MODULE 4

Paying and Collecting Banker

Precautions to be taken by Paying Banker, Protection to paying banker in case of Order
cheques, Suitable replies to dishonored cheques, Conversion by collecting bankers,
Duties of Collecting Banker

Paying Banker
The relationship between a banker and a customer is primarily that of debtor and creditor, the
respective positions being determined by the existing state of account. If the customer has a
credit balance with the bank, he is the creditor and if he has a debit balance with the bank, he
is the debtor of the bank. Thus, bank does not work as a trustee of money deposited with it by
the customer because, instead of money being set apart in a safe room, it is replaced by a debt
due from the bank. When a bank accepts the deposits from a customer, it becomes the debtor
of the customer and it will be bound to return the equivalent amount to the customer on his
order or on demand. In other words, it is the obligation of the bank to honour the cheques
issued by the customer if the following conditions are fulfilled:
(a) there is sufficient balance in the account of the customer;
(b) the cheque is properly drawn and presented; and
(c) there is no legal restriction on payment.

Meaning
The banker who is liable to pay the value of a cheque of a customer as per the contract, when
the amount is due from him to the customer is called “Paying Banker” or “Drawee Bank.”
The payment to be made by him has arisen due to the contractual obligation. He is also called
drawee bank as the cheque is drawn on him.

Precautions to be taken by Paying Banker

Honouring of cheques drawn by his customer is a very important obligation of a banker. He

should not dishonour his customer’s cheques without adequate ground. The customer can
claim damages for the injury caused to his credit owing to wrongful dishonour of cheques.
Further, if he honours a cheque which is not properly drawn or contrary of the instructions of
his customer or against the intention of his customer or when the customer has no adequate
balance, he gets into trouble. The paying banker in such a condition is said to be in “between
the devil and the deep sea.”
The banker’s duty to pay customer’s cheques is delicate and hence, to be handled judiciously
as well as cautiously. The banker has to take the following precautions while honouring the
cheques of his customers:

1. Proper Form: A banker should see whether the cheque is in the proper form. That means
the cheque should be in the manner prescribed under the provisions of the Negotiable
Instruments Act. It should not contain any condition.

2. Open or Crossed Cheque: The most important precaution that a banker should take is
about crossed cheques. A banker has to verify whether the cheque is open or crossed. He
should not pay cash across the counter in respect of crossed cheques. If the cheque is a
crossed one, he should see whether it is a general crossing or special crossing. If it is a
general crossing, the holder must be asked to present the cheque through some banker. It
should be paid to a banker. If the cheque bears a special crossing, the banker should pay only
the bank whose name is mentioned in the crossing. If it is a open cheque, a banker can pay
cash to the payee or the holder across the counter. If the banker pays against the instructions
as indicated above, he is liable to pay the amount to the true owner for any loss sustained.

3. Place of Presentment of Cheque: A banker can honour the cheques provided it is

presented with that branch of the bank where the drawer has an account. If the cheque is
presented at another branch of the same bank, it should not be honoured unless special
arrangements are made by the customer in advance. The reasons are: (a) A banker undertakes
to pay cheques only at the branch where the account is kept. (b) The specimen signature of
the customer will be with the office of the bank at which he has an account. (c) It is not
possible for other branches to know that the customer has adequate balance to meet the
cheque.

4. Date of the Cheque: The paying banker has to see the date of the cheque. It must be
properly dated. It should not be either a post-dated cheque or a stale-cheque. If a cheque
carries a future date, it becomes a post-dated cheque. If the cheque is presented on the date
mentioned in the cheque, the banker need not have any objection to honour it. If the banker
honours a cheque before the date mentioned in the cheque, he loses statutory protection. If
the drawer dies or becomes insolvent or countermands payment before the date of the cheque,
he will lose the amount. The undated cheques are usually not honoured. A stale cheque is one
which has been in circulation for an unreasonably long period. The custom of bankers in this
respect varies. Generally, a cheque is considered stale when it has been in circulation for
more than three months. Banker does not honour such cheques. So, verification of date is
very important

5. Mutilated Cheque: The banker should be careful when mutilated cheques are presented
for payment. A cheque is said to be mutilated when it has been cut or torn, or when a part of
it is missing. Mutilation may be either accidental or intentional. If it is accidental, the banker
should get the drawer’s confirmation before honouring it. If it is intentional, he should refuse
payment. The cheque is to be returned with a remark ‘Mutilated cheque’ or ‘Mutilation
Requires Confirmation’.

