UNIT- I

BANKER, CUSTOMER AND DEPOSITS

The term banking may define as accepting of deposit of money from the public for the
purpose of lending or investing investment of that money which are repayable on demand or
otherwise and with a draw by cheque, draft or order.
BANKER
Sec.5 (b) of the B R Act “Banking' means accepting, for the purpose of lending or
investment, of deposits of money from the public repayable on demand or otherwise and
withdrawable by cheque, draft, order or otherwise."
CUSTOMER
A person who has a bank account in his name and for whom the banker undertakes to
provide the facilities as a banker is considered to be a customer.
To constitute a customer the following requirements must be fulfilled;
1. The bank account may be savings, current or fixed deposit must be operated in his name
by making a necessary deposit of money.
2. The dealing between the banker and customer must be of the nature of banking business.
The general relationship between banker and customer:
RELATIONSHIP BETWEEN BANKER AND A CUSTOMER
The relationships falls under two categories, namely:
 General Relationships
 Special Relationships
Is there a Depository relationship exists among the banker and customer?
A depository is one who receives some valuables and returns the same on demand. But at
present, a banker is not bound to return the same coins and currency notes deposited by a
customer. Instead, he is required to gice the same amount. So, he is not a depository.
GENERAL RELATIONSHIPS
The general relationships between banker and Customer are categorized into four;
1. A banker as a bailee
2. Relationship as debtor and creditor.
3. Banker as a trustee.
4. Banker as an agent.

1
A BANKER AS A BAILEE
A banker becomes a bailee when he receives gold ornaments and important documents
for safe custody. In that case, he cannot make use of them to his best advantage because he is
bound to return the identical articles on demand.
RELATIONSHIP AS DEBTOR AND CREDITOR
On the opening of an account, the banker assumes the position of a debtor. A depositor
remains a creditor of his banker so long as his account carries a credit balance.
Relationship with the customer is reserved as soon as the customer account is overdrawn.
Banker becomes a creditor of the customer who has taken a loan from the banker and continues
in that capacity fills the loan is repaid.
BANKER AS A TRUSTEE
Ordinary a banker is a debtor of his customer in the report of the deposit made by the
letter but in certain circumstances, he acts as trustee also.
A trustee hold holds money or asset and performs certain functions for the benefit of
some other person called the beneficiary.
For example; If the customer deposits securities or other values with the banker for the safe
custody, the letter acts as a trustee of his customer.
BANKER AS AN AGENT
A banker acts as an agent of his customer and performs a number of agency functions for
the conveniences of his customer. For example, he buys or sells securities on behalf of his
customer, collects cheques on his behalf and makes payment of various dues of his customer.
SPECIAL RELATIONSHIP
SPECIAL RELATIONSHIP WITH CUSTOMER/OBLIGATION OF A BANKER:
Through the primary relationship between a banker and his customer is that of a debtor
and a creditor or vice versa, the special features of this relationship as a note above impose the
following additional obligations on the banker.
1. Statutory obligation to honor the cheques
The deposit accepted by a banker is his liabilities repayable on demand or otherwise. The
banker is therefore under a statutory obligation to honor his customer‟s cheque in the usual
course.

2
 According to section 31 of the negotiable instruments. Act 1881 the banker is bound to
honor his customer‟s cheque provided by following conditions are fulfilled:
 Availability of sufficient fund of the customer.
 The correctness of the cheque.
 Proper presentation of the cheque.
 A reasonable time for collection.
 Proper drawing of the cheque.
2. The obligation to maintain the secrecy of the customer accounts
The banker is an obligation to take utmost care in keeping secrecy about the account of
his customer.
By keeping secrecy is that the account books of the bank will not be thrown open to the public or
government, officials if the following reasonable situation does not occur,
1. Discloser of information required by law.
2. Discloser permitted by bankers practice and wages. The practice and wages customary
amongst banker permit disclosure of certain information and the following
circumstances.
 With express or implied consent of the customer.
 Banker reference.
 Duty to the public to disclose.
3. Bankers Lien
Lien refers to the right of the banker over certain securities of his customer which may
come into possession in the course of business.
Conditions required to exercise lien:
1) The securities and goods must come to his hands as a banker
2) The banker should obtain the possession of the securities lawfully
3) Securities should not have been given to the bank for a special purpose
4) The securities held shall be in the name of the borrower only
A banker can exercise the right of lien on all goods and securities entrusted to him as a
banker

3
Kinds of Lien
A lien is the right of a person to retain the goods in this possession under the debt due to
him has been settled. Lein is of two kinds: General Lien and Particular lien.
General Lien means gives a right to a person to retain the goods not only in respect of a
particular debt but also in respect of the general balance due from the owner of the goods to the
person exercising the right of lien.
Particular lien means a right to retain the goods in connection with which a particular
debt arose.
4. Right to claim Incidental Charges
Every bank holds the right to claim incidental charges on the operation of accounts of a
customer for example in the case of a collection, remittance of drafts, etc.
5. Right to Charge Compound Interest
A banker is given a special privilege of charging compound interest. Usually, bankers
charge interest on the money lent at the end of every quarter. The same practice of crediting the
customer‟s account with interest at the end of every half-year.
6. Exemption from the law of Limitation act
As per the provisions of law, a debt will become a bad one after the expiry of three years
from the date of debt. According th article 22 of the law of limitation act, 1963, for a bank debt
the period of three years will be calculated from the date on which express demand is made for
the repayment of debt. And also generally, a customer gives up the right to recover the amount
due at a banker if he has not operated his account since last 10 years.
GENERAL PRECAUTIONS FOR OPENING AN ACCOUNT
The precautions which must be observe by the banker before opening a account are following :
1. Decide the Type of Bank Account you want to Open
There are several types of bank accounts such as Saving Account, Recurring Account,
Fixed Deposit Account and Current Account. So a decision regarding the type of account to be
opened must be taken.
2. Approach any Bank of choice & meet its Bank Officer
Once the type of account is decided, the person should approach a convenient bank. He
has to meet the bank officer regarding the opening of the account. The bank officer will provide
a proposal form (Account Opening Form) to open bank account.

4
3. Fill up Bank Account Opening Form - Proposal Form
The proposal form must be duly filled in all respects. Necessary details regarding name,
address, occupation and other details must be filled in wherever required. Two or three specimen
signatures are required on the specimen signature card. If the account is opened in joint names,
then the form must be signed jointly. Now a days the banks ask the applicant to submit copies of
his latest photograph for the purpose of his identification.
4. Give References for Opening your Bank Account
The bank normally required references or introduction of the prospective account holder
by any of the existing account holders for that type of account. The introducer introduces by
signing his specimen signature in the column meant for the purpose The reference or
introduction is required to safeguard the interest of the bank.
5. Submit Bank Account Opening Form and Documents
The duly filled in proposal form must be submitted to the bank along with necessary
documents. For e.g. in case of a joint stock company, the application form must accompany with
the Board's resolution to open the account. Also certified copies of articles and memorandum of
association must be produced.
6. Officer will verify your Bank Account Opening Form
The bank officer verifies the proposal form. He checks whether the form is complete in
all respects or not. The accompanying documents are verified. If the officer is satisfied, then he
clears the proposal form.
7. Deposit initial amount in newly opened Bank Account
After getting the proposal form cleared, the necessary amount is deposited in the bank.
After depositing the initial money, the bank provides a pass book, a cheque book and pay in slip
book in the case of savings account. In the case of fixed deposits, a fixed deposit receipt is
issued. In the case of current account, a cheque book and a pay in slip book is issued. For
recurring account, the pass book and a pay in slip book is issued.
Various Types of Bank Accounts
1. Saving Account
2. Regular Savings
3. Current Account
4. Recurring Deposit Account

5
 5. Fixed Deposit Account
1) SAVINGS ACCOUNT:-
a) Basic Savings Bank Deposit Accounts (BSBDA)
 This account will be considered as normal banking service.
 For this account, maintenance of minimum balance is not required.
 ATM card/ ATM cum Debit card, Rupay card will be given for the account holders.
 There are going to be no limit on the number of deposits that can be made in a month but,
account holders will be allowed most of 4 withdrawals in a month, which includes ATM
withdrawals also.
 The above facilities will be given without any charge. There will be no charge levied for
non-operation/ activation of in-operative basic saving bank deposit account.
 For this account, overdraft facility will be provided up to Rs. 5000/-.
b) Basic Saving bank Deposit Accounts Small scheme (BSBDS)
 These are accounts with relaxed KYC, with a minimum document requirement of self-
attested address proof & photograph.
 Total credit should not exceed 1Lakh rupees in a year.
 Maximum balance should not exceed Rs. 50,000/- at any time.
 Cash withdrawals & transfers must not exceed Rs.10, 000/- in a month.
 Remittance from foreign account cannot be credited to this account without completing
normal KYC formalities.
 This account can be opened only at Core Banking Solution linked branches of banks or at
such branches, where it is possible to manually monitor the fulfillments of the conditions.
2) REGULAR SAVINGS BANK ACCOUNT
 Any resident individual- single accounts, two or more individuals in joint accounts,
Associations, clubs etc., are eligible for this account.
 Modest credit option available to the depositor.
 Two free cheque books will be issued per year.
 Internet banking facility will be provided without any charge.
 Balance enquiry, NEFT, Bill payment, Mobile recharge etc., are provided through mobile
phones.
 Students can open this account with zero balance by providing the required documents.

6
3) CURRENT ACCOUNT
 Any resident individual- single accounts, two or more individuals in joint accounts,
Associations, Limited companies, Religious Institutions, Educational Institutions,
Charitable Institutions, clubs etc., are eligible for this account.
 Payments/ withdrawals can be done unlimited number of times.
 It is mainly used by Business people
 No Interest is provided by the bank to the current account holders
 Funds can be remitted from any part of the country to the corresponding account.
 Overdraft facility will be available.
 Internet banking facility is available.
4) RECURRING DEPOSIT ACCOUNT

7
CUMULATIVE RECURRING DEPOSIT SCHEME
 Any resident individual- single accounts, two or more individuals in joint accounts,
Associations, clubs, Institutions/Agencies specifically permitted by the RBI etc., are
eligible to open this account in single/joint names.
 Periodic/Monthly installments can be for any amount starting from as low as Rs.50/-
onwards.
 Account can be opened for any period ranging from 6 months to 120 months, in multiple
of 1 month.
 The amount selected for installment at the start of the scheme will be payable every
month.
 The number of installments once fixed, cannot be altered.
 Approved rate of interest is compounded every quarter.
 The amount after maturity will be paid to customers one month after the deposit of the
last installment.
 Pass book will be given to the depositor.
 TDS will be applicable on the interest, as per the latest changes in the Income Tax Act on
cumulative deposits also.
5) FIXED DEPOSIT ACCOUNT
a) SHORT DEPOSIT RECEIPT
 Banks accepts deposits from customers varying from 7 days to a maximum of 10 years.
 The period of 7 days & above but not exceeding 179 days deposits is classified as „Short
Deposits‟.
 The minimum amount that can be deposited under this scheme is Rs. 5 lakh for a period
of 7-14 days.
b) FIXED DEPOSIT RECEIPT
 Any resident individual- single accounts, two or more individuals in joint accounts,
Associations, Minors, societies, clubs etc., are eligible for this account.
 The minimum FDR in metro & Urban branches is Rs. 10,000/- & in rural & semi urban
& for Senior citizens is Rs.5000/- .

8
  For the subsidy kept under the government sponsored schemes, Margin money, earnest
money & court attached/ordered deposits, minimum amount criteria will not be
applicable.
 Depositors may ask for repayment of their deposits before maturity. Repayment of
amount before maturity is allowable.
 Interest rate differs from bank to bank depending upon the tenure of the deposits & as
when the bank changes the rate.
 Additional interest of 0.50% is offered for senior citizens on deposits placed for a year &
above.

SPECIAL TYPES OF DEPOSITS

FLEXI DEPOSIT
A Flexi Deposit is a special kind of deposit scheme offered by banks in India and many
countries in the world, which is a combination of demand deposit and a fixed deposit. The
depositor is able to enjoy both the liquidity of savings and current accounts as well as the high
returns of fixed deposits.
SENIOR CITIZEN DEPOSIT SCHEME
The Senior Citizens Savings Scheme (SCSS) offers regular income, highest safety and
tax saving, making it a popular product for those over 60 years of age. Post retirement, people
are looking for investment avenues to park their retirement corpus in. They are hesitant to put
their hard-earned money in equities, which carry capital loss risk, or products which come with a
long lock-in period and don't offer any income till maturity.

