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1) Different Kinds of Banks and Financial Organizations

There are various kinds of banks and financial organization which are playing
predominant role in the economy of our country as detailed below:
1. Reserve Bank of India or Central Bank of India
2. Commercial Banks
(a) Commercial Banks under Public Sector
I. State Bank of India and its subsidiaries
II. Nationalized Banks and their subsidiary banks
(b) Commercial Banks under Private Sector
3. Regional Rural Banks
4. Co-operative Banks
a. State Co-operative Banks
b. Central District Co-operative Banks
c. Primary Credit Societies
5. Development Banks
(a) Industrial Development Banks
I. Industrial Development Bank of India
II. Industrial Finance Corporation of India
III. State Financial Corporation
IV. Industrial Credit and Investment Corporation of India Limited
(b) Land Development Banks (State Level Land Development Banks
and Primary Land Development Banks)
(c) Agricultural Finance Corporation Ltd and
(d) National Bank of Agriculture and Rural Development (NABARD)
(e) Exchange Banks.
Reserve Bank of India or Central Bank of India
The Reserve Bank of India is the central bank of our country. It was
established as a body corporate under the Reserve Bank of India Act, 1934.
It started functioning from April 1, 1935. It was first, a shareholders bank. It
was nationalized with effect from January 1, 1949. It took over the function
of issuing currency from the government of India, the power of credit control
from the then Imperial Bank of India (State Bank of India at present). Its
main functions are stated below :
1. It issues currency notes.
2. It acts as Banker to the government.
3. It acts as Banker to the banks and lends the banks as a last resort.
4. It is a custodian of Foreign Exchange Reserves.
5. It controls/regulates the credit created by the commercial banks and
6. It acts as a clearing house.
Commercial Banks
The banks which perform all kinds of banking business and generally finance
trade and commerce are called commercial banks. Since their deposits are
for a short period, these banks normally advance shorts term loans to the
businessmen and traders and avoid medium term and long-term lending.
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However, recently, the commercial banks have also extended their areas of
operation to medium term and long term finance. Majority of the commercial
bank in India are in the public sector. But, there are certain private sector
banks operating as Joint Stock Companies. Hence, the commercial banks are
also called joint stock banks.
In simple words, commercial banks are those, which carry on banking
business to earn profits. They borrow from the public by accepting different
kinds of deposits at lower rates of interest and lend the same to the public
by sanctioning loans and advances at higher rates of interest and thereby
earn profits. The commercial banks may be classified into two categories
namely:
1. Commercial Banks under Public Sector and
2. Commercial Banks under Private Sector
Commercial Banks under Public Sector
Commercial banks under the public sector are governed by the respective
statutes. One such statute is the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1970. They include:
1. State Bank of India and its subsidiaries viz. State Bank of Hyderabad
and State Bank of Mysore etc., and
2. Nationalized Banks (viz. Bank of India, Central Bank of India, Indian
Bank, Canara Bank etc. etc.)
The Nationalized Banks are owned by the Government of India. The State
Bank of India acts as an agent of the Reserve Bank of India, while the other
Commercial Banks do not act as the agents of the State Bank of India. About
90% of the country’s commercial bank system is now in the public sector.
State Bank of India
The State Bank of India occupies a unique position in our banking system. It
is the biggest commercial bank with very vast financial resources and the
largest number of branches. It had 7 subsidiary banks. Before 1920, the
State Bank of India was known as Imperial Bank of India. In 1920, the
Imperial Bank of India was nationalized with change of its name as the State
Bank of India.
Now, the State Bank of India is next to the Reserve Bank of India and acts
as an agent of the Reserve Bank of India in the places where the RBI does
not have an office or branch of the banking department. It has been
conferred the status of the largest commercial bank of India. Its subsidiaries
were the State Bank of Hyderabad, State Bank of Mysore, State Bank of
Travancore, State Bank of Bikaner and Jaipur etc. After the acquisition of
subsidiary banks by the SBI, subsidiary banks have ceased to exist.
Management : The affairs of the SBI is managed by a Central Board of
Directors consisting of 15 members :
1. The Chairman and a Vice-Chairman are appointed by the Government
in consultation with RBI.
2. Two managing directors are appointed by the Central Board.
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3. In the remaining 12 directors, 4 are elected by private shareholders, 4

directors are nominated by the Central Government in consultation with the
RBI representing various economic interests.
4. The Central Government appoints one director and nominates one.
5. The RBI nominates one director.
There is one ex-officio director. There are 14 Local Boards in the Country.
Nationalized Banks
Where the ownership and management of banks is taken over by the
state/government, it is called “Nationalization of Banks” and the banks
are known as “Nationalized banks”. The government of India on July 19,
1969 nationalized 14 major commercial banks and 6 other banks on April
15, 1980. Later, the State Bank of India and its 7 subsidiaries were
nationalized. Among the banking institutions in the organized sector,
commercial banks are the oldest, having the wide network of branches
commanding utmost public confidence. There are about 28 banks, which
constitute the strong public sector in Indian commercial banking. The
nationalized banks do not act as agents of the Reserve Bank of India.
Commercial Banks under Private Sector
Apart from the commercial banks under the public sector, there are
commercial banks under private sector, both Indian and Foreign banks,
which are playing role in the economy of our country.
On March 31 2006 there were 220 scheduled commercial banks in India. Of
these 28 were public sector banks, 133 are Regional Rural Bank, 29 Foreign
Banks and 29 Private Banks.
Role of Commercial Banks in a Developing Economy
A well organized and well developed banking system is a prerequisite for the
economic development of any country. Commercial Banks in our country are
playing significant role in the economy of our country. Commercial Banks
mobilize financial resources from the saving public and provide them for
industrial growth. In the process they can also influence the direction in
which these resources are utilized. Banks are regarded as development
agencies. In underdeveloped countries, banking facilities are limited. They
are confined to specific areas and regions. They provide credit facilities to
some sectors only. In India before nationalization of major banks in 1969.
Banks neglected agriculture and small industry. Changes in the structure
and functions are necessary to enable banks to perform development role in
these economies.
In a modern economy, banks provide a variety of functions and services
which are conducive to growth. They do much more than deposit banking.
They undertake several financial services and introduce new instruments.
They encourage entrepreneurs and also undertake entrepreneurial function.
They also undertake social responsibilities. They are the agents necessary
for economic development . Banks play an important role in the
development of a country. It is the growth of commercial banking in the 18th
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centuries that facilitated the occurrence of industrial revolution in Europe.

Similarly, the economic progress in the present day developing economies
largely depends upon the growth of sound banking system in these
economies.
Regional Rural Banks
In 1970, the Government of India announced 20 Point Economic Program.
One of the significant features of the program was the liquidation of the rural
indebtedness. Consequently, the Government of India thought it necessary
to established rural banks as subsidiaries of the public sector banks to
Chairmanship of Mr. M. Narasimham recommended on July 30, 1975 the
establishment of RRBs. The first 5 RRBs were set up on October 2, 1975 by
an Ordinance (which was replaced by the Regional Rural Banks Act of 1976).
The commercial banks are basically urban oriented and unable to provide
credit at cheaper rates to the weaker sections of the rural people. In order to
provide credit at cheaper rates and to protect the interests of the weaker
sections of the rural population the Regional Rural Banks came into
existence in 1975. The Regional Rural Banks are relatively new banking
institution which were added to the Indian banking scene since October
1975.
A Rural Bank carries on the normal business of banking as defined in Section
5(b) of the Banking Regulation Act, 1949. It generally undertakes are
business of granting loans and advances to small and marginal farmers and
agricultural peasants, who may be individuals or groups and to co-operative
societies which include marketing societies, agricultural processing societies,
co-operative farming societies, for agricultural purpose or agricultural
operations or for other relevant or allied purposes, and to artisans, small
entrepreneurs and persons of small means, engaged in trade, commerce or
industry or other productive activities within the notified area of the
concerned Rural Bank.
Objectives and Functions
The RRBs perform the following functions :
1. They provide credit facilities to the agricultural sector with particular
emphasis on small and marginal farmers and agricultural labourers.
2. They promote the welfare of economically and socially backward
sections of the population.
3. They help the rural artisans and small entrepreneurs in rural areas by
providing credit facilities.
4. Along with the agriculture, they are expected to help small business
units and self employment schemes and thereby promote the all-round
development of village societies.
5. They mobilize deposits of rural people.
6. They provide subsidiary services like commercial bank.
Cooperative banks
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Cooperation means voluntary association on the basis of equality and for

some common purpose. The basic principle of cooperation is each for all and
all for each’. In the words of H. Calvert, Cooperation then is from of
organization wherein persons voluntarily associate together as human beings
on the basis of equality for the promotion of their economic interest.
Cooperative bank is institution established on the cooperative basis and
dealing in ordinary banking business. Like other banks, the cooperative
banks are funded by collecting funds through shares, deposits etc.
The co-operative banks are established under the Co-operative Societies
Acts of the states concerned. The co-operative banks are basically rural
oriented and function on the principles/ideas of co-operation. They have
three tier set-up and sub-divided as follows –
1. State Co-operative Banks : State cooperative banks are the apex
institutions in the three tier cooperative credit structure, operating at the
state level. Every state has a state cooperative bank. State cooperative
banks occupy a unique position in the cooperative credit structure
2. Central/District Co-operative Banks at District Level : Central
cooperative banks are in the middle of the three tier cooperative credit
structure Central cooperative banks are of two types :
3. There can be cooperative banking unions whose membership is open
only to cooperative societies. Such cooperative banking unions exist in
Haryana, Punjab, Rajasthan, Orissa, and Kerala,
4. There can be mixed central cooperative banks whose membership is
open to both individuals and cooperative societies.
5. Primary Credit Societies at village level : Primary agricultural
credit society forms the base in the three tier cooperative credit structure. It
is a village level institution which directly deals with the rural people. It
encourages savings among the agriculturists, accepts deposits from the,
gives loans to the needy borrowers and collects repayments.
The co-operative banks also perform the basic functions of banking and
differ from the commercial banks as follows :
1. The commercial banks are established under the central enactment
viz, the Companies Act, 1956 or a separate Act passed by the Parliament,
while the co-operative banks are established under the Co-operative
Societies Acts of the States concerned.
2. The co-operative banks have three tier set-up as stated above, while
the commercial banks are organized on unitary basis.
3. Only the State Co-operative banks have access to the Reserve Bank of
India, whereas every commercial banks which is a scheduled bank is entitled
to avail of the refinance facilities from the Reserve Bank of India.
4. The co-operative banks function within a limited area/jurisdiction only
viz, particular state or district or to a local area (in case of a society).,
whereas the jurisdiction of commercial banks extends to other district, states
and also other counties.
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5. The Reserve Bank of India has full / complete control over the
commercial banks, whereas its control over co-operative banks is partial.
6. Co-operative banks function on the principles/ideals of co-operation,
while the commercial banks function on sound business principles and profit
motive.
Development Banks
The banks, which aim to promote trade, commerce and finance and to
develop the economy of our country may be divided into two categories
namely :
1. Industrial Development Banks, and
2. Land Development Banks.
Industrial Development Banks
Industrial sector is playing vital role in the economy of any nation and hence
the government takes all necessary steps by providing financial assistance
through financial organizations for industrial development. Industrial banks,
also known as investment banks, mainly meet the medium-term and long-
term financial needs of the industries. Such long-term needs cannot be met
by the commercial banks which generally deal with short-term lending. The
main functions of the industrial banks are :
• They accept long-term deposits
• They grant long-term loans to the industrialists to enable them to
purchase land, construct factory building, purchase heavy machinery etc.
• They help selling or even write the debentures and shares of industrial
firms.
• They can also provide information regarding the general economic
position of the economy.
Following are some of the notable institutions/organization of industrial
finance:
1. Industrial Development Bank of India.
2. Industrial Finance Corporation and
3. State Financial Corporation and
4. Industrial Credit and Investment Corporation of India Limited.
Industrial Development Bank of India
The Industrial Development Bank of India is the apex bank, which provides
industrial finance. It was established in July 1964 as a wholly owned
subsidiary bank of the Reserve Bank of India. On 16th February 1976 it was
delinked from the Reserve Bank of India and its entire Share capital was
transferred to the Central Government. Consequently, its role has been
enlarged and has been conferred the status of principal financial organization
for coordinating the functions and activities of all India term lending
institutions and also to some banks under the public sector. The IDBI
provides direct finance to the large scale and medium industries. It also
extends indirect financial assistance to the other industrial establishments as
stated below :
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1. The IDBI refinances the industrial loans sanctioned by the State

Financial Corporations, State Industrial Development Corporations,
Commercial Banks, Co-operative Banks, Regional Rural Banks etc.
2. It provides financial assistance by re-discounting of bills and
3. It provides seed capital assistance granted to new entrepreneurs
through the State Financial Corporation, State Industrial Development
Corporations etc.
Industrial Finance Corporation of India
The Industrial Finance Corporation of India is the first Industrial
Development Bank in India. It was established in the year 1948 with the
main objective to provide finance to the newly established industries for the
purpose of accommodation and fixed assets. It has been contributed 50% by
the Industrial Development Bank of India and 50% by the Scheduled Banks.
It raises its resources by issuing bonds in the market, borrowing from
Industrial Development Bank of India, Central Government and other
financial institutions and foreign credits.
State Financial Corporation
The Industrial Finance Corporation provides financial assistance to large
public limited companies and cooperative societies and does not cover the
small and medium sized industries. In order to meet the varied financial
needs of small and medium sized industries, the Government of India
passed the State Finance Corporations Act in 1951, which empowers the
State governments to establish such Corporations in their states.
Functions : The functions of the State Financial Corporations are
summarized below:
1. The SFCs have been established to provide long-term finance to small
scale and medium sized industrial concerns organized as public or private
companies, corporations, partnership or proprietary concerns.
2. The SFCs can grant advances to the industrial concerns repayable
within a period of 20 years.
3. The SFCs guarantee loans raised by the industrial concerns in the
market or from scheduled or cooperative banks and repayable within 20
years.
4. The SFCs subscribe to the debentures of the industrial concerns
repayable within a period of 20 years.
5. The SFCs guarantee loans raised by the industrial concerns from
scheduled or cooperative banks and repayable within 20 years.
6. The SFCs underwrite the issue of stocks, shares, bonds and
debentures by industrial concerns.
Industrial Credit and Investment Corporation of India Limited
The Industrial Credit and Investment Corporation of India Limited was
established as a Joint Stock Company in 1955. Its main objective was to
channelize the funds market in the country. Its entire share capital was held
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by commercial banks, insurance companies which were then in the private

sector and were not nationalized, and individuals.
Land Development Banks
(State Level Land Development Banks and Primary Land Development
Banks)
The Land Developments Banks are the co-operative societies/institutions,
which provide long term credit facilities in the agricultural sector. The main
objective behind the establishment of the Land agricultural sector. The main
objective behind the establishment of the Land Development Banks is
agricultural development. The structure of these banks is two tier i.e. i)
State Level Land Development Banks and ii) Primary Land Development
Banks. The central land development banks are located at state level, while
the primary land development banks are located at the district and taluka
level guaranteed by the State Governments and subscribed by the Central
and State Governments.
Agricultural Finance Corporations Ltd.
It was set up as a Joint Stock Company in 1968 by the Indian Banks
Association. Its main object is to help the commercial banks in financing the
agricultural projects. There are about 17 banks, which induce the State Bank
of India and other nationalized banks are the share holders of this
corporation. It is now functioning as a Rural Development Consultancy
Organization. It has built up expertise in this field and is engaged in the
formulation of projects and development plans at the instance of member
banks, State Governments and the Central Government.
National Bank for Agriculture and Rural Development (NABARD)
With the increasing role of Institutional credit in the integrated rural
development of the country, it was felt necessary for a single broad based
organization which would not only extend adequate financial assistance to
the various credit institutions of the rural areas but also provide guidance in
all the mattes concerning the formulation and implementation of rural
developments programs. So far all such functions have been performed by
the Reserve Bank of India and the Agricultural Refinance and Development
Corporation (ARDC). In 1981, the Committee to Review Arrangement for
Institutional Credit for Agriculture and Rural Development (CRAFICARD), set
up by the Reserve Bank of India, recommended the establishment of the
National Bank for Agriculture and Rural Development (NABARD). The
recommendation was approved by the government and consequently
NABARD came into existence on July 12, 1982 (NABARD) is the apex
development bank for agriculture and rural development. It was established
on July 12, 1982 by merging the Agricultural Credit Department and Rural
Planning and Credit Cell of the Reserve Bank of India, and the entire
undertaking of Agricultural Refinance and Development Corporation.
The functions of the NABARD are three tier, namely:
1. The credit functions
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2. The development functions, and

3. The regulation functions.
Exchange Banks
Exchange Banks are those banks which deal with foreign exchange and have
specialized in financing foreign trade. These banks are foreign banks and
have their head offices located outside the country. Although the main
business of these banks is financing of foreign trade, they also perform
normal commercial banking functions and thus compete with local
commercial banks.
The main functions of exchange banks is to finance foreign trade. There are
two aspects of financing foreign trade (a) financing exports, and (b)
financing imports.
2) Relationship between banker and customer
Introduction
In India, the history of banking had started long before India got
independence from the British in 1947. The first phase of the banking sector
was initiated during 1786 with the establishment of India’s first bank “bank
of Hindustan” (which collapsed in 1832) and ended in 1947. From there till
now there have been major changes in the banking system and
management over the years with the advancement in technology and
considering the needs of people. In India, the banking sector forms the base
of the economic development of the country. Trust helps in building a
healthy relationship between a banker and a customer. Their relationship
comes to existence once the banker agrees to open an account in the name
of a customer.
Definition of Bank
The definition for banking is given by Section 5 (b) of the Banking
Regulations Act 1949, “Banking means accepting, for lending or
investment, of deposits of money from the public repayable on demand or
otherwise and withdraws by cheque, draft, and order or otherwise”. To be
precise a bank is a lawful institution that acts as deposit and lending. They
promote people who have excess money (saver) to deposit and earn an
interest rate and on the other hand, they promote loans for people who need
money (borrower) at an interest rate. So, the bank functions as an
intermediary between the saver and the borrower. Certain features of
banking are:
1. A bank should conduct the major function of acceptance of deposits and
lending.
2. They should collect the deposits from stakeholders.
3. They are bounded to repay the deposited amount at any time via any
mode.
Definition of a Banker
It is stated under Section 3 of the Negotiable Instruments Act 1881,
that the term banker includes any person acting as a banker. The banker is
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an individual who is a dealer of capital or a money dealer. Sir john Paget

