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Banker and customer – meaning and definitions – Relationship between
Banker and customer – General and special obligations ; (i) 70 honour customer is
cheque ii) To right to set off – Garnishee order.
Operations of Bank accounts – Opening of different types of deposit accounts
in a Bank – Special types of Banker is customers – New deposit saving schemes
introduced by banks – cash certificate – amity, deposit, Reinvestment plants,
Perennial plan an non-Resident (General) accounts scheme.
Law reading to Negotiable instruments – meaning and features of cheques,
bill of exchange and promissory note – Holder in the course – privilege of holder in
due course – Requisites of cheque crossing – different forms of cheque crossing
and their significance – Endorsement – essentials of a valid endorsement –
different innovative financial services offered by commercial banks – new types of
credit cards – scraps, LOC, IBPS, any where banking etc.,
Paying Banker – meaning – duties and responsibilities – statutory protection
– payment in due coulee – refusal of payment – consequences of wrongly dishonor
– collecting banker – Banker as a holder for value – banker as agent statutory
protection duties and responsibilities.
Loan advances – landing polices – from of advances – loans over doubt and
cash credits secured Advances – General principles – carious methods of creating
charge – lien, pledge, hypothecation & montage – Advances against goods,
documents, bill of loading, Grail ways receipts stock exchange securities.

The Banking Regulation Act 1949 section 5(b) defines Banking a ―accepting
for the purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdraw able by cheque, draft, order or
A person who is dong the banking business is called a banker.
1. ― Banker includes a body of persons whether in corporate or not who carry
on the business of banking‖.
2. The Bill of exchange Act 1882 ― A banker is one who in the ordinary
couple of his business honours cheques drawn upon him by persons from
and for whom he occupies money on current accounts‖.
… Dr.L.Hart
3. The Banking Regulation Act 1949 section defines banker as ―a company
which transacts the business of banking in India.
A person who has an account in a bank is considered its customers.

1. ― To constitute a customer there must be some recognizable course or
habit of dealing in the nature of regular banking business‖.
…… Sir Tohn paged
2. ― a customer is one who has an account with a banker or for whom a
banker habitually undertakes to act as such ―.
…….. Dr.L.Hart.

Any dispute between the Banker and customer can be settled only on the
hasps of the nature of the existing relationship between the hanker and customer.
The relationship between a banker and his customer depends upon the nature of
service provided by a banker.
The relationship between banker and customer falls under two broad
categories viz.
i) General relationship and
ii) Special relationship
i) General relationship :
a) Relationship as debtor and creditor :-
The relationship between a banker and his customer is mainly that of
debtor and creditor, the respective position is determined by the state of the
account, this means when a banker receive deposit from a customer, the banker
becomes a debtor and the customer creditor.
Ordinarily in all saving accounts shows that customer‘s account is in credit
balance. So, that banker is the debtor and the customer is a creditor in some times,
the banker considered as a creditor when the customer borrows from the bank or
when a customers enjoys over draft or cash credit facility.
a) Relationship as Bailor and Bailee:
A banker becomes a bailee when he receives gold ornaments and
important documents for safe custody. In that case he cannot make use to them to
his best advantages because he is hound o return the identical articles on demand.
The banker does not get the ownership of there articles. The ownership remains
with the customer. A banker does not allow any interest on there articles it is only
the customer who has to pay rent or the lockers.
b) Relationship as principal and Agent :-
Section 182 of the Indian contract Act depends an agent as one
employed to do any dealing with third person.
When a banker act as an agent of his customer and performs a number of a
agency functions for the convenience of his customer. When banks undertake to
purchase (or) sell securities, collect, cheques, bills, interest, dividends, etc., and
pay insurance premium, subscriptions, etc., on behalf of his customer.
c) Relationship as foresee and Beneficiary : -
A Banker becomes a trustee only under certain circumstances for
instance, when money is deposited for a specific purpose , till that purpose is
fulfilled the banker is regarded as a trustee for that money.
The banker is a trustee whenever he undertakes to collect cheques gives for
collection. Once the cheques are realized, the banker is a trustee and the customer
is a beneficiary. But when the amount is credited to the account is creditor to the
account of the customer. The relationship changes when in the banker becomes a
debtor and the customer creditor. It is also an deposit on money and safe custody
of valuable securities.
d) Relationship as assignor and Assignee :-
Whenever a bank gives loan against life banker is the assignee and
the customer the assignor under assignment, the actionable claim of the customer
is transported to the bank as security for loan. Thus, assignment is done by
customers whenever they taken loan against insurance policy or book debts.
Statutory Obligation Of A Banker (Or) Special Features Of Relationship
Between A Banker And Customer :-
The primary relationship between a banker and his customer is that of a
debtor and creditor. The following are the additional obligations of a banker.

i) Obligation to honour the customer is cheque.
ii) Obligation to maintain secrecy of Account.
2) Obligation to honour the customer is cheque :-
The deposit accepted by a banker are his liabilities repayable on demand or
otherwise. The banker is, there fare, a statutory obligation to honour his customer‘s
cheques in the usual course action 31 of the negotiable instruments Act 1881, lays
down that.
― The drawee of a cheque having sufficient funds of the drawer in his hands,
property applicable to the payment of such cheques, must pay the cheque when
duly required to do so and in default o such payment must compensate the drawer
for any loss or damage caused by such default‖.
Thus, the banker is bound to honour his customers cherub‘s provided the
following conditions are fulfilled.
i) There may be sufficient funds to the drawer in the funds of the drawee. By
sufficient funds is meant funds at least equal to the amount o the cheque
ii) The funds must be properly applicable to the payment of the cheque for
instance it thus bunds are with drawn by a cheque for private use, the banker will
not honour it.
3) The banker must be duly required to pay. This means that the cheque, complete
in order, must be presented before the banker at the proper time.
Dishonour of cheques :-
The bank has a right to dishonor cheques under the following grounds.
1) rate :-
a) Part – dated cheques,
b) State cheques.
Port dated cheques are share which carry a date which is yet to come. If a banker
honours a post dated cheque, he will not only lose statutory protection but will be
sued by the customer.
State cheques means, when the cheque is more than 6 months old, it is no more a
2) Payee – When the payee is not clear (or) wrong person.
3) Amount in words and figures differ.
4. If the signature is not according to the specimen signature on differers from the
5) The endorsements appearing n the cheque is not proper.
6) If there are insufficient funds.
7) Over writing or cancellation which are no approved by the drawn by his but
signatures on the cheque, at the place o such overwritten., The cheque will be
II. Obligation to maintain secrecy of Accounts :-
A banker is expected to maintained secrecy of his customers account. The
banker should hot disclose his customer financial position and the details nature
and the details nature and the details of his accounts. If a customer suffers any
loss on accounts of the unwanted is closure of his account the banker will be
compelled to compensate for the loss suffered by his customer.
The duty of secrecy is not a statutory one only the nationlise banks in India
are compelled, under section 13 of the Banking comparing [Acquisition and transfer
of undertakings] Act, 1970, to maintain secrecy of the customer‘s Accounts.
Sir Tohn paged goes to the extent of saying that this secrecy should be
maintained even after the accounts is closed and even after the death of the
customer. It is immaterial whether the account is in debts or credit. This duty of
secrecy goes beyond the rate of the account.
Thus, the general rule about the secrecy of customer‘s accounts may be
dispensed with in the following circumstances.
1. Disclosure under compulsion of law.
2. Where there is duty to its disclose.
3. Where the interest of the bank required disclosured.
4. Where the disclosure is made by the express (or) implied of the customer.
1) Disclosure under compulsion of law :-
A banker is under statutory obligation to disclose the information relating to
his customer‘s accounts when the law specifically requires him to do so. The
following are done of the stationary provisions that fall in the category.
a) Section 131 & 285 of the income tax Act 1961.
b) Section 234 & 240 of the companies Act 1956
c) Section 4 of the banker‘s Book Evidence Act 1891
d) Section 45 B of the RBI Act, 1934.
e) Section 26 of the Banking Regulation Act 1949.
f) Section 86 of the Gift Tare Act 1950.
g) Section 94(3) of the criminal procedure code.
h) Section 43 of the foreign exchange Regulation Act 1973.
i) Section 29 of the IDBI Act 1975.
2. Where there is duty to the public to disclose :-
As between individual interest and public interest, public interest is more
important and so the individual interest should be sacrificed for the sale to the
public interest. Hence, a banker is Instrified in disclosing the date of his customer‘s
account in the interest of the public. The following grounds generally fall under the
a) It is a customer is engaging in the prohibited trading activity.
b) Disclosure of the account o an unlawful association.
c) Disclosure of the account of energy in times of war.
d) It is customer is receiving sizable funds from a foreign country.
3) Where the interest of Bank :-
A bank, in order to protect its own interest may have to general the secrecy of
customer‘s account. Any prodent banker will safeguard his position before fulfilling
his obligations.
The following are the instances of this kinds,
a) Disclosure of the account of the customer who has failed to repay the loan
to the guarantor.
b) Bankers amongst themselves have the practice of exchanging information
about customers for the sake o common courtesy.
4) Disclosure under he express on implied consent of customer :-
The Banker will be justified in disclosing any information relating to his
customers accounts with customers content. The consent of the customer may be
express or implied. Express consent exists in case the balance in his account or
any other information to his agent, employee or consultant, the banker would be
Justified in furnishing to such person only the required information and no more.
Another special feature of the relationship existing between a banker and his
customer is that a bank can exercise the right of lien on all goods an securities
entrusted to him as a banker.
Lien :-
Lien means the right to retain goods belonging to others until the debt due to
him is fully repaid for instance, a creditor who has in his possession, goods of his
debtor, many have a lien over the goods in respect of the money due by the debtor.
There are two kinds of lien,
1. Particular lien, and
2. General lien
i) Particular lien :-
Particular lien confers upon the creditor the right to retain the particular
security offered for the particular debt.
For example :-
A watchmaker has a lien own the watch till the repair charges due from the
owner of the watch are paid to him.
2. General lien :-
A general lien is applicable in respect of all amounts due from the debtor to
the creditor section 171 of the Indian contract Act, 1872, confers the right of general
lien on the bankers as follows.
―Bankers….. may in the absence of a contract to the contrary, retain as a
security for a general balance of amount any goods bailed to them‖.
A Banker‘s lien is always a general lien. A banker has a general lien confers
upon him the right to retain the securities in respect of the general balance due from
the customers.

