Management of Banking Operation

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MANAGEMENT OF BANKING OPERATIONS
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CONTENTS
1. BANKING
Meaning and Definition, Role of Banks-Types Of Banks –
Banking Structure-Unit And Branch Banking- Pure And Mixed
Banking.
2. COMMERCIAL BANKS
Functions Including Modern Services And Hi-Tech
Banking-Internet Banking, ATM, DEBIT CARD,CREDIT
CARD.
3. CENTRAL BANKING
Evolution Of Central Bank-Function Of Central Bank-
Monetary Policy-Objectives-Credit Control Methods
4. BANKING REGULATION ACT 1949

Banking Regulation Act 1949-With Regard To Capital-
Reserve Inspection-Branch Expansion, Accounts and Audit.
5. BANKER AND CISTOMER

Meaning-Relationship-General Relationship And Special
Relationship-Obligation To Honour Cheques On Demand-
Secrecy Of Accounts-Banker Rights To Combine Accounts
And Banker General Lien- Types Of Accounts & Procedure To
Open Bank Accounts.
6. CHEQUES
Definition-Essentials-Crossing Endorsement-paying Banker-
Payment of Customers Cheque precaution To Be Taken by the
Banker and Collecting Banker- Duties of Collecting Banker.
1
Unit -1: BANKING
ORIGIN OF BANK
A Bank is an institution and a financial intermediary that

accepts money in the form of deposits from the public and
channels those deposits, either directly or through capital
markets into productive activities. A bank connects those who
have capital deficits to those with capital surpluses.
The term Bank is derived from the French word Banco

which means a Bench (Benches were used as desks or exchange
counters) of Money exchange table. In olden days European
money lenders or money changers used to display coins of
different countries in big quantity on benches or tables for the
purpose of lending or exchanging.
Another possible origin of the word is from

the Sanskrit words 'byaya' (expense) and 'onka' (calculation) =
byaya-onka. This word still survives in Bangla, which is one of
Sanskrit's child languages. Such expense calculations were the
biggest part of mathematical thesis written by Indian
mathematicians as early as 500 B.C.
The word bank was borrowed in Middle English from

Middle French banque, from Old Italian banca, from German
2
banc, bank "bench, counter". Benches were used as desks or

exchange counters during the activity.
In common view is that the word “Bank” might be

originated from the German word “banc” which means a joint
stock fund. Of course a bank essentially deals with funds.
In ancient times the main function of banks was relating to

granting of funds to individuals or the state in times of crisis.
MEANING
A bank is an institution which deals with money (fund) and

credit. It accepts deposits from the public, makes funds
available to those who is need for money, and helps in
remittance of money from one place to another place. And also
modern services like use of money by using credit & debit card.
Now it also extended to exchange of currency with other
country currencies.
A bank is an organization, usually a corporation, which

receives demand deposits and time deposits, honors instruments
drawn on them and pays interest on them; discounts notes,
makes loans, and invests in securities; collects cheques, drafts
and notes; certifies depositor’s cheques and issues drafts and
cahier’s cheques.
In other words the Bank is an establishment authorised by a

government to accept deposits, pay interest, clear cheques,
3
make loans, act as an intermediary in financial transactions,

transfers money from one place to another place and provides
other financial services to customers.
DEFINITIONS
Oxford Dictionary defines a bank as “an establishment for

custody of money, which it pays out on customer’s order.”
The negotiable instruments act of 1881 contains a statutory

definition of the term banker: “Banker includes a body of
persons, whether incorporated or not, who carry on the business
of banking.”
According to H. L. HART’S “A Banker is one who in the

ordinary course his business honor cheques drawn upon him by
person from and for which he receives money on current
accounts.”
According to these definitions the bank perform functions of
 Acceptance of deposits
 Honoring of cheques drawn against those

[repayment on demand]
An INDIANS view about Bank is “a financial institution

which deals with deposits, advances and other related services.
It receives money from those who want to save in the form of
deposits and it lends money to those who need it”
4
According to section 5 (1) (c) of Indian Banking Regulation

Act of 1949
Banking company is “A company which transacts the

business of banking in India.” The term banking has defined as
“Accepting for the purpose of lending and investments of
deposits of money from the public, repayable on demand, order
or otherwise.
The above definitions bring out clearly the characteristics of

a banker as under.
 Acceptance of deposits through the current, fixed,

saving bank account.
 Allowing of withdrawals of those deposits by cheque,
draft and orders.
 Utilization of deposits for the purpose of lending or
investment in securities.
 Performance of other activities called subsidiary
services in addition to the principal activities of
receiving deposits and lending of funds.
 Transferring money from one place to another
(Remittances)
 Credit Creation
 Keeping valuables in safe custody
 Performance of banking business as the main business.
5
ROLE OF BANKS
Banks plays vital role in modern economy.
First – By accepting deposits the banks control the habit of

thrift (spending) and create habit of savings among the people
for future uncertainty. Some time these savings may results in
capital formation in the economy.
Second- The banks also encourage industrial innovations

and expansion through funds providingto entrepreneurs.
Third- The banks exercise considerable influence on the

level of economic activities through their ability to create
money mobilization in the economy.
Thus economic development of any country is not possible

without proper banking activities and services.
1. CAPITAL FORMATION
The rate of savings in the developing country is generally

increasing, but in underdeveloped country is very low due to
deep rooted poverty among people. All types of banks are very
essential to mobilize money through capital formation in the
country. And by mobilizing savings and make them available to
the entrepreneurs for productive purpose and to develop sound
economic system. Forexample,So many nationalized and
private banks started service which allows the public to invest in
6
mutual funds, this is a major step taken by banks to create

capital.
2. INNOVATIONS
Innovations are the essential requisites for the economic
development. In the developed country banks providing finance
to innovative business, but in under developed country people
worried about investment in new innovation because of risk
factor and lack of bank credit. Now a day in developing country
banks giving more preference to provide finance towards
innovative entrepreneurs.
3. FINANACE FOR PRIORITY SECTOR

Banks can have direct influence on economic activity. There
are more ways to provide prominence to develop economical
activity like provision for financial assistance to priority sector
like agriculture and trade and other sector like small scale to
enhance production of necessity goods. Banks providing credit
facility to different sector where risk involvement is more like
joint ventures.
4. MONETSATION
Banks are the manufactures of money and they allow money

to play its role freely in the economy. Banks monetize debts and
also assist the backward subsistence sector of the rural economy
7
by extending their branches in to the rural areas. They must be

replaced by the modern commercial bank’s branches.
5. INFLUENCE ECONOMIC ACTIVITY
Banks are in a position to influence economic activity in a

country by controlling the rate of interest. They can influence
the rate of interest in the money market by controlling the
supply of funds. Banks may follow a cheap money policy with
low interest rates which will tend to stimulate economic
activity.
6. FACILITATOR OF MONETARY POLICY
Thus monetary policy of a country should be conductive to

economic development. But a well-developed banking system is
on essential pre-condition to the effective implementation of
monetary policy. Under-developed countries cannot afford to
ignore this fact. A fine, an efficient and comprehensive banking
system is a crucial factor of the developmental process.
In overall banks are vital institutions in any society as they

significantly contribute to the development of an economy
through the facilitation of business. Banks also facilitate the
development of savings plan and are instruments of the
government’s monitory strategy among others. credit fuels
economic activity by allowing business to invest beyond their
8
cash on hand ,households to purchase homes without saving the

entire cost in advance and government to smooth out their
spending by mitigating the cyclical pattern of tax revenues and
to invest in infrastructure projects.
The banks make available loans of different periods to

agriculture, industries and trade. They make direct investment
in industrial sector. The provide industrial,agricultural and
commercial consultancy hence facilitating the process of
economic development.
TYPES OF BANKS
Generally banks are classified on the basis of their function.

Banks are classified into six categories they are
1) Commercial Banks
2) Industrial Banks
3) Agriculture Banks
4) Exchange Banks
5) Saving Banks
6) Central Banks
1. Commercial Banks:
Commercial banks are banks which accept deposits from the

public and lend money for commercial activities. They provide
credit facility to agriculture purpose and small scale industries
and other neglected and weaker section of the economy like
small scale enterprises. These banks accept deposits from public
9
for various accounts like saving bank, current account, and

fixed deposits accounts. They provide funds to trade &
commerce. They grant advances by way of loans, overdraft,
cash credits, discounting of bills. Generally they provide
working capital.
2. Industrial Banks:
Industrial banks are banks which provide fixed capital to

industries for long term they also known as investments banks
as they invest their funds in subsiding to the shares and
debentures of industrial concern with object of providing long
term finance to industries. This meets requirements of industries
such as financing towards acquisition of fixed assets (plant &
machinery, land building).
3. Agricultural Banks:
These are banks which provide finance to agriculture. These

banks were set up in India to meet the needs of formers. These
banks provide loans to formers to purchase of fertilizers, seeds,
other inputs. They also provide long term loan to made
improvement of land, to buy equipments & for irrigation works.
4. Exchange banks:
These banks are also called as foreign exchange banks.

These banks finance mainly foreign business of a country. Their
main function is to finance foreign trade of a country. They
10
make international payments through purchase & sale of

exchange bills. The foreign exchange banks helps in converting
the currency of one country into other country currency. These
banks discount export and import bills of a country. They issue
letter of credit, circular notes, travelers’cheques etc. they buy
gold and silver.
5. Saving banks:
Savings banks are special types of banks which specialize in

the mobilization of the small savings of the middle and low
income groups, as they are concerned mainly with mobilization
of small savings of people, they are called savings banks.
6. Central Banks:
Central bank, as the name specified is the central monetary

institution of a country. Every country in the world has a central
bank. It occupies a central position in the banking structure of a
country. It operates under state control & works for the
promotion of monetary & economic stability of the country. It
does not work for profit.
11
INDIAN BANKING STRUCTURE
In every country there will be one bank constituting the apex

of the monetary and banking structure, supervising the activities
of the commercial banks and other financial institution. In India
we have RESERVE BANK OF INDIA.
In India we have organized banking system and it can be

broadly classified into three categories, namely commercial
banks, co-operative banks and regional rural banks. The
Reserve bank of India is supreme authority for monitoring
banking activities.
Commercial banks have been in existence from so many

decades. Commercial banks mobilize savings in urban areas and
make them available to large and small scale industries trading
mainly for working capital requirements.
Regional rural banks (RRBs) came into existence in the

middle of 1970s with specific objective of providing credit &
12
deposit facility particularly to the small marginal formers,

agricultural labors and small entrepreneurs.
Primary co-operative societies were originally set up in

villages to promote savings of formers and meet their credit
needs in cultivation.
The development of banking service is depends on the

specific country economical condition and other social factors
Banking service system isdeveloping very much faster in

developing countries like India.
UNIT BANKING
Unit banking is a system of single, individual banks carry on

their business and each bank is a separate entity having its own
independent management and board of directors. The area of
operation of bank is restricted to a particular locality. The scale
of operation of individual banks under unit banking system is
usually smaller.
Merits of Unit Banking
1) Resource of local area will be used for economic

development.
2) To promote financial assistance to local enterprises,

small industries.
13
3) To promote savings habit for local rural people.
4) There is no delay of any kind in decision about problems

related to concerned bank.
Demerits of Unit Banking
1) Unit bank has limited financial resource its difficult to

withstand local business depression
2) It is not able to provide adequate banking service facility

to small communities.
3) Banking person may or may not follow economic

principles while granting loans because he is local
person.
4) There will be difference in interest rates in different

geographical area.
BRANCH BANKING
Branch banking system operates throughout a countrywide

in network basis. Under this system one major bank acts as a
legal entity with group of shareholders. Some of the banks
operateoutside country also. Branch banking system was first
developed in England but this system is operating all over the
world in India also.
Merits –
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1) In this system of branch banking the level of operation is

much larger
2) Financial resource can be put into productive use

through branches
3) Interest rate will be uniform throughout country
4) Branch bank system provides better to customers in

remittance & collection of funds
5) This system follows uniform policy.

Demerits-
1) In this system individual needs may be ignored.
2) Branch persons not possible to take their decision to

meet needs of local needs, they have to follow policies
laid down by main bank.
3) Concentration of huge financial resources
4) Possibilities of mismanagement of branches
5) There will be unnecessary Competition by expansion of

branch banking.
15
PURE BANKING
Pure banking is a system under which commercial banks

accepts deposits from the public & lend them only for short
periods,( not more than one year) to industry & commerce.
Merits-
1) Pure banking ensures the safety & liquidity of funds for

commercial banks.
2) No locking up of funds in long term industrial finance.

Demeritof Pure banking does not encourage industrial
developments as it does not provide long term finance.
MIXED BANKING
In this system of banking which combines commercial

banking with investment banking. It is nothing but universal
banking system. In this system banks accepts deposits& lend
money to general public in the form of short term as well as
long term.
Merits of Mixed Banking
1) This system provides both long term & short term

finance to industries.
2) Mixed banking working for industries and adjust their

credit policies according to the need.
16
3) It provides reliable guidelines to investing public as

regards to industrial investments.
Demerits of Mixed Banking
1) The liquidity of funds of commercial banks & there by

reduces the ability of commercial banks to repay the
deposits of their customers on demand
2) In boom and depression have an influence of working

of commercial banks
Questions:
1. What is Bank? Briefly explain the origin of Bank.
2. Explain the functions of banks. What is the role played by

the Banks in the economic development of the country?
3. Briefly explain the various types of banks.
4. What do you mean by merchant banking?
5. Write a note on foreign banks.
6. Distinguish between pure banking and mixed banking.
7. Distinguish between unit banking and branch banking.
8. Explain the meaning and merits and demerits of branch

banking system.
17

Unit-2: COMMERCIAL BANKS
Commercial bank refers to that banking which is concerned

with the acceptance of deposits from public & repayable on
demand or expiry of a short period, by granting short term
credit to trade & commerce, through a wide network of
branches throughout the country. Commercial banks are oldest
banking institution in organized sector.
FUNCTIONS OF COMMERCIAL BANKS
The modern commercial banks perform a variety of

functions; they can be classified into two categories
a) Primary function
b) Secondary function.
18
PRIMARY FUNCTIONS
 Acceptance of deposits
 Provide loans
 Credit creation
 Investments of funds on securities
1) ACCEPTANCE OF DEPOSITS
A deposit constitutes the main source of funds for

commercial banks. There are several deposits accounts scheme
in commercial banks for people viz., they are Current Accounts,
Saving Bank Accounts, Fixed Deposits Accounts and Recurring
Deposits Accounts.
Current Accounts Deposits
Current accounts are the most important deposits bank

accounts. Generally this current account is opened by trading
business, industrial concern. Usually these authorities have
frequent banking transaction with huge amounts. Current
accounts are active or running accounts which are continues in
operation. Customers can deposits any amount in any number of
times, similarly withdrawal in any number of times. Banks have
required for keeping the major portion of current deposits in
liquid form. The banks undertake the obligation of paying all
cheques drawn against these deposits. Banks usually do not pay
interest in respect of these deposits.
19
Saving Bank Accounts
Generally Saving bank accounts are opened by small &

medium income group who wish to save part of their incomes
for future needs and earn fair interest on these deposits. In
developing countries like India the apex bank implementing
good interest rate system for saving bank depositors to promote
savings. In this type of accounts there is limit for withdrawal.
Fixed Deposits Accounts
A fixed deposit accounts also one of important in bank

accounts. They are opened by small investors who do not want
to invest in risky industrial securities. These types of deposits
are made with the bank for fixed period specified in advance. it
is nothing but term deposits. Banks pay fixed percentage of
interest on these deposits.
As the deposits cannot, ordinarily be withdrawn before the

specified period. Banks can invest these deposits into profitable
avenues without fear of withdrawal in the course of fixed
period.
Recurring Deposits Accounts
Recurring deposits accounts are meant for people who have

regular monthly incomes. It is one form of savings depositor.
Depositors save & deposit regularly every month a fixed
20
installment so that they are assured of the sizeable amount at a

later period. This will enable the depositors to meet contingent
expenses. After expiry of agreed period the repayment of
accumulated amount to depositors by banks.
Difference between Current account &Saving Deposits

Accounts& fixed deposits accounts
Current deposits Saving deposits Fixed deposits
accounts accounts
1. It is meant for 1.It is meant for 1. It is for small
business small medium investors
concerns income group or
individual
2. A specific 2.Less amount 2. One time
amount is required to open deposits
required to open compare to current
this account (Rs account( Rs 500)
2000-3000)
3. There are no 3.There are 3. Withdrawal
restriction on restriction on after specified
withdrawal withdrawal period only
4. Account holder 4.Cannot get 4. No over draft
can get overdraft facility facility
overdraft
facility
5. Operates only 5.Operates with
with cheques cheques& special
withdrawal form
21
2) PROVIDE LOANS
Lending funds or providing loans is another major function
of banks. The major portion of funds employed by way of loans
and advances to business, trade institutions and also to
individuals against specific documents.
Generally banks lend funds like Loans, Overdrafts, Cash
Credits, and Discounting of Bills.
Loans: - A loan is a financial assistance to needed people.

The person who gets assistance is called as borrower, banker is
lender. It is one kind of advances made with security. It is gives
for fixed period having specified rate of interest. Bankers
provide loans depending on the demand it may be short term
loans (for one year), long term loans (more than one year).
Overdraft: - An overdraft is a financial arrangement under

which a current account holder is permitted to overdraw his
account without any security.
Cash credits: - it is an financial arrangement by banker in
which borrower is allowed to barrow money under separate
account called cash credit account up to a specified limit
against security of goods.
Discounting of bills: - It is an arrangement under which the

bank discounts a bill of exchange maturing within period of 60
22
days or 90 days from approved customers and pays him or

credit his current account immediately.
3) CREDIT CREATION
Bank money refers to bank deposit created by banks. Banks

perform functions like increase purchasing power to group of
people; banks create and distribute money through demand by
public.
4) INVESTMENT OF FUNDS ON SECURITIES
This is one of the important functions of commercial bank.

They invest their considerable amount of funds in government
securities & industrial securities by analyzing which have more
profitable. High liquidity, safety secured, with social
responsibility.
SECONDARY FUNCTIONS
1) GENERAL SERVICES
Apart from the main function of accepting deposits and

granting advances, a banker performs a number of secondary
services. By performing secondary services a banker will earn
goodwill from existing customers and attract new customers.
Banks remit and collection of the funds from one place to
another place through cheques, drafts and other instruments like
bill of exchange, Commercial banks arrange for remittance of
23
funds from one place to another place on behalf of their

customers by means of following instruments
a) Bank draft according to section 85(A) of the negotiable

instruments Act. A bank draft is as order to pay money
draft by one office of the bank upon office of the same
bank branch for a sum of money payable to order on
demand.
b) Mail, telex transfer are two widely used mode of

remittance, mail transfer (postal) generally resorted only
when the payee has an account with the drawee branch or
the paying branch of the bank. Under this mail transfer
the customer deposits the required amount of money into
issuing branch of bank. After receiving money from the
remitter the issuing branch sends instruction by mail to its
drawee branch in the place of the payer to credit the
account of the payee named therein with the amount of
money specified. After receiving instruction from issuing
branch the draweebranch credits the accounts of the
payee and informs the payer about the same. Telex
transfer is the message for transfer of funds is
communicated through telex machine instead of usual
mail transfer.
c) Travelers’cheques – Travelers cheques are issued by

banks to avoid the risk of loss or inconvenience in having
24
carried large amount of cash while travelling. These

cheques are issued in suitable denominations E.g.-Rs 50,
Rs 100, Rs 500 and are en-cashable on any office of the
issuing bank. Travelers’ cheque can be purchased by
anyone who needs not to be a customer of the bank. A
person may buy any number of traveler’s cheques by
depositing money with issuing bank. Traveler’s cheques
are generally en-cashable only at the branches of the
issuing bank, or branches of other bank with which
issuing bank have that arrangement.
d) A letter of credit is a document issued by a banker,

authorizing some other banker to whom it is addressed, to
honor the cheques of a person named in the document, to
the extent of stated amount in the letter and charge the
same to the account of grantor of the letter of credit. It is
nothing but a promise by the issuing banker to accept all
bills to the limits of credit. When promise to accept is
conditional on the receipt of document of title of goods it
is called a Letter Of Credit.
e) Safe custody valuables service is providing by banks, it

means banks accept valuables like negotiable securities
(shares, debentures, bonds,and fixed deposits receipts),
jewels and documents of title to the property. There are
two ways through which a banker ensures safety of its
25
customer’s valuables. (1) By accepting valuables for safe

custody. (2) By hiring out safe deposits lockers to the
customers.
f) Merchant Banking is basically a service banking

concerned with providing non-fund based service of
arranging funds rather than providing them. The merchant
banker merely acts as an intermediary. Whose main job is
to transfer capital from those who own it to those who
need it. With increase in complexities and requirements
of modern business, the role of merchant banker has
undergone a substantial change.
The main services of a merchant banking are as follows.
o All aspects of project counseling such as pre-

investment and feasibility studies to identify project.
o Help to entrepreneurs to obtain various government

consent including letter of intent and Industrial
license and other permissions.
o Preparation of project report after examining source

of finance.
o Assisting in formulation of financial plan.
o Management of public issue. Corporate restructure,

amalgamation, merger, takeover situations.
26
o Assist to small scale industries to strengthen capital

base and for diversification of activities.
o Assist to locate or evaluate new market conditions

and finding foreign collaborations.
g) Foreign Exchange Business is one of important activity

in banks, rendering of service in overseas trading like
execution of differed payment guarantee on behalf of
customer to enable them to acquire required assets from
overseas. And providing import packing facility against
trust receipt of customers.
Banks grants export finance both at pre and post shipment at

concessional rates of interest. Some banks enter into forward
contracts with importers & exporters for sale of foreign
exchange at fixed rates to safeguard them against fluctuations in
the rates of foreign exchange.
h) Lease financing is a method of financing equipment &

machinery. It is a mechanism by which a person acquires
the use of an asset by passing predetermined amount
called ‘rental’ periodically over a period of time. In
developed countries approximately 25 to 30 percent
plants and equipments is being financed by leasing.
Leasing has become a growing business activity in India
also. It has gained vital role in financing major source of
finance for major projects.
27
i) Factoring is a “continuing arrangements between a

financial institution(the factor) and a business concern(the
client) selling goods or services to trade customers
whereby the factor purchases the clients book debts
either with or without resource to the client and relation
thereto controls the credit extended to the customers and
administers the sales ledger. The purchase of book debts
or receivables is central to the functions of factoring,
permitting the factor to provide basic services such as
(i) Administering the seller’s sales ledger.
(ii) Provision of pre-payment against the debts

purchased.
(iii) Collection of debts purchased.
(iv) Covering the credit risk involved.
j) Housing finance playing a significant role in developing

countries by providing housing finance to the people who
need it. In the early seventies the reserve bank of India
appointed a ‘working group’ to examine the role of
banking system in providing finance to housing schemes.
By the analysis of the working group they have made
recommendation that bank could advance housing loans
directly to the parties concerned or indirectly to the state
housing finance boards with special rates of interest. Now
28
a day’s all nationalized and private banks attracting

customers by financing for housing and vehicles.
k) Underwriting means undertaking the responsibility by a

person or firm or an institution that if the shares or
debentures offered to the public for subscriptions are not
fully subscribed for, the underwriter will subscribe for
such unsubscribed shares or debentures. Now a day’s
banks acts as underwriter to a particular issue of shares
and debentures. They receive applications for shares and
application money from public. They also undertake to
receive subsequent installment from those who are
allotted shares.
2) AGENCY SERVICES
The services rendered by a banker as an agent of his
customer (on behalf of customers) are called Agency Services.
Now day’s banks started giving various types of services
besides performing the basic functions.
I. Payment and collection of subscriptions, dividends,

salaries, pension, etc.
II. Purchase and sale of securities.
III. Acting as executor, Administrators and trustee.
IV. Acting as attorney.
29
I. Payment and collection of subscriptions, dividends,

salaries, pension, etc.
Bankers make payment and receive money on behalf of their
customers in following ways:
a. Payment of insurance premium
b. Payment of membership subscription to clubs, libraries,