stated that “no person or body, corporate or otherwise, can be a banker who
does not:
1. Take deposit accounts.
2. Take current account.
3. Collect, issue, and paycheques, crossed and uncrossed for his customers.
Relationship between Banker and Customer
The relationship between the banker and the customer varies according to
the type of customer and the service he/she demand. There are two main
relationships between the banker and customer, they are:
1. General relationship: it consists of the possible services the banker
provides to the customer.
2. Special relationship: it consists of duties and instructions to the banker.
General Relationship between Banker and Customer
The general relationship between a banker and customer is:
1. Debtor and Creditor relationship
When a customer fills and signs the account opening form he/she enters into
a contract with the bank. And when the customer deposits money in their
account, the customer becomes a creditor and the bank becomes a debtor.
The bank can utilize the amount in the way they want. They aren’t bound to
inform the creditor about the utilization and aren’t bound to give any
security to the depositor. The banks are liable to give the amount back when
the depositor demands.
Lending money by providing loans is one of the major aspects of banks.
They provide loans by charging a particular amount of interest by utilizing
the resources mobilized by them. In this case, the bank becomes a creditor
and the customer becomes a debtor. But here, the bank requires security
and documents for providing loans.
2. Trustee and Beneficiary relationship
Section 3 of the Indian Trust Act, 1882 describes trust as: “an obligation
annexed to the ownership of property, and arising out of a confidence
reposed in and accepted by the owner, or declared and accepted by him, for
the benefit of another, or of another and the owner’.
Here the relationship between the bank and the customer is based on trust.
When the bank receives a valuable asset or document for security in
exchange for the loan provided by the bank, the bank is considered to be a
trustee and the customer is considered to be a beneficiary.
It can be done in two conditions:
• When a person deposited his important document in the bank locker.
• The person took the loan and deposited his property document as
security.
3. Agent and Principal
An agent is a person who acts as the one who is employed to do any act for
another or to represent another in dealings with the third person. The
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person for whom the work is done or to whom it is represented is called the
principal.
Bank carry payments to various authorities by collecting cheques, bills on
the behalf of the customers. Here bank acts according to the guidelines of
the customer and charges for the services rendered to them.
Special Relationship or Banker’s Rights
The special relationship that exists between banker and customer is:
The special relationship between banker and customer refer to certain rights
of the banker as stated below:
1. Rights of Lien.
2. Right of Set-off and
3. Right of Appropriation of Payments or the Rule in Clayton’s case.
4. Banker’s right to claim incidental charges.
5. Banker’s right to charge interest.
1. Right of Lien or Banker's Lien
Lien: Meaning : Banker’s right of lien is an important special feature of
banker customer relationship. The term ‘lien’ means “the right of a creditor
to retain in his possession the goods and securities owned by the debtor
until the debt has been discharged, but not the right to sell”. In simple, lien
means right to retain the goods or securities till the debt is cleared.
Kinds of Lien
Lien is of two kinds namely:
1. Particular or Special Lien; and
2. General Lien
Particular Lien
A particular lien gives the right to retain possession only of goods in respect
of which the charges or dues have arisen.
Eg. A tailor’s right to retain the clothes till the stitching charges are paid.
General Lien
A General Lien is one, which gives right to retain possession until the whole
balance of the account is paid. It extends not only towards goods pledged as
security but also in respect of others. A Banker exercises/possesses the right
of ‘General Lien’.
Banker’s Right of General Lien
It confers on Banker (as a creditor) right to retain the goods and other
securities owned by the debtor until the debt due from him, is repaid. For
instance, when a bank sanctions loan to a customer against a particular
security. At the time of repayment/to clear off the loan, the
security/pledged/mortgaged is not sufficient to meet the liability, the banker
may proceed (exercise lien) against other securities (moveable or
immovable) pertaining to the customer (debtor). Where as a particular lien
confers right over a particular debt only, the general lien is applicable to all
debts due from debtor to the creditor.
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Section 171 of the Indian Contract Act, 1872 confers on Banker, the right of
general lien. The banker can exercise his right of lien on all goods and
securities entrusted to him in the capacity as a banker. The Banker cannot
exercise his right of lien in respect of :
1. the goods and securities entrusted to him as a trustee or an agent;
and
2. the goods and securities entrusted to him for some specific purpose.
Banker’s lien, an implied pledge : If goods are delivered as security by
one person to another, it is called ‘Pledge’. Eg. If a farmer delivers 100 bags
of paddy or wheat for securing a loan from the bank, it is called ‘Pledge’. The
former is pledger and the banker is pawnee. In pledge, the pledges
(creditor) can exercise the right of sale. With the right of lien, the banker
can sell the goods and securities in case of default by the customer.
However, he cannot sell the title deeds of an immovable property.
Therefore, the Delhi High Court in Vijay Kumar vs. Jullundur Body
Builders & Others1) has judicially defined banker’s lien as an Implied
Pledge.
Exceptions to the General lien
The Banker cannot exercise the right of general lien in the following cases :
1. Safe custody deposits : When the customer deposits with the
banker, valuables, securities, documents, etc. for safe custody, the right of
General Lien cannot be exercised over them.
2. Documents deposited for Special Purpose.
3. When the customer, negligently or mistakenly left the securities with
the banker.
4. When the right of general lien becomes particular lien.
2. Right of set-off
The expression ‘Set-off’ means “Combining two accounts of the same
customer”. It is a mutual adjustment/arrangement between the banker (as
creditor) and customer (as debtor) in respect of payments due to the
creditor. Set off may aptly be described as the right of a Banker to
appropriate the credit balance in one account in order to arrive at the net
sum due. It is a statutory right, which a banker is entitled to exercise in
order to combine two accounts in the name of the same customer to recover
the debts due by the customer (debtor). The banker adjusts the debit
balance in one account with the credit balance in one account with the credit
balance in another account. For instance, one of his customer’s accounts
shown debit balance i.e. overdraft of Rs. 10,000/- and another account
shows a credit balance of Rs. 5,000/-. Then, the banker can adjust the credit
balance of RS. 5,000/- against the debit balance by combining the two
accounts and can claim the remaining amount of Rs. 5,000/- only from the
customer.
Conditions : The banker can exercise the right of set-off subject to the
following conditions:
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1. The accounts must be in the same name of the customer and in the
same right/capacity.
2. The right is in respect of debts due only : not in respect of future
debts.
3. The amount of debts must be certain and undisputed.
4. There should not be any agreement express or implied to the contrary.
5. The right cannot be exercised after the Garnishee Order has been
passed by the court.
Automatic Right of Set-off: Banker’s right to set-off arises automatically
under the following circumstances:
1. On the death, insanity or insolvency of the customer.
2. On the insolvency of the partner of the firm or on the winding up of a
company.
3. On the receipt Garnishee Order.
4. On receiving notice of assignment of a customer’s credit balance, and
5. On receiving notice of second mortgage over the security charged to
the banker.
It is generally believed that a banker could combine his customer’s accounts
unless there is an agreement contrary to that effect. This view was laid
down, basing on the decision in:
Garnett vs. Mc. Kervan2) : In this case, the plaintiff had a dormant
overdraft with one branch of a bank and a few years after he had stopped
business with the branch, he opened a new account with another branch of
the same bank, where his credit balance just exceeded the amount of the
dormant debit balance referred to above. The amount required for the
clearing of the overdraft with the first branch was transferred from his
account with the second branch, which led to the dishonour of the
customer’s cheques drawn against his credit balance. The court’s decision
was in favour of the bank, as it was held that there was no special contract
or usage proved to keep the accounts separate and that, while it might be
proper and considerable to give notice to a customer of intention to combine
accounts, there was no legal obligation on a bank to do so arising either
from the express contract of course of dealings.
Halesowen Presswork & Assemblies Ltd v. Westminster Bank Ltd3) :
In this case, the court held that the bank is not entitled to combine two
accounts if there was an arrangement with its customer at the time of
opening the accounts to keep the accounts separately for a period unless the
Bank had given notice to determine the arrangement by reason of special
circumstances, the Bank having taken no steps to determine.
3. Right of Appropriation of payments
The rule in Clayton's case: The expression ‘Appropriation of payments’
means “adjusting the payment towards the debts”. When a debtor owes
several distinct debts to a creditor, and makes a payment not sufficient to
clear/discharge all the debts, the question, that arises is : against which
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debt/debts the payment is to be adjusted/appropriated ? Similarly, when the

customer takes more than one loan, he owes to the banker different debts.
Later, the customer takes more than one loan, he owes to the banker
different debts. Later, the customer may make payment, which is not
adequate to clear all such distinct debts. Here, also the question of
appropriation arises.
To answer this questions, four rules were laid down in the Clayton’s case.
Hence, it came to be known as “The Rule in Clayton’s Case”. These rules are
embodied in Sections 59 to 61 of the Indian Contract Act, 1872, as follows :
1. When the debtor intimates, against what debt/debts (in full or in part)
the payment is to be appropriated/adjusted, the creditor has to
adjust/appropriate accordingly (Sec. 59).
2. When the debtor (while making payment) does not indicate as to
appropriation, the circumstance so implies that the payment is to be
appropriated against a particular debt (implied appropriation). Eg. The
payment may imply appropriation towards a debt which is about to be
barred by limitation period.
3. When the debtor does not indicate as to appropriation, the creditor has
a discretion to appropriate the payment against any debt including time
barred, but not disputed one (Sec. 60).
4. Where neither of the parties appropriates, the payment shall be
applied to discharge the debts including time barred ones in chronological
order i.e. in order of time. If the debts are of equal standing, the payment
shall be appropriated proportionately.
Question may arise whether the payment made by the debtor is to be
adjusted first towards the interest or the principal in the absence of
agreement to that effect ? In M/s Kharavela Industries Pvt. Ltd. vs.
Orissa State Financial Corporation & other : It was held that in the case
of a debt due with interest, any payment made by the debtor should be
adjusted first towards satisfaction of interest and thereafter towards the
principal unless there is an agreement, to the contrary.
The rule in Clayton’s case: The rule in Clayton’s case is of great
importance to the Bankers. The above four rules were laid down in the case
of Devaynes vs. Noble4) (popularly known as ‘Clayton’s Case). Hence, the
above rules as to the appropriation of payment, came to be known as “The
Rule in Clayton’s Case”.
Facts of the case : A firm of Bankers Devaynes, Daives, Noble & Co. had
five partners. Devaynes, a senior partner died. The surviving partners
continued the business. After one year, the firm became bankrupt and the
creditors (customer) continued to deal with the firm even after the death of
Devaynes. Clayton had a credit balance on the death of partner. Later, he
withdrew in excess of the balance and also paid in, so as to arrive at credit
balance. Mr. Clayton claimed that the payments in, should be appropriated
against the withdrawals so as to leave the credit balance intact at the time
 15

of partner’s death. The court rejected his contention and denied the claim
and laid down the above rules.
Thus, in case of death, retirement or insolvency of a partner, the existing
debt (due from the firm) is adjusted by making subsequent credit made in
the account. Then the banker has no right to claim such debt from the
assets of the deceased/retired partner.
4. Banker's Right to claim Incidental Charges
Every customer is expected/supposed to maintain a minimum balance with
his account. If he fails to do so, the banker may impose/collect certain
incidental charges for the purpose. Similarly, the banker may collect charges
for issuing the statement of account of the customer’s account.
5. Banker's Right to Charge Interest
If the banker has given a loan to the customer, as a lender the banker has a
right to debit the interest to the customer’s account. It is an implied right of
the banker to charge interest for his loans, unless there is a contract to the
contrary to this right. He is also entitled to collect the compound interest on
the amount due to him at half yearly rests.
3) Obligations of The Banker
The obligations or duties of a banker may be explained under the following
heads :
1. Obligation to honour cheques.
2. Vicarious liability of a Banker for the fraud committed by his servants.
3. Garnishee Order.
4. Obligation or duty to maintain Secrecy of Customer’s Account.
5. Banker’s obligation for Articles deposited with the bank and valuables
kept in safe deposit vaults.
6. Duty, not to close customer’s account without his consent.
Obligation to Honour Cheques
It is one of the implied terms of the contract between a banker and a
customer to honour cheques drawn by the customer subject to fulfilment of
certain conditions under section 31 of the Negotiable Instruments Act, 1881.
The Banker is under statutory obligation to honour his customer’s cheques,
provided the following conditions are satisfied :
1. There must be sufficient funds (credit balance) or within the
permissible limit of overdraft.
2. The funds must be properly applicable to the payment of cheque. (Eg.
The customer may have two accounts : one showing more credit balance
and the other showing less credit balance. He cannot present a cheque for
higher amount against his account showing less credit balance, although his
other account shows sufficient credit balance).
3. The banker must be duly required to pay. This means the cheque must
be presented within a reasonable time i.e., within 6 months. After 6 months
(3 months asper RBI Notification), it becomes stale and cannot be honoured.
Similarly post-dated (i.e. cheque with future date) cheque cannot be
 16

honoured. The customer shall present post dated che1ue on or after the
date of cheque and
4. The customer shall not be disqualified by law or order of the court
(Garnishee Order) to draw the amount from his bank account).
Liability of Banker for Wrongful Dishonour
A banker has a statutory obligation to honour his customer’s cheques
provided, the conditions under Sec. 10 of the Negotiable Instruments Act,
are satisfied. (P.S : This topic ‘Banker’s obligation to honour customer’s
cheques also appears in Negotiable Instruments Act). According to Section
31 of the Negotiable Instruments Act, 1881, the Banker is liable to
compensate the drawer for loss or damage caused by such wrongful
dishonour. Section 31 funs as follows: “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 default”.
If there are sufficient funds to meet the cheque and the same is dishonoured
by a bank, it can be held liable for the wrongful dishonour of the cheque and
required to pay compensation for the damage caused thereby. It may be
noted that the banker’s liability is towards the payee or the holder of the
cheque. The banker has a contractual relationship with the customer only,
having a duty to honour his cheques, and therefore, only a customer i.e. the
drawer can bring an action against the bank for the wrongful dishonour of
the cheque.
Assessment of Damages
While assessing computing damages payable as a consequence of wrongful
dishonour, the following factors/points are to be taken into consideration.
1. Monetary loss caused to the drawer, payee and
2. Loss of credit and reputation.
The expression wrongful dishonour of a cheque means failure to make
payment against the cheque by mistake or negligence on the part of the
Banker or its employee. Eg. An amount deposited and collected had not
been credited to customer’s account in time. Consequently cheques issued
by such customer have been dishonoured for lack of funds. Or dishonour
may take place, when the banker gives wrong debit to such customer’s
account instead of another by mistake.
The terms loss or damage under sec. 31 denotes :
1. monetary loss suffered by the customer: and
2. loss of credit or reputation.
In other words, the Banker is liable to compensate not only actual monetary
loss, but also the loss of reputation suffered by the customer as a
consequence of wrongful dishonour. Sometimes, the customer may claim
special damages also.
 17

Justification of Dishonour
A banker is bound or justified in dishonouring the cheques of his customer
under the following circumstances:
1. Where the customer countermands the payment.
2. Where there are not sufficient funds in the customer’s account to meet
the cheque.
3. When the funds in the customer’s account are meant for being utilized
for some other purpose (for instance, the banker has lien over such funds
under Sec. 171 of the Negotiable Instruments Act.)
4. If the cheque is not properly presented.
5. When the banker receives the notice of customer’s death, bank’s
authority to pay gets terminated since the funds of the account vests in the
legal representatives of the deceased customer.
6. When the banker receives the notice of customer’s insanity.
7. When the Banker receives order from Court, prohibiting the payment.
8. When the cheque is stale or post-dated and
9. When the cheque is of doubtful legality.
Vicarious Liability of a Banker for the Fraud committed by his
Servants
The word ‘Vicar’ means the person, who performs the functions of another, a
substitute, Vicarious liability means “Liability, which is incurred for or instead
of another”. For instance, liability of a master for the wrong/tort committed
by his servant. Section 238, Indian Contract Act, provides that
misrepresentation made, or frauds committed, by agents acting in the
course of their business for their principals, have the same effect on
agreement made by such agents as if such misrepresentations or frauds had
been made or committed by the principals, but misrepresentations made, or
frauds committed by agents in matters which do not fall within their
authority, do not affect their principals. It means that when an agent makes
a misrepresentation or commits a fraud, acting in the course of the
principal’s business, the principal will be vicariously liable for the same. This
provision relates to the liability of every principal, including a banker.
The position may be explained by referring to the case of: Lloyd vs. Grace
Smith & Co1) : In this case it was held that the master is also held liable for
fraudulent acts done by servant for his (Servant’s) own benefit. The
defendants were a firm of solicitors. The plaintiff, a widow requested the
defendant to prepare documents for sale of her property. But the
defendant’s servant prepared the documents to transfer the property in his
own name. In an action by the plaintiff, the defendant was held liable for the
fraudulent act of their servant.
The above view was followed in National Bank of Lahore Vs. Sohan Lal2)
: In this case, the appellant (defendant) bank was held liable for the fraud
committed by the Manager of one of its branches.
Garnishee Order
 18

When a creditor who has lent money fails to recover the money, he may file
a suit against the debtor and obtain a decree from the court for payment of
the debt. Sometimes, the creditor may not find any property in the
possession or debtor for execution of decree. Yet, there may be some person
who is in possession of debtor’s property. In such the creditor may request
the court to issue an order attaching the debtor’s property in the hands of
the their part. If the court passes such order, such order is called ‘Garnishee
Order’.
The word ‘Garnishee’ is derived from a Latin word ‘garnir’ which means to
warn the third party. Since it is a warning to the third party with regard to
property of others in his hand, it is named as garnishee order. As stated
above, there are certain cases in which a creditor may request the court to
issue an order to attach the property belonging to the judgement debtor in
the hands/possession of some third party so as to enable him (creditor) to
execute the decree. In such a case, if the court issues order, it is called the
‘Garnishee Order’. Section 60 of the Code of Civil Procedure, 1908, lays
down the provisions relating Garnishee Order.
The banker has an obligation to honour his customer’s cheques, and is liable
for wrongful dishonour. Similarly, the Banker has an obligation to stop
payment by dishonouring his customer’s cheque, when he receives
Garnishee Order against his customer’s account.
According to section 60 of the Code of Civil Procedure, 1908, debts due to a
judgement debtor by third parties are liable to attachment in execution of
the decrees of Civil Courts. Garnishee Order is an order of the court, issued
under Order XXI, Rule 46 of the Code of Civil Procedure, 1908, directing the
banker to stop payment to a particular customer, whose name is mentioned
in the order.
When a debtor fails to repay his creditor, the latter (creditor) may apply to
the court for the issue of a Garnishee Order on the banker of his debtor. By
Garnishee Order, the debtor’s account with the banker stands suspended
and the debtor (customer) will not be allowed to draw, though he has a
credit balance. The creditor at whose request, the order is issued is called
‘the judgement Creditor’, the customer is called judgement debtor, and the
banker (debtor of the judgement debtor) is called Garnishee’.
Features of Garnishee Order
1. It (Garnishee Order) attaches the entire or specific amount of the
customer (Judgement Debtor).
2. It does not extend to over draft account of the Judgement debtor,
though he had not drawn the amount permitted under over draft.
3. It is not applicable in case of cheques, bills of exchange, drafts etc.
presented by customer and sent for collection (which remain uncleared at
the time of order).
4. It cannot attach the amounts deposited into the customer’s account
after the order.
 19

5. It is not effective in respect of payments already made before the

receipt of the order.
6. It is not applicable to money held abroad by the Judgement Debtor.
7. It is not applicable to securities held in safe custody of the Banker or
trustee.
8. It may be served on the Head Office of the Bank concerned and it will
be treated as sufficient notice to all the branches.
9. It is not effective against a joint account in which only one is a
judgement debtor or all are not judgement debtors.
10. It may be issued against income tax defaulters also.
Kinds of Garnishee Order
The Garnishee Order issued by the court is of two kinds namely:
1. Order Nisi or Preliminary Order and
2. Order Absolute or Final Order.
Order Nisi : Order Nisi is a preliminary order issued to the banker :
1. to stop the payment over the customer's account.
2. To give explanation, why, the judgement debtors credit balance in his
account should be used for the purpose of payment of the judgement
creditor and
3. it is also a duty of the banker to inform the same to his customer.
Order Absolute: It is a final order issued by the court to the banker to pay
the amount in the judgement debtors account to the judgement creditor
(decree holder) according to the direction given by the court.
Effect of Garnishee Order
After receiving garnishee order, banker is justified in dishonouring the
cheques of his customer. So customer cannot claim the damages for
dishonour.
Secrecy of Customer’s Accounts
The Banker is under an obligation to take utmost care to maintain the
secrecy of his customer’s account. Secrecy in the sense, the banker should
not disclose the position of his customer’s accounts to any member of the
public or Government official except under statutory or lawful authority (Eg.
Garnishee Order).
Section 13 of the ‘Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970, imposes on Banker, such obligation to maintain
secrecy of his customer account. The duty to maintain the secrecy of the
customer’s established. This duty is not only limited to the bank accounts,
but also it extends to all other facts, such may come to the
notice/knowledge of the banker from any other sources. The duty/obligation
to maintain secrecy of the customer’s account was legally imposed on
banker in 1924 in a leading case.
Tournier v National Provincial and Union Bank of England : In this
case it was held that the banker must not disclose the position of the
customer’s account except on reasonable and proper occasions and he
 20

should not disclose the state of customer’s account even after the account is
closed.
Tournier was the plaintiff and National Provincial and Union Bank of England
Ltd was the defendant. The plaintiff was working in M/s Kenyon & Co. on
temporary basis and his employment was to be permanent. He overdrew
from the defendant bank to a sum of 9 pounds 8 cents 6 d., and he agreed
to pay by weekly instalments of 1 pound. Out of this amount, he paid some
amount to a bookmaker towards the purchase of certain goods.
On one day, Tournier did not come to duty. The Directors of the Kenyon &
Co. telephoned the Bank Manager of the defendant company to know the
plaintiff’s address. In the conversation, the Bank Manager passed the
information that the plaintiff was over drafted and he made the payment to
a bookmaker. The Directors misled the information that the plaintiff was a
gambler and was in practice of betting, and also he was insolvent. Therefore,
they did not permanent the plaintiff and ousted him from the employment.
Therefore, they did not permanent the plaintiff, who filed a suit against the
bank for not keeping the secrecy of the customer, and for the compensation
of the job he lost.
The lower court dismissed his petition. He preferred appeal. The Court of
Appeal allowed his appeal and gave the judgement in his favour holding that
the Bank Manager violated his duty and caused loss to the customer
(plaintiff).
Exceptions: Disclosure of customer’s account is justified under the following
circumstances:
1. The Banker’s Book of Evidence Act.
2. The Income Tax Act, 1961.
3. The Companies Act, 1956.
4. The Reserve Bank of India Act, 1934.
5. The Banking Regulation Act, 1949.
6. The Gift Tax Act, 1958.
7. The Code of Criminal Procedure, 1973 and
8. The Foreign Exchange Regulations Act, 1933.
Consequences of wrongful disclosure
When the banker improperly discloses any information of his customer’s
account in which customer incurs any loss, the banker is liable for that. Now
banker’s liability is of two types i.e.
1. Liability to the customer, and
2. Liability to third party.
The customer may sue for breach of contract in case he incurs loss.
Sometimes a third party may also incur some loss due to disclosure of the
customer’s account, then the banker is also liable to the third party :
1. When he gives such an information with the knowledge that it is false,
and
2. Such party acts on that information and suffers a loss.
 21