9
HOUSING DEPOSITS SCHEME
National Housing Bank(NHB) offers term deposits as well as tax-saving deposits at
attractive interest rates, currently superior to a number of banks.
NHB is offering three deposit schemes at attractive rates of interest.
NHB SUNIDHI Term Deposit Scheme:
It is a term deposit scheme for Individuals/HUFs/Partnerships/Societies & Trusts &
Association of persons. The minimum deposit in the scheme is Rs. 50,000 with a maturity period
ranging from 12 months to 60 months.
The below interest rates are effective from October 31, 2011

NHB SUNIDHI Term Deposit Scheme

All Others For Senior Citizens

Duration of
Deposit Interest Rate Annualised Return Interest Rate Annualised Return
(%) (%) (%) (%)

12 Months 9.5 9.84 10.1 10.49

24 Months 9.5 9.84 10.1 10.49

36 Months 9.25 9.58 9.85 10.22

60 Months 9.25 9.58 9.85 10.22

Insurance Linked Current / Savings Bank Deposit Scheme

If the Depositor hold more than one current/savings bank deposit account or both the
accounts in the Bank under this scheme the insurance eligibility is for only one current or savings
bank deposit account which is beneficial to the depositor he must provide necessary documents
to the satisfaction of the bank. There are various types of insurance linked savings bank deposit
scheme are there. They are
Abhaya Savings Bank (ASB)
The scheme is having features of Savings Bank coupled with insurance coverage (Group
Janata Personal Accidental Insurance Cover). It is meant for all individual depositors including
joint accounts, especially those whose lives are exposed to accidental risks on account of their
profession/ employment/occupation. M/s.United India Insurance Company is undertaking the

10
risk coverage. All Joint accountholders are compulsorily covered. Age – 5 to 70 years.
Accidental Insurance cover is available to all depositors. Rs.25000/- for death / total disability
and Rs.12500/- for partial disability. Premium – Rs.15/-; Insurance year – 1st Sep to 31st Aug.
Nomination holds good for deposit balance and the insurance claim. Joint accountholders can
specify their nominees separately. (Cir.no. 210 Ref 51/09 dated 17.08.2013)
Abhaya Savings Plus (ASB+)
The scheme was introduced in our bank in the year 2006. It is meant for all individual
depositors, especially those whose lives are exposed to accidental risks on account of their
profession / employment / occupation. Individuals and Joint Account holders can open. All Joint
accountholders are compulsorily covered. Age: 5 to 70 years. Cover: Group Janata Personal
Accidental Insurance Cover. Rs.100000/- for death / total disability and Rs.25000/- for partial
disability. Premium – Rs.36/-; Insurance year – 1st Nov to 31st October. United India Insurance
Company is undertaking the risk coverage. Nomination holds good for deposit balance and the
insurance claim. Joint accountholders can specify their nominees separately.
Abhaya Gold Savings (ABG)
This scheme was introduced in the year 1996. Individuals and joint account holders are
eligible. All joint account holders are compulsorily covered. Age – 5 to 70 years. It is a Group
Personal accident Insurance Policy. M/s. United India Insurance Company is undertaking risk
coverage. Death / Total Disability – Rs.1.50 lakh. Partial disability – Rs.50000/-. Premia Rs.70/-;
Insurance year – 1st November to 31st October. Separate nomination for insurance claim. Joint
accountholders can give separate nominations for the insurance amount.
AB Jeevan Abhaya (ABJ)
This scheme was launched in the year 2002. It is a Savings Bank account that provides
Life and Accidental death cover on payment of nominal premium and simple health declaration.
No medical examination is required. Individuals in the age group of 18 to 55 years can open this
account. SB opening form can be used. The premium rates depend on the age of the insured. The
insurance period is 1st Dec to 30th November. The risk is covered by IndiaFirst Life Insurance
Corporation Limited (IFLIC) and the amount of coverage is Rs.1 lakh in case of normal or
accidental death. Joint accountholders can be covered by opening a joint account and by paying
the applicable Premia. All accounts opened under AB Super Salary (SB account) scheme will be
covered under this scheme. (Circular no. 294 Ref 51/25 dated 16.11.2010)

11
AB Jeevan Abhaya “Plus” –
Bank has launched a new scheme on the eve of 90th year of Foundation Day celebrations
w.e.f. 01.12.2013. It is meant for individuals whose age is in between 18 to 55 years. The
depositors will be covered with life insurance coverage of Rs.2 lakhs (Life and Accidental death)
in association with M/s.India First Life Insurance Company Ltd. No medical tests required
except for declaration of Good Health. The premium depends on the age of the depositor. The
minimum deposit stipulated under this scheme is Rs.1000/- for Rural, Rs.2000/- for Semi-urban;
Rs.3000/- for Urban and Rs.5000/- Metro branches. All existing guidelines that are applicable to
SB accounts will apply to the new scheme. The insurance year for this scheme is from 1st
December to 30th November every year. (Cir.no.353 Ref 51/19 dated 28.11.2013)
Insured Current Deposits (ICD)
Individuals, Joint A/cs, HUF, Sole Proprietors, Partnership Firms, Ltd Cos., having
CD/ODCC/Pattabhi Agricard accounts. However, office bearers of clubs / societies / trusts /
associations and account holders of inoperative accounts are not eligible to join in the scheme.
The age of the account holder should be in the range of 5 to 70 years. ICD covers risk against
accident (death / disability). It also includes snakebite, electrocution, food poisoning, riots etc.,
United India Insurance Company covers the risk upto 1.50 lakh for death/total disability.
Insurance year – 21st February to 20th February. Premia – Rs.69/- per person per annum to be
collected. (Cir no.462 Ref 51/22 dated 19.02.2013)
AB Kiddy Bank Scheme (Kids Khazana)
Bank has re-launched the earlier the earlier Kiddy Bank scheme under the new brand
name “AB Kiddy Bank Scheme” in the year 2007. It is meant for minors (even 1 day old minor)
represented by Guardians or by the minors themselves who have completed the age of 10 years.
All existing Kiddy bank accounts can be converted. Minimum balance to be maintained is
Rs.100/-. Kid and parent/guardian (aged up to 70 years) both are covered under Accidental
Insurance. Accidental insurance coverage is available up to one lakh for the kid and the
parent/guardian. Insurance Premia is Rs.54/- per annum (31st of October). The risk is covered by
United India Insurance Company. Free Doll. Educational Grant of Rs.5000/- (for age up to 10
years) / Rs.10000 (for age of 11-18 years) as per the age of the child in case of accident risk of
the parent.

12
DEMAT ACCOUNT
The capital market regulator –– the Securities and Exchange Board of India, two decades
ago came up with a instruction that trading in securities, particularly equity shares, will be
allowed only if they were held in a dematerialised form.
Dematerialisation is a process in which your physical investment certificates
/securities (shares, mutual funds, ETFs, bonds, debentures, etc.) get converted to an equal
number of securities in an electronic form, credited into your account with your Depository
Participant (DP) –– which could be a bank or a broker. So, as against holding valuable securities
(shares, mutual funds, ETFs, bonds, debentures, etc.) in a physical or paper form, they can be
held in an electronic form. The process of dematerialisation normally takes about 15 days.
National Securities Depository Limited (NSDL) was the first depository established in
1996 to handle the process of dematerialization, followed by Central Depository Services
Limited (CDSL) in 1999.
Banks and brokers are DPs of either of the aforesaid depositories. Please note that it is
not compulsory to dematerialise your physical certificates. As per the Depository Act, 1996, you
have an option to hold shares either in physical or dematerialised form. However, if you wish to
trade (buy and/or sell) your valuable securities, holding a demat account is always beneficial.
How to open a demat account?
To open a demat account, you need to approach a DP, who could be your bank or broker.
You need to fill in the account opening form and along with it submit the following documents:
 Aadhaar
 Other address proof (Ration card, voter id, driving license, etc.)
 PAN
 Bank statements
 Bank crossed cheque
 KYC form
Make sure you are reading the terms and condition carefully. Also, add a beneficiary to
the demat account for efficient estate planning.
The DP will then follow a verification process. And once that‟s done, the DP will allocate
a unique account number or ID to the account. It usually takes around a week or so to open a

13
demat account – which can be even accessed online –– by logging into your account, through e-
mail, or you can opt for dial-your-demat service.
TYPES OF DEMAT ACCOUNTS
Broadly, there are two types of demat accounts…
Basic Services Demat Account (BSDA)
This account is designed for small investors whose holding value of investment
certificates or securities does not exceed a couple of lakhs. Thus, the annual maintenance charge
for this account is lower. BSDA was introduced after SEBI‟s instruction in August 2012, prior to
that only regular demat accounts existed.
Typically, BSDA holders are not charged an annual maintenance charge for holding
value upto Rs 50,000. For a holding value between Rs 50,000 to Rs 2 lakh the annual
maintenance charge is Rs 100, while if it is over Rs 2 lakh, the tariff of a regular demat account
applies.
Regular Demat Account
This is a normal demat account which even a small investor can open. Compared to
BSDA the charges for this account are more, but are worth it for the services and convenience it
offers.
Is there a minimum balance required to maintain demat account?
As mentioned before, the demat account is to hold your valuable investment certificates
or securities in an electronic form. So, unlike a savings bank account and/or a current account,
there‟s a no-minimum-balance criteria for a demat account.
Benefits of a demat account:
 Storing valuable investment certificates or physical securities will not be an issue
 It eliminates the threat of theft, forgery, fake certificates, non-delivery, etc.
 It even facilitate ease in transacting, i.e. buy and sell securities backed by electronic
settlements
 Reduces transaction cost vis-à-vis dealing with physical investment certificates/securities
 Reduces the paperwork involved while transacting
 Enhances the liquidity of the securities you hold in the investment portfolio
 A lower annual maintenance fee reduces your cost of holding securities
 If need be, you can even pledge the securities in a demat account

14
  A demat account is a safe, convenient, and an efficient way of holding your valuable
investment certificates/securities
 Along with a demat account, make sure you open a trading account so that you buy and
sell securities.
DORMANT ACCOUNT/ INACTIVE BANK ACCOUNT
If you Savings Bank account or current account hasn‟t witnessed any
transactions(credit/debit except interest credited the bank, deduction of service charges, for more
than 1 year, the account is rendered inactive. On exceeding 2 years, the account is declared
dormant/inoperative. Statute (Law) of limitations usually does not apply to dormant accounts,
and their funds can be claimed by their owner or beneficiary at any time.

15
 UNIT – II
PASS BOOK AND CHEQUE

MEANING OF PASS BOOK

Pass Book is a record of transactions taken place between a banker and customer.
It is called “Pass Book” as it passes between the banker and customer, whenever transactions
are taking place. It is a conclusive evidence of banking transactions.
Customer depends on the Pass Book entries to know his account balance and act for
further transactions. Customer should bring the Pass Book to the bank at time of each
transaction. Banker will update the Pass Book, by entering the transaction taken place.
Customer has a right to point out the mistake in the Pass Book at any time. According
to Sir John Paget “The proper functioning of a Pass Book is to constitute a conclusive and
unquestionable record of transactions between the banker and the customer and it should
be recognized as such”.
CONTENTS OF A BANK PASS BOOK
The First Page of a bank pass book usually contains two fold information:
 Details of the bank, issuing Pass Book
 Details of the Account Holder
Details of Bank
 Name of the Bank
 Name of the issuing branch
 Address of the issuing branch
 Telephone No of the issuing branch
 Email ID of the issuing branch
 IFSC code of the issuing branch
 MICR code of the issuing branch
 IFSC – Stands for Indian Financial System Code, which enables money transfer
fromone bank to another
Details of Customer
 Name of the Account Holder
 Address of the Account Holder
 Photo of the Account Holder
 Customer ID of Account Holder

16
  Account No of the Account Holder
 Date of opening of account
 Name of the Nominee, if any
 Nomination registration details
From next page onwards, the details of transaction are recorded. The format of a bank
Pass Book, will enable us to understand Pass Book, in a complete sense. Initial payment into
theaccount would be the first transaction in a Pass Book.

TYPES OF ACCOUNTS FOR WHICH PASS BOOK IS ISSUED:-

Normally a Bank Pass Book refers to a Savings account Pass Book. i.e a Pass Book
for a running or operating bank account. But practically, Pass Book is used to be issued for all
types ofbank accounts, whether it is a deposit account or loan account.
Now, we can see about various types of accounts, for which a banker issues a Pass Book and
their significance.
Savings Bank Account:-
As the name indicates, this account is meant for savings purpose of customer and is an
operating account. This savings Bank account comes under the category of “Demand
Deposits”. It means a savings bank account is payable only on demand from the Customer /
Account Holder, through withdrawal slips or cheque leaves.
Normally, a Pass Book has been issued on opening of a savings bank account. Details
regarding the bank branch issuing and the customer details will be recorded in the First Page
of the Pass Book. The photo of the customer is authenticated by fixing the bank seal.
The details of transaction is recorded from the 2nd page onwards. Based on the Pass
Book record, customer used to continue further transactions.

17
Current Account:-
Current account is another type of “Demand Deposits”. Usually such account is
opened for trading purposes.
In olden days, Pass Books (of some large size) had been issued to Current Accounts
but now-a-days bankers used to issue statements, instead of book-type Pass Books. The
current account holders may opt for daily statements or weekly statements or monthly
statements as per their requirements. The bank levies a charge for issue of account statements.
The customers got the account statements and file them for their future use. They also used to
get yearly statements for auditing and tax purpose.
Recurring Deposit:-
Recurring Deposit is a type of “Term Deposit” or “Time Deposit”, in which a certain
sum of money has been paid to the bankers in monthly instalment for a fixed period. (Eg. For
One year or two years etc) and at the end of the contracted period, the amount paid will be
repaid to the customer with interest at an agreed rate.
For this type of deposits also, bankers used to issue a Pass Book. The first page
contains the details of the banker and the customer. The transaction details of a Recurring
Deposit are recorded in the Pass Book as monthly instalments. On maturity of the deposit, the
customer should sign on the last page of the Pass Book across a revenue stamp for closing of
the deposit.
Loan Pass Books:-
Pass Books are issued to the loan account holders also. As usual, the first page
contains the bank details and customer details. Some banks may give the details of loan
instalments, to bepaid also. Loan Pass Book is an indirect intuition to pay the loan promptly.
RULES RELATED TO PASS BOOK
When an account is opened by a customer, the banker issues a Pass Book for making
entries of the financial transaction, between the banker and the customer.
Mostly, the inside wrapper of the Pass Book contains the rules regarding Pass Books,
which customer is supposed to go through and adhere to.
The Rules are,
1. The customer has to produce the Pass Book, at times of transactions with the bank.
2. The banker must update the entries on production of the Pass Book.
3. On receiving back the Pass Book, the customer must go through the same. If there is
any mistake found, customer should inform the banker and correct it.
4. Any error in the Pass Book can be corrected only by the bank. The customer should

18
 not write anything on his own, in the Pass Book. In case, one Pass Book has been
completely filled with entries, banker will issue a “Continuation Pass Book”. The
word “Continuation” will be mentioned in the first page of the next Pass Book issued.
Every entry in the Pass Book must be countersigned by the officer of the bank.
So, the customer should be vijilant in noticing it and ensure that all entries in the Pass
Book are properly authenticated. But In India, no clear cut evidences are seen in Law
regarding Pass Book. We have to follow many case decisions while dealing with Pass Books.
Here, customer is expected to go through the Pass Book entries.
If he found any mistake, he should brought it to the notice of the bankers, for
rectification within a reasonable period. If the customer fails to do the entries in the Pass
Book are taken as settled and accepted. So In India, the entries in the Pass Book does not
form a conclusive evidence of transactions between bankers and customer.
ENTRIES IN THE PASS BOOK IN FAVOUR OF CUSTOMER
Entries in favour of customer is said to have made, when
 Excess credit has been made to his account wrongly (or)
 A debit due to his account, is not made (or) omitted to be made
So the Pass Book will show an excess credit amount in customer‟s favour. Now, the
question arises “whether the customer can issue a cheque for payment, based on this wrong
entries?”
Since, the Pass Book is handled by the banker any entry in the Pass Book is an
evidence against the bankers. If the customer, acts in good faith, that the money is belonged
to him, then the banker can not act against the customer.
 The customer has acted by relying on the entries in the pass book and did not think
that there was defect in the pass book.
 The customer has not only taken advantage of the excess credit entry but has also
altered his position by spending the excess credit amount. This has altered the position
of the customer. Here, the customer has spent the excess money on the strong belief
that this money belonged to him.
 However, the customer can take advantage of the excess credit entry only when the
customer is able to prove that he solely depended on the pass book and there was no
opportunity for him to go through the personal account or of his cash book.
ENTRIES IN FAVOUR OF THE BANKER
1. When a bank omits certain credit entries due to a customer (or)
2. When the account of a customer is wrongly debited, the entries are said to have made