and professional associations.
c. Payment of rent and salaries
d. Collection of dividend on behalf of customers
e. Collection and payment of pension
f. Transfer of funds from one account to another.
g. Collection fee from students on behalf of colleges and

universities.
II. Purchase and sale of securities
Banks purchase and sell various securities like shares, stock,

bonds, and debentures on behalf of customers. The banks act as
brokers and give their opinion on securities and list of
securities. Bank acting as a broker in between customers and
stock markets. Some time banks provide advice to its customers
regarding investments of their surplus funds.
30
III. Banker as Executor, Administrators and Trustee.
Executor: A person may make a will expressing his

intention regarding disposal of his property after his death. A
will has to be in writing signed by the person making the will
who is called testator and attested by two witnesses. A will
becomes effective only after it’s approved by court of
competent jurisdiction by the issuance of probate. A probate is a
copy of the will duly certified under the seal of the court
together with a grant of administration to estate of the testator.
The probate is conclusive as the appointment of the executor
and the validity and the content of the will. The person
appointed by the will to administer the estate of the deceased is
known as executor.
Administrator: In case a person dies without making a

valid will, the property of the person will devolve according to
the law which he is subject to. The person claiming the property
of the deceased may apply to the court for the administration of
the estate. The person in whose favour the court grants letter of
administration is known as administrator.
Trustee: A person may desire that after his death a part or

whole of his estate be held in a trust for the benefit of certain
beneficiaries named in the will in such a case he may create
trust under his will directing certain person to hold the property
on a trust and handover the income from the property to such
31
person after a specified time or happening of the specified event

the person holds the property for the beneficiaries is known as
trustee.
Commercial banks undertake the function of executors,

administrators and trustees. Many banks have set up their
respective head offices. Executor & trustee department which
administrates the trust and will of the customers. Banks are
better service provider in these cases because banks are
corporate body and having continues existence
Attorney: power of attorney may be given by customers to

his banker. Legal effect of acting under a power of attorney is
as valid as if customer had done itself. By granting power of
attorney, the customer authorizes the banker to receive dividend
and interest on securities belonging to him and give a valid
discharge thereof. The banker may also be empowered to sign
transfer form in respect of purchase and sale of stock exchange
securities and government securities.
MODERN SERVICES
Modern Service Rendered by Commercial Banks:
1. Provision of Night Safes : An important service rendered

by a modern commercial bank is that of keeping in safe
custody, valuables such as negotiable securities, jewellery
documents of title, wills, deed-boxes etc. some branches
32
are also equipped with specially constructed strong rooms;

each containing a large number of private, steal, safes, of
various sizes. These may be used by non-customers for
small-free as well as regular customers. For shop-keeper
and other customers who handle large sums of money after
banking hours, night safes are available at many banks.
Night safes take the form of a small metal door in the
outside wall of the ban, accessible from the street, behind
which there is a chute connect the bank’s strong room.
Customers who require this service are provided with a
leather wallet, which they lock before placing in the chute.
The wallet is opened by the customer when he calls at the
bank the next day to pay contents into his account.
2. Bank giro and credit cards: Among the services

introduced by modern commercial banks during the last
quarter of a century or so, the bank giro and credit cards.
The bank giro is a system by which a bank customer with

many payments to make, instead of drawing a cheque for each
item may simply instruct his bank to transfer to the bank
accounts of his creditors the sum, due from him and he writes
one cheque debiting his account with the total amount.
Credit advices containing the name of each creditor with the

name of his bank and the branch will be cleared through the
33
credit of the cleaning house, which operates in a similar way as

for the clearing of cheques.
Credit cards are introduced for the use of credit worthy

customers. Users are issued with a card on production of which
their signature is accepted on bills in shops, establishment,
petrol bunks etc. The banks thereby guarantee to meet the bill
and recover from the cardholder through a single account
presented periodically. In some cases users are required to pay a
regular subscription for the use of the services as sell. An
extension o the scheme allows the repayment of large sums
(subject to a maximum) over a period at interest.
3. Opening budget accounts: Some commercial banks open

budget account for credit worthy customers. The bank
guarantees to pay, for a specific charge, certain types of
annual bills like fuel bills, rates, etc. Promptly as they
become due while repayments one spread over a period of
12 months period from the customers current account.
4. Overseas Trading services: The modern commercial

banks also render services in overseas trading also for its
customers. They act as a means of settlement between the
parties concerned. The banks are also provides of credit and
enable the company to release the capital which would
otherwise be tied up in the goods exported. Bill of exchange
has been one of the chief means of settlement in trade.
34
5. Information and other services: Many banks act as a

major source of information on overseas trade in all
respects. Some banks produce regular bulletin on trade and
economic conditions at home and abroad and special
reports on commodities are market. In some cases they
invite enquiries for those wishing to extend their foreign
trade.
HIGH-TECH BANKING
ATM (Automated Teller Machine)
ATM is introduced to provide faster and safer service to the

customers by commercial banks. ATM facility is one of the
modern services provided by commercial banks now-a-days.
Every transaction can be carried out within a minute by ATM.
The multimedia disperser of an ATM can recognize any type of
currency notes on the basis of its length width and thickness.
They provide the customers input device for ATM customer
who used this to cover the Personal Identification Number
(PIN) and communicate with the terminal. A PIN is nothing but
a number given to the customer and which will be hidden from
other for safety purpose.
The customer having an ATM card can enter any of the

bank’s ATM counters and insert cardhe will be asked to enter
his PIN. If the PIN match with his secret pin the machine will
35
continue provide the service. All transactions like debiting from

account or crediting to an account and other services like
balance enquiry, cheque book request, exchange rates, bill
payments are also provide by this machine. The customer needs
to press corresponding keys for his required transaction.
Through the keypad he can give the details of the amount.
An ATM card has data like account number and PIN.

Balance details will be written on the magnetic strip of the card.
Before returning the card to the customer after a transaction,
updated data will be automatically rewritten. The ATM service
is available for all 24 hours a day and hence 365 days a year.
Cash Deposit Machine (CDM) is self-service terminal that

enables you to deposit cash without any manual intervention of
the branch officer. Now no need to fill deposit slips and stand
in long queues at the cash counter.
DEBIT CARD
Debit card is a substitute for cash cheque book. One can use
for cash withdrawal at the concerned bank’s ATMs, other bank
ATMs and at designated branches of the bank and other banks.
This card can also be used at merchant outlets for purchase and
availing services. This card is governed by the terms and
conditions applicable to respective bank concerned. The bank
36
will initially allocate a Personal Identification Number (PIN) to

the cardholder. The cardholder may select his own PIN (any
four digit number, usually), if he would like to change it.
The card had validity for particular period, within a

particular region / country. Before due date, the car will be
automatically renewed and be a automatically renewed and sent
to the customer’s branch from whom he may collect and
continue the same card.
On presenting the debit card for payment of the purchase

amount, the merchant will swipe the card in the point of sale for
authorization. After a successful authorization, a charge slip
will be generated from the merchant’s machine. On ensuring the
correctness of the amount and signing the charge slip exactly as
appearing on the reverse of the card, the customer must collect
back his card from the merchant along with his copy of is
charge slip. This helps in verifying the amount as appearing in
the banks statement of account.
There are certain cases where the customer may be billed

extra service charges while making use of his card with, say for
example petrol bunks, railways etc. only if the customer agrees
to bear the extra charges, he should proceed with the
transaction. Such service charge together withdraw charge slip
amount will be debited to his operative account.
37
An annual fee at the prevailing rate will be levied at the time

of issuance of the card which will be collected by debiting to
the account. This is subject to changes from time to time. It is to
note that since the signature verification is essential for a debit
card transaction, the customer to be physically present along
with his card at the time of purchase. It cannot be used for
Money Transfer / Telephonic Order/ Internet Transaction.
There is a limit for withdrawal of cash per day using the
debit card. The maximum amount of cash withdrawal may vary
for different banks.
TYPES OF DEBIT CARDS

Visa debit gives you the convenience of a credit card but
accesses funds in your current account rather than having a
credit card. Visa Debit cards can be used to purchase goods or
get cash in all types of merchant environments, from typical
retail transactions to mail or telephone orders to online
transactions.
Maestro is a multi-national debit card service owned by

MasterCard that was founded in 1992. Maestro cards are
obtained from associate banks and can be linked to the card
holder's current account, or they can be prepaid cards. .
RuPay Card is an Indian version of credit/debit card. It is very

similar to international cards such as Visa/Master. National
38
Payments Corporation of India (NPCI) initiated the launch of

RuPay card in India. It was done with the intention of
integration of payment systems in the country
Advantages of debit Card
Convenience- A debit card can be convenient in so many

ways. If you need access to cash and are either far away from
your bank or after bank hours, you can still get cash if you need
it.
Protection- there are several ways that a debit card offers

protection. First, if your cash is lost or stolen, it cannot be
replaced, it is gone. A debit card on the other hand can be
cancelled and a new one ordered. If someone did get the card
or card number before you realize it is gone, it has preset limits.
Budget- When a debit card is used appropriately, it can help

you budget much more than a credit card. Most debit cards stop
allowing transactions once your balance is at zero, which also
can save on fees such as overdrafts.
Disadvantages of debit card
Disputed charges can be more difficult to resolve. Since money

was spent out of your account at the moment of purchase, you
have more risk with a debit card than with a credit card if the
39
item is defective, misrepresented, or never gets delivered to

you.
Some banks may charge you extra fees. There could be monthly
service charges, over-limit fees, per transaction costs, or
penalties for dropping below a minimum required balance that
result from using a debit card.
CREDIT CARD:
Credit cards are introduced for the use of creditworthy

customers. Users are issued with card on production of which
their signature is accepted on bills in shops, establishment,
petrol bunks etc. The banks thereby guarantee to meet the bill
and recover from the cardholder through single account
presented periodically. In some cases, users are required to pay
a regular subscription for the use of the services as sell. An
extension of the scheme allows the repayment of large sum
(subject to a maximum) over a period at interest.
Advantages of Credit Card
Convenience--Credit cards can save you time and

trouble--no searching for an ATM or keeping cash on-
hand.
40
Record keeping--Credit card statements can help you

track your expenses. Some cards even provide year-end
summaries that really help out at tax time.
Low-cost loans--You can use revolving credit to save

today (e.g., at a one-day sale), when available cash is a
week away
Perks--From frequent flier miles to discounts on

automobiles, there is a program out there for everyone.
Many credit card companies offer incentive programs
based on the amount of purchases you make
Purchase protection--Most credit card companies will

handle disputes for you. If a merchant won't take back a
defective product, check with your credit card company.
Disadvantages of Credit Card
Paperwork--You'll need to save your receipts and

check them against your statement each month. This is a
good way to ensure that you haven't been overcharged
High-cost fees--Your purchase will suddenly become
much more expensive if you carry a balance or miss a
payment.
41
Unexpected fees--Typically, you'll pay between 2 and

4 percent just to get the cash advance; also cash advances
usually carry high interest rates.
Teaser rates--Low introductory rates may be an

attractive option, but they last only for a limited time.
When the teaser rate expires, the interest rate charged on
your balance can jump dramatically.
ONLINE BANKING
Online banking facilities offered by various financial

institutions have many features and capabilities in common, but
also have some that are application specific.
The common features fall broadly into several categories:
A bank customer can perform non-transactional tasks through

online banking, including -
o Viewing account balances

o Viewing recent transactions
o Downloading bank statements, for example in
PDF format
o Viewing images of paid cheques
o Ordering cheque books
o Download periodic account statements
o Downloading applications for M-banking, E-
banking etc.
42
 Bank customers can transact banking tasks through

online banking, including -
o Funds transfers between the customer's linked
accounts
o Paying third parties, including bill payments
and third party fund transfers
o Investment purchase or sale
o Loan applications and transactions, such as
repayments of enrollments
o Credit card applications
o Register utility billers and make bill payments
RTGS
Real-time gross settlement systems (RTGS) are specialist funds

transfer systems where transfer of money or securities takes
place from one bank to another on a "real time" and on "gross"
basis. Settlement in "real time" means payment transaction is
not subjected to any waiting period.
NEFT
Neft stands for National Electronic Funds Transfer and is a

payment system which facilitates one-to-one funds transfer.
Like RTGS, Neft also transfers funds from one bank, but unlike
RTGS the settlement takes place in batches (that may include
transfers from various individuals) rather than individually.
43
Questions:
1. What do mean by Commercial banks? State its functions.
2. Explain the primary functions performed by the commercial
banks.
3. Explain the changing role of commercial banks as service
providers.
4. Explain in brief the various types of deposits accepted by
the commercial banks.
5. State the secondary functions performed by the commercial
banks.
6. What are Agency functions of commercial banks?
44

Unit-3: CENTRAL BANKING
EVOLUTION OF CENTRAL BANKING
The central bank is the apex authority in the monetary and

banking structure of every country in the world. It is called as
central bank because it occupies the central position in the
banking system of the country. It has special powers and
authorities which other banks do not possess. It controls,
regulates, and directs the operations of all other banks in the
country. It also controls the volume of credit and circulation of
currency notes to safeguard the financial stability in the country.
The earliest central bank was established in 1656 in Sweden

called the Risk Bank. But the successful working Bank of
England which was established in 1694 stimulated the
establishment of central banking in other parts of Europe and
other countries of the world. Countries like France, Germany,
Russia, Japan were started their central banks during 19th
century. However the evolution of central banking concept is
triggered in the 20th century, due to the rapid development and
growing complexity of banking sector. In India The Reserve
Bank of India is the central bank which was established in 1935.
45
EVOLUTION OF CENTRAL BANK IN INDIA:
In India, the efforts to establish a central bank dates back to

the late 18th century. The Governor of Bengal in British India
recommended setting up a central bank in Bengal and Bihar in
1773 but it was short-lived. Later in the early of 20th century
the Chamberlain Commission in 1914 proposed the
amalgamation of the three Presidency Banks and to establish
the Imperial Bank of India to perform the central banking
functions along with commercial banking. As result of the
recommendations of Chamberlain Commission the Imperial
Bank of India was established in 1921.In 1926, the Royal
Commission on Indian Currency and Finance (Hilton Young
Commission) suggested the establishment of a central bank to
be called as the Reserve Bank of India to regulate banking
activates throughout the country. As the result a Bill was
introduced in January 1927 in the Legislative Assembly, but it
was failed due to differences in opinion regarding ownership
and composition of its Board of Directors. In 1933 a fresh Bill
was introduced and passed in 1934 and came into force in 1 st
January 1935 by the name Reserve Bank of India (RBI) Act.
The Reserve Bank of India (RBI) was inaugurated on 1st April
1935 as a shareholders intuition. After the independence the
RBI was nationalized on 1st January 1949 in terms of the
Reserve Bank of India (Transfer to Public Ownership) Act
46
1948. The RBI has played a crucial role in the nation building
process, particularly in the development of the financial sector.
FEATURES OF CENTRAL BANK:
Central Bank is quite different from other banks of the

country. As it enjoys the important and highest position in the
banking structure it has some distinct features. They are as
follows: -
1. There is only one central bank in the country.
2. It enjoys the monopoly right of issuing notes.
3. The main aim of central bank is to regulate, control and

supervise the operations of other banks in the country.
4. It is owned and managed by the government.
5. It acts as a banker’s bank.
6. It acts as bank, agent and advisor to the government.
7. It does not deal with the public. It means central bank

neither accepts deposits from the public nor it lend to
the public.
8. It frames policies and regulations to control the

activities of other banks.
47
FUNCTIONS OF CENTRAL BANK
The functions of central bank vastly differ from those of the

other banks. As the apex authority of the monetary and banking
structure the central bank has to perform the following
functions to safeguard the interest of the economy of the nation.
1. Issue of currency notes: The central bank has a monopoly

right of issuing currency notes throughout the country.
While doing so it is required to observe certain rules. It has
to issue notes according to the need of industry, trade and
the economy, by avoiding the over issue of notes which
may cause to inflation. Further it has to keep a reserve of
gold, silver, foreign currencies and other eligible securities
against the issue of notes. Elasticity, uniformity, public
interest, and stability in the financial system are the other
basic considerations of issue of currency notes.
2. Bankers bank: The central bank is the bank for all other
banks in the country. Every bank has to deposit a certain
percentage of its total deposits and cash reserve with the
central bank to fulfill the statutory requirement. It enables
the central bank to have a control over the banks and also to
maintain sufficient liquidity and stability in the economy. In
turn this requirement also helps the other banks they can get
the financial assistance from the central bank and further
they get loans from the central bank in the time of
48
emergency. Lastly these deposits help to clear the inter-

bank indebtedness.
3. Custodian of Metallic and Foreign exchange reserve:

The bank has to keep the reserve of Gold, Silver and
Foreign currencies against the issue of currency notes and
to meet the requirement of international payments. Further
it has to maintain the exchange rates and impose the
restrictions and control to maintain the stability in the
economy.
4. Lender of last resort: The central bank acts as a lender of

last resort in the time of financial emergencies. It lends
temporarily to other banks when they are facing difficulties.
It is called lender of last resort because it is the only bank
which helps the other bank at time of financial emergency.
5. Banker, Agent and Adviser to the Government: The

central bank acts as banker, agent and adviser to the
government. As a banker it provides all the banking
services and facilities to the government that a commercial
bank provides to its customers. It accepts the deposits from
the government and lends loan to the government. As a
agent it makes the payment and receives the receipts on
behalf of the government, transmits government funds and
raises public loans for the government. Further it represents
the government in the international institutions. As aadviser
49
the central bank advises the government in farming policies

and regulations about the monetary and economic matters.
6. Credit controller: The central bank acts as controller of

credit created by the commercial banks. With the view of
making profits the commercial banks goes on creating more
and more credit which will increases the volume of money
in circulation which in turn will leads to the inflation. By
using various methods the central bank controls the volume
of the credit in order to inflation.
7. Other functions: In addition to the above functions the

central bank also performs many other functions like
providing loans to the development of agriculture,
conducting research in the monetary and financial matters,
collection of data and publish of statistical information
about banking system and the economy as a whole etc.
MONETARY POLICY:
Monetary policy is a part of economic policy of the country.

It controls the cost and supply of money and credit by adopting
various techniques. It is one of the ways that the government
attempts to have a control over the economy. It plays a
significant role in implementing the economic policy.
Monetary policy means the policy used by the central bank

to control the volume of money in circulation and credit to
50
maintain the stability of rupee. It comprises all monetary and

non-monetary actions and measures taken by the central bank to
control the cost and supply of the money. Through monetary
policy government determines the size and rate of growth of the
money supply, which in turn affects interest rates. Monetary
policy is maintained through actions such as increasing the
interest rate, or changing the amount of money banks need to
keep in the reserves.
DEFINITIONS:
Prof. Harry Johnson defines monetary policy as “a policy

employing the central banks control of the supply of money as
an instrument for achieving the objectives of general economic
policy is a monetary policy”.
As defined by Raymond P. Kent monetary policy is “the

management of expansion and contraction of the volume of
money in circulation for the explicit purpose of attaining a
specific objective”.
According to G. K. Shaw monetary policy is “any conscious

action undertaken by the monetary authorities to change the
quantity, availability or cost of money”.
Paul Einzig defines monetary policy as “it includes all

monetary decisions and measures irrespective of whether their
51
aims are monetary or non-monetary that aim at affecting the

monetary system”.
From the above definitions, it is clear that the monetary

policy deals with those decisions and actions of the government
and central bank which affect the volume of money and the
level of interest rates. It includes such measures which influence
the cost and availability of money and credit in the economy,
the ratio of interest, and viability of money to attain certain
specific objectives.
OBJECTIVES OF MONETARY POLICY:
The objectives of monetary policy differ from country to

country and vary from time to time depending upon the nature
of the economy and the economic problems faced by the
monetary authorities. The primary objectives of the monetary
policy shall include the price stability, financial stability and the
economic growth of the country. However in this transition
period of globalization, driven by the imperfections in the world
economy the main objectives of the monetary policy may
include the followings:
1. Rapid economic growth: It is one of the most important

objectives of monetary policy. Economic growth means the
increase in the per-capita income of the country in the long
run. It implies rising in the standard of living of the people
and reducing inequalities of income distribution. The
52
monetary policy may influence the economic growth by

controlling the real interest rates and through its effects on
the level of investments. By adopting an easy monetary
policy and lowering interest rates the monetary authorities
encourage the investment which promotes the economic
growth. Monetary policy also promotes the growth by
maintaining stability of income and prices and moderating
economic fluctuations and avoiding depressions. The
objective of economic growth can be achieved by adopting
the following steps:-
i) By providing an efficient currency system in the

country.
ii) By increasing the supply of money and credit to meet

the growing requirements of the expanding markets.
iii) By developing the sound banking and financial system

encouraging the expansion of banks, insurance
companies and stock markets.
iv) By encouraging the establishment of new financial

institutions and co-operative institutions to mobiles the
savings of people both in urban and rural areas.
v) By adopting export promotion and import controls to

accumulate the foreign exchange.
53
2. Price stability: Achieving stability in the price is the very

important objective of the monetary policy. Instability in
the price level of goods and services leads to inflation and
deflation which are both harmful to the economy. They
bring uncertainty and fluctuations in the economy. Raising
and falling in the price are both equally dangerous as they
bring unnecessary loss to some and undue advantages to
others and ultimately they results in economic crisis. Price
stability does not mean that the price should be fixed or
constant indefinitely, but it means that the average price
should not fluctuate crossing the normal limits. Individual
prices may change due to change in business cycle like
production volume, demand and other market conditions
but they should not fluctuate rapidly beyond the narrow
limits. The policy of price stability helps in achieving the
economic stability, eliminating the income and wealth
inequalities, and promoting of economic welfare. However
there are certain limitations in adopting the objective of
price stability. They are
i) The concept of price stability is not clear and specific

about determining the satisfactory level of price that
should be stabilized. There is no specific criterion with
regard to the choice of a price level.
54
ii) In a dynamic world like today inventions and

innovations may improve the production methods and
reduce the cost of production, the price stability policy
may bring large profits to producers at the cost of
consumers and workers.
iii) In an open economy where the raw materials and

production techniques are imported the cost of
production of domestic goods and services are at high,
in such situations the policy of price stability may
reduce the profits and discourage further investments.
iv) This concept ignores the realistic requirement of a

dynamic society where the prices need to be dynamic
due to changes in business and economic conditions in
the economy. Further changes in prices are necessary
for allocating the resources in the market economy.
In spite of these limitations, the majority of economists are

in favor of this policy. Price stability can be achieved by
adopting easy monetary policy in a recession period and dear
monetary policy in a boom period.
3. Exchange rate stability: Stability in the exchange rate is

the most important objective of the monetary policy.
Exchange rate means the value of domestic currency in
terms of any foreign currency. Attaining the stability in the
55
exchange rate is the more important due to the following

reasons:
i) Stable exchange rate increases the foreign trade which

in turn promotes the welfare of the society.
ii) Fluctuations in the exchange rates adversely affect

international borrowing and lending and may lead to
speculation actions in the exchange markets.
iii) The frequent ups and downs in the exchange rates may
lead to the loss of confidence in our economy and
international community may drawback the capital
from the country.
iv) Stability in the exchange rate would bring the stability

in the internal price level and production and surely
maximize the social and economic welfare of the
country.
4. Full employment: Achieving full employment is the

foremost objective of the monetary policy. It is an
important objective because unemployment leads to
wastage of potential output and also to the loss of social
standing and self-respect. Moreover it breeds poverty. It
was advocated by Keynes in England and by Hansen in
America. Full employment refers to absence of involuntary
unemployment. Full employment is a situation in which all
56
those who are willing and able to work gets work at the
current wage rates. It does not mean that achieving 100%
employment which is impossible. It simple means having
96 to 97 percentage of employment with the exception of 3
to 4 percentage of unemployment existing in the economy
due to frictional and seasonal factors. Full employment can
be achieved in an economy by adopting an expansionary
monetary policy.
5. Balance of payment equilibrium: Maintaining equilibrium

in balance of payment is now-a-days, an essential objective
of the monetary policy. The achievement of this objective
has become necessary due the rapid growth in the
international trade. Many countries in the world suffer from
the disequilibrium in the balance of payment. The BOP has
two aspects they are “Deficit Balance of payment” and
“Surplus Balance of payment”. The deficit in the balance of
payments reflects excessive money supply in the economy.
Further it leads to the outflow of excess gold and foreign
reserve. As a result people exchange their excess money for
foreign goods and securities. Under a system of fixed
exchange rates, the central bank will have to sell foreign
exchange reserve and buy the domestic currency for
eliminating excess supply of domestic currency. This is
how equilibrium will be regained in the balance of
payments. On the other hand, the surplus leads to the
57
shortage of domestic currency below the existing demand.