6. Words and Figures: The amount of the cheque should be expressed in words, or in words
and figures, which should agree with each other. When the amount in words and figures
differ, the banker should refuse payment. However, Section 18 of the Negotiable Instruments
Act provides that, where there is difference between the amount in words and figures, the
amount in words is the amount payable. If the banker returns the cheque, he should make a
remark ‘amount in words and figures differ’

7. Alterations and Overwritings: The banker should see whether there is any alteration or
over-writing on the cheque. If there is any alteration, it should be confirmed by the drawer by
putting his full signature. The banker should not pay a cheque containing material alteration
without confirmation by the drawer. The banker is expected to exercise reasonable care for
the detection of such alterations. Otherwise, he has to take risk. Material alterations make a
cheque void.

8. Proper Endorsements: Cheques must be properly endorsed. In the case of bearer cheque,
endorsement is not necessary legally. In the case of an order cheque, endorsement is
necessary. A bearer cheque always remains a bearer cheque. The paying banker should
examine all the endorsements on the cheque before making payment. They must be regular.
But it is not the duty of the paying banker to verify the genuineness of the endorsements,
unless the cheque bears ‘Not-Negotiable’ crossing. He is not expected to know the signatures
of all payees. So he gets statutory protection in case of forged endorsements. In India, even in
the case of bearer cheques, bankers insist on endorsement though it is not required.

9. Sufficiency of Funds: The banker should see whether the credit balance in the customer’s
account is sufficient to pay the cheque or not. If there is an overdraft agreement, he should
see that the limit is not exceeded. The banker should not make part-payment of the cheque.
He should pay either full amount or refuse payment. In case of insufficiency of funds, the
banker should return the cheque with the remark ‘No Funds’ or ‘Not Sufficient Funds’

10. Verification of Drawer’s Signature: The banker takes specimen signatures of his
customers’ at the time of opening the account. He should compare the drawer’s signature on
the cheque with the specimen signature of the customer. He should carefully examine the
signature to find out whether the drawer’s signature is forged or not. If there is any difference
or doubt, he should not honour the cheque. He should get the confirmation of the drawer. If
there is forgery and there is negligence on the part of the banker to detect the same, there is
no protection to the banker.

Protection Available Under the Negotiable Instruments Act

The Negotiable Instruments Act has come to the rescue of the paying banker and provided
protection under certain circumstances. These circumstances are given below:
1. Protection in Case of Bearer Cheque.
2. Protection in Case of Order Cheque.
3. Protection in Case of Crossed Cheque.
4. Protection in Case of Obliterated Cheque.
5. Protection in Case of Drafts.

Protection in Case of Order Cheque: In case the payment is made to a person other than
the payee, the paying banker does not get any protection under the Negotiable Instruments
Act. If the endorsement is regular and payment is made in due course, the paying banker gets
the protection under Section 85 (1) of the Negotiable Instruments Act, 1881 : “Whereas a
cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is
discharged by payment in due course.” In case, payment is made to a wrong person whose
signature is not according to specimen signature, the protection is given to a banker under
Section 16 (2) of the Negotiable Instruments Act : “It is not possible for a banker to know
each of the endorsers and their signatures.”

For getting the protection, the banker should note the following:

(a) Regular Endorsement: According to Section 85 (1) of the Act the endorsement should be
regular. For example, if a cheque is payable to a right person and signature is bearing same
name and the same spellings this is known as regular endorsement. Though this is not a valid
endorsement.
(b) Payment in Due Course: According to Section 10 of the Act the cheque should be paid in
due course. In case the payment is made on forged signature of the endorser and not that of
the drawer, the banker gets statutory protection under Section 10 of the Act. 3.
"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 therein mentioned.

