Unit – II

What do you mean by the Endorsement of Instruments?

The holder of a negotiable instrument may sign his or her name on the back of
that instrument, which replicates the transfer of title or ownership of that
negotiable instrument, this process is termed as an endorsement. An
endorsement can be done by keeping another individual or an entity in a
favorable position. Thus, we can say that an endorsement helps in the transfer
of the property to another individual or a legal entity. In this context, we will
know about the types of endorsement of instruments done in the legal world.

An Endorser and an Endorsee

In an act of endorsement, there are mainly two persons - Endorser and
Endorsee who initiates the act overall.

The person to whom the instrument is being endorsed is known as the

endorsee. While the person who is making the endorsement is known as the
endorser.

Types of Endorsement
An endorsement is basically of two sorts:
1. The Endorsement in Blank
2. The Endorsement in full

As indicated by Section 16 of the Negotiable Instrument Act, 1881, if the

endorser signs his name just, the underwriting is supposed to be in the clear,
and on the off chance that he adds a heading to pay the sum referenced in the
instrument to, or to the request for, a predetermined individual, the
Endorsement is supposed to be in full, and the individual so determined is
known as the endorsee of the instrument. There are some different sorts
which are established, however, not well known, which are given underneath.

There are six types of endorsement. These are applicable for endorsement in
banking and various types of endorsement cheques:
 Blank or General Endorsement.
 Full Endorsement or Special Endorsement.
 Conditional Endorsement.
 Restrictive Endorsement.
 Partial Endorsement.
  Facultative Endorsement.

In the following section, we are going to discuss each endorsement in detail.

Blank or General Endorsement

An endorsement is supposed to be blank or general endorsement when the
endorser puts his unmistakable just on the instrument and doesn't compose
the name of anybody to whom or to whose request the installment is to be
made.

Full Endorsement or Special Endorsement

A special Endorsement or full Endorsement is when the endorser,
notwithstanding his mark, additionally notices the name of the individual to
whom or to whose request the installment is to be made. There is a heading
added by Endorsement to the individual indicated called the endorsee of the
instrument who presently turns into its payee qualified to sue for the cash due
on the instrument.

Conditional Endorsement
The restrictive endorsement is an arrangement that produces results on the
occurrence of an expressed occasion, or not something else. Segment 52 of
the Negotiable Instrument Act 1881 gives the endorser of a debatable
instrument may, by express words in the Endorsement, reject his own risk
subsequently, or make such obligation or the privilege of the endorsee to get
the sum due consequently rely on the occurrence of a predetermined
occasion, albeit such occasion may never occur. Where an endorser so
prohibits his risk and a short time later turns into the holder of the instrument,
all intermediates endorsers are obligated to him.

Restrictive Endorsement
Restrictive Endorsement tries to end the chief qualities of a Negotiable
Instrument and seals its further debatability. This may sound somewhat
unordinary, yet the endorsee is especially inside his privileges on the off
chance that he so signs that its resulting move is limited. This forestalls the
danger of unapproved individuals acquiring installment through
misrepresentation or falsification and losing their cash.

Partial Endorsement
An endorsement is supposed to be a partial endorsement when the endorser
indicates to move to the endorsee, just an aspect of the sum payable. In
straightforward terms, support which permits moving to the endorsee an
aspect of the sum payable is known as halfway underwriting.

Facultative Endorsement
Facultative Endorsement is an underwriting where the endorser defers some
privilege to which he is entitled. For instance, the endorsee is subject to pull
out of disrespect to the endorser, and typically inability to pull out will vindicate
the endorser from his risk.

A dishonoured cheque – what is it?

A cheque falls under the dishonoured category when a payee cannot successfully deposit the
payer’s cheque. A payer is the one who issues a cheque to the payee. The payee deposits this
cheque in the bank. If the bank refuses to pay the amount mentioned on the cheque, the cheque is
dishonoured.

The payee must inform the payer of the dishonoured cheque and ask them to inquire about its
reason. If the payer believes the cheque will be honoured a second time, they can resubmit it within
three months after the date on it. However, if the cheque bounces again, the payer can face legal
action.

Why do cheques get dishonoured?

Cheques can be dishonoured for a no. of reasons. Some of them are as below-

1. Insufficient funds

Lack of cash in the account is one of the most common reasons for dishonoured cheques. The bank
cannot execute the transaction if you do not have the required funds in your account. The bank may
impose a cheque bounce penalty on the payer and the payee. The payer has two options when this
occurs: write a replacement cheque or add enough money to the account.

2. Mismatched signature

Cheques are among the few payment methods that still rely on signatures. Signatures are, in fact,
a key component of cheques. If the payer’s signature does not match the recorded signature with
the bank, the bank will reject the cheque.

3. The date on the cheque

Date is an essential feature in cheques. Any discrepancy or fault with it can result in dishonoured or
disapproved cheques. The most common problem with dates on cheques is that they can be
distorted or outdated. Ensure that you check it thoroughly before depositing or offering a cheque.