Consequently, people acquire the domestic currency by
selling goods and securities of foreigners. They will also
seek to acquire additional money balances by restricting
their expenditure relatively to their income. The central
bank, on its part, will buy the excess foreign currency in
exchange for domestic currency in order to eliminate the
storage of domestic currency.
These objectives of monetary policy are not complimentary

to each other in fact they conflict with each other. If the one
objective is fulfilled the other objective will go away. To attain
one the other has to sacrifice. Hence it is not possible to achieve
all these objectives simultaneously.
CONTROL OF CREDIT
Credit is an outcome of banking activities. Commercial
banks basic function is to lend money to the commercial
activities. In the process of lending they create credit in the
economy. In the developing economy the bank credit has very
significant influence on the level of economic activities. An
increase in the bank credit encourages the business activities
and decrease in the credit discourages the business activities.
Further increased credit enhances the purchasing power of the
money. So it becomes necessary to regulate the bank credit
which is the very important function of the central bank. The
58
central bank adjusts the bank credit in according to the needs of

the economy. When there is need for funds from various sectors
like trade, industry, agriculture, commerce etc. the central bank
encourages the commercial banks to create more bank credit
through various steps. On the other hand it tries to reduce the
volume of bank credit when the inflation increases in the
economy. Thus the central bank is responsible to regulate and
control the bank credit to encourage the development in the
various sectors and also to avoid the inflation and deflation
conditions so as to maintain the stability and growth in the
economy of the country.
Objectives of credit control: The objectives of Credit

control depends upon the economic situation and problems
prevailing in the Economy. In the developing economy the main
objectives of credit control are stabilizing the economy and
prices by avoiding the inflation and deflation conditions. The
various objectives of credit control can be listed as:
a. To maintain stability is internal price level:
b. To maintain stability in exchange rates.
c. To promote economic development.
d. To maintain stability in the money market.
Methods of credit control: The central bank employees

various methods to control the credit created by the commercial
59
banks. These methods can be broadly classified into 2

categories, they are:
a. Quantitative or General credit control methods
b. Qualitative or Selective credit control methods
QUANTITATIVE OR GENERAL CREDIT CONTROL

METHODS: Quantitative methods are used to increase or
decrease the total quantity of bank credit in the economy. They
are relate to the overall size and cost of the bank credit in
common, not concerned to the specific industry or commercial
activity in which the credit is being used. These methods are of
the following kinds:
1. Bank rate policy
2. Open market operations
3. Cash Reserve ratios
1. Bank rate (Discount rate) policy

Bank rate refers to the official lending rate of interest at
which the central bank provides loan to the commercial banks
against the approved securities brought by them or rediscounts
the bill of exchange of the commercial banks. Hence it is also
called as discount rate. The bank rate has been the earliest
method of credit control. It was first adopted and experimented
by the Bank of England as a technique of money control. Now
every central bank has adopted this instrument of credit control.
60
HOW IT WORKS?
According to the bank rate theory an increase or decrease in

the bank rate leads to a raise or reduction in the creation of
credit in the economy. This is possible because change in bank
rate brings about changes in the other rates of interest in the
economy. Suppose, if there is over supply of bank credit in the
economy and the central bank wishes to reduce it and bring
down the price levels, it will raise the bank rate. When the bank
rates are raised borrowing from the central bank becomes
costlier for the commercial banks. Hence they also raise their
rates of interest chargeable on loans and advances. The increase
in rates discourages the business men from borrowing. On the
other hand the business men try to repay their old loans and
advances to the banks. Further, the interest payable by the banks
on deposits will also rise as a result more money will flow to
the bank to earn more income. Thus a rise in the bank rates
decreases the volume of bank credit resulting in reduction of
business activities and fall in the price levels. In contrast if the
central wishes to control the deflation it will reduce the bank
rates and all the commercial banks also cutoff their lending
rates accordingly. This encourages the borrowing by the
business men and stimulates the production and business
activities which in turn increase the employment and prices.
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Conditions for the working of bank rate theory: The

working of bank rate theory is subject to fulfillment of certain
conditions. If these conditions are not fulfilled the effect of
bank rate theory is reduced to the smaller extent. The conditions
are as follows:
a. Close and Direct relationship among bank rate and

other interest rates: There should be close and direct
relationship between bank rate and other interest rates.
There is a need for existence of integrated interest rate
structure in the economy. Changes in bank rate should bring
similar and proper change in the other interest rates.
Otherwise the effect of bank rate will be least.
b. Elastic economic system: The proper working of bank rate

theory requires the existence of elastic economic structure.
The economic structure of the country should be flexible to
adjust with the change in the bank rate. The change in bank
rate should being the adequate change in the costs, prices,
output and profits, etc. the rigid economic structure will
decrease the effect of bank rate.
c. Short term funds market: This another condition required

for the working of bank rate theory. The short term funds
market help to handle the foreign as well as domestic funds
that flow in due to the change in the interest rates followed
by the change in bank rate.
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The bank rate policy a very powerful instrument of credit

control and had widely usage and reputation. It is very delicate
method of credit control. Its success is very much depends upon
the above stated conditions.
Limitations of bank rate theory: the bank rate theory has

some limitations. They are as follows:
i) It is argued that bank rates are ineffective during boom and

depression periods. During boom period investment is
interest elastic. Even if the bank rates are increased
investment will not be limited, because in the boom period
the marginal efficiency of capital is very high and the
business men were very optimistic. On the other hand
during depression the bank rates will ineffective due to the
general psychology of the difference and pessimism among
the business men.
ii) The growth of non-banking financial intermediaries has a

great influence on the working of the bank rate policy. The
change in bank rate affects the rate of interest of the
commercial banks only and the non-banking intermediaries
are not in the direct control of the central bank. Hence the
existence of non-banking institutions is the threat to the
effectiveness of the bank rate policy.
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iii) Now a day the role of commercial banks as supplier of loan

has been decreased by the alternative methods of business
financing like self-financing, public deposits, plouging back
the profits etc. this has been reduced the importance of bank
rate policy.
iv) The dependence of commercial banks on central bank for

loans has also been decreased due to the decline in
rediscounting of the bills by the central banks. So there is
no much influence of the bank rate policy on the interest
rates of the commercial banks.
v) The adoption of other alternative methods of credit control

has also decreased the impact of the bank rate.
vi) Lastly the importance of fiscal policy following the great

depression in 1930 has also responsible for the decline in
the importance of bank rate policy. However in spite of
these limitations the bank rate policy is a significant
instrument of credit control. It gives more good results
when it is used with other tools of credit control.
2. Open market operations
Open market operation is one of the most significant

tools of the credit control invented in the post-war period. Open
market operation refers to buying and selling of government
securities by the central bank with a view to control supply of
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money. Germany was the first country to adopt this as a

quantitative credit control instrument. The open market theory
is that by purchasing and selling the securities the central bank
increases or decreases the cash reserves of the commercial
banks and there by controls the supply of credit in the economy.
When the central bank sells the securities to the banks, publics,
and others there will be flow of cash from the buyers to the
central bank. This will decrease the cash reserve of the
commercial banks as the buyers have to withdraw cash from
their accounts. So a portion of commercial bank’s cash transfers
to the central bank and the lending and financing power of the
commercial banks reduces which in turn leads to the decrease in
the creation of credit. The purchase of securities by the central
bank has the reverse effects. It will inject the more and more
money in to the economy and the commercial banks supplies
more credit following an increase in their cash reserves.
Conditions for the success of open market operations: the

success of open market operation as tool of credit control
depends upon certain conditions. They are
i. There should be an existence of well-developed securities

market. Otherwise the open market operation becomes
ineffective instrument of money control. In the under
developed countries the open market operation has a limited
65
scope because of the absence of well-developed securities

market.
ii. There should not be legal restrictions on the holding of the

securities by the central bank. In some countries there is
restriction by the governments on the holding of the
government securities by the central bank. Such legal
restrictions are obstacle for the success of the open market
operations.
iii. The commercial banks should maintain a definite cash

reserve ratio. It means the cash reserves of the commercial
bank should change according to the purchase and sale of
securities by the central bank. When the central bank sells
the securities the cash reserve of the commercial banks
should fall and when central bank buys the securities the
cash reserve should raise. If the banks does not maintain a
definite cash reserve ratio the open market operation fails
achieve its objective.
iv. There should not be a direct access to central bank by the

commercial banks for financial accommodation. If the
commercial banks have the direct access to the central bank
for their finance needs the cash reserve will not be affected
by the open market operations. In fact in many under
developed countries the open market operation is not
effective because of this reason.
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v. Sometimes the cash reserves of the commercial banks will

not change according to the requirement of open market
operations due to some other factors such as unfavorable
balance of payment, increasedbuying habits of the public etc.
However regardless of the above conditions the open

market operations has proven a superior tool of the credit
control. It has a direct and effective influence on the volume
of money, credit and on the market interest rates. Yet the
open market operation only will not achieve the desire goals
to have better result open market operation will have to
combine with the bank rate policy. This will yield a better
result in controlling and regulating the volume of credit in the
economy.
3. Changing cash reserve ratios
As per the legal requirement every commercial bank should

maintain certain percentage of its deposits as a minimum cash
reserve with the central bank. So the central bank acts as a
custodian of the cash reserves of the commercial banks. The
central bank uses this cash reserve as a tool of credit control. By
the altering the percent of cash reserves the central bank tries to
control the credit creation of the commercial banks. This
method was first adopted by the Federal bank of the United
States and later it was introduced by other countries.
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Working of Cash reserve ratios: the mechanism of

changing cash reserve ratios is that by altering the percentage of
reserve requirements of the commercial banks the central bank
controls the amount of credit creation of the banks and therefore
the supply of credit in the economy. During the inflation the
central bank raises the percentage of reserve requirement in
order to reduce the supply of credit and to reduce the price
level. When the percentage of reserve is raised more cash flows
in to the central bank and the credit creation of commercial
banks falls and hence the size of their credit decreases.
Therefore the increase in the percentage of reserve decreases
the supply of credit by the commercial banks. On the contrary
during the deflation period the central bank decreases the
percentage of reserve to increase the flow of cash in to the
economy. When the percentage of reserve is minimized cash
flows to the commercial banks and this will enables them to
create more credit in the economy. Thus, decrease in the
percentage of reserve increases the supply of credit by the
commercial banks.
Limitations: this method of credit control suffers from the

following limitations.
1. This method has been considered to be a blunt and harsh

instrument of credit control.
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2. As compared to the other methods of credit control it is

considered as inexact and uncertain as regard to changes not
only in the amount of reserves but also the place where
these changes can be made effective.
3. This method affects different banks differently, banks with

a large margin of excess reserve would be hardly affected
where as banks with small excess reserves would be hard
pressed.
4. This method lacks flexibility. It is considered inflexible

because the changes in reserve requirements would not be
well adjusted to meet small or localized situations of
reserve severity or surplus.
5. This method is likely to create panic among the banks and

the investors. Frequent change in percentage of reserve
disturbs the working of the commercial banks and
complicates their book keeping and the way of doing their
business.
In spite of the above limitations this method found to be very

prompt and effective in bringing about the desired changes in
the supply of bank credit. In the words of De Kock, changing
reserve ratio should be used “with moderation and discretion
and only under abnormal conditions.” Yet, the changing reserve
ratio is stronger than the bank rate policy and open market
operations. While the success of bank rate policy and open
69
market operation needs the fulfillment of certain conditions, in

case of changing reserve ratio the results can be achieved by the
stroke of pen. This instrument of credit control has been found
extremely popular among both the under developed and the
developing countries.
The three methods which we have discussed so far have

their own merits and demerits and hence no one method is
perfect and can be successful in attaining the desired goals.
Therefore a skillful and judicious combination of all the
methods is essential in order to realize the set goals of credit
control.
QUALITATIVE OR SELECTIVE CREDIT CONTROL

METHODS: These methods are also called discriminated
methods. Generally the quantitative methods discussed earlier
above affects all the sections of the economy. They affect all
borrowers without making any distinction between essential and
non-essential uses to which credit is being applied, where as the
selective methods of credit control makes distinctions among
essential and non-essential uses of credit and discriminate in
favor of the essential uses. The silent features of these methods
are as follows:
a. They distinguish the bank credit between essential and non-

essential uses.
b. They affect not only lenders also the borrowers of credit.

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c. Only the non-essential uses of credit in brought under the

scope of control.
Objectives of selective credit controls: These methods of

credit control become popular after the Second World War. The
main objectives of these methods are:
1. To regulate the particular sector of the economy without

affecting the economy as a whole.
2. To divert the flow of credit from speculative and

unproductive uses to more economical and productive uses.
3. To discourage excessive consumer demand for certain

products.
4. To control the credit created by the non-banking financial

intermediaries.
5. To stabilize the balance the payment by providing credit to

export industries and by charging high rates of discounts on
import bills.
6. To regulate the supply of consumer credit.
7. To check the investment in unwanted lines of business.
Methods of selective credit controls: There are various

methods of selective credit control. They are as follows:
1. Margin requirements
2. Regulation of consumer credit
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3. Moral suasion
4. Rationing of credit
5. Control through directives
6. Direct action
1. Margin requirements: The banks are required by the law
to keep a safety margin against securities in which they
lend. While lending money against securities the banks do
not lend to the full amount of the value but lend less than
that. If the margin is set at 20% than the bank can lend only
80% of value of the security and keeps a margin of 20%.
Thus, the difference between the market value of the
security and loan lend against the security is called as the
margin. The central bank may direct the banks to raise or
reduce the margin. By raising the bank margin the central
bank could reduce the volume of credit which the
commercial bank can grant and a party can borrow. And by
reducing the margin the central bank could increase the
volume of credit the commercial bank can grant and a party
can borrow. This method was originated in the U.S.A
during 1934 and was developed later on. Margin
requirement is a good tool to reduce the degree and extent
of speculation in commodity market and stock exchange.
2. Regulation of consumer credit: Consumer credit means

the credit given to consumers to purchase certain durable
72
goods. The demand for consumer durable goods is

extremely variable and has a greater influence on the
general price level and on the level of employment and
production. Hence it becomes necessary to regulate the
consumer expenditure on such products to control inflation.
This type of credit control has come into existence due to
the popularity of hire purchase and installment buying.
Such purchases should bring under the control by adopting
this method. The steps involved in this method is as
follows:
a. During the inflation consumption of large number

durable goods is restricted and during the deflation
consumption of such goods is encouraged by removing
the set restrictions.
b. During the inflation the down-payment is kept at a high

percentage of the total value of the goods to discourage
the buying of such goods. During the depression the
percentage down-payment is set at low to encourage
their buying.
c. During the inflation a short period is set for the

repayment of all installments where as in the depression
a long period is set for the repayment of installments.
This method is proven success in U.S.A in controlling

inflationary pressures. In the past-war period it has been
73
extensively adopted in all those countries where the system of

consumer credit prevailing.
3. Moral suasion: Moral suasion implies persuasion and

request made by the central bank to the commercial banks.
At the time of depression the central bank may persuade
commercial banks to provide favorable conditions to
stimulate bank credit and investment. The central bank
directs them to expand their loans and advances, to accept
inferior types of securities which they may normally not
accept and to fix lower margin. On the contrary at the time
of inflation the central bank may persuade the commercial
banks not to apply for further accommodation or not to use
the accommodation already granted for financing the non-
essential and non-productive uses. This method was first
used by the Bank of England. However the success of this
method needs a high degree of co-operation from the
commercial banks.
4. Rationing of credit: It is a method of controlling and

regulating of the purpose of credit is granted by the central
bank. It implies two things. The first is known as variable
portfolio ceiling and the second is known as variable
capital-assets ratio. The variable portfolio ceiling refers to a
method in which a ceiling or maximum amount of loans
and advances for each bank is fixed by the central bank.
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Whereas in the variable capital-assets ratio the central bank

fixes the ratio in which the commercial banks should have
the capital to its total assets. Rationing of credit also implies
the power of central bank to allow only a fixed amount of
accommodation to commercial bank by means of
rediscounting. This method plays an important role in a
planned economy in diverting the financial recourses into
the desired channels according to the planned priorities.
However the criticism of this method lays into conflict with
the function of the central bank as a lender of the last resort.
When the central bank acts as a lender of the last resort it
cannot deny accommodation to any bank even if it has
borrowed in excess of its quota.
5. Control through Directives: Most of the central banks

have the direct power of controlling bank advances either
by statute or by mutual consent between the central bank
and commercial banks. Using this power the central bank
may give directions to commercial banks regarding the
expansion or contraction of credit which the commercial
banks have to follow accordingly. In India the Banking
Regulation Act of 1949 empowered the Reserve Bank Of
India to give directions to commercial banks in respect of
their lending policies, the purposes for which advances may
or may not made and the margins to be maintained in
respect of secured loans. However there is no uniformity in
75
the use of directives to control bank credit. They have taken

the form of written statements, appeals and warnings.
6. Direct Action: Direct action is the direct measures to

control the credit. It is one of the extensively used methods
of selective credit control by almost all banks at some time
or the other. It refers to controls and directions which the
central bank may enforce on all banks or any bank in
particular concerning lending and investment. It may take
various forms. The central bank may refuse to rediscount
the bills or advances loans against securities to those banks
which are not following its policy or directives. The central
bank may charge a penal rate of interest on money
borrowed beyond the prescribed limit.
Limitations of selective credit controls: The quantitative

methods of credit control suffer from the following limitations.
They are:
a. They can control only credit created through bank and

investments made through banks. Hence the non-
banking financial institutions are not covered by these
controls.
b. It is very difficult to find out the purpose for which the

loan is granted is used for that purpose only.
c. It is also difficult to distinguish between the productive

and non-productive uses of credit.
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d. Development of alternative mode of business finance

has reduced the importance of selective controls.
From the above discussion, we can say that these two modes
of credit control qualitative and quantitative are supplementary
to each other. For successful monetary management the central
bank should combine these two methods in appropriate
proportions. However It must be noted that these various
methods whether qualitative or quantitative cannot ensure
perfect credit control in an economy in view of the several
limitations from which they suffer and other complexities
involved in the situation.
Questions:
1. What do you mean by Central Bank? Explain the main
functions of the central Bank.
2. What are the methods of credit control generally adopted
by the central bank? Explain in brief.
3. What is quantitative control? Explain the different methods
of quantitative credit controls.
4. Discuss the role of central bank.
5. How is central bank a banker’s bank?
6. Explain the various methods of qualitative credit control.
7. Evaluate the open market operation as method of credit
control.


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Unit 4:
RELATIONSHIPS BETWEEN BANKER
AND CUSTOMER
The nature of relationship between a banker and customer
depends upon the type of service rendered by the banker.
The services rendered by commercial banks in our

country can be classified into two categories:
(i) Traditional Services
(ii) New Services.

TRADITIONAL SERVICES
These services mainly relate to:
(i) Maintenance of different types of deposit accounts e.g.

savings, fixed and current deposit accounts:
(ii) Grant of advances through cash credit, overdraft and

loan accounts and through purchasing/discounting of
bills;
(iii) Collection of cheques, bill of exchange and other

instruments (inland and foreign)
(iv)Issue of performance and financial guarantees;
(v) Provision of remittance facilities by issue of drafts,

mails transfers, and telegraphic transfers;
78
(vi) Provision of facilities of safe deposit and safe custody;

and
(vii) Purchase and sale of securities.
NEW SERVICES
The banks have introduced a number of new services with

the accent on deposit mobilization and grant of credit to
weaker sections of society during recent years.
Some of the important new services are as follows:
1. Schemes for Deposit Mobilization. A large number of

new schemes have been introduced for deposit mobilization.
Some of these schemes are as follows:
1. Certificate of deposit (CD). The Certificate of Deposit

(CD) is a document of title similar to a time deposit receipt
issued by a bank. However, there is no prescribed interest
rate on such funds and banks have the freedom to issue it at
a discount or face value. It is a bearer document. Hence, it is
readily negotiable. It is being discussed in detail in the next
chapter.
2. Daily savings scheme. Under this scheme, small depositors

are expected to deposit their money with the bank every day.
It is specially meant for daily wage earners. Syndicate Bank
was a pioneer in this field with its Pigmy Deposit Scheme.
79
3. Minor savings scheme. This scheme has been introduced as

an attempt to encourage children to form the saving habit.
Withdrawal facility is also available under the scheme.
4. Ladies department. In order to attract women as depositors

some banks have Ladies Departments. They also conduct
special courses to acquaint the women with banking habit.
5. Monthly interest income schemes. They are fixed deposit

accounts on which instead of annually or half yearly,
monthly interest is either paid by way of cash or is credited
to the current or savings deposit account of the depositor. It
may also be credited to a recurring deposit or festival
deposit account.Banks usually allow loan and refund
facilities before maturity on appropriate terms.
6. Annuity or retirement schemes. Under this scheme,

monthly installments of deposits are collected for a period of
years. The amount inclusive of interest or double the amount
received, in monthly installment, is repaid after a certain
specified period.
7. Farmers' deposit schemes. This scheme is intended for the

benefit of those farmers, who can save once or twice a year,
when their income is received after harvest. Under the
scheme farmers can deposit their money once or twice a
year as and when they receive the proceeds of the sale of
80
their crop and they can withdraw up to 1/10 of deposit every

month.
8. Insurance linked savings bank accounts. The scheme

provides life insurance protection on the life of an account
holder covered under a special Insurance Linked Savings
Bank Account. Persons, not below 18 years of age and not
above 49 years of age. and who agree to maintain specified
minimum balance and who have an independent regular
income by way of salary, professional income, rent,
dividend on shares are eligible for opening an account under
this scheme. Joint accounts can be opened by two persons
closely related to each other but only one of the joint
account holders will be insured. Insurance cover is provided
by the Life Insurance Corporation of India under a special
arrangement with the bank. Besides the insurance benefits,
the depositor has the advantage of getting repayment of the
balance with interest calculated by bank on minimum
balance.
9. Innovative deposit schemes. In order to attract deposits

from the public many banks (particularly foreign banks)
have started innovative deposit scheme over and above the
deposits schemes as discussed above.
81
Some of these deposit schemes are being discussed below.