Banker’s Obligation for Valuables Kept in Safe Deposit Vaults

When a cheque, bill of exchange, dividend warrant or other such instrument
is deposited with a bank for collection, he has a duty to collect the same and
credit the customer’s account with the proceeds realized. For such collection
he serves as an agent of the customer. If a cheque is dishonoured, the bank
to whom the same was given for a collection, has a duty to inform the
customer of the same, and to return the dishonoured cheque. If a cheque
could not be collected and is lost in transit, the bank should inform his
customer about the same within a reasonable time.4). `
Valuables Kept in Safe Deposit Vaults : A bank is not a bailee of the
valuables kept by a customer in a locker of the safe deposit vault of a bank,
and therefore, it does not attract the liability of the bank as a bailee in
respect of such goods. The position would, however, be different when the
lock of a locker has been tampered with by a bank employee before hiring
the locker to a customer in National Bank of Lahore v. Sohan lal (AIR 1962
Punjab 534), the manager of a bank in which the customer had hired a
locker and kept his valuables, had filed the levers of the lock before handing
over the possession of the locker to the customer. The manager, who was
living in the bank premises, could open the locker without the customer’s
key. He opened the locker and took out the valuable of the customer. The
bank was held liable for this fraud of the bank manager. The bank’s liability
arose in its capacity as bailee, because due to the defective lock, the
possession of the valuables kept in the locker was with the bank, rather than
the customer. The bank was also liable on the basis of the principle of
vicarious liability, for the fraud committed by its servant (agent) in the
course of employment.
When there is no proof of entrusting exclusive control to the bank of
jewellery kept in the locker, and also no proof of the contents of the locker,
it is not a case of bailment to attract bank’s liability for negligence. More so,
where there is no sufficient material to hold that robbery occurred due to the
bank’s negligence, the bank cannot be held liable for alleged loss of
jewellery allegedly kept in the bank locker.
In Atul Mehra v. Bank of Maharashtra5) the customer alleged that be had
hired a bank locker and kept jewellery worth Rs. 4,26,100/- and the same
was stolen due to the bank’s negligence and he claimed compensation in
respect of the same. It was held that:
1. It was not a case of bailment as there was no exclusive banking over
the possession of jewellery to the bank, and in the absence of bailment
under section 148 of the Contract Act, bank’s liability could not arise.
2. The plea that bank robbery had occurred due to the bank’s negligence,
was also rejected, as there was no sufficient material to hold bank’s
negligence in the matter. The bank could not be held liable for the reason
also.
Duty not to close Customer’s Account without his consent
 22

Another obligation of the banker is not to close the customer’s account

without his consent. By closing the account, it severed the relationship
between the banker and the customer. Every customer had a right to open
an account in any scheduled bank when he satisfies the requirements to
open an account. Once money is deposited and it is accepted by the banker,
it is his obligation to keep the account without closing even if it is not
operated by the customer. When banker wants to close the customer’s
account, he should inform the customer in writing and it should be accepted
by the customer, then only banker can close the account, otherwise the
banker is responsible to his customer. If customer wants to close the
account, he can do so by sending a written notice to the banker.
Conclusion
As time evolves major changes occur in different sectors of society. One
such sector which has got evolved with time is banking. The history of
banking in India shows that with time and according to the necessities of
people, major developments had occurred in the field of banking. And also
due to the invasion of the internet, the opportunities for easy and convenient
banking have got widened. As in the future, we can witness new changes
each day in the banking sector for the betterment of the economic growth of
the country
4) Special Types of Banker’s Customers
In discharge of primary function, banker invites the public to open an
account with the bank. Opening of an account with a bank, is creation of a
special contract so that the principles of contract viz. capacity to contract,
free consent etc. are strictly adhered to. Therefore, a banker must be very
careful, while opening an account in the name of a customer particularly at
the time of opening/accepting accounts in the name of special category of
customers viz. minors, partnership firm, joint stock company, club etc. This
lecture deals with the precautions to be taken by the Banker, while opening
as account in the name of the “Special Types of Customers” as follows:
1. Minor
2. Illiterate
3. Lunatic
4. Married woman
5. Purdanashin Woman
6. Joint account
7. Joint Hindu Family
8. Trust account
9. Clubs, Societies and Charitable Institutions
10. Partnership Firm and
11. Joint Stock Companies.
Minor
A person under the age of 18 years is years is a minor; if a guardian of his
person or property or both has been appointed by a court or if the
 23

superintendence of his property or both has been assumed the age of 18

years, he remains minor till he completes the age of 21 years. According to
the Indian Contract Act, 1872, a minor is not capable of entering into by a
minor is void. The banker should, therefore, be very careful in dealing with a
minor and take the following precautions:
OPENING THE ACCOUNT
The banker may open a savings bank account, not a current account in the
name of a minor since in case of an overdraft the minor does not have any
personal liability. The savings bank account may be opened in any of the
following ways:
• In the name of the minor himself.
• In the joint names of the minor and his/her guardian.
• In the name of guardian in the following way “ABC, natural guardian of
XYZ”.
Section 26 of Negotiable Instruments Act provides that a minor may draw,
endorse, deliver and negotiate a negotiable instrument. In case of the minor
can operate the account only jointly with his or her guardian while in case of
the account is to be operated by the guardian on behalf of the minor. In
cases the minor must have at least attained the age of 12 years and should
be in a position to read or write English, Hindi or Regional language.
DATE OF BIRTH
At the time of opening of the account of minor, the bank should record the
date of birth of the minor as disclosed by his or her guardian.
DEATH OF THE MINOR GUARDIAN
In the event of death of a minor the money will be payable to the guardian.
In case the guardian dies before the minor attains majority and the account
is a joint account or to be operated by the guardian only, the money should
be paid by the bank to the minor or attaining majority or to some person
appointed by the court as his guardian.
MINOR AS A PARTNER
A minor can be admitted to the benefit of partnership with the consent of all
the partners but he will not be liable for the losses or debts of the firm.
Within six months after majority he should repudiate the liability as partner
otherwise he will be liable as a partner.

PROVISIONS REGARDING LGAL GUARDIANSHIP OF A MINOR

• Natural guardian
• Testamentary guardian
• Guardian appointed by the Court

The first two types of guardians are governed by the provisions of the Hindu
Minority and Guardianship Act, 1956, whereas a guardian is appointed by a
court under the Guardians and Wards Act, 1890. RESERVE BANK'S
DIRECTIVES
 24

Reserve bank of India has advised the banks to allow opening of minors
accounts with mother as guardian. Thus, banks are now permitted to open
account of minor in the guardianship of the mother, even if the father of the
minor is alive.
Lunatic
According to Sec. 12 of the Indian Contract Act, 1872, a person of unsound
mind is not competent to enter into a valid contract. A person is said to be of
sound mind for the purpose of making a contract if he is capable of
understanding it and of forming a rational judgement as to its effect upon
his interests2). It is important that he should be of sound mind at the time
he enters into a contract. If a person is usually of unsound mind but
occasionally of sound mind, he may make a contract when he is of sound
mind. Similarly, if a person is usually of sound mind but occasionally of
unsound mind, he cannot enter into a valid contract when he is of unsound
mind. A contract entered into by a person of unsound mind is a void contract
according to the Indian Contract Act, 1872.
The banker should therefore, not open an account in the name of a person
who is of unsound mind. But if a banker has discounted a bill duly written,
accepted or endorsed by a lunatic he can realize the money due on the same
from such person except in the circumstances where it is proved that the
banker was aware of the lunacy of the person concerned at the time he
discounted the bill. The banker should suspend all operations on the account
of a customer as soon as he receives the news of his lunacy till he gets the
proof of his sanity or is served with an order of the court.
Married Woman
A married woman (Hindu) has the contractual capacity (if about 18 years of
age) and has the right to acquire or dispose of her personal property called
“Stridhana” in Hindu Law. The manager should make the usual essential
enquiries in opening the account of a married woman. In the application
(account opening form), she should fill up in addition to her name, address
etc., the name of her husband,, his address (and the address of the
employer of the husband). Proper introduction is necessary. As a competent
person, she can draw and endorse cheques and other documents and these
can be debited to her account. As long as credit balance is there in her
account, there will be no risks, but, if loan or overdraft is to be given the
Bank should ascertain her credit worthiness, her personal properties
(Stridhana) the nature of the properties held by her etc. The Husband is not
liable for her debts, except for those loans incurred for “necessaries of life”
for her and her family.
Precautions in granting loans or overdraft are necessary as:
1. she may have no property as stridhana,
2. Her Husband's property is not liable except for necessaries,
3. she may plead undue influence or ignorance of the nature of loan
transaction,
 25

4. she cannot be committed to civil prison.

Purdanashin Woman
She is one who wears a veil (Purdah), as per her customs, and is secluded
except the members of her family. Some Muslim women observe this as
custom in their community. The Manager should of course follow the
preliminary enquiries as usual and may allow such a woman to open an
account. Her identity and that she is opening the account out of her freewill
are essential. To be on the safer side the manager may require a responsible
person known to the bank attest her signature. Better if he insists such
attestation in respect of her withdrawals also.
Joint Account
While opening the joint account, all the concerned persons should sign the
application form. The necessary forms are filled up and signed to specify
how the account is to be operated and also who is authorised on all matters
including cheques, bills, securities, advances etc. Operation of the account
may be by one or more persons but clear instructions are essential to draw
cheques etc. Instructions regarding survivorship are also a part of the
process of opening of accounts. Generally the account is made payable to
either or survivor and the survivor is entitled to the amounts standing to the
credit. The joint holders may nominate a person, if they so desire. Example
of Joint Account is Husband and Wife. In a case of an account with
instructions payable to either or survivor it is held that on the demise of the
husband, the wife would be entitled to the amount if the husband had such
an intention to benefit her, but, if there is no intention, it becomes part of
the estate of the husband and hence heirs will be entitled as per law. Death
of the husband, will not constitute a gift to the wife. The burden of proving
the intention is on the wife.3)
Partnership Firm
When two or more persons (subject to a maximum of 100) carry on business
to share profits and losses equally or in proportion of capitals, it is called
‘Partnership business’. The Indian Partnership Act, 1932 defines partnership
as “The relation between the persons who have agreed to share the profits
of the business carried on by all, or by any one of them acting for all”. The
persons are called ‘Partners and the business is called ‘Partnership Firm’. In
partnership, the liability of partners is unlimited.
A banker should take the following precautions, while opening an account in
the name of a partnership firm:
1. He (Banker) must examine carefully, the partnership deed to acquaint
himself with the constitution and business of the firm.
2. He must check that the number of partners is not less than two and
not more than 100.
3. The account should be opened in the name of the firm, not in the
name of partner/partners.
 26

4. The Banker can insist all the partners to join, to open the account, and
must obtain specimen signatures of all the partners.
5. The Banker should take a letter or mandate containing:
a) the names and addresses of the partners;
b) nature of business undertaken by the firm;
c) name/names of the partner/partners who will operate the account.
6. If a cheque in favour of firm is endorsed to a partner, the banker
should not honour it without making necessary enquiry.
7. If there is a minor partner, his date of majority should be obtained to
ensure that a fresh partnership later signed by him on attaining majority.
TRUST Account
Meaning of Trust
The formation and operation of trusts in India are governed by the Indian
Trusts Act of 1882. As per Section 3 of Indian Contract Act, 1882 “A trust is
a commitment attached to the responsibility for, and emerging out of a trust
in and acknowledged by the proprietor, or proclaimed and acknowledged by
him, for the advantage of another, or of another and the proprietor.”
Trust Account
A trust account is an account where you (as a trustee) can hold money in
trust on behalf of someone else (a beneficiary).A trustee can be an
accountant, solicitor, licensee or other person who receives money on behalf
of another person and is required to account to that person.
Trust accounts operating in Queensland have reporting requirements under
Queensland legislation depending on the type of trust account.
Documents Needed
While opening account for a trust, the bank obtains the following documents
from the trust:
1. A duplicate of the constitution of the trust
2. The trust deed, if available
3. Testament of enrolment and an affirmed duplicate of the passage of
the general population trust’s register
4. Open Trust Register Number.
5. A rundown of the present trustees and the power designating them as
trustees.
6. The vital determination went by the trustees for opening the record
with the bank.
7. Attested duplicate of the determination marked by every one of the
trustees on the behaviour of the record. For Trusts which have no
constitution, instruments of trust or plan is required.
Types of Trusts
The availability of the type of trust depends on the state law prevailing in the
jurisdiction. It has basic four classifications, which include: –
1) Living Trust
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The trust is enforceable during the lifetime of the trust’s creator, i.e., the
settler.
2) Testamentary Trust
It is the trust that is enforceable after the death of the settler.
3) Revocable Trust
The trust having the clause gives the settler the right to change or terminate
the trust agreement.
4) Irrevocable Trust
Under this, the settlor is restricted from making any changes in the
agreement or terminating the trust. Once the settlor transfer property under
this account, the right of ownership is given up.
Thus, one has to first decide about the type of trust account it is interested
in, then it has to decide who should be the trustee, who all will be the
beneficiaries, and all the assets that one can transfer into the trust account
Joint Stock Companies
A company is an artificial person, created by law with perpetual existence
and common seal. To acquire legal personally (to sue and be sued) it must
be incorporated/registered under the Indian Companies Act, 1956. A Banker
has to take the following precautions while opening an account in the name
of a Joint Stock Company.
1. He (Banker) must ensure that the company (applicant to open an
account in the Bank) is incorporated/registered under the Indian Companies
Act, 1956 (so that the Banker can sue the company for default or breach of
contract if any in future).
2. He has to thoroughly examine the following documents of the
company:
a) of Incorporation, issued by the Registrar of Joint Stock Companies to
ensure that the company (whether Private Limited or Public Limited) is
incorporated under Companies Act.
b) Certificate of Commencement of Business in case, the applicant is a
Public Limited Company. (A Private Company can start business after getting
the certificate of Incorporation. But a public company can start business only
after obtaining the certificate of commencement of Business issued by the
Registrar of Joint Stock Companies).
c) Memorandum of Association and Articles of Association are the most
important documents, submitted to the ‘Registrar for Incorporation.
Memorandum contains the relationship between the company and outsiders
(public) while the Articles contain the constitution of the company.
3. He must obtain from the applicant, a copy of the ‘Resolution passed by
the Board of Directors’:
a) to ensure that the Bank is appointed as Banker of the Company’.
b) To know the persons authorized to operate the Account, and
c) to know the borrowing power of the company and the persons so
authorized to borrow.
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4. If the person authorized to operate the company’s account is having

his personal account also with the bank, the banker must properly enquire
about the cheques endorsed and deposited in personal account so as to
avoid unauthorized transfer/diversion of Company’s funds.
5) Reserve Bank Of India
Explain the powers, functions and duties of Reserve Bank Of India?
Introduction
Reserve Bank of India (RBI) is the Central Bank of India. RBI was
established on 1 April 1935 by the RBI Act 1934. The Central Office of the
Reserve Bank was initially established in Kolkata but was permanently
moved to Mumbai in 1937. The Central Office is where the Governor sits and
where policies are formulated. Though originally privately owned, since
nationalization in 1949, the Reserve Bank is fully owned by the Government
of India.
Objective of RBI
The primary objectives of RBI are to supervise and undertake initiatives for
the financial sector consisting of commercial banks, financial institutions and
non-banking financial companies (NBFCs).
The Reserve Bank of India was established in order to fulfil the following
objectives –
1. To maintain stability in the internal and external value of Indian rupee.
2. To establish co-ordination between money and credit in the country.
3. To act as banker to the government.
4. To regulate banking system in the country.
5. To control and regulate credit and foreign exchange.
6. To arrange agricultural finance.
7. To establish monetary relation with foreign countries.
8. To collect and publish statistical data relating to money, credit and
banking business.
Powers of RBI
Election of New Directors
Section. 12A: The Reserve bank may, by order, require any banking
company to call a general meeting of the shareholders of the company
within such time, not less than 2 months from the Date of the order, as may
be specified in the order or within such further time as the Reserve bank
may allow in this behalf, to elect, in accordance with the voting rights
permissible under this Act, fresh directors.
Cash Reserve
Section. 18: Under Section 42 of the Reserve Bank of India Act, every
scheduled bank has to maintain a sum equal to at least 3% of its time and
demand liabilities in India as cash reserve with the RBI. The Reserve bank
has the power to increase the percentage up to 20% by a notification in the
government Gazette.
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Licensing of Banking companies

Section. 22: Prior to granting license to a banking company, the Reserve
bank may require to be satisfied by an inspection of the books of the
banking company or all or any of the following conditions should be fulfilled,
namely:
1. What the company is or will be in a position to pay its present or
future depositors in full as they become due
2. That the affairs of the company are not being, or are not likely to be
conducted in a manner detrimental to the interest of the depositors.
3. In the case of a company incorporated outside India that the carrying
on of banking business by such company in India will be in the public
interest and that the government or law of the country in which it is
incorporated does not discriminate in any way against banking companies
registered in India.
Cancellation of the License: The license of any banking company may be
cancelled by the Reserve Bank due to the following reasons:
1. If the company ceases to carry on banking business in India; or
2. If any of the conditions imposed by the Reserve bank are not fulfilled.
Any banking company aggrieved by the decision of the Reserve bank
cancelling a license may, within thirty days from the date on which such
decision is communicated to it, appeal to the central government.
Opening of New and Transfer of Existing place of Business
Section. 23: Without obtaining prior approval of the Reserve Bank:
1. No banking company shall open a new place of business in India or
change otherwise than within the same city, town or village, the location of
an existing place of business situated in India.
2. No banking company incorporated in India shall open a new place of
business outside India or change, otherwise than within the same city, town
or village in any country or area outside India, location of an existing place
of business situated in that country or area.
Power to call for information relating to the business of any banking
company
Section. 27(2): Sec. 28 gives power to the Reserve Bank to publish such
information if it considers it proper to do so in the public interest.
The Reserve bank can at any time a banking company to furnish within the
specified time, with such statements and information relating to business of
the banking company as the Reserve bank may consider necessary.
Power of Inspection
Section. 35: The Reserve Bank may at any time, and shall at the direction
of the central government inspect a banking company and its books and
accounts to find out whether or not the affairs of the banking company are
conducted in the interest of the depositors. The central government may
after giving reasonable notice to the banking company, publish the report
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submitted by the Reserve Bank of such portion thereof as may appear

