BANKING THEORY LAW AND PRACTICE UNIT I A bank is a financial institution and a financial intermediary that accepts deposits

and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank links together customers that have capital deficits and customers with capital surpluses. Definition: As per Section 5(c) of Banking Regulation Act, 1949 a "Banking Company" means any company which transacts the business of banking in India. As per Section 5(b) of Banking Regulation Act, 1949 , banking means the 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: It is generally believed that any individual or an organisation, which conducts banking transactions with a bank, is the customer of bank. However, there are many persons who do utilize services of banks, but do not maintain any account with the bank. Thus bank customers can be categorized in to four broad categories as under: (a)Those who maintain account relationship with banks i.e. existing customers. (b)Those who had account relationship with bank i.e. Former Customers (c)Those who do not maintain any account relationship with the bank but frequently visit branch of a bank for availing banking facilities such as for purchasing a draft, encashing a cheque, etc. Banker-Customer Relationship: Banking is a trust-based relationship. There are numerous kinds of relationship between the bank and the customer. The relationship between a banker and a customer depends on the type of transaction. Thus the relationship is based on contract, and on certain terms and conditions. Classification of Relationship: The relationship between a bank and its customers can be broadly categorized in to General relationship and Special relationship. A. General Relationship: Debtor-Creditor: When a 'customer' opens an account with a bank, he fills in and signs the account opening form. By signing the form he enters into an agreement/contract with the bank. When customer deposits money in his account the bank becomes a debtor of the

customer and customer a creditor. The money so deposited by customer becomes banks property and bank has a right to use the money as it likes. The bank is not bound to inform the depositor the manner of utilization of funds deposited by him. Bank does not give any security to the depositor i.e. debtor. The bank has borrowed money and it is only when the depositor demands, banker pays. Banks position is quite different from normal debtors. Banker does not pay money on its own, as banker is not required to repay the debt voluntarily. 2. CreditorDebtor: Lending money is the most important activities of a bank. The resources mobilized by banks are utilized for lending operations. Customer who borrows money from bank owns money to the bank. In the case of any loan/advances account, the banker is the creditor and the customer is the debtor. Borrower executes documents and offer security to the bank before utilizing the credit facility. In addition to opening of a deposit/loan account banks provide variety of services, which makes the relationship more wide and complex. Depending upon the type of services rendered and the nature of transaction, the banker acts as a bailee, trustee, principal, agent, lessor, custodian etc. B. Special Relationship: 1. Bank as a Trustee: As per Sec. 3 of Indian Trust Act, 1882 A "trust" is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner. Thus trustee is the holder of property on behalf of a beneficiary. In case of trust banker customer relationship is a special contract. When a person entrusts valuable items with another person with an intention that such items would be returned on demand to the keeper the relationship becomes of a trustee and trustier. 2. Bailee Bailor: Sec.148 of Indian Contract Act, 1872, defines "Bailment" "bailer" and "bailee". A "bailment" is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the "Bailor". The person to whom they are delivered is called, the "bailee". 3. Lessor and Lessee: Sec.105 of Transfer of property Act 1882 defines lease, Lessor, lessee, premium and rent. As per the section A lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to

be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. 4. Agent and Principal: Sec.182 of The Indian Contract Act, 1872 defines an agent as a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done or who is so represented is called the Principal. Thus an agent is a person, who acts for and on behalf of the principal and under the latters express or implied authority and the acts done within such authority are binding on his principal and, the principal is liable to the party for the acts of the agent. Banks collect cheques, bills, and makes payment to various authorities viz., rent, telephone bills, insurance premium etc., on behalf of customers. . 5. As a Custodian: A custodian is a person who acts as a caretaker of some thing. Banks take legal responsibility for a customers securities. While opening a de mat account bank becomes a custodian. 6. As a Guarantor: Guarantee is a contingent contract. As per sec 31, of Indian contract Act guarantee is a contingent contract ". Contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. It would thus be observed that banker customer relationship is transactional relationship. Termination of relationship between a banker and a customer: The relationship between a bank and a customer ceases on: (a) The death, insolvency, lunacy of the customer. (b) The customer closing the account i.e. Voluntary termination (c) Liquidation of the company (d) The closing of the account by the bank after giving due notice. (e) The completion of the contract or the specific transaction. Duties of a banker: A 'Banker' has certain duties vis--vis his customer. These are: (a) Duty to maintain secrecy/confidentiality of customers' accounts. (b)Duty to honour cheques drawn by customers on their accounts and collect cheque, Bills on his behalf. (c) Duty to pay bills etc., as per standing instructions of the customer. (d) Duty to provide proper services. (e) Duty to act as per the directions given by the customer. If directions are not given the banker has to act according to how he is expected to act.