Dishonour of Cheques

1. When the Customer Countermands the Payment : Countermands means “the

instruction conveyed by the drawer of a cheque to drawee bank not to pay the cheque, when it
is presented.”
2. Notice of the Customer’s Death: The banker should not make payments on cheques
presented after the death of the customer. He should return the cheque with the remark
‘Drawer Deceased’. However, if the payment is made without knowing the fact of the
customer’s death, the banker cannot be held liable.
3. Notice of Customer’s Insanity : The banker should stop the payment on cheques drawn
and received after the receipt of notice of the customer’s insanity. However, the banker
should be very careful in this regard. He can believe that the customer is insane only when
the latter is sent to the lunatic asylum. Otherwise, he had to obtain the certificate from the
competent doctor. Cheques drawn at a time when the customer was rational may be
honoured.
4. Notice of the Customer’s Insolvency: A banker should refuse payment on the cheques
soon after the customer is adjudicated as insolvent.
5. Receipt of the Garnishee Order: Where Garnishee order is received attaching the whole
amount, the banker should stop payment on cheques received after the receipt of such an
order. But if the order is for a specific amount, leaving the specified amount, cheques should
be honoured if the remaining amount is sufficient to meet them
6. Notice of Assignment: The banker should stop the payment, on receipt of the notice of
assignment signed by the customer of the credit balance in his account.
7. Trust Accounts: If the banker feels suspicious that the trustee wants to use the amount of
the cheque for his personal use, he must stop payment.
8. Suspicion about the Title over the Cheque: When the banker believes that the person
presenting the cheque is not entitled to receive the payment, he should refuse to make
payment. For example, stolen cheque.

A banker may also dishonour a cheque without incurring any liability in the following cases:

1. Post-dated Cheques: Refusal to pay post-dated cheque before the date mentioned on the
cheque does not amount to dishonour. So, post-dated cheques can be dishonoured.
2. Insufficiency of Funds: The banker can refuse to pay the amount if the funds are not
sufficient. However, the banker may honour the cheque if he feels that the customer is a
trustworthy and long-standing customer.
3. Presentation of Cheque: The banker may refuse the cheque of his customer if it is not
duly presented. Presentation of cheque out of business hours, for example, can be
dishonoured.
4. Joint Accounts: In the case of joint account, the banker can refuse to make payment on
the cheque if it is not signed by all the joint account holders.
5. Material Alterations: When there is material alteration in the cheque, the banker may
refuse payment.
6. Stale Cheques: When the cheque is presented after the period of three months from the
date it bears, the banker may refuse to make payment.
7. Drawer’s Signature: If the signature of the drawer on the cheque does not tally with the
specimen signature, the banker may refuse to make payment
8. Difference between Words and Figures: If there is difference between the amount
written in words and figures, the banker may refuse to make payment.
9. Endorsement: If the endorsement is irregular, the banker may refuse payment on the
cheque.
10. Proper Form of the Cheque: If the cheque is not in the proper form i.e., in accordance
with the provisions of the Negotiable Instruments Act, and with conditions, the banker should
refuse the payment.

Bank’s Replies / Remarks on Dishonoured Cheques :When a cheque is returned unpaid,

the banker should attach a slip containing brief remarks, to convey the reason for
dishonouring the cheque. The following remarks are generally made:
(a) R.D. (Refer to Drawer): This remark is used only when there is reasonable ground to
suspect the veracity of the cheque.
(b) N.S. (Not sufficient), N.E. (No. Effects) and N.F.( No funds): These are used where the
drawer’s balance is inadequate to meet the cheque.
(c) E.I. (Endorsement Irregular) : when an endorsement on a cheque is not in order.
(d) E.N.C. (Effect is not cleared): This is used when cheques deposited are not yet collected
and not available for withdrawal.
(e) “ Irregular drawn: requires confirmation” : This is used where the cheque appears to
have been drawn in an unusual manner or ambiguous manner or where the banker suspects
the cheque have been tampered with.
(f) D.D. : “ Drawer Deceased” . When the drawee comes to know of the drawers death,
payment on cheques drawn prior to his death should be suspended.
(g) W & FD = “Words and Figures Differ”. This answer is given where the amount stated
in words differ from the amount in figures

Collecting Banker

Meaning
Collecting banker means the banker who collects the cheques and bills on behalf of the
customers. In other words, every crossed cheque is necessarily to be collected through any
bank, which is known as collecting banker. As Sir John Paget has rightly said “Looking at the
restriction on the encashment of crossed cheques, save through a bank and the universal and
legally encouraged use of crossed cheques the collection of such cheques must be regarded as
an inherent part of banker’s business.” While collecting the cheques of a customer, the banker
may act in the capacity of either
(a) as a holder for value, or
(b) as an agent of the customer.
The legal position of the collecting banker under these two circumstances is discussed below.