necessary
Power to give Directions
Section. 34: The Reserve Bank may from time to time issue directions to
banking companies generally or to any banking company particularly. The
Reserve Bank shall do when it deems it necessary to issue such directions:
1. in the public interest; or
2. to secure the proper management of any banking company generally.
3. to prevent the affairs of any banking company being conducted in a
manner detrimental to the interest of the depositors or in a manner
prejudicial to the interests of the banking company;
Reserve Bank's approval necessary for the amendment of provisions
relating to appointment of managing directors
Section. 35B: The appointment or reappointment of a managing or a whole
time director, manager or chief executive officer, by whatever name called,
shall not have any effect unless it is made with the previous approval of the
Reserve Bank.
Power of Reserve Bank to appoint additional directors
Section. 36AB: The Reserve Bank, if considers necessary for the protection
of the interest of depositors, from time to time may appoint additional
directors but the number should not exceed five or one third of the
maximum strength fixed for the Board by the articles whichever is less.
Additional directors shall hold office at the pleasure of the Reserve bank not
exceeding three years at a time.
Power of Reserve Bank to remove managerial and other persons
from office
Section. 36AA: For preventing the affairs of the banking company, the
Reserve bank may remove any director, chief executive officer by writing an
order the order shall contain reasons for his removal and the date from
which it is effective. Reasonable opportunity should also be given to such a
person for explaining his position before such order is actually passed
against him. Such person, within 30 days, can appeal to central government.
Further powers and functions of the Reserve Bank
Section. 36
1. It may on a request being made, assist in a proposal for the
amalgamation of banking companies concerned.
2. It may assist any banking company by means of the grant of a loan or
advance to it.
3. It shall make an annual report to the central government on the trend
and progress of the banking in the country. It shall also include in such
report its suggestions for the strengthening of banking business throughout
the country.
Functions of Reserve Bank
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The Reserve Bank of India performs all such functions, which the Central
Bank of a country performs as explained hereunder-
1) Banker to the Government
2) Note-issuing Authority
3) Banker to the Commercial Banks
4) Credit Controller
1) Banker to the Government
The RBI acts as banker to the Government under Section 20 of RBI Act.
Section 21 provides that Government should entrust its money remittance,
exchange and banking transactions in India to RBI. Under Section 21A RBI
has to conduct similar transactions for State Governments also.RBI also acts
as adviser to Government on economic and financial matters.
According to Section 45 of the Reserve Bank of India Act 1934 it is
obligatory on the parts of the Reserve Bank Of India to appoints State Bank
of India as its sole agent at all places. As a banker’s bank , It performs the
following functions:
(i) A custodian of cash reserves and a bank of clearance
The RBI acts as the custodian of cash reserves of the commercial banks. In
some countries law requires that a certain portion of the deposits of the
commercial banks should be kept with the central bank. In India , for
example, the commercial banks must keep 3% of the total demand and time
liabilities with the Reserve Bank. The advantages of centralization of cash
reserves are as follows
a) It is source of great strength to the banking system. The general public
feel confident of the solvency of the banks
b) These centralized cash reserves can be effectively employed during
general emergencies. When a bank is faced with heavy withdrawals,
these reserves may be lent to the bank concerned
c) The cash reserves acquire mobility. In a country like india, Financial
needs do not arise in all the parts of the country at the same time. In
such case banks in some regions can keep the surplus reserves with the
Central Bank
d) The cash reserves are conductive to economy and increase elasticity and
liquidity of the banking system. In the absence of a Central Bank and
Centralized cash reserves, each commercial bank would have to
maintain a higher cash reserve.
e) There is one more advantage of these cash reserves. These reserves can
be used by the central bank to settle the inter-bank indebtedness. All
the commercial banks maintain accounts with RBI
f) By varying these reserves the central bank can control credit. For
example, The Reserve Bank can vary the cash reserve between 3 and 15
percent. This is the most important function of centralized cash reserves
(ii) As a Bank of rediscount and lender of the last resort:
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The RBI acts as a lender of the last resort. The function has developed out of
th special position of the bank issue. The RBI will be performing the function
of the lender of last resort when it rediscounts the bills of exchange brought
by the commercial banks.
(iii) The RBI undertakes supervision and regulation of Banks as per the
provisions of the Banking Regulation Act 1949. It is also armed with powers
to supervise banks and give directions under the RBI Act 1934. It grants
licences for establishment of banks. It undertakes supervision of banks
(iv) Collects taxes and makes payments on behalf of the Government
(v) Accepts deposits from the Government
(vi) Collects cheques and drafts deposited in the Government accounts.
(vii) Provides short-term loans to the Government
(viii) Provides foreign exchange resources to the Government.
(ix) Keep the accounts of various Government Department.
(x) Maintains currency chests in treasuries at some importance places for
the convenience of the government.
(xi) Advises governments on their borrowing programmes.
(xii) Maintains and operates Central Government’s IMF accounts.
2) Note-issuing Authority
The system of note issue as it exists today is known as the minimum reserve
system. The currency notes issued by the Bank arid legal tender everywhere
in India without any limit. At present, the Bank issues notes in the following
denominations: Rs. 2, 5, 10, 20, 50, 100, and 500. The responsibility of the
Bank is not only to put currency into, or withdraw it from, the circulation but
also to exchange notes and coins of one denomination into those of other
denominations as demanded by the public. All affairs of the Bank relating to
note issue are conducted through its Issue Department.
In terms of Section 22 of the Reserve Bank of India Act, the RBI has been
given the statutory function of note issue on a monopoly basis. The note
issue in India was originally based upon “Proportional Reserve System”.
When it became difficult to maintain the reserve proportionately, it was
replaced by “Minimum Reserve System “. According to the RBI Amendment
Act of 1957, the bank should now maintain a minimum reserve of Rs.200
crore worth of gold coins, gold bullion and foreign securities of which the
value of gold coin and bullion should be not less than Rs.115 crore.
The Government of India issues rupee coins in the denomination of Rs.1, 2,
and 5 to public. These coins are required to be circulated to public only
through Reserve Bank un der Section 38 of the RBI Act. The RBI presently
issues notes of denominations Rs.10 and above.
Originally RBI issued currency notes of Rs.2 and above. However, due to
higher cost of printing small denomination notes these denominations are
now coincides and issued by Government.
3) Banker to the Commercial Banks
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Reserve Bank acts as a guardian for the commercial banks. The RBI being
an apex monitory institution has obligatory powers to guide, help and direct
other commercial banks in the country. The RBI can control the volumes of
banks reserves and allow other banks to create credit in that proportion.
The Reserve Bank acts as the banker’s bank in the following
respects:
1. Every Bank is under the statutory obligation to keep a certain
minimum of cash reserves with the Reserve Bank. The purpose of these
reserves is to enable the Reserve Bank to extend financial assistance to the
scheduled banks in times of emergency and thus to act as the lender of the
last resort. According to the Banking Regulation Act, 1949, all scheduled
banks are required to maintain with the Reserve Bank minimum cash
reserves of 5% of their demand liabilities and 2% of their time liabilities. The
Reserve Bank (Amendment) Act, 1956 empowered the Reserve Bank to raise
the cash reserve ratio to 20% in the case of demand deposits and to 8% in
case of time deposits. Due to the difficulty of classifying deposits into
demand and time categories, the amendment to the Banking Regulation Act
in September 1972 changed the provision of reserves to 3% of aggregate
deposit liabilities, which can be raised to 15% if the Reserve Bank considers
it necessary,
2. The Reserve Bank provide financial assistance to the scheduled banks
by discounting their eligible bilk and through loans and advances against
approved securities,
3. Under the Banking Regulation Act,1949 and its various amendments,
the Reserve Bank has been given extensive powers of supervision and
control over the banking system. These regulatory powers relate to the
licensing of banks and their branch expansion; liquidity of assets of the
banks; management and methods of working of the banks; amalgamation,
reconstruction and liquidation of banks; inspection of banks; etc.
4) Credit Controller
As the central bank of the country, the Reserve Bank undertakes the
responsibility of controlling credit in order to ensure internal price stability
and promote economic growth. Through this function, the Reserve Bank
attempts to achieve price stability in the country and avoids inflationary and
deflationary tendencies in the country. Price stability is essential for
economic development. The Reserve Bank regulates the money supply in
accordance with the changing requirements of the economy. The Reserve
Bank makes extensive use of various quantitative and qualitative techniques
to effectively control and regulate credit in the country. Quantitative
controls include the bank rate policy, the open market operations, and the
variable reserve ratio. Qualitative or selective credit control, on the other
hand includes rationing of credit, margin requirements, direct action, moral
suasion publicity, etc.
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Conclusion
The Reserve Bank of India holds a vital in the banking and economic stability
of the country. It formulates and implements monetary policy in the country
to maintain stability and growth in the economy. As a banker’s bank its role
is essential for the proper operation of the banking sector of the country.
The Reserve Bank of India is entrusted with multidimensional role and its
role as a regulator had been crucial in recent global crisis where Indian
banking and financial system remained strong with capital adequacy and
stability. Thus, considering the role and functions of the Reserve Bank of
India, it can be termed as one of the most vital organizations of Indian
economy and ‘super regulator of banking sector.’
6) Explain how the RBI controls the advances of commercial Banks
in India?
INTRODUCTION
The RBI is the Central Bank of our country. It is the open Institution of
India’s Financial and monetary system. RBI came into existence on 1st April,
1935 as per the RBI act 1935. But the bank was nationalized by the
government after Independence. It became the public sector bank from 1st
January, 1949. Thus, RBI was established as per the Act 1935 and
empowerment took place in the banking regulation Act 1949. RBI has 4 local
boards basically in North, South, East and West – Delhi, Chennai, Calcutta,
and Mumbai
ROLE OF RBI IN CREDIT CONTROL:
Probably the most important of all the functions performed by a central bank
is that of controlling the credit operations of commercial banks. In modern
times, bank credit has become the most important source of money in the
country, relegating coins and currency notes to a minor position. Moreover,
it is possible for commercial banks to expand credit and thus intensify
inflationary pressure or contract credit and thus contribute to a deflationary
situation. It is, thus, of great importance that there should be some
authority that will control the credit creation by commercial banks. As the
controller of credit, the central bank attempts to influence and control the
volume of Bank credit and also to stabilize the business condition in the
country.
Reserve Banks and Commercial Banks
By Virtue of powers conferred the Reserve Bank of India Act 1934 and the
Banking Regulation Act 1949 the Reserve Bank is empowered to regulate the
commercial banks by exercising certain powers as follows:
(i) Reserve Bank acts as supervisory authority of commercial banks. It
issues licenses to banking companies (Sec 22 Banking Companies Regulation
Act)
(ii) Every banking company shall take the permission of the Reserve Bank
for opening its new branch anywhere 9Sec 23)
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(iii) It has power to inspect (Sec 35) and issue directions (Sec 35-A) to
commercial banks
iv) It has control over the managements of commercial banks. The
management of any commercial bank has to obtain prior permission from
the Reserve Bank of India for appointment or re-appointment of a Chairman,
Managing Director etc.
(v) It controls the credit created by the commercial banks and prevents
inflation and economic instability
(vi) Under Sec 35 (b) of th Banking Regulation Act 1949, the approval of the
Reserve Bank of India is necessary for the appointment or re-appointment or
termination of an appointment of a Chairman, Managing or whole time
Director
(vii) Under section 21, the Reserve Bank of India has been given a power to
control advances granted by the commercial banks. The power is known as
the power of Selective Credit Control
CONTROLS OF RBI OVER COMMERCIAL BANKS
RBI controls the commercial banks through the following measures:
i. Quantitative Measures
ii. Qualitative Measures
GENERAL / QUANTITATIVE CREDIT CONTROL METHODS OF RBI
1. Bank Rate Policy:
The bank rate is the rate at which the Central bank lends money to the
commercial banks for their liquidity requirements. The bank rate is also
called a discount rate. In other words, bank rate is the rate at which the
central bank rediscounts eligible papers (like approved securities, bills of
exchange, commercial papers etc) held by commercial banks. Bank rate is
important because it is the pace setter to other market rates of interest.
Bank rates have been changed several times by RBI to control inflation and
recession.
In India the bank rate has been changed frequently from 1951 onwards and
today the bank rates stands at 10%. However, the efficacy of the bank rate
depends on the extent of integration in the money market and also it
depends upon how far the commercial banks resort to borrowings from the
Reserve Bank of India
2. Open market operations
It refers to buying and selling of government securities in open market in
order to expand or contract the amount of money in the banking system.
This technique is superior to bank rate policy. Purchases inject money into
the banking system while sale of securities does the opposite. During the
last two decades, the RBI has been undertaking switch operations. These
involve the purchase of one loan against the sale of another or, vice-versa.
This policy aims at preventing an unrestricted increase in liquidity.
3. Variable Reserve Ratios:
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Commercial banks have to keep a certain proportion of their total assets in

the form of liquid assets so that they are always in a position to honour the
demand for withdrawal by their customers. These reserve ratios are named
as Cash Reserve Ratio (CRR) and a Statutory Liquidity Ratio (SLR). The CRR
refers to the percentage of deposits with the commercial banks which they
have to maintain with the RBI in cash form and SLR refers to the percentage
of deposits to be maintained as reserves in the form of gold or foreign
securities. Thus, by varying reserve ratios lending capacity of commercial
banks can be affected.
The Reserve Bank Of India has got the power to use the variable reserve
requirements as an instrument of monetary control only in 1956 when the
bank was authorized to vary the minimum cash reserve requirement to b
maintained by commercial banks between 5% and 20% of demand deposits
and 2% and 8% of time deposits
4. Cash Reserve Ratio (CRR)
The Cash Reserve Ratio (CRR) is an effective instrument of credit control.
Under the RBl Act of, l934 every commercial bank has to keep certain
minimum cash reserves with RBI. A high CRR reduces the cash for lending
and a low CRR increases the cash for lending.
5. Statutory Liquidity Ratio (SLR)
Under SLR, the government has imposed an obligation on the banks to;
maintain a certain ratio to its total deposits with RBI in the form of liquid
assets like cash, gold and other securities.
6. Credit Control Function
A commercial bank in the country creates credit according to the demand in
the economy. But if
this credit creation is unchecked or unregulated then it leads the economy
into inflationary
cycles. On the other credit creation is below the required limit then it harms
the growth of the
economy. As a central bank of the nation the RBI has to look for growth with
price stability.
Thus it regulates the credit creation capacity of commercial banks by using
various credit control
tools.
SELECTIVE / QUALITATIVE CREDIT CONTROL METHODS OF RBI
Under Selective Credit Control, credit is provided to selected borrowers for
selected purpose, depending upon the use to which the control tries to
regulate the quality of credit - the direction towards the credit flows. The
Selective Controls are
1. Ceiling on Credit
The Ceiling on level of credit restricts the lending capacity of a bank to grant
advances against
certain controlled securities.
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2. Margin Requirements
A loan is sanctioned against Collateral Security. Margin means that
proportion of the value of
security against which loan is not given. Margin against a particular security
is reduced or
increased in order to encourage or to discourage the flow of credit to a
particular sector. It varies
from 20% to 80%. This method is used to encourage credit supply for the
needy sector and
discourage it for other non-necessary sectors by increasing margin for the
non-necessary sectors;
and by reducing it for priority sectors. For agricultural commodities, it is as
high as 75%. Higher
the margin lesser will be the loan sanctioned.
3. Discriminatory Interest Rate (DIR)
Through DIR, RBI makes credit flow to certain priority or weaker sectors by
charging
concessional rates of interest. RBI issues supplementary instructions
regarding granting of
additional credit against sensitive commodities, issue of guarantees, making
advances etc.
4. Directives
The RBI issues directives to banks regarding advances. Directives are
regarding the purpose for
which loans may or may not be given
5. Direct Action
It is too severe and is therefore rarely followed. It may involve refusal by
RBI to rediscount bills or cancellation of license if the bank has failed to
comply with the directives of RBI.
6. Moral Suasion
Under Moral Suasion, RBI issues periodical letters to banks to exercise
control over credit in
general or advances against particular commodities. Periodic discussions are
held with authorities of commercial banks in this respect
Conclusion
The Reserve Bank traditionally relied on direct instruments of monetary
control such as Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio
(SLR). Cash Reserve Ratio indicates the quantum of cash that banks are
required to keep with the Reserve Bank as a proportion of their net demand
and time liabilities. RBI regulates day to day operations of commercial
banks through monetary instruments like bank rate, open market operations
and varying cash reserve ratios. ... By varying Cash Reserve Ratio and
Statutory Reserve Ratio RBI regulates liquidity in the market.
7) Passbook
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The Banks supply his customer either with a pass-book or with statements of
account at regular intervals. Pass-book is a booklet issued by the banker to
his customer, wherein all the transactions between the banker and the
customer are recorded. It is the replica of the customer’s account in the
banker’s books. In other words, Pass-Book is a book, which passes between
the Banker and customer periodically, containing the record of customer’s
account. The reason why it is called pass book is, it passes between banker
and customer and from the customer to the banker. It is also known as
‘Statement of Account”
The main purpose of the passbook is to enable the customer-
(i) to acquaint himself with he banker
(ii) to know / check whether entries as to day to day transactions are
properly entered / recorded in the passbook
(iii) to prepare bank reconciliation statement
(iv) to treat the account got settled
Specimen / Format of the Bank Pass Book
Name of the bank__________
Address of the bank____________
Account No._________________
Customer Name:_______________
Address of the customer.___________
Date Particulars Cheque No Withdrawals Deposits Balance Initials

Features: The important features of the passbook are:

(i) Entries in the pass book are to be made by the bank staff only. The
customer cannot make any entry in the Pass Book
(ii) It must be sent by the customer periodically to the banker to up-to-date
entries
(iii) In case of savings Account, the pass book must accompany the
withdrawal slip, unless there is cheque book facility
Duty of Customer to examine Pass Book
The customer is at liberty to bring to the notice of the banker, the mistakes
or omissions, if any in the passbook and can get them corrected. Thus, the
entries in the passbook
Effect of Entries in the Pass-Book
The effect of entries made by mistake may be explained with reference to
the following heads –
(i) Entries favourable to customer
(ii) Bank Entitled to recover on case of over-crediting customer’s account
(iii) Customer entitled in case bank over-debit a customer’s account
(iv) Entries favourable to Banker and
(v) Effect of false entry in the pass book
8) Letters Of Credit
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Examine critically the legal incidents of 'commerical letter of credit"

A Letter of Credit (LC) is a legal document that is issued by the bank that
acts as an irrevocable guarantee in making payment to a beneficiary. When
an individual fails to perform the required obligations, the bank pays. In this
article, we look at the various types of letter of credit available in India
Letter of Credit (LC) is a credit limit that is used majorly by businesses
engaged in international trade. It acts as a payment guarantee offered by
Bank/NBFCs to exporters. Letter of Credit is a payment instrument in which
Banks/NBFCs offer monetary guarantee to enterprises that are engaged in
the import and export businesses, in case of payment delays or any default.
Kinds of Letters of Credit: Letters of credit are of two types as follows
(i) Travellers’ letter of credit and
(ii) Letters of commercial credit
(i) Travellers’ letter of credit
It is a letter of credit issued by one bank to another branch of the same
bank for the purpose of facilitating the travelling of the customer. If it is
issued on more than one branch then it is called circular letter of credit. It
help traders or travelers who travel within the country or abroad from the
risk of carrying cash. Banks by issuing travelers letters of credit protect the
travelers from the risk of theft etc.
Characteristics and Features:
Following are the Characteristics of the Travelers letter of credit:
(1) It (travelers letter of the credit) is issued by a bank on its own branch or
branches or corresponding bank in the country or abroad.
(2) It contains request by the issuing bank to the paying bank to pay up to
or specified sum of money to the holder, whose name is specified therein
(3) Its back (Reverse) side contains proforma to furnish the particulars of
payment made by the paing bank / banks
(4) It is also enclosed by a letter of identification containing the specimen
signature of the payee
(5) The holder / Payee shall issue drafts drawn on issuing banker, to the
paying banker for reimbursement (Of the amount paid).
(6) The applicant has to deposit the amount (which he could draw against
the letter of credit) with the issuing bank. Or he may give a letter of
guarantee to that effect. It is called Guarantee letter of credit.
Types of Travelers’ Letter of Credit: The Travelers’ Letter of Credit can be
divided into the following forms:
1. Travelers Cheque: It is issued and drawn by a bank upon its own branch
or another bank. It is a request by the issuing bank to the paying bank to
pay a specified amount to the holder. It also contains the specimen
signature of the holder for the purpose of identification.
2. Circular Letter of Credit: It is addressed to more than one banker.
Details of the amount paid by the various bankers are entered in the
proforma, printed on the back of the letter of credit. The holder is to deposit
 40

the required amount for which he wants a letter of credit with the issuing
bank. The issuing bank charges its commission for the service.
(ii) Letters of commercial credit
A commercial letter of credit is written on behalf of the customer and allows
a different bank than the one issuing credit to make a payment to the
beneficiary. In the letter, the issuing bank promises to allow draws made on
the credit. The idea behind a letter of credit is similar to escrow. A bank acts
as a neutral party and only releases funds after the parties meet certain
requirements. In most situations, the beneficiary provides the products or
services. Under a letter of credit, the issuing bank takes over from the
bank's customer as the payee.
Commercial letters of credit have a longstanding history in international
trade. For international matters, the letters are overseen by the
International Chamber of Commerce Uniform Customs and Practice for
Documentary Credits. The provisions from this group are required for all
parties. In the U.S., domestic collections are overseen by the Uniform
Commercial Code.
Letters of commercial credit may be sub-classified as follows:
(i) Documentary letter of credit and clean letter of credit
(ii) Fixed credit and Revolving Credit
(iii) Revocable and Irrevocable letters of credit
(iv) Confirmed and unconfirmed letters of credit
(v) ‘With’ and ‘Without’ Recourse letters of credit
(vi) Transferable and non-transferable letters of credit
(vii) Back to back letter of credit
(viii) Red-Clause letter of credit
(ix) Clean letter of credit
(x) Revolving letter of credit
(i) Documentary letter of credit and clean letter of credit
It contains a clause that the title deeds viz. bill of lading , insurance policy
etc., shall be attached with the bill of exchange
(ii) Fixed credit and Revolving Credit
In this case, the issuing banker specifies the amount upto which the
beneficiary can draw within the specified time
(iii) Revocable and Irrevocable letters of credit
A revocable letter of credit may be revoked or modified by the issuing bank,
for any reason at any time, without notification. A revocable letter of credit
cannot be confirmed. If a correspondent bank is engaged in a transaction
involving a revocable letter of credit, it serves as the advising bank. The
irrevocable letter of credit may not be revoked or amended without the
consent of the issuing bank, the confirming bank, and the beneficiary. The
buyer’s issuing bank must follow through with payment to the seller so long
as the seller complies with the conditions listed in the letter of credit.
(iv) Confirmed and unconfirmed letters of credit
 41

If the issuing bank requests the advising bank to add its confirmation to an
irrevocable credit, it is called ‘Confirmed or Irrevocable Letter of Credit’. If
the advising bank does not add this confirmation, It is called ‘unconfirmed
letter of credit’.
(v) ‘With’ and ‘Without’ Recourse letters of credit
Bills of exchange may be drawn under the letter of credit with resource to
the drawer or without resource to the drawer. In case of former , if the bill is
dishonoured, the banker can recover the amount from the drawer
(vi) Transferable and non-transferable letters of credit
Under transferable letter of credit, the beneficiary can transfer his right to
draw a bill to somebody
(vii) Back to back letter of credit
When a beneficiary receives a non-transferable letter of credit, he may
request a bank to open a new letter of credit in favour of some other person
on the security of the letter of credit issued in his favour. It is called ‘Back to
Back letter of credit’.
(viii) Red-Clause letter of credit
Sometimes , the exporter / seller may need credit from the advising bank for
purchase of raw material etc.. In order to enable the exporter to secure
credit, a clause printed in red link is inserted in the letter of credit. A Red
Clause Letter of Credit contains an authority from the issuing banker to the
advising banker to grant advances to the beneficiary upto a specified
amount at the responsibility of the former (i.e issuing banker)
(ix) Clean letter of credit
A clean or open letter of credit does not contain any such condition for
payment to beneficiary (exporter). Under shipping document they are not
attached with the bill of exchange at the tome of acceptance by the banker
issuing letter of credit but sent by the exporter direct to the importer
(x) Revolving letter of credit
If the amount of credit allowed under a letter of credit automatically
renewed after the bills negotiated under it are fully honored it is called a
revolving letter of credit. The opening banker specified not the total amount
upto which bills may be drawn, but the total amount upto which bills drawn
remain outstanding as a time
Advantages:
The advantages of the letters of credit may be explained with reference to
the following heads –
(A) Advantages to the Importer
(B) Advantages to the Exporter
(A) Advantages to the Importer:
(i) Purchases without cash: The purchaser can purchase goods on credit
from foreign merchants who do not know him and may not rely upon his
standing, on the banker’s credit issuing the letter of credit
 42