If the following conditions are fulfilled, a banker can exercise his right of lien.
1) There must not be any agreement in consistent with the right of lien.
2) The property must come into the hands of a banker in his capacity as a
3) The possession should be lawfully obtained in his capacity as a banker.
4) The property should not be entrusted to the banker for a specific purpose.
Banker‘s Lien As An Implied Pledge :-
A banker‘s lien is generally described as an implied pledge. It means that a
lien not only gives a right to retain the goods but also gives a right to sell the
securities and goods of the customers after giving a reasonable notice to him, when
the customer does not take any steps to clear his arrears.
This right of sale is normally available only in the case of pledge. That is why
lien is regarded as an implied pledge. This right o sale is available only is
exceptional circumstances in the case of lien.
Right of appropriation [Clayton‘s Rule]
This is the right of a banker to appropriate the money paid by the customer to
any one of the loan including a time barred debt. The customer has more tan once
account on has taken more than one loan from the banker. At the time, the
question of appropriation of the money subsequently deposited by him are arises,
section 59 to 61 of the Indian contract Act, 1872 contain provisions regarding the
right of appropriation of payment in such cases. According to the right of
1. When payments are made by debtor to the creditor the debtor has a right to
inform the creditor as toward which loan he is making payment [section 59].
2. When the debtor has not exercised his right, the creditor ha the right to
appropriate the payment made by debtor towards any loan according to the
discretion of the creditor [section 60].
3. When neither debtor or creditor exercises their right for appropriation, then it
is the chronological order in which the debit entries have arises in the same
sequence the credit entries will go to discharge the debit entries [section 61]
4. In case of debt due with interest, any payment made by the debtor in the first
instant is to be applied towards satisfaction of interest and agreement to the
The relevance of apocopation arises in the case of death, insolvency or
retirement of a partner of a firm. Here, the banker will close the old account and
open a new account in the name of rosining partners. This enables the banker to
decide the liability of the deceased, retired an insolvent partners. The loan can be
recovered even from the estates of the deceased partner.
C.layton‘s care :-
A firm of bankers known as Reuagners, Dalies, Noble by co had five
partners. Devaijnes, the senior partner, died and the spurning partners carried on
the business of banking under the same name After a year the firm because
bankrupt and various clarred of creditors of the firm placed their claims against the
estate of revenges the deceased partner .
N. Clayton was one of those creditors who continued to deal with the
surviving partners by making payments to and receiving payment from the bank. At
the time of death of revenges, clayton‘s balances was 1,713. During the net few
days he with drew several times and thus the balance was reduced to & 453.
Thereafter surviving partner paid more than & ,1713 to him and subsequently his
deposits with the firm largely exceeded the amounts with drawn by him and thus his
credit balance at the time of bankruptcy of the firm was larger then the amount
which was due to him at the time of deposable of deafness, clayton claimed that the
amount of Z 45‘s was due to him from the estate of the deceased partner, It is
contention was that.
i) The withdrawals from the amount after the death of the partner were paid out of
the deposits made in the same period, and
ii) The credit balance standing at the time of the partners death was reconcilable
from the deceased partner‘s assents.
There arguments were not accepted by the court and clayton‘s claim was
The mutual claims of debtor and creditor are adjusted together and only the
reminder amount is payable this right off set off which enables him to combine two
accounts in the name of the same customer and to adjust the debit balance in one
account with the credit balance in the other.
For example :-
A banker has allowed on overdraft to Mr.x. amounting to Rs. 25000 and Mr. x
‗s savings Bank account shows a credit balance of Rs. 10,000. In case x fails to
pay the overdraft, the banker can execs his right of et off by combining both
account‘s by which the banker can claim the net difference of Rs. 15,000 from his
customer. The mutual adjustment of debit and credit balances is called set off.
The right of set-off can be exercised subject to the fulfillment of the following
conditions :-
1) The capacity of the parties both in the debit and credit accounts should be
one and the same i.e., the same customer should have the deposit account
and loan account.
2) The loan must he outstanding and over due where a loan amount is not over
due, right of set off cannot he expertise.
3) The right can be exercised in respect of debts due and not in respect of
future debts.
4) There should not be any agreement controls to due right of set off.
A banker has the automatic right of let of in the following cases.
i) On the death in slovenly and inanity of the customer.
ii) On receiving a notice of assignment of a customer‘s credit balance.
iii) On insolvency of a firm on winding up of a company.
iv) On the receipt of a garnishee order from the court.
v) On the receipt of notice of second charge over securities montage.
Garnishee order
The banker‘s obligation to honour a customer‘s cheques is extinguished on
receipt of a court odder know as the Garnishee order, issued under order 21, Rule
46 of the ill procedure code, 1908.
If a debtor fails to pay the debt owed by him to his creditor, the creditor may
apply to the court for the issue of a Garnishee order on the banker of his debtor.
Such order attaches the debts not secured by negotiable instrument, by prohibiting
the customer from receiving the debt ad the debtor from making payment thereof.
The amount of the customer with the banker, thus becomes suspended and the
banker is under an obligation not to make any payment from the account concerned
after the receipt of the Garnishee order.
The creditor at whose request the order issued is called judgment – creditor
the debtor whose money is forzen is called Judgment debtor and the banker who is
the debtor of the Judgment debtor is called the Garnishee.
This order issued in two parts :
a) The court directs the banker to stop payment out of the account of the
Judgment debtor. It is an order called ‗order wise‘ also seeks explanation from the
banker as to why the funds in the Sid account should not be utilized for meeting the
Judgment creditor‘s claim. The banker is prohibited from paying the amount due to
his customers on the date of receipt of the order ill.
b) After the banker files his explanation, if any the court issues the final order
called order absolute‘ whereby the funds in the account are attached to be
attached to be handed over to the judgment creditor. The judgment account may
be received after payment has been made to the judgment creditor as per the
directions of the court.
Effects of Garnishee order :-
When Garnishee order is issued, the following will be the effect on the
i) The banker has to suspend operation of the account of the Judgment debtor.
ii) The cheques drawn by the judgment debtor on the garnishee account should not
be honoured after the order is issued on the bank.
iii) When the order is made absolute the balance available should be made over to
the Judgment creditor as per the direction of the count. If the customers balances
is not sufficient to over the dues, then the banker has to pay whatever is available
on the judgment debtor‘s account.
iii) The suspended account of the judgment debtor may be received after
payment has been made to the judgment creditor as per the direction of
the court.
Rights And Duties Of A Banker :-
i) Banker‘s lien.
ii) Bankers right of set off.
iii) Bankers right of appropriation
iv) Law of limitation.
v) Banker‘s Right to charge compound internet.
vi) Banker‘s Right of incidental expenses.
Iii) Law O Limitation :-
Under Actual 22 of part of the schedule to the limitation Act, 1963 the period
of limitation for the refund of bank deposits in three years with effect from the date a
customer makes a demand for his money. A debt a customer makes a demand for
his money. A debt a customer makes a demand for his money. A debt becomes
time – barred if it is not repaid with in three years after it is contracted. The three
years conditions is not considered when the date of money deposited in bank
without any transitions having taken place, the debt due by the bank will not be time
Iv) Banker’s Right To Charge Compound Indirect :-
A banker grants loan and advances to customers and charges internet on the
same. bankers usually debit the customers account when a customer ails to pay
the interest amount every month. Afro period of thee months, the interest will be
added on the principal amount and the principal amount inflated Internet will now he
charged on the new principal amount. This kind of Interest added will the principal
is called compound internet and the banker has every right to do so.
Ii) Banker’s Right To Claim Incidental Charges :-
As long as the relation of a banker and customers exists, the banker has an
implied right to claim commission, interest and other incidental charges for the
services rendered to the customers. They are not payable in cash but are debited
in the accounted as and when they become due. If a customer is unable to keep a
gemunezatiue credit balance, the banker in India charges Rs.10 to Rs 50 per half

