Duties & obligations of Paying Banker & Collecting Banker & Statutory Protection

under NI Act, 1881.

Compiled by
Md. Najir Hossain
Faculty Member, BIBM
Introduction
A banker is one who does banking business. According to ‘Bank Company Act, 1991’: Banking business
means ‘accepting for the purpose of lending or investment, of deposits of money from public, repayable
on demand or otherwise and withdrawable by cheque, draft, order or otherwise’. Thus, the prime duty of a
banker is to honour the cheques of its customers.
Duties & Obligations of Paying Banker
Wrongful dishonor of a Cheque: Section-31 provides :‘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 so to do , and in default of such payment, must compensate the drawer for any loss or
damage caused by such default’. So, it is equally important that the banker must be cautious both at the
time of honouring as well as dishonouring the cheques. The wrongful dishonour of a cheque does not
mean misappropriation of money, but it leads to breach of contract and causes financial loss or
defamation of the drawer. The banker may be sued in the civil court by the drawer and liable to
compensate.
Precautions of payment of a cheque
 Form of Cheque: The cheque must be in proper form. The bank may not honour the cheque
which is not in prescribed form.
 Date of Cheque : The cheque must be dated when it is presented. The undated cheque is valid ,
but it must be filled by the holder at the time of presentment.
 However, the bank will not honour the cheque in the following cases:
o Stale Cheque : It is an ‘Out-of-date’ cheque i,e a certain period of time has elapsed since the
apparent date of issue. Generally, a cheque is termed as ‘stale cheque’ which is presented after
six months from the date of issue.
o Post-dated Cheque: It bears a date which is yet to come. It runs the following risks:
a) drawer may countermand payment;
b) drawer may make the bank liable for dishonouring of other cheques on account of
insufficiency of fund;
c) death or insolvency or lunacy of the drawer may occur.
 Amount of Cheque: The amount in the cheque both in words and figures should be the same.
However, Section-18 states that in case the amount in words and figures differ, the amount in
words will be taken into consideration for payment. But, it is advisable that such cheque should
not be paid.
 Material Alteration : The cheque which is materially altered will not be honoured. However, in
case the alteration is authenticated by the drawer the bank will make payment of the cheque in
due course.
 Endorsement of Cheque:
The bearer cheque requires no endorsement. But a cheque payable to order requires
endorsement while it is transferred. The bank must ensure that the endorsement is regular and
the person to whom the payment is made, is properly identified.
 Crossing of Cheque: If the cheque is a crossed one, the bank shall not make payment of the
cheque over the counter but through a collecting banker.
 Issuance of Cheque : The cheque must be issued properly by the drawer. The requisites as
stipulated in Section-5 & 6 must be fulfilled.
Main risks of a Paying Banker
 Forgery of Drawer’s Signature: If the drawer’s signature is forged and the banker makes
payment, the banker is liable to compensate as because no instruction has been given by the
drawer. However, the banker may be exempted in two cases:
 that forgery is connected with negligence of the drawer and is proximate cause of loss;

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  where the drawer is found to be liable of unreasonable delay in informing the bank about
the forgery of his signature after he comes to know of it.
 Change in Amount: If any change is made in amount for the purpose of fraud and the banker
makes payment, the banker is liable to compensate. However, when the drawer draws a cheque
without care leaving space which allows insertion of words or figures and the change is made
fraudulently , the banker will discharge liabilities for making payment of the cheque.
Legal Protection of a Banker
Payment in due course: The banker is expected to make payment in due course. Section-10 of N.
I. Act provides: ‘payment in due course’ means 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 mentioned therein. Thus, the payment in order to discharge of a
cheque must satisfy the following:
 That the payment should be in accordance with apparent tenor of the cheque.
 Apparent tenor means what appears on the face of the cheque to be the intention of the drawer.
 That the person to whom payment is made should be in possession of the cheque i,e he is the
holder of the cheque entitled to receive the amount.
 That the payment should be made in good faith and without negligence.
 This implies that no reasonable ground exits to suspect the title of the holder and payment has
been made in accordance with banking norms and procedures.
When banker is discharged
A bank is discharged from liability where the bank pays a crossed cheque in due course
 to a banker, if crossed generally
 to a particular banker on whom it is crossed or its agent, if crossed specially (Section-128).
 A bank is discharged from liability by making payment of the amount of a bearer cheque in due
course to the bearer (Section- 85).
 A bank is discharged from liability by making payment of the amount of an order cheque in due
course to the payee or the apparent endorsee (Section-85).