4. Damaged cheque

The bank will not accept any cheque in damaged, ripped, or poor condition. Banks also reject
cheques if the details are unclear or there are too many stains on them. Hence, keep the cheque in
readable condition before processing it forward.

5. Overwriting

Overwriting anything on cheques can lead to rejection. Banks reject them because it appears
suspicious.

Paying Banker and Collecting Banker

Paying banker and collecting banker can be defined as follows:

“The bank on which a cheque is drawn (the bank whose name is printed on the cheque)
and which pays the amount for which the cheque is written and deducts that sum from the
customer’s account.” The paying banker should use due care and diligence in paying a cheque so
as to refrain from any action potential enough to damage his customer’s credit.

“A Collecting banker is the one who attempts to collect different types of instruments
representing money in favour of his customer or his own behalf from the drawers of these
instruments; some are negotiable instruments as provided for in the Negotiable Instruments Act,
1881.”

Rights and Liabilities of Paying and Collecting Banker

Rights and liabilities of a both types of bankers can be discussed as follows:

Rights of Paying and Collecting Banker

 The rights of the banker include:

1. Right of General Lien: can be retained till the owner discharges the debt or obligation to the
possessor. A lien is the right of a creditor in possession of goods, securities or any other assets
belonging to the debtor to retain them until the debt is repaid, provided that there is no contract
express or implied, to the contrary. A banker has the right to retain the property belonging to the
customer until the debt due from him has been paid. It is a right to retain possession of specific
goods or securities or other movables of which the ownership vests in some other person and the
possession

2. Right to set off: The right of set off is also known as the right of combination of accounts.
Right to set off is a right of the banker to adjust his outstanding Joan (debit) in the name of the
customer from his credit balance of any of the accounts he s maintaining with the bank. A bank
has a right to set off a debt owing to a customer against a debt due from him. Right to set off is
nothing but combine the two or more accounts of a customer of the customer. If the customer
have two or more account and in case of absence of agreement the banker can exercise has right
of set off:

(a) The two or more accounts must be in the name of same customer
(b) There must be same capacity
(c) There must be same bank ,though different branches
(d) One account should show debit balance and other should show a credit balance
(e) The debt must be manual
(f) The amount of debit should be certain one.
Thus set off is adjustment of debit balance with that of credit balance
3. Right to close an account: There should be no confusion between closing the account and
stopping operation of the account. The contractual relationship between banker and customer is
terminated by closing the account. There is no opportunity for the customer to operate the
account once again. On the other hand, stopping operation of an account refers to the suspension
of the operation of an account for the time being, at the advent of certain events. It is purely
suspension of the relationship between a banker and a customer and the customer can operate the
account, after such events come to a close

The circumstances for closure of account are:

(a) Customer’s intension to close the account
i. The customer can close the account in any of the following condition
ii. If he does not agree to the terms of the banker such as rate of interest, bank charges etc
iii. If the customer does not enjoy such facilities as are offered by some other banks e.g. free
transfer of money up to Rs.10000
iv. When the confidence of the person is shaken.

(b) Bankers intention to close the account Notes

i. The banker can close the account of the customer when he finds
ii. The account is not remunerative
iii. When the customer is not a desirable one.

(c) Customer’s death-as soon as the bank gets notice of the death of the customer, he should
immediately stop the operations of the account. It is because death puts an end to the contract.

(d) Customers insanity-the banker should stop the operation of his account .the banker should
apply for the official copy of Lunacy Order.

(e) Customers insolvency-when the banker comes to know that the customer is insolvent than the
bank will close the account of the customer.

4. Right to appropriate payments: The banker has the right to appropriate the money deposited
by a customer to any one of the loan account due by him. The appropriation arises when the
customer has more than one account one showing the debit balance and the other with a credit
balance. The customer is given the first option to decide the account to which the amount should
be credited. If the customer fails to indicate his choice then the banker has every legal right to
credit the amount in any one account of that customer.

Liabilities of Paying Bankers

Following are the liabilities of paying bankers:

 Checking the signature of the drawer.

 Verification of the genuineness of the instrument.
 Payment not stopped by the A/c holder
 Holder’s title on the cheque is valid.
 A/c is not dormant one.
  A/c holder is not bankrupt or deceased.
 A/c is not under subject of liquidation process.
 No ‘Garnishee Order’ is issued by court.
 Properly endorsed.
 Cheque is not drawn beyond limit fixed by the drawer is respect of amount.
 Instrument being presented is crossed.
 Instrument is not state or postdated.
 No material adjustment is made.
 Sufficient balance in the A/c

Liabilities of Collecting Bankers

Following are the liabilities of collecting bankers:

1. Acting as agent: While collecting an instrument, the Bankers works as agent of his customer.
As an agent he has to take some steps & precautions to protect the interest or his customer as a
man of ordinary discretion would take to safeguard his own interest.