Deposit Account : -
The relationship between the banker and his customer begins with the
opening of account by the customer in a bank. Initially all the accounts are open-
ended with a deposit of money by the customer and rice this accounts are called
deposit accounts.
Different types of deposit account :-
Deposit Accounts are classifier into caprices types. Some of fee classified
are as follows,
1. Final deposit Accounts,
2. Earning deposit accounts,
3. Current accounts, and
4. Recurring deposit accounts.
Fixed deposit Account :-
A fixed deposit is one which is repayable after the expiry of a preen
determined period fixed by the customer himself. 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. This deposits are not repayable on demand but they are with
drabble subject to a period of notice. Hence, it is properly known as ‗time deposits‘
are ‗time liabilities‘.
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. Heavy with drawls are pomaded only against prior notes gently.
The number of with drawls is permitted is 50% per half year.
iii) Current deposit Accounts :-
A current Accounts is on Account which is opened for their convenueiens.
Money can deposited an withdrawn at any time. Money can be withdrawn by only
by means of cheques usually a hank does not allowed any interest an this account.
Even then, people come formed to deposit money on current Account because of
two important pricilegeges which type can enjoy in a current A/c.
a) over draft facilities.
b) Other facilities like close of cheques gofer of money, Gendering agency and
gendered utility services.
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. This will enable the depositors to meet contingent expenses. Many
people would not have sawed if this deposits had not b introduced. This deposit
works on the maxim ‗little drops of water make a big ocean‘.
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. 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.
ii) Payment of Interest :-
The banker usually pay interest quarterly or half yearly. Interested will be
payable by the Bankers on the deposits for the over due period onyx the deposits
Renewed. Wit drawl of Interest or the principal through cheque of is not permitted
through cheques is not permitted. 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,
Banker also permit encased of such deposits even before he due date.
if the depositors so distress, 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.
iv) Renewable before maturity :-
The reserve Bank as permitted the Banker to renew an existing term deposit
before maturate, with out involving tee penalty provided.
v) Loss of fixed deposit receipt :-
Were a deposit Receipt is lost, generally, a Banker demands the customer to
sign an identity Bond with a guarantee. it will pretext the Banker against losses in
future. In extra ordinary cases, the courtiers may be asked to go though the court
and seek its authorization.
vi) Exception from stamp duty :-
A fixed deposit Receipt, 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.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, payment by a Bank o co-operative security
where it exits Rs. 5000 in a financial gear.
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. In opening of new
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, prater ship forms and companies, the
customer mention is named, trust, occupations, specimen signature and the name
and signature of a person for References.
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,
usually they are obtained on cards, which are filed alphabetically for Ready
Referees. Each bank maintains a signature Book for this purpose thus specimen
signature protect the bankers against forgery.
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.
v) Safety against wrong full over draft granted :-
It a Banker grants an overdraft even by mistake, to a customer who is not
prosperity introduction the risk of losing case it is not repaid by the customer, In
such a care the amount can be creative only is the customer is a respectable
solvent party.
vi) Mad date writing :-
If a new party wants in accounts to be operated by come party else, 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, the
specimen signature of the authorized person and the power delegated to him.
vii) Amount in cash :-
After the above calamities are over the time of opening an account. The
minimum amount is Rs. 500 with cheque and 250 for with out cheques facility for
savings Bank accounts.
Operating of current and savings account :-
Operating a bank means that the customer deposits for there sums of money,
cheques etc into the bank and with dreams money according to his need on
convenience so the Banker hands over to the customer.
i) Cheque book.
ii) Paying-in-slip book and
iii) 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.
The cheque may be in favor of the customer himself of in favor of third party.
he must write the amount both in words and figures the book will dishonor a cheque
if there is any defect in it.
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, calques, draft, bills, etc., to
the credit of his account. Though the size and define such slips by from bank to
iii) Pass Book :
The Pas Book is a small handy book which count ions the record of
transitions in depts. and credit returns a Baker and his courtier. it is called a pass
Book because it passes between the hands of customer and banker. If refuels the
customer‘s A/c in the banker‘s laager.
Special Types Of Banker’s Customers :-
When a Banker opens an account in the name of customer this arises a
counteract between the two. This contract will be valued one only when the Both
the parties are component to enter into counteracts. Some different special types
of customers are as follows.
i) Minor (or) infant
ii) Married women
iii) illiterate person
iv) lunatics
v) executions, administrators and urinates
vi) Joint account
vii) Partnership form
viii) Joint stock companies
ix) Club, society and Non trading associations.
i) Minor or infant :-
A person who has not completed 18 years of age is a minor. if a guardian, of
his person are property appointed by the court before he completes 18
years , he
remains manor till he completes his 21
year. According Indian counteract act
1872. A minor his not capably of entering into a valid counteract and a contact
entered into by a minor his void. A counteract for he supply of necessary of life to a
minor, however, a valid counteract.
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, all their became the properties of her husband on her husband, she was
not allowed to hold property in her hold name.
A married women cannot make her husband responsible for the debts
incurred by her expect in some cases. If she is authorized to act has on agent of
other husband, then the husband can be made liable for the debts in the follow
a) If the loan taken with his contend of authority and,
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.
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. The
banker should also take session potlograntr attended by a first class magistrate for
the purpose of Indintification. 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
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, 1872, since a lunatic
does not understand what is right? and what is wrong? so, the counter enter into
him is void.
5) Executors, administers and trustee :-
Exactors and ammoniates are persons who are appointed to content the
faired of a person after his death. When a person know as dictator, [maker of will]
appoints another person for this purpose through a will, he is know as a exactors, if
the will of the testator does not mention the name of the exactor, (or) if the person
appointed as executer dies (or) refuses to act, the court appoints the person. For
the purpose that is know as administered. A trustee is a person in whose care he
control of an estate is placed under an instrument of trust on trust deed.
6) Joint Accounts :-
A joint Account is one which is opened by two or more indigos, who are not
partners in a farm (or) who are not joint trustee. While opening the joint Account,
the Banker must get a clear man date in writing, countering instructions as to, how
the account is to be apprised. The Banker should get specific interactions
regarding the operate of the account and the major of the powers delegated to the
authorized person. In the assertion of a man date, all joint holders must jointly
opportunity the account.

7) Partnership form :-
According to section 4 of the Indian partnership Act, 1932, A partnership is
‗The relaxation between persons who have agreed to share the profit of a business,
carried by on by all (or) any of them acting for all‘.

Unit – III
Many documents are rued in the mordent commercial world, but, certain
documents are freely used in commercial transfer which are called Negotiable
The negotiable stunts in India are governed by the Negotiable Instruments
act of 1881. This Act does not define a negotiable Instruments reaction 13 of
negotiable instrument simply states that @ A Negotiable Instrument means priming
note, Bill of exchange, (or) cheque payable either to order (or) to Bearer‘.
‗ One the property in which is acquired by any one who takes it benefited and
for value not-with-standing any defect of title in the person from where he took it?
i) Free transfer :-
There is know formality to he complied with the transfer of Negotiable
Instruments. It can be crassly either by more delivery or by endorsement and
delivery… Transplant is on geranial feature of a amegable instrument . But all
transaxle Instruments are not negotiable instruments.
ii) Free from defects :-
A person who takes Negotiable instrument from another person, who had
stolen it from somebody heals, will have absolute and dispute little to instrument
provide. He rescues the same for value. [i.e. after paying its full value]. The
transferee is called the holder in due course and his interest in the instrument his
well proceed by the law.
iii) No notes to Transfer :-
The transferor of a negotiable transmit can simply transfer the documents,
with out shrilling any notes of transform to the party who is liable on the instrument
to pay.
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.
Types of Negotiable instruments :-
In India, Negotiable instrument classifier into three, viz.,
i) Promissory Note.
ii) Bill of exchange
iii) Cheque.
i) Promissory Note :-
According to section (4) of negotiable Instrument Act of 1881, ‗ 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, (or) to the Bearer of the Instrument‘.
Thus, the promise not count ions promise by the detour to the creditor to
pay certain sum of money after a certain date. else it is always drawn by the
holder. he is called the matter of the Instrument.
Specimen of a profiling Note :
Rs. 10,000/- Chennai-600 082
July 2007
Three months after date, I promise to pay maha (or ) order the sum of
Rupees ten thousand, 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, signed by me matter, Directing a certain person to pay a
certain sum of Money only to, (or) to order of, A person or to the bearer of the
A bill of exchange continued an order from the creditor to the editor to pay a
specified amount to a person mentioned therein. The maker of a Bill is called the
‗drawer‘. person on whom it is drawn is called ‗ drawee‘. (or) ‗ acceptor‘ and the
person to whom the amount is payable is called the payee‘ some times the drawer
himself is the payee.
Specimen of a ill o exchange.
Rs. 10,000/- Chennai-600 082
July 2007
Three months after date, pay to Mr.Ram (or) order the sum of Rupees ten
thousand, for value revised.
To Stamp
G. Eany,
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. oral order (or)
promise don‘t make a value instrument.
ii) Un conditional order :-
The promise (or) order must be unconditinal if any condign are applied
destroys the Negotiable crater of an instrument. 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.
Corn example :- 7 promise to pay Rs. 1,000 days after x is retirement is not
3) Drawn on a certain person :-
A Bill is always drawn on a certain person, preferably, by the seller n his
courtier., hence the drawee must be a sorting person.

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. (ex. )
foods and sectary.
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, however promise
note are Bill of exchange or not the made payable to bazaar on demand.
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‘. In case of time bill, acceptance is essential and usually three days
grace is allowed in the case of payment of a Bill.
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.
A cheque, being a Negotiable instancing be passed from hand to hand easily
and so it has become a popular made of payment a cheque is the most economic
and safe method of money transaction because the transfer cost is very low and
also the portability of loss is minimum.

Section (6) of the Negotiable insurer act defines a cheque as follows.
‗A cheque is a bill of exchange drawn on a suicidal harden and not exposed
to be payable otherwise then on demand‘.
Specimen of cheque :-
Date : ___________
Pay _____________________________________________________
________________________________ or bearer.
A/c No :
Cheque No :
The person who draws a cheque i.e. the court one of the Bank is called the
drawer, and the Bank upon whom the cheque is drawn in know as the drawee (or)
M.I.C.R. Cheque :-
The reserve bank of India as introduced mechanized cheque processing
system using M.I.C.R. [Magnetic Ink character Recognition] Technology box sec
purpose of seeding up the cheque clearing process both local as well as inter-city.
Under this system the chorus are processed at high speed on machine, Bank
issue cheque, draftee and other payment instilment in M.I.C.R. format using the
special quality paper and printing specifications on M.I.C.R. instilments, their is
code line at the bottom cautioning information printed in Magnetic Ink, which is
required for mechanical prosing. The code lines containing the following
i) Trieste six number cheque number :
ii) Next three number indigent city code.
iii) Next three numbers indict Bank code.
iv) next thee numbers indict Branch code.
After some space their is the Number for transition code [that is thither the
transition is for saving on current account.
M.I.C.R. cheque books provide for record sleeps at the end which are used
for recording the details of every cheque issued.
Essential Features Of A Cheques :-
i) Instrument in waiting :-
A cheque must be an instrument in writing oval orders their fore do note
constitute a cheque. Their is know special rule regarding the writing materials to be
diesel. If may the done by means of a nice, Renal a typewriter are any other
printed charter.
2) An unconditioal order (or) promise :-
A cheque count ions a promise by the maker to his customer. A Negotiable
instrument is always unconditional a cheque is an order to pay and it is not request.
The honoring of the cheque was not he made to depend upon the happening (or)
occurrence of a purtune even or on the fulfillment of any count ions.
3) Drawn on a specified banker :-
A cheque is always drawn only on a prune hander. usually the name of
address of the banker is clearly printed on the cheque leaf itself.
4) Payable on demand :-
The cheque should not be expressed to be payable otherwise on demand it
is not necessary that the words ‗On demand‘ should appraiser on the cheque. As
per section 19 of a negotiable instrument act, unless a time factor is special by the
drawee. The cheque is always payable on demand
5) Payee to be certain :-
The payee must be a certain person be may he human being on an artificial
person. A cheque may payable due to two on more indulges in which care, all of
them must sign the cheque before the encasing it.
vi) A certain sum of money :-
A cheque is slay drawn for a definite sum of money. Indefiniteness has know
place in monetary transactions. any phase like ‗ lese then Rupees one hundred
only‘ (or) ‗above Rupees two hundred only‘. Does not give a clear and concrete
idea to the parties concord and it will creator foe cheque involved.

vii) To be signed by the drawer :-
The cheque must be signed by the drawer i.e. customer. The drawer
normally puts his signaler at the right hand corner of the cheque. When the
signature differs from the specified (or) it is slightly different, the Banker need not
honor the cheque.