When a banker may refuse to honour a cheque

 funds in the account is insufficient
 funds are not properly applicable
 Countermand of payment is made
 information of death or insolvency or lunacy of the drawer is received.
 garnishee order is issued by the court
 freezing or attachment in the account is imposed by the competent authority.
Duties of a Paying Banker at the time of payment of cheque.
1 Verify the signature of the drawer on the cheque to see if it agrees with the specimen of record.
2 Check whether all material alterations have been authenticated by the full signature(s) of the
drawer(s).
3 Verify the date of the cheque to ensure that the cheque has not become stale. If a cheque is
stale it should not be paid unless revalidated.
4 Do not pay a post dated cheque.
5 Do not pay a crossed cheque across the counter except to another bank presenting it.
6 If paid across the counter, obtain the presenter's discharge on the back of the cheque with date.
7 Verify the crossing whether special or general. Note whether a cheque is bearer or order.
8 If a Cheque is made payable to a firm or company or joint holders credit the proceeds to the
respective firm or company or the joint payees, but not to an account of any one person who is a
partner employee, or director or one of the joint holders respectively.
9 Carefully scrutinise crossings with additions like ' Not Negotiable ' and "A/C. Payee".
10 Check whether the amount in words and figures agreed in the cheque.
11 Do not pay cheques, payment of which have been stopped by the drawer.
12 Pay only cheques which have been drawn on to same branch of the bank in which the customer
has his account.
13 Examine whether cheque is not torn or mutilated.
14 Pay the Cheque only during banking hours.
15 Ensue that the endorsements on the cheques are regular and correct.

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16 Check whether the cheque has been drawn in the correct form supplied by the bank or not,
cheque leaves issued to one party cannot be used by the another . Do not pass cheques
which has been drawn by pencil.
17 Compute carefully the balance at the credit of the customer and examine any other draft
arrangement
18 See whether endorsements by the thumb impressions are authenticated in English or any local
language and attested by a known party other than an employee of the bank.
19 Verify whether the number of cheque entered in ledger with the number of leaves of the cheque
book issued to the customer concern.
20 Where an individual depositor is reported to be deceased, payment of cheques issued period to
the date of his death drawn on his personal Account shall be stopped . But presented for
payment after receipt of intimation of the death stop if there is sufficient balance to meet the
cheques .
21 Verify whether there is any earmarking in the Account or any Garnishee order from the courts or
freezing of balance by income Tax and Sales Tax Authorities , before passing the cheque
22 Cancel the signature of the drawer of the on passing the cheque.
23 In the absence of special direction from the customer, pay the cheques in the order of their
presentment without discrimination. If there is a sufficient balance in this A/C.
Duties & Obligations of Collecting Banker

The collecting banker is one who does the duty of collecting the proceeds of cheques and other
instruments for its customers. Collection of cheques and other instruments is an indispensable service
rendered by every modern Bank now a days although there is no legal obligation on the part of a banker
to collect cheques and other instruments for its customers.