19
 in favour of the banker.
Even if a customer fails to go through the Pass Book, the wrong entries made by the
banker cannot bind the customer, as the banker is responsible for making entries in the Pass
Book.
The customer can always recover the excess amount wrongly debited or entries which
are to be credited or omitted by the bank. At the same time, the customer can rectify the
mistake as a matter of right provided the customer applies the law of limitation. Suppose,
there is a forgery in the cheque belonging to a customer, he has to inform the bank so that the
bank can stop payment on the same.
But if a customer does not inform it will be a negligent on the part of the customer and
the customer cannot recover the amount paid by the banker on the forged cheque. It is the
bank which has to prove that there is negligence on the part of the customer. We have a case
law to prove that the bank cannot throw the blame on the customer for his negligence.
PROCEDURE FOR ISSUE OF DUPLICATE PASSES BOOK:-
What is a Duplicate Pass Book?
In case of a Pass Book lost, customer can report it to the Banker and banker will issue
a new Pass Book, instead of the lost one. It is called “Duplicate Pass Book”. The Pass Book
issued in such manner will certain the word “Duplicate” on its cover properly authenticated
by the issuing banker.
Procedure for obtaining Duplicate Pass Book
 A separate letter should be written by the customers (who have lost the pass book) to
thebanker as to the loss of Pass Book.
 Bankers accept to issue duplicate Pass Book immediately (or) at his time of
convenience.
 The customer should pay the charges to issue the duplicate Pass Book, either in cash
or allows the banker to debit his account for the due charges.
 The banker issues a duplicate Pass Book, in lieu of the original one containing the
word “Duplicate” on its face.
CHEQUE
Meaning of the term “Cheque”
Normally „Cheque‟ is a paper printed and issued by a banker (normally issued in the
form of booklets containing 10 leaves, 20 leaves etc – called “cheque book”) either used to
withdraw money for personal use or to make trade payments or otherwise in favour of

20
another person.
In legal terms, cheque is a negotiable instrument. “Negotiable” means transferable.
A cheque given in the name of one person can be transferred to the ownership of another
person, by merely putting a signature on the backside of the cheque. The second owner can
also transfer it to a third person, by putting his signature below the signature of the first owner.
This process is called “Negotiation” and the instrument is called “Negotiable
Instrument”. A cheque is a negotiable instrument which is supplied by a banker to the
customer who opens a savings or current account in a bank.
Definition of a cheque
According to section 6 of the Negotiable Instruments Act, 1881, “a cheque is a bill of
exchange, drawn on a specified banker and not expressed to be payable, otherwise than on
demand”. From the above definition; we come to know that,
 A cheque is always drawn upon a banker
 It is always payable on demand
Another definition of a Cheque
"Cheque is an instrument in writing containing an unconditional order, addressed to a
banker, signed by the person who has deposited money with the banker, requiring him to pay
on demand a certain sum of money only to or to the order of certain person or to the bearer of
instrument."
CHEQUE VS BILL OF EXCHANGE
Basis of
S.No. Cheque Bill of exchange
difference
A cheque is a document, used to A bill of exchange is a written
make payments on demand and document that shows the
1 Meaning
can be transferred through indebtedness of the debtor
delivery. towards the creditor.
A cheque is a bill of exchange A bill of exchange is an
drawn on a specified banker and instrument in writing containing
not expressed to be payable an unconditional order, signed by
2 Definition otherwise than on demand and it the maker, directing a certain
includes the electronic image of person to pay a certain sum of
a truncated cheque and a cheque money only to, or to the order of,
in the electronic form. a certain person or the bearer.

21
 Bill of Exchange is defined
Cheque is defined under Section
Governing under Section 5 of the
3 6 of the Negotiable Instruments
Section Negotiable Instruments Act,
Act, 1881.
1881.
A bill of exchange can be drawn
A cheque is drawn only on a
4 Drawn on any person including a
particular banker.
banker.
A bill made payable on demand
A cheque is payable on demand
is void as per Section 31 of
5 Validity to the bearer and hence, it is
the Reserve Bank of India Act,
valid
1934.
A bill of exchange becomes
A cheque becomes payable on-
6 Payability payable on the expiry of a certain
demand only.
date or period.
A cheque does not need any Acceptance must be given by the
7 Acceptance acceptance per se from the drawee before he can be made
payee. liable on it.
No grace period is allowed in
A grace period of three days is
case of payment being made by
allowed while calculating the
8 Grace period cheque for the simple reason
maturity date in the case of a
that it is always payable on
time bill.
demand.
A bill of exchange can be
9 Discounting A cheque cannot be discounted.
discounted with a bank.
A bill of exchange must be
Cheques need not be stamped
10 Stamping sufficiently stamped before
before payment.
payment.
When a cheque is dishonoured, Notice of dishonour is necessary
11 Notice
notice is not necessary. in case of a bill of exchange.
A cheque can be crossed to
Crossing a bill of exchange is not
12 Crossing ensure payment to the rightful
allowed.
owner.

22
 The practice of noting and
There is no protest or noting for
13 Dishonour protesting is followed in case of
the dishonour of a cheque.
dishonour of a bill.
The drawer of a cheque is not
The drawer of bills is discharged
Discharge discharged by the delay of the
14 from liability if it is not duly
from liability holder in presenting it for
presented for payment.
payment.

CHEQUE VS DRAFT
BASIS FOR
CHEQUE DEMAND DRAFT
COMPARISON
Meaning A cheque is a written Demand Draft is a negotiable
document which contains an instrument, issued by the bank in
order to the bank, to pay a favour of a certain person or entity,
certain sum of money to a to transfer of money from one
specified person. place to another.
Order of payment By the account holder to the By the branch of a bank to another
bank. branch of the same bank.
Payment Payable either to order or to Always payable on demand to a
bearer. specified party.
Issuance The cheque is issued by a Demand Draft is issued by a bank.
customer of the bank.
Bank Charges for No Yes
issuance
Drawer Customer of the bank. Bank itself.
Signature It must be signed by the party It contains seal and signature of
issuing it, be it an individual the authorized officer and the
or authorized signatory of a rubber stamp of the bank.
firm.
Parties Involved Three Parties Two Parties
Dishonor Yes No

23
ESSENTIAL ELEMENTS / CHARACTERISTICS OF CHEQUE
Essential characteristics of a cheque
1. It must be in writing: A cheque must be in writing. An oral order to pay does not
constitute a cheque.
2. It should be drawn on a banker: It is always drawn on a specified banker. A
cheque can be drawn on a bank where the drawer has an account (saving bank or
current account).
3. It contains an unconditional order to pay: A cheque cannot be drawn so as to be
payable conditionally. The drawer's order to the drawee bank must be unconditional
and should not make the cheque payable dependent on a contingency. A conditional
cheque shall be invalid. (Example: Pay only if presented by Ram in person) This is
conditional. So the cheque become not valid for payment, though presented
properly.
4. The cheque must have an order to pay a certain sum: The cheque should contain
an order to pay a certain sum of money only. If a cheque is drawn to do something
in addition to, or other than to pay money, it cannot be a cheque. For example, if a
cheque contains 'Pay USD 500 and a TV worth USD 500 to A‟ it is not a cheque.
5. It should be signed by the drawer and should be dated: A cheque does not carry
any validity unless signed by the original drawer. It should be dated as well.
6. It is payable on demand: A cheque is always payable on demand.
7. Validity: A cheque is normally valid for three months from the date it bears.
Thereafter it is termed as stale cheque. A post-dated cheque will not be valid. In
both cases, the validity of the cheque is presumed to commence from the date
mentioned on it.
8. It may be payable to the drawer himself: Cheques may be payable to the drawer
himself/herself. It may be drawn payable to bearer on demand unlike a bill or a pro-
note.
9. Banker is liable only to the drawer: The banker on whom the cheque is drawn shall
be liable only to the drawer. A holder or bearer has no remedy against the banker if
a cheque is dishonoured.
10. It does not require acceptance and stamp: Unlike a bill of exchange, a cheque
does not require acceptance on part of the drawee. There is, however, a custom
among banks to mark cheques as 'good' for the purpose of clearance. But this
marking is not an acceptance. Similarly no revenue stamp is required to be affixed

24
 on cheques.
11. The cheque book may consist of 10, 20, 50 or 100 printed leaves.
MICR Cheques
Now-a-days, banks supply to their customer, MICR (Magnetic Ink Character
Recognition) Cheques. This means that cheque contains white patch at the bottom, in which
numbers are given in magnetic form. The given numbers represent the number of the cheque,
the code number of the concerned branch and the bank. This MICR code has been given to
enable mechanical sorting. Normally the MICR code line is framed in such a manner,
containing the following numbers.
 The first 6 numbers signify the cheque number
 The second 3 numbers signify the city code
 The third 3 numbers signify bank code
 The fourth 3 numbers signify the branch code of the bank

SPECIMEN OF A CHEQUE

A Cheque payment involves three parties:

 The drawer of the cheque – Bank Account Holder
 Drawee of the cheque – on whom the cheque is drawn. It is the bank branch which
has issued the cheque book. That bank branch, ultimately pays the cheque.
 Payee of the cheque / Beneficiary of the cheque - The person to whom the amount of
cheque is paid.

25
REQUISITES OF A CHEQUE:
 Form of the Cheque: A cheque can take the form of an order written on an ordinary
piece of paper. But generally the banks will supply printed cheque forms to the
customer while opening the account and the customers as a rule must use only the
printed cheque forms supplied only as that rule, if the order is made on piece of paper
the bank will refuse payment.
 Issue of Cheque: A cheque is said to be issued when the drawer parts it to another
person. The issue of cheque is very important because the drawer is not liable on a
cheque until he has issued it. Even if drawer is induced by fraud, it is deemed to be
duly issued.
 Dating of Cheque: A cheque is not invalid simply because it is not dated. But dating
of a cheque is essential to find whether it is stale cheque or not. A stale cheque is one
which is not presented for payment before three months from the date of issue of
cheque.
DRAWING OF A CHEQUE
If the drawer makes the cheque properly and if the balance of the drawer at the bank
permits, the bank must pay the amount of cheque as soon as it is presented. If the drawer does
not make the cheque properly, the bank rejects payment. Hence, to make the cheque properly,
the following points or rules must be considered.
1. Date: Date should be mentioned on the cheque properly. If the cheque is more than
three months old or contains future date then the bank will not pay the amount.
2. Name of the Payee: The name of the payee should be mentioned on the cheque.
3. Amount of the Cheque: The amount of the cheque should be mentioned both in
words and figures clearly. The amount written in the word should tally with the
amount written in figures.
4. Signature: The drawer should sign the cheque properly. The signature given on the
cheque should tally with the signature given on the signature specification card. The
signature specification card is kept by the bank.
5. Account Number: The drawer should mention his account number clearly and
correctly.
6. Minimum Balance: The amount mentioned on the cheque should not be more than
the amount deposited in the bank. Beside it, a certain amount of minimum balance
should always be there in the account as per the rule of the bank.
7. Overwriting: There should not be any overwriting in the cheque.

26
 8. Condition of the Cheque: Cheque should be in proper condition. If the cheque is torn,
wet and spotted, it will not be acceptable to the bank.
9. Endorsement: The ordered and crossed cheques should be transferred by proper
endorsement and delivery. Otherwise, the amount of cheque will not be paid by the
bank
VARIOUS TYPES OF CHEQUES
A cheque is an unconditional order addressed to a banker, signed by the person who
has deposited money with a banker, requesting him to pay on demand a certain sum of money
only to the order of the certain person or to the bearer of the instrument.
TYPES OF CHEQUES:-
Bearer Cheque
Bearer cheques are the cheques which are used to withdraw money by the cheque‟s
owner. These types of cheques normally used for a cash transaction.
Order Cheque
Order cheque are the cheques which are withdrawn for the payee (the cheque
withdrawn for another person). Before paying the amount to that payee, banks cross check
the identity of the payee.
Crossed Cheque
Crossed cheques are cheques which bear, two parallel line made on the left top part of
the cheques. Then that cheques formed to crossed cheques. In this type of cheques, payment
is not made in cash while the payment of that type of cheque transferred to the payee‟s
account or to the person‟s account recommended by the holder of the cheque.
Account Payee Cheque
When two parallel lines along with a crossing made on the cheque and the word
„Account Payee‟ written between these lines, then that types of cheques are called account
payee cheque. The payment of the account payee cheque should be made to the person, firm
or company on whose name the cheque was issued.
Company Crossed Cheque
When two parallel lines along with a cross made on the cheque and the word
„Company‟ written between these lines, then that types of cheques are called company
crossed cheques. Normally crossed cheque and company crossed cheque are same.
Stale Cheque
If any cheque issued by a holder does not get withdrawn from the bank till three
months, then that type of cheques are called stale cheque.