(ii) Payment after satisfying conditions: The importer is assured in case

of documentary letter of credit that the exporter cannot obtain any benefit
under the letter of credit without actually shipping the merchandise and
handing over the documents to the bank
(iii) Better terms of Trade: The issuing banker lends the advantages of
his own credit to the importer, who is able to secure better terms of trade,
from the foreign suppliers which is otherwise not possible
(iv) Release against Trust Receipt:
When the bankers are willing to assume the credit risk of the importer,
shipping documents are surrendered to him in return for his trust receipt
and thus goods are released
(B) Advantages to the Exporter
(i) Certainty of Payment: Though the importer and the exporter are not
known to each other, the letter of credit provides the letter an absolute
assurance that the bills of exchange drawn under the letter of credit will be
honoured
(ii) Exchange Security: Possession of baker’s letter of credit tends to
eliminate, for the seller of the exporter, the risk trade control or exchange
control regulations in the country of the importer
(iii) Secure Loans: The exporter can secure loans from his bank o buy or
manufacturing the goods to be supplied on the strength of the letter of credit
(iv) Immediate Negotiation of Bill is possible: The bills of exchange
drawn under the letter of credit are readily discounted (Negotiated) with the
advising or confirming banker or any other banker because of the firm
undertaking given by the opening banker
Disadvantages:
As with any financial instrument, even a letter of credit has disadvantages,
as listed below:
Additional Cost – Bank Fee
A letter of credit adds to the cost of doing business. Banks charge a fee for
providing this service, and it can increase steeply if the parties want to put
some additional features.
Time-Consuming Formalities
The required documentation and formalities may be more in a letter of
credit. This may also add to the cost of doing business.
Possibility of Misuse – Fraud Risk
A letter of credit has complex governing rules and some notorious buyers or
sellers can misuse it to take advantage of it.
A letter of credit poses a material fraud risk to the importer. The bank will
pay the exporter upon looking at the shipping documents and not the actual
quality of goods. Disputes can arise if the quality is different from what was
agreed upon.
 43

Currency Risk
A letter of credit also carries forex risk. There will be an agreed-upon
currency in the letter of credit. At least one of the parties will have a
different currency than that, and hence they will face a risk due to currency
fluctuations. It can also work in favor.
Time-Bound
A letter of credit has an expiration date, and therefore the exporter has a
time limit within which he will have to deliver the goods by all means. At
times, this haste creates a mess.
Risk of Default by Issuing Bank
A letter of credit essentially transfers the credit-worthiness from the
importer to the issuing bank. So, if the issuing bank defaults, there is still a
payment risk to the exporter. Though the exporter can avoid it if the
advising bank guarantees the payment, that will add to the cost of the letter
of credit.
9) Nationalization Of Banks
Nationalization is a process by which ownership and management is
transferred from private individuals to the government. The main objective
of the nationalization is, to serve better, the needs of economic development
in consonance with national priorities and objectives. Its main aim is to
render the largest good to the largest number of people
Objectives and causes of nationalization of banks
Objectives of nationalization of banks:
1. To generate public confidence in banking system of the country.
2. To prevent concentration of economic power in few hands.
3. To prevent the use of bank funds for anti-social activities.
4. To mobilize national savings and to channelize them into productive
purposes.
Reasons for nationalization of banks:
1. To remove concentration of economic power
2. Mobilization of savings
3. To curb malpractices
4. To eradicate anti social elements
5. Balance of Inter-regional development
6. Greater control by Reserve Bank Of India and
7. Expansion of Banking Service
Advantages of Nationalisation
1. It helps to check exploitation: Just like I have discussed before,
Nationalisation of helps to stop exploitation by foreign and private
businesses in the nation. When the government take control of the business,
citizens will enjoy because the government might provide that same service
for free or fore a lesser amount.
2. It ensures steady supply of essential services: When essential
services like water supply is owned by private individuals in a country, it
 44

won’t be as efficient as when it is owned by the government. Thus,

nationalization is a way of through which can ensure efficiency in the supply
of some goods or services.
3. Encourages efficient use of resources: It encourages more efficient
use of economic resources.
4. Protection of strategic industries: The government can also
nationalize a business due to the fact they the business is so important that
it should not be allowed to be in the hands of a private individual or foreign
investor.
5. Ensures equitable distribution of resources: Since the sole aim of the
government is to provide for the needs of the whole nation, nationalization
of businesses tends to benefit every part of the country more than when
those businesses were owned by private individuals. It ensures equitable
distribution of resources as well as correct any imbalance in the means of
production.
6. Elimination of Monopoly: This is also one of the major advantages of
nationalization. By taking over privately owned and foreign companies, there
is a large decrease in private monopoly.
7. Mobilisation of capital: When a business is nationalized, large capital
can be mobilised to ensure large scale investment.
Disadvantages of Nationalisation
1. Low productivity and inefficiency: Due to the fact that government
businesses are usually poorly managed, most nationalized businesses by the
government end up being mismanagement and that reduces efficiency of the
business.
2. Prevention of private initiatives: When government takes over private
business, there is every likelihood that private initiatives will also decrease.
This can also be due to lack of competition.
3. Consumers can be exploited: Even though nationalization is supposed
to be with the aim of not making profit, that does not mean that the
government can not exploit the citizens. In many cases, even after
nationalization, citizens are still exploited by the government.
4. Corruption and mismanagement: As usual, there is always a high rate
of corruption in businesses owned and managed by the government. Thus,
nationalization may not be a good idea for a nation where majority of
politicians are corrupt by nature.
5. Political interference: When a business becomes owned and managed
by the government, there is usually political interference and that may lead
to misallocation of resources.
10) Negotiable Instruments
Introduction
The Negotiable Instrument Act was promulgated in the year 1881 which was
introduced to ease the growth of banking and commercial transactions. The
basic purpose was to legalize the system of negotiable instruments. The Act
 45

was enforced during British rule and to date, most of the provisions still
remain unchanged. The Ministry of Finance is the nodal organization that
regulates the system related to negotiable instruments. The process of
transfers from one person to another in dealings of monetary value in terms
of legal documents is the negotiable instrument.
Definition
According to the Section 13 of the Negotiable Instruments Act of 1881, a
negotiable instrument means “a promissory note, bill of exchange or cheque,
payable either to order or to the bearer.
The term “negotiable” in a negotiable instrument refers to the fact that
they are transferable to different parties. If it is transferred, the new holder
receives full legal title to it.
The negotiable instrument enables its holders to either take money in cash
or transfer it to another person. The exact amount the payer is promising to
pay is indicated on the negotiable instrument and must be paid on demand
or on the specified date. Like contracts, negotiable instruments are signed
by the issuer of the document.
Features Of Negotiable Instrument
Following are the characteristics features of the Negotiable instruments –
(I) Transferability
(ii) Absolute Title and
(iii)Right to sue
(I) Transferability: The negotiable instruments are easily transferable
from one person to another by mere delivery in case of a bearer instrument
and by endorsement and delivery in case of an order instrument
(ii) Absolute Title: A negotiable instrument confers absolute and good title
on the transferee, who takes it in good faith, even though the transferor and
defective toitle. Such person (transferee) is called ‘holder in due course’ and
his interest in the instrument is protected by law
(iii)Right to sue: The holder of a negotiable instrument, who is leally called
as ‘holder in due course’ has a right to sue upon the instrument in his own
name
Kinds of Negotiable Instruments
Following are the different kinds of negotiable instruments:
(A) Promissory Note (Section 4)
(B) Bill of exchange (Section 5)
(C) Cheque (Section 6)
(A) Promissory Note (Section 4)
A “promissory note” is an instrument in writing (not being a bank-note or a
currency-note) containing an unconditional undertaking signed by the
maker, to pay a certain sum of money only to, or to the order of, a certain
person, or to the bearer of the instrument. In short, it is called ‘Pronote”
Parties to Promissory Notes
 46

Every promissory note always comprises of three important parties. These

include the maker, the payee as well as the holder. Even endorsers and
endorsees can be parties in certain cases.
1) The maker: This is basically the person who makes or executes a
promissory note and pays the amount therein.
2) The payee: The person to whom a note is payable is the payee.
3) The holder: A holder is basically the person who holds the notes. He may
be either the payee or some other person.
Essential Elements of a Promissory Note
A typical promissory note contains several features that separate it from
other negotiable instruments. The following are a few such distinct
elements:
a) The Promissory note must be in Writting
A promissory note must always be in writing. It can never be an oral
contractual promise to pay money. This is a legal as well as a customary
requirement of such instruments.
b) Express undertaking
The undertaking that forms the base of a promissory note must generally be
express. Thus, merely inferring an acknowledgement to pay and calling it a
promissory note is not enough. For example, A writing “I owe B Rs. 1,000”
does not amount to such notes.
c) Unconditional promise
The promise to pay a certain amount of money must be unconditional in all
cases. Hence, a conditional promise cannot form the basis of such notes. For
example, one cannot promise to pay money only if he has it, as that
amounts to a condition.
However, promising to pay on a specific date or upon the happening of an
inevitable event is fine. For example, A can promise to pay B three years
from the date of the note’s execution.
d) It must be duly Signed and deliver by the Maker
No particular form is prescribed; a promise contamed in a letter will suffice.
An oral promise to pay a sum of money is not an instrument. Though it is
usual to mention in a note that it is made for “value received”, such a
statement is not an essential of the note and its omission will not render the
instrument invalid. Similarly, date and place are not the essential requisites
of a note.
e) The parties must be certain
There must be two parties to a promissory note; a note cannot be made
payable to the maker himself, such a note is nullity; the reason being that
the same person is both the promisor and the promisee. Thus a note in the
form, “I promise to pay myself” is not a promissory note. It is, however,
valid if it is endorsed by the maker, because then it becomes payable to
bearer, if endorsed in blank, or to the indorsee or order, if specially endorsed
 47

f) It must be stamped according to the provisions of the Stamp Act

1940
However, a promissory note should be stamped either before or at the time
of its execution (Execution is defined to mean signing or affixing of the
signature). An unstamped note is not admissible in evidence and no suit can
be mentioned thereon.
(B) Bill of exchange (Section 5)
According to Section 5 of the Negotiable Instrument Act 1881, A “bill of
exchange” is an instrument in writing containing an unconditional order,
signed by the maker, directing a certain person to pay a certain sum of
money only to, or to the order of, a certain person or to the bearer of the
instrument.
The following parties play a role in bills of exchange:
1) Drawer: This is basically the person who draws the bill.
2) Drawee: In contrast to the drawer, the drawee is the person in whose
favour the bill is drawn.
3) Acceptor: This is the person who accepts a bill of exchange. Generally,
the acceptor is the drawee but a stranger may accept it too.
4) Payee: Either the drawee or a stranger may be a payee, which is the
person to whom bills are payable.
5) Holder: This is generally the payee of the bill. It could also be some
other person to whom the payer endorses the bill. In case of bearer bills, the
bearer himself is the holder.
6) Endorser: The holder becomes an endorser when he endorses the bill to
another person.
7) Endorsee: This is the person to whom a bill is endorsed by the endorser.
Essentials of a Bill of Exchange
As noticed in the case of the promissory notes a valid bill of exchange must
have the following prerequisites:
1. it must be in writing,
2. it must contain an unconditional order to pay;
3. it must be signed by the drawer who must be a certain person ,
4. the drawee must be certain,
5. the payee must be certain,
6. the amount payable must be certain
7. the order must be to pay money and money only.
Forms of Bills of Exchange
The following are some common forms of bills of exchanges that the
Negotiable Instruments Act recognizes:
a) Inland and Foreign Bills
A bill of exchange may be an inland instrument under two conditions. Firstly,
the bill must be drawn as well as payable within India. Secondly, it may also
be drawn in India upon an India resident but payable in a foreign country.
 48

All bills that are not inland bills are foreign bills by default. Generally, foreign
bills require three copies and different rules govern them.
b) Time and Demand Bills
A Bills of Exchange that is payable on demand or when presented at the site
is called a demand bill and it does not have a due date or time mentioned for
the payment in it, so the transaction between the involved parties can be
made when the bill is presented.
c) Trade Bill and Accommodation Bills
A bill of exchange that comes into play during a genuine trade transaction is
a trade bill. For example, when A sells goods to B, he may draw a bill
directing B to pay later on. This bill will mention the purchase price as well
as the specific date on which it is payable.
Accommodation bills are different from trade bills because they do not
involve any transactions of trade. Hence, consideration for the exchange of
goods or services is not important here. In accommodation bills, one person
lends his name to oblige a friend or some other person. This is basically
similar to loan transactions.
d) Clean Bill and Documentary Bills
A type of bill that is without documents of proof is called a Clean Bill. In this
bill no documents are present so the charges for this bill are higher with the
higher interest rate in comparison to other documentaries.
It is always accompanied by supporting documents to facilitate the trade or
transaction between two parties is called a documentary bill. There are two
types of Documentary Bills of Exchange: Documents against acceptance Bills
and Documents against payment.
(C) Cheque (Section 6)
According to Section 6 of the Negotiable Instrument Act 1881, A ”cheque” is
a bill of exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand and it includes the electronic image of a
truncated cheque and a cheque in the electronic form.
A cheque is bill of exchange with two more qualifications, namely,
(i) it is always drawn on a specified banker, and
(ii) it is always payable on demand.
Parties to a Cheque
1. Drawer. He is the person who draws the cheque, i.e., the
depositor of money in the bank.
2. Drawee. It is the drawer’s banker on whom the cheque has
been drawn.
3. Payee. He is the person who is entitled to receive the
payment of the cheque.
4. The holder, indorser and indorsee (the same as in the case of
a bill or note).
ESSENTIAL ELEMENTS / CHARACTERISTICS OF CHEQUE
Essential characteristics of a cheque
 49

If we take a close look at the definition of a cheque, it becomes clear that a

cheque has the following 10 essential elements or characteristics.
1. It must be in writing: A cheque must be in writing. An oral order to pay
does not constitute a cheque.
2. It should be drawn on a banker: It is always drawn on a specified
banker. A cheque can be drawn on a bank where the drawer has an account
(saving bank or current account).
3. It contains an unconditional order to pay: A cheque cannot be drawn
so as to be payable conditionally. The drawer's order to the drawee bank
must be unconditional and should not make the cheque payable dependent
on a contingency. A conditional cheque shall be invalid. (Example: Pay only
if presented by Ram in person) This is conditional. So the cheque become
not valid for payment, though presented properly.
4. The cheque must have an order to pay a certain sum: The cheque
should contain an order to pay a certain sum of money only. If a cheque is
drawn to do something in addition to, or other than to pay money, it cannot
be a cheque. For example, if a cheque contains 'Pay USD 500 and a TV
worth USD 500 to A’ it is not a cheque.
5. It should be signed by the drawer and should be dated: A cheque
does not carry any validity unless signed by the original drawer. It should be
dated as well.
6. It is payable on demand: A cheque is always payable on demand.
7. Validity: A cheque is normally valid for three months from the date it
bears. Thereafter it is termed as stale cheque. A post-dated cheque will not
be valid. In both cases, the validity of the cheque is presumed to commence
from the date mentioned on it.
8. It may be payable to the drawer himself: Cheques may be payable to
the drawer himself/herself. It may be drawn payable to bearer on demand
unlike a bill or a pro-note.
9. Banker is liable only to the drawer: The banker on whom the cheque
is drawn shall be liable only to the drawer. A holder or bearer has no remedy
against the banker if a cheque is dishonoured.
10. It does not require acceptance and stamp: Unlike a bill of exchange,
a cheque does not require acceptance on part of the drawee. There is,
however, a custom among banks to mark cheques as 'good' for the purpose
of clearance. But this marking is not an acceptance. Similarly no revenue
stamp is required to be affixed on cheques.
validity period of Cheque
As per guidelines of Reserve Bank of India (RBI), the validity period of
cheque from the date of issue is 3 months. These guidelines came into effect
from April 1, 2012. Prior to this guideline the validity period of cheques was
6 months. The validity period of pay orders, demand drafts are also 3
months.
validity of post dated cheque
 50

Post-dated cheques are normal cheques with a future date written on them.
The cheques cannot be honoured by the banks before the date mentioned on
the cheque.
Post-dated cheques, like normal cheques, have a validity of 3 months from
the date of issuance. The national bank of India, RBI (Reserve Bank of
India), has reduced the validity period of all cheques from the previous 6
months to 3 months, effective April 1, 2012.
However, there is a small technicality. The 3 months are not counted in the
number of days, but the date of issuance. For example, if the cheque was
issued or is payable on 01 Jan 2021, the cheque will be valid till 31st of Mar
2021, irrespective of the number of days in between.
Cheques may be classified into two categories
(i) Bearer or open or counter cheques
(ii) Crossed Cheques
(i) Bearer or open or counter cheques
Bearer cheques are the cheques which are used to withdraw money by the
cheque’s owner. These types of cheques normally used for a cash
transaction
The holder of a bearer cheque can do the following
- Receive its payment over the counter at the bank
- Deposit the cheque in his own account
- Pass it to someone else by signing at the back of such Cheque
For example: A cheque has been signed by Arjun (drawer) and the payee
for the cheque is Varun. Varun can either go to the bank himself or can send
a third person to get encashment for the cheque. No identification shall be
required for the bearer’s name.
Account Payee crossing Cheque
When two parallel lines along with a crossing made on the cheque and the
word ‘Account Payee’ written between these lines, then that types of
cheques are called account payee cheque. The payment of the account
payee cheque should be made to the person, firm or company on whose
name the cheque was issued.
(ii) Crossed Cheques :
These are the safest types of cheques as they cannot be drawn on the cash
counter of the bank. It basically means that these cheques cannot be
converted into cash and lead to direct bank to bank transfer. The two
parallel lines on the top-left of the cheque represents the crossing of a
cheque.
Kinds of Crossing: Crossing of cheques is of two kinds namely-
(i) General Crossing and
(ii) Special Crossing
(i) General Crossing (Section 123) : Section 123 deals with “General
Crossing”. It runs as follows: This type of cheque crossing requires two
parallel transverse lines. There isn’t any restriction on putting these parallel
 51

lines on a specific area on the cheque, but they can be drawn anywhere.
Usually, it is advisable to put it on the top left corner of the cheque. The
usefulness or significance of this crossing is that the cheque should
essentially be paid only to the banker.
(ii) Special Crossing (Section 124) : Section 124 deals with “Special
Crossing”. It runs as follows: Special Crossing cheque does require the
name of the banker. The effect of this type of crossing is that the cheque
should be funded only to the banker to whom it is crossed. It is a reminder
to all the people that a special crossing cannot be changed into a general
crossing
Who can cross a cheque (Section 125)
A cheque can be crossed by four persons:
• Drawer: When a drawer issues a cheque to a party, he can cross the
cheque either generally or specially.
• Holder: When a cheque is given to the holder by the drawer without
crossing, the holder can cross the cheque.
• Holder in due course: When a holder in due course receives an open
cheque, he can cross the cheque generally, or when the cheque is already
crossed generally, it can be converted into special crossing.
• Banker: When the collecting banker receives an open cheque without
any crossing, the banker himself can cross the cheque before sending it for
collection.
Section 126 of the Act imposes an obligation on the paying banker to make
payment against crossed cheques. Otherwise he is liable under section 129
of the Act. Further , he loses statutory protection available to paying banker
under section 128
Section 127: The banker also is entitled to cross a cheque in the name of
another bank who may collect the cheque as an agent for collection.
Therefore, where a cheque is crossed specially, the banker to whom it is
crossed may cross it specially to another banker, his agent for collection
11) What are the statutory protections given to a paying banker?
Introduction
Consumers are those who with due consideration of money use a service of
any goods and services provided by the manufacturer or service provider.
Similarly, the moment a person opens an account with the banker, he
becomes the bank’s client.
The primary banking purpose was and is to keep money in custody and lend
a part of it to other citizens. Such roles were slowly expanded, and new
additional ones were introduced. As a result, the market’s dependency on
banking has become so great that the cessation of bankers ‘ operation, even
for a day or two, will totally paralyze a nation’s economic existence in
modern money economy. It will be appropriate to say that the banking
system has become the lifeline of the country.
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Definition of Banking
The Indian Banking Regulation Act defines the business of banking by stating
the essential functions of a banker. It also states the various other
businesses a banking company may be engaged in and prohibits certain
business to be performed by it.
As per section 5(b) of Banking Regulation Act, 1949, the term banking is
characterized as the acceptance of deposits of money from the public,
repayable on demand or otherwise, for the purpose of lending or
investment, and withdrawals by cheque, draft, order or otherwise
Section 5(c) of the Banking Regulation Act, 1949 defines “Banking
Company” as any company that carries out the banking business in India.
As per Section 5(d) of the Banking Regulation Act, 1949 Company means
any company as defined in Section 3 of the Companies Act, 1956 and
includes a foreign company within the meaning of Section 591 of that Act.
Who is a customer?
“A customer is someone who has an account with a banker or who is
regularly committed to behaving as such with the banker.
One may conclude that a “Customer” is one who has either a current or a
saving account or, in the absence of it, some relation with the bank in the
ordinary course of business, that can be seen as banking business.
Paying Banker
While modern banking has many aspects and the range of activities of
clearing banks today is very broad, the payment and processing of cheques
are still a central and fundamental feature.
Paying banker refers to the banker who holds the cheques of the drawer and
is obliged to make payment if the funds of the customer are sufficient to
cover the amount of his cheque drawn.
The paying banker is the banker who cancels the signature of the drawer on
payment of the cheque either by the usual means of authorizing a drawer’s
signature or by any method that the bank takes, which also reflects the
point of payment. In some cases, cheques are paid by stamping the cheques
“Paid”, usually with the date being included in the stamped crossing, or by
perforating the payment date onto the cheque.
Protection to the Paying Banker (Section 128)
The Section 10, section 85(1), 85(2), 128 of negotiable instrument acts
provide statutory protection to paying banker for making payments of order
cheque, bearer cheque or crossed cheque in that order.
Section 10
The paying banker can claim protection under the Negotiable Instruments
Act; the condition the banker has got to satisfy is that the payment is in due
course.
‘Payment in due course’ means payment following the apparent tenor of the
instrument in straightness and without negligence to someone in possession
thereof under circumstances which doesn’t afford an inexpensive ground for
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believing that he is not entitled to receive payment of the quantity therein

