 7th Cross.20th July 2007 Three months after date. (ex. Accepted To G. 20 . 3) Drawn on a certain person :A Bill is always drawn on a certain person. 1.. ii) Un conditional order :The promise (or) order must be unconditinal if any condign are Stamp applied destroys the Negotiable crater of an instrument. Corn example :. for value revised.

however promise note are Bill of exchange or not the made payable to bazaar on demand. since. THE SALIENT FEATURES OF A CHEQUE: 21 . 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. Thus the payee his certain. a cheque is nothing but a Bill of Exchange.” A better understanding of the concept of cheque entails the definition of a Bill of Exchange. In case of time bill. 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. 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. acceptance is essential and usually three days grace is allowed in the case of payment of a Bill.

On a specific banker: A cheque is always drawn only on a particular banker. Payee to be certain: In order that a cheque may be a valid one. Indefiniteness has no place in monetary transactions. Any phrase like „less than Rupee One hundred only‟ or „Above rupees two hundred only‟ does not give a clear and concrete idea to the parties concerned and it will render the cheque invalid. In the indigenous bill of exchange. words of courtesy with little monetary implications were generously employed. it must be made payable to the order to the order of a certain specified person or to his agent or the bearer thereof. An unconditional order: A cheque is an order to pay and it is not a request. 6. 2. Payable on demand: 22 . 3. It may be done by means of a nib. a pencil. Usually the name and address of the banker is clearly printed on the cheque leaf itself. 5. 4. Instrument in writing: A cheque must necessarily be an instrument in writing Oral orders therefore do not constitute a cheque.1. 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. a type writer or any other printed character.

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

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

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

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

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. that addition shall be deemed a crossing and the cheque shall be deemed to be crossed generally”.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. The following are examples of general crossing: 1) 2) 3) 4) 5) 6) . between two parallel transverse lines. either with or without the words “not negotiable”. 1881.

the paying banker is directed to make payment only through another banker. Even if the payee of a crossed cheque is well known.Significance of General Crossing: A crossed cheque should not be paid across the counter. 27 .

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

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

8. 7. If the delivery is conditional. General or Blank Endorsement: If the endorse just puts his signature without specifying the name of the endorsee. KINDS OF ENDORSEMENTS 1. Special of Full Endorsement: If the name of the endorsee is specified in whose favour it is being endorsed. An endorsement written on an allonge is deemed to be written on the instrument itself. Conditional Endorsement: 30 . along with the signature of the endorser. all must endorse unless the one endorsing has authority to endorse for all others. 4.3. It must be signed by the endorser. The delivery must be made by the endorser himself. 3. 6. the endorsement is said to be blank. 5. 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. 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. 2. Endorsement is complete only when the instrument is delivered. 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. endorsement is snot complete untill the condition is fulfilled. The endorser must sign his name in the same spellings as spearing on the face of the cheque. The endorser should endorse the instrument in full and not in part.

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

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). the endorses will acquire no title even though the instrument is purchased for value and it good faith. He takes the responsibility of making payment on a cheque to the true owner. 2. it cannot be further endorsed or negotiated except by an instrument is negotiated by way of a forged endorsement. 3. Conditions given under payment in due course 32 . 1881 clearly mentions the manner in which the paying banker should make payment on a cheque when presented to him and demanded payment. 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”. because the endorsements nullifies further negotiation.` FORGED ENDORSEMENTS If an instrument is endorsed in full. UNIT – IV 1. Payment in due course (Section 10) Section 10 of the Negotiable Instruments Act. Meaning of Paying Banker A Paying banker is one who is a drawee of a cheque.

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

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

must compensate the drawer for any loss or damage caused by such default”. (vii) Proper endorsement: It should be ensured whether the cheque presented for payment requires endorsement or not and if so. (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.. properly applicable to the payment of such cheques must pay the cheque when duly required to do so. name of the payee. (vi) Material alteration: Changing the date. affect the credibility of the instrument. If no date is written and still presented for payment. and in default of such payment. (ix) Garnishee order: The banker should not honour a cheque received by him after the issue of the Garnishee order by the court authorities. 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. Section 31 of the Negotiable Instruments Act. (v) Words and figures differ: When the amount stated in words and figures differs in a cheque.(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. The banker should refuse payment of a materially altered cheque unless it is confirmed by the drawer. the banker follows the practice of returning the cheque with a remark to that effect. amount. removal of crossing. whether the endorsement made thereon is regular or not. 1881 provides that “The drawee of a cheque having sufficient funds of the drawer in his hands. etc. CONSEQUENCES OF WRONGFUL DISHONOR OF CUSTOMER’S CHEQUE 35 .