Cheque Bill of exchange
A cheque is always drawn on a
printed form
A bill need not be drawn on a
printed form
cheque is always supposed to be
drawn against the funds in the
bands of the banker
Thin is no such supposed
A cheque can only be drawn
payable on demand and not
A bill may be drawn payable on
demand or the expery of a sertion
period after date are sight.
The banker need not accepted a
Accepteneens by the drawee is
A Cheque is an instument for
immidet payment
It is drawn for a specific period.
In case is an instument for immidet
Where s three days of grace are
allowed in care of bills.
The liability of the drawee
countionus for 6 months.
Unresanable delay in the presation,
will discharge the Bill
Cheques are exampled from
It requres spansing depending on
value and duration of the Bill.
It may be raised to enqure safety. It cannot be raised.
In case dishoner, Notice of dishoner
to the draver is not essential.
Notice of dishoner must be sent to
hold the party liable.

According to section (8) of the Negotiable instrument act defines a ‗Holder o
a promiser note, Bill of exchange or cheque means any person entitled in his own
name to the passion of the instrument and to receive (or) require the amount due
thereon from the panties thereof‘.
Clause two of the same section says, the person who has entitled to receive
payment at the time the instrument was lost, will counting to be regarded as its
holder, the oinker does not became its holder. A person his called a holder of a
regional instrument if toe following counter are stadiums.
(i) He must be entail to the possession of the instrument in his own name nod
under a leangle title. Actual posses o the instilment is not essential.
ii) He should have right to receive (or) require the amount from the parties counted
his own name.
Holder in due counsel :-
According to section (9) of the Negotiable instrument act defines a. ‗ holder in
due course means any person who, for counter became the possessor of a
promiser notes Bill of exchange (arc) Cheque, if payable to bearer, (or) The payee
(or) endocrine thereof if payable to order, happen the amount mentioned init
became payable and without having sufficient course to believe that depict existed
in the title of the person from who he derived his title‘.
A person becomes holder in due course of Negotiable instrument, if he
fulfilled the following conditions.
1) He must be a holder as defined in section 8. i.e. he must be entitle to passion of
the instrument in his own name and he should have the right to cursive (or) require
the amount. 2) The Negotiable instrument must be regular and complete in all
respects. holder in due coerce. The instrument must have been properly delivered
to the holder in due course.
3) The instilment must have be upturn was valuable contras that is by Paying its full
value for example a person crevices a cheque as a gift will not be called it holder is
due in because he did not Alan any available contain. So, the contradiction should
be legal and adequate.
4) The instrument must have been required before its maturity. If he takes its after
a due date, he will require the instrument with all defects in the instruments. If the
intent is payable on demand, he should have acquired it within a resemble time
after it is required.
5) A holder in due course must obtain the a limit with out having efficient cause to
between that nay defect existed in the title of the transferor section (9) lays heavy
secretenlity on the person excepting a negostiablstment in this regard. So a person
requiry an instument in good faith nd without lengligence.
So, the about define and coundioons total that,‘every holder in due course is
a holder, But a every holder is not holder in due course‘.
For all legal pongus, the of the holder in due course is supers ion to that of
the true owner. But, if fee instilment count ions a barberry, then his title is lost.
True owners title will became super son.
Privileges of holder in due course.
The following are the some of the rights and receileges of holder in due coerces
Better littlie free from debits
Section 53 states that, ‗ holder of a negotiable instrument who derives title
from a holder in due coerce has the right their on of that holder in due coerce‘. A
holder in due coupe is entitled to reburied the amount of the instument from any or
all of the prices parties. The good ill of the holder in due cause is effected if he
himself was party to the ford (or) illegality which effected instument early. so, a
holder induce course poser better tactile free from all defects.
Liability of prior parties to hidden in due coerce according to section 36,
‗every prior party is a negotiable instument, is liable their on to holder in due cop
uncle until he instument is duly satisfied‘. it means that holder in due court can
require the amount of lllneoreau installment from any on all of the pries parties to
the instument.
In case of incomplete instument according.
According to section 20, if a negotiable interment was originally an compel
instument and a sequent transferor, completed the treatment foray sum greater
then behalf was the intoner of the matter, the right of a hidden in due coerce of
require the money of the instrument is not at all effected.
iv) Right in case of fictitious bills :-
If a Bills of exchange is drawn on behalf oaf fireside person and his payable
to his order, the accepter his not relieved of his liability to holder in due council
because of such fictitious name but it essential that the holder in due coerce. Profits
that the documents hers the endorsement with signaler in the same hand has that
of the driver and the purporting to he made by the driver.
v) Right in case of unlawful consideration :-
According to section 58, A person liability and a negotiable instument cannot
defend himself against a holder in due came on the ground that the instument was
lot or upturned from him by means of an offence or far an unlawful cauterization
example: the Bill drawn through the amount lost in gambling. So it is holed in due
vi) Stopple against defying original validity of the instument :-
Section 120 provides that. ‗know maker of a promise note and no driver of a
Bill of exchange or cheque and No exception of a Bill of exchange for the homer of
the drawn shall in suit their on by the holder in due coerce, he primate deny the
validity of the instument as originally made or drawn‘.
example : Ram is the maker of a promising note for Rs.1000 payable to rattan, who
endorse it to Rain for a unable counter an its due date it is disnatured. Ray fails a
shut for the require of the comment for cannot deny that the instument as drawn by
him was not a valid one that is we cannot dispute that know amount was due from
him on the prosody note.
vii) centuple against denying capacity of payee to endorse :-
According atop section 121, the claim of the holder in due coerce cannot be
denied on the plea that the payee ha no capacity to enclose.
viii) Centuple against denying signaler (or) capacity of prison party :-
According to section 122, No enclose of a negotiable instument is primate to
deny the signaler or capacity of any primary party to the instument in case o a suet
by a holder in due council. Example : defrayal a hale of exchange on ‗y‘ infamous
of z to enclosures the same to ‗A‘. a minor. A enclosures it to be and ‗;B‘ to c who
becomes it holder in due coerce. It is disorder on the due date ‗C‘ the holder in due
course as the right to faille a suet against all or any of the parties to the bill expect
‗A‘, the minor, now ‗B‘ the endorser cannot plead that a was a minor and had know
capacitive to enclose the Bill and hens the bill is valued one he will rewind liable on
the to C.
Crossing of cheque.
Section 123 to 131 of the remittable instrument act count ion provocation
realizing to crossing.
Crossing a cheque means drawing to parallel transevense lines on the left
hand top corner of a cheque. Crossing on a cheque is a direction to the paying
banker by the drawer that payment should not be made across the counter. The
payment should not be made across the counter. The payment on a crossed
cheque can be collected only through a banker. Therefore, crossing probates the
holder o the cheque and reduce the portability of found.
Crossing of cheques is of two type
(i) General crossing
(ii) Special crossing
i) General crossing :-
Section 123 of a negolatable instument act 1881 defines ender l crossing has
―Where a cheque bears accuse its for an addition of the words ―and
company‖ (or) any abreaction their of between two parallel transducers lines.
Simply, either with are with out he ―not negotiable‖ that addition shall be denied to
be a crossing, and he cheque shall be to demand to be crossed generally‖.
Forms of general cross :-
a) b) c) d) e)

A generally crossed cheques notes the drawer and also the payee. The
following are the significance of general.
i) Effect of general crossing is that it gives a direction to the paying banker.
ii) The directions is that, the paying banker should not pay the cheque at the
counter. It should be pained only to a bellow banker that is payment is made they
an account and not at the counter.
iii) The main indention of crossing a cheque is to give protection to it. When
a cheques crossed generally, A person who is not entitled to receive its payment is
prevented from getting that cheque case or the paying bank.
Distinction between Bill of exchange and a raillery Note.
Basic Bill of exchange Premolar Note
No. of parties
There are three parties the
drawer, the drawee and the
There are two particles the
promiser and he payee
P rawer
The credit ion is the
The debtor is the drawer
Promise and order If contains an order to pay If contains a promises to pay
If should Abe accepted by
the drawee by the drawee
before it handing upon him
except in return cases.
It is signed by the person
liable to pay and as sub no.
acceptance is necessary
It is drawer is liable only
when the drawee does not
accept or pay the amount
It is maker is primarily liable
Nothing of
In case dishonored it would
be better to get in noted for
non payment
In these case nothing is not
In case of foreign Bill thus
are usually draw in the
three copies
Here only care copy is
prepared when it is foreign
on local.
Here the drawer stares
immediate relationship with
the acceptor and not to be
the payee
In this case the maker
stanzas in an immaterial
relationship to the payee.
The Bill payable on
demand need not be
stamped but otherwise
stamps would be
This has to be stamped in
any case.