mentioned.
Section 85
This acts as the statutory protection of the paying banker.
Protection in case of order cheque
Section -85(1) of N.I.Acts 1881 provides that “Where 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” The above section provides protection
to paying banker if he has made payment of an order cheque in due course
(within the meaning of sec.10 of N.I.Act.) and if the proceeds credited to the
account of an endorsee if and only if the endorsement is regular.
However, two conditions must be fulfilled to avail of such protection.
(a) Endorsement must be regular: To avail of the statutory protection,
the banker must confirm that the endorsement is regular.
(b) Payment must be made in Due Course: The paying banker must
make payment in due course. If not, the paying banker will be deprived of
statutory protection.
Protection in case of Bearer Cheque
Section -85(2) of N.I.Acts provides that
“Where a cheque is originally expressed to be payable to bearer, the drawee
is discharged by payment in due course to the bearer thereof,
notwithstanding any endorsement whether in full or blank appearing thereon
and notwithstanding that any such endorsement purports to restrict or
exclude further negotiation”.
The above section specifies that a cheque which is ‘once a bearer is always
bearer’ (which means if a cheque is originally drawn as a bearer cheque
remains always bearer irrespective of any endorsements on the back of the
instrument). Therefore banks are not required to verify the regularity of the
endorsement on the back of the cheque if any and they are protected from
liability if they have made payment of an uncrossed bearer cheque to a
bearer in due course.
Protection in case of Crossed cheque (Section 128)
The paying banker has to make payment of the crossed cheques as per the
instruction of the drawer reflected through the crossing. If it is done, he is
protected by Section 128. This section states “Where the banker on whom
a crossed cheque is drawn has paid the same in due course, the banker
paying the cheque and (in case such cheque has come to the hands of the
payee) the drawer thereof shall respectively be entitled to the same rights,
and be placed in if the amount of the cheque had been paid to and received
by the true owner thereof”.
It is clear that the banker who makes payment of a crossed cheque is by the
Section -128 given protection if he fulfils two requirements:
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(a) That he has made payment in deuce course under Section -10 i.e. in
good faith and without negligence and according to the apparent tenor of the
cheque
(b) That the payment has been made in accordance with the requirement of
crossing (Section 126), i.e. through any banker in case of general crossing
and through the specified banker in case of special crossing.
Thus, the paying banker is free from any liability on a crossed cheque even if
the payment was received by the collecting banker on behalf of a person
who was not a true owner. For example, a cheque in favour of X is stolen by
Y. He endorses it in his own favour by forging the signature of X and
deposits it in his bank for collection . In this case, the paying banker shall be
discharged if he makes payment as mentioned above and shall not be liable
to pay the same to X, the true owner of the cheque.
The drawer of the cheque is also discharged since protection is also granted
to him under this Section. There is, however, one limitation to the protection
granted under this Section. If the banker cannot avail of the protection
granted by other Section of the Act, the protection under Section 128 shall
not be available to him.
For example, if the paying bankers makes payment of a cheque crossed with
• Irregular endorsement
• A material alteration
• Forged signature of the drawer,
He loses statutory protection granted to him under the Act for these lapses
on his part. Hence he cannot avail of the statutory protection under Section -
1289, even if he pays the cheque in accordance with the crossing.
Precautions to be taken by a paying banker
What precautions should a paying banker take while honoring
cheque?
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 to him.
The precautions to be taken by the paying bankers:
In order to safeguard his position, the paying banker must take the following
precautions while honoring a cheque:
In that case a paying banker must exercise extreme precautions while
making the payments in due course of his duty. Here’s a few things that he
must keep remember:
1. Form of Cheque: The form of cheque placed before him must be in
valid form and not damaged or torn or cancelled. The signature must be
authenticated to verify the issuer.
2. Date of Cheque: The cheque must not have been issued before 6
months. It must bear the date clearly on which it was issued.
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3. Amount of Cheque: The amount should be mentioned without fail in

words and in numbers. Both the amount in words and in numbers must
match. It should be written in a way that any insertion or alteration is
impossible.
4. Fund of the customer: The customer who has drawn the cheque
must have sufficient funds in his account to clear the cheque. In case of
insufficient funds the cheque is bounced. There cannot be a partial payment,
the cheque must be paid in full by the paying banker at all times or outright
reject it altogether.
Conclusion
In modern banking, the aspects of the payment and processing of cheques
are still the central and fundamental features. A paying banker has a
responsibility for the customer’s cheque if it is valid and issued by the holder
in a given period. The sufficient fund is available to the customer’s account,
and when that balance is available to the paying banker.
The banking system is designed in such a way that it generates money
through different business transactions and domestic and foreign trade. This
type of banking system develops a special relationship between the banker
and the customers. This relation can be formed with specific duties and
obligations that a banker has.
12) What are the statutory protections given to a Collecting banker?
Introduction
Sections 131 and 131 A of the act deals with the protection given to the
collecting banker. The collecting banker in respect of a cheque bearing a
forged endorsement or in respect of a cheque to which the customer has no
title or has a defective title. This section states that “A banker who has in
good faith and without negligence, received payment for a customer, of a
cheque crossed {generally or specially}to himself shall not, in case the title
to the cheque prove defective, incur any liability to the true owner of a
cheque by reason only of having received such payment”
Collecting banker
One who undertakes to collect cheques, drafts, bill, pay order, traveller
cheque, letter of credit, dividend, debenture interest, etc., on behalf of the
customer is known as a Collecting banker
A banker is not legally obligated to receive cheques from the client, but now
the collection of checks has become a main feature of a banker with a
widening banking procedure and a broader use of crossed checks, which are
invariably only obtained by a banker.
A banker receives cheques from his client and behaves
1. as a holder for value, or
2. as his agent,
Banker as a holder for value
A banking entity becomes the holder for value in the below mentioned ways:
(a) by lending further with the same value of the cheque;
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(b) By paying the amount of the cheque or any share of it in cash or in the
account before being sent for clearing
(c) by committing to that client, either at the time or earlier , that he may
draw the cheque before it is cleared;
(d) by approving a current overdraft in avowed reduction of the check; and
(e) by providing cash for the cheque over the counter while it is in for
collection.
Collecting Banker as an Agent
A collecting banker acts as the customer’s agent when he credits the check
to the latter’s account after a drawee’s banker actually pays the money. He
then will be permitted to take the sum of the cheque.
Conversion by the Collecting Banker
Often a banker is charged incorrectly converting checks to which his
customer has no title or defective title. It means an improper or morally
wrong interference (i.e., use, sale, invading or taking) with the property of
another person that is not coherent with the owner’s right of possession.
Negotiable instruments come under ‘property’ so a banker could be
responsible for conversion if he receives cheques for a client who does not
have a title or faulty instrument title.
Statutory Protection to Collecting Banker (Section 131)
Under Section 131 of the Negotiable Instruments Act the collection banker is
secured as under:
Section 131: Non-liability of a banker receiving payment of cheque
Section 131 in The Negotiable Instrument Acts, 1881 provides that.
“A banker who has in good faith and without negligence received payment
for a customer of a cheque crossed generally or especially to him 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.”
The protection available to the collecting bankers under Section 131of NI
Acts 1881 only when following conditions are satisfied by the collecting
banker.
1. The check should have been crossed generally or especially to the
bank.
2. The bank should have collected such cheque for a customer as an
agent for collection and not as a holder for a value.
3. The proceeds of the collected cheque are credited to only to the
account of the payee or to the account of endorsee if endorsement on the
instrument is regular.
4. The collecting banker must have acted in good faith. Here ’good faith’
means banker had no reasonable ground to believe that the customer is not
entitled to receive payment of the amount therein mentioned.
5. The collecting banker should have acted without negligence. ’Without
negligence’ means the account of the customer on whose behalf cheque is
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collected, is opened with proper compliance of KYC norms such as

verification of identity proof and address proof before opening the account.
6. The collecting banker who received payment based on the electronic
image of truncated cheque should have verified the apparent genuineness of
the cheque in his possession with due diligence and ordinary care to ensure
the prima facie genuineness of the instrument.
The protection provided by Section 131 is not absolute but qualified. A
collecting banker can claim protection against conversion if the following
conditions are fulfilled.
1. Good Faith and Without Negligence
Statutory protection is available to a collecting banker when he receives
payment in good faith and without negligence.
The phrase in “good faith” means honestly and without notice or interest of
deceit or fraud and does necessarily require carefulness. Negligence means
failure to exercise reasonable care. It is not for the customer or the true
owner to prove negligence on the part of the banker. The burden of proving
that he collected in good faith and without negligence is on the banker. The
banker should have exercised reasonable care and deligence. What
constitutes negligence depends upon facts of each case.
Following are a few examples which constitute negligence:
(a) Failure to obtain reference for a new customer at the time of opening
the account.
(b) Collection of cheques payable to ‘trust accounts’ for crediting to
personal accounts of a trustee.
(c) Collecting for the private accounts of partners, cheques payable to the
partnership firms.
(d) Omission to verify the correctness of endorsements on cheques payable
to order.
(e) Failure to pay attention to the crossing particularly the “not negotiable
crossing”.
2. Collection for a Customer
Statutory protection is available to a collecting banker if he collects on behalf
of his customer only. If he collects for a stranger or noncustomer, he does
not get such protection. As Jones aptly puts if “duly crossed cheques are
only protected in their collection, if handled for the customer”. A bank
cannot get protection when he collects a cheque as holder for value. In
Great Western Railway Vs London and Country Bank it was held that “the
bank is entitled for protection as it received collection for an employee of the
customer and not for the customer.”
3. Acts as an Agent
A collecting banker must act as an agent of the customer in order to get
protection. He must receive the payment as an agent of the customer and
not as a holder under independent title. The banker as a holder for value is
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not competent to claim protection from liability in conversion. In case of

forgery, the holder for value is liable to the true owner of the cheque.
4. Crossed Cheques
Statutory protection is available only in case of crossed cheques. It is not
available in case uncrossed or open cheques because there is no need to
collect them through a banker. Cheques, therefore, must be crossed prior to
their presentment to the collecting banker for clearance. In other words, the
crossing must have been made before it reached the hands of the banker for
collection. If the cheque is crossed after it is received by the banker,
protection is not available. Even drafts are covered by this protection.
To conclude, it is necessary that the collecting banker should have acted
without negligence if he wants to claim statutory protection under Section
131 of the said Act. The statutory protection is available to the banker if he
collects a cheque marked “Not Negotiable” for a customer, whose name is
not used as the payee there-in, provided the requirements of the said
sections are duly complied with.
Leading case law on duties of collecting banks
Ladbroke vs Todd (1914)
In this scenario, a thief stole a transit cheque and obtained it from a banker
where, without reference, he opened an account and presented himself as
the payee whose signature the thief forged. The thief withdrew the sum after
the cheque was obtained. The bank was kept responsible for making the
sum good because it behaved negligently when opening the account to the
degree that it did not receive any reference.
Conclusion
it is necessary that the collecting banker should have acted without
negligence if he wants to claim statutory protection under Section 131 of the
said Act. The statutory protection is available to the banker if he collects a
cheque marked “Not Negotiable” for a customer, whose name is not used as
the payee there-in, provided the requirements of the said sections are duly
complied with.
13) Discuss the rights , duties, and responsibilities of a collecting
banker?
Note: Write Introduction and Collecting Banker definition and then start
below duties and responsibilities
Some rights and duties of a collecting banker are discussed below:
• Quick clearance of the cheque:
It’s the duty of a collecting banker they must clear the cheque or any other
thing given to them for collection. There should not be any delay in this. As
a collecting banker, the person should be highly active with their work and
responsibilities. They must work actively to avoid any kind of delay during
clearance. The customer should not face any issue due to the late clearances
of cheques or similar things given for collection.
• Acts as bailee:
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The person working as a collecting banker plays the role of the bailee. He or
she has the right to collect the cheque and give the amount to the customer.
But this work is risky as well. You might have heard that sometimes,
cheques don’t work due to various reasons. In such situations, the collecting
banker can get in danger.
That’s why it is their duty to return the cheque to the customer and inform
them about the problem. He or she will talk to the customer and tell them
about how their cheque is not working. It is also their duty to collect the
given amount from the customer.
• Collecting cheques without any negligence:
It’s the duty of a collecting banker to collect the cheques without any
negligence. Not only this, he or she must not show any negligence while
opening another account for the customer. The collecting banker should
keep an eye so that no payment is made for a crossed cheque. He or she will
have to be active so that no payment is made for a cheque which is crossed.
If this happens, again the collecting banker can face problems due to this.
Also, while opening any new account, there should be a proper enquiry
about the account holder.
Duties of the collecting bank
The Negotiable Instruments Act, in Section 131 which offers immunity to the
collecting bank, specifies that the bank should not have been negligent amid
other conditions. The bank will have to prove that it has taken all the steps
that would be expected of a responsible banker to obtain a cheque to
demonstrate that the bank has not been careless. Over the years, these
protections have been developed based on practices and judicial declarations
as duties placed on bankers, which the bank can be responsible for failure to
comply on the grounds of negligence.
The duties are given as below:
• Obligation to open an account with references and sufficient
documentary evidence
It is too well understood by today’s banker that the requirement to open an
account only after properly identifying the new account holder is unlikely
without an introduction. The need to get a good customer introduction is to
keep away crooks and fraudsters who can open accounts to collect forged
cheques or other tools. RBI has insisted as an added precaution that
photographs of the customer and sufficient documentary evidence for
constitution and address be obtained while opening accounts.
• To identify the reference where the referee is not identified or
reference in absentia
As practice bankers in India require the introduction of an existing bank
customer, particularly when the branch is newly opened, this may not
always be possible. In these instances, clients are expected to obtain
references from the local people or the current bankers. In such a scenario,
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the banker must ask the referee to confirm that the person with a newly
opened account is a genuine person.
• Obligations relating to Crossing and special crossing
The banking officer’s responsibility is to ensure the check is clearly crossed
and to deny collection if the cheque is handed over to another banker.
Likewise, when the check is moved into a certain account, the credit of the
check will render him liable for negligence without requiring any required
inquiries.
• Obligation to check the instruments or any obvious flaws in it
The instrument presented for collection will sometimes send a notice to the
banker that a customer who submitted the instrument is either committing a
breach of trust or mismanaging the money belonging to someone else. In
the event that a banker does not heed the warning requested by a prudent
banker, he could be held liable for negligence.
• The obligation to know the status of the customer’s account
The collecting banker is required to know the status of the customer and
different dealings that have taken place in the customer’s account. It will be
the banker’s duty to take the necessary precautions if there are any
amounts coming into the account that are unlikely to be received by him and
when collecting such cheques.
The 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 bills 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
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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.
Conclusion
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The primary aim of banking was and is to hold money in custody and to send
other people some of it. Such functions were extended gradually and
clarified in depth.
In the modern economic world, the banking system plays a significant role.
Banks are gathering the individuals ‘ savings and lending them to business
people and producers. Bank loans make trading easier.
14) Parties To the Negotiable Instrument?
A negotiable instrument is transferable from one person to another. The
Negotiable Instrument Act 1881 confers upon a person who acquires the
instrument bonafied and for value, the right to possess good title to the
instrument. Such a person is called ‘holder in due course’. Each and every
person in possession of a cheque or bill can not be holder in due course and
therefore cannot claim statutory protection under the Act.
The parties to the Negotiable Instrument may be explained with reference to
the following heads-
(A) Holder (Section 8)
(B) Holder in due course (Section 9)
(C) Payment in Due Course (Section 10)
(D) Drawee in case of Need
(E) Holder for value
A) Holder (Section 8)
Section 8 of Negotiable Instruments Act 1881 defines the term Holder.“The
holder of a promissory note, bill of exchange or cheque means, any person
entitled in his own name to the possession thereof and to receive or recover
the amount due thereon from the parties thereto. Where the note, bill or
cheque is lost or destroyed its holder is the person so entitled at the time of
such loss or destruction”
The party transferring the negotiable instrument must be legally competent.
It does not include the person who finds the lost instrument payable to the
carrier and the one who is in wrongful possession of the negotiable
instrument.
Kinds of Holder under negotiable instruments act
The following are the materials to be satisfied to be eligible to be a holder
under negotiable instruments act: –
1. De jure: – The holder of the Negotiable Instrument as a matter of
legal right.
o A person should have the right to have the instrument in his own
name. It is not necessary that the person has actual physical possession of
the instrument. The principle is that a right must be acquired under a legal
title.
o The name of the person should be in the instrument as payee or
indorsee. He can also be the bearer of the instrument if it is the bearer
instrument. In cases where the holder dies, the heir of such holder becomes
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the holder even when he is not the recipient or the insurer or the holder of
the instrument.
2. De facto: – The holder of negotiable instrument by the virtue of
possession but not entitled on his own name.
o Where any person comes to hold a negotiable instrument and
does not have the right to hold or keep it, he shall not be called a holder. A
person who finds an instrument lying somewhere or he stole the instrument,
though may be in possession of such instrument, but he has no right on that
instrument. Therefore he cannot be called holders.
o The person by means of the instrument shall be entitled to
receive the amount which the parties are liable to pay to the holder. So not
only possession but also the right to receive the amount is an important
aspect to be called as a holder. After receiving the amount, the person who
is liable to pay the amount get relief from his/her liability.
o In cases where a person finds the instrument lying somewhere
or where any person has stolen such equipment, he is not entitled to receive
the amount. Thus he is not called a holder.
What are the rights of a Holder under negotiable instruments act?
Following are the rights of a Holder under negotiable instruments act: –
1. Section 8: – Holder has the legal right to possess the instrument and
to recover and receive the amount which due as per the instrument.
2. Section 14: – In Negotiation, a holder of a cheque has a right to
negotiate to another person. Moreover, in some cases, a holder has a power
of negotiation even though cheque has no title or faulty title.
3. Section 45A: – Holder has the right to get a duplicate of the
instrument which is lost. In case of misplacing of the cheque, the holder can
ask to the drawer to give him another cheque of the same tenor, but holder
must give security to the drawer to indemnify him for all the loses if the lost
cheque has been found again.
4. Section 50: – Holder has the right to Indorse the instrument which
basically means that holder has the right to countersign the instrument. The
holder of a cheque indorsed in blank may convert the blank endorsement, by
writing above the indorser’s signature which gives direction to pay the
cheque to or to the order of himself or any other person.
5. Section 61 and 64: – Holder has the right to present the instrument
for acceptance if it is a bill and receive payment if it is any other instrument.
If a cheque is an open cheque then the person can take it to the drawee
bank and request payment in cash; but in case of crossed cheques one
cannot anticipate drawee bank to pay in cash, and he should, therefore,
present it to the drawee bank for payment.
6. Section 125: – In Crossings of cheque after issue; where the cheque
is not crossed, the holder may cross it generally or specially. Where the
cheque is crossed generally, the holder may cross it specially. He also the
option of adding the words like “not negotiable” or “account payee”.
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7. Section 138: – In Notice of Dishonour of cheque, a cheque holder