Legal position:- While collecting customer's cheques, a banker acts either:-

i) As a holder for value, or
ii) As an agent of the customer.
As a holder for value: A collecting banker is regarded as a holder for value when he acts in any of the
following way:-
1. When a banker has given value of the cheque to the customer before its collection.
2. When the banker expressly or impliedly permits his customer to draw against the cheque
deposited for collection before its actual realisation.
3. When a banker credits a cheque to his customer's account against the payment of an
existing over draft or loan.
As a holder for value: A banker enjoys the rights of a holder in due course. If the cheque sent for
collection is returned dishonoured, the collecting banker can sue all the parties. Besides, as a holder for
values a collecting banker enjoy a complete defence against an action for conversion, provided that the
acts in good faith and the only or the last endorsement in the cheque is not a forged one.
As an agent: A collecting banker acts as an agent of the customer if he credits the customer's account
after the amount is actually realized from the drawee Bank. As an agent, the collecting banker does not
possess better title to cheque than that of his customer. Thus when, the customer's title is found defective
the collecting banker may be held liable for "Conversion of Money".
Conversion by the collecting Banker: Conversion means wrongful or unlawful interference (i.e. using,
selling, occupying or destroying ) with another person's property which is inconsistent to the true owner's
right. Negotiable Instruments are also included in the term "Property". Conversion is independent of
intention and knowledge and an innocent party may be held liable for conversion. Hence, a collecting
banker may be charged for conversion if he collects cheques for a customer who has no title or defective
title to the instrument.
Statutory Protection to the collecting banker: Keeping in view the importance of banking business and
order to minimise the risks inherent to collecting of cheques by the bankers the Negotiable Instruments
Act. provides statutory protection to the collecting banker against the risks of conversion as follows:-
“ Where a banker in good faith and without negligence receives payment for a customer of a
cheque crossed generally or specially to himself and the customer has no title or a defective title thereto,
the banker shall not incur any liability to the true owner of the cheque by reason of only having received
such payment ( Section 131 of N.I. Act.).
Therefore, to avail statutory protection a banker must fulfil the following conditions:-

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i) For Crossed Cheque only: The statutory protection is available to the collecting banker only in
case of cheques crossed generally or specially to himself, It is essential that the cheque is a
crossed one before it is deposited with the collecting bankers.
ii) Collection on behalf of a customer: A banker must collect cheque on behalf of his customer
only. If a cheque is collected on behalf of a person who is not a customer of the Bank, he can not
claim protection under section 131 of the Negotiable Instruments Act. Such protection is not also
available to the banker when he acts as holder for value.
iii) Payment must be received in good faith & without negligence: The most important
prerequisite for availing the statutory protection is that the banker receives payment in good faith
and without negligence.
Good Faith: A collecting banker is deemed to be acted in good faith when it is in fact done (Collection of
cheque) honestly i.e. without notice of the defective title of the customer and without any involvement in
the act of conversion.
Negligence: Negligence depends upon the circumstances of each cases, generally speaking negligence,
indicates lack of care which is necessarily to be taken in any circumstance. Some examples of negligence
are given below:-
i) Opening of account without satisfactory introduction : Failure on the part of a collecting
Banker to obtain satisfactory introductions at the time of opening the account in the name of a
person whose title to the cheque collected turned out to be defective, was held to be negligent
sufficient enough to deprive statutory protection.
ii) Verification of endorsement: It is the duty of the collecting banker to verify the correctness of
endorsement, if any, on an order cheque tendered for collection and failure to do the same may
amount to negligence. Since the collecting banker's statutory protection is not adequate enough
to provide protection always in case of forged endorsement, a collecting banker should take
sufficient care in case of third party cheques about the genuiness of the endorsement in addition
to regularity of the endorsement. If the endorsement is a per pro endorsement, or an
endorsement put on delegated authority, the collecting banker is to put on inquiry as to
authenticity of the authority of the person who signs.
iii) Failure to take note or "Account Payee" Crossing and ' Not Negotiable' Crossing: A cheque
crossed ' Account payee' should not be collected in an account other than the payee named in the
cheque. Whenever a cheque is crossed ' Not Negotiable' means that the title of the Transferee
shall not be better than the Transferor. Therefore, the collecting banker should carefully examine
the title of the prior parties before accepting a cheque, with ' Not Negotiable' crossing.
iv) Enquiry to be made in doubtful cases: It is essential for a collecting banker to make sufficient
enquiries in doubtful cases as a safe guard against an act of conversion. Some examples are
given below:-
a) If a person of ordinary means deposits a cheque for a large amount the banker should
properly enquire into the matter in order to ascertain the good title of the depositor.
b) A cheque drawn by a customer in the capacity of agent, attorney, manager, partner, Director
of a Company, Public Official or Trustee etc. should not be collected in the private account of
the customer without satisfactory enquiries.
c) Similarly instruments payable to Principal, Firm, Limited Company, Public Official, Trust
Account etc. and endorsed in favour of the Private account of agent, Manager, Partner,
Director, Public Official etc. should not be collected without satisfactory enquiries.
While conducting such enquiries a banker should take into consideration the following:-
i) The amount of the cheque.
ii) The history of the account to which the amount is to be credited.
Duties of Collecting Banker: The duties of a collecting banker towards his customer are as follows:-
1) Presentment for payment: A collecting banker should present the cheques received for collection to
the drawee within a reasonable time. Recognised practice in this regard is that the collecting banker
should present the cheques by the following working day if the drawee bank is located at the same
place and in case of outstation cheques, he should dispatch to the drawee bank by the following
working day. If the presentment of the cheque is to be made through an agent, he (agent) can also
hold for a single day. If undue delays are made in presentment and the customer suffers, the
collecting banker may be liable to reimburse such losses arising out of the following circumstances:-
i) If the drawee bank fails:
ii) If the drawer becomes insolvent:
iii) Payment is received with delay and in the meanwhile a cheque drawn by the customer
is dishonoured, which may be held wrongful.