(f)Duty to submit periodical statements i.e. informing customers of the state of the account (g)Articles/items kept should not be released to a third party without due authorization by the customer Duty to maintain secrecy: Banker has a duty to maintain secrecy of customers' accounts. Maintaining secrecy is not only a moral duty but bank is legally bound to keep the affairs of the customer secret. The principle behind this duty is that disclosure about the dealings of the customer to any unauthorized person may harm the reputation of customer and the bank may be held liable. The duty of maintaining secrecy does not cease with the closing of account or on the death of the account holder. Failure to maintain secrecy: Bank is liable to pay damages to the account holder for loss of money and reputation if it fails in its duty to maintain secrecy and discloses information relating to a customer's account or conduct of the account to any unauthorized person. Bank can also be liable to the third party if its wrongful disclosure harms the interest of the third-party. If bank knowingly furnishes wrong information there has been a misrepresentation over estimation of favorable opinion Circumstances under which banker can disclose information of customer's account: A bank can disclose information regarding customer's account to a person(s) under the following circumstances. (a)Under compulsion of law. (b)Under banking practices. (c)For protecting national interest. (d)For protecting banks own interest (e)Under express or implied consent of the customer Disclosure under compulsion of law: Banks disclose information to various authorities who by virtue of powers vested in them under provisions of various acts require banks to furnish information about customers account. The information is called under: (i)Section 4 of Banker's Book Evidence Act, 1891 (ii)Section 94 (3) of Code of Civil Procedure Act, 1908 (iii)Section 45 (B) of Reserve Bank of India Act, 1934 (iv)Section 26 of Banking Regulation Act, 1949

(v)Section 36 of Gift Tax Act, 1958 (vi)Sections 131, 133 of Income Tax Act, 1961 (vii)Section 29 of Industrial Development Bank of India Act, 1964 (viii)Section 12of Foreign Exchange Management Act, (FEMA) 1999 (ix)Section 12 of the Prevention of Money Laundering Act, 2002 Disclosure under banking practices: In order to ascertain financial position and credit worthiness of the person banks obtain information from other banks with which they are maintaining accounts. It is an established practice among bankers and implied consent of the customer is presumed to exist. The opinion is given in strictest confidence and without responsibility on the part of the bank furnishing such information. Credit information is furnished in coded terms to other banks on IBA format and without signatures. 2. Duty to provide proper accounts: Banks are under duty bound to provide proper accounts to the customer of all the transactions done by him. Bank is required to submit a statement of accounts / passbook to the customer containing all the credits and debits in the account. 3. Duty to honour cheques: As 'banking' means accepting of deposits withdrawal by cheque, draft, order or otherwise, the banker is duty bound to honour cheques issued by the customers on their accounts. Sec. 31of Negotiable Instruments Act, 1881 specifies the liability of drawer of cheque. As per Sec. 31 The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and, in. default of such payment, must compensate the drawer for any loss or damage caused by such default. Rights of a banker: It is not that the bank has only duties to wards its customers; it too has certain rights vis--vis his customers. The rights can broadly be classified as: Right of General Lien a) Right of Set-Off b) Right of Appropriation c) Act as per the mandate of customer d) Right to Charge Interest, Commission, Incidental Charges etc.

Lien: A lien is the right of a creditor in possession of goods, securities or any other assets belonging to the debtor to retain them until the debt is repaid, provided that there is no contract express or implied, to the contrary. It is a right to retain possession of specific goods or securities or other movables of which the ownership vests in some other person and the possession can be retained till the owner discharges the debt or obligation to the possessor. The creditor (bank) has the right to maintain the security of the debtor but not to sell it. There are two types of lien viz. 1. Particular Lien and 2. Right of General Lien (a) Particular Lien: A 'particular lien' gives the right to retain possession only of those goods in respect of which the dues have arisen. It is also termed as ordinary lien. If the bank has obtained a particular security for a particular debt, then the banker's right gets converted into a particular lien. (b) Right of General Lien: Banker has a right of general lien against his borrower. General lien confers banks right in respect of all dues and not for a particular due. It is a statutory right of the bank and is available even in absence of an agreement but it does not confer the right to pledge. A 'general lien' gives the right to retain possession of any goods in the legal possession of the creditor until the whole of the debt due from the debtor is paid. Right of Appropriation: It is the right of the customers to direct his banker against which debt the payment made by him should be appropriated. In case no such direction is given, the bank can exercise its right of appropriation and apply it in payment of any debt. Rule in Claytons case: The rule was laid down in famous Devayanas vs. Noble. The rule applies to running accounts like CC/ OD with debit balance. The rule states that each withdrawal in a debit account is considered as a new loan and each deposit as a repayment in that chronological order. Banker's right to charge interest, commission, incidental charges etc.: Banker has an implied right to charge for services rendered and sold to a customer. Bank charges interest on amount advanced, processing charges for the advance, charges for non-utilization of credit facilities sanctioned, charges commission, exchange, incidental