2. Scrutinizing the instruments: Name of the holder, Branch name, amount in world and
figure, date, material alteration of any to be checked carefully.

3. Checking the endorsement: Bankers have to check the instrument whether it has
been endorsed properly.

4. Presenting the instrument in due time: It is the responsibility of the collecting bank
to present the instrument in due time to the paying bank.

5. Collecting the proceeds in the payee’s account: It is the duty of collecting banks to
collect and credit the proceeds of the instruments to the proper/correct account.

6. Notice of dishonour and returning the instruments: If any instrument is dishonoured by

the paying bank it should be informed to the customer on the day following the receipt of
the unpaid instruments.

What Is an Equated Monthly Installment (EMI)?

An equated monthly installment (EMI) is a fixed payment amount made by
a borrower to a lender at a specified date each calendar month. Equated
monthly installments are applied to both interest and principal each month so
that over a specified number of years, the loan is paid off in full. In the most
common types of loans—such as real estate mortgages, auto loans, and
student loans—the borrower makes fixed periodic payments to the lender over
several years to retire the loan.

KEY TAKEAWAYS

 An equated monthly installment (EMI) is a fixed payment made by a

borrower to a lender on a specified date of each month.
 EMIs are applied to both interest and principal each month so that over a
specified time period, the loan is paid off in full.
  EMIs can be calculated in two ways: the flat-rate method or the reducing-
balance method.
 The EMI reducing-balance method generally is more favorable for
borrowers, as it results in lower interest payments overall.
 EMIs allow borrowers the peace of mind of knowing exactly how much
money they will need to pay each month toward their loan.
How an Equated Monthly Installment (EMI) Works
EMIs differ from variable payment plans, in which the borrower can pay higher
amounts at his or her discretion. In EMI plans borrowers are usually only
allowed one fixed payment amount each month.

The benefit of an EMI for borrowers is that they know precisely how much
money they will need to pay toward their loan each month, which can make
personal budgeting easier. The benefit to lenders (or investors the loan is sold
to) is that they can count on a steady, predictable income stream from the loan
interest.
Time Value of Money Formula

The present Value Formula is as follows.

PV = Future Value / (1 + Interest Rate)^Number of Periods

Enter the following.

o Future value = amount you'll receive in future

o Interest Rate = Rate of return or discount rate
o Number of Periods = Years until you get the future cash flow

The Future Value Formula is as follows.

FV = Present Value * (1 + Interest Rate)^Number of Periods

Enter the following.

o Present value = amount you have now

o Interest Rate = rate of return you'll earn
o Number of Periods = Years until the future date

Time Value of Money Example

$100 now at 10% for 2 years

FV = $100 * (1 + 0.1)^2

FV = $100 * 1.21

FV = $121

So the future value is $121

Need of Time Value of Money

The needs of the time value of money have been stated below.

o Compare investments: You must compare income/costs at different times to choose

the best investment.
o Choose between loans: You must compare loans with different interest rates and
terms to pick the best deal.
o Calculate loan payments: We must determine the correct loan amount to repay with
interest over time.
o Evaluate projects: We must determine if a project's future cash flows justify the initial
investment when discounted to present value.
o Assess profits: We need to decide if a firm's future profits will exceed the costs
incurred today.

Fundamentals of Time Value of Money

The basic fundamentals of the time value of money have been stated below.
 o Money has value over time - Money today is worth more than the same amount in
the future.
o Opportunity cost - Money now can be invested or used to earn interest. Money in
the future has lost that time for investing and earning interest.
o Inflation - The purchasing power of money decreases over time due to inflation. So
$1 today is worth more in real terms than $1 in the future.
o Interest - Interest rates represent the cost of borrowing money or the return
available on investments. They reflect the time value of money.
o Compounding - Interest that is earned on previous interest is called compound
interest. It allows money to grow over time.
o Present value - The current worth of a future sum of money or stream of cash flows
after accounting for the time value of money.
o Future value - The worth of a current sum of money or stream of cash flows at some
point in the future when accounting for the time value of money.
o Net present value - The present value of all cash inflows minus the present value of
all cash outflows from an investment project.
o Discounting cash flows - Removing for the time value of money by discounting
future cash flows to determine their present value.

Key Components of Time Value of Money

The parts of the time value of money have been stated below.

o Present value - The current worth of a future sum of cash or payments after
accounting for the time value of money.
o Future value - The future worth of an initial cash amount or payments after
accounting for interest over time.
o Interest rate is used to decide how much interest is earned or paid on an investment
over a while.
o Time - The number of periods between the current and future dates a cash flow
occurs.
o Net present value - The present value of all cash inflows minus all cash outflows from
an investment project.
o Internal rate of return - The interest rate at which the net present value of all cash
flows from an investment equals zero.