Special crossing :
Section 124 of the negotiable internal act 1881 defines a special crossing as
―Where a cheque Bears across it is face, an addition to the name of a Banker, with
are without the words ―Not Negotiable‖. that addition shall be deemed a crossing,
and the cheque shall be deemed to be crossed specially and to be crossed to that
Farms of special crossing :-
1) 2) 3) 4)

Essentials of special crossing :-
i) Two parallel thane safe lines are not at all essential for a special crossing.
ii) The name of the Banker must be necessary specified across the face of
the cheque the name of banker itself counties special crossing.
iii) If must appears of the left head lied, preferably on the corner so is not to
obliterate the printed number of the cheque.
iv) The two Burial transfer lines and the words not negotiable may be added
to special crossing.
Significance of special crossing :-
i) Special crossing is the direction to the paying Banker. The direction is
that the paying Banker should pay the cheque only to the Banker, whose
name appears in the crossing or to his agent.
ii) If a cheque specially crossed to a Bank his presented by another Bank,
not in the capacity of it‘s agent, the paying Banker his justified in Return in
the cheque.
iii) A special crossing gives more production to the cheque then a general
crossing. It makes a cheque still safer because, A person who does not
have a retail claim for it, would find it defile to upturned payment.
iii) A/c payee crossing :-
This is know revision in law regarding this type of crossing. But, it has been
dwelled in practice. If the words, ―Account payee‖ are added to a crossing, It
becomes an account payee crossing.
These types of crossing give a further production to a cheque. This crossing
gives a direction to the collecting Banker. This direction is that, the collecting
banker should not collect it for pay person then the payee. If a collecting banker
collects such a years cheque for any person other then the payee. He will lose the
statutory production gives under section of the Act 131.
Forms of A/c payee crossing :-
a) b) c) d)

i) If payment is made by mans of crossed cheque, respect need not be
ii) Account payee crossed cheque makes sure that only the particular person
to whom the cheques are draw can resave payment.
iii) If a crossed cheque is lost Nothing lost because the finder of cheque
cannot encase it without the help of the Bank.
4) Not – Negotiable crossing :-
Section 130 of the Indian Negotiable instrument act lays down that, ―A person
taking a cheque crossed tenderly by specially, bearing in a either case the words ―
not negotiable‖ shall not have and shall be callable of giving a better little to the
cheque then that which the person from who he took if had.
Not negotiable does not mean not thundering negotiability is something
different from transit. Negoslibility is a broader term which includes tharability. As
per law. Negorhablity mans transablity by more delivery on endorsement and
deliveyr place tharablity free from defects. But, transability does not possess the
transfer free from defects.
Forms of Not negotiable crossing :-

For example :-
―A‖ draus a crossed cheque on his banker in favour of B without the words
not negotiable their in ‗C‘ steals it from the of ‗B‘ and endoures it to ‗D‘ who crivies it
for value and in good faith. [C had no title to the cheque]. ‗D‘ will be it is holder in
due couree and will have valued little, though his transferor [endorser] have know
title their to.
In case the cheque hearse thin words memorable in the crossing, the title of
‗C‘ his defective he cannot transfer to D title better then what he himself possess.
So, the cannot be its holder in due coerce.
Double crossing :-
Section 125 of the act provide that ― where a cheque is crossed special the
Banker to whom it is crossed, pay again cross it specially to another Banker his
agent for collection‖.
A specially crossed cheque is to be collected only through the Banker
specifically their in. Therefore, Especially crossed cheque cannot be crossed
specially again to another banker. i.e. a cheque cannot be crossed specially twice,
because the every purpose of first special crossing is trusted by the second one.
However, there is one expectation to this rule for specie purpose. If the
Banker, to whom a cheque is specially crossed, does not have a branch at the
Place of the paying Banker. So, the cheque crossed specially another Banker, who
acts his agent for the purpose o collection of the cheque. In such a case, the later
crossing, must specified hat the banker to whom it has been specially crossed
again shall act as the agent of the first banker for the purpose of collection of the
For example :-

It is necessary that the words ―as agent for collection‖ must be included in the
special crossing. Section 127 provides that ―where a cheque is crossed specially to
more than one banker receipt when crossed to an agent for the purpose collection,
the Banker on whom it is drawn shall reface payment their of‖.
The special crossed cheque with out the word as agent for collection shall not
be honoured by the paying banker. But, the collecting banker cannot reface to
collect such a cheque.
For example :

Endorsement is derived from the Latin word, ―dorsum‖. meaning ―upon
the back‖ which indicates that the useful place of an endorsement is on back of the
Along :-
If the space available on the back has been completely covered, A piece
of paper may safely be attached to the instrument and the subsequent
endorsement may be made on that paper. The paper so attached is know as
Negotiation :-
The Terrence of Negotiation, thus likes not in more transferee the
instrument from one person to another but also in the fault that the transferee that
get the right as the holder of the instrument. If the transferee of an instrument get
not be called its holder the instrument s not said to have been negotiation.
Delimitation Of Endorsement :-
According to sec 15, ―when the maker (or) holder of a negotiable
instrument signs the same, other wise then as us maker, for the purposes of
negotiation on ate back of face on face there or on a slip annexed their two or so
sighs for the same purpose a stamped paper indented to the completed as a
negated instrument, he is laid to have endured the same and is called endorser‖.
Legal provision regarding endorsement :-
Effect of endorsement :-
Section 50 provides that the endorsement of a memorable instrument
followed by delivery transfers to the endorsee the value their in with the right of
further negation. those the endorse acquires the property and also the right in the
instrument as its holder and he can also negotiate it feather also primes.
i) To encloses the instrument further (or)
ii) To receive its amount for tenders on for some other special person.
For example :
(A) Pay ‗C‘ for my use.
(B) Pay ‗C‘ (or) order for the A/c o ‗B‘.
Endorser :-
Every sole maker, power payee (or) endorses on all of special joint
makers, drawers, payee (or) endorses of a Negotiable instrument may endorse and
Negotiate the same. This is subject to the condition that the right to negotiate as
not her resented or excluded. Thus incase the instrument is held jointly by a
number of person, endorsement by all of them is essential one can not recipient for
The absence of the words ―or order ― in the instrument (or) endearment,
thereon does not restive other Migration. For sample : A bill is drawn payable to ‗A‘
or order. ‗A‘ endorses it to ‗B‘. But, he endorsement does contain the words ―or
order‖. it does not restorative ‗B‘s further Evocation ‗B‘ may further Negotiate the
iii) Time :-
According to section 60, A memorable instrument may be negotiated until
its payment has been made by the banker, drawee (or) acceptor at maturity but not
their after.

iv) Endorsement for a part of amount :-
Section 56 provides that if an endorsement his made on the instrument
for transforming only a part of the amount appearing to be due on the instrument,
the endorsement is not value. Their fore, the instrument must be endorsement for
its ender amount. But in case un instrument has been partly paid. It may be
negotiated for the balance of amount provided a note to that effect is given on
v) Death of enclose :-
If the endorser dies for after endorsing the instrument payable to order
but with out delivery the same to the enclose, such endorsement shall not be
valued and his legal represent ate can not complete its regulation by near delivery
their fore.
Essential of valid endorsement :-
An endorsement must be regular and valid in order to be effective. The
following rule are essential of a valid endorsement.
i) Signature of the endorsement :-
The instrument must be signed by the endorses. If the endorser signs in
block letters, it will not be considered a regular endorsement.
ii) Spelling :-
The endorser should spell his name in the same way as his name
appears on the cheque (or) Bill as its payee (or) endorsee. If his name is miss spelt
(or) has designation has been given in correctly he should singe the instrument in
the same manner ha given the instrument.
iii) No addition (or) omission of initial of the name :
A initial of name should mightier he added NOG – omitted from the name
of the payee (or) enclose as given the cheque.
iv) Prefixes and suffixes of he excluded :-
The prefixes and suffixes to the names of the payee (or) enclose need not
be included in the endorsement for example :- the words, ―Mr. Messer, shirk,
chromate, general, Dr.Manager, etc., ― need not be given by the endorser otherwise
the endorsement will not be regular.
i) Teller system
ii) ATM
iii) Home baking
iv) Green land
v) Factoring
vi) Mutual funds
vii) Electronic clearing system
viii) Gold and platinum card
ix) Gold banking
x) E-banking.
i) Teller system :-
Under the system, when a customer presents a cheque a counted clerk
will make payment immediately. So, the customer, need not wait for a long time for
with drawly of money. The counter clerk will have their specimen signature of he
customer and updated amount cased by his lied.
ii) ATM Automatic teller system :-
In ATM system a customer can with drawn money by using his cards.
The customer who wants to avail ATM facilities will be given a code number which
will be secrete by the customer.
iii) Home Banking :-
Instead of going to the Bank for with drawl of money or for deposits of
cheques a customers can do his banking business by sitting at home for this
purpose the personal computer of the customer will be collected with the bank‘s
computer through a net work. The customer will have a secrete code for operating
his amount from home.
iv) Green land :-
In India, credit card facilities is given to the farmers by issue green card to
them this will enable them to by all their input by using the Green card. They can b
seeds, fertilizers, and participles through this cards.
v) Factoring :-
Commercial banking in India are under baking factory business under this
the bills drawn by customers on the bank the will be handed over to the bank for
collection. The bank will pay 80% and balance 20% will be paid after reaching the
bill from the buyer for this purpose the bank will be received the factoring
vi) Mutual funds :-
To enable the customers to anvil the a bank of installment bankers, in
India have standard mutual funds. They saying of the customers are indented in
mutual funds by purchase o units, the bank, after mobilizing the funds, incorrect the
same in serious company seventies.
vii) Electronic clearing system :-
The telephone charges are being paid through this system. The banks
are connected to the telephone department through a network by which, the
telephone charges of the customers are paid. The customers will present there
telephone bills to the bank which in tomatoes electronically to the telephone
department and the bills are paid by the bank.
viii) Gold and Platinum card :
Certain restriction are induced in credit card facilities, But in gold or
platinum card, the credit limit restriction will not be their, customer who are very rub,
and who have a high local status evil not be provided gold or platinum and a gold or
platinum card holder can go to any part of the world for the purchase of valuable
items through this card.
ix) Gold Banking :-
It is a scheme introduced in 2000 – 01 Budget a by the union finances
minister and SBI is the first bank in India to introduce ―Gold deposit scheme‖
Account 13,000 tones of gold are estimated to be ramble in India, out of
13,000 tones SBI has initially special 4.54 tons from 3051 individually this gold
deposit will be used giving loan by the Jeweler industry under metal loan‘s scheme.
x) E-banking :-
E-banking reapers to electronic banking scheme in the entire operation
are done by the customer through his computer system by using code, which
maintained necessary of transaction. The computer will be instructing the banker
through the computer with regard to transfer instrument and repayment of loans or
appropriation of different payment.
xi) Credit cards :-
The credit cards act as on instrument of credit. The credit card holders
held not carry cash. They may purchases goods from many authorized dealers,
using the credit cards. The credit cards can also be used to settee accounts with
the merchant as the cards offer the power and flexcibility to plan payments in easy
installments. The customer may have to pay certain service charges to the bank
when he makes use of this card, apart from paying interest on the outstanding
xii) Travelers cheque :-
A traveler‘s cheque is a presented cheque of a particular denomination.
A banker may issue travelers cheque at the request of the customer after
captaining the customer signature. When he travels either with in the country or out
of the country, he may pay by travelers cheque.
xiii) Merchant banking :-
Some commercial banks have also started merchant banking in order to
assisted new industry‘s to upturned types of impartation and plan out their proposal
activities banks also under right loaned and of companies.
xiv) Debit card :-
Debits cards are generally used by customers for with drivel of cash from
ATM. debit card refers from the customers credit cards in the sends the debit card
holder‘s account gets install mentally debit un like in the case of credit cards were
as the card holder‘s are given a credit cards fixed period.
xv) Electronic fund transpiring system :-
Electron fund transfer system uses, computer and electronic technology
as the substitute cheques and other paper transition funds are transferred
installment among varies branches at varies locations in the country through the net
work, using latest commission technology.
xvi) Any time banking :-
Any time banking have helped the customers to over come the time
libations of four hours of customer services the customer are given a host of
banking services including departs withdrawal. required and transfers.
xvii) Any where banking :-
With the introduction of tale banking and networking of all brands through
comma network, customer becomes the customer entire hand credit a branch has
all the branches are connected by satellite inter system commodity of at has
safecilated with drawn from other station as serious usefully for frequent travelers.
xviii) Letters of credit :- [LOC]
A letter of credit is a document (or) order by a banker by one place,
authorizing some other banker in some other place, to honour the drafts
exchequers of a person named in the document up to the amount stated in the
letter and the issuing handed himself hands to pay the money paid. Inbound a
letter of credit carries a promise (or) an under taking by me issuing banking which is
honoured thought out the world.