27
Post Dated Cheque
If any cheque issued by a holder to the payee given with a later date, then that type of
cheques are called post-dated cheque.
Anti-Dated Cheque
If a cheque contains a date, prior to the date of presentation it is called Ante-Dated
cheque Banker will honour this cheque till the completion of 3 months from the date of the
cheque.
What is material alteration of a cheque?
When any changes are made on the cheque without the knowledge of the drawer, it is
a material alteration. This concept is not limited to cheques, but rather any changes made on
an instrument) or the rights and obligations of the parties involved are known as material
alteration.
Instances of material alteration of a cheque:
 Alteration in Amount Payable
 Change in cheque date
 Change in Time of Payment
 Alteration of Place of Payment
 Tearing of the material part of the cheque
 Addition of a New Party to the instrument.
It is important to know the material alteration in cheque meaning. After alteration, the
cheque becomes a void enforced against any person. If you have to make any changes
{payee‟s name, courtesy amount (amount in figures) or legal amount (amount in words), etc}
in the cheque then write a new one. This helps the bank control fraudulent behaviour.
This is all from my end on material alteration in cheque.
What are the alterations that do not constitute a material alteration?
The alterations that do not constitute a material alteration are: –
1. Alterations that are made with the consent of the parties and changes that correct
errors in data or clerical errors. The change is not obvious and goes into the hands of
the instrument holder.
2. After a change is made to the instrument, the parties to the old instrument cannot be
held liable for the new instrument or the modified instrument for which they never
consented. The party that consents to the change or who changes the instrument is not
entitled to complain against such alteration.
3. A material alteration is one that changes the rights, liabilities or legal status of the

28
 parties as ensured by the original instrument. Whether a change is biased or beneficial
to the parties, the liability of the parties to the material alteration is avoided.
What are the effects of material alteration?
Following are the effects of material alteration: –
1. The main effect of a material instrument is that it makes the instrument void, and that
it frees the instrument itself against any person who was a party to such an instrument
at the time of the material alteration and has had not given his approval.
2. All former parties to a negotiable instrument, which was subsequently changed
without their consent, shall also not be liable to the holder-in-course of having no
notice or knowledge of the material alteration.
3. It does not discriminate whether the change was for profit or to cause harm to any
party. Further, it also does not matter whether the holder himself changed the
instrument or a stranger changed it while the instrument was in the holder‟s custody
because a party in whose condition the instrument is bound to protect the instrument
in its original condition.
4. However, it is worth noting that a material alteration does not make the instrument
completely void i.e., it cannot be applied against all parties.
5. It is void only against those who have not given their approval for the change, and can
be enforced against those who consented to the change or effected the change. Such
an instrument also works against those who become parties to the instrument after the
conversion. However, there is an exception to this rule.
6. On the other hand, section 89 of the Negotiable Instruments Act provides protection
to a party who pays a material altered bill of exchange or promissory note or cheque
provided that he does not know about the alteration and makes such payment in good
faith and without negligence on his part.
BANKERS DUTY IN MATERIAL ALTERED CHEQUE
The paying banker should not make a payment on a materially altered cheque. If the
alteration is confirmed by the drawer with his full signature, the banker should honour it.
MARKING OF A CHEQUE
Marking of a cheque is writing on a cheque by the drawee banker that it would be
honoured when it is duly presented for payment. Marked cheque can not be countermanded
(i.e Stop payment) by the drawer. Payee is certain of getting money.

29
CROSSING OF A CHEQUE
The usage of crossing cheques:
 Cheques are usually crossed as a measure of safety Crossing is made by drawing two
parallel transverse lines across the left top corner of the cheque with or without the
addition of certain words.
 The usage of crossing distinguishes cheques from other bills of exchange.
 The object of general crossing is to direct the drawee banker to pay the amount of the
cheque only to a banker, to prevent the payment of the cheque being made to wrong
person.
DEFINITION OF CROSSING
Sections 123 to 131 (A) of the Negotiable Instruments Act deal about crossing of a
cheque. There are two types of crossing. They are (1) General crossing, and (2) Special
crossing. Section 123 defines general crossing of cheque while section 124 defines special
crossing.
GENERAL CROSSING
According to section 123 “where a cheque bears across its face an addition of the
words „And Company‟ or any abbreviation thereof, between two parallel transverse lines, or
two parallel transverse lines simply, either with or without the words “Not negotiable” that
addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally”.
Special Crossing
According to section 124 “where a cheque bears across its face an addition of the
name of the banker, either with or without the words „Not negotiable‟, that addition shall be
deemed a crossing and the cheque shall be deemed to be crossed specially and to be crossed
to that banker”.
What Constitutes crossing of a cheque:
When a cheque is crossed across the face with two transverse parallel lines, it is said
to be crossed. In between the two parallel lines, the cheque will contain words such as "And
Company' or an abbreviation as '& Co.‟, such cheque is said to be crossed generally. When a
cheque is crossed it implies two things:
 Payment will not be made across the counter by a bank when a crossed cheque is
presented.
 The crossed cheque will have to be presented in an account through a pay-
in-slip.
If a banker makes payment on a crossed cheque across the counter, it is a gross violation

30
of payment in due course. When the cheque goes to an account, it will be credited and the
amount can be withdrawn only by a separate cheque.
Who can cross a cheque
A cheque can be crossed by four persons
1. Drawer: When a drawer issues a cheque to a party, he can cross the cheque either
generally or specially.
2. Holder: When a cheque is given to the holder by the drawer without crossing, the
holder can cross the cheque.
3. Holder in due course: When a holder in due course receives an open cheque, he can
cross the cheque generally, or when the cheque is already crossed generally, it can be
converted into special crossing.
4. Banker: When the collecting banker receives an open cheque without any crossing,
the banker himself can cross the cheque before sending it for collection.
TYPES OF CROSSING
GENERAL CROSSING
In General crossing, two transverse parallel lines are drawn by the drawer of the
Cheque with or without words “Not Negotiable” in between parallel lines. Such a crossing is
called General Crossing.

Words Such as „and Company‟ or „& Co‟ may be written between two parallel lines.
“Account Payee” or “A/c Payee” is written between two parallel lines.
Effect of General Crossing
Cheques which are generally crossed by the drawer can only be paid into a bank
account of the payee whose name written on the cheque.
They cannot be encashed over the counter by bearer or payee.
Both bearer and order cheques can be crossed. However, drawer can make it bearer

31
cheque by cancelling the crossing, writing that CROSSING IS CANCELLED and Putting
full signature verifying the crossing cancellation.
SPECIAL CROSSING
When drawer imposes restrictions on collecting or paying banker by writing particular
bank‟s name between two parallel lines.

Effect of Special Crossing

The bank makes payment only to banker whose name is written in special crossing.
There can be two special crossing. In this collecting banker add an additional crossing and
write the name of other bank who act as their agent in collection of cheque. It allow other
bank to collect the amount on their behalf.
Restrictive Crossing / Account Payee Crossing
Drawer write the word such as “Account payee only” or “A/c Payee” in between the
parallel lines.

Effect of Restrictive Crossing

This crossing restrict the collecting banker to make the payment in account of payee
named in the cheque. If collecting banker credit the amount to any third person other than
payee, he will be liable for any loss arising to drawer or payee.

32
Not Negotiable Crossing
Drawer writes the word “Not Negotiable” in between the transverse lines of crossing.

Effect of Not Negotiable Crossing

The effect of “Not Negotiable Crossing” is that cheque lost its essential feature of “a
Negotiable Instrument”. The Transferee of such crossed cheque cannot get a better title than
that of the transferor (cannot become holder in due course).
Banker do not comply with crossing
A banker can‟t debit its customer‟s account without complying with the crossing on
cheque. If a banker fails to comply with instructions or crossing marked by the drawer of the
cheque, it amounts to breach of contract of the bank with its customer. Banker will be liable
to pay any losses arising out to the drawer or payee.
ENDORSEMENT OF A CHEQUE
Meaning of Endorsement
In legal terms, cheque is a negotiable instrument. “Negotiable” means transferable.
A cheque given in the name of the person can be transferred to the ownership of another
person, by merely putting a signature on the backside of the cheque. The second owner can
also transfer it to a third person, by putting his signature below the signature of the first owner.
This process is called “Endorsement”.
Definition of Endorsement
Endorsement has been defined in sec 15 of the Negotiable Instruments Act, 1881 as
follows:-
Where the maker or holder of a negotiable instrument signs the same otherwise than
as such maker, for the purpose of negotiation on the bank or face thereof or on a slip of paper
annexed there to he is said to have endorsed the same and is called endorser.
In practice, an endorsement is made, always on the back of the instrument. If there is
no space for further endorsement, a slip of paper (slip of paper is called as “Allonge”) can be
attached to the cheque and the endorsement can be continued.

33
REGULATIONS OF ENDORSEMENT
1. Complimentary and Courtesy Title
Complimentary prefixes and suffix and other courtesy title should nor form a part of
the endorsement.
Example: A cheque payable to Dr.M.Siva may be endorsed as M.Siva
2. Correct and Incorrect spelling
If the name of thepayee or endorsee is spelt incorrectly on a cheque, then the
endorsement must correspond with that of the misspelt name.
3. Endorsement by Women
In the case of a spinster, the correct endorsement consists of her first name and
surname. That is her endorsement is her maiden name followed by her father‟s name
Example:If a cheque is endorsed as “Miss Arun” is an incomplete name for a girl. So
the correct endorsement is Kavitha Arun. In case of a married women she can add his
husband name “Kavitha Kaviarasan”
4. Endorsement by Illiterate persons
Cheques is payable to illiterate person should be endorsed with their left hand thumb
impression, which should be wittenesed by an individual well known to both the
parties. The witness should give his signature and the complete address.
Other Rules Regarding Endorsement
1. All Endorsements should be made in ink only (pencil endorsements are not objected
in law, but as they may be altered, such practice should be discouraged)
2. An endorsement should not be in block letters. The endorsement should be made by
signature and not by writing name in Block Letters.
3. A type written endorsement is also valid.
4. A rubber stamp endorsement is as valid as written endorsement
5. An endorsement in the form of facsimile, (signature made on a stamp) of payee‟s
signature is also legally valid. But endorsement types from point 3 to 5 are normally
discouraged in practice, as there are chances of fraud, to take place.
6. When endorsement is in a language which a banker is not expected to know the
paying banker can refuse payment for its confirmation. But he should give valid
reason for it.
KINDS OF ENDORSEMENTS:
Endorsement in blank:
If the endorser signs his name only, endorsement is said to be in blank. The endorser

34
does not specify the name of the endorsee with the effect that an instrument endorsed in blank
becomes payable to bearer, even though originally payable to order and no further
endorsement is required for negotiation.
Endorsement in full:
If in addition to signature, the endorser adds a direction to pay the amount mentioned
in the instrument to or to the order of a specified person, the endorsement is said to be
endorsement in full.
Conditional Endorsement:
If the endorser of a negotiable instrument puts some conditions through explicit words
in the endorsement to make his liability or the right of the endorsee to receive the amount due
thereon is called a conditional endorsement.
Restrictive Endorsement:
Example: Pay the contents to „C‟ only Pay to „C‟ for my use
Endorsement Sans Recourse:
Sans-Recourse means stop taking actions. Here the endorser informs the endorsee that in case
of the dishonor of the instrument, the endorsee cannot make the endorser liable.
Example:
1. Pay to „A‟ or order at his own risk
2. Pay to „B‟ without recourse to me
LEGAL EFFECT OF LOSS OF CHEQUE IN TRANSIT:-
When cheque are sent for collection to another branch or bank, there are chances of
missing them in transit (i.e in the travel from collecting banker to the paying banker).
In such situation, “what should the banker do” – guidelines have been given in a circular
issued by IBA (Indian Banks Association). IBA issued the circular on the orders of Reserve bank of
India. The circular says “In respect of cheques lost in transit or at the paying banks branch, banks
should immediately bring it to the notice of the Account holder so that he can issue a stop payment
instruction”.
Customer can stop payment of the cheque either through net banking or by visiting
the bank. He can also take care that other cheques issued by him are not dishonoured due to
the non- credit of the amount of lost cheque.
Since the reason for such loss is on the collecting banker, customer are expected to be
reimbursed for any ensuing expenses. They are also entitled to interest for the time taken to
obtain the duplicate cheque. A photocopy of the deposited cheque is enough to prove a
deficiency in service.

35
 UNIT – III
PAYING BANKER AND COLLECTING BANKER
PAYING BANKER
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.
PRECAUTIONS BEFORE HONOURING A CHEQUE
In order to safeguard his position, the paying banker has to observe the following
precautions before honouring a cheque.
(1) PRESENTATION OF CHEQUE
First of all a paying banker should note whether the presentation of the cheque is correct.
It can be found out by noting the following factors.
(a) Type of Cheque
Cheques may generally be of two types – open or crossed. If it is open one, the payment
may be paid at the counter. If it is crossed, the payment must be made only to a fellow banker.
(b) Branch
The paying banker should see whether the cheque is drawn on the branch where the
account is kept.
(c) Banking Hours
The paying banker should also note whether the cheque is presented during the banking
hours on a business day.
(d) Multination
If the cheque is from into pieces or cancelled or mutilated, then the paying banker should
not honour it.
(2) FROM OF THE CHEQUE
Before honouring a cheque, a banker should see the form of cheque and find out whether
it is regular or not.
(a) Printed Form
The customer should draw cheques only on the printed leaves supplied by the bankers
failing which the banker may refuse to honour it.

36
(b) Unconditional Order
The cheque should not contain any condition
(c) Date
Before honouring a cheque, the paying banker must see whether there is a date on the
instrument. if a cheque is ante dated, it may be paid if it has not exceeded six months from the
date of its issue otherwise it will become stale one. If a cheque is post dated, he should honour it
only on its due date.
(d) Amount
The paying banker should see whether the amount stated in the cheque both in words and
figures agree with each other.
(e) Material Alteration
If there is any material alteration the banker should return it with a memorandum
―Alteration requires drawer‘s confirmation‖.
(f) Sufficient Balance
If the funds available are not sufficient to honour a cheque, the paying banker is justified
in returning it.
(g) Signature of the Drawer
It is the duty of the paying banker to compare the signature of his customer found on the
cheque with that of his specimen signature.
(h) Endorsement
The banker must verify the regularity of endorsement, if any, that appears on the
instrument.
(i) Legal Bar
The existence of legal bar like Garnishee order limits the duty of the banker to pay a
cheque.
DISHONOUR OF CHEQUE MEANING:
A cheque is said to be honoured, if the banks give the amount to the payee. While, if the
bank refuses to pay the amount to the payee, the cheque is said to be dishonoured. In other
words, dishonour of cheque is a condition in which bank refuses to pay the amount of cheque to
the payee.

37
CIRCUMSTANCES UNDER WHICH A CHEQUE MAY BE DISHONOURED
A paying banker is under a legal obligation to honour his customer‘s mandate. He is
bound to do so under his contractual relationship with his customer. A wrongful dishonor will
have, the worse effect on the banker. However, under the following circumstances, the payment
of a cheque may be refused.
a) Countermanding
Countermanding is the instruction given by the customer of a bank requesting the bank
not to honour a particular cheque issued by him. When such an order is received, the banker
must refuse to pay the cheque.
b) Upon receipt of notice of death of a customer
When a banker receives written information from an authoritative source, regarding the
death of a particular customer, he should not honour any cheque drawn by that deceased
customer.
c) Upon the receipt of notice of insolvency
Once a banker has knowledge of the insolvency of a customer he must refuse to pay
cheques drawn by him.
d) Upon the receipt of notice of insanity
Where a banker receives notice of a customer‘s insanity, he is justified in refusing
payment of the cheque drawn by him.
e) Upon the receipt of notice of Garnishee order
Garnishee order refers to the order issued by a court attaching the funds of the judgement
debtor (i.e. the customer) in the hands of a third party (i.e. the banker). In such a case, the banker
may refuse payment.
f) Upon the receipt of notice of assignment
The bank balance of a customer constitutes an asset and it can be assigned to any person
by giving a letter of assignment to the banker. In such case also the banker may refuse payment.
g) When a breach of trust is intended
In the case of trust account, mere knowledge of the customers intention to use the trust
funds for his personal use is a sufficient reason to dishonor his cheque.