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

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

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

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

the fact of negligence will be seen under the duties of collecting banker. To Collect cheques without negligence Negligence of a collecting banker is of different nature. 3. Sometimes. (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. DUTIES OF A COLLECTING BANKER A Collecting banker has three major duties to perform towards the customer: 1. If any doubt arises. 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. There are number of instances revealing the negligence of the collecting banker. Quick clearance of cheques or other instruments given for collection Whenever the customer gives ay instrument for collection.regard to the ownership of the cheque. (i) Negligence while opening account for a customer where in the banker has failed to . the banker should clarify the same before the collection of the cheque. the cheque given for collection may bounce and gets dishonored due to insufficient funds. We can state the following negligence of collecting banker. However. 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. (v) Agent for collection: Section 131 gives statutory protection to the collecting banker acts agent for collection and not as holder for value. In such a case. 2. the collecting banker should immediately send the same for collection. 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.

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

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

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

The credit facilities may be broadly classified into four types. In the case of prime security . The house is mortgaged to the creditor.or Rs. 1949. By choosing a single industry such as iron and steel or sugar. he cannot invest all his resources in a single industry or with a single borrower.8. THERE ARE TWO TYPES OF SECURITIES. The banker should not keep all the eggs in the same basket. 43 . It may be like insurance policy or any other immovable property. the banker is inviting more risks. Example: House in a housing loan.9. 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. LOANS OVERDRAFTS OF CASH CREDITS. FORMS OF ADVANCES Bank offer different kinds of borrowing facilities to their customers. It is likely that these industries may face depression and the banker will find it difficult to recover the loan or realize his investment. 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”. (g) Diversification: As the banker lends or invests.still the banker will be able to realize the loan amount in case the borrower defaults. it is the security which is taken by the banker as the main security for the loan. the prime security is obtained by the borrower with the help of the loan.000/. SECURED ADVANCES Section 5(i) of the banking regulation Act. (i) Primary Security Prime security and collateral security. (ii) Collateral Security Collateral Security is that additional Security offered by the customer over and above the existing security.000/.

Bills Purchased and Discounted. 2. A loan once repaid in full or in part cannot be withdrawn again by the customer. Sometimes. In case a borrower wants further loan. Overdraft. 2.1. grant unsecured overdraft for small amounts to customers having current account with them. TEMPORARY OVERDRAFT Bank. He can put back any surplus amount which he may find with him. but draw the amount as and when required. The interest is charged only for the amount drawn and not for the whole amount sanctioned. 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. The borrower is permitted to draw an repay any number of times. 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. Cash Credit System. Thus cash credit is an active and running account tow which deposits and withdrawals maybe effected frequently. provided the total amount overdrawn does not exceed the agreed limit. The loan may be made with or without security. Cash Credit A cash credit is an arrangement by which the customer is allowed to borrow money up to a certain limit. Loans In case of loan. he has to arrange for a fresh loan. the banker advances a lump sum for a certain period at an agreed rate of interest. Such customers may be 44 . This is only a temporary accommodation usually granted against securities. The loan may be repaid in installments or at the empery of a certain period. 3. 3. 4. This is a permanent arrangement and tube customer need not draw the sanctioned amount at once. Loans. 1. The interest is charged for the full amount sanctioned whether he withdraws the money from his account or not.

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”. experience 45 . The distinguishing feature of this type of loan.government employees with fixed income or traders. interest. Discounting of bill constitutes a clean advance and banks rely on the credit worthiness of the parties to the bill. after deducting the interest from the amount of the instrument. Temporary overdrafts are permitted only where reliable source of funds are available to a borrower for repayment 3. Success of the enterprise depends mainly on the initiative. reputation and goodwill. 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. promptness. the interest is received by the banker in advance. 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. The word character implies personal qualities like honesty. character. In this form of lending. The confidence is judged by three considerations. Character Character constitutes the best asset of a man. The amount. capacity and capital usually referred to as the three C‟s. according to the definition is that no tangible security is offered to the bank. Bills Discounted and Purchased Banks grant advances to their customers by discounting bill of exchange or promote. 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. Capacity The capacity of a borrower refers to his ability to manage the business. responsibility.