(i) Multi deposit scheme. In case of a traditional fixed
deposit scheme, if the depositor needs to withdraw even a small
sum. He has to break the entire deposit. Alternatively he can
take a loan or overdraft facility on his deposit. However, he will
pay a higher interest on such loan or overdraft as compared to
the interest that he gets on his fixed deposit. This looks strange
since one is paying interest to use own money.
In case of multi-deposit scheme, a depositor gets free access

to his money. It is so structured that the depositor can use his
money whenever he needs it without losing returns or breaking
the entire deposit or paying interest to use his own money.
The depositor is required to open a deposit account with

minimum amount say Rs. 1,000. His money is treated as
multiple of deposits of fixed sum say Rs. 1.000. He is entitled to
withdraw as many blocks of Rs. 1.000 as he wants. There is no
compulsion to put back the money withdrawn.
For example, if one opens a 3-year multi-deposit account of

Rs. 1.00.000 and decides to withdraw Rs. 10.000 after 9
months, the balance of Rs. 90.000 withdrawn will earn interest
at an attractive rate for these 9 months. As per RBI regulations,
premature withdrawals earn interest at 1% less than the rate
applicable for the period for which the deposit was actually
held.
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The cheque facility is also available for withdrawing the

amount. Some banks permit use of their bank cards for this
purpose. The banks usually do not issue a Deposit Certificate to
the depositor for this purpose. They give a Credit Advice
instead. In the event of its being lost. Its duplicate copy can be
obtained without much difficulty.
The City Bank is the first bank in the country to introduce

multi-deposit scheme.
(ii) Time-wise savings scheme. This scheme gives such

facilities to a depositor that he saves more time than just money.
The salient features of the scheme are asfollows:
(a) The depositor has to open a deposit account with a

minimum amount, say Rs. 10.000.
(b) The depositor's account is credited with interest

regularly at the rate applicable to savings deposit. The
interest is credited on the minimum balance in the
depositor's account between the 10th and the last day of
the month.
(c) The depositor is sent statement of his account every

quarter by post and that also free of charge. Cheque
book facility is also made available.
If In case a depositor is going out of town, he can have

a confident operating his account in his absence
83
(e) The depositor is given access to all branches of the bank

irrespective of the branch where he has opened the
account. The account holder can deposit or withdraw
up to a fixed amount (say Rs. 3,000) at any of the
branches of the bank. Similarly he is also entitled to
free transfer of funds from his account in one branch to
the same titled account in any other branch.
(f) The bank also agrees to pay the routine bills of the
depositor if given instructions.
(g)In case the depositor does not want to receive any bank
related correspondence at his registered address, the
bank at his request can hold his mail to be collected
personally by him.
The Time-wise Scheme was first introduced in India by ANZ

Grindlays Bank.
(iii) Smart-money scheme. This gives the depositor a smart
alternative to his savings account. The depositor can withdraw
upto 75% of his deposit whenever he wants it by issuing a
cheque. On the balance, he continues to enjoy the rate
applicable to fixed deposits as per the directives of the Reserve
Bank.
The Smart-Money Account scheme has been launched in

India by the Hong Kong Bank.
84
(iv) Any time money(ATM) scheme. The Scheme enables

the depositor through ATM card, to withdraw, deposit, check
balances, transfer money and order for cheque book or
statements, at his convenience, day or night, seven days a week.
City Bank and Hongkong Bank are pioneers in this field.
However, now all major banks have started this facility.
Housing Finance. Housing finance, which was earlier the

preserve of a few specialized non-banking housing finance
companies registered with National Housing Bank (established
under National Housing Bank Act. 1987) has now been taken
over by commercial banks. The major banks providing the
housing finance and related facilities include Bank of Baroda.
Canara Bank. Corporation Bank. ICIC1 Bank, Punjab National
Bank and State Bank of India.
Housing finance in developing countries is a social good in

view of its backward and forward linkages with other sectors of
the economy. In India, growth of housing finance segment has
accelerated in recent years in response to the several supporting
policy measures taken and the supervisory incentives instituted.
The Reserve Bank has been promoting the housing sector
through minimum disbursement targets linked to incremental
deposits and also by prescribing lower capital adequacy
requirements. Direct finance to the housing sector up to Rs. 15
lakh is treated as part of priority sector lending. The limit on
85
housing loans for repairing damaged houses has been raised to

Rs. 1 lakh in rural and semi-urban areas and to Rs. 2 lakh in
urban areas. Banks have the freedom to stipulate lending rates
in respect of loans extended to individuals for acquiring
residential properties.
Government of India too has been according considerable

importance to the housing sector in rural areas. Housing in the
rural areas, both of agriculturists and non-agriculturists,
combines the business as well as dwelling needs and thereby
leads to overall rural development. With a view to
supplementing the efforts of Government of India, State
Governments, National Housing Bank (NHB) and banking
sector in augmenting the resources for the rural housing
segment. NABARD included rural housing as an eligible
activity for extension of refinance (investment credit) to the
eligible banks since April 2001. Housing finance is available for
construction of new as well as repairs and renovation of existing
houses in rural areas subject to various terms and conditions
including security/margin requirement as per RBI/NHB
guidelines issued from time to time. In case land is acquired, the
land cost may be reckoned as margin money. Otherwise, cost of
land is not included in the project cost.
The total outstanding credit by scheduled commercial bank

which stood at Rs. 34.654 crores as at the end of March
86
2003.rose to Rs. 51.981 crores as at the end of March 2004,

giving an increase of around 50% in the year ending March
2004 over that of the previous year.
It is to be noted that NPAs in case of housing finance

constitute a very small portion of the outstanding advances,as at
the end of March 2004. The impaired credit or net NPA was
around 1.4% of the outstanding advances.
However, with growing competition in the housing finance

market, there has been a growing concern over its likely impact
on the asset quality.
Expressing concerns about the high growth witnessed in the

housing segment the Reserve Bank has, as a temporary
measure, put in place risk containment measures and increased
the risk weight from 50% to 75% in the case of housing loans.
Automatic extension Deposit Scheme.Depositorsmake a

lump-sum payment and deposits can be automaticallyrenewed
for any term as desired after the specified period.
Personal Loan Scheme. The scheme has been introduced

during the last one decade. Under the scheme individuals, either
employed or engaged in business and having a steady income,
are granted loans to purchase durable goods such as VCRs.
refrigerators. TVs, etc. These are clear loans and banks keep a
87
lien on the goods and reserve the right to seize them, if the
borrower fails his part of the contract.
Loan participation or Consortium Banking. Some of the

larger borrowers are financed by more than one institution on a
participation basis. This is done either because the amount
involved is very large and beyond the resources of a single
institution, or because the amount is beyond what an institution
would like to risk on a single borrower.
Multiple Banking Arrangement. This arrangement is

different from Consortium or Participation Banking discussed
above. In case of this arrangement, the credit requirements of a
borrower are met by more than one bank. Each bank sanctions
credit facilities on its own terms and conditions in respect of
security, interest rate, margin etc. In case of multiple banking
arrangement, the credit appraisal is being done by each
individual bank independently which involves a lot of time and
labor Moreover, the chances for double financing in case of this
type of banking are greater.
Schemes for Financing Agriculture. Banks grant term-

loans to small scale industrial units for expansion,
modernization, renovation and also provide them with working
capital finance. They also grant loans to technocrats,
Technologists, technicians and entrepreneurs to set up small-
scale industrial units.
88
Schemes for Financing Agriculture. A large number of

schemes have been introduced by banks to help agriculturists.
They provide short-term loans for financing seasonal
agricultural operations including purchases of inputs. Medium-
term loans are provided for purchases of equipment such as
tractors, agricultural machinery and pump-sets. Sinking-wells,
etc. Long- term loans are provided for purchase of land and
other assets of long-term durability. Some of the banks have
adopted certain villages for providing credit facilities for all
productive purposes in the villages adopted. Many of the banks
have launched schemes for financing farm-based activities such
as poultry, dairy farming, etc. They have also started providing
loans to fishermen for purchase, construction and
mechanization of boats.
Financing of Road Transport operators and other small

Borrowers. Loans are granted for purchase of vehicles i.e. taxis,
scooters, trucks, rickshaws to road transport operators, on
hypothecation of the vehicle concerned. Self-employed persons
like doctors, lawyers, architects, etc. are also granted loans to
start or expand trade or vocation. Many banks have also
introduced schemes for granting of educational loans to
deserving students for graduate and post-graduate courses in
India and for higher studies abroad.
89
Credit Transfer System. As a result of increased customer

expectations many banks have introduced schemes for free
remittance of funds by their customers, subject to certain
conditions. One of such schemes is "Special Credit Transfer
System" under which any person can remit free of charge
amounts upto a specified limit at a time from one branch of the
bank for credit to any personal account with any of its branches.
Similarly, under another scheme known as 'Special Cheque
Transfer Scheme' Chequesupto a certain amount drawn on any
personal account can be collected, negotiated at par for the
payee or the last endorsee.
Rural or Green Cards. Dena Bank and a number ofother

banks are now offering 'Green Cards' to farmersto provide them
production credit to buy agricultural inputs without repeated
visits to them. Under this scheme of Green card' or Rural card",
an agriculturist with a good track record is issued a card to avail
credit facility within indicated limits for three years. He can
present special cheques issued along with a card at any one of
the designated branches convenient to him. The Branch
Manager after comparing his signatures on the card makes cash
payments or issues a bank draft at par in the name of dealers-of
fertilizer, seeds, pesticides etc. Of course, there is a risk of
misusing this facility, hence, it is necessary that the banks
should issue such cards only to farmers with good past records.
90
Corporation Bank issues two types of Rural cards, one for crop
loans and the other for consumption loans.
Travelers’ Cheques. Travelers’ cheques are issued by

banks to avoid the risk of loss or inconvenience in having to
carry large amount of cash while travelling. These cheques are
issued in suitable denominations and are en-cashable at any
office of the bank
Travel Agency Work.Afew banks have start eel travel

agency work for their clients such as securing of passage,
accommodation in hotels, providing general travel information,
etc. Some banks arrange reservation of tickets for a small
charge for their customers only.
Gift Cheques. These cheques are artistically signed in

attractive folders and covers the purchaser of the gift cheque
need not be an account holder with that bank or any other bank
to avail of that service. The cheque is collectable at par at all the
offices of the issuing banks in India.
Lock-box and Night Safe service: In case of lock-box

service a box is kept at the branch of the bank in which the
customers lodge the cheques and other remittances after the
bank’s office hours. The bank collects them the next day and
passes the necessary entries. It obviates the need for the
customers to go to the bank during the customers own office
hours and thus saves time for them. At some banks efforts have
91
also been made to offer night safe Facilities whereby the

customers, particularly the traders, can lodge then .ash
overnight.
Services after Banking Hours. In order to provide service

to the customers after banking hours some banks have
introduced "Emergency Vouchers Scheme". These vouchers,
which are sold free of any extra charge, are encashable at the
bank's branches during office hours and selected Petrol Stations
after office hours. A number of banks have started morning
and/or evening banking facilities or work 8 to 8 (like Bank of
Baroda) in residential areas.
Other Services. These services include such as tax

assistance, executor and trustee, merchant banking services, etc.
Since these services are of a high specialized nature, only a few
banks provide them.
CUSTOMER
The term customer' has not yet been statutorily defined. In

common parlance the term customer means a person who has an
account with the bank. Old banking experts used to lay
emphasis on the duration for which a person maintained an
account with the bank. For example, according to John Paget,
"to constitute a customer there must be some recognizable
course or habit of dealing in the nature or regular banking
business...it is difficult to reconcile the idea of single transaction
92
with that of a customer". Thus, according to the view, a person

does not become a customer simply by opening an account with
bank he should be in the habit of dealing with the bank i.e. there
should be some measure of continuity in his dealing with the
bank.
The above viewpoint, popularly known as “duration theory”

has now been rejected. In the case of Commissioner of
Taxation Vs. English Scottish and Australian Bank, Lord
Dunedin observed. The word customer signifies a relationship
in which duration is not of essence....A person whose money
has been accepted by the bank on the footing that the bank
undertakes to honourchequesup to the amount standing to this
credit, is customer of the bank irrespective of whether his
connection is of long or short standing'.
The above view was also confirmed by the Kerala High

Court in the case of Central Bank of India Ltd., BonibnijVs.
Gopinathan Nair and others
THEIR LORDSHIP OBSERVED:
"Broadly speaking, a customer is a person who has the habit

of resorting to the same place or person to do business. So far as
the banking transactions are concerned “ he is a person whose
money has been accepted on the footing that the banker will
honour his chequesup to the amount standing to his credit,
irrespective of his connection being of short or long standing".
93
Thus, in order to constitute customer, a person should satisfy

two conditions:
i) He should have an account with the bank, whether

fixed, savings or current.
ii) The dealings should be of a banking nature. These

dealings have to be distinguished from of her dealings
wihch are of a casual nature e.g.occasionally getting a
cheque encashed or purchasing stamps or depositing
valuables for safe custody.
General relationship between a Banker and Customer

The relationship between a banker and its customer can be
put as follows:
1. Debtor and Creditor. The relationship between a

banker and its customer is primarily of that of a debtor and
a creditor, the respective position being determined by the
existing state of account e.g. if the account is overdrawn the
banker becomes the creditor. The money deposited with the
banker becomes his property and is absolutely at his
disposal whether he pays or does not pay interest on it. This
is because the banker undertakes to repay on demand a sum
equivalent to the amount deposited with it. The customer
has no right whatsoever to claim identical coins or notes
deposited by him with the banker. The banker can pay in
any kind of legal tender money.
94
However, this relationship of debtor and a creditor

between a banker and its customer differs from similar
relationship arising out of ordinary commercial debts, in the
following respects:
a) Demand for repayment necessary. The general rule

that demand for repayment by creditor is unnecessary
and applicable in case of ordinary commercial debts,
does not apply in case of banks. The customer must
make an express demand for repayment to make the
debt actually due for payment by the bank. This is
because if the banker oilers money to the customer
without any demand for him. it would amount to
summarily closing the customer's account without
notice. This may damagehis customer credit on account
of possible dishonor of cheques already issued by him.
b) Demand should be made at proper time and place.

The demand for repayment should be made during
normal working hours of the bank on a working day. In
case a banker makes payment during anyother time it
shallnot be takento be a payment in due course and he
may be heldliable to customer for loss.
Moreover, the demand should be made at the branch of the

bank where the customer has his account unless otherwise
agreed. Though, branch forms part of one legal entity, yet the
95
banker’s obligation to repay is confined to the place where the

account is kept.
It is to benoted that under the Limitation Act. The limitation

period for filing a suit for recovery of money payable on
demand is three years from the date of demand. In case of fixed
deposit, normally production of deposit receipt is necessary for
repayment on maturity. Thus, the period of three years will be
calculated from the date on which the deposit receipt has been
presented.
(c) Demand must be made in the proper manner.
The demand for repayment of money should be made

through a cheque or any other written order as per the common
usage among the bankers. A verbal or telephonic demand will
not be taken as a proper demand.
In case a customerhas two or more accounts with the same

branchof the bank, the banker cannot generally combine these
accounts unless he obtains prior approval of the customer or has
given prior notice to the customer. Similarly the customer
cannot also treat two different accounts at the same branch as
one. He cannot draw a cheque on one with insufficient balance
presuming that the banker will pay it since the balance in the
other account is sufficient.
96
2. Trustee and Beneficiary. The banker acts as a trustee for

his customers in those cases where he accepts securities and
other valuables for safe custody. In such cases the customer
continues to be owner of the valuables or securities deposited
with the bank and they are not available for distribution among
the bank's creditors inthe event of bank going into liquidation.
The position of a banker as a trustee or debtor depends upon

the particular circumstances of each case. This has to be viewed
in the light of specific instructions given by the customer
regarding the purpose or use of the documents or money
entrusted to the banker, if specific instructions are given it the
time to deposit of money. The banker is taken as a trustee for
the money and not as debtor. For example, when the money is
paid into a bank with special instructions the banker will be
considered as trustee for the funds and not as mere debtor.
Similarly when a cheque or bill is deposited with the bank for
collection, the banker acts as a trustee of the cheque or bill till it
is collected. But once the cheque or bill is collected and
proceeds are credited to the customer's account, the bank
becomes the customer's debtor. But if before the collection of
the cheque or bill, the bank goes into liquidation such
instrument will not be available for distribution among the
creditors of the bank.
97
In New Bank of India Lid.Vs.PyareLal, the Supreme Court

observed that in the absence of any other evidence, a person
paying into a Bank, whether, he is a constituent of a Bank or not
may be presumed to have paid the money to be held as a
Banker. In other words, when a person dealing with a bank
delivers money to the bank, the intention to create relationship
of creditor and debtor between him and the bank is presumed,
unless this presumption is rebutted. For example, when the
money is paid to the bank to pay the same to other person, who
has no account with the bank and the bank accepts the
instructions and holds the money pending instructions from that
other person, a trust results and the hank continues to hold the
money as a trustee till the instructions for the final disposal of
the money are received from such person.
3. Principal and Agent. Banker acts as the agent of the

customer in those cases where it performs agency functions
such as collection of cheques, bills of exchange, purchasing and
selling of securities, payment of insurance premium etc.on
behalf of his customer.
OBLIGATIONS OF BANKER
The primary relationship between a banker and his

customer is that of a debtor and a creditor. This
relationship imposes the following special obligations on the
banker :
98
1. Obligation to honourcheques
A banker must honour the customer's cheque drawn on him

provided:
(a) He has sufficient funds of the customer.
(b) The funds are properly applicable to the paymentof

such cheque.
(c) Banker has been duly required to pay.
(d) The cheque has been presented within a reasonable

time after the apparent data of its issue, standing against
the accounts of the customer.
The above points have been explained in detail:
a) Sufficiency of funds. Banker's obligation to honour the

customer's cheque will arise only when the banker has
customer's funds at least equal to the amount of the cheque.
While determining the sufficiency of funds, the customer’s
funds which the banker may have in different other
branches, the negotiable instruments which have not yet
been collected etc. are not to be taken into account. As a
matter of fact, as explained below, even the funds which
the customer may have in accounts other than against
which the cheque has been drawn are not to be taken into
account for this purpose.
99
The obligation to honour the customer's cheque may be

extended to the extent of the amount of overdraft which the
banker may have expressly or impliedly agreed to sanction to
the customer. For example, where the banker in the past had
been honouring customer's cheque to a certain limit in spite of
insufficiency of funds and later on asking the customer to make
good the deficiency, the banker should not dishonour the
customer's cheque in a similar case without giving him proper
notice, because in such a case an implied agreement to grant
overdraft will be presumed.
(b) Applicability of funds. The funds must be available for the

cheque drawn. In case a customer has drawn a cheque against
one account, having insufficient funds, the banker cannot debit
it to his other account where he has sufficient funds unless the
customer asks for it. For example, a customer having
insufficient funds in his current account cannot presume that the
cheque drawn by him will be honoured by the bank because he
has fixed deposit with the bank.
(c) Banker duly required to pay. This means that the

cheque is complete in all respects and is presented during
banking hours. The cheque should not be post-dated. A banker
is also not bound to pay a cheque which does not bear the date
of its issue or in the case of joint account, if it is not signed by
all the joint account holders.
100
(d) Presentment within a reasonable time. A cheque is

meant for immediate payment and, therefore, it should be
presented within a reasonable time of its issue. A cheque
becomes stale in case it is not presented within six months of its
issue. It can be renewed for further 6 months.
(e) No Garnishee or Attachment order. A banker will be

justified in refusing payment in case a Garnishee or Attachment
order has been issued against the customer's account with the
bank
2. Garnishee Order
In case a debtor fails to pay the money due to its creditor, the
latter may apply to the court to issue a Garnishee order, on the
debtor's banker. As a result of this order the debtor's account
with the bank is frozen and the banks donot make any payment
out of the account. The creditor, on whose request such an order
is issued is called the Judgment Creditor, whose account is
frozen is called the Judgment Debtor and the banker who has
the customer's account is called the Garnishee.
The Garnishee Order is issued by the court in two parts:
1. Order Nisi. By this order the court:

(a) Asks the banker to freeze the debtor's account.
(a) Asks the banker to explain why the funds in theaccount, so
freezed should not be used for payment toJudgment Creditor.
101
On receipt of such an order the bank should immediately

inform the customer so that he may make the necessary
arrangements for payments of the debts due by him.
2. Order Absolute. This order directs the banker to pay

either the whole or a part of the funds lying in the account
against which 'Order Nisi" has been issued lo (he Judgment
creditor.
Following points are worth noting regarding the Garnishee

Order:
(1) The amount attached.The Garnishee order may

provide for the attachment of the whole or a part of thefunds of
the Judgementdebtor's account with the bank.The bank should
not make payment out of the accountsofreezed in contravention
of thecourt's order otherwise it will be liable for defying the
order of court.
Illustration.A fails to pay his creditor B. a sum ofRs.

6.000.Bbrings a Garnishee Order against the bank where A has
an account having a balance of Rs. 10.000 prohibiting any
payment out of this account. In spite of this the banker
subsequently honours A's cheque for Rs. 5.000. The banker is
liable for defying court's order and will have to compensate for
any loss that he may Buffer on account of non recovery of the
full amount due to him.
102
In case only a part of the sum standing to the credit of the

judgement debtor's account has been attached on account of
Garnishee Order, the banker may transfer that much of amount
to a suspense account and the customer s account may be
permitted to be operated with the balance.
In case certain cheques drawn by the Judgment debtor were

certified as "good for payment" by the banker before the receipt
of Garnishee order by the bank, they can be paid in spite of
subsequent Garnishee order.
ii) Order applicable only against the debt due or accruing

due. The banker is restrained by the Garnishee Order only to
make payment of such debts which have already become due to
the customer or which are not at present payable but for the
payment of which an obligation exists. An amount which is not
a debt due by the banker cannot be attached by such an order.
For example, a banker has agreed to allow an overdraft of Rs.
5.000 to a customer he has overdrawn only Rs. 3.000 so far
remaining Rs. 2.000 cannot be attached by the Garnishee Order.
iii) Banker's claim to set off. In case a banker has a definite

claim against the debtor, it can claim the set off of such claim
against the customer's balance with it in spite of the Garnishee
Order.
103
iv) Amounts not covered by the Garnishee Order.
The Garnishee Order attaches only that balance which is

lying in the Judgement debtor's account at the time when the
order is served on the banker.
If therefore, does not apply to:
a) Cheques, bills of exchange, etc. deposited with the

banker for collection but not yet collected.
b) Sale proceeds of securities etc. of the customer not

collected.
c) Deposits made subsequent to the serving of the

Garnishee Order.
d) Payments made by the banker before serving of the

Garnishee Order.
e) Money held abroad by the Judgement debtor.
f) Securities lying in safe custody with the banker.
(v) Serving of Garnishee Order. Garnishee Order

maybe served on the Head Office of the bank and it will serve
as a notice to all branches where the judgmentdebtormay have
his accounts. However, the Head Office willhave to be given
reasonable time so as to enable it to inform the branches. Any
payment made by the branches before receipt of information
regarding Garnishee Order, will be taken as a valid payment.
104
Consequences of Wrongful Dishonour of Cheques
In case a bank wrongfully fails to honour a customer’s

cheque, it can be held liable by the customer to pay him in
damages. The damages will be not only for the pecuniary loss
that the customer might have suffered but also for loss to his
reputation. From this point of view, customers can be divided
into two categories. (i) Traders and (ii) Non -Traders. In case of
a trader customer, the loss to the reputation of the customer in
the event of wrongful dishonour of a cheque is presumed and he
is entitled to claim besides ordinary damages, substantial
damages for loss of reputation even without proving the special
loss.
In the case of New Central Hall Vs. United Commercial

Bank Ltd. the Madras High Court held as follows:
"In a case where a cheque by a trader-customer is

wrongfully dishonoured even special damages could be
awarded without proof of special loss or damage. The fact that
such dishonour took place due to the mistake of the bank is no
excuse nor can be offer of the bank to write and apologies to the
payees of such dishonouredcheques affect the liability to pay
the damages for their wrongful act."
In the above case, a number of cheques issued by a customer

were dishonoured because the clerk of the bank forgot to give
credit to the customer of the amount deposited by him.
105
It should be noted that amount of damages claimed by the

customer need not depend on the amount of the cheque. As a
matter of fact, reverse is true. It means, the smaller is the
amount of cheque dishonoured, the greater will be amount of
damages. This is because it is presumed that dishonour of a
cheque of a smaller amount will result in a greater loss to the
credit of the customer.
In the case of a non-trader customer, the loss to the

reputation of the customer in the event of wrongful dishonour of
a cheque, is not presumed but will have to be proved by the
customer. Such a customer is therefore, entitled to get only
ordinary damages. He can claim substantial damages for loss of
reputation only when he proves this as a special loss.
Illustration.R was a representative of a group of concerns at

Chennai. He issued a cheque on his personal account to pay off
a telephone bill outstanding in the name of his principals. The
cheque was wrongfully dishonoured by the bank. On account of
non-payment the telephone connection was disconnected by the
telephone authorities. The principals got annoyed on account of
disconnection of the telephone connection and they dismissed
him. On a suit being filed by R, the Madras High Court held
that dismissal was attributable to the conduct of the bank. It
awarded special damages to R to the extent of Rs. 14.000 for
106
the loss of prestige, status and mental agony for dishonour of a

cheque for Rs. 294.40.
Stop Payment of Cheques
A banker may receive instructions from the drawer or the

holder of a cheque to stop payment of the cheque.
The banker should take the following steps when such

instructions are received:
(i) In case, the instructions are received from the drawer

himself, the banker should immediately on receipt of
instruction verify the signatures of the drawer on the letter. If
the instructions are in order and cheque has not already been
paid the particulars of the cheque should beenteredin
"Stopped Cheques Register" and initialed by the Manager, or
the Accountant of the Branch.
(ii)The letter of acknowledgement of receipt of stop payment

instructions should be issued to the customer.
(iii) Proper instructions should be recorded conspicuously in

the related account and "Stop Payment*' rubber-stamp with
the following description should be affixed therein:
107
Stop Payment
Cheque No, Date Payee Amount officer’s initials
Such rubber stamp should be carried over from page to page

till the final disposal of the cheque in question.
Below the last entries the word "Stop" will also be written in
pencil and carried down as further postings are made:
(iv)When a stopped payment cheque is presented, the word

"Stop" should be written prominently in red ink across the
cheque in order to prevent the risk of payment through
oversight, should the chequebe presented again.
(v) Instructions to stop payment of a cheque received by

telegram or telephone or from a third party must be confirmed
in writing by the drawer. Should the cheque be presented in the
mean time, the Branch Manager must use his discretion
whether to pay it or not. If not paid, it should be returned under
the objection “Drawer’s confirmation required”. “Present
against” or with other reason not damaging to the drawer.
Legal Implications: The law recognizes the customer’s right to

give notice to bankers to stop payment of a cheque which he
has issued. The notice should be in writing giving accurate
particulars of the cheque
It should be noted that it is only the drawer of a cheque who

can stop its payment. However, the banker may receive notices
108
from the payees that the cheques art lost or stolen. In such
circumstances, the payee should beasked to inform the drawer
at once so that the latter may instruct the banker to stop
payment. Great discretion has to be exercised by the Branch
Manager if the cheque is so presented before such instructions
are received by him. In such cases, it will be always better for
the banker to postpone the payment pending confirmation.
If the cheque, which is lost is signed by several persons, a

notice from one of them e.g.the executor, one trustee, one
partner is usually acted upon by a banker. Whenthe account is
in several names and the last cheque is signed only by one of
the account-holders or by one partner, a notice from any of the
other holders or partners, give sufficient authority to a banker to
justify him in stopping payment of the cheque.
The drawer has also got the right to cancel his order of Stop
Payment. This must be done in writing ‘andbesigned by him. A
better course, however, would be to ask the drawer to issue a
fresh cheque rather than cancelling his order of "Stop Payment".
If a banker pays a cheque after a Stop Order payment has

been received by him. He will be liable for so doing.
2. Obligation to maintain secrecy of accounts
It is obligatory for the banker not to disclose the state of the

customer’s account with it since such disclosure may adversely
affect the customer's credit and business. This obligation
109
continues even after the customer has closed his account with
the banker.
However, if the following circumstances, the banker

may dispense with the above rule:
(i) Where such disclosure is a legal necessity.