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

(a). There must be sufficient funds in the customer‘s account and only in the account on
which the cheque is drawn. The amounts in the credit of the customer‘s account in other
branches will not be considered.
(b). The funds should be properly applicable to the payment of such cheques.
(c). The cheque should be properly drawn and should not be irregular or ambiguous.
(d). Cheques should be presented during the banking hours of the bank.
(e). Cheques should be presented for payment within a reasonable time. They should be
presented within six months of their issue. Usually, cheques presented after six months of
their issue are considered stale.
(i) Open or crossed cheques: When a cheque is presented for payment, the banker
should verify as to whether it is an open cheque or a crossed one and whether the
cheque is in printed from. There is no provision in the Banking Regulation Act
preventing a customer from drawing his own cheque.
(ii) Drawn on the specific branch: Cheques should be drawn on the particular branch at
which they are presented. If they are presented at a different branch were an account
is not maintained by a customer, the banker should refuse payment, 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.
(iii) Mutilated cheque: The banker should also verify whether a cheque is mutilated, torn or
cancelled. If it is torn in such a way as to give an impression that the customer had
desired its cancellation, the banker should return the cheque with the remark,
―Mutilated Cheque‖. When a cheque is torn accidentally, the banker can pass it for
payment after obtaining the drawer‘s confirmation on the 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. If no date is written and still presented for payment, the banker
must refuse payment.
(v) Words and figures differ: When the amount stated in words and figures differs in a
cheque, the banker follows the practice of returning the cheque with a remark to that
(vi) Material alteration: Changing the date, amount, name of the payee, removal of
crossing, etc., affect the credibility of the instrument. The banker should refuse
payment of a materially altered cheque unless it is confirmed by the drawer.
(vii) Proper endorsement: It should be ensured whether the cheque presented for
payment requires endorsement or not and if so, whether the endorsement made
thereon is regular or not.
(viii) Chronological order of payment : The banker generally follows the rule of making
payment of the cheques in the chronological order of their receipt. 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.
(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, 1881 provides that ―The drawee of a cheque
having sufficient funds of the drawer in his hands, properly applicable to the payment of
such cheques must pay the cheque when duly required to do so, and in default of such
payment, must compensate the drawer for any loss or damage caused by such


(i) Gibbons vs. Westminster Bank A Housewife issued a cheque to a departmental store
for purchases made by her. When the cheque was presented by the departmental
store, the banker negligently dishonored the cheque. When the account holder sued
the bank, it was held that the bank must pay the cheque, dishonored negligently.
(ii) Davidson vs. Barclays Bank: Davidson is a book maker and he issued a cheque for
15sh-10d to a client as part of dividend. When the cheque was presented by the client,
the banker, negligently dishonored it. Davidson sued the bank for negligence. 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. The smaller the
amount of the cheque dishonored.
In this case, Raja opal was employed as a liaison officer by a group of companies
at Delhi. He gave a cheque for Rest. 294.40 towards telephone charges to the telephone
department. When the cheque was presented to Canada Bank, it was dishonored
negligently. Consequently, the telephone line was disconnected for non-payment and the
employers of I.V Raja opal dismissed him from service, taking it as his negligence.
Dishonoring a cheque is different from refusing payment on a cheque. Dishonour
takes place when there is defect in the instrument or when there are insufficient funds in
the accounts. Refusing payment of a cheque takes place on the happening of certain
events. We can see the grounds under which a bank refuses payment.
(1) Countermanding of payment: When a customer after having issued the cheque to third
party, instructs the banker to stop payment on the cheque before the instrument is
presented, it is called countermanding of payment. It is the responsibility o f the
customer to inform the banker before the payment is effected.
(2) Death of customer: Notice of death of customer has to be given by the close relative of
the deceased. On receipt of the notice, banker will close the account and any cheque
received thereafter, payment will be refused.
(3) Insolvency of the customer: When the court adjudged the customer of a bank as
insolvent, the account of that customer will be taken over by an official assignee
appointed by the court. Hence, any cheque received thereafter will be refused
(4) Lunacy: When a customer is of unsound mind, hi‘ account cannot be operated. But
the lunacy of the customer has to be certified by a doctor and the nature of the lunacy
must also be stated. If it is of a temporary nature, the account may be suspended till
such time the lunacy is cured. But when the lunacy is of a permanent nature, on the
advice of the doctor, the account will lobe closed and cheques received thereafter will
be refused payment.
(5) Garnishee order: Here, 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
(6) Closing of account voluntarily: When the customer on his own accord, closes the
account b y giving a written declaration, the bank will close the account. But, the
customer has to surrender all the unused cheques and the passbook. The banker will
close the account after arriving at the balance. The amount will be paid to the
(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, the bank will close
the account automatically.
(8) Undesirable customer: When a customer issues cheques frequently with insufficient
funds, these are dishonored causing embarrassment, both to the banker and customer.
Such a customer will be intimated by the banker to close the account, failing which the
banker on his own will close the account and will send the balance, if any, to the
(9) Partnership firms, companies and institutions: Their account will be operated according
to the bye-law. In the case of death of a partner, winding up of companies or
dissolution of institutions, the account will be closed.
(10) In public interest: When a banker comes to know that the account holder is building an
account by cheating the public, he may close the account by giving notice to the party.
The bank does this in the interest of the public and prevents the public from incurring
any monetary loss.

1. Meaning of Collecting Banker
A Collecting banker is one who undertakes to collect cheques, drafts, bill, pay order,
traveler cheque, letter of credit, documents such as lottery chits, dividend warrants,
debenture interest, etc., on behalf of the customer. For undertaking this collection, the
collecting banker will be charging commission.
2. Capacity of Collecting banker
While collecting the instrument on behalf of the customer, 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.

(i) When the collecting banker advances money to the customer before the
realization of the cheques given for collection.
(ii) When the collecting banker settles the loan amount due from the customer with
the cheque amount given for collection, even before its realization.
(iii) Where a collecting banker reduces an overdraft with the amount for collection
before its realization.
(iv) Where a part of the amount is given by the collecting banker to the customer
even before the realization of the cheque.
(v) By allowing the customer to draw the full amount of the cheque before its
(b) As agent for collection: When the banker undertakes to collect the cheques and
credits the account of the customer only on realization. Thus, in acting as agent for
collection, there is no risk for the collection, there is no risk for the collecting banker
whereas in the case of holder for value, the collecting banker has enormous risks,
especially when the cheque is dishonored or payment has been made to the
wrongful owner of the cheque.
Statutory protection to collecting banker under Section 131 of the Negotiable
Instrument Act
According to this Section, ―A Banker who has in good faith received payment for a
customer of a cheque crossed generally or specially to himself shall not, in case the
title to the cheque proves defective incur any liability to the true owner of the cheque by
reason only of having received such payment‖.
(i) Collecting for a customer: A collecting banker must collect the cheque or draft or any
other instrument only for a customer. A customer is one who has an account opened
with the bank which may be a savings or a current account. A savings account can be
opened by any person, only when that person is introduced by another savings account
holder of the same branch of the bank.
(ii) The cheque presented to the bank for collection should be crossed generally or
specially: That is, the banker is collecting the cheque only on behalf of a customer. If a
customer gives an open cheque which is uncrossed, the banker will cross the cheque
before it is sent for collection.
(iii) In good faith: A collecting banker should accept the cheque for collection from the
customer on good faith. i.e., there should not be any ambiguity with regard to the
ownership of the cheque. If any doubt arises, the banker should clarify the same
before the collection of the cheque.
(iv) Without negligence: Negligence pertains not only with regard to the instrument but also
the manner and the circumstance under which the cheque is given for collection.
However, the fact of negligence will be seen under the duties of collecting banker.
There are number of instances revealing the negligence of the collecting banker.
(v) Agent for collection: Section 131 gives statutory protection to the collecting banker acts
agent for collection and not as holder for value.
A Collecting banker has three major duties to perform towards the customer:
1. Quick clearance of cheques or other instruments given for collection
Whenever the customer gives ay instrument for collection, the collecting banker
should immediately send the same 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
2. 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. Sometimes, the cheque given
for collection may bounce and gets dishonored due to insufficient funds. In such a case,
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.
3. To Collect cheques without negligence
Negligence of a collecting banker is of different nature. We can state the following
negligence of collecting banker.
(i) Negligence while opening account for a customer where in the banker has failed to
obtain letter of introduction and has opened the current account.
(ii) A cheque crossed but payment made across the counter by oversight.
(iii) A cheque crossed account payee and payment credited to the account of a person
other than the payee. For example, a cheque is drawn in the name of pay to Mr. and
crossed account payee. The bank should credit the account of only Mr. But if the bank
credits the account of Mr. or Z, it is negligence.
(iv) A Cheque crossed not negotiable. Here, the collecting banker should take due
precaution before making any payment. But if a collecting banker makes payment
without any precaution, it amounts to negligence.
(v) Opening of accounts without proper enquiry. As stated already in the two case laws,
where banker has not made proper enquiries with the employer of the intending
(vi) A cheque belonging to a partnership firm endorsed to the personal account of the
customer and if the banker, without proper enquiries, credited the personal account of
the partner it is ground for negligence.