Capital In addition to the character and capacity of borrower. It confers upon the 46 . A banker‟s lien is a general lien which tantamount to an implied pledge. requirements of the business. LIEN Lien is the right of a creditor to retain the properties belonging to the debtor until the debt due to him is repaid. capital. a banker looks into another aspect i.and managerial ability of the entrepreneur. e. Hypothecation. b. Assignment. g. 3. c. d. Lien. Lien gives a person only a right to retain the possession of the goods and not the power to sell them. So capacity is the next consideration in granting clean advances. Pledge. 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.. Mortgage. 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. a. 5. Character Insufficient capital Capacity Capacity Modes of charging Security The important methods of charging a security are the following 1.e.Memoria. C. f. 2. B. h. 4.

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

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

The transfer is subject to the condition that the property shall be transferred on repayment of the loan. Equitable Assignment. 2. Hypothecation: This is applicable to movable goods. (iii) insurance Policies. The borrower is given loan for the purchase of goods or vehicles. a borrower may assign to the banker (i) the book debits. the creditor has a charge on the security until the loan is repaid. Assignment Assignment means transfer of any existing or future right.. Legal Assignment. is entitle to take immediate possession of the property. In banking business. 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. Such a mortgage can be effected according to the terms and conditions of the mortgagor and the mortgagee. with an intention to create a security there on. the transaction is called mortgage by deposit of title deeds. (ii) money due from government department. The person who assigns the property is called assignor and the person to whom it is transferred is called assignee. The mortgager transfers the property absolutely to the mortgagee. The mortgagee. Mortgage by Deposit of Title Deeds When a debtor delivers to a creditor or his agent document of title to immovable property. Though the borrower is the owner of the security.The English mortgage has the following characteristics: 1. insurance claims etc. The mortgager also binds himself to pay the mortgage money on a certain date. Usually assignments are made of actionable claims such as book debts. Assignment may be of two types: 1. property or debt by one person to another person. If the borrower 49 . therefore. 2.

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

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

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

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

Bearer bonds and 3. The bearer of the bonds possesses the ownership. on a specified date or after certain notice. Bearer Bonds A Bearer bond certifies that the bearer is entitled to certain sum specified on the date indicated. The title to the promissory note passes by endorsement and delivery. Stock 2. 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. 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. normally the warehouse keeper. according to the terms issue. A promissory note is negotiable one. 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. The title to the bonds is transferred by mere delivery without any formality. possessor of goods. 53 . The certificates are not transferable by endorsement. Promissory notes Stock A stock holder is given a certificate indicating the amount of a specified loan held by him. 5. The name of the stock holder is entered in the books of the public debt office. 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. GOVERNMENT SECURITIES THE PRINCIPAL FORMS OF GOVERNMENT SECURITIES ARE: 1.It is a document which is addressed by the owner of the goods to the custodian or .

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

debentures carry a predetermined rate of interest payable at regular intervals. (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. Life Insurance policy A life insurance is a contract between a person known as insured and the insurance company called insurer. Debentures give prior claim on the profits and assets of the company. Kinds of Insurance Policy A life insurance policy may be a. 2. Endowment Policy 55 . 4. the insurance company undertakes to pay. 1. 3. Transfer of debentures involves minimum expenses. company‟s assets. The value and title of the borrower could be ascertained easily. 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. a certain sum of money or annuity on the death of the person whose life is insured. Debentures are easily marketable. According to the contract. to the person for whose benefit the insurance is made. The principal is generally payable on maturity varying upon 10 years.

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

th e policy becomes void. 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 . (iii) Risk in case of suicide: A life policy contains a number of conditions. (iv) Admission of age: The insured must have forwarded his birth certificate and this mist have been accepted by the insurance company. (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. There is a risk that the customer may not be able to pay future premiums.(ii) Non-payment of premia: A life policy depends for its continued vaidity for the amount insured on the regular payment of premia. In its absence the difficulty arises in claiming the amount of the policy. For example.

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