(ii) Where such disclosure is permissible on account of banking
practices, or
(iii) Where such disclosure is in public interest
Each of the cases has been explained in detail in the following

pages.
Disclosure as a legal necessity,in the following circumstances

a banker is under statutory obligation to disclose the state of
the customer's account with him.
(i) Disclosure under the Income Tax Act, 1961.
The Income-Tax authorities have been given powers under
various sections of the Act to ask the bankers to furnish
information about their clients for assessment purposes.
(a) Under Section 131 the Income-Tax authorities have the

same powers as are vested in a court under the code of
civil procedure when trying a suit in respect of
enforcing the attendance of any person including any
officer of a banking company and examining him on
oath
110
(b) Under section 133 the Income-tax authorities may

require any person including an officer of a banking
company to furnish informal ion in relation to such
matters as in view of the Income- tax authorities will be
useful or relevant to any proceedings under the Act.
(ii) Disclosure under the Companies Act, 1956.
In case the affairs of a company are being investigated under

Section 235 or Section 237 of the Companies Act. it is the duty
of all officers, other employees and agents including bankers of
the company to present before the Inspector all books and
papers relating to the affairs of the company.
(iii) Disclosure under an order of the court.
The bank will have to disclose information regarding its

customer's account where the court requires it to do so. In order
to save the banks from inconvenience in those cases where bank
is not a party to the suit but is required disclose information
about customer's account, the bank may produce before the
court only certified copy of the entries made in customer's
account. According to Banker's Books Evidence
ActSuchproduction shall be treated as sufficient evidence in
place of actual presentation of books of account.
111
(iv)Disclosure under Reserve Bank of India Act, 1934.

According to section 45 of the Reserve Bank of India Act
every banking company is under a statutory obligation to
furnish such credit information as the Reserve Bank of India
may require. Similarly, a banking company may also apply to
the Reserve Bank to furnish it with such credit information as it
may require. However, the credit information furnished by the
Reserve Bank shall be kept confidential. The Banks are also
free to exchange credit information mutually among
themselves.
v) Disclosure under the Banking Regulation Act.
According to section 26 of the above Act everybanking

company has to submit a return to the Reserve Bank of India of
all those accounts in India which have not been operated for the
last ten years. The return should also state the amount standing
to the credit of each' account.
vi) Disclosure under the Gift Tax Act.
According to section 36 of the above Act Gift Tax

authorities have the same powers as arc available to Income-tax
authorities under the Income – Tax Act.
vii) Disclosure under Criminal Procedure Code.
A banker, under section 94(3) of the above Act may be

required by the policy authorities to produce books of account
112
before them. Similarly they may under section 5 of the Banker’s

Book Evidence Act. Examine the bank’s books of account for
their investigation.
viii) Disclosure under Foreign Exchange Regulation Act.
The officers of the Directorate of Enforcement and the

Reserve Bank may under section 43 of the above Act, inspect
the books of account of those banks which have.
(ix) Disclosure under the Industrial Development Bank of

India Act, 1964.
According to section29(1A) of the above Act, the Industrial

Development Bank of India can furnish or demand such credit
information to or from other financial institutions (including
banks) as it may consider necessary for the efficient
performance of its functions.
Disclosure as a banking practice,under the following

circumstances a banker may disclose the relevant
information about his customer as a banking practice:
1. Where customer's consent has been obtained.

Thecustomer may himself direct the banker to disclose the
state of his account to his employee or messenger or any
person acting as his agent. In such a case the consent is said
to be expressed. Where the customer furnishes the banker's
name to the third person for reference or where the
113
customer take loans from the banker on the basis of a

guarantee given, it is implied that the customer has
authorised the banker to furnish the necessary information
to such third party on his request.
2. Wherebankersowninterestrequire. For example, where a

banker has to recover money from the customer, the banker
can disclose the information regarding the customer's
account to its solicitors or lawyers, etc.
3. Where credit information is required by the other

banks. The banks exchange credit information about their
customers.
However, the banker should observe the following

precautions while furnishing such information:
(i) The information should be based on the record of

customer's dealings with the banker.
(ii) The banker should only give a general statement

regarding his customer's financial position without
going into figures.
(iii) The information should be given honestly.
In order to avoid their liability the bankers usually gave its

opinion as follows. "The company was a respectably constituted
company, considered good for its ordinary business
engagements. The banker also added that the opinion was given
114
without responsibility on its part or on the part of its officials.

Subsequently the Company went into liquidation. The
advertising firm sued the company's banker for a loss of £
17.000 on the ground that was a breach of duty on the banker's
part in giving them information negligently.
It was held by the House of Lords that the banker owed no

duty to the advertising firm. In general, an innocent and
negligent misrepresentation, gave by itself no cause of action
and that there must be something more than mere mis-statement
in order to fasten the liability on the person making it. The
banker, to whom reference was made, was not expected to make
a detailed enquiry and produce a well balanced report. All that
was expected was that he should answer honestly the question
put to him from what he knows the books and accounts before
him.
(ii) Liability towards the customer. Banker is liable to

compensate for any material loss that he might have suffered on
account of any wrongful disclosure or expression of extremely
unfavorable opinion about him.
RIGHTS OF THE BANKER
1. Right of general lien
Banker has the right of general lien in respect of the amount

due to him by the customer.
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Lien is right of a person to retain that which is in his

possession and which belongs to another, until the demands of
the person in possession are satisfied. Lien gives to a person
only a right to retain the possession of the goods and not the
power to sell unless such a right is expressly conferred by the
statute (e.g. to the unpaid seller) or by custom or usage.
There are two kinds of lien;
(a) Particular lien (b) General lien.
A) Particular lien is attached to some specific goods. It is a

right to retain possession over particular goods in connection
with which the debt arose. It is restricted to those goods which
are the subject matter of the contract and are liable for certain
demands of the person in possession of those goods.
B) General lien entitles a person to retain possession of

goods belonging to another for a general balance of account. It
will entitle a person in possession of the goods to retain them
until all claims of accounts of the person in possession against
the owners of goods are satisfied. It is not necessary that the
demands should arise only out of articles detained under
possession. This right is available only to certain specified
categories of persons such as bankers, factors, attorneys of High
Court, policy brokers and those whose who obtain it by a
special agreement.
116
The banker's general lien entitles there banker to retain in his

possession securities etc., In respect of the general balance due
by the owner to the banker. The right extends to all securities
placed in his hands as a banker by his customer which are not
specifically appropriated.
The banker has an implied right to exercise the right of lien

over the securities in his possession for the debt due by his
customer unless the right has been expressly excluded.
The right is available under section 171 of the Indian

Contract Act provided the following conditions are satisfied
i) The property has come into thepossession of the banker
in his capacity as banker.
ii) The property has not been entrusted for a special
purpose which is inconsistent with the lien.
iii) TheBanker should have lawfully obtained the
possession of the property
iv) There is no agreement contrary to the lien.
(i) Safe custody deposits. The banks generally receive for
safe custody customers valuables e.g. jewellery,
documents, etc. These properties are received by the
banker not as a banker but as a bailee and that also for a
specific: purpose. They are not, therefore, subject to
banker's general lien unless contrary isimplied.
117
(ii) Bills of exchange or other documents entrusted for a

special purpose. In such a case the banker will have no
right of general lien.
Illustration. A sold certain goods to B and drew a bill of

exchange for the amount which B accepted. B sold the same
goods to C and drew a bill of exchange on him for the amount
which was accepted by C.B gave the bill on C for collection to
his bank with the instructions that the proceeds should be
utilised for meeting the bill accepted by B in favour of A and
payable at that bank. The proceeds of the bill accepted by C
after collection were held not to be subject to banker's lien as
they were entrusted for a special purpose inconsistent with the
lien.
Money deposited for a special purpose. In case the

customer has deposited money for a specific purpose with the
banker e.g. purchase of securities and the banker has express or
implied notice of such deposit, such money will not be
subjected to the banker's right of general lien.
Documents or valuable left in the banker hands

inadvertently. The banker does not have the right of lien in
respect of document or valuables left inadvertently by the
customer with him.
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Similarly a banker cannot enforce his right of lien in respect

of property which has not been given to it by way of security
for a loan which has not yet been granted.
(v) Amounts not due. The right of lien is available only in

respect of debts which have become due unless the customer
has become insolvent.
(vi) Trust accounts. In case a customer is operating with the

banker a trust account to the knowledge of the bankers, no right
of lien will be available to the banker against this account for
any amount which the customer otherwise owes him.
Banker's Lien and the Limitation Act The banker's right of lien
is not affected by the Law of Limitation since the Limitation
Act only bars the remedy but not the debts It. therefore, does
not affect the property over which the banker has lien.
2. Right of set off
A debtor has a statutory right to set off any money due by

the creditor to him before the debtor is required to pay the
creditors claim. A banker also has this right which enables him
to set off (of combine) a debit balance in one account of the
customer with the credit balance in some other account.
This right can be exercised by the banker subject to the

following conditions:
(i) There must not be a contract to the contrary.

119
(ii) The customer has been given a formal notice regarding the
banker's intention to exercise the right of set off.
(iii) The capacity of the account holder in all the accounts must
be the same. For example, a banker cannot set off any credit
balance of a partnership account against money due from one or
more of its partners their individual accounts. However, in case
of a sole trader the accounts in his personal name and that of the
firm's name are deemed to be in the same capacity.
(iv)The right can be exercised in respect of debts which have

become due and not in respect of future of contingent debts.
The bank can deal with the balances and securities etc.
in the following manner:
(i) The office account seems to be in reality the personal

account of the advocate. The credit balance of Rs. 2.000 in
this account can. Therefore, be set off against the debit
balance in his personal account.
(ii) The clients' account, as name itself clearly indicates is a

trust account. The account has been opened by the
advocate to deposit money received by him on behalf of
his clients. The personal account of the advocate and the
clients account are not in the same right. The right of set
off will not. Therefore, be available to the banker against
the amount standing to the credit of the clients' account.
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(iii) The Fixed Deposit Receipt of Rs. 5,000 is in the name of

the advocate in his personal capacity. It is going to mature
after 4 months. The banker can. Therefore, exercise its
right of lien till it matures and thereafter its right of set off.
(iv) The relationship between the banker and the advocate in

respect of the shares held by- it which were left by the
advocate with specific instructions to sell, is that of a
principal and an agent. The banker cannot, exercise its
right of lien on such shares.
(v) In case of safe deposit locker, the relationship between

banker and the customer is that of bailee and bailer. The
right of lien on the valuable deposited in the locker is
therefore, not available to the banker.
3. Banker's right of appropriation (Clayton's case)
When a customer owes several distinct debts to a banker and

makes a payment which is insufficient to discharge his whole
indebtedness, there is a problem of appropriating this payment.
In England the law on the subject was laid down in Clayton's
case.1 In India rules regarding appropriation of payments
have been laid down in sections 59 to 61 of the Contract Act. In
this connection it is important to remember the observations
made by the learned judge In Croft VsLumely's case.
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"There is an established maxim of law that, when money

is paid, it is to be applied according to the expressed will of
the payer, not the receiver. If the party to whom the money
is offered does not agree to apply it according to the
expressed will of the party offering it, he must refuse it and
stand upon the rights which the law gives him."
The rule stated above will be clear with the help of the
following example.
The overdraft limit has been sanctioned to the extent of

Rs 20,000 in the name of Raj & Ram
Their account in the Banker’s ledger appears as follows:

Date particulars Withdrawals Deposits Der./cr Balance
Rs Rs Rs
Jan 1 To Dr 20,000
balance
Jan 5 10,000 Dr 10,000
By cash
Jan 8 5,000 Dr 15,000
To cheque
Jan 15 10,000 Dr 5,000
By cash
Jan 20 10,000 Dr 15,000
To cheque
Illustration An overdraft limit has been sanctioned to the
extent of Rs. 20,000 in the joint names of Raj & Ram. Raj dies
on January 4 2000.On this date debit balance in the account
stands at Rs. 20,000. The banker requests for adjustment of the
account on January 12, 2000 when the debit balance in the
account stands at Rs. 15,000. This banker can claim this amount
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only from Ram and not from the estate of the deceased raj. This
is because the debit of Rs. 20,000 was cancelled by two credits
to the account, one on 5th January of Rs. 10.000 and the other
on 15th January of Rs. 10.000. This is what has been provided
by the Clayton's case. It thus works to the detriment of the
banker. In order to protect itself, the banker should close the
operations of the account as soon as it receives the news of the
death of one of the joint account holders. He should have
opened a new account in the name of the surviving account
holder
If this would have been done the new account would have
appeared as follows:
Date Particulars Withdrawals Deposits Der./Cr Balance

Rs Rs Rs
Jan 5 By cash Cr 10,000
Jan 8 To cheque 5,000 Cr 5,000
Jan 15 By cheque 10,000 Cr 15,000
Jan 20 To cheque 10,000 Cr 5,000
In this case though the net amount due is Rs. 5.000 (i.e. Rs.
20.000. -Rs. 15.000) as in the first case, but in such a case for
this amount both Raj estate and Ram are liable.
The Indian Contract Act has laid down the following

provisions with regard to the appropriation of payments.
123
1. Appropriation by the debtor (Sec. 59). Where money is

paid by a debtor to his creditor with the express or implied
intimation that money is to be applied to a particular debt,
creditor, if accepts the payment, must apply the money received
according to the direction of the debtor.If the debtor owes other
debts which are also due and payable and the debtor insists
upon applying the money to the debt of his choice, the creditor's
remedy is to refuse to accept the money if he is not prepared to
agree with the wishes of the debtor. Appropriation is a right
primarily of the debtor and for his benefit. Law on this point is
mandatory and the creditor must refuse to accept payment, if he
does not agree to the specific directions of the debtors as to
appropriation. He may enforce his rights against the debtor in
the ordinary course of law. But in no case he can receive the
amount under protest or alter the appropriation after he has once
accepted it. The debtor's information must synchronies with the
payment.
The debtor may give directions as to appropriation either by

words or by conduct e.g. if the debtor owes two debts one of
Rs. 50 and another of Rs. 80 and pays Rs. 80. it will be
presumed that the latter is the debt intended to be paid.
2. Appropriation by the creditor (Sec. 68). If the debtor

fails to intimate to the creditor at the time of payment as to the
debt towards the payment of which the money is to be applied
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and where several debts are due, the right of application may be
exercised by the creditor, who may apply it to the payment of
any lawful debt at his choice including even the time barred
debts. Creditor may in such cases apply the repayments to the
earliest items which are time barred according to law of
limitation and use for such balance as is not so barred. Creditor
will exercise such a right of appropriation only after the debtor
had the opportunity to exercise his right but has omitted to do
so. Creditor may exercise his right of appropriation until the
very last moment. He need not declare his intensions in any
express terms.
Creditor's appropriation, in such a case, will be revocable till

communicated to the debtor i.e. if he has appropriated the
payment to a certain debt, he can afterwards change it to
another debt provided he has not disclosed the earlier
appropriation to the debtor. But when once an appropriation has
been made and communicated to the debtor, the creditor has no
right to appropriate it otherwise. Appropriation can be made
both to legal and equitable claims i.e. time-barred debts, though
they might not be enforceable by action. But a creditor cannot
appropriate a payment to a demand arising out of a contract
forbidden by law nor does his right to appropriate remain after a
judgment which does not give effect to it.
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3. Where neither party appropriates (Sec.61).Where

neither party makes any appropriation, the payment shall be
applied in discharge of the debts in order of time, whether they
are or not barred by the law in force for time being as to the
limitation of suits. If debts are of equal standing, payment shall
be applied in discharge of thedebt proportionately. Law here is
based onpresumptionwhich may be rebutted by evidence
showing a contrary intention.
4. Payment of interest first. In case of a debt carrying

interest and the debtor has not given specific direction as to the
appropriation of money paid, the rule is to apply the money
inordinary cases, first towards payment of interest and then to
apply the surplus in payment of the principal amount.
5.Right to charge incidental charges, interest, etc,
A banker has the right to charge interest for the advances it

might have granted to its customers. The interest may be simple
or compound depending upon the terms of the contract. Usually
the interest is charged after every six months and the amount of
interest is debited to the customer's account which subsequently
becomes a part of the debt due by the customer. In case of
current accounts the banks charge their customers for incidental
charges to meet the incidental expenses they have to incur for
such accounts.
126
8. Period of limitation. Since the deposits with the

banks are repayable on demand and. Therefore, the period of
limitation begins only from the date on which demand for
payment has been made by the customer. The same principle
holds good in case of fixed deposits too. In case of an
overdraft granted by a banker to its customer, the period will
generally run from the time the overdraft is made use of.
Questions
1. Define the term ‘Banker and Customer’ Explain the

general relationship that exist between them.
2. Banker is a dignified debtor. Why?
3. Explain right of general lien.
4. Explain the duties of a banker.
5. Discuss the special features of relationship between a

banker and customer.
6. Which are the circumstances the banker can disclose

the details of accounts?
7. Which are the conditions should be exercised by the

banker to set off of customer accounts?

127
UNIT 5: CHEQUES
A cheque is a document of very great importance in the
commercial world. It was originally spell as 'check'. It is
Gilbart, who introduced the modern spelling 'cheque' in his
book "Practical Treatise on Banking". The origin of the word
cheque is not clear. According to Gilbert, it has been derived
from the French word 'Echecs’ meaning 'chess'. Others arc of
the view that the origin of 'cheque' can be traced to the notes
issued by the Goldsmiths of London in the early periods. The
modern cheque, anyway, is the outcome of many old trial and
error forms of cheques. For instance, there was an interesting
case where a cheque had been written on the back side of a cow.
Thank God it was not written on the face or back of a man.
Now, all commercial banks issue their own standard printed
forms of cheques.
Once, all the commercial banks were given the privilege of

issuing currency notes. But, later on, this right was withdrawn
and was given to the central bank alone. All the banks at that
time felt that their important right had been taken away from
them and so they could not print any more currency notes. They
had forgotten the fact that when they were given the power to
print cheques, they were only creating money though not a legal
money but an optional one. The commercial banks today enjoy
128
the privilege of printing money in the form of cheques. A

cheque can be printed on a piece of paper. This cheque currency
is not a legal tender money but can be converted into one at any
time. Cheques are drawn against the funds in the hands of the
banker. They act as currency notes in these days of economic
civilization.
Section 6 defines a cheque as '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.
Thus a cheque is also a bill of exchange with three

additional qualifications:
1. It is always drawn on a specified banker.