38
h) Defective Title
If the person who brings a cheque for payment has no title or his title is defective, the
banker should refuse to honour the cheque presented by him.
i) Other Grounds
A banker is justified in dishonouring a cheque under the following circumstances also:
 a conditional one,
 drawn on an ordinary piece of paper,
 a stale one,
 post-dated one,
 mutilated,
 drawn on another branch where the account is not kept,
 presented during non-banking hours.
 If the words and figures differ,
 If there is no sufficient funds,
 If the signature of the customer is forged,
 If the endorsement is irregular and,
 If a crossed cheque is presented at the counter
Statutory Protection to a Paying Banker
Supposing, a paying banker pays a cheque which bears a forged signature of the payee or
endorsee, he is liable to the true owner of the cheque. But, it is quite unjustifiable to make the
banker responsible for such errors. It is so because, he is not expected to know the signature of
the payee or the endorsee.
Therefore, law relieves the paying banker from his liability to the true owner in such
cases, This relief is known as ‗statutory protection.‘
To claim protection under Sec.85 of the Nl. Act, 1881, the banker should have fulfilled
the following conditions:
1. He should have paid an order cheque.
2. Such a cheque should have been endorsed by the payee or his order.
3. It should have been paid in due course.

39
Payment in due course
The cheque should have been paid in due course as per Sec. 10 of the N.l. Act. This
concept of payment in due course has three essential feature :
(I) Apparent tenor of the instrument
To avail of the statutory protection, the payment should have been made according to the
apparent tenor of the instrument. The apparent tenor refers to the intention of the parties as it is
evident from the face of the instrument.
Example: If a drawer draws a cheque with a post —date, his intention is to make payment only
after a certain date. If it is paid before the due date, this payment does not amount to payment in
due course. So also, the payment of a countermanded cheque does not amount to payment in due
course.
(ii) Payment in good faith and without negligence
Good faith forms the basis of all banking transactions. As regards negligence, the banker
may sometimes be careless in his duties which constitutes an act of negligence. If negligence is
proved, the banker will loss the statutory protection given under Sec. 85.
Example:
 Payment of a crossed cheque over the counter.
 Payment of a post-dated cheque before maturity.
 Failure to verify the regularity of an endorsement.
(iii) Payment to a person who is entitled to receive payment:
The banker must see that the person, who presents the cheque, is in possession of the
instrument and he is entitled to receive the amount of the cheque.
Protection to a bearer cheque
Now this protection has been extended to bearer cheques also under sec. 85(2). If a
bearer cheque is paid in due course, the banker is entitled to get protection.
Statutory Protection in the case of a Materially Altered Cheque
A paying banker cannot normally claim any statutory protection for a materially altered
cheque. However; Sec. 89 of the Negotiable instrument Act. Gives protection in the case of a
materially altered cheque provided,
1) He is liable to pay,
2) Such an alteration is not apparent and,

40
 3) The banker has made the payment in due course.
Recovery of Money Paid by Mistake
Under the following circumstances, money wrongly paid can be recovered:
(i) Money received mala fide is recoverable
When a person receives money by mistake in bad faith, knowing that he is not entitled to
receive that money then the banker is entitled to recover the same.
(ii) Money paid under a mistake of fact is recoverable
For instance, a banker pays money to X, thinking that he is Y. This is a mistake of fact
regarding the identity of the parties. Y is under a legal duty to pay the money back to the banker.
COLLECTING BANKER
A collecting banker is one who undertakes to collect the amount of a cheque for his
customer from the paying banker. In collecting a cheque, the banker can act in two capacities
namely
i) as a holder for value, and
ii) as an agent for collection.
As a Holder for value
The banker would be regarded as a holder for value:
 If he allows his customers to withdraw money before cheques paid In for collection are
actually collected and credited.
 If any open cheque‘ is accepted and the value is paid before collection, and
 If there is a reduction in the overdraft account of the customer before the cheque is
collected and credited in the respective account.
 In all these cases, the banker acquires a personal interest.
A Banker as an agent
In practice, no banker credits a customer account even before a cheque is collected. He
collects a cheque on behalf of a customer. So, he cannot acquire any of the rights of a holder for
value, He has to act only as an agent of the customer.
COLLECTING BANKER
A collecting banker is one who undertakes to collect the amount of a cheque for his
customer from the paying banker.

41
DUTIES & RESPONSIBILITIES OF COLLECTING BANKERS:
Acting as agent
While collecting an instrument, whether for credit to customer‘s account or for himself,
the Bankers works as agent of his customer. As an agent he has generally to take such steps &
precautions to protect the interest or his customer as a man of ordinary prudence would take to
safe-guard his own interest.
Scrutinizing the instruments
Name of the holder, Branch name, date, amount in world and figure, any cutting without
signature, material alteration of any to be checked carefully.
Checking the endorsement
Bankers has to check the instrument whether it has been endorsed properly.
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.
Collecting the proceeds in the payee’s account
It is the duty of collecting banks to collect and credit the proceed of the instruments to the
proper/correct account.
Notice of dishonor and returning the instruments
If any instrument is dishonored by the paying bank it should be informed to the
customer on the business day following the receipt of the unpaid instruments.
Collecting Banker’s Protection
Under section 131 of negotiable instrument Act the collecting banker is not liable to the
true owner of a cheque or a banker‘s draft if his title to the instrument proves defective provided
the cheque or draft was one crossed generally or specially to himself and collected for a customer
is good faith and without negligence.
The above statutory protection is available to the collecting banker only if he fulfills the
following conditions:
 The cheque he collected is a crossed cheque.
 He collected such crossed cheque only for his customer as an agent & not as a holder for
value.
 He collected such crossed cheque in good faith and without negligence.

42
STATUTORY PROTECTION TO COLLECTING BANKS
A collecting banker can claim protection against conversion if the following conditions
are fulfilled:
1. Good Faith and Without Negligence
Statutory protection is available to a collecting banker when he receives payment in good
faith and without negligence. The phrase in ―goodfaith‖ means honestly and without notice or
interest of dishonesty or fraud and does necessarily require carefulness. Negligence means
failure to exercise reasonable care. The banker should have exercised reasonable care and
deligence.
2. Collection for a Customer
Statutory protection is available to a collecting banker if he collects on behalf of his
customer only. If he collects for a stranger or noncustomer, he does not get such protection. A
bank cannot get protection when he collects a cheque as holder for value
3. Acts as an Agent
A collecting banker must act as an agent of the customer in order to get protection. He
must receive the payment as an agent of the customer and not as a holder under independent title.
The banker as a holder for value isnot competent to claim protection from liability in conversion.
In case of forgery, the holder for value is liable to the true owner of the cheque.
4. Crossed Cheques
Statutory protection is available only in case of crossed cheques. It is not availablein case
uncrossed or open cheques because there is no need to collect them through a banker. Cheques,
therefore, must be crossed prior to their presentment to the collecting banker for clearance.
What is negligence?
Negligence is a failure to take reasonable care to avoid causing injury or loss to another
person. There are four steps in proving negligence. The plaintiff must prove:
 That there is a duty in the circumstances to take care duty of care
 That the behaviour or inaction of the defendant in the circumstances did not meet the
standard of care which a reasonable person would meet in the circumstances that the
plaintiff has suffered injury or loss which a reasonable person in the circumstances could
have been expected to foresee (damage)
 That the damage was caused by the breach of duty (causation).

43
 UNIT – IV
LOANS, ADVANCES AND NON- PERFORMING ASSETS

MEANING OF LOANS AND ADVANCES

PRINCIPLES OF SOUND LENDING
The principles of sound lending by commercial banks are as follows:
1. Safety of principal
The first and foremost principle of lending is to ensure the safety of the funds lent. It
means that the borrower is in a position to repay the loans, along with interest, according to the
terms of the loan contract. The repayment of the loan depends upon the borrower‟s
 capacity to pay and
 willingness to pay.
The banker should, therefore, take utmost care in ensuring that the enterprise or business
to which a loan in to be granted is a sound one and the borrower is capable to repay it
successfully.
2. Profitability
Commercial banks are profit earning institutions. They must employ their funds
profitably so as to earn sufficient income out of which to pay interest to the depositors, salaries to
the staff and to meet various other establishment expenses and distribute dividends to the
shareholder. The sound principle of lending does not sacrifice safety or liquidity for the sake of
higher profitability.
3. Marketability or Liquidity
Liquidity of loans is another principle of sound lending. The term liquidity of loan
indicates quick realisation of loans from the borrowers. Banks are essentially dealers in short
term funds and therefore, they lend money mainly for short term period. The banker should see
that the borrower is able to repay the loan on demand or within a short notice.
4. Purpose of the loan
Before granting loans, the banker should examine the purpose for which the loan is
demanded. If the loan is granted for productive purpose, thereby the borrower will make much
profit and he will be able to pay back the loan. In no case, loan is granted for unproductive
purpose.

44
5. Diversification
The element of risk in relation to loans cannot be totally eliminated, it can only be
reduced. Risks of lending can be reduced by diversifying the loans. While granting loans, the
banker should not grant a major part of the loan to one single particular person or particular firm
or an industry. If the banker grants loans and advances to a number of firms, persons or
industries, the banker will not suffer a heavy loss even if a particular firm or industry does not
repay the loan.
6. National policies
Banks have certain social responsibilities towards society also. The banks have to take
into account the economic and social priorities of the country beside safety, liquidity and
profitability. While formulating the lending policy, the banks are guided by the government
policies in relation to disbursal of credit. Thus, national interest and policies are influence the
lending decisions of banks.
SECURED AND UNSECURED ADVANCES
Loan is referred to a sum of money borrowed from bank or financial institution for a
particular period, that requires repayment along with interest. These days, loans are considered as
the best means of availing finance for any purpose like education, construction of a house,
purchasing the car or any other business requirement. There are two types of loan, namely,
secured loan and unsecured loan. When a loan is secured the borrower pledges some asset as
security against the loan.
On the other hand, an unsecured loan is one that is backed with the borrower‟s
creditworthiness and paying capacity. these are issued to promorters, so as to fulfill promorter‟s
contribution norm.
DEFINITION OF SECURED LOAN
A type of loan in which the borrower pledges an asset as security against the loan
amount, it is known as a Secured Loan. In the case of default in repayment, the lender has the
right to seize and sell the security to recover the amount lent. Here one thing should be kept in
mind that the borrower need not transfer the asset for getting the loan amount approved instead
he can possess the property until and unless he fails to pay the loan amount. In the event of
failure to repay the loan, the asset is forfeited by the lending institution.
 Mortgage Loan

45
  Foreclosure
 Repossession
 Non-recourse loan
Definition of Unsecured Loan
The loan agreement, in which an asset does not protect the loan amount is Unsecured
Loan. In this type of loan, there is no obligation of the borrower to pledge an asset as security.
The loan is known as unsecured because there is no guarantee regarding payment and if the
borrower defaults payment the financial institution can only sue him for the money but cannot
recover the amount forcefully or by selling his property.
The risk is very high as the property does not support the amount. The loan amount will
be approved on the basis of creditworthiness, financial status, character and ability to pay, of the
borrower. This also becomes one of the criteria for deciding the rate of interest. For availing such
loans, the borrower must possess high credit ratings.
In the case of bankruptcy of the borrower, the unsecured creditors have the right to realise
the amount out of his assets. But first of all the secured creditors are given the asset collateral,
after that the unsecured creditors are paid off, on a proportionate basis. One good example of
such loan is a credit card.
FORMS OF ADVANCES IN BANKING
 Cash credit,
 Overdraft,
 Loans,
 Demand loan vs term loan,
 Secured vs unsecured loan,
 Participation loan or consortium loan,
 Purchasing and discounting bills.
These types of advances are explained below.
Cash Credit
Cash Credit is an arrangement by which the customer is allowed to borrow money up to a
certain limit known as the „cash credit limit‟.Usually, the borrower is required to provide security
in the form of pledge or hypothecation of tangible securities. Sometimes, this facility is also
provided against personal security.

46
 Interest is charged only for the amount withdrawn and not for the whole amount
approved. If the customer does not use the cash limit to the foil extent, a commitment charge is
made by the bank. This charge is imposed on the un-utilized portion of cash credit only.Cash
credits are the most favorable mode of financing by large commercial and industrial concerns.
OVERDRAFT
Overdraft is an arrangement between a banker and his customer by which the latter is
allowed to withdraw over and above his credit balance in the current account up to an agreed
limit. This is only a temporary accommodation usually granted against security.
The borrower is permitted to draw and repay any number of times, provided the total
amount overdrawn does not exceed the agreed limit. The interest is charged only for the amount
drawn and not for the whole amount sanctioned.
LOANS
W. Kocli defines loans as “a formal agreement between a bank and borrower to provide a
fixed amount of credit for a specified period”.
The banker advances a lump sum for a certain period at an agreed rate of interest- The
entire amount is paid on an occasion either in cash or by credit in his current account which he
can draw at any time. The interest is charged for the full amount sanctioned whether he
withdraws the money from his account or not.
The loans may be repaid in installments or at the expiry of a certain period. The loan may
be made with or without security.A loan once repaid in full or in part cannot be withdrawn again
by the customer. In case a borrower wants a further loan, he has to arrange for a fresh loan.
The loan may be a demand loan or a term loan.A demand loan is payable on demand. It is
for a short period and usually granted to meet the working capital needs of the borrower.Term
loans may be medium-term or long-term. Medium-term loans are granted for a period ranging
from one year to five years for the purpose of vehicles, tools, and equipment.
Long-term loans are granted for capital expenditures such as the purchase of land,
construction of factory building, purchase of new machinery and modernization of plant.
Purchasing and Discounting Bills
Bills of exchange, as defined in The Negotiable Instruments Act, 1 SSI, is “an instrument
in writing containing an unconditional order, signed by the maker, directing a certain person to
pay (on demand or at a fixed or determinable future time) a certain sum of money only to, or to

47
the order of, a certain person or to the bearer of the instrument”.Banks grant advances to their
customers by discounting bills of exchange.
The net amount, after deducting the amount of interest/discount from the amount of the
installment, is credited in the account of the customer.In this form of lending, the interest is
received by the banker in advance.Banks sometimes purchase the bills instead of discounting
them.Bills which are accompanied by documents or title to goods such as bills of lading or
railway receipt are purchased by the bankers.In such cases, the banker grants a loan in the form
of overdraft or cash credit against the security of the bills.
The term „bill purchased‟ seems to imply that the bank becomes the purchaser or owner
of such bills. But in almost all cases the bank holds the bill only as a security for the advance.
MODES OF CHARGING SECURITY
 Lien
 Pledge
 Hypothecation
 Mortgage
 Assignment
Lien: Lien means the right to retain the goods of the borrower until the debts are repaid.
Pledge: Pledge is the bailment of goods as security for payment of a debt. Only movable goods
can be pledged.
Hypothecation: Hypothecation creates on equitable charge on movable property without
possession. However, the hypothecation deed provides that the banker will have the right to take
the goods hypothecated in its possession if the the need arises.
Mortgage: A mortgage is a conveyance of an interest in property (land or any immovable
property) for securing a debt. A legal mortgage is created by a registered deed and gives the
mortgagee the right of sale in case of default of the borrower.
Assignment: Assignment is transfer of ownership from one person/authority to another
person/authority.
Set-off: Set-off means the total or partial merging of a claim of one person against another in a
counter claim by the latter against the former.