presents the cheque for payment and if it does not get paid then he may
give notice of dishonour outright to prior parties in order to hold back their
liability to him.
(B) Holder in due course (Section 9)
Section 9 of Negotiable Instruments Act 1881 defines the term Holder in due
course. Holder in Due Course is defined as a person who acquires the
negotiable instrument in good faith for consideration before it becomes due
for payment and without any idea of a defective title of the party who
transfers the instrument to him. A person who acquires the negotiable
instrument bonafide for some consideration, whose payment is still due, is
called holder in due course.
Section 9 of the Negotiable Instrument act, 1881, A holder in due course is a
holder itself, who accepts a negotiable instrument in a value-for-value
exchange without doubting its legitimacy so ultimately in a good faith. Now
the person who took it for value in good faith now becomes a real owner of
the instrument and is known as “holder in due consideration”. Every holder
in due course is a holder but every holder in due course is not a holder.
What are the essentials to be eligible to be a holder in due course?
The following are the materials to be satisfied to be eligible to be a holder in
due course: –
• The person must hold the instrument for the valuable consideration;
• The person can become the holder of the instrument before its
maturity;
• The negotiable instrument must be complete in all respects and
requirements;
• The holder must have received the instrument in good faith.
If a person acquires a negotiable instrument after its maturity, he does not
become a holder in due course.
What are the rights of Holder in due course under negotiable
instruments act?
Following are the rights of a Holder in due course under negotiable
instruments act: –
1. Section 20: – The holder is due course gets a good title even though
the instruments were originally stamped but was an inchoate instrument.
The person who has signed and delivered an inchoate instrument cannot
plead as against the holder in due course that the instrument has not been
filled in accordance with the authority given by him. However, a holder who
himself completes the instrument is not a holder in due course.
2. Section 36: – Every prior party to the instruments is liable to a holder
in due course until the instrument is duly satisfied.
3. Section 42: – Acceptor cannot plead against a holder in due course
that the bill is drawn in a fictitious name. In Bank of England vs. Vagliano
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Bros (1891 – Ac 107) it was held that the acceptor should consider whether
the bill was genuine or false before signing his acceptance in it.
4. Sections 46 and Section 47: – The liable parties cannot deny
liability to a holder who negotiates a bill of exchange or promissory note on
the ground that the delivery of the instrument was subject to the conditions
or had a specific purpose.
5. Section 53: – He gets a good title to the instrument even though the
title of the transferor or any price party to the instrument is defective. He
can recover the full amount unless he was a party to fraud; or if the
instrument is negotiated by means of a forged endorsement.
6. Section 58: – The holder in due course has a superior title to the
transferor of the instrument. In cases where the transferor’s title was
defective, the holder would get a good title in due course. However, if the
title is forged, the holder does not get the title in due course because there
is no defect in the title, but no title.
7. Even if the negotiable instrument is made without consideration, if it
get into the hands of the holder in due course, he can recover the amount
on it from any of the prior parties thereto.
8. Section 118: – Every holder is deemed to be a holder in due course.
Holder in due course can file a suit in his own name against the parties liable
to pay. He is deemed prima facie to be holder in due course. The burden of
proof is on the other party to show that the person is not the holder in due
course.
9. Section 120: – The validity of the instrument as originally made or
dawn cannot be denied by the maker of drawer of a negotiable instrument or
by acceptor of a bill of exchange for honor of the drawer
10. Section 121: – The maker of a promissory note, bill of exchange or a
cheque shall not deny the validity of the promissory note, bill of exchange or
the capacity of the recipient on the date of the bill of exchange, note, or
cheque to endorse (countersign) the same. Therefore, a holder is entitled to
recover the amount mentioned in the instrument in due course even though
the payee has no capacity to indorse the instrument.
11. Section 122: – Endorser is not permitted as against the holder in due
course to deny the signature or capacity to contract of any prior party to the
instrument.
(C) Payment in Due Course (Section 10)
Payment in due Course is defined in Section 10 of Negotiable Instruments
Act 1991. Any person legally responsible to make payment under negotiable
instrument must make the payment of the amount due under in due course
with the purpose of obtaining a valid discharge against the holder.
Payment in due course refers to a payment in keeping with the evident tenor
of the instrument, in good faith & without negligence to any person in
possession thereof.
A payment will be regarded as a payment in due course if:
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(a) It is in agreement with the apparent tenor of instrument, that is,

according to what comes into view on the face of instrument to be the
intention of the parties;
(b) It is made in good faith & without negligence, & under conditions which
do not meet the expense of a ground for believing that the person to whom
it is made is not allowed to receive the amount;
(c) It is made to the person who possesses the instrument who is entitled as
holder to obtain payment;
(d) Payment is made under conditions which do not pay for a rational ground
believing that he is not entitled to obtain payment of the amount stated in
the instrument; and
(e) Payment is made in money & money only.
As per Sections 10 & 128, a paying banker making payment in due course is
protected
(D) Drawee in case of Need
Under Section 115 of the Negotiable Instruments Act,1881, Where a drawee
in case of need is named in a bill of exchange, or in any indorsement
thereon, the bill is not dishonoured until it has been dishonoured by such
drawee. . The maker of a bill of exchange or cheque is called the “drawer”;
the person thereby directed to pay is called the “drawee”. When the drawer
of a bill mentions an alternative drawee to whom, the bill can be presented
for acceptance in case the actual drawee refuses to accept or refuses to pay
after acceptance, such an alternative’ drawee is called a drawee in case of
need.
Definition: Drawee in case of need, when in the bill or in any endorsement
thereon the name of any person is given in addition to the drawee to be
resorted to in case of need, such person is called a ‘drawee in case of need’.
[Negotiable Instruments Act, 1881 (26 of 1881)]
(E) Holder for value
The term Holder for value is not defined under the Negotiable Instruments
Act. According to Section 27(2)of the Bills of Exchange Act, Where value has
at any time been given for a bill, the Holder is deemed to be a holder for
value as regards the acceptor and all parties to the bill who became parties
prior to such time
Whenever the value of the instrument is guaranteed to any holder, he is
called holder for value. No consideration is needed i.e a person who claimed
to be a Holder, need not be given value, it may be given by a prior party
Example: ‘P’ the payee of a bill, transfers it to ‘E’ for value. ‘E’ again
transfers it to ‘F’ without consideration. In this example ‘F’ is the holder for
value.
15) Endorsement
What is endorsement? Explain the different clauses of
'endorsements"?
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Definition of Endorsement -
According to Section 15 of the Negotiable Instruments Act 1881, When
the maker or holder of a negotiable instrument signs the same, otherwise
than as such maker, for the purpose of negotiation on the back or face
thereof or on a slip of paper annexed thereto, or so signs for the same
purpose a stamped paper intended to be completed as a negotiable
instrument, he is said to endorse the same, and is called the “endorser”.
Meaning of Endorsement -
Endorsement means signing at the back of the instrument for the
purpose of negotiation. The act of the signing a cheque, for the purpose of
transferring to the someone else, is called the endorsement of Cheque. The
endorsement is usually made on the back of the cheque. If no space is left
on the Cheque, the Endorsement may be made on a separate slip to be
attached to the Cheque. There are six Kinds of Endorsement i) Endorsement
in Blank / General ii) Endorsement in Full / Special iii) Conditional
Endorsement iv) Restrictive Endorsement v) Endorsement Sans Recourse vi)
Facultative Endorsement.
Negotiation of Negotiable Instrument:
The word Negotiation simply means a “Transfer”.
The essential characteristic of a Negotiable Instrument is that it is freely
transferable from one person to another.
The rights in a negotiable instrument can be transferred from one person to
another by:
1.Negotiation under the Negotiable Instrument Act
2.Assignment under Transfer of Property Act
Section 14 of the Negotiable Instrument Act, 1881 says that when a
negotiable instrument is transferred to any person with a view to constitute
the person holder thereof, the instrument is deemed to have been
negotiated. Thus, there is a transfer of ownership of the instrument.
Modes of Negotiation:
Negotiable instruments may be negotiated either by delivery - When these
are payable to bearer; or
Negotiable instruments may be negotiated by endorsement and delivery -
when these are payable to order.
1.Negotiation by delivery:
Section 47 of the Negotiable Instrument Act, 1881 deals with the provisions
of Negotiation by delivery.
A promissory note, bill of exchange or cheque payable to bearer is
negotiable by the delivery thereof.
Exception:
A promissory note, bill of exchange or cheque delivered on condition that it
is not to take effect except in a certain event is not negotiable unless such
event happens.
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Example:
P, the holder of a negotiable instrument payable to bearer, delivers it to P’s
agent to keep for P. The instrument has been negotiated.
2.Negotiation by endorsement:
Section 48 of the Negotiable Instrument Act, 1881 deals with the provisions
of Negotiation by endorsement.
Subject to the provisions of section 58, a promissory note, bill of exchange
or cheque payable to order, is negotiable by the holder by endorsement and
delivery thereof.
Object Of Endorsement:
The following are the objects of endorsement
(i) At the time of endorsement the endorser has a good title to the
instrument
(ii) The instrument is genuine one
(iii) All prior endorsements are genuine and regular
(iv) The instrument will be duly paid at maturity
Who may Endorse and Negotiate (Section 51)
Every sole maker, drawer payee or endorsee, or all of several joint makers,
drawers, payees or endorsees, of a negotiable instrument may endorse and
negotiate the same unless the negotiability of such instrument has been
restricted or excluded as mentioned in Section 51.
Features of Endorsement: Following are the features of Endorsement
(i) There is no proper procedure to be followed
(ii) Endorsement may be either on the face of the instrument or on backside
of it or in a separate sheet
(iii) It requires the signature of the holder or his agent
(iv) The payee or the holder must sign in his exact name
(v) T Endorsement should be by pen only
(vi) It need not contain any complimentary words
(vii) An illiterate can also endorse by thumb impression
(viii) An Endorsement is presumed to have been made in the order in which
it appears
(ix) Endorsement should be for full value
(x) If married woman endorses then her husband’s name is also to be
included
(xi) The Endorsement will be completed by delivery
(xiii) In case of signing on behalf of the holder or as an agent, it should
make clear by adding the words for or on behalf of
(xii) It can be endorsed any number of times
Kinds of Endorsement:
Endorsement of an instrument can be made under the following ways:
(i) Endorsement in Blank or General Endorsement (Sec 16(1))
(ii) Special Endorsement or Endorsement in full (Sec 16(1))
(iii) Conditional Endorsement (Sec 52)
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(iv) Restrictive Endorsement (Sec 50)

(v) Sans recourse Endorsement (Sec 52) and
(vi) Contingent Endorsement
(i) Endorsement in Blank or General Endorsement (Sec 16(1))
It is an endorsement when the endorser merely signs on the instrument
without mentioning the name of the person in whose favour the
endorsement is made. Endorsement in blank specifies no endorsee. It simply
consists of the signature of the endorser on the endorsement. A negotiable
instrument even though payable to order becomes a bearer instrument if
endorsed in blank. Then it is transferable by mere delivery. An endorsement
in blank may be followed by an endorsement in full.
Example: A bill is payable to X. X endorses the bill by simply affixing his
signature. This is an endorsement in blank by X. In this case the bill
becomes payable to bearer. There is no difference between a bill or note
indorsed in blank and one payable to bearer. They can both be negotiated by
delivery.
(ii) Special Endorsement or Endorsement in full (Sec 16(1))
When the endorsement contains not only the signature of the endorser but
also the name of the person in whose favour the endorsement is made, then
it is an endorsement in full. Thus, when endorsement is made by writing the
words “Pay to A or A’s order,” followed by the signature of the endorser, it is
an endorsement in full. In such an endorsement, it is only the endorsee who
can transfer the instrument.
Example: A is the holder of a bill endorsed by B in blank. A writes over B’s
signature the words “Pay to C or order.” A is not liable as endorser but the
writing operates as an endorsement in full from B to C.
(iii) Conditional Endorsement (Sec 52)
The restrictive endorsement is an arrangement that produces results on the
occurrence of an expressed occasion, or not something else. Segment 52 of
the Negotiable Instrument Act 1881 gives the endorser of a debatable
instrument may, by express words in the Endorsement, reject his own risk
subsequently, or make such obligation or the privilege of the endorsee to get
the sum due consequently rely on the occurrence of a predetermined
occasion, albeit such occasion may never occur. Where an endorser so
prohibits his risk and a short time later turns into the holder of the
instrument, all intermediates endorsers are obligated to him.
(iv) Restrictive Endorsement (Sec 50)
The endorsement of an instrument may contain terms making it restrictive.
Restrictive endorsement is one which either by express words restricts or
prohibits the further negotiation of a bill or which expresses that it is not a
complete and unconditional transfer of the instrument but is a mere
authority to the endorsee to deal with bill as directed by such endorsement.
“Pay C,” “Pay C for my use,” “Pay C for the account of B” are instances of
restrictive endorsement. The endorsee under a restrictive endorsement
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acquires all the rights of the endoser except the right of negotiation.
(v) Sans recourse Endorsement (Sec 52) and
Where the endorser does not want the endorsee or any subsequent holder,
to incur any expense on his account on the instrument, the endorsement is
‘sans frais’.
(vi) Contingent Endorsement
Where an endorser makes his liability depend upon the happening of a
contingent event, or makes the rights of the endorsee to receive the amount
depend upon any contingent event, in such a case the liability of the
endorser will arise only on the happening of that contingent event. Thus, an
endorser may write ‘Pay A or order on his marriage with B’. In such a case,
the endorser will not be liable until the marriage takes place and if the
marriage becomes impossible, the liability of the endorser comes to an end.
Important Clauses of an Endorsement Agreement
The most important clauses of an Endorsement Agreement, without these
clauses it is not possible to complete a contract. The Endorsement
Agreement contains certain clauses :
• Parties
• Term
• Indemnity
• Dispute Resolution
• Termination
• Duties of celebrity
• Consideration
• Exclusivity
• Fore Majeure
• Moral clause
• Insurance
• Obligation of the company
• Intellectual Property
• Confidentiality
• Definitions and Interpretations
• Territory
Parties
This is the first clause where the agreement starts. Because, without the
parties there can’t be any contract. In the beginning of an Endorsement
Agreement, the contract identifies the parties to the agreement along with
their individual status or any other identification proof.
Term
This clause describes the duration of the agreement, i.e the length of time
that both the parties agreed to be in this contract. The duration is usually for
the specified number of months or a year. It can be possible that the
agreement can be renewed through one or more mechanisms, which are, by
giving notification from one of the parties or both parties mutually agreed
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etc. If in the case of an extension, the extended period will be considered as

the term of the agreement.
Indemnity
The party will generally recover the other party for any loss occured due to
their negligence or due to any false representation. The scope and procedure
of indemnification must be carefully presented.
Dispute Resolution
This clause states that, if any dispute arises out from the agreement then
the parties will mutually resolve that dispute. Some common dispute
resolutions through which the disputes can be resolved are arbitration (to
resolve the dispute through an appointed third party), mediation (a person
who settles the dispute by intervening both the parties) and conciliation
(which helps the party to compromise between themselves).
Illustration: If there are two parties ‘A’ and ‘B’, where ‘A’ is a company and
‘B’ is a famous personality. They both had an Endorsement Agreement and
after some days certain disputes arose between both parties. Then they will
resolve it by themselves or bring a third party to resolve the dispute which
has arose between the both parties.
Termination
There are certain circumstances under which an agreement can be
terminated, i.e: it can be terminated when it will be considered as fully
performed or it can be terminated when agreement comes to the end of its
term.
However, if the party violates the Endorsement Agreement, then the other
party can terminate the contract. This usually happens when companies do
not make payment timely or the celebrity does not deliver properly or as to
the satisfaction of the company.
Duty of the celebrity
It is the duty of the celebrity to agree not to take or engage in any action or
conduct in the territory which would lose their character, reputation and
work culture. The celebrity should confirm that the product and the services
shall be original and should not infringe Intellectual Property of any third
party. The celebrity has to agree not to participate in any other activities
which would hamper the goodwill and reputation of the company during the
term of the agreement and 12 months after the date of the termination. It is
the duty of the celebrity to agree that the company shall be entitled to use.
They should also permit the company to use his name, biography,
photograph etc. for the purpose of advertising or promoting the product
during the term of the agreement.
Consideration
This clause must indicate the methods and schedule of payments (i.e
licensing fees, royalties, profits, cash, instalment payments, etc). The
quantum of payment must be mutually agreed by the two parties. It should
clearly indicate what interest will be charged for late payment. Companies
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make certain conditions for the reduction of payment, if the celebrity fails to
perform at a certain level or fails to generate positive publicity.
Example- Serena Williams endorsement consideration for Nike is based on
her ranking and performance at Grand Slam.
Exclusivity
This clause gives importance to the company that an agreement contains an
exclusivity clause, which restricts the celebrity to offer the same service to
the competitor. This agreement also prevents the celebrity from using
competitors’ products for a specified period. Exclusivity in an Endorsement
Agreement should be considered through negotiations.
Force Majeure
This clause states that if there is any external pressure by which the parties
are free from their rights and liabilities. Such external pressure includes the
Act of God, war, terrorist attacks etc. If the Force Majeure extends for a
certain period, then both the parties have the right to terminate their
agreement.
Moral clause
This clause protects the risk taken by the celebrity, where his value might be
damaged by any misconduct. This clause also permits the company to end
the Endorsement Agreement if the celebrity loses his or her image or the
image of the company or its product or service.
Insurance
If due to the celebrities death or any permanent injury which causes damage
to the company’s marketing program, then consider a suitable “key person”
life insurance policy to cover this risk with the celebrities consent. UK and US
have been following this to protect their investments, their brands when the
celebrity endorsers suffer public embarrassment.
Obligation of the company
The company agrees that the celebrity is the principal authority to endorse,
present and advertise the product throughout the territory during the term.
Companies should not disclose any statement concerning celebrities personal
life and personal views to the media (newspaper, radio, television etc,)
without the prior written consent of the celebrity.
Company agrees to provide the celebrity with notice of the meetings where
the celebrity is going to attend under this agreement.
Intellectual Property
This clause grants company a limited rights to use the endorsers name,
image, signature, etc. and also states that both the parties should respect
each other’s Intellectual Property. The agreement should be properly drafted
and avoid confusion. There must be the consent of the celebrity before using
his or her name, identity, signature etc..
Illustration- There are two parties ‘A’ and ‘B’. ‘A’ is the company and ‘B’ is
the celebrity. ‘A’ uses the name and identity or signature of ‘B’ without the
prior consent of ‘B’ then ‘A’ has infringed the Intellectual Property of ‘B’ or ‘B’
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uses the trademark of the company ‘A’ without the consent of ‘A’ then ‘B’
has infringed the Intellectual Property of ‘A’.
Confidentiality
Neither of the party shall disclose any confidential information during the
term of the agreement or after its termination.
Definitions and Interpretations
The agreement should clearly mention a list of definitions to clarify the
meaning of the important terms of the contract.
Territory
This describes the geographical area in which the parties perform their
obligations as well as their rights under the agreement. This can be a
particular country, state, city or the entire world.
Conclusion
Endorsement Agreement is usually done between the celebrities and the
companies or with the sports idols. Endorsement Agreement helps to
promote the product and services of the company. The celebrity or the
sports idol must be a well-known personality. The parties are legally bound
by this agreement. If any of the parties suffer loss then it can be
compensated.
16) Dishonour of cheque / Notice to Dishonour
Under Negotiable Instrument Laws (Amendment ) Act, 1988, A cheque falls
under the dishonoured category when a payee cannot successfully deposit
the payer’s cheque. A payer is the one who issues a cheque to the payee.
The payee deposits this cheque in the bank. If the bank refuses to pay the
amount mentioned on the cheque, the cheque is dishonoured.
The payee must inform the payer of the dishonoured cheque and ask them
to inquire about its reason. If the payer believes the cheque will be honoured
a second time, they can resubmit it within three months after the date on it.
However, if the cheque bounces again, the payer can face legal action.
Dishonour of cheque is of 2 kinds: –
1. Dishonour of bill of exchange by non-acceptance
2.Dishonour of promissory note, cheque by non-payment or bill of exchange.
There is dishonour of instrument when the maker, acceptor or the drawee
makes any default in making the payment. Thus when this maker, acceptor
or drawee purposely prevents the presentment of instrument is considered
to be dishonoured even without the presentment.
Sections 138 to 142 has been inserted in the Negotiable Instrument Act.
Section 138 makes the dishonour of cheque an offence. The payee or holder
in due course can have recourse against the drawer, who may be held liable
for the offence.
Essential for an action under section 138
1. There should be dishonour of the cheque- section 138 makes dishonour of
cheque, a punishable offence, only in certain cases. So for it to fall under the
same, requirements must be fulfilled.
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2. Payment in the discharge of debtor liability – The cheque should have

been drawn by any person on account with the banker for payment of
money to another person to discharge the debt in part or in whole.
3. Presentment of the cheque within the period of its validity – One
important requirement is that the cheque should be presented before it
becomes stale and invalid. Cheque should be presented within a period of 6
months from the date of issuing.
4. Dishonour due to insufficient fund –
one requirement is that the cheque should be returned by the bank unpaid.
Dishonour mainly is because of 2 reasons-
1. Either the amount is insufficient
2. The signatures on the cheque do not match to the original ones.
LIABILITY OF A DRAWER OF A DISHONOURED CHEQUE
• Civil liability
Where a cheque is dishonoured, the legal position of the drawer of the
cheque becomes that of a principal debtor to the holder. The holder can
bring civil suit just like any creditor to recover the amount from the drawer
making him liable as principal debtor.
• Criminal liability
A drawer of a cheque is deemed to have committed a criminal offence when
the cheque drawn by him is dishonoured by the drawee on account of
insufficiency of funds.
The criminal liability of a drawer in case of dishonour of cheque is dealt in
section 138 to Section 142 of Negotiable Instrument Act 1881.
Maximum Punishment
The maximum punishment for such an offence is imprisonment upto 2 years
or fine upto twice the amount of cheque or both.
Where the cheque is drawn by a company, a firm, or association of
individuals, the punishment can be awarded to every person who was in-
charge of and was responsible for its conduct of business and also to the
company.
Conclusion
After the amendment of 2002 and insertion of such penal provision has
given relief to the drawee. It has also helped in curtailing the dishonest
intention of doing fraud. The steps can be taken as remarkable steps in the
banking sector.
17) State the cases in which the banker a) may b) must refuse to
honour a customer's cheque?
When can a banker refuse payment on a cheque?