2. It is always payable on demand.
3. It includes the electronic image of a truncated cheque
and also a cheque in the electronic form.
The cheque currency is very popular in all places of

commercial importance because of its merits. It is cheaper to
print a cheque than a currency note. It economizes on the use of
metallic money which is more costly. Since, a cheque can be
drawn for any amount; it satisfies the cannon of convenience.
Another advantage is that it can be crossed to ensure safety and
since the name of the payee is clearly drawn on the face of it,
wrong payment is impossible. Further, a paid cheque itself acts
129
as a voucher. Hence, there is absence of the necessity to obtain

a separate receipt for each payment made. A cheque, being a
negotiable instrument, can be passed from hand to hand easily
and so it has become a popular mode off payment. A cheque is
the most economical and safe method of money transaction use
the transfer cost is very low and also the possibility of loss is
minimum. Even if a cheque forged, the loss is incurred by the
paying banker provided, the customer is not careless in drawing
it. One is naturally tempted to know more about such a useful
form of money transaction.
Definition of a Cheque: Section 6 of the Negotiable
Instruments Act defines a cheque as follows:
“A bill of exchange drawn on a specified banker and not

expressed to be payable otherwise than on demand." A better
understanding of the concept of cheque entails the definition of
a bill of exchange, since a cheque is nothing but a Bill of
Exchange.
Section 5 of the Negotiable Instruments Act defines a bill of

exchange as follows:
"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." Even though a cheque is
considered to be very similar to a bill of exchange, it is different
130
from a bill in many respects. Chalmer rightly points out that,

"All cheques are bills of exchange but all bills of exchange are
not cheques."
The Salient Features of a Cheque
1. Instrument in Writing: A cheque must necessarily be an

instrument in writing. Oral orders therefore do not constitute a
cheque. There is no specific rule regarding the writing materials
to be used. It may be done by means of a nib, a pencil, a type
writer or any other printed character. So also, according to the
Negotiable Instruments Act writing includes print. There is no
legal breach in writing out cheques with lead pencils also. But,
banker: in their own interest and in the interest of their
customers, allow the cheques to be drawn only in ink. In all
other cases, fraudulent alterations unauthorized by the drawer
are easy to make but difficult to detect.
2. An unconditional order: A cheque is an order to pay and

it is not a request in the indigenous bill of exchange, words of
courtesy with little monetary implications were generously
employed. They are conspicuous by their absence in the modem
cheque. It is not essential that the word 'order' must form a part
of the writing because the word 'pay' itself denotes a command
and words like 'please' or 'kindly' are dispensed with in a
cheque.
131
3. This order must be unconditional: If any condition is

attached to the order, the instrument can no longer be called a
cheque. However, if the order contains a condition that a
particular account for e.g. "No.3" account is to be debited with
the amount of the cheque, the order will remain unconditional.
On the contrary, if any other condition is imposed on the
banker, the instrument will become a conditional one. In
BabinsJunior and Sons Vs. London and South Western Bank,
the following stipulation was made in a drawn cheque. "Pay to
provided the receipt form at the foot hereof is duly signed,
stamped and dated." It was held that the instrument was not a
cheque, since; the payment was made subject to the completion
of the receipt. If the condition is applicable only to the party
who is presenting the cheque (payee) it will not make the
document invalid. In Nathan VsOgdens,the following condition
was put down on the cheque. It was made the foot of the cheque
and not as part of the order, "the receipt at the back here-off
must be signed which signature will be taken as an endorsement
of this cheque.” It was held that such words were directed only
to the payee and the document was an unconditional order.
Strictly speaking, a banker is concerned with any private
request made to the payee. Practically, the banker cannot pay
such a cheque, unless, the condition is fulfilled by the payee.
This point (unconditional order) has given rise to doubts and
even today there is a lack of proper guidance on this point.
132
4.On a specified banker. A cheque is always drawn only on

a particular banker. Usually the name and address of the banker
is clearly printed on the cheque leaf itself. It is advisable that
the full name of the bank is mentioned in the cheque. For e.g.
instead of "IOB" it must be written "Indian Overseas Bank." A
cheque drawn on a particular branch of a particular bank cannot
be encashed at another branch of the same bank unless there is
an agreement between the parties.
5. Payee to be certain: In order that a cheque may be a

valid one, it must be made payable to the order of a certain
specified person or to his agent or the bearer thereof. That is
why Sir John Paget rightly points out that "A normal cheque is
one in which there is a drawer, a drawee banker and a payee or
no payee but bearer." The payee is the person to whom the
amount the cheque is payable. The payee must, therefore, be a
certain person. He may be a human being or an artificial person
i.e., a body corporate, e.g., a company, an authority, trade union
etc.
The payee may be mentioned by his designation. Thus the

payee may .be a Secretary, Director, Principal etc. When a
designation is wrongly mentioned, it will not vitiate the cheque.
A cheque may be payable to two or more individuals, in which
case, all of them must sign the cheque before encashing it. A
cheque can be made payable to alternate persons. For e.g., pay
133
to Kiruba or Raja. A cheque may have a restrictive payee only,

e.g., 'pay to Eby only'. A cheque payable to two or more
persons jointly and severally can be negotiated by the
endorsement of any one of them.
Cheques drawn payable to fictitious payees like 'pay to

wages or bearer' or 'cash or order' will be treated as bearer
cheques as was decided in the case of North and South
Insurance Corporation Ltd. Vs The National Provincial Bank
Ltd. Such cheques, in practice, are paid to the drawer or to his
authorised agent.
6.A certain sum of money:A cheque is usually drawn for a

definite sum of money. Indefiniteness has no place in monetary
transactions. Any phrase like 'less than Rupees One hundred
only' or 'above rupees two hundred only does not give a clear
and concrete idea to the parties concerned and it will render the
cheque invalid. That is why the modern bankers request their
customers to draw the amount both in words and figures, even
though, the Negotiable Instruments Act is silent on this point If
there is any difference between the amount in figures and
words, banker can return the cheque, since, the amount is not
certain. However Sec. 18 of the Negotiable Instruments Act
permits the banker to honor cheque to the extent of the amount
stated in words. When there is norm international relationship, a
cheque can be drawn in the currency of another country, in
134
which case, the rate of conversion is determined by the current

market rate. In that case, the cheque is deemed to be drawn for a
certain sum.
7. Payable on demand':A cheque is payable only on

demand. It is not necessary to use the word 'on demand’ as in
the case of a demand bill. As per Sec. 19 of the Negotiable
Instruments Act, unless a time factor is specified by the drawer,
the cheque is always payable on demand.
8. To be signed by the drawer:The cheque must be signed

by the drawer i.e. the customer. The drawer normally puts his
signature at the bottom right hand corner of the cheque. The
signature must be that of the person in whose name the account
is kept or his authorized agent When the signature differs from
the specimen or it is slightly different the banker need not honor
the cheque.
 Name of your bank which is also called the "drawee
bank" or paying bank
 “Account Payee Only" crossing is a directive to the
collecting bank to pay into the account of the payee
 Payee is the person to whom the cheque is to be made.
Ensure that the name of the person is correctly spelt and
written close to the words "pay to". Draw a line on the
space after the payee's name to avoid alteration
135
 Date of the cheque. To be able to receive payment, the

date must be the current date
 The person who holds and presents the cheque at the
bank. It is advisable to cross out "or bearer" to avoid any
stolen cheque from being paid out
 The payment amount written in words. The same value
will be written in the box beside it. Ensure that the
amount in words and figures are written close to the
words "Ringgit Malaysia" and "RM" printed on the
cheque. Do not leave any gap by drawing a line after
them. Make sure that the amount in words and in figures
tally, otherwise, the bank will return the cheque.
 Your signature as the "drawer" of the cheque
 Serial number of the cheque. Each cheque has a different
number for identification purposes
 Thedrawee bank's state and branch code
 Your current account number
 Thedrawee bank's internal code for account
9. Multi city cheque
In multi-city cheque facility, customer can issue cheques

that are drawn at the base branch in one city and payable
at a branch of the bank at any other city. These cheques
will be treated as local cheques at the remote branch.
136
There will be no collection charges and the amount will be

credited on the same day, as in the case of local cheques.
Bank will not charge any collection fees even if the

cheque is dropped at a bank other than the base bank. The
first 50 cheque leaves will be given free to every customer
and the charge for subsequent issues has been reduced
from Rs 3 to Rs 2 per cheque leaf. Recently, SBI had
introduced ‘minimum balance’ policy and announced a
waiver of that requirement.
Printed Form
All banks follow more or less a common form. They supply
standard printed forms to their customers. The customer should
invariably make use of those cheque leaves and this is one of
the conditions laid down in the Pass Book supplied to the
customers. In England, some of the banks even today
honorcheques when they are drawn on an ordinary slip of paper.
But, Indian bankers do not follow this practice. The drawing of
a cheque on an ordinary piece of paper is not conducive to the
safety of the banker as well as the customer. In fact, the printed
cheque form enjoys more advantages than an ordinary form and
so, all banks supply printed forms to their customers. The
following are the advantages of a printed form.
(1) A printed cheque will naturally conform to the legal
requirements as given in Sec. 5 and Sec. 6 of the
Negotiable Instruments Act.
137
(2) It relieves the customer from the botheration of

preparing a cheque leaf. A cheque leaf must conform to
the specification laid down in the Act and if a customer
is to prepare the cheque leaf, he must cut the paper
accordingly. It is a time consuming and tedious job. A
printed form serves as a ready-made form.
(3) It minimizes the work of the customer. A customer is
expected to fill up only a few columns left blank in the
printed form.
(4) Forgery on a printed form can be easily detected.
Cheque books will be supplied only to established
customers and so, a prospective forger will have to
obtain a cheque form which is not easy. Even if he
manages to get one, he must know the specimen
signature and the serial number must agree. These will
discourage forgery/
(5) Any alteration on a printed form can be found out more
easily than on an ordinary piece of paper.
(6) If a cheque is drawn on a printed form supplied by a
banker, countermanding becomes easier because of the
serial number.
(7) The counterfoils of a printed form serve as a piece of

record.
138
(8) It would reduce bank operating expenses to a large

extent from the point of view of its cost and handling.
According to the Research Council of the American
Bankers' Association "lack of uniformity slows up the
machinery of cheque handling, causes losses of various
kinds. In short it runs up operating costs. Placing the
essential information on every cheque, where it can be
found at a glance, will do away with these split-second
waste of time."
Special Printed Forms
Some banks in the West attract their customers by offering

them a special printed cheque form on which their names and
addresses are printed. This gives them a sort of advertisement,
because, a cheque issued by a prominent business house is
likely to remain in circulation for a long period and change
hands. Thus, the name of the business house is popularized.
Some customers request the bankers to attach a receipt form

to cheque. In that case, the payee will have to complete and
handover the receipt before receiving the amount of the cheque.
Strictly speaking, Customer cannot compel a banker to do so.
But, once the banker agrees to do so, he should follow it
strictly. If a payee refuses to sign the receipt, the banker will
have to dishonor the cheque. In such cases, the question of
wrongful dishonor would not arise. Anyhow, to be on the safer
139
side, the banker should demand the customer to sign an

indemnity bond.
Distinguish between Cheque and Draft
A cheque is an unconditional order directing the banker to

pay a certain sum of money only to or to the order of a certain
person.
A draft is an order to pay money drawn by one office of a

bank upon another office of the same bank for a sum of money
payable to order on demand.
a) Facility
The current account and saving account holders get a
cheque facility.
Draft is issued to anyone even to non-account holders.
b) Purpose
Cheques are used to make payments or to settle transactions.
There is no certainty of payment in the case of cheques as they
can be dishonoured or payment can be stopped.
The main purpose of a draft is to transfer money from one

place to another or to guarantee the certainty of payment to the
payee.
c) Drawer
In case of cheque, the drawer is the customer of the bank.
140
In case of draft, the drawer is the bank itself.
d) Bank charges
The bank may not charge for issuing the cheque book.
The bank charges a nominal fee or commission to issue a

draft.
e) Dishonour
Cheques can be dishonoured for various reasons.
There is no question of dishonouring of draft.
f) Stopping of payment
In case of cheque, the drawer can ask the bank to stop
payment of the cheque even if it is delivered to the payee.
In case of draft, the purchaser of the draft can ask the bank
to stop payment before the draft is delivered to the payee.
g) Popularity
Cheques are very common and popular mode of payment.
Drafts do not enjoy much popularity as compared to

cheques.
h) Clearance
In case of cheque, there is a need for clearance.
In case of a draft, there is no need for clearance, if DD is

drawn on the same bank.
141
i) Parties involved
Three parties are involved in cheque transaction viz., (a)

Drawer, (b) Drawee, and (c) Payee.
Two parties are involved in draft transaction viz., (a)

Drawer, and (b) Payee.
A draft is nothing but an order by one branch upon its head

office or upon another branch to pay a certain sum of money to
the person named in the document.
The draft can also be crossed just like a cheque. Moreover,

the statutory protection as extended to cheques, has been
extended to draft also. But, the holder of a draft differs from the
holder of cheque in many respects.
1. As a rule, a cheque is given only to customers, whereas,
a draft is given to non-customers also.
2. The drawer and the drawee of a cheque must be two
distinct parties, whereas, the drawer and the drawee of a
draft are of the same bank.
3. A cheque can be drawn payable to bearer, whereas, a
draft can be drawn always payable to order.
4. A drawer of a cheque can stop payment of it, but, a
banker cannot I stop payment of a draft.
5. A cheque may be dishonored, whereas, in the case of a
draft a banker cannot avoid liability for any reason.
142
6. A cheque can be used for making local payments,

whereas, a draft cannot be used for making local
payments, except for the payment of government dues.
Drawing up of a cheque:Cheques can be drawn by persons

who have, current or a saving account in a bank. The customer
should exercise reasonable care while drawing cheques. Even a
slight carelessness on his part may make the document invalid.
Moreover, the amount of the cheque should not exceed the
balance available in the account, as otherwise, will be
dishonored. However, if there is any prior arrangement for
overdraft, the cheque can be drawn to that extent, even in the
absence of sufficient funds. A person may also draw a cheque
with the prospect of depositing money before the presentment
of the cheque. If a cheque is drawn in any other case, the drawer
may be convicted of cheating, especially, if it could be proved
that he persuaded the payee to part with his goods, in return for
the cheque, at a consideration.
New Provision under Sec. 138 of the Negotiable Instruments

Act
A new Section 138 has been introduced in the Negotiable

Instruments Act, 1881 which comes into effective from 1st
April 1989 onwards. This new provision recognises the act of
drawing of cheques without sufficient balance in the account of
the drawer as a criminal complaint against that drawer.
143
What constitutes an offence?
To constitute a criminal offence under Sec. 138, the

following conditions must have been fulfilled:
(i) The cheque should have been issued to settle a debt
or for a consideration.
(ii) The cheque should have been presented within a
reasonable period of time i.e., before six months
from the date of issue.
(iii) The cheque in question should have been
dishonored only due to the reason of insufficiency
of funds in the account of the drawer.
(iv) The payee should have made a demand for
payment of that dishonored cheque, through a
written notice addressed to the drawer, within 15
days of the return of the cheque in question.
(v) The drawer should have failed to make payment of
the amount, within 15 days of the receipt of the
notice.
Thus, the criminal offence is deemed to have been

committed only if the drawer of the cheque fails to make
payment within 15 days of the receipt of the notice from the
payee and not from the date of drawing of the cheque.
144
Therefore, the limitation to file a complaint starts from the

16th day after the receipt of notice from the payee as was
decided in the case of
M/s. Mahalakshmi Enterprises, Calicut Vs. Shree Vishnu

Traaa Company and others (1991). The same view was
expressed S. PrithvirajKukkillayaVs. Mathew Koshir (] 991).
In Paramjit Singh Vs. N.C. Job (1990), it was clearly

established that the drawing of the cheque itself does not
constitute an offence and therefore, the fact that, the cheque has
been drawn prior to the date commencement of this section is
baseless. Again in V.S. Krishnan Vs.V.S. Narayanan (1990), it
was held that Sec. 138 applies to cheque drawn before the
section came into force, but, dishonoured subsequent to the
commencement of this new section.
In K.T. KuriyanVs. K.K. Sreedharan, the drawer was relieve

from his liability, since, the notice of dishonour was not given
by the payee within the stipulated period of 15 days.
In PrasannaVs. R. Vijayalakshmi (1993), it was held that

Sec. 138 of the Negotiable Instruments Act is not applicable to
a situation, where the cheque is dishonoured with a
memorandum "A/c closed."
In Anil Kumar SawhneyVs.GulshanRai (1993), it was held

that a post-dated cheque remains a bill of exchange till the date
145
written or" it. It becomes a cheque only from the date shown on
the face of it Therefore, the period under Sec. 138 would be
computed from the date of which appears on the cheque and not
from the date of issue.
When to Make Such a Complaint?
As stated earlier, the offence is deemed to have been

committee from the 16th day after the receipt of notice from the
payee requesting the drawer to pay the amount of the
dishonoured cheque. If the drawer does not pay the amount, the
cause of action 'Starts from the 16th day onwards. The payee, in
such cases, should prefer a criminal complaint against the
drawer, within one month of the date on which the cause o\
action arises under Sec. 138.
Punishment
If the drawer is found guilty of a criminal offence under Sec.

138, he would be punishable with an imprisonment of one year
or a fine to lh6 extent of twice the amount of the cheque
dishonoured or both.
2002 Amendment
In fact a new chapter XVII with new sections 138 to 141

was added to the Negotiable Instruments Act is order to
146
accommodate the above said provisions. With a view to

improving further the efficacy of banking operations and giving
credibility to negotiable instrument, the Negotiable Instruments
(Amendment and Miscellaneous provision) Bill 2001 was
introduced in the LokSabha on Jan. 24, 2001. However, it could
get the assent of the President only on Dec. 17, 2002.
Some of the important features of the 2002 Amendment Act are
the following:
(i) The period within which the payee should give

notice to the drawer has been extended to 30 days
instead of 15 days as stated earlier.
(ii) Stopping payment of a post-dated cheque before the

due date of its payment is denied to be an offence
committed under Sec. 138 of the N.I. Act.
(iii) For offences under Sec. 138 of the N.I. Act., the
maximum period of imprisonment has been
enhanced to two years from one year.
(iv) Again, to speed up the matter, the trials should be

continued, as far as practicable from day to day,
consistently with the interests of justice, until
conclusion.
(v) All efforts should be taken to conclude the trial

within 6 months from the date of filing of the
complaint.
147
(vi) The nominee directors cannot be prosecuted under

this Act for dishonour of a company's cheque. This
applies to non-executive directors also.
It is a well-accepted principle that bounced cheques,

to come under the purview of the Act, should have been
issued its satisfaction of a debt or liability.
Proper Drawing of a Cheque
The drawing of a cheque requires special attention. Any

mistake may lead to the dishonoring of the cheque. The
important items in a chequeare the following:
1. The Data Column: Date is the first item to be filled in by

a customer. The cheque, like any other document in commerce,
must bear -.date. If the date happens to be a Sunday, it will not
affect the validity a cheque. Since a cheque is always payable
on demand, the date seems to be so important. So, even an
undated cheque can be regarded as valid one. However, the
absence of a date can be taken as a ground for e dishonoring of
a cheque.
Therefore, a drawer of a cheque must give it a date before he

parts with it. If the drawer fails to give a date, as per Sec. 20 of
the Negotiable Instrument! Act, any holder can fill up the date
column. But, he must do it within reasonable period of time. In
Griffiths Vs. Dalton, the date was filled in after a lapse of one
148
and a half years from the date of drawing and it was held that
the banker was justified in returning the cheque. According to
the Negotiable Instruments Act, the absence of a date does not
affect the validity of a cheque and its negotiability. However,
without a date, it is difficult to find out whether a cheque has
been outstanding for a sufficiently long period to consider it
stale. So 'date' is an important part of a cheque. Even the
banker, on whom the cheque is drawn, can insert the date. But,
in practice, he does not do so. It all depends on the relationship
between the banker and his customer. Supposing a cheque is
dated 31st June, which does not exist at all, it cannot be paid
before the 30th of June. It is so, because the drawer of that
cheque may countermand its payment on the 30th of June.
2. Ante Dating And Post Dating: The date on a cheque

may be a current one, or an ante one or a post one. A cheque,
which bears a date before the date of issue, is said to be ante
dated. So far as a banker is concerned, the ante dating of a
cheque is of importance only for the purpose of regarding a
cheque as stale. As per Sec. 71(4) (ii) of the Negotiable
Instruments Act, acheque should be presented for payment
within a reasonable period of time after its issue. If it is not
presented within a reasonable period of time, it will be
considered as a 'stale cheque'. It is very difficult to determine
what constitutes a reasonable time. Law is very silent on this
point. In the absence of any legal provision, one should fall
149
back upon custom. As per the banking customin India, a cheque

which is more than 6 months old is considered to be stale,
though, this position varies from country to country. For
instance, in England, a period of one year is allowed.
A cheque which bears a date subsequent to the date of issue

is said to be post-dated. For e.g. a cheque may be drawn on 25th
June, 1991 bearing the date 5th July 1991. It is a clear case of
post-dating. This cheque is encashable only on the 5th July
1991. On that date, the paying banker can honor that cheque,
irrespective of the fact, that it was originally post-dated.:
As stated earlier, in Anil Kumar SawhneyVs. GulsnanRai

(1993), it; was clearly established that a post-dated cheque
remains a bill of exchange till (he date written on it. It becomes
a cheque with effect from the date shownon the face of that
cheque.
3. A Banker And A Post-Dated Cheque: (1) A post-dated

cheque cannot be considered as a valid cheque till the date of
maturity. As per the definition of a cheque, it is always payable
on demand. But a post-dated cheque violates this definition and
so, the banker cannot honor it before the date of maturity.
(2) The banker who pays a post-dated cheque before its date,
disobeys customer's mandate, since, a cheque is nothing but
acustomer's mandate. Row, the banker is answerable to his
150
customer and he will have to bear any loss that result from his
action.
(3) If the banker honors a post-dated cheque before its date,

he has no authority to debit his customer's account until its date.
Thus, the banker may be compelled to reverse the debit entry. It
is so because, when a cheque is & post-dated, it is to be taken
for granted that the customer's intention is that the cheque
should not be paid until the date put down by him.
(4) It is possible that a customer might have issued a cheque

with a post-Hate with an intention to have it countermanded
before that date. In that case, the banker will be in an awkward
position, if he had already paid the postdated cheque. It amounts
to double violation of the customer's mandate.
(5) If a banker makes payment on a post-dated cheque

before its due date, this payment does not amount to payment in
due course. In other words, he does not make payment
according to the intention of the panics as it is evident from the
face of the cheque. Since the payment does not amount to
payment in due course, the paying banker will lose the statutory
protection given under Sec. 85 of the Negotiable Instruments
Act.
(6) Moreover, the prepayment of the cheque would deplete

the balance in the account of the customer, and so, the
subsequent chequeswouldhave to be dishonored for want of
151
funds. In such a case, the drawee bank would be liable to pay

damages for wrongful dishonor. (Smith Vs. Moddox-
RucherKBankLtd. Co.)
(7) Further, the marking or certification of a post-dated

cheque is not at all valid.
Thus, the prepayment of a post-dated cheque exposes the

banker lo the E danger of loss, litigation and disputes, which
might arise, if the drawer should countermand its payment or
attempt to withdraw the funds before that date orif a subsequent
cheque should be wrongfully dishonored. Hence, the banker
should return the post-dated cheque, when it is presented before
that date, with the remark "post-dated".
The 'Payee' Column
The next important column is the 'payee' column. The term

'payee' denotes the person to whom the amount of the cheque is
payable. As per the definition of a cheque, the payee must be a
certain person. A cheque can be made payable to the order of a
specified person or to his order or to the bearerThereof. Sec. 7
(1) of the Negotiable Instruments Act lays down that, when a
cheque is not payable to bearer, the payee must be named. It
follows that, in "the case of a bearer cheque, even if the payee's
152
name is not mentioned, it is still payable to a certain payee,

namely the bearer. The following cases will clarify the position:
1. "Pay to — order" — In this case, these words mean
'Pay to my order'. Hence, even if the blank space is not
filled in, the cheque will be regarded as a valid one.
2. "Pay to______or order" — In this case, doubts as to the
validity of the cheque arise, so long as. The blank space
remains unfilled.
3. "Pay to_______or bearer" — These words denote that
the cheque is
Payable to the bearer, and so, the cheque is a valid one,

notwithstanding the fact that the blank space remains unfilled.
Now, as per the provisions of law. The words 'order' or

'bearer' are no longer necessary to render a cheque negotiable.
The 'Amount Column'
The law does not say anything about the way in which the
amount of a cheque should be indicated. However, the custom
is to indicate the amount both in words and figures — words in
the body of the cheque and figures at] the left hand bottom. It is
necessary that, the amount is very correctly and, legibly written.
If it is not done, either the cheque will be dishonored or a' delay
will be caused in the payment.
153
As a rule, the amount expressed both in words and figures

must agree, failing which, the banker may return it. The word
'ONLY' must be added after the amount in words (e.g. Rupees
five hundred only). The amount in figures should follow a
stroke and a dash (e.g., Rs. 500/-). They will always protect the
drawer. In fact, no blank space should be left before and after
the amount in figures, because, it gives an opportunity for an
unscrupulous: person to increase the 'amount'. If the amount is
expressed only in words, the cheque can be regarded as a valid
one. But, the banker may return such a' cheque, since, it does
not comply with the custom of drawing a cheque. In any case, a
banker should not honor the cheque, wherein the amount has
been expressed only in figures.
The amount should always be written clearly with a pen. If

there is any overwriting or alteration, it should be confirmed by
the drawer himself with his full signature. If the amount is
written with a pencil, there is always the danger of an
indiscernible alteration.
If the amount of a cheque is very large, bankers may write

on the top of the cheque the maximum amount in red ink e.g.,
'not above Rs. 2,00,000. Some banks make use of mechanical
appliances for entering the amount. For instance, protect
graphs-and perforating machines are made use of for this
purpose.
154
The 'Signature Column'
Signature is an essential part of a cheque. Without signature,

the instrument cannot be regarded as a valid one. A banker
usually obtains the specimen signatures of customers at the time
of opening new accounts. A banker should always compare the
signature on the cheque with the specimen signature. If it does
not tally, the banker need not honour the cheque without the
confirmation of the drawer. If the customer happens to be an
illiterate person, the banker can accept the left hand thumb
impression in lieu of his signature. Finger prints cannot be
accepted as signature, because, no two finger prints of the same
hand of the same person are alike. In the case if big companies,
the banker may accept the 'Rubber Stamp Signature"
“Facsimile" signature provided, they have been appended

with authority. If he accepts, he does it at his own risk, because,
the use of such signature Involves the risk of forgery. In such
cases, the best way will be to accept the signature of an
authorized person along with the seal of the company. A
customer, when seriously ill, may draw a cheque and put his
signature, which may not tally with the specimen signature In
such cases, if the banker has knowledge of his customer's
illness, he can honour the cheque after getting a certificate from
a doctor, to the effect, that the person was in possession of his
full faculties at the time of drawing it.
155
Banker's Cheques
The cheque which has been discussed so far in this chapter is

called a customer’s cheque, since it is drawn by a customer
upon a banker. On the other hand, a Banker's cheque is one
which is drawn by a banker upon himself. The concept of
banker's cheque was introduced by the State Bank of India in
1976, on the recommendations of the working Group on
Customer Service in Banks.
Local Payments
Banker's cheques are issued on behalf of customers and non-

customers for facilitating local payments only. So also, for
payment of remittances received, when the beneficiary does not
maintain an account, banker's cheques are issued. Moreover, all
payments of its own exceeding Rs. 10,000/- should be made
only by crossed banker's cheques. Since, drafts cannot be issued
for local payments, banker's cheques have become popular.
They are payable at the issuing branch only and they are
specifically marked 'Not transferable' and 'Payable at par
locally'.
State Bank Gold Cheque Scheme

In order to provide instant encashment facilities for
personal cheques, the State Bank of India has introduced the
above scheme from 01.01.1983 onwards. Gold cheque books
are issued against the special requisition form, on all savings
156
bank and current accounts, which are satisfactorily conducted.