48
Lien
Lien is the right of a creditor to retain the properties belonging to the debtor until debt
due to him is repaid. Lien gives 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 statute or by custom or by
usage. A banker‟s lien is a general lien which is tantamount to an implied pledge. It confers upon
the banker the right to sell the securities after serving reasonable notice to the borrower
Kinds of Lien
 A particular lien applies to one transaction or certain transactions only.
 General lien gives a right to a person to retain the goods not only in respect of a
particular debt but also in respect of the general balance due form the owner of the goods
to the person exercising the right of lien. It extends to all transactions.Negative Lien
Negative Lien: In case of negative lien. The possession of the security is with the debtor himself,
who promises not to create any charge over them until the loan is repaid.
Banker’s Lien
A banker‟s lien is always a general lien. A banker has a right to exercise both kinds of
lien. A banker‟s lien is treated as an implied pledge: It must be noted that a banker‟s lien is
generally described as an implied pledge. It means that a lien not only gives a right to retain the
goods but also gives a right to sell the securities and goods of the customer after giving a
reasonable notice to him.
When the customer does not take any steps to clear his arrears. This right of sale is
normally available only in the case of pledge. That is why lien is regarded as an implied pledge.
Pledge:
Section 172 of contract Act, 1872, defines a pledge as, the „bailment of goods as security for
payment of a debt or performance of a promise.” Only movable goods can be pledged. From the
above definition we observe that,
1. A pledge occurs when goods are delivered for getting advance,
2. The goods pledged will be returned to the owner on repayment of the debt,
3. The goods serve as security for the debt.
The person who transfers the goods is called pledger and to whom it is transferred is called the
pledgee.

49
ESSENTIALS OF PLEDGE
Delivery of goods:
Delivery of goods is essential to complete a pledge. The delivery may be physical or
symbolic. Physical delivery refers to physical transfer of goods from a pledger to the pledgee.
Symbolic delivery requires no actual delivery of goods. But the possession of goods must be
transferred to a pledgee. This may be done in any one of the ways:
1. Delivery of the key of the warehouse in which the goods are stored.
2. Delivery of the document of title to goods like bill of lading, Railway receipt, Warehouse
warrant etc.
3. Delivery of transferable warehouse warrant if the goods are kept in a public warehouse.
Transfer of ownership:
The ownership of goods remains with the pledger. The possession of the goods vests with
pledgee till the loan is repaid.
Right in case of failure to repay:
If the pledger fails to repay within the stipulated time, pledgee may,
1. sell the goods pledged after giving reasonable notice,
2. File a civil suit against the pledger for the amount due,
File a suit for the sale of the goods pledged and the realization of money due to him. When
the pledgee decides to exercise the right of sale, he must issue a clear, specific and reasonable
notice.
Accepting goods for pledge
Before accepting the goods for pledge, banker should be satisfied that proposed pledge goods
contain the attributes of a good security.
In the matter of pledge banks may be cheated in one or more of the following manners:
 Pledge of spurious goods.
 Inflating the value of goods.
 Pledging the goods to more than one bank by using various entrances to the godowns.
 Fraudulent removal of goods with the connivance / due to the negligence of the bank‟s
staff.
 Pledge of goods belonging to a third party.

50
Attributes of a good Tangible security
1. Marketability
2. Easy ascertainment of value
3. Stability of value
4. Storability
5. Cost and labor of supervision
6. Transportability
7. Durability
8. Ascertainment of title
9. Easy transfer of title
10. Absence of contingent liability.
11. Yield
Documents required for Pledge:
 Demand promissory note.
 Agreement for pledge.
 Letter of continuity.
 Letter of arrangement
 Insurance policy covering all risks.
 Invoice of goods pledged (for imported goods).
 Latest stock report.
 Letter of disclaimer
 Other documents as per sanction letter.
Hypothecation:
Hypothecation creates on equitable charge on movable property without possession. The
mortgage of movable property for securing loan is called Hypothecation. In other words, in case
of hypothecation, a charge over movable properties like goods, raw materials, goods in progress
is created. Hypothecation is a charge against property for an amount of debt where neither
ownership nor possession is passed to the creditor. Though the borrower is in actual physical
possession, the constructive possession remains with the Bank as per the deed of hypothecation.
The borrower holds the possession not in his own right as the owner of the goods but as
the agent of the Bank. Being only an equitable charge on movable property without possession,

51
hypothecation facility is risky as clean advances. So it is granted only to parties of undoubted
means with the highest integrity. Moreover, bankers insist upon for giving some sort of collateral
securities.
Features of Hypothecation:
 Charge against a property for an amount of debt,
 Goods remains in the possession of the borrower,
 Borrower binds himself to give possession of the hypothecated goods to the Bank when
called upon to do so.
 It is a floating charge.
 It is rather precarious.
Being only an equitable charge on movable property without possession, hypothecation facility
is risky as clean advances. So it is granted only to parties of undoubted means with the highest
integrity.
Mortgage
 The transferor is called a „mortgagor‟, the transferee a „mortgagee‟, the principal money
and interest of which payment is secured for the time being are called „mortgage money‟,
and the instrument (if any) by which the transfer is effected is called a „mortgage deed‟.
 A mortgage is a method of creating charge on immovable properties like land and
building.
 Section 58 of the Transfer of Property Act 1882, define a mortgage as follows: “A
mortgage is the transfer of an interest in specific immovable property for the purpose of
securing the payment of money advanced or to be advanced by way of loan, an existing
or future debt, or the performance of an engagement which may give rise to a pecuniary
liability.”
Forms of Mortgages
Section 58 of the transfer of Property Act enumerates six kinds of mortgages:
1. Simple mortgage.
2. Mortgage by conditional sale.
3. Usufructuary mortgage.
4. English mortgage.
5. Mortgage Ly deposit of title deeds.

52
 6. Anomalous mortgage.
Rights of Mortgager
1. Rights of Redemption
2. Accession to Mortgaged Property:
3. Right to Transfer to Third Party
4. Right to Inspection and Production of Documents
Rights of Mortgagee
1. Right to sue for mortgage money:
2. Right of sale:
3. Right of foreclosure:
4. Right of accession to property:
5. Right of possession:
Sub-Mortgage
A sub-mortgage is created when the mortgagee gives the mortgaged property as security
for advance. The mortgaged security is the property of the mortgagee and so he has the right to
re-mortgage for securing loans. The sub-mortgagee is placed in the position of the original
mortgagee and entitled to receive the mortgage money, sue for the property and realise, the
security. Therefore, a sub-mortgage is also known as „mortgage of mortgagee.‟
Assignment
 Assignment means transfer of any existing or future right, property or debt by one person
to another person.
 The person who assigns the property is called assignor and the person to whom it is
transferred is called assignee.
 Usually assignment are made of actionable claims such as book debts, insurance claims
etc.
 In banking business, a borrower may assign to the banker
 The book debts,
 Money due from government department
 Insurance policies

53
Type of Assignment
Assignment may be two types
1. Legal Assignment: A legal Assignment is an absolute transfer of actionable claim. It
must be in writing signed by the assignor. The assignor informs his debtor in writing
intimating the assignee‟s names and address. The assignee also gives a notice to the
debtor and seeks a confirmation of the balance due.
2. Equitable assignment: An equitable assignment is one which does not fulfill all the
above requirement.
In case of legal assignment, the assignee can sue in his own name. A legal assignee can also
give a good discharge for the debt without the concurrence of the assignor.
CANNONS OF A GOOD BANKING SECURITY
Validity of the title of the borrower
When a customer applies for a loan against some security, the banker must ascertain the
validity of the title of the borrower. If he gets a defective title, he cannot enforce his right against
the debtor. The banker must also get the title transferred to him by executing appropriate
documents.
Liquidity
Liquidity is also an important principle of lending in banking. Bank lend public money
which is repayable on demand by depositors so bank lends for a short period. A banker must
ensure that money will come back on demand or as per repayment schedule. The borrower must
be able to repay the loan within a reasonable time after demand for repayment is made.
Stability is value
The value of security should be steady and stable. It should not fluctuate widely.
Easy transferability
The security should be easily transferable. A document of title to goods can be
transferred by endorsement and delivery. Immovable property does not have easy transferability.
Free from disabilities
A banker should disqualify securities with certain disabilities like partly paid-up shares,
life insurance policy without surrender value and so on. He should see before accepting that the
security is free from disabilities.

54
Realization of advance
If the borrower fails to repay the debt within the time specified, the banker after serving a
reasonable notice, can sell the securities and recover his dues. If the banker is unable to recover
the full amount from the sale proceeds, he can file a suit against the borrower for the recovery of
the balance within three years from the date of sanction of the advance.
Margin
Margin is the provision for safety maintained by the banker while advancing against
securities. A banker does not lend the full value of the security offered by the borrower. He
retains a margin over it. The margin is the difference between the market value of the security
offered and the loan granted. For instance, if a building worth of Rs.10,000 us submitted as
security, the banker will sanction only Rs,5,000. He lends only 50% of the value of the property.
ie. He maintains 50% margin.
Documentation
Documentation is the salient feature of sound lending. The terms and conditions under
which the loan is sanctioned and the security accepted are put down in writing and signed by the
borrower. Obtaining such agreement is called documentation.
Such agreement specifies the rights and liabilities of the banker and customer. So, there is
no room for misunderstanding of the terms between both the parties.
DOCUMENTS OF TITLE TO GOODS
Bill of lading
A document issued by a carrier, or its agent, to the shipper as a contract of carriage of
goods. It is also a receipt for cargo accepted for transportation, and must be presented for taking
delivery at the destination.
Among other items of information, a bill of lading contains (1) consignor's and
consignee's name, (2) names of the ports of departure and destination, (3) name of the vessel, (4)
dates of departure and arrival, (5) itemized list of goods being transported with number of
packages and kind of packaging, (6) marks and numbers on the packages, (7) weight and/or
volume of the cargo, (8) freight rate and amount.
Warehouse receipt
This is a document issued by the warehouse keeper, which acknowledges, the receipt of
the goods from the depositor. It also shows the existence of an agreement to keep the goods in

55
the warehouse subject to certain conditions. This is not a document of title to goods and is not
transferable. The warehousekeeper can deliver the goods only after receiving the delivery order
from the depositor. The delivery order may be for all or a part of the goods deposited.
Delivery order
This is a document through which the depositor directs the warehouse keeper to deliver
the specified goods either to the party mentioned in the document or to the bearer. The
warehouse keeper delivers the goods as per the instructions. Transfer of ownership takes place
through this document.
Railway receipt
A railway receipt is a document issued by the railway;y company acknowledging the
receipt of the goods and undertaking to carry the goods delivered to a place mentioned therein. It
is not a negotiable instrument, but it can be transferred by endorsement and delivery.
Dock warrant
A Dock warrant is a document issued by a dock company in exchange of goods received.
The document acknowledges and describes the goods received. The dock company undertakes to
deliver them to the person named therein. The document can be transferred by endorsement and
delivery.
What is Non-Performing Asset (NPA)
A nonperforming asset (NPA) refers to a classification for loans or advances that are in
default or are in arrears on scheduled payments of principal or interest. In most cases, debt is
classified as nonperforming when loan payments have not been made for a period of 90 days.
While 90 days of nonpayment is the standard, the amount of elapsed time may be shorter or
longer depending on the terms and conditions of each loan.
Types of Nonperforming Assets
Although the most common nonperforming assets are term loans, there are six other ways
loans and advances are NPAs:
 Overdraft and cash credit (OD/CC) accounts left out-of-order for more than 90 days
 Agricultural advances whose interest or principal installment payments remain overdue
for two crop/harvest seasons for short duration crops or overdue one crop season for long
duration crops
 Bill overdue for more than 90 days for bills purchased and discounted

56
  Expected payment is overdue for more than 90 days in respect of other accounts
 Non-submission of stock statements for 3 consecutive quarters in case of cash-credit
facility
 No activity in the cash credit, overdraft, EPC, or PCFC account for more than 91 days
Banks are required to classify nonperforming assets in one of three categories according
to how long the asset has been non-performing: sub-standard assets, doubtful assets, and loss
assets.
 A sub-standard asset is an asset classified as an NPA for less than 12 months.
 A doubtful asset is an asset that has been non-performing for more than 12 months.
 Loss assets are assets with losses identified by the bank, auditor, or inspector and have
not been fully written off.
FACTORS CONTRIBUTING TO NPA’S
There are several reasons for an account becoming NPA they are Internal factors &
External factors
Internal factors
 Funds borrowed for a particular purpose but not use for the said purpose.
 Project not completed in time.
 Poor recovery of receivables.
 Excess capacities created on non-economic costs.
 In-ability of the corporate to raise capital through the issue of equity or other debt
instrument from capital markets.
 Business failures.
 Diversion of funds for expansion\modernization\setting up new projects\ helping or
promoting sister concerns.
 Willful defaults, siphoning of funds, fraud, disputes, management disputes, mis-
appropriation etc.,
 Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups,
delay in settlement of payments\ subsidiaries by government bodies etc.,
External factors
1. Sluggish legal system -
 Long legal tangles