Introduction
Banker’s Duty and Rights for Cheque Returns, The Negotiable Instruments
Act provides the various cases in which the the cheque should be returned.
In this article you can find complete details for Banker’s Duty and Rights for
 75

Cheque Returns like – When Banker must refuse Payment, When Banker
may Refuse Payment, Protection of Paying Banker etc. Now you can scroll
down below n check more details regarding “Banker’s Duty and Rights for
Cheque Returns”
Banker’s Duty and Rights for Cheque Returns
There are various cases in which we know it will be the liability of the banker
to stop the transaction or to carry it out. Here, we will see
• the cases in which the Banker must Refuse Payment,
• the cases in which the banker may refuse Payment
• Protection of the Paying Banker
The person who performs the banking activities such as accepting of
deposits, lending money, withdrawing facilities, exchanging of money is
known as a banker. In other words, the person who directly related to the
banking business is called banker.
Cheques are a form of payment that is recorded by accountants on your
receivables ledger. While you may record the payment instantly upon
receipt, there will be a lag time between when you record the payment and
when the check clears the bank and is posted to your account.
The Banker must, therefore, refuse payment of the cheques without
incurring the liability.
When the drawer countermands payment:
• A cheque has been lost by him.
• Stop payment must be signed by the drawer.
• Change number and date must mention.
In the following circumstances a banker is bound to refuse the payment of a
cheque without incurring any liability thereon. A paying banker may refuse
payment on cheques, issued by its customers due to the following reasons:
When Banker must refuse Payment:
In the following cases, it is the authority of the banker to dishonor
customer’s cheque :
• (a) When a customer countermands payment Le., when a customer,
after issuing a cheque issues instructions not to honor it, the banker must
immediately stop payment.
• (b) When the banker receives notice a of customer’s death.
• (c) When customer has been adjudged as an insolvent.
• (d) When the banker receives notice of customer’s insanity.
• (e) When an order of the Court prohibits payment of the same.
• (f) When the customer has given a notice of assignment of the credit
balance of his account.
• (g) When the holder’s title is defective and the banker comes to know
about it.
• (h) When the customer has given a notice for closing his account.
When Banker may Refuse Payment:
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In the following cases the banker may refuse to pay a customer’s

cheque:
• (a) When the cheque is post-dated.
• (b) When the banker has not sufficient funds of the drawer with him
and there is no communication between the bank and the customer to honor
the cheque.
• (c) When the cheque is of doubtful legality.
• (d) When the cheque is not duly presented, e.g., it is presented after
banking hours.
• (e) When the cheque on the face of it is irregular, ambiguous or
otherwise materially altered.
• (f) When the cheque is presented at a branch where the customer has
no account.
• (g) When some persons have joint account and the cheque is not
signed jointly by any or by all the survivors of them.
• (h) When the cheque has been allowed to become stale, i.e., it has not
been presented within six months of the date mentioned on it.
They are briefly discussed as follows. Meanwhile you would also like to read
the essential characteristics of a cheque and dishonor of cheque
Insufficiency of funds
When sufficient funds are not available in a customer’s account, the cheque
may be dishonoured. If the banker pays a counterclaimed cheque, he will
not only be obliged to cancel the application but will also be held liable for
damages for dishonouring the cheques actually submitted, which would
otherwise have been honoured.
When the customer has countermanded payment:
If a customer countermands payment, i.e., issues instructions to his/her
banker not to pay or honor, i.e.,’stop payment’ of a particular cheque issued
by him/her, the banker is bound to comply with such instruction. It is
important to note that the customer must duly sign the countermand notice,
which should contain correct particulars of the cheques and give to the
banker in sufficient time, i.e., before the banker makes the payment of the
cheque that is desired for ‘stop payment’. However, it is not necessary that
such a notice be given in writing always. An oral countermand is equally
effective.
When the banker has received a Garnishee order:
Garnishee order implies a prohibiting order by a court of law attaching the
funds in the customer’s account. On receipt of such order, the banker must
refuse the payment of the customer’s cheque. If the banker by mistake
makes payment of any cheque after receipt of such order, it will have to
bear the loss itself. In this case it cannot recover from the payee who gets
payment of an otherwise valid cheque
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When the customer has died:

If the banker receives notice of a customer’s death, it must dishonor the
cheque presented to it after the notice of death. However, a banker is
justified in making payment if such payment is made before receiving the
notice of death and the payment so made is valid.
When the customer has become insolvent or insane:
A banker must also refuse payment of cheques when its customer has been
adjudged insolvent or has become insane since in such cases its original
authority to pay on behalf of the customer ceases to exist. A fresh authority
is required on those accounts. If a banker makes any payment even after
receiving a due notice as regards insolvency or insanity of the account
holder, such payment is not good against the drawer and in such a case the
banker cannot get a refund from the payee, who gets payment of an
otherwise valid cheque.
Where the banker has received a Notice of Assignment:
When the banker receives notice of assignment from the customer about his
credit balance, it must refuse payment of the cheque(s) drawn by that
customer.
When the customer has lost the instrument:
When the customer has lost the cheque and has informed the banker about
the loss of the instrument, the bank must, in turn, dishonor the cheque.
When the banker has come to know of any defect in the Title:
When the banker comes across any defect in the title of the person
presenting the cheque, it must refuse to honor the cheque. Even the holder
of a bearer cheque is subject to this rule and the banker should insist on
identification of the presenter in the event of any suspicion or doubt about
the integrity of the possessor of the instrument.
Where the instrument has been materially altered:
When there is a material alteration on the instrument or where the signature
of the drawer does not match with the specimen signature kept by the
banker, the latter must dishonor such cheques. However, in case of payment
by mistake, the banker is entitled to a refund from the wrong payee if
traceable, failing which the banker will have to bear the loss itself.
When the account is closed:
When the customer gives notice to the banker for closing his account, the
banker must not pay the customer’s cheques after that date, i.e., the date of
closing of the account.
Presentation of a post-dated cheque
The banker may refuse the cheque when the cheque is presented before the
valid date.
• Stale Cheques:
When the cheque is presented after a period of three months from the date
it bears, the banker may refuse to make payment.
• Material Alterations:
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When there is material alteration in the cheque, the banker may refuse
payment.
• Drawer’s Signature:
If the drawer’s signature on the cheque doesn’t match the signature of the
specimen, the banker can refuse to pay.
Types of dishonour
There are two categories for which a cheque is dishonoured:
Rightful Dishonour
Dishonour of cheque by the drawee banker for any of the reasons given
above or for any other legitimate reason. There is no recourse available
against the banker in this situation but the holder has, in due course, both
civil and criminal remedies against the drawer.
Wrongful Dishonour
Dishonour of cheque by the banker due to negligence or carelessness by its
employees. The drawer may bring an action against the bank for losses
suffered by him. The payee has no action against the banker in this case.
Leading case laws on payment of cheques by a bank
• Canara Bank vs Canara Sales Corporation and Others [(1987) 2
Supreme Court Cases 666]
In this case, the Supreme Court ruled that the bank is not allowed to pay
when the customer signs the check. Since such a banker has no right to
debit the account of the customer on such falsified cheque. Since the
customer-bank link is between the borrower and the debtor, a cheque that
has a forged signature has no authority on the bank to pay.
• Bank of Bihar vs Mahabir Lal (AIR 1964 Supreme Court 397)
In this case, the Supreme Court held that only where payment was made to
the holder or to his agent, i.e. in due course, a banker would claim cover
under Section 85. Payment to an individual without a business or to a bank’s
agent is not a payment to a corporation
Protection of Paying Banker:
The Act states that where a cheque payable to order looks to be endorsed by
or on behalf of the payee, the banker is discharged by payment in due
course. He can debit the account of the customer with the amount even
though the endorsement turns out subsequently to have been forged, or the
agent of the payee without authority endorsed it on behalf of the payee. It
would be seen that the payee includes endorsee. This protection is granted
because a banker cannot be expected to know the signatures of all the
persons in the world. He is only bound to know the signatures of his own
customers
In the case of bearer cheques, the rule is that once a bearer cheque, always
a bearer cheque. Thus a cheque originally expressed by the drawer himself
to be payable to the bearer, the banker may ignore any endorsements on
the cheque. He will be discharged by the payment in due course.
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Conclusion
The precautions measures and mandatory functions of paying bankers were
explained in detail. The protections available to the paying banker, dishonour
of cheque the reasons for dishonour of cheques are explained in detail. To
conclude, it is necessary that the collecting banker should have acted
without negligence if he wants to claim statutory protection under Section
131 of the said Act. The statutory protection is available to the banker if he
collects a cheque marked “Not Negotiable” for a customer, whose name is
not used as the payee there-in, provided the requirements of the said
sections are duly complied with.
18) Explain in detail 'Material Alteration' referring to leading cases?
Introduction
Material Alteration is a party to the negotiable instrument. Material alteration
can change the character of the instrument or the rights and obligations of
the parties. An original instrument can be called an altered instrument after
it is altered.
Material alteration occurs, when the changes have taken place in the
instrument without the knowledge of the drawer, and changes made after
the cheque has been issued. Where the nature of the instrument has
changed by the alteration, it amounts to a material alteration. All material
alterations must have the drawer’s approval with his full signature where the
alterations are made. Without the permission and consent of the drawer, a
blank cheque cannot be enforced.
Meaning of Material alteration: – Material alteration means to make any
change or alter some material parts of the instrument and try to make it a
valid created with the purpose of the nature of that instrument. Any
alteration in the original state of a cheque such as date, amount, payee’s
name, changing the word ‘order’ to bearer appearing after payee’s name or
in endorsement is called material alteration.
All material alteration must have drawer’s approval with his full signature
(not initials) where the alterations are made. Due to the effects of Material
Alteration, the said instrument become a void.
Material alteration is one aspect of a negotiable instrument. Material
alteration may change the character of the instrument or the rights and
obligations of the parties. An original instrument can be said to be an altered
instrument after it has been altered.
Material alteration occurs when changes have occurred to the instrument
without the drawer’s knowledge, and changes made after the cheque has
been issued. Where the nature of the instrument has changed by alterations
made in the instrument, it is equivalent to a physical change. All physical
changes must have the approval of the drawer with his full signature where
the changes are made. Without the permission and consent of the drawer, a
blank cheque cannot be enforced.
Instances of material change
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• Alteration in instrument date

• Alteration in Amount Payable
• Alteration in Time of Payment
• Alteration of Place of Payment
• Alteration in interest rate or any change in its favor, if any
• Tearing of the material part of the instrument
• Insertion of the place of payment where the bill is generally accepted
• Addition of a New Party to the instrument.
• Adding words to a blank endorsed bill of exchange so as to convert it
into a special endorsement.
For Example: – ‘A’ drew a cheque of Rs. 500 in favor of ‘B’, who changed
the figure of 500 to 5,000 without the consent of the manufacturer. The
cheque appears to have been pulled from above for Rs. 5,000. On
presenting the check for payment, the paying banker paid Rs. 5,000 to ‘B’.
The banker did so in accordance with the express term of the instrument
and in good faith. In this case, since the banker acted honestly and without
negligence, he is entitled to debit ‘A’ with Rs 5,000.
What are the alterations that do not constitute a material alteration?
The alterations that do not constitute a material alteration are: –
1. Alterations that are made with the consent of the parties and changes
that correct errors in data or clerical errors. The change is not obvious and
goes into the hands of the instrument holder.
2. After a change is made to the instrument, the parties to the old
instrument cannot be held liable for the new instrument or the modified
instrument for which they never consented. The party that consents to the
change or who changes the instrument is not entitled to complain against
such alteration.
3. A material alteration is one that changes the rights, liabilities or legal
status of the parties as ensured by the original instrument. Whether a
change is biased or beneficial to the parties, the liability of the parties to the
material alteration is avoided.
What are the effects of material alteration?
Following are the effects of material alteration: –
1. The main effect of a material instrument is that it makes the
instrument void, and that it frees the instrument itself against any person
who was a party to such an instrument at the time of the material alteration
and has had not given his approval.
2. All former parties to a negotiable instrument, which was subsequently
changed without their consent, shall also not be liable to the holder-in-
course of having no notice or knowledge of the material alteration.
3. It does not discriminate whether the change was for profit or to cause
harm to any party. Further, it also does not matter whether the holder
himself changed the instrument or a stranger changed it while the
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instrument was in the holder’s custody because a party in whose condition

the instrument is bound to protect the instrument in its original condition.
4. However, it is worth noting that a material alteration does not make
the instrument completely void i.e., it cannot be applied against all parties.
5. It is void only against those who have not given their approval for the
change, and can be enforced against those who consented to the change or
effected the change. Such an instrument also works against those who
become parties to the instrument after the conversion. However, there is an
exception to this rule.
6. On the other hand, section 89 of the Negotiable Instruments Act
provides protection to a party who pays a material altered bill of exchange
or promissory note or cheque provided that he does not know about the
alteration and makes such payment in good faith and without negligence on
his part.
What is crossing the cheque?
Meaning of crossing the cheque: – To cross a cheque means to draw two
parallel lines on the face of the cheque. Crossing a cheque is an instruction
given by the customer as to how the payment is to be made and who can
give it. Crossed cheque cannot be paid over the counter, it can be endorsed
to anyone, and the payment will be through the bank.
A crossed cheque is a cheque that has been marked specifying an instruction
on the way it is to be redeemed. A common instruction is for the cheque to
be deposited directly to an account with a bank and not to be immediately
cashed by the holder over the bank counter.
Purpose: – The crossing is to warn the bank to not to make payment of
crossed cheque over the counter. The crossing serves as a caution to the
paying banker.
What are the types of crossing cheque?
There are 3 types of crossing cheque: –
1. Normal crossing: – When there are two transverse lines on the face
of a check and there is a pair of words between those lines.
o Amount cannot be paid in cash
o The amount can only be credited to the bank account of the
designated recipient or endorser.
2. Special crossing: – When the banker’s name is written on the top of
the cheque. When the words “non-negotiable” are added to the check, the
check loses its negotiability.
o Amount cannot be paid in cash
o The amount can be deposited only in the bank account of the
mentioned bank.
3. Account payee crossing: – Where the drawer adds words like
account payee, or account payee only in general or special crossing, it gives
instructions to the banker to collect the cheque and credit the amount only
to the payee’s account. This crossing is not legally recognized.
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Protection from liability to the paying banker in the following cases

• Where the cheque is drawn by the payee with the order of the drawee,
if such payee is a fraud, or the banker is not held responsible for the forged
signature of the drawer, the banker is not held liable.
• Banker is not liable in cheques payable to bearer. In this case, it does
not matter whether the direct holder is the owner of the cheque.
• The banker must have acted in good faith and without any negligence.
• The banker had received the payment of the cross cheque.
• The collection was done by the bank on behalf of the customer.
Meaning of Double-crossing: – When there are two special crossings on a
cheque, it is called double-crossing. In this, the second bank acts as the
agent of the first collecting banker. This is done when the banker in whose
favor the check is crossed does not have a branch where the cheque is paid.
Meaning of Opening the crossing: – The checker can cancel the check by
writing the words “pay cash” on the check with his full signature. The law
does not allow this but it has been taken out of custom.
Case Laws under Material Alteration of cheque
1. In the case of Veera Exports vs. T. Kalavathy [2002(1) SCC 97]
the supreme court held that invalid cheque can be re-validated voluntarily
by altering the dates, so as to give fresh life to cheques for another 6
months. A cheque which has become invalid because of the expiry of the
stipulated period could be made valid by alteration of dates. There is no
provision in the Negotiable Instruments Act or in any other law which
stipulates that a drawer of a negotiable instrument cannot re-validate it. It is
always open to a drawer to voluntarily re-validate a negotiable instrument,
including a cheque.
Conclusion
The Negotiable Instruments Act is silent on the subject as to what
constitutes a material alteration. Courts of Law in India in this regard
have followed the English Common Law, which held that anything, which has
the effect of altering the legal relations between the parties, the character of
the instrument, or the sum payable, amounts to a material alteration.
Accordingly, an alteration can be termed as material alteration if it is such
that it alters or attempts to alter the character of the instrument and affects
or attempts to affect the contract, which the instrument contains. It may
arise not only by means of altering, changing, or erasing a certain thing
already written on the instrument, but also by a new insertion.
19) Closing Of a Bank Account
Similarly , when the banker takes initiative to close the account, it is refered
to as ‘stopping of account’
Closing an Account: When a customer requests the banker in writing to
close his account, the banker is bound to close the same. He should not ask
the reason and the customer is required to return the unused cheques
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A customer may get his account closed by withdrawing the balance standing
to his credit or liquidating the outstandings in his account. An account
cannot be treated as closed even if it shows ‘nil’ balance, until and unless
the customer’s request/direction to that effect has been received. The
account may be closed even if the unused cheques are not returned.
However, efforts should be continued to recover unused cheque leaves
Stopping an account: A Banker may take steps to stop his customer’s
account , which is found to b undesirable. The banker must give due notice
to the customer, of his intention to close the account and request him to
withdraw the balance standing to his credit. The banker takes such extreme
step to stop his customer’s account under the following circumstances
(i) Mis-use
(ii) Un-operated account
(iii) Insanity of customer
(iv) Insolvency of customer
(v) Death of customer
(vi) Garnishee order and
(vii) Assignment
(i) Mis-use: When the customer is guilty of misusing the account viz.
forging cheques, bills of exchange, issuing cheques without sufficient
balance, failure to pay back loans, overdrafts etc.
(ii) Un-operated account
Wn an account of his customer remains un-operated for a long time, the
banker may presume that he needs no longer the account and communicate
him to withdraw the amount. Despite reasonable efforts, if the customer has
not been traced, the banker may transfer the balance at his credit to an
‘unclaimed deposit account’ and the account is closed. The balance shall be
paid to the customer, as and when, he is traced
(iii) Insanity of customer
When a banker receives notice regarding insanity of his customer, he has to
stop payments against the account
(iv) Insolvency of customer
If the customer becomes insolvent, he is deprived of operating the account.
The banker has to transfer the balance to the Official Receiver of the
insolvent customer
(v) Death of customer
When the customer dies, the banker must stop operation of his customer’s
account
(vi) Garnishee order and
When the banker receives a Garnishee Order from the court, he is bound to
suspend the operation of his customer’s account
(vii) Assignment
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Assignment simply means transfer, when the banker receives a notice of

assignment of the credit balance of his customer’s account to a third party,
the banker is bound to pay/transfer the same to such third party
20) Over draft
Bank overdraft is a type of financial instrument that is provided to some
customers by the bank in the form of an extended credit facility, which
comes into effect once the main balance of the account reaches zero.
In other words, bank overdraft is an unsecured form of credit that is mainly
used for covering short term cash requirements.
Banks offer a credit limit to the bank customers based on their relationship
with the bank. The bank levies separate interest and charges towards non-
maintenance of account. The interest rate for the overdraft facility may vary
from bank to bank.
Features of Bank Overdraft
Following are the features of bank overdraft facility:
1. Banks offer overdraft facilities on a predetermined limit which differs from
borrower to borrower.
2. In an overdraft account the withdrawal or deposit of an amount can be
done anytime upto the specified limit.
3. The bank charges an interest on the overdraft amount which is calculated
on a daily basis and is billed monthly to the borrowers account. There is an
increase in interest if the borrower defaults in paying the amount.
4. Banks do not charge prepayment penalty on the borrowers in the event of
loan repayment before the tenure. This is a feature that is different from
other kinds of loans.
5. The system of EMI is not applicable in bank overdraft accounts. Borrowers
can repay the amount by paying off different values each time.
6. There can be joint borrowers of an overdraft loan and both the applicants
are equally responsible for repaying the borrowed amount.
Types of Bank Overdrafts
There are two types of bank overdraft accounts
1. Authorised Bank Overdraft: In this type of overdraft account there is
arrangement made in advance between the account holder and the bank.
Both the parties mutually agree on a limit which can be used for all the
payments and a daily, monthly or yearly service fee that can vary from bank
to bank.
2. Unauthorised Bank Overdraft: This type of overdraft occurs when the
bank account holder has spent more than his available balance without prior
authorisation or any such arrangement with the bank or if there was an
arrangement done before but the limit of overdraft is exceeded.
Advantages of Bank Overdraft
Following are the advantages of bank overdraft:
1. Helps in managing the availability of cash for a business or an individual.
2. Helps in fulfilling urgent cash requirements.
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3. Interest needs to be paid only on the amount that is utilised and not the
total limit.
4. There is less amount of paperwork involved in availing bank overdraft.
5. There is no requirement of collateral.
Disadvantages of Bank Overdraft
Following are some of the disadvantages of the bank overdraft:
1. Higher interest rate charged for the loan facility availed.
2. It is offered only to the bank account holders.
3. The limit offered depends upon the financial position of the individual or
business.
4. The interest rate is not fixed and changes frequently.
5. Is not an ideal option for long term financing.