Collecting Banker as Holder for Value

A collecting banker is holder for value if he gives the value of the cheque in any form to its
customer before collecting the proceeds of the cheque deposited by the latter. He does not
remain an agent of the customer, but becomes the owner of the cheque in his own right since
he has paid value for it, and has acquired the ownership right in good faith. In such a
situation, the banker is called holder for value and he is also the holder in due course.

According to Paget, a banker becomes an holder for value in the following ways:
(a) by lending further on the strength of the cheque;
(b) by paying the amount of the cheque or part of it in cash or in account before it is cleared;
(c) by agreeing that the customer may draw before the cheque is cleared;
(d) by accepting the cheque in avowed reduction of an existing overdraft;
(e) by giving cash over the counter for the cheque at the time it is deposited in for collection.

In the above circumstances, the banker becomes the holder for value. Further, if he proves
that he gave value for a cheque in good faith, he will be able to resist any claim by the true
owner provided that
(a) the cheque was not tainted with forgery,
(b) he had no notice of any previous dishonour or of any defect in the title of his customer,
(c) the cheque was not crossed ‘not negotiable’
(d) the cheque was not overdue for the purpose of negotiation, and
(e) the cheque was regular on the face of it in all respects.

If the cheque is dishonoured, the collecting banker can use all the previous parties after
giving them the notice of dishonour. The banker undertakes a risk also when he acts as a
holder for value. He will be in a difficulty if last, but one endorsement proves to be a forged
one. The banker will be liable to the true owner of the cheque. However, he can recover the
amount from his customer.

Collecting Banker as an Agent of the Customer

When a collecting banker acts as an agent of the customer, he credits the latter’s account with
the amount of the cheque after the proceeds of the cheque are actually collected from the
drawee banker. The customer can draw the amount after his account is credited with the
proceeds. In such a case, banker acts as an agent of his customer and does not get better title
to the cheque than that of the customer. If the title of the customer is defective, the banker
will run the risk of being liable to the true owner if it collects the cheque. If the cheque
collected by the banker does not belong to his customer, the banker will be liable for
‘conversion of money’ or in other words, for illegally interfering with the rights of the true
owner of the cheque.
As an agent of the customer, the collecting banker is a mere “conduit pipe to receive payment
of the cheque from the bank on which it is drawn and holds the proceeds at the disposal of the
customer.” Like any other agent, the banker has to perform his duties diligently for the
customer who has paid in his cheques. If he delays or does not exercise the normal skills
expected, he will be liable to his customer. It has been held that the reasonable time would be
presenting the cheque within one day after the receipt thereof where the cheque is drawn on a
bank in the same place, or forwarding or presenting it on the day following the receipt thereof
where the cheque is drawn on a bank in another place. After the expiry of reasonable time,
the customer paying in the cheque for collection is entitled to presume that it has been
collected and the proceeds thereof credited to his account.
Conversion by collecting bankers

According to Dictionary of Banking, “Conversion is a legal term signifying wrongful

interference with another person’s property inconsistent with another’s right of possession.”
Conversion applies only to tangible property and not to debts. Negotiable Instruments are
included in the term ‘property’. The collecting banker may be charged for conversion if he
collects a cheque for a customer having defective title to it. The collecting banker while
collecting the payment of a cheque to which his customer has defective title, deprives the true
owner of the cheque to receive payment. So he incurs a liability to the true owner of the
cheque. The principle which is applied here is that a rightful owner of the cheque can recover
the same from anyone who takes it without his authority and in whose hands it can be traced.