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2) Notice of dishonour: In case of cheques returned dishonoured, the collecting banker must serve
notice of dishonour to the customer within reasonable time to enable him to claim the amount from the
prior parties. If collecting banker fails to do the same he will be liable to the customer for any loss
suffered by him . When an instrument is dishonoured with remark ' Please present again' such fact
should also be brought to the notice of customer.
Scrutiny of Pay-in-Slip.
1 On the Counterfoil and pay-in slip ,the following should be checked ;
i) Date of Deposit - Which should be current date.
ii) Account Number.
iii) Title of Account.
iv) Cheque (s), Number (s) & Name of drawee bank (s).
2 The depositor's name/ signature should be given in the larger portion of the pay- in- slip.
3 Customer should use separate pay-in- slip for Transfer, Transfer delivery & Clearing cheques etc.
4 The amount noted should be the same as the amount of the instrument and the amount in words and
figures should be same.
Scrutiny of the Instruments:
1 The instrument should neither be stale nor post dated or impossible dated.
2 The Instrument should not bear any unauthorized alteration
3 The instrument should not be mutilated.
4 The amount in words and figure should be same.
5 The instrument should be crossed, but not specially crossed to another bank. If the Cheque or draft is not
crossed ask the depositor to cross it.
6 It the Cheque is crossed " A/C. Payee "or " A/C payee only " or " Payee's Account", it should be
accepted for collection for payee's Account .
7 If the instrument is crossed "Not negotiable", it should not generally be collected for third party. If
instruments may, however be collected for third party with special precaution.
8 If the cheque is crossed "A/C. Payee Only" " A/C. Payee Only " or " Payee's Account ", it should only be
accepted for collection for the payee's Account .
9 "Not transferable" instruments, like T.T, M.T. receipt, pay slips and treasury receipts, should not be
collected for a person other than the payee.
10 Do not collect an instrument in the account of an agent, or of the servant of the Payee.
11 A cheque payable to a firm, should not be accepted for crediting to a partner's account.
12 A cheque payable to a firm should not be accepted for crediting to a personal A/C of the Partner.
13 A Cheque drawn by a customer in the capacity of an agent, attorney, or Manager of his Company or firm
should not be collected for credit to his personal account.
14 A cheque payable to one of the joint account holders should not be collected for the Joint account without
payee's endorsement or consent.
15 If the payee is a Govt. Official, the instrument can not be collected for the payee's own account.
16 Cheque payable to a trust account should not be collected for crediting to the Trustee's own account.
17 Branch Manager's permission should be obtained before accepting a third party cheque or draft for credit
a account of the staff Member .
18 If the account is new or balance & operation of the account is not satisfactory, satisfy yourself about the
title of the customer to the instrument before accepting.

Reference:
1. The Negotiable Instrument Act. 1881.
2. Banking Law and Practice - P.N. Varshney.
3. Cheque in Law and Practice M.S. Parthasarathy.
4. Banking Law and Practice in India. M.L. Tenan.