charges etc. depending on the terms and conditions of advance banks charge interest at monthly, quarterly or semiannually or annually. Banks charge customers if the balance in deposit account falls below the prescribed amount. Usually the bank informs such charges to the customer by various means. FUNCTIONS OF COMMERCIAL BANKS Commercial banks have to perform a variety of functions which are common to both developed and developing countries. These are known as General Banking functions of the commercial banks. The modern banks perform a variety of functions. These can be broadly divided into two categories: (a) Primary functions and (b) Secondary functions. A. Primary Functions Primary banking functions of the commercial banks include: 1. Acceptance of deposits 2. Advancing loans 3. Creation of credit 4. Clearing of cheques 5. Financing foreign trade 6. Remittance of funds 1. Acceptance of Deposits: Accepting deposits is the primary function of a commercial bank mobilise savings of the household sector. Banks generally accept three types of deposits viz., (a) Current Deposits (b) Savings Deposits, and (c) Fixed Deposits. (a) Current Deposits: These deposits are also known as demand deposits. These deposits can be withdrawn at any time. Generally, no interest is allowed on current deposits, and in case, the customer is required to leave a minimum balance undrawn with the bank. Cheques are used to withdraw the amount. These deposits are kept by businessmen and industrialists who receive and make Commercial Banking large payments through banks. The bank levies certain incidental charges on the customer for the services rendered by it. (b) Savings Deposits: This is meant mainly for professional men and middle class people to help them deposit their small savings. It can be opened without any introduction. Money can be deposited at any time but the maximum cannot go beyond a certain limit. There is a restriction on the amount that can be withdrawn at a particular time or during a week. If the customer wishes to withdraw more than the specified amount at any one time, he has to give prior notice. Interest is allowed on the credit balance of this account. The rate of interest is greater than the rate of interest on the current deposits and less than that on fixed deposit.

This system greatly encourages the habit of thrift or savings. (c) Fixed Deposits: These deposits are also known as time deposits. These deposits cannot be withdrawn before the expiry of the period for which they are deposited or without giving a prior notice for withdrawal. If the depositor is in need of money, he has to borrow on the security of this account and pay a slightly higher rate of interest to the bank. They are attracted by the payment of interest which is usually higher for longer period. Fixed deposits are liked by depositors both for their safety and as well as for their interest. In India, they are accepted between three months and ten years. 2. Advancing Loans: The second primary function of a commercial bank is to make loans and advances to all types of persons, particularly to businessmen and entrepreneurs. Loans are made against personal security, gold and silver, stocks of goods and other assets. The most common way of lending is by: (a) Overdraft Facilities: In this case, the depositor in a current account is allowed to draw over and above his account up to a previously agreed limit. The bank allows the customer to overdraw his account through cheques. The bank, however, charges interest only on the amount overdrawn from the account. This type of loan is very popular with the Indian businessmen. (b) Cash Credit: Under this account, the bank gives loans to the borrowers against certain security. But the entire loan is not given at one particular time, instead the amount is credited into his account in the bank; but under emergency cash will be given. The borrower is required to pay interest only on the amount of credit availed to him. He will be allowed to withdraw small sums of money according to his requirements through cheques, but he cannot exceed the credit limit allowed to him. Besides, the bank can also give specified loan to a person, for a firm against some collateral security. The bank can recall such loans at its option. (c) Discounting Bills of Exchange: This is another type of lending which is very popular with the modern banks. The holder of a bill can get it discounted by the bank, when he is in need of money. After deducting its commission, the bank pays the present price of the bill to the holder. Such bills form good investment for a bank. They provide a very liquid asset which can be quickly turned into cash. The commercial banks can rediscount the discounted bills with the central banks when they are in need of money. These bills are safe and secured bills. When the bill matures the bank can secure its payment from the party which had accepted the bill.