57
  Changes that had taken place in labour laws
 Lack of sincere effort.
2. Scarcity of raw material, power and other resources.
3. Industrial recession.
4. Shortage of raw material, raw material\input price escalation, power shortage, industrial
recession, excess capacity, natural calamities like floods, accidents.
5. Failures, non-payment\ over dues in other countries, recession in other countries,
externalization problems, adverse exchange rates etc.
6. Government policies like excise duty changes, Import duty changes etc.,
Other factors
1. Liberalization of the economy and the consequent pressures form liberalization like
severe competition, reduction of tariffs, removal of restriction, etc.
2. Poor monitoring of credits and the failure to recognize early warning signals shown by
standard assets.
3. Promoters over optimism in setting up large projects.
4. Sudden crashing of capital markets and the failure to raise adequate funds.
5. Granting of loans for certain sectors on the basis of governments directives rather than
commercial imperatives.
6. Mismatch of funding, i.e, sing loans granted for short- terms for long-term transactions.
7. High leveraging and high cost of borrowing.
8. Commitment of willful defaults sensing that the legal recourse available to collect debts
is very slow.
REMEDIES OF NPA’S
Non legal remedies
Non legal remedies may be in the form of compromise, mergers and take-overs. The goods
pledged or hypothecated may be sold without the intervention of the court. The debts can be
assigned in favour of any agency which may come forward to collect debts for a service charge.
Legal remedies
1. Debt Recovery Tribunals (DRTs)
Narasimham Committee Report I (1991) recommended the setting up of Special
Tribunals to reduce the time required for settling cases. Accepting the recommendations, Debt

58
Recovery Tribunals (DRTs) were established. There are 22 DRTs and 5 Debt Recovery
Appellate Tribunals. This is insufficient to solve the problem all over the country (India).
2. Securitisation Act 2002
Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act 2002 is popularly known as Securitisation Act. This act enables the banks to issue
notices to defaulters who have to pay the debts within 60 days. Once the notice is issued the
borrower cannot sell or dispose the assets without the consent of the lender.
The Securitisation Act further empowers the banks to take over the possession of the
assets and management of the company. The lenders can recover the dues by selling the assets or
changing the management of the firm. The Act also enables the establishment of Asset
Reconstruction Companies for acquiring NPA.
According to the provisions of the Act, Asset Reconstruction Company of India Ltd. with
eight shareholders and an initial capital of Rs. 10 crores has been set up. The eight shareholders
are HDFC, HDFC Bank, IDBI, IDBI Bank, SBI, ICICI, Federal Bank and South Indian Bank.
3. LokAdalats
LokAdalats have been found suitable for the recovery of small loans. According to RBI
guidelines issued in 2001. They cover NPA up to Rs. 5 lakhs, both suit filed and non-suit filed
are covered. LokAdalats avoid the legal process. The Public Sector Banks had recovered Rs. 40
Crores by September 2001.
4. Compromise Settlement
Compromise Settlement Scheme provides a simple mechanism for recovery of NPA.
Compromise Settlement Scheme is applied to advances below Rs. 10 Crores. It covers suit filed
cases and cases pending with courts and DRTs (Debt Recovery Tribunals). Cases of Willful
default and fraud were excluded.
5. Credit Information Bureau
A good information system is required to prevent loans from turning into a NPA. If a
borrower is a defaulter to one bank, this information should be available to all banks so that they
may avoid lending to him. A Credit Information Bureau can help by maintaining a data bank
which can be assessed by all lending institutions.

59
 UNIT – V
E- BANKING

Meaning of E- Banking
E-banking is an arrangement between a bank or a financial institution and its
customers that enables encrypted transactions over the internet. Short for electronic banking,
E-banking has various types that cater to customers' different requirements, which can be
resolved online.
E-banking is also helpful for non-financial transactions such as changing your ATM
PIN, getting a mini statement, updating your personal details, balance inquiry or printing an
account statement. Essentially, it refers to any transaction that doesn't involve any movement
of funds to or from your account.
Difference between Traditional Banking and E- banking

Basis Traditional Banking E- Banking

E-Banking Practices involve
Traditional Practice provides
Global Coverage global coverage while sitting
limited coverage.
at home/office.
E-Banking provides the
Traditional Practice does not facility of marketing of
Marketing Tool
provide proper marketing tools. products/ schemes online
easily.
Traditional Practices involves E-Banking same lot of line as
Prompt Services process which requires more there is no need to stand in
time. long queues.
With the system of
Traditional banking practices do
Reduction of reconciliation of inter-branch
not provide a complete check on
errors/ Frauds transactions, frauds and errors
banking transactions.
could be reduced.
Cost and time could be
Bank executives have to perform
reduced or everything is to be
Paperwork a lot of paperwork which
through some interval and no
increases both time and cost.
need for huge paperwork.
E-banking provides banking
In the case of traditional
Risk of carrying without carrying cash as
business, a person has to carry
cash plastic money (ATMs, Credit
cash at each point of time.
cards are available)

60
E- DELIVERY CHANNELS
Internet Banking
Internet banking, also known as online banking or e-bankingor Net Banking is a
facility offered by banks and financial institutions that allow customers to use banking
services over the internet. Customers need not visit their bank’s branch office to avail each
and every small service.
Features of Online Banking
 Check the account statement online.
 Open a fixed deposit account.
 Pay utility bills such as water bill and electricity bill.
 Make merchant payments.
 Transfer funds.
 Order for a cheque book.
 Buy general insurance.
 Recharge prepaid mobile/DTH.
Advantages of Internet Banking
The advantages of internet banking are as follows:
 Availability: You can avail the banking services round the clock throughout the year.
Most of the services offered are not time-restricted; you can check your account
balance at any time and transfer funds without having to wait for the bank to open.
 Easy to Operate
 Convenience
 Time Efficient
Automated Teller Machines (ATMs)
 An automated teller machine also known as an Automated Banking Machine
(ABM) is an electronic telecommunication device that enables the customers of a
financial institution to perform financial transactions, particularly cash withdrawal,
without the need for a human cashier, clerk or bank teller.
The Services Normally Offered At An ATM Are:
 Cash withdrawal
 Cash Deposit
 Account information
 Regular bills payment
 Balance Enquiry
61
  Mini Statements
 Money Transfer
 Purchase of Re-load Vouchers for Mobiles
Types of ATMs
 White Label ATM: White Label ATMs are those ATMs which set up, owned
and operated by non-bank entities. To aid financial inclusion and drive ATM
penetration in the country the Reserve Bank of India has permitted the launch of
White Labelled ATMs (WLAs) i.e private non-bank companies to set up, own and
operate its own brand of ATMs in the country. These white label ATMs will not
display logo of any particular bank. TATA launched the first white label ATM in
India under the brand name of Indicash.
 Brown Label ATMs: These ATMs are owned and maintained by service provider
whereas a sponsor bank whose brand is used on ATM takes care of cash
management and network connectivity.
 Onsite ATMs: These are ATM machines that are set up in the premises where
there is a bank branch so that both the physical branch and the ATM can be
used. This is known as being on site and this can be used for several purposes. Many
people can use this to avoid the lines that are present in the branch and hence save on
the time required to complete their transactions.
 Offsite ATMs: These are the machines that are set up on a standalone basis. This
means that the bank has a place where there is only an ATM machine then this
becomes an offsite ATM. This is done to ensure that the bank reaches out to more
geographical areas and that people are able to use its services even when there is no
bank branch in the area.
Point-of-sale (POS) terminal
 A point-of-sale (POS) terminal is a computerised replacement for a cash register
which can process credit and debit cards. A customer needs to enter a card PIN to
complete the transaction using the PoS terminal.
How to install one?
 If you are a merchant, then you can request the bank where you have an account to
install PoS machines at your establishment.
What are the charges?
 The end-customer does not have to pay any charges for swiping his or debit/credit
cards at the PoS terminals.
62
Separate charges for debit and credit cards
 MDR is capped for debit cards but not for credit cards. Effective July 1, 2012, RBI
capped the MDR for debit cards at 0.75 per cent of the transaction amount for value
up to Rs.2,000 and 1 per cent for a transaction amount for value above Rs.2,000. For
credit cards, the MDR varies between 1.5 per cent to 2.5 per cent. Following the
withdrawal of legal tender status to the old Rs.500 and Rs.1,000 currency notes, RBI
had asked banks to waive off the MDR till the end of December. Last week, RBI also
lowered the MDR cap for debit cards effective between January 1 to March 31, 2017.
In this period, MDR is capped at 0.25 per cent for debit card transactions up to
Rs.1,000 and 0.5 per cent for transactions above Rs.1,000 up to Rs.2,000.
Mobile Banking
 Mobile banking is a facility which enables customers to initiate and/or perform
banking tasks on their mobile phones. This is provided by most of the banks in
India and abroad. Customers can use mobile banking to view their account balance,
make instant fund transfers and pay bills, etc.
 There are various types of mobile banking, viz. via SMS, USSD and mobile apps.
Some of the banks like SBI, have incorporated services like loan approval and linking
of insurance policy in their mobile banking apps. Let us read the features and benefits
of mobile banking and how to use mobile banking.
Banks provide mobile banking services to their clients in the different ways listed here:
 Mobile Banking over mobile applications (for smartphones; e.g. SBI Yono and
iMobile by ICICI Bank, etc.)
 Mobile Banking over SMS (also known as SMS Banking)
 Mobile Banking over Unstructured Supplementary Service Data (USSD)
Immediate Payment Service (IMPS)
The full form of IMPS is an Immediate Payment Service. It enables 24 x 7
electronic fund transfer services in which the transaction is carried out between two
bank accounts in real-time and on an immediate basis. IMPS fund transfer can be done
through online banking as well as mobile banking. Immediate Payment Service was
launched in 2010 and is now one of the most widely-used forms of electronic payments
across India.
Objectives of IMPS
 To enable bank customers to use mobile instruments as a channel for accessing their
banks accounts and remit funds
63
  Making payment simpler just with the mobile number of the beneficiary
 To sub-serve the goal of Reserve Bank of India (RBI) in electronification of retail
payments
 To facilitate mobile payment systems already introduced in India with the Reserve
Bank of India Mobile Payment Guidelines 2008 to be inter-operable across banks and
mobile operators in a safe and secured manner
 To build the foundation for a full range of mobile based Banking services.
IMPS Transfer via MMID and Mobile Numbers
 With IMPS it’s easier to transfer money through your mobile number. All you need to
do is register your mobile number for IMPS service with your bank (can do it online
as well). If not online you can visit the nearest bank branch and get this done. Once
your mobile number is registered, you will be given a 7-digit MMID code from
your bank. MMID code is essential to initiate IMPS transfers through your mobile
number.
With your MMID number, the funds can be transferred easily using the following steps:
 Simply log in to your mobile banking app with your User ID and password
 You will see the fund transfer section on the app, there you can select the IMPS
option
 Now enter the beneficiary’s details like the bank account number, mobile number, and
the MMID code
 After this, you can simply verify the transaction using an MPIN or by entering the
OTP sent you to via SMS
Unified Payments Interface (UPI)
 Unified Payments Interface (UPI) is a system that powers multiple bank accounts
into a single mobile application (of any participating bank), merging
several banking features, seamless fund routing & merchant payments into one
hood. It also caters to the “Peer to Peer” collect request which can be scheduled and
paid as per requirement and convenience.
 With the above context in mind, NPCI conducted a pilot launch with 21 member
banks. The pilot launch was on 11th April 2016 by Dr. Raghuram G Rajan,
Governor, RBI at Mumbai. Banks have started to upload their UPI enabled Apps on
Google Play store from 25th August, 2016 onwards.

64
Features of UPI
 Immediate money transfer through mobile device round the clock 24*7 and 365
days.
 Single mobile application for accessing different bank accounts.
 Single Click 2 Factor Authentication – Aligned with the Regulatory guidelines, yet
provides for a very strong feature of seamless single click payment.
 Virtual address of the customer for Pull & Push provides for incremental security with
the customer not required to enter the details such as Card no, Account number; IFSC
etc.
 Bill Sharing with friends.
 Best answer to Cash on Delivery hassle, running to an ATM or rendering exact
amount.
 Merchant Payment with Single Application or In-App Payments.
 Utility Bill Payments, Over the Counter Payments, Barcode (Scan and Pay) based
payments.
 Donations, Collections, Disbursements Scalable.
 Raising Complaint from Mobile App directly
FACETS OF E-BANKING
1. Customer to bank e-banking
2. Bank to bank e-banking
3. Electronic central banking
4. Intranet procurement
1. Customer to bank e-banking
E-banking is basically internet-based. Banking products and services such as deposits,
remittances, credit cards etc, as well as all important banking information’s can be made
available with easy access to customers on internet. Customers can make use of these
services with no restricted office hours, no queues, no waiting and no formalities of physical
visit. Several network innovations for e-banking can be visualized such as smart card,
electronic data interchange etc.
2. Bank to bank e-banking
This is for transacting inter-bank transactions such as money at call etc. this type of e-
banking is driving extranets which is restricted to banks only. Hence it is well secured and
unauthorized access is less.