After accepting deposits from the customer, a bank goes for lending or for
investment in different types of securities, such as government, company etc. For deposits
received under savings account and fixed deposits, the bank has to pay an agreed interest
rate. This, the bank has to pay only from its earnings. On the investments, the bank earns
a good return. Similarly, when the bank lends, it earns a higher interest rate. From out of
the return on investments and from the interest earned on loans, the bank will be able to
offer interest for the deposits, The difference between the interest offered on deposits, and
the interest earned on lending will be the profit of the bank.
(a) Safety: When a loan or investment is made, the banker will have to ensure that the
money advanced is returned by the borrower along with interest within the stipulated
period. This is possible only when the borrower does not face any risk and strictly
adheres to the terms and conditions of the loan. For this purpose, the banker will have
to chose such type of borrowers who are prompt in repayment of the principal and
interest amount.
(b) Liquidity: An asset is said to be liquid when it can be converted into cash within a
short notice, with out loss. As the bank is investing or lending the depositors‘ money, it
has to take more precaution while doing so. The depositor may demand his/her money
at any time and the bank must be in a position to repay the same.
(c) Profitability: When a bank is undertaking lending or investment, it has to earn a good
return. The bank has profit as its main business motive. So, while lending or investing
the depositor‘s money, the bank must earn higher interest or higher return. if the bank
is able to achieve this, it will be deploying its funds in such ventures which give a higher
(d) Shift ability: As the bank is giving loan against the security, in case of bad debts, the
bank must be able to sell the security and realize the loan amount. In some cases, the
bank will not sell the security, but will shift the same to the Central bank which will grant
the commercial bank additional fund against the security. Mostly treasury bills can be
shifted to Central bank and the commercial bank can raise additional funds.
(e) National Interest: The bank must keep in mind national interest while lending or
investing depositor‘s money. When a country is facing unemployment, the bank must
give more loans to employment oriented industries, so that the problem of
unemployment can be reduced. Similarly, when a country is faced with food problem,
more loans should be given for agriculture so that, food production can be increased.
(f) Safety Margin: While granting loan against security, the bank will have to keep
sufficient safety margin. 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%. For example, when
loan is given against a jewel whose market value is Rest. 10,000/-. the loan amount
will be Rest. 6,000/- and the safety margin Rest. 4,000/- now even if the market value
of the jewel fluctuates to Rest. 9,000/- or Rs.8,000/- still the banker will be able to
realize the loan amount in case the borrower defaults.
(g) Diversification: As the banker lends or invests, he cannot invest all his resources in a
single industry or with a single borrower. The banker should not keep all the eggs in
the same basket. By choosing a single industry such as iron and steel or sugar, the
banker is inviting more risks. It is likely that these industries may face depression and
the banker will find it difficult to recover the loan or realize his investment.
Section 5(i) of the banking regulation Act, 1949, 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‖.
(i) Primary Security
Prime security and collateral security. In the case of prime security , it is the security
which is taken by the banker as the main security for the loan. In fact, the prime
security is obtained by the borrower with the help of the loan. Example: House in a
housing loan. The house is mortgaged to the creditor.
(ii) Collateral Security
Collateral Security is that additional Security offered by the customer over and above
the existing security. It may be like insurance policy or any other immovable property.
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.

Bank offer different kinds of borrowing facilities to their customers. The credit
facilities may be broadly classified into four types.
1. Loans.
2. Cash Credit System.
3. Overdraft.
4. Bills Purchased and Discounted.
1. Loans
In case of loan, the banker advances a lump sum for a certain period at an agreed
rate of interest. 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. The interest is charged for the full amount
sanctioned whether he withdraws the money from his account or not. The loan may be
repaid in installments or at the empery of a certain period. The loan may be made with or
without security. A loan once repaid in full or in part cannot be withdrawn again by the
customer. In case a borrower wants further loan, he has to arrange for a fresh loan.
2. Cash Credit
A cash credit is an arrangement by which the customer is allowed to borrow money
up to a certain limit. This is a permanent arrangement and tube customer need not draw
the sanctioned amount at once, but draw the amount as and when required. He can put
back any surplus amount which he may find with him. Thus cash credit is an active and
running account tow which deposits and withdrawals maybe effected frequently.
3. 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. This is only a temporary accommodation usually granted against
securities. The borrower is permitted to draw an repay any number of times, provided the
total amount overdrawn does not exceed the agreed limit. The interest is charged only for
the amount drawn and not for the whole amount sanctioned.
Bank, Sometimes, grant unsecured overdraft for small amounts to customers
having current account with them. Such customers may be government employees with
fixed income or traders. Temporary overdrafts are permitted only where reliable source of
funds are available to a borrower for repayment
3. Bills Discounted and Purchased
Banks grant advances to their customers by discounting bill of exchange or promote.
The amount, after deducting the interest from the amount of the instrument, is credited
in the account of the customer. In this form of lending, the interest is received by the
banker in advance. Discounting of bill constitutes a clean advance and banks rely on
the credit worthiness of the parties to the bill.
Loans and advances may be made either on the personal security of the borrower
or on the security of some tangible assets. The former is called unsecured or clean or
personal advances and the latter is called secured advances.
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‖.
The distinguishing feature of this type of loan, according to the definition is that no
tangible security is offered to the bank.
The confidence is judged by three considerations, character, capacity and capital
usually referred to as the three C‘s.
Character constitutes the best asset of a man. The word character implies personal
qualities like honesty, responsibility, promptness, 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.
The capacity of a borrower refers to his ability to manage the business. Success of
the enterprise depends mainly on the initiative, interest, experience and managerial ability
of the entrepreneur. So capacity is the next consideration in granting clean advances.
In addition to the character and capacity of borrower, a banker looks into another
aspect i.e., capital. A bank provides mainly the working capital requirements of the
business. A borrower should have sufficient capital to conduct his business and adequate
plant and machinery to carry out capital to production. In this respect banks may follow the
formula evolved by Dr. C. B.Memoria.
a. Character + Capacity + Capital = Safe credit
b. Character + Capacity + Insufficient capital = Fair credit risk
c. Character + Capacity - Capital = Limited success
d. Character + Capacity -
Impaired character

= Doubtful credit risk
e. Character + Capacity - Character = Dangerous risk
f. Character + Capacity - Insufficient capital = Fair credit risk
g. Character + Capacity - Capacity = Inferior credit risk
h. Character + Capacity - Capacity = Fraudulent one

Modes of charging Security
The important methods of charging a security are the following
1. Lien.
2. Pledge.
3. Mortgage.
4. Assignment.
5. Hypothecation.
Lien is the right of a creditor to retain the properties belonging to the debtor until the
debt due to him is repaid. Lien gives a person only a right to retain the possession of the
goods and not the power to sell them. A banker‘s lien is a general lien which tantamount
to an implied pledge. It confers upon the banker the right to sell tee securities after serving
reasonable notice to the borrower.
Section 172 of Indian Contract Act, 1872, defines a pledge as, the ―bailment of
goods as security for payment of a debt or performance of a promise.‖
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.
(a) delivery of the key of the warehouse in which the goods are stored.
(b) Delivery of the document of title to goods like Bill of Lading, Railway Receipt,
Warehouse Warrant etc.
(c) Delivery of transferable warehouse warrant if the goods are kept in a public ware
(ii) Transfer of ownership: The ownership of goods remains with the pledge. The
possession of the goods vests with pledge till the loan is repaid.
(iii) Right in case of failure to repay: If the pledge fails to repay within the stipulated time,
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,
(iii) File a suit for the sale of the goods pledged and the realization of money due to him.
A Mortgage is a method of creating charge on immovable properties like land and
building. Section 58 of the Transfer of Property Act, 1882, 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, an
existing or future debt, or the performance of an engagement which may give rise to a
pecuniary liability.‖
Section 58 of the Transfer of Property Act enumerates six kinds of mortgages:
1. Simple mortgage.
2. Mortgage by conditional sale.
3. Usufructuary mortgage.
4. English mortgage.
5. Mortgage by deposit of title deeds.
6. Anomalous mortgage.
Simple Mortgage.
In a simple mortgage, the mortgager does not deliver the possession of the
mortgaged property. He binds himself personally to pay the mortgage money and agrees
either expressly or impliedly, that in case of his failure to repay, the mortgagee shall have
the right to cause the mortgaged property to be sold and apply the sale proceeds in
payment of mortgage money.