In the following cases, the banker is liable for conversion to the true owner of the instrument:
(a) when he collects a cheque, a bill of exchange, or a promissory note bearing a forged
endorsement or in respect of which the customer has no title at all;
(b) when he borrows for his customer the proceeds of a cheque on which the customer has no
title or only defective title;
(c) when he takes as holder for value, a cheque marked ‘not negotiable; and
(d) when he delivers to the wrong person the goods entrusted with him for safecustody.

In the following cases, the banker is not liable for conversion to the true owner of a cheque:
(a) where there is no forgery and the instrument comes into the hands of the holder in due
course; and
(b) where there is forgery and the instrument is a cheque, payment whereon has been made in
due course by the banker.

Duties and Responsibilities of a Collecting Banker

The duties and responsibilities of a collecting banker are discussed below:
1. Due care and diligence in the collection of cheque.
2. Serving notice of dishonour.
3. Agent for collection.
4. Remittance of proceeds to the customer.
5. Collection of bill of exchange.

1. Due Care and Diligence in the Collection of Cheques: The collecting banker is bound to
show due care and diligence in the collection of cheques presented to him. In case a cheque is
entrusted with the banker for collection, he is expected to show it to the drawee banker within
a reasonable time. According to Section 84 of the Negotiable Instruments Act, 1881,
“Whereas a cheque is not presented for payment within a reasonable time of its issue, and the
drawer or person in whose account it is drawn had the right, at the time when presentment
ought to have been made, as between himself and the banker, to have the cheque paid and
suffers actual damage, through the delay, he is discharged to the extent of such damage, that
is to say, to the extent to which such drawer or person is a creditor of the banker to a large
amount than he would have been if such cheque had been paid.”

In case a collecting banker does not present the cheque for collection through proper channel
within a reasonable time, the customer may suffer loss. In case the collecting banker and the
paying banker are in the same bank or where the collecting branch is also the drawee branch,
in such a case the collecting banker should present the cheque by the next day. In case the
cheque is drawn on a bank in another place, it should be presented on the day after receipt.

2. Serving Notice of Dishonour: When the cheque is dishonoured, the collecting banker is
bound to give notice of the same to his customer within a reasonable time. It may be noted
here, when a cheque is returned for confirmation of endorsement, notice must be sent to his
customer. If he fails to give such a notice, the collecting banker will be liable to the customer
for any loss that the customer may have suffered on account of such failure.

Whereas a cheque is returned by the drawee banker for confirmation of endorsement, it is not
called dishonour. But in such a case, notice must be given to the customer. In the absence of
such a notice, if the cheque is returned for the second time and the customer suffers a loss, the
collecting banker will be liable for the loss.

3. Agent for Collection: In case a cheque is drawn on a place where the banker is not a
member of the ‘clearing-house’, he may employ another banker who is a member of the
clearing-house for the purpose of collecting the cheque. In such a case the banker becomes a
substituted agent. According to Section 194 of the Indian Contract Act, 1872, “Whereas an
agent, holding an express or implied authority to name another person to act in the business
of the agency has accordingly named another person, such a person is a substituted agent.
Such an agent shall be taken as the agent of a principal for such part of the work as is
entrusted to him.”

4. Remittance of Proceeds to the Customer: In case a collecting banker has realised the
cheque, he should pay the proceeds to the customer as per his (customer’s) direction.
Generally, the amount is credited to the account of the customer on the customer’s request in
writing, the proceeds may be remitted to him by a demand draft. In such circumstances, if the
customer gives instructions to his banker, the draft may be forwarded. By doing so, the
relationship between principal and agent comes to an end and the new relationship between
debtor and creditor will begin.
5. Collection of Bills of Exchange: There is no legal obligation for a banker to collect the
bills of exchange for its customer. But, generally, bank gives such facility to its customers. In
collection of bills, a banker should examine the title of the depositor as the statutory
protection under Section 131 of the Negotiable Instruments Act, 1881. Thus, the collecting
banker must examine very carefully the title of his customer towards the bill. In case a new
customer comes, the banker should extend this facility to him with a trusted reference.

From the above discussion, there is no doubt to say that the banker is acting as a mere agent
for collection and not in the capacity of a banker. If the customer allows his banker to use the
collecting money for its own purpose at present and to repay an equivalent amount on a fixed
date in future the contract between the banker and the customer will come to an end.