65
3. Electronic central banking
Central bank digital currencies (CBDCs) are the digital form of a government-issued
currency that isn't pegged to a physical commodity. They are issued by central banks, whose
role is to support financial services for a nation's government and its commercial-banking
system, set monetary policy, and issue currency.
4. Intranet procurement
The Procurement Intranet is a customizable intranet template that allows to store and
share important procurement-related information, such as supplier lists, sourcing, vendor
performance, purchasing policies, and procurement procedures. Extensive work is required to
integrate internal and external communication of banking related information through intranet
and internet banking for the development of the financial sector.
MEANING OF TRUNCATED CHEQUES:
Truncation means, stopping the flow of the physical cheques issued by a drawer to the
drawee branch. The physical instrument is truncated at some point enroute to the drawee
branch and an electronic image of the cheque is sent to the drawee branch along with the
relevant information like the MICR fields, date of presentation, presenting banks. etc.
It is the process in which cheque details are captured by the payee bank (or its
clearing agent) and electronically presented in an agreed format to the drawee bank (the bank
on which it was drawn) for payment. Unlike the more common form of presentment, where a
cheque is physically presented to the drawee bank, a truncated cheque is stored by the payee
bank.
EXPECTED BENEFITS
FOR BANKS
Banks can expect multiple benefits through the implementation of CTS like faster
clearing cycle means realization of the proceeds of cheques possible within the same day. It
offers better reconciliation/verification process, better customer service, and enhanced
customer window. Operational efficiency will provide a direct boost to bottom lines of banks
as clearing of local cheques is a high cost low revenue activity.
Besides, it reduces operational risk by securing the transmission route. Centralised
image archival system ensures data storage and retrieval is easy. Reduction of manual tasks
leads to reduction of errors. Customer satisfaction will be enhanced, due to the reduced turn
around time (TAT). Real-time tracking and visibility of the cheques, less fraudulent cases
with secured transfer of images to the RBI are other possible benefits that banks may derive
from this solution.
66
FOR CUSTOMERS
CTS / ICS substantially reduces the time taken to clear the cheques as well enables
banks to offer better customer services and increases operational efficiency by cutting down
on overheads involved in the physical cheque clearing process. In addition, it also offers
better reconciliation and fraud prevention. CTS / ICS uses a cheque image, instead of the
physical cheque itself, for cheque clearance thus reducing the turn around time drastically.
E-cheques are cheques that are written and processed electronically. This means that the
funds are transferred from the payer’s account to the payee’s account through an electronic
network instead of a physical cheque. These cheques are also known as “digital cheques” or
“electronic cheques”.
Features of E-cheques
The features of E-cheque are as follows
 Faster: E-cheques are processed faster than traditional paper cheques. This is because
there is no need to wait for the cheque to be physically delivered to the payee.
 More Secure: E-cheques are more secure than traditional paper cheques because they
are processed through an electronic network. This means that there is less chance for
them to be lost or stolen.
 Easier to Track: E-cheques can be easily tracked through online banking systems.
This makes it easy to see where the funds are going and who they are being
transferred to.
 Reduces Paper Waste: E-cheques reduce paper waste because they do not require
the use of physical cheque stock. This means that fewer trees need to be chopped
down in order to produce paper cheques.
 Saves Time and Money: E-cheques save time and money because they eliminate the
need for manual processing. This means that there is less chance for human error and
that the funds will be transferred more quickly.
 Overall, e-cheques offer a number of benefits over traditional paper cheques. They are
faster, more secure, easier to track and reduce paper waste. They also save time and
money. If we are looking for a more efficient and secure way to process cheques, then
e-cheques may be the solution.
PROCESS OF E-CHEQUE
The process of writing and processing an e-cheque is similar to that of a traditional
cheque. The payer fills out a form with the necessary information, including the amount to be

67
transferred, and submits it to the bank. The bank then verifies the funds and processes the
transaction.
This work makes it a safe, fast, and easy way to transfer money electronically. If you
are looking for a more efficient and secure way to process cheques, then e-cheques may be
the solution for you.
Components of E-cheques
 The components of e-cheques are the account number, the bank code, the cheque
number and the amount. The routing number is also included on paper cheques but
not on e-cheques.
 The first three digits of the account number are the bank’s transit routing number. The
next four digits are the account number within that bank. The last digit is a check
digit, which is used to confirm the accuracy of the other numbers.
 The bank code consists of two letters and six numbers and identifies which financial
institution issued the e-cheque.
 The cheque number is six digits long and increments with each new e-cheque.
 The only difference between writing a regular cheque and writing an e-cheque is that
with an e-cheque, you don’t need to write “Pay to the order of” followed by the name
of the person or company to which you’re sending payment. The name of the payee is
automatically included in the e-cheque information.
ADVANTAGES OF E-CHEQUE
 Provide protection:- it provides more protection to customers than the paper cheque .
 More convenient:-there is no need for carrying cheque book or cheque leaf to the
bank for transacting business.
 Less costly:-the cost of producing e-cheque is practically nil. the handling cost is also
very low
 Avoids loss in transit , bad delivery,etc:-such problems do not arise in e-cheque
 Any time cheque:-it is anytime cheque as it can be drawn any time during the day
 No delay cheque:-e-cheque can be credited to the payee’s banker’s account with the
help of cheque truncation system
 e-cheque facilitates e-banking
MODELS OF E-BANKING
Complete centralized solutions
Under this model centralized banking system allows the banks to perform various
functions like account opening, deposits, withdrawals, fund transfers, loan processing, and
68
other banking services and allows customers to access their accounts and carry out banking
transactions irrespective of the location of their home branch. For these the bank has to
provide web server and the requisite software which is connected to the main server. Once
the required hardware and software are set, the customers can access the web server for their
banking operations using browser at any location.
Cluster approach
Under this model, computerized branches of each city are connected with regional
processor located at each city which are then connected through reliable media to a
centralized high end server. Under this approach, computer facility is needed to all branches
through regional clusters.
High-tech Bank within bank
Hi-tech banks are new generation banks. These banks not only accept deposits and
lend money but also provide variety of other services to its customers, they provide the hi-
tech banking services through internet services, are provision of ATMs, mobile banking,
internet banking, anytime banking, EFTs, credit cards merchant banking etc. This approach
enables the banks to play a balanced role to offer state of the art service to ever demanding
customers of major cities and simultaneously continue to offer traditional personalized
services to the mass customers who still dominate the banking scene.
Benefits of e-banking:
Benefits of e-Banking to customers
 e-banking covers digital payments, which have transparency.
 It usually supports 24×7 access to banking services. So customers can avail services
as per their time.
 It is a very convenient and easy to use service for customers as they do not have to
visit the bank branches every time.
 It provides the best features, such as notification services which inform customers of
anything and everything happening with their banking services.
 Financial discipline is inculcated as each and every transaction is recorded.
Benefits of e-Banking to banks
 It reduces banks’ transaction costs. Operation cost per unit service decreases.
 It is completely electronically managed, which reduces the chance of mistakes in the
transaction.

69
  Banks can easily attract customers for various offers via phone calls, emails and apps,
as the customer doesn’t have to visit the branches anymore for any product specific
information.
 Banks have to hire less people and also it will reduce the branch size and area, which
helps in overall revenue growth.
 It provides a competitive advantage to the banks.
 With the help of e-banking, banks have a wider coverage area as banks are now not
limited to the number of branches.
 Loads of branches are reduced as a centralized database is present.
CONSTRAINTS OF E-BANKING
 Setting up an account in the bank may take time though the E-Banking facility is
provided by the banks.
 Internet account of customer with an Internet Service Provider (ISP) which may be
another hectic experience.
 Banking sites can be difficult to navigate at first by the customers who do not have
knowledge of computer and internet so getting acquitted with the banking sites
software may require some time to read the tutorials in order to become comfortable
in persons virtual lobby. There may be some difficulties to the customer for learning
these activities of E-Banking.
 Some alterations or changes made in the banks sites due to technological
advancement may lead to a problem to customers who have to provide all the personal
information once again through online transaction.
 E-Banking is time consuming for the customers, though there is option of online
transactions, in the end customers have to run to the ATM for withdrawing the cash.
 No personal contact with any of the bank staff, and if talk to any bank staff through
the telephone, there is no guarantee to the customers that they had talked with a right
person or not.
 “Hackers” who may access customer’s bank account is the main disadvantage to the
customers who takes E-Banking facility very casually.
 Security concern is the important issue as cybercrimes activities are clutching up
which decreases the number of customers to avail the benefit of e- banking.
 technical breakdowns where online banking websites sometimes go down. If this
happens then, if customer wishes to close his bank account then he will definitely go
penniless.
70
  Switching banks due to technical faults can be a major disadvantage of using E-
Banking system to the customer.
 Increasing online frauds and attacks i.e. Trojan horse (Remote Attacker) are a major
disadvantage of using E-Banking.
 However, in the case of Internet banking, one will find oneself making endless calls
to the customer service department. There have been cases, where the person is put on
hold or has been passed around from one person to another.
 Hackers and crackers attack on the bank account of customer by stealing passwords
or using fake credit cards to cheat a person which will cause loss to the customer’s
wealth.
WHAT IS A VIRTUAL CURRENCY?
A virtual currency is a digital representation of value only available electronically. It
is stored and transacted through designated software, mobile, or computer applications.
Transactions involving virtual currencies occur through secure, dedicated networks or the
internet. They are issued by private parties or groups of developers and are mostly
unregulated.
Virtual currencies are a subset of digital currencies, such as cryptocurrencies and
tokens, issued by private organizations. Virtual currencies can allow for faster transaction
speeds, ease of use, and broad access. However, virtual currencies can be hacked through
software used to access them and are not regulated, so there is generally no legal recourse for
users if they are victims of an attack.
RTGS full form is “Real-Time Gross Settlement,” and it is a specialized electronic funds
transfer system used by banks and financial institutions for high-value and time-sensitive
transactions. In an RTGS system, funds are transferred from one bank to another in real-time,
meaning the transaction is processed immediately, typically within seconds or minutes. The
term “gross” in RTGS signifies that each transaction is settled individually and in full,
without netting or offsetting against other transactions. This ensures that the funds are
transferred securely and without any dependence on other transactions, minimizing
counterparty risk. Real-time gross settlement systems are often operated and overseen by
central banks or financial authorities to ensure the stability and integrity of the financial
system.
Features and Benefits of RTGS
 Safety and Security: RTGS, with its RTGS meaning (Real-Time Gross Settlement)
in banking, is a highly secure method of transferring funds. The electronic nature of
71
 the transaction significantly reduces the risk of loss, theft, or fraudulent activity
compared to physical instruments like checks or demand drafts.
 No Maximum limit: Real-time gross settlement transactions made through the bank
branch typically do not have a maximum limit, making it suitable for transferring both
small and large sums of money within the real-time gross settlement framework.
 Real-time transfer: RTGS, being a key component of real-time gross settlement in
banking, offers real-time fund transfers. This ensures that the recipient’s account is
credited immediately upon initiation of the transaction, adding to its efficiency.
 Seven days a week: RTGS operates on all days, including weekends and holidays, as
part of its real-time gross settlement functionality, providing uninterrupted access for
users to transfer funds when needed, enhancing convenience and accessibility.
 No physical instruments: Real-time gross settlement eliminates the need for physical
instruments like cheques or demand drafts, as it is entirely electronic. This not only
streamlines the process but also reduces the risk associated with physical
documentation.
 Reduced risk: The absence of physical instruments in RTGS significantly reduces the
risk of these instruments being lost, stolen, or fraudulently encashed by unauthorized
individuals or parties, reinforcing its security.
 Convenience of internet banking: RTGS transactions, within the real-time gross
settlement system, can be initiated conveniently from the user’s home or workplace
through internet banking. This added convenience offers flexibility and ease of use in
electronic fund transfers.
 No fees or charges: While some banks may charge nominal fees for Real-time gross
settlement transactions, many banks offer this service free of charge, making it a cost-
effective method for transferring funds within the real-time gross settlement
framework.
 Legal backing: RTGS transactions, being legally recognized and regulated as part of
the real-time gross settlement system, provide users with a sense of security and
assurance that their financial transactions are protected by the law, further enhancing
trust in the process.
MOBILE BANKING
Mobile Banking refers to banking via mobile phones. Most banks today offer mobile
banking services, enabling you to perform various basic tasks that usually require lining up at
the bank. The most prominent advantages of mobile banking are that it saves you time and
72
allows you to bank remotely, 24x7, from any corner of the world. It also enables you to
conduct fund transfers and check account balances and statements using your mobile phone.
Mobile Banking Advantages
Time Saving
Mobile Banking offers quick and instant banking services, eliminating dependence on
banks for basic transactions. Do we want to check the account balance, the details of our
recent transactions or simply transfer funds in a jiffy? Just load your bank’s mobile banking
app on your phone, and you are good to go.
Remote Banking
When we travelling to a different city or perhaps going abroad? No matter where we
are, all need is a stable internet connection and a robust mobile and internet network. We can
conduct various kinds of transactions form from anywhere across the globe.
Monitoring Transactions
Another mobile banking advantage is that we can track all our financial transactions.
We can monitor our bank accounts and conveniently dispute fraudulent transactions simply
by logging in to our mobile banking app.
Easy Access
Whether if we want to transfer funds, check account balances and statements, or apply
for loans – we can do it all with mobile banking. We can order cheque books and apply for
credit and debit cards, open fixed and recurring deposits, and more using our mobile banking.
Round-the-clock availability
Mobile banking is like carrying our bank in your pockets 24 hours a day, 7 days. We
can initiate fund transfers at any hours, reach out to customer care helplines and get banking
information within minutes through the mobile banking app.
Value-Added Services
Mobile banking apps also enable utility bill payments, mobile phone recharges,
insurance policy purchases, etc. We can open investment securities accounts, pay taxes,
purchase FASTags, open pension accounts, and more.
Mobile Banking Disadvantages
Internet reliant
A major disadvantage of mobile banking is that it functions only if you have an
internet-enabled smartphone. You can also enjoy the services on regular mobile phones, but
they are not as extensive as those you can get through mobile apps.

73
Tech Knowledge
We need to be well-versed with the constantly evolving banking technologies to enjoy
mobile banking advantages. This can prove to be quite a challenge for older people or people
from rural areas.
Internet Phishing
Unsafe internet and mobile banking practices can lead to internet phishing scams.
You risk exposing your account details if you store your passwords and other sensitive
banking information on your phone. Avoid opening scam emails or sharing passwords to
enjoy mobile banking services securely.
Final Note
As is apparent, there are several advantages and disadvantages of mobile banking.
While the benefits outweigh the consequences, you should take both into account and ensure
you practice the proper mobile banking etiquette.
Modus Operandi
Fraudsters create a third-party phishing website which looks like an existing genuine
website, such as - a bank’s website or an e-commerce website or a search engine, etc.
Links to these websites are circulated by fraudsters through Short Message Service
(SMS) / social media / email / Instant Messenger, etc.
Many customers click on the link without checking the detailed Uniform Resource
Locator (URL) and enter secure credentials such as Personal Identification Number (PIN),
One Time Password (OTP), Password, etc., which are captured and used by the fraudsters.
INTER-BANK MOBILE PAYMENT SERVICES
IMPS is a platform provided by National Payments Corporation of India (NPCI). IMPS
allows existing unit holders to use mobile technology/instruments as a channel for accessing
their bank accounts and initiating interbank fund transaction in a convenient and secure
manner.
How does IMPS Works
 Unit holder needs to register himself/herself for Mobile Banking with his/her Bank
 The bank issues a unique MMID (Mobile Money Identifier) which is a combination
of his / her bank account and bank code and also issues an M-PIN, a secret password.
 Unit holder can now perform transaction using mobile banking application or SMS /
USSD facility as provided by his/her Bank. For example: If unitholder wants to invest
Rs. 5000 in ABSL Cash Manager using the mobile application, he/she needs to follow
the following steps - In the mobile application; provide the
74
 o MMID of the scheme i.e. Cash Manager (ABSLMF currently provides it for
15 schemes)
o His / Her Aditya Birla Sun life Mutual Fund Folio No. (in lieu of the
beneficiary mobile number no in the mobile application)
o MMID of the Scheme (ABSLMF currently provides MMID for 15 schemes)
 Amount to Invest/transfer
 MPIN issued by the bank remitting bank validates the details and debits the account
of the Unit holder. It passes on the information to the beneficiary party (ABSLMF)
via NPCI.
 ABSLMF/AMC shall, after validating the details, credit the folio/scheme account
with the appropriate units and shall also provide an SMS/email confirmation to the
Unit holder informing of the allotment

75