Mortgage by Conditional Sale
In this form of mortgager ostensibly sells the property to the mortgagee on the
following conditions:
1. The sale shall become void on payment of the mortgage money.
2. The mortgagee will retransfer the property on payment of the mortgage money.
3. The sale shall become absolute if the mortgager fails to repay the amount on a
certain date.
Usustructuary Mortgage
Under this from of mortgage, the mortgager delivers possession of the property or
binds himself to deliver possession of the property to the property to the mortgagee. The
mortgagee is authorized to retain the possession until the debt is repaid. The mortgager
reserves the right to recover the property when the money is repaid.
English Mortgage
The English mortgage has the following characteristics:
1. The mortgager transfers the property absolutely to the mortgagee. The mortgagee,
therefore, is entitle to take immediate possession of the property. The transfer is
subject to the condition that the property shall be transferred on repayment of the loan.
2. The mortgager also binds himself to pay the mortgage money on a certain date.
Mortgage by Deposit of Title Deeds
When a debtor delivers to a creditor or his agent document of title to immovable
property, with an intention to create a security there on, the transaction is called mortgage
by deposit of title deeds.
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.
Assignment means transfer of any existing or future right, property or debt by one
person to another person. The person who assigns the property is called assignor and the
person to whom it is transferred is called assignee. Usually assignments are made of
actionable claims such as book debts, insurance claims etc., In banking business, a
borrower may assign to the banker (i) the book debits, (ii) money due from government
department, (iii) insurance Policies.
Assignment may be of two types:
1. Legal Assignment.
2. Equitable Assignment.
This is applicable to movable goods. The borrower is given loan for the purchase of
goods or vehicles. Though the borrower is the owner of the security, the creditor has a
charge on the security until the loan is repaid. If the borrower fails to pay, the creditor will
cease the goods from the borrower. Thus, hypothecation provides a right for the creditor
to take possession of the goods.
Pledge Mortgage
1. Applicable to movable goods only. 1. Applicable to immovable property.
2. Governed by Indian Contract Act.

2. Governed by Transfer of Property.
3. Possession of security with the
pledge or creditor.

3. There is no possession of property.
4. There is pledgor-Pledgee
4. There is mortgagor-mortgagee
relation ship
5. As a bailee, the pledge has to take
care of the security.

5. There is no such responsibility for
the Mortgagee.
6. The pledge has a lien on the
6. There is no lien for the Mortgagee.
7. When there is a default, the pledge
can sell the security and recover the
loan amount
7. Under English mortgage, the
ownership of property is transferred in
favour of mortgagee when there is
default by the mortgagor.

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

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


Document of title to goods are defined by Section 2 of the Sale of Goods Act 1930
as ―A bill of lading, dock warehouse keeper‘s certificate, railway receipt 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.‖
The following are some of the documents of title to goods.
1. Bill of lading
2. Dock warrant
3. Railway receipt(R.R.) or Lorry receipt (L.R)
4. Delivery order, and
5. Warehouse keeper‘s Certificate.
1. Bill of Lading:
This represents goods sent by ship. Only on production of this document, the
captain of the ship will deliver the goods. A bill of lading is a quasi negotiable instrument.
That is, 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, even if he is a holder in due
course. If the freight changes are due on a bill of lading, and without knowing this, if a
person obtains the same, he cannot obtain a favorable title as the captain will refuse to
deliver the goods.
2. Dock warrant:
After taking delivery of the goods from the ship, the goods will be kept in the dock
and the dock master will give a certificate which is a dock warrant. Only on production of
the dock warrant, the goods will be delivered.
3. Railway Receipt or Lorry Receipt:
When the wholesaler dispatches goods to the retailer, under the condition that
documents are negotiable through the bank, the documents, railway receipts or lorry
receipts will be sent to the bank of the retailer. The retailer‘s bank will intimate him (the
retailer) about the receipt of L.R. or R.R. which is representing the goods sent by lorry or
rail. The retailer after making payment into the bank, will take delivery of these
documents. Later, he will produce it to the railway authorities if it is R.R and to lorry
authorities if it is L.R. and take delivery of tools.
4. Delivery Order:
It is a document which is addressed by the owner of the goods to the custodian or .
possessor of goods, normally the warehouse keeper. 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.
5. 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. 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.
1. Stock
2. Bearer bonds and
3. Promissory notes
A stock holder is given a certificate indicating the amount of a specified loan held by
him. The name of the stock holder is entered in the books of the public debt office. The
certificates are not transferable by endorsement.
Bearer Bonds
A Bearer bond certifies that the bearer is entitled to certain sum specified on the
date indicated. The bearer of the bonds possesses the ownership. The title to the bonds
is transferred by mere delivery without any formality.
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, on a specified date or after certain notice, according to the terms
issue. A promissory note is negotiable one. The title to the promissory note passes by
endorsement and delivery.

Corporate securities
The corporate securities comprise the ownership securities such as equity shares
and preference shares and creditor ship securities such as debentures.
Merits of stock Exchange Securities
(1) Liquidity: Stock and shares can be easily realized if the borrower is unable to pay the
debt. The existence of ready market provides liquidity to the security.
(2) Safety: In normal times the securities enjoy stability of value. in times of recession the
value of security may undergo fluctuations. But gilt-edged securities are less
susceptible to the changes. Nowadays even corporate securities are unaffected by
business cycle.
(3) Few legal formalities: Investigation of the title involves no complication as in the case
of real estates. The formalities to be observed are few which facilitate easy transfer of
securities and minimize the expenses.
(4) Negotiable securities: Some of the securities such as bearer bonds bearer
debentures, share warrants and government promissory notes are fully negotiable.
a. The banker gets good title and from all defects if he acts bonfire.
b. The securities empower the banker to dispose them of without customer‘s assistance.
c. Transfer of the securities requires no stamp duty and so is inexpensive.
(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.
(6) Easier valuation: The market value of these securities can be easily ascertained from
quotations given in stock exchange reports or newspapers.
A debenture is a document issued by a company as an evidence of debt. It is an
acknowledgment of company‘s indebtedness to its holders. The debentures carry a
predetermined rate of interest payable at regular intervals. The principal is generally
payable on maturity varying upon 10 years. The amount of debenture is usually secured
by a fixed or floating charge on the company‘s assets.

Debentures as security are acceptable to bankers because of the following
1. Debentures give prior claim on the profits and assets of the company.
2. Debentures are easily marketable.
3. The value and title of the borrower could be ascertained easily.
4. Transfer of debentures involves minimum expenses.
Life Insurance policy
A life insurance is a contract between a person known as insured and the insurance
company called insurer. According to the contract, the insurance company undertakes to
pay, to the person for whose benefit the insurance is made, a certain sum of money or
annuity on the death of the person whose life is insured.
Kinds of Insurance Policy
A life insurance policy may be a,
(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.
Endowment Policy
In case of an endowment Policy premiere payable during the stated period or till
death, if earlier. The policy money is payable on the expiry of the period or on the death of
the insured.
Advantages of Life Policy as Security
(i) Liquid security: A life policy can be easily realized. If he borrower fails to
repay the loan, the bank can surrender the policy and get payment of surrender
value. 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.
(ii) Stability in value: A life policy is stable in value. Its surrender value
continually increases, 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.
(iii) No problem in ascertaining the value: The value of the policy can be
easily ascertained. Sometimes, the policy it self indicates how the surrender
value is to be calculated, if it does not do so, the company will supply required
(iv) Assignment made easy: The policy can be easily assigned in favour of
the banker. The legal formalities connected with the assignment is simple. The
banker gets perfect title without much difficulty.
(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.
(i) Evasion of facts when policy is effected: A contract of insurance is a contract of
Uberriemae fide i.e. contract mad in utmost good faith. This means the insured
must disclose all material facts relating to his life at the time of taking the policy.
(ii) Non-payment of premia: A life policy depends for its continued vaidity for the
amount insured on the regular payment of premia. There is a risk that the
customer may not be able to pay future premiums. The policy will lapse if the
assured fails to pay the premia regularly.
(iii) Risk in case of suicide: A life policy contains a number of conditions. For
example, almost all policies have a ‗suicide clause‘ stating that if the assured
commits suicide within the period from the date of insurance, th e policy
becomes void.
(iv) Admission of age: The insured must have forwarded his birth certificate and
this mist have been accepted by the insurance company. In its absence the
difficulty arises in claiming the amount of the policy.
(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. In such case the contract
becomes void.

Fixed deposit receipt
Fixed Deposits which are repayable after the expiry of a certain period are
excellent security to obtain advance from banks. The depositor who is in urgent
need or money can seek loans by pledging the Fixed Deposit Receipt.
1. Deposit receipt in borrower‘s name: Advance should be granted to the person in
whose name the deposit stands. If the deposit is in two or more names, a letter
o authority signed by all authorizing the banker to grant loan to one or more of
them should be obtained.
2. Deposit receipt in minor‘s name: No advance should ordinarily be granted
against a deposit standing in the name of amino. In exceptional cases, an
advance could be made after getting a declaration from the guardian that the
amount will be utilized for the benefit of the minor.
3. Advances against third party receipt: Banks may allow advances on the security
of third party fixed deposit receipt issued by their own bank. In such a case the
banker should get the receipt duly discharged by the owner of the receipt and a
letter of request sighed by him authorizing the bank to hold the receipt as
security for the advance.
4. Discharge of the deposit receipt: A fixed deposit receipt accepted for advance
should be discharged by the depositor putting his signature across the
appropriate revenue stamp.
5. Note the lien: The bank‘s lien should be noted in the fixed deposit receipt and
ledger and also on the face of the receipt under the signature of an authorized
bank officer.
6. Margin: According to the directive issued by the Reserve Bank, a margin of not
less than 25% is to be maintained while granting loans against any deposit.
7. Rate of interest: According to the Reserve Bank Directive the rate of interest
chargeable on a loan against fixed deposit receipt shall be at least two percent
above the interest payable on such deposit if the deposit is in the name of the
Repayment: Usually advances against fixed deposit receipts are automatically
adjusted on maturity from the proceeds of the deposits. If payment is made before
due date, the deposit receipt is returned to the borrower after cancellation of
discharge there on.