A gold cheque is an order cheque only and it is restricted to Rs.
500/- in the case of savings bank accounts and Rs. 1,000/- in the
case of current accounts. It is called a gold cheque because:
(i) It is en-cashable at any branch in the country and thus

instant encashment facility is assured.
The two terms; 'A truncated cheque' and 'A cheque in the
electronic form' having defined under the Act as under:
i) A truncated cheque" means a cheque which is
truncated during the course of a clearing cycle, either
by the clearing house or by the bank whether paying
or receiving payment, immediately on generation of
an electronic image for transmission, substituting the-
further physical movement of the cheque in writing.
(ii) A cheque in the electronic form' means a cheque

which contains the exact mirror image of a paper
cheque, and is generated, written and signed in a
secure system ensuring the minimum safety standards
with the use of digital signature (with or without
biometrics signature) and asymmetric crypto system.
Thus, all cheques are bills of exchange but all bills are not
cheques.
157
Difference between Bill Of Exchange And Cheque

1. A bill of exchange is usually drawn on some person or
firm while a cheque is always drawn on a bank. In the
case of bill of exchange, drawee can be any one
including a bank. A cheque is generally used for inland
payments but a bill of exchange may be used both for
inland and foreign payments.
2. Drawer cannot hold the drawee liable on a bill of

exchange unless the latter has accepted it. It is essential
that a bill of exchange must be accepted before its
payment can be claimed. A cheque does not require any
such acceptance.
3. A cheque is always payable on demand. A bill of

exchange may be payable on demand or on the expiry
of a fixed period.
4. A cheque is payable immediately on demand without
any days of grace but in the case of a time bill of
exchange, three days of grace are allowed from the due
date, within which the payment can be made.
5. A bill of exchange must be properly stamped. A cheque

does not require any stamp.
6. A bill of exchange must be duly presented for payment

or else, the drawer will be completely discharged. In
the case of a cheque, drawer is discharged from
158
liability only when the delay in presentment has caused

him some loss on account of failure of the bank.
7. Unlike cheque, a bill of exchange cannot be crossed.
8. A cheque drawn "payable to bearer'* on demand shall

be valid but a bill payable on demand can never be
drawn payable to bearer.
9. Unlike bills of exchange, cheques usually are not

intended for circulation but for immediate payment.
10. Unlike cheques, the payment of a bill cannot be

countermanded by the drawer.
Bank draft or Demand draft
Demand draft is drawn by one branch of a bank on another

branch of the same bank instructing the latter to pay a specified
sum of money to a named payee or to his order.
The essential features of a bank draft are as follows:
1. It is drawn by a bank's branch on another branch.

2. It cannot be made payable to bearer.11
3. Its payment cannot be stopped or countermanded.
4. It is always payable on demand.
Magnetic ink character recognition (MICR) cheques/drafts
MICR technology has been introduced by the Reserve Bank of

India for speeding up the cheque clearing process. The scheme
159
has been initially introduced in four metropolitan cities—

Mumbai, Kolkata. Chennai and New Delhi.
This Process involves the following steps:
1. Standardisation of quality/size, printing of cheques or drafts

with suitable space for encoding information at the bottom.
2. Encoding in magnetic ink specific details on the cheque itself,

to facilitate mechanical sorting.
The code line contains the following information:
(i) First six numbers indicate cheque number;

(ii) Next three numbers indicate city code;
(iii) Next three numbers indicate Bank code; and
(iv) Next three numbers indicate Branch code.
After some space, there is number for transaction code i.e.

whether the transaction relates to a savings account or a current
account.
3. Selections and acquisition of different typesofequipments,

necessary in the clearing house and banks for implementing the
MICR technology.
The magnetised portion (i.e. read band) when put under

MICR equipment allows instant readability and identification.
160
MICR cheque(s) should not be folded, pins etc. should be put at

the top left corner of the cheque. The signature of the drawer,
rubber stamp etc. should be affixed above the code line.
A proforma of MICRcheque is given as follows
As discussed above, it is the prime duty of a banker to

honour the cheques of its customers. Besides that, a banker may
also agree to collect cheques of its customers on their behalf.
The liability of a banker, mainly from these two angles, has

been discussed below:
AS PAYING BANKER
The relation between a banker and his customer is that of a

debtor and a creditor. Banker does not enjoy the position of a
trustee of the money deposited with him by the customer.11
Money deposited will always belong to the customer and the
bank will be bound to return its equivalent to the customer or to
any person to his order on demand. Section 31 of the Negotiable
Instruments Act provides "the drawee of a cheque having
161
sufficient funds of the drawer in his hand, properly applicable to

the payment of such cheque must pay the cheque when duly
required so to do, and in default of such payment, must
compensate the drawer for any loss or damage caused by such
default." Thus, a banker should be very cautious both at the
time of honouring as well as dishonouring his customer's
cheques.
Precautions to be taken by a paying banker
In order to protect its as well as the customer's interests, the

paying banker should take the following precautions while
making payment of his customer's cheques :
1. Precaution regarding form of the cheque.The cheque

should be in proper form. The Negotiable Instruments Act does
not give the form of a cheque but most banks in India provide in
their rules of operating accounts that the cheque must be drawn
in the printed forms supplied by the banks and the banks reserve
the right of dishonouring a cheque in case it is not in the
prescribed form. In such cases bank may not honour a cheque
which is not in the prescribed form. In the absence of any such
rule the bank should honour the cheques, though not in proper
form if it happens to be an unconditional order and it fulfills
other conditions.
It has been held that a cheque does not become invalid

merely because it is in the form supplied to some other
162
customers of the bank. The bank should make payment of such

cheques in such circumstances that it seems to be a payment in
due course.
2.Precaution regarding 'date'the banker should refuse to

honour an undated cheque which has been presented to it for
payment. The date need not be filledin by the drawer, it can be
filled by the subsequent holder too.
Post-dated cheques.In case a cheque is post datedi.e. it bears

a date which is yet to come, the bank should honour it only on
or after the date mentioned on the cheque e.g. if a cheque is
drawn on 15th September and bears the date of 15th December,
the cheque is postdated and it should be honoured by the
banker, not earlier than 15th December.
In case a banker honours a post-dated cheque, it runs the
following risks :
(i) The drawer may countermand the payment before the

date mentioned on the cheque and then the banker will
not be entitled to debit the customer's account with the
amount of the cheque.
(ii) The drawer may make the banker liable for

dishonouring of other cheques on account of
insufficiency of funds resulting because of payment of
the post-dated cheque.
163
(iii) In case of insolvency or death of the drawer before the

date mentioned on cheque, the banker shall not be
entitled to debit the customer's account, if it has already
made payment of the cheque.
(iv) The payment of a post-dated cheque shall not be

considered to be a payment in due course and therefore,
the banker shall not be entitled to any statutory
protection if the payment is made to a wrong person.
Stale cheque. That is also termed as an Out-of-date cheque.

It is the custom of the bankers not to pay cheques which are
presented after a certain period has elapsed since the apparent
date of their issue. The period varies from banks to banks. In
some banks it is 3 months while in case of others it is 6 months.
Generally the period of 6 months is more popular. When such a
cheque is presented for payment, the bankers returns it with the
answer out-of-date'.
3. Precaution regarding amount. The banker should see that
the amount mentioned both in figures and words in the cheque
are the same. In case they differ, the amount stated in words
may be taken as correct and the banker may make the payment.
Usually in such cases also, though not correct, the banker
returns the cheque for reference to the drawer. In case the
amount has been stated in words only and not in figures the
banker should pay the cheque. But where the amount has been
164
mentioned in figures, only not in words, the banker should

return the cheque.
4. Precaution regarding 'funds' of the customer. There
should be sufficient funds in the account of the customer for
payment of the cheque. Cheque has to be paid in full and not in
part and therefore, inadequacy of funds will result in dishonour
of the cheque unless the banker has granted loan or advance to
the customer to that extent or more than the amount of deficit.
The cheques should be paid in chronological order of their

receipt by the bank. The date of their issue or serial number is
not significant in this respect. Therefore, in case of inadequacy
of funds, the cheques will be paid in the order in which they arc
received by the bank to the extent the funds permit and the rest
will be dishonoured.
Problem arises in those cases where several cheques drawn

by the customer are received simultaneously by the banker. This
happens when cheques are received by post and funds are
insufficient to meet them. For example, the drawer has only Rs.
400 to the credit of his account and two cheques, one of Rs. 300
and the other of Rs. 400 are received by the bank. In such a case
the usual practice is to honour the cheque of bigger amount
unless it is for tax liability etc. where the cheque is honoured
first though it must be of a smaller amount. In case two or more
cheques are of equal amount, the banker has the discretion to
honour any of them to the extent the funds of the drawer permit.
165
5. Precaution regarding material alteration. The term 'material

alteration' has already been explained in the previous pages.
In case a cheque is materially altered and the banker makes the

payment, he shall be discharged from liability only when he
proves the following :
(i) The alteration could not be detected with reasonable care,

prudence and scrutiny, and
(ii) The payment had been made in due course.
6. Precaution regarding drawer's signature.A banker is

expected to know the signatures of his customers and therefore,
if the drawer's signature has been forged, and the banker makes
the payment it shall not be entitled to debit the customer's
account with the payment. The loss will be borne by banker.
When there is a joint, both or all the signatures on the Cheque
should be genuine. In case any one of the signatures is forged,
the bank should not make payment.
It is also expected from the customers to remain reasonably

vigilant and render all possible assistance to the bank when
asked by it. e.g. if the signatures of the drawer are forged and
the bank seeks the drawer's confirmation about the cheque, the
drawer confirms the issue of cheque without himself verifying
and the bank makes the payment, the bank will not be liable.
However, in all such cases the drawer's negligence should be
166
the proximate cause of the loss. This has been explained in

detail later in the chapter.
7. Precaution regarding mutilated cheques. A cheque is said

to be mutilated when it is torn into two or more pieces. Such a
cheque should not be paid unless the banker is satisfied that
mutilation was unintentional and it also obtains confirmation of
the drawer.
8. Precaution regarding banking hours.The banker should

make payment of only such cheques which have been presented
to it for payment during its banking hours. Any payment of
cheque which was presented after banking hours will not be
taken as a payment in due course and the banker will not be
entitled to debit the customer's account if in the meanwhile the
customer has countermanded the payment or some similar
event had happened.
9. Precaution regarding crossing. If the cheque is a crossed

one, it should not be paid on the counter but through a
collecting banker. A detailed note about crossing has been
given later in this chapter.
When may a banker refuse to honour a customer's cheque:
1. When the balance to the credit of the customer is

insufficient to meet the cheque.
167
2. When the funds are not properly applicable to the

payment of a cheque e.g. when the account was opened
for a purpose other than that for which the cheque has
been drawn i.e. personal cheques cannot be paid out of
trust accounts.
3. After receiving the notice or information of death, the

banker should stop payment of all cheques drawn against
his account. The account will cease to be operative till his
successor or legal representative produces to the bank the
succession certificate or probate of the will or a letter of
administration.
The banker must ensure that the succession certificate covers

the debt due by the bank to the deceased customer. He should
insist on the presentation of the succession certificate otherwise
it may incur some risk.
Illustration.A current account holder died leaving a credit

balance in his account. On insistence by the bank for production
of the succession certificate, the widow of the deceased pleaded
that the amount was part of the joint family property and the
minor sons were entitled to the amount by survivorship under
the Hindu Law and hence no succession certificate was
required. The court held that it was no part of the duty of the
bank to undertake an elaborate investigation of the source of
funds in the account. In the absence of any notice to the bank
168
that the funds formed part of the joint family property, the
demand by the bank for production of succession certificate was
perfectly justified. The court further observed that if the
property proved to be the separate property of the deceased and
he left a will, the bank would be exposed to legal action from
the other persons if it made payment to minor sons without
production of succession certificate. Howeverthe bank would be
free from all liability by making payment in accordance with
the succession certificate.
It should be noted that the banker should not rely on rumors

and should ascertain the news of the customer’s death from
reliable sources.
In case an agent has signed a cheque of his principal, the

banker should not stop payment of a cheque on account of the
death of the agent. This is because the agent was not the drawer.
Similarly, if a person signs a cheque in his official capacity such
as Secretary of a cluboras Principal of a college or as Director
of a company, the death of such a person shall not make the
account in operative. Hence, cheques drawn on such accounts
should be honoured.
In case of insolvency proceedings against the customer, the

banker should stop payment from customer's account as soon as
it comes to know that insolvency petition has been filed against
the customer. On passing of order of adjudication, the banker
169
must close the account and intimate the balance of the account
to the Official Receiver.
In case of joint account holder being declared insolvent, the

banker must stop payment from joint account till their
respective shares are determined.
In case a company goes into liquidation, the powers of the

directors and managerial personnel cease on the commencement
of winding up and they vest in the liquidator. Afterwards no
cheques signed by the directors etc. should be paid by the bank
from the company's account.
4. When the customer has informed the bank about the loss
of the cheque.
5. When the bank comes to know of the defect in the title of

the Person Presenting a cheque.
6. When the bank comes to know that the customer is

applying funds in breach of trust.
7. When the bank receives notice of an assignment by a

customer of his credit balance.
8. When the customer closes the account before the cheque

is presented for encashment.
9. When the cheque is post-dated and is presented for

payment before its ostensible date.
170
Answers in case of dishonouredcheques
In case a cheque is dishonoured, the bank should return it

with a slip disclosing the reason for dishonour. Most bank have
such slips tailed as Return Memos' printed and they tick off the
most appropriate answer.
Some of the reasons for dishonour and the abbreviations

used by the bankers are explained below:
1.Refer to drawer (R.D.).This means that the holder should

refer to the drawer for payment. The bank puts such a note in
those cases where the drawer does not have sufficient funds
with the bank or there is reasonable ground for suspecting that a
cheque has been tampered with. It will be more appropriate for
the bankers to use these words in the latter case.
2. Not Sufficient. No effects' or 'No funds' (N.S..N.E., or

N.F.). These abbreviations are used in those cases where the
drawer does not have sufficient funds with the bank. Generally
in such a case in actual practice the words 'R.D.' are used.
3. Not arranged for (N.A.).This phrase is used in a case

where payment of cheque will result in an overdraft which has
not been approved by the bank.
4. Endorsement irregular (E.I.).This phrase is used where

endorsement is not in order, e.g., the spelling of the payee's
171
name as given on the face of the cheque differs from that in the
endorsement.
5. Effects not cleared (E.N.C.). This phrase is used in those

cases where the drawer has given certain cheques, drafts, etc.,
for collection and the same have not been collected yet and.
therefore the banker is not in a position to meet the cheque
drawn on account of insufficiency of funds in the drawer's
account at the moment.
6. Drawer deceased (D.D.).Where the banker receives

intimation that the drawer has expired and. therefore, it has
stopped payment of cheques.
7. Words and figures differ (W. & F.D.).This phrase is

used in cases where the reason for dishonour is differing of
amount of cheque in words and figures.
Banker's liability in case reply is not appropriate
A banker should take utmost precaution while sending its

reply in respect of a dishonoured cheque. In case the banker
states an inappropriate reason which injures the reputation of
the drawer unnecessarily, the drawer can make the banker liable
for damage.
Illustration.A instructs his bankers Union Bank of India,

Kamlanagar to close his account and transfer the balance to
Karol Bagh branch of the bank. After the transfer of balance, a
172
cheque drawn by A is presented at the Kamlanagar branch. In

such a case the Kamlanagar branch should return the cheque
with an appropriate reply such as, "Account transferred to Karol
Bagh branch." If the Kamlanagar branch returns it with a reply
such as 'Refer to drawer", it will indicate as if the drawer has no
sufficient funds. A may sue the bank is such a case for loss to
his reputation.
Duty of the payee.It is expected of the payee to the cheque to

present it for payment to the bank at the earliest opportunity
without any unreasonable delay and before the relations
between the drawer and the banker alter to the prejudice of the
drawer. Drawer of cheque shall be discharged from liability to
the payee if the bank on the part of the payee if unreasonable
delay in the presentation of the cheque for payment to the bank
has caused any damage to the drawer e.g. on account of failure
of the bank. Drawer shall no more be liable to the payee to the
extent of damages so caused to him. However, the payee shall
rank as creditor of the bank to the extent of such discharge.
Drawer's remedy. In those cases where a bank wrongfully

refuses to honour a valid cheque drawn upon it by its customer,
who had sufficient amount to his credit in the bank, the drawer
may bring about a suit for damages against the bank for breach
of contract as well as for loss of reputation or injury caused to
his credit. However, payee to the cheque does not get any cause
173
of action against the drawee bank, for there is no provision of

contract between the two except when the bank had admitted to
the holder that the customer has sufficient money in his account
or contracted with him to pay it when presented for payment. A
cheque is not an equitable assignment of the drawee's balance
and accordingly a third party has no right of action against a
banker for refusing to honour it. He can hold only the drawer of
the cheque liable for damages for breach of contract.
When is bank discharged? A bank is discharged from

liability by making payment of the amount of a bearer cheque in
due course to the holder thereof (Sec. 78). A banker in the case
of a bearer cheque is not expected to enquire into the title of its
holder. In case of order cheques also, a bank shall be discharged
from liability if it pays the amount of the cheque in due course
to the payee or to the apparent endorsee thereof. Bank cannot be
held liable if the endorsement subsequently comes out to be a
forged one and it is proved that the person to whom the
payment has been made had no right to receive it. This is
because a banker cannot be expected to know the signatures of
all and every endorser.
Illustration.A draws on K bank a cheque payable to R or

order and forwards to his agent. S with instructions to hand it
over to R. S forges R's endorsement and collects payment of the
cheque. Can A recover the amount of the cheque from the bank
174
No. Banks cannot be expected to know the signatures of all

the endorsers and therefore, payment of the amount of a cheque,
having forged or unauthorized endorsement. If made in due
course will discharge the bank horn liability. Bank can debit the
account of the drawer of the cheque i.e. his customer.
However, a banker cannot be discharged from liability even

for payments in due course of those cheques where the
signatures of the drawer (depositor) were forged except in two
cases:
a) Where it can show that forgery was intimately

connected with the negligence of the drawer and was
the proximate cause of the loss.
b) Where the customer if found to be guilty of

unreasonable delay in informing the bank about the
forgery of his signatures after he comes to know of it.
In both the above cases the customer or drawer of the cheque

shall not be allowed to dispute the payment of the cheque by the
bank.
Illustration.A's wife forged his signatures on 40 cheques on

M bank and cashed them. A did not inform the bank
immediately upon discovery of forgeries. Subsequently, when
his wife again demanded the money for the same purposes for
which the cheques had been previously drawn, he stated his
intention to notify the bank with the result that the same night
175
the wife committed suicide. A brought an action against the

bank claiming to be credited with the amount of forged
cheques. It was held that the action could not be sustained as his
continued silence operated to prevent the bank from taking its
remedies against the wife.
A customer is expected to be reasonable careful while

issuing cheques so that it may not mislead the bank. Besides,
that if a cheque is drawn so negligently that it may facilitate
forgery by alteration of the amount payable, any loss caused by
such an alteration will fall on the customer of the bank,
provided the bank had made payment of the cheque in due
course.
Illustration.A draws a cheque on his bankers for Rs.

50.carelessly leaving a blank space before the words and
figures, fifty". The holder fills it up as a cheque for Rs. 550, and
obtains payment. The banker can charge A with amount so paid.
In the case of crossed cheques, banker shall be discharged

from liability after payment of the cheque in due course and
according to the implication of the type of crossing which the
cheque bears upon it.
'Payment in due course' in all the above cases implies

payment made by a bank in good faith, without negligence, and
without reasonable ground to suspect the title of the holder. It
must always be made according to the apparent tenor of the
176
cheque and in accordance with the instructions of the drawer

which have already been communicated before the issue of the
cheque, or are communicated to the bank after the issue of the
cheque but before its payment.
Illustration.A draft was purchased from X branch of a bank

drawn on Y branch. It was intercepted during transit. The
interceptor got it presented through a collecting banker with a
forged endorsement in his favour purporting to be that of the
payee—Hurry DassAuddy. The collecting banker cashed it
from the Y branch, the paying banker.
The following further facts were proved.
(i) Hurry DassAuddy was the name of a firm. The account

was operated by its sole proprietor PW. Y branch, the paying
banker knew this fact well since PW had his account with it in
the name of Hurry DassAuddy.
(ii) The endorsement on the draft by the first payee Hurry

DassAuddy was an endorsement in full. The name of the
endorsee EstmittertkCo.was in rubber stamp impression. The
endorsement by the Esmitter& Co. was in the same rubber
stamp.
The Court held that the endorsement in the name of
Esmitter& Co. by Hurry DassAuddy should have normally
aroused suspicion in the mind of a careful banker because how
could Hurry DassAuddy could get hold of the rubber stamp of
177
Esmitter& Co. Moreover, the same stamp had been used in two
endorsements, which should have aroused the suspicion of the
paying banker who knew it well that it was only a firms. Thus,
the paying banker did not succeed in proving good faith and
absence of negligence on its part and. therefore was held
responsible for loss.
Payment of cheque by mistake

In case the payment of a cheque has been made by the
drawee bank under a mistake, it can recover from the payee
provided the payee's position has not been altered to its
prejudice before detection of mistake. This was held by the
Calcutta High Court in the case of United Bank of India v. M/s
A.T. Ali Hussain Co. & Others.
The facts of the case were as under:

(i) M/s A.T. received a cheque of Rs. 5.200 from a customer
for purchase of certain goods. They sent the cheque to
Union Bank for collection. On hearing from the Union
Bank that the cheque has been realised, they delivered the
goods to the person who gave the cheque.
(ii) The drawee bank. United Bank of India, subsequently
found that the drawer's signatures on the cheque had been
forged. It filed a suit for recoveiy of the amount from the
Union Bank/Messers AT.
178
(iii) The Court found that the forgery of the signature on the
cheque had been done so skillfully that it could not be
detected even by a trained eye. Even the authorised
signatory found it difficult to deny his signatures on the
cheques.
(iv) The Court, therefore, held that the payment of the cheque
was made under a mistaken belief that the instrument was
genuine.
(v) According to section 72 of the Indian Contract
Act.Aperson to whom any money has been paid or
anything delivered by a mistake must repay or return it.
However, this rule is governed by the Doctrine of Equity,
according to which no one should be enriched unjustly. It
means if the payee has been enriched unjustly, he should
pay the money back. However, in the absence of any
such enrichment, he will not be liable for repayment.
(vi) On the basis of the above principle, the court held that
Union Bank of India was not liable to pay the money
since it had passed on that money to M/s A.T., the payee.
Since M/s A.T. had delivered the goods to the person
who delivered the cheque the position had changed to
their prejudice after the payment was made by the paying
banker. They were, therefore, also not responsible to
repay the money to United Bank of India.
179
AS COLLECTING BANKER
A bank may undertake to collect a cheque either as a holder

for value or merely as an agent to the holder thereof. In the
latter case the bank incurs a fiduciary responsibility to account
and pay the money to his principal or to anyone else according
to his direction. Banker shall continue to act as an agent of its
customer till the amount of the cheque has actually been paid
off. If the customer has permitted the bank to use the collected
money for its own purpose at the present, and to repay an
equivalent amount to him at a later date fixed, or otherwise
determined, the contract of agency between the customer and
the banker will come to an end. Customer will become creditor
of the bank. Bank will no more be holding the amount in trust
as an agent for the customer i.e. the principal. During the
continuance of the agency, the money collected shall be held by
the bank in a fiduciary capacity and in the event of the
insolvency or winding up of the bank it may be recovered so
long as it can be traced to a specified fund.
Section 131 provides protection to a collecting banker who

receives payment of a crossed cheque of draft on behalf of his
customer.
In case the customer's title to the cheque is defective, the

banker will not be liable to the true owner of the cheque for
receiving payment if the following conditions are satisfied :
180
1. The collecting banker acts in good faith and without

negligence. Examples of negligence are opening of account
without proper introduction, not verifying correctness of
endorsements, no proper enquiry in doubtful cases, failure to
take note of negotiable crossing' collection of 'account payee'
cheque for person other than payee mentioned therein etc.
2. The collecting banker receives payment of the crossed

cheque for a customer. The protection under this section is
not available if the person for whom the banker collects
payment is not its customer.
Customer means a person who has an account with the bank

or some similar relation.A person who does not maintain any
account with a bank but is merely in the habit of cashing
cheques across the counter is not a customer.
3. The banker is acting as a mere agent for collection and not

in the capacity of a holder.
4. The protection is available only in case of a crossed cheque

and the crossing must have been made before the cheque
comes into the hands of the collecting banker.
The protection is also available to the collecting banker

when it credits its customer's account with the amount of a
cheque or a draft before it receives payment of it.
181
Duties of a collecting banker
The duties of a collecting banker towards its customers were

well summarised by the supreme Court in the case of Keshari
Chand JaisukhlalVsShillong Banking Corporation,as follows :
"A banker entrusted by his customer with the collection of a

cheque is bound to act according to the directions given by the
customer, and in the absence of such directions, according to
the usages prevailing at the place, where the banker conducts
his business and applicable to the matter in hand. The banker is
also bound to use reasonable skill and diligence in presenting
and securing payment of the cheque and placing the proceeds to
his customer's account and in taking such other steps as may be
proper to secure the customer's interest."
Thus a collecting banker has the following duties towards its

customers:
1. Due-care and diligence in the collection of cheques.
A collecting banker should exercise due care and diligence

in collection of cheques entrusted to it for collection by its
customer. It must present them for payment within a reasonable
time to the drawee bank. According to banking customs if the
collecting and paying bankers are in the same place, the
collecting banker should present it by the next day. In case they
are at different places, the cheque must dispatch for collection
182
by the day next after the day on which it was received by the
collecting banker. In case the collecting banker fails to present
the cheque, within the reasonable time, and in the meanwhile
the drawee bank fails, the collecting banker will be responsible
to the customer to the extent of the damage.
However, the collecting banker will not be liable for any loss
to the customer in case it has not been negligent in performance
of its duties as was decided in the case of BoothlingamVs India
Commercial Bank Ltd.
Illustration.Your customer gives you for collection a

cheque for Rs. 10.000 drawn on Bank of Dharampur Ltd.
Dharampur. Since you have no branch there you send the
cheque to that Bank, with a request to remit the amount by a
draft on a bank in Mumbai. After you receive the draft from
them and before it is presented for payment it is learnt that Bank
of Dharampur Ltd. has failed and hence the draft cannot be
paid. Who will bear the loss? What are your liabilities as a
collecting banker? Give reasons.
The collecting banker is not liable since it has followed the

normal procedure and did not exhibit any negligence in its
duties. Loss should fall on the customer on whose behalf the
collection was made.
2. Serve notice of dishonour. In case the cheque is

dishonoured, the collecting banker must within a reasonable
183
time give notice to the customer so as to enable him to take

action against the prior parties. In case the banker fails to serve
notice of dishonour to the customer, it will be liable to the
customer for any loss that the customer might have suffered on
account of such failure.
In case a cheque is returned by the drawee bank for

confirmation of endorsement, it is not dishonour, but in such
case also the notice should be given to the
customer,ifsuchnotice is not given and the cheque is returned
second time and the customer suffers a loss, the collecting
banker may be held liable for that loss.
RBI's instructions regarding collection of cheques
The Reserve Bank of India has issued the following

instructions to all the commercial banks in respect of collection
of cheques :
1. Immediate credit for outstation cheques. The banks have

been instructed to give immediate credit of outstation
cheques up to Rs. 5.000 to its customers. Such credit
should normally be given in respect of one cheque at a
time, if there is no adverse experience in the past and
the customer has been maintaining the account for
minimum period of say six months or more. In case such a
cheque is dishonored, the bank has been advised not to
charge interest for the period between the date of creditor
184
of the outstation cheque and its return. Similarly, if the

cheque has been credited to savings bank account, no
interest will be allowed on the amount so credited if the
cheque has been returned unpaid. The bank may charge
interest at the normal rate in the event of dishonor of
thecheque from the date of dishonor till reimbursement
of money is made to the bank.
2. Interest for delay in collection of out station cheques. The

RBI requires the banks to pay interest at
2% above the rate applicable to Saving Bank Deposits,
(i.e.at present 5% p.a.) for delay in collection of outstation
cheques as follows :
(i) If the cheques are drawn on banks located in State

headquarters for the period beyond ten days after the
date of their deposit for collection. This period may be
14 days in case of State Capitals in Northern Eastern
Region and Sikkim.
(ii) If the cheques are drawn on banks at other places for

period beyond 14 days from the date of deposit
ofcheques for collection.
The above instructions have been given to improve the

operational efficiency and public image of the banks. The
interest must be credited automatically to the customer's
account without his making the claim for it.
185
Collection of Bills of Exchange
A banker is under no legal obligation to collect the bills of

exchange for its customers. But usually banks give such facility
to their customers. However, the statutory protection afforded to
banks under section 131 of the Negotiable Instruments Act in
case of cheques, is not available to them in respect of bills of
exchange. Thus, the collecting banker must satisfy itself
regarding the title of its customer towards the bill. In case its
customer's title to the bill collected by the banker proves
defective, the banker can be held liable to the true owner of the
bill.
Illustration.Shri S.O. Nagarajan working as Manager of New

Plywood Co. Ltd. maintains a duly introduced current account
with you.
He gives for collection following terms:
(i) A crossed cheque issued by Ram Singh in favourof New
Plywood Co. Ltd., for Rs. 1.500 and endorsed as under :
Pay S.O. NAGARAJAN

For New Plywood Co. Ltd.
S. Narayan Director
(ii) Open bearer cheque for Rs. 1.000 issued in favour of Shri
K.S. Verma.
(iii) A crossed demand bill for Rs. 2.500 drawn by Excellent

Food Products on Shrinivas Hotels. The Billof Exchange is
186
accompanied by Railway Receipt for certain cases of beverage

consigned to Self. TheRailway Receipt is also crossed. Both the
Bill and Railway Receipt are blank endorsed.
All the above items are in order in all respects.
Please discuss whether Bank runs any risk in collecting

above items.
(i) The cheque can be accepted for collection. The banker runs
the risk of being charged with conversion in those cases
when the cheque is payable to the company and it is
collected for any of its principal officers. However, in this
case, the cheque has already been endorsed by another
authorised official of the company in favour of Shri S.O.
Nagarajan. The company is therefore in full knowledge of
the endorsement in favour of its manager. The banker thus
incurs no risk in collecting the cheque for the manager.
(ii) The cheque can be collected but before it is accepted for

collection the banker should get it crossed. This is because
the protection under Section 131 is available to the banker
only in respect of collection of crossed cheques.
(iii) The bill of exchange should not be accepted for collection

without making proper enquiries with the drawers. The
bank may be held liable for conversion in case it accepts the
collection of this item. This is because section 131 grants
protection to collecting banker only in respect of crossed
187
cheques. The Railway Receipt is consigned to self and

therefore, it gives to the consigner certain rights like
stoppage in transit etc. It has been endorsed in blank to
negotiate with the bank or to facilitate the consignee to
obtain delivery. However, without specific endorsement in
favour of S.O. Nagarajan the bill of exchange should not be
accepted for collection to his account.
Collecting Banker's Liability in respect of Agent appointed

for collection. The collecting banker may have to get a cheque
or bill of exchange collected through another banker. Phis
happens in those cases where the cheque or the bill of exchange
is payable at a place where the collecting banker does not have
its own branch. In such a case, it will ask some other banker
who has a branch there. The status of such an agent banker has
been held to be that of a substituted agent1 and not that of a sub-
agent2 as was held by the Mumbai High Court in the case of
Punjab National Hank Ltd., GondiaVs. M/s IshiuarDayal Lai
Filial Pal el & Co.
This facts of the case were as under :
(i) IshwarDayal Lai Bhai Patel & Co., delivered a cheque to

Punjab National Bank. Gondia for collection. The cheque was
drawn on the Lakshmi Bank. Bhandara.
188
(ii) The Punjab National Bank had no branch at Bhandara and

therefore, it sent the cheque to Lakshmi Bank. Gondia for
collection.
(iii) The Lakshmi Bank. Gondiasent the cheque to its Bhandara

branch for payment.Bhandra branch issued a payment order to
Punjab National Bank to receive payment at its Gondia branch.
(iv) The Punjab National Bank presented the payment order

twice but no payment could be received and by that time the
Lakshmi Bank had suspended thepayment.
(v) M/s IshwarDayal Lai Bhai Patel filed a suit onPunjab

National Bank for realisation of the amount of the cheque.
The Mumbai High Court held that the nature of the business
of collecting banker was such that it had to appoint another
person for the purpose of realization. Since, the collection of the
amount would have been facilitated by appointing the Gondia
Branch anagent, the collecting banker had an implied authority
to do so. The Gondia branch was a substituted agent and not a
sub-agent. In case of a properly appointed sub-agent, the
original agent is liable to the principal for acts of the sub-agent.
Neither the principal can sue the sub-agent, nor the sub-agent
can sue the principal. He works under the control of the agent.
While a substituted agent acts under the direct control of the
principal and the principal is responsible for his acts. In the
instant case, therefore the acts of Lakshmi Bank
189
Gondiawouldbe binding on the customer and Punjab National

would not be responsible to the customer unless the amount was
received and credited by it to the account of the customer.
Banker's duty to maintain accurate accounts
A bank owes a duty to its customers to record accurately

each entry of debit and credit in the customer's account. In case
the bank makes wrong entries to the credit of the customer and
intimates him and the customer acting bona fide. Alters his
position to his prejudice upon the intimation of credit entries,
the bank, later cannot contend that credit entries were wrongly
made. It therefore, cannot recover the money covered by them.
However, the customer should not be grossly negligent in not
carefully scrutinizing the weekly statements of accounts sent to
him by the bank, otherwise the law will presume a constructive
notice of mistake to him and he will not be entitled to press the
doctrine of estoppels against the bank.
CROSSING OF CHEQUES A cheque may be classified:

(a) An open cheque which can be presented for payment by
the holder at the counter of the drawee's bank.
(b) A crossed cheque which can be paid only through a
collecting banker.
190
Crossing defined
A cheque is said to be crossed when two transverse parallel
lines with or without any words are drawn across its face. A
crossing is a direction to the paying banker to pay the money
generally to a banker or a particular banker as the case may be
and not to the holder at the Counter. Crossing may be written,
stamped, printed or perforated.
Object of crossing
Crossing affords security and protection to the true owner,
since payment of such a cheque has to be made through a
banker. It can therefore, be easily detected to whose use the
money has been received. Cheques are crossed in order to avoid
losses arising from open cheques falling into the hands of
wrong persons.
Crossing of a cheque does not affect its negotiability.
Crossed cheques are negotiable by delivery in case they are
payable to bearer and by endorsement and delivery where they
are payable to order. Holder of a crossed cheque, who has no
account in any bank, can obtain payment by endorsing it in
favour of some person who has got an account in a bank
Modes of crossing
Crossing may be general, special or restrictive
(i) General crossing. Where a cheque bears across its face
two transverse parallel lines with or without any words, it is
191
called 'general crossing". Words such as and company' or any

other .abbreviation, e.g., '& Co." may be written in between
these two transverse parallel lines, either with or without words
'not negotiable' (Sec. 123). Absence of these words would not
affect the validity of the crossing. In this case, the banker upon
whom the cheque is drawn will make the payment only to some
other banker.
The addition of the words "& Co. in a crossing does not have
any legal significance. But the addition of words not
negotiable" has significant legal effect. Of course, these words
do not take away the characteristics of transferability of the
instrument, but they very much restrict it. This is because a
transferee of a cheque bearing words 'not negotiable' will not
get a better title than that of the transferor. In other words, if the
transferor's title is defective, the title of the holder will also be
defective even if he happens to be a holder in due course.
(ii) Special Crossing. Where a cheque bears across its face

an addition of the name of a banker with or without the words
192
not negotiable be deemed to be a special crossing (Sec. 124).

When a cheque has been specially crossed, the banker upon
whom it has been drawn will make the payment only to that
banker in whose favour it has been crossed.
(iii) Restrictive crossing. Besides the above two types of

statutory crossing, in recent years the practice of crossing
cheques with the words "account payee" or "account payee
only" has sprung up. Such a crossing is termed as restrictive
crossing'.
Restrictive crossing is only a direction to the collecting

banker that the proceeds are to be credited only to the account
of payee named in the cheque. In case the collecting banker
allows the proceeds to be credited to some other account, it may
be held liable for wrongful conversion of funds. It does not in
any way affect the paying banker, who has simply to see that
the cheque has been presented to it for payment by any bank in
case of general crossing and by the particular bank (named in
crossing) in case of special crossing. It is under no duty to
193
ascertain that the cheques are in fact collected for the account of
the person named as payee.
It is to be noted that the basic ingredient of crossing, "the

two transverse parallel lines" across the face of the cheque,
must be presented in order to constitute any cheque as a crossed
cheque. The cheque will not be taken as a crossed cheque if this
has not been done.
Who can cross a cheque?
1. The drawer. The drawer can make general, special or

restrictive crossing on a cheque before issuing it.
2. The holder.
(i) Where a cheque is uncrossed, the holder may cross it
generally or specially.
(ii) Where a cheque is crossed generally the holder may cross
it specially.
(ii) Where a cheque is crossed generally or specially the holder
may add the words not negotiable.
3. The banker. Where a cheque is crossed specially, the banker
to whom it is crossed may again cross it specially to another
194
banker to work as its agent for collection (Sec. 125). It is to

be noted that a cheque can be specially crossed only once
except where the second crossing is to a banker as agent for
collection. It is necessary to specify in the second special
crossing that the banker in whose favour it is made is an
agent for collection on behalf of the first bank.1 Section 127
prohibits payment of a cheque crossed specially to more than
once in any other case.
Crossing of a cheque does not amount to a material

alteration so as to discharge the person liable under it.
Statutorily, only cheque can be crossed but if the words Not

Negotiable' are added to a bill of exchange, it may take away
the characteristic of negotiability to the instrument especially
when It is payable to the payee only.
Illustration.Adraw a bill of exchange payable to B only. The

bill is accepted by C. The bill bears the words ‘Not Negotiable'.
B endorses the bill to E. The bill is dishonoured on maturity.
E sues C thereon. Will he succeed?
He will not succeed since the words ‘Not Negotiable’ made

the instrument non-transferable. B could not endorse the bill to
E. E therefore acquired no title to the bill. The bill was valid
between the parties thereto i.e. A and B.
195
Double Crossing
When a cheque bears two separate special crossings, it is
said to have been doubly crossed. According to Section 127
"where a cheque is crossed specially to more than one banker,
except when crossed to an agent for the purpose of collection,
the banker on whom it is drawn shall refuse payment thereon
Thus, a paying banker shall pay a cheque doubly crossed only
when the second banker is acting only as the agent of the first
collecting banker and this has been made clear on the
instrument. Such crossing may be done in those cases where the
banker in whose favor the cheque has been specially crossed
does not have a branch at the place where the cheque is to be
paid.
This may be in the following form :
In all other cases the paying banker should refuse to pay a

cheque bearing double crossing.
Obliterating a crossing
Section 89 provides protection to a collecting banker of a
cheque whose crossing is obliterated or erased by dishonest
persons.
196
In case of such cheques the paying bank shall be discharged

from its liability if :
(i) the cheque does not appear to be a crossed oneor

obliteration of crossing is not apparent at the
time of its presentation for payment, and
(ii) the payment has been made in due course as required
under Section 10.
Opening of crossing
Cancellation of crossing of a cheque iscalled opening of

crossing. The cancellation can be done only by the drawer of
the cheque. The drawer after cancellation of crossing will put
his signature and write 'Pay Cash' on the cheque.
Liability of the p a y i n g banker on crossed cheques
The paying banker should make payment of a crossed

cheque only through the collecting banker. In case of special
crossing the payment of cheque should be done only to the
banker whose name has been mentioned between the two
transverse parallel lines.
In case the paying banker makes payment of a crossed

cheque in contravention of the above roles, its liability will be as
follows :
197
(i) The paying banker will have to reimburse the true

owner for any loss that he might have suffered on
account of payment being made to a wrong person.
(ii) The paying banker shall not be entitled to debit his
customer's account with the amount of payment in
case payment has been made to a wrong person since
it has not followed the mandate of the customer. Such
payment will not be taken as a 'payment made in due
course' (Sec. 126).
MARKING OF CHEQUE
A marked cheque means a cheque which is 'marked' or

'certified' by drawee banker, to the effect that it is "good for
payment". Drawee bank thus intimates that it had sufficient
funds to the credit of the drawer at-the time when it certified the
cheque and the cheque was apparently alright in all other
respects.
Marking of a cheque by the drawee bank is generally done

by writing the words good for payment' across one corner of the
cheque, with the bank's stamp an initials of bank's authorised
official.
It may be done at the request of

a. the drawer,
b. the holder and
c. the collecting banker.
198
a. Marking at the request of drawer. When a cheque is

marked by the drawee bank at the request of the
drawer, the latter cannot countermand or stop payment.
In case he does so, he shall be liable to indemnify the
banker for any loss, the banker may be required to pay
because of refusing to make payment to a subsequent
holder of the cheque who took it on the faith of such
marking.
b. Marking at the request of the holder. When the holder

gets the cheque marked by the drawee banker, it does
not amount to the acceptance of the liability on the
cheque by bank. It simply indicates that drawee banker
has sufficient funds to the credit of the drawer to meet
the cheque at the time of making it. Drawee bank will
not incur any liability for damages if subsequently,
when the cheque is presented for payment, it is
dishonored on account of insufficiency of funds.
c. Marking at the request of collecting banker. When a

cheque is received by a collecting banker too late for
inclusion in the days clearing, it may get it marked from
the paying banker to protect the customer from any loss
that he may suffer on account of delay in presentation.
Marking of a cheque by bankers in between themselves
will amount to promise by one banker to the other to
199
pay the cheque when presented. Such a cheque is

honoured when presented through the next clearing on
account of banking custom. However, the legal position
seems to have undergone a change since the decision in
the case of Bank of Baroda Punjab National Bank.
Now, such marking may not create any legal obligation
on the drawee bank in the absence of any consideration.
Illustration.A cheque drawn on Bank of Baroda on 13th

June post-dated to 20th June, was certified by the manager of
the bank, "good for payment on 20th June." Punjab National
Bank became holder in due course of the cheque, which when
presented for payment on 20th June, was dishonoured on
account of funds being insufficient. It was held by the Privy
Council that the Baroda Bank was not liable on the cheque.
The above decision makes it clear that making of a cheque

only certifies the existence of sufficient balance of money to the
credit of the drawer on that particular date. It does not in any
way amount to the acceptance of any type of liability by the
drawee bank on the cheque marked by it. Holder in due course
cannot claim any right either on the principle of estoppel or on
the basis of the actual words used.
The practice of marking of cheques has now been

completely stopped in our country on account of inter-bank
agreement.
200
Questions
1. What is Cheque? What are its features?
2. Distinguish between Cheque and bills of exchange.
3. Who is collecting banker? What are his duties?
4. What is crossing of cheque? State its importance.
5. What are the essentials of valid cheque?
6. State the circumstances under which banker can
dishonour cheque.
7. Enlist the precautions to be taken by the banker while

honouring a cheque.
8. Write a note on endorsement of cheque.

201

Skill Development:
1. Enumerating of Banks in your area and classifying

them.
2. Visit a Bank and ATM centre near-by. Collecting
details about credit cards and
working of ATM and write a report on it.
3. Collection of Loan application form and filling it up.
4. Collection of specimen of Cheques, Demand Drafts.
5. Visit a bank and write the procedure of opening an
account and paste filled account opening form.
202
B.Com May June 2014 question paper
Part A
Answer any two questions. Each question carries 20 marks
1. What is a bank? Explain the role of banks in the economic

development of a country.
2. Explain the modern functions of commercial banks.
3. What is the meaning of central bank? Explain the measures

taken by it in controlling credit.
4. Define cheque. State the important features of valid

cheque.distinguish between general crossing and special
crossing.
Part B
Answer any two questions. Each questions carries 10 marks.
5. Explain the meaning and merits and demerits of branch

banking system.
6. Explain the duties of a collecting banker.
7. Explain briefly the special relationship between banker and

customer.
8. Explain the procedure to open a bank account
203
Part c
Answer any four questions. Each question
9 Write a note on ATM.
10 Write a note on general lien of banker.
11 Write a note on unit banking.
12 Write a note on “fixed deposit receipt”.
13 Write a note on endorsement.
14 State the duties of paying banker.
********************************************
204
B.Com November/December 2013 question paper
Part A
Answer any two questions. Each question carries 20 marks
Part B
Answer any two questions. Each questions carries 10 marks.
Part c
Answer any four questions. Each question
********************************************
205
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MANAGEMENT OF BANKING OPERATIONS

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4. BANKING REGULATION ACT 1949

5. BANKER AND CISTOMER

Unit -1: BANKING

A Bank is an institution and a financial intermediary that

The term Bank is derived from the French word Banco

Another possible origin of the word is from

The word bank was borrowed in Middle English from

banc, bank "bench, counter". Benches were used as desks or

In common view is that the word “Bank” might be

In ancient times the main function of banks was relating to

A bank is an institution which deals with money (fund) and

A bank is an organization, usually a corporation, which

In other words the Bank is an establishment authorised by a

make loans, act as an intermediary in financial transactions,

Oxford Dictionary defines a bank as “an establishment for

The negotiable instruments act of 1881 contains a statutory

According to H. L. HART’S “A Banker is one who in the

According to these definitions the bank perform functions of

 Honoring of cheques drawn against those

An INDIANS view about Bank is “a financial institution

According to section 5 (1) (c) of Indian Banking Regulation

Banking company is “A company which transacts the

The above definitions bring out clearly the characteristics of

 Acceptance of deposits through the current, fixed,

Banks plays vital role in modern economy.

First – By accepting deposits the banks control the habit of

Second- The banks also encourage industrial innovations

Third- The banks exercise considerable influence on the

Thus economic development of any country is not possible

The rate of savings in the developing country is generally

mutual funds, this is a major step taken by banks to create

3. FINANACE FOR PRIORITY SECTOR

Banks are the manufactures of money and they allow money

by extending their branches in to the rural areas. They must be

5. INFLUENCE ECONOMIC ACTIVITY

Banks are in a position to influence economic activity in a

6. FACILITATOR OF MONETARY POLICY

Thus monetary policy of a country should be conductive to

In overall banks are vital institutions in any society as they

cash on hand ,households to purchase homes without saving the

The banks make available loans of different periods to

Generally banks are classified on the basis of their function.

Commercial banks are banks which accept deposits from the

for various accounts like saving bank, current account, and

Industrial banks are banks which provide fixed capital to

These are banks which provide finance to agriculture. These

These banks are also called as foreign exchange banks.

make international payments through purchase & sale of

Savings banks are special types of banks which specialize in

Central bank, as the name specified is the central monetary

INDIAN BANKING STRUCTURE

In every country there will be one bank constituting the apex

In India we have organized banking system and it can be

Commercial banks have been in existence from so many

Regional rural banks (RRBs) came into existence in the

deposit facility particularly to the small marginal formers,

Primary co-operative societies were originally set up in

The development of banking service is depends on the

Banking service system isdeveloping very much faster in