(d) Money at Call: Bank also grant loans for a very short period, generally not exceeding 7 days to the borrowers, usually dealers or brokers in stock exchange markets against collateral securities like stock or equity shares, debentures, etc., offered by them. Such advances are repayable immediately at short notice hence; they are described as money at call or call money. (e) Term Loans: Banks give term loans to traders, industrialists and now to agriculturists also against some collateral securities. Term loans are so-called because their maturity period varies between 1 to 10 years. Term loans; as such provide intermediate or working capital funds to the borrowers. Sometimes, two or more banks may jointly provide large term loans to the borrower against a common security. Such loans are called participation loans or consortium finance. (f) Consumer Credit: Banks also grant credit to households in a limited amount to buy some durable consumer goods such as television sets, refrigerators, etc., or to meet some personal needs like payment of hospital bills etc. Such consumer credit is made in a lump sum and is repayable in instalments in a short time. Under the 20-point programme, the scope of consumer credit has been extended to cover expenses on marriage, funeral etc., as well. (g) Miscellaneous Advances: Among other forms of bank advances there are packing credits given to exporters for a short duration, export bills purchased/discounted, import financeadvances against import bills, finance to the self employed, credit to the public sector, credit to the cooperative sector and above all, credit to the weaker sections of the community at concessional rates. 3. Creation of Credit: A unique function of the bank is to create credit. Banks supply money to traders and manufacturers. They also create or manufacture money. Bank deposits are regarded as money. They are as good as cash. The reason is they can be used for the purchase of goods and services and also in payment of debts. When a bank grants a loan to its customer, it does not pay cash. It simply credits the account of the borrower. He can withdraw the amount whenever he wants by a cheque. In this case, bank has created a deposit without receiving cash. That is, banks are said to have created credit. Sayers says banks are not merely purveyors of money, but also in an important sense, manufacturers of money. 4. Promote the Use of Cheques: The commercial banks render an important service by providing to their customers a cheap medium of exchange like cheques. It is found much more convenient to settle debts through cheques rather than through the use of cash. The cheque is the most developed type of credit instrument in the money market.

5. Financing Internal and Foreign Trade: The bank finances internal and foreign trade through discounting of exchange bills. Sometimes, the bank gives short-term loans to traders on the security of commercial papers. This discounting business greatly facilitates the movement of internal and external trade. 6. Remittance of Funds: Commercial banks, on account of their network of branches throughout the country, also provide facilities to remit funds from one place to another for their customers by issuing bank drafts, mail transfers or telegraphic transfers on nominal commission charges. As compared to the postal money orders or other instruments, a bank draft has proved to be a much cheaper mode of transferring money and has helped the business community considerably. B. Secondary Functions Secondary banking functions of the commercial banks include: 1. Agency Services 2. General Utility Services 1. Agency Services: Banks also perform certain agency functions for and on behalf of their customers. The agency services are of immense value to the people at large. The various agency services rendered by banks are as follows: (a) Collection and Payment of Credit Instruments: Banks collect and pay various credit instruments like cheques, bills of exchange, promissory notes etc., on behalf of their customers. (b) Purchase and Sale of Securities: Banks purchase and sell various securities like shares, stocks, bonds, debentures on behalf of their customers. (c) Collection of Dividends on Shares: Banks collect dividends and interest on shares and debentures of their customers and credit them to their accounts. (d) Acts as Correspondent: Sometimes banks act as representative and correspondents of their customers. They get passports, travellers tickets and even secure air and sea passages for their customers. (e) Income-tax Consultancy: Banks may also employ income tax experts to prepare income tax returns for their customers and to help them to get refund of income tax. (f) Execution of Standing Orders: Banks execute the standing instructions of their

customers for making various periodic payments. They pay subscriptions, rents, Insurance premium etc., on behalf of their customers.

(g) Acts as Trustee and Executor: Banks preserve the Wills of their customers and execute them after their death. 2. General Utility Services: In addition to agency services, the modern banks provide many general utility services for the community as given. a) Locker Facility: Bank provides locker facility to their customers. The customers can keep their valuables, such as gold and silver ornaments, important documents; shares and debentures in these lockers for safe custody. (b) Travellers Cheques and Credit Cards: Banks issue travellers cheques to help their customers to travel without the fear of theft or loss of money. With this facility, the customers need not take the risk of carrying cash with them during their travels. (c) Letter of Credit: Letters of credit are issued by the banks to their customers certifying their credit worthiness. Letters of credit are very useful in foreign trade. (d) Collection of Statistics: Banks collect statistics giving important information relating to trade, commerce, industries, money and banking. They also publish valuable journals and bulletins containing articles on economic and financial matters. (e) Acting Referee: Banks may act as referees with respect to the financial standing, business reputation and respectability of customers. (f) Underwriting Securities: Banks underwrite the shares and debentures issued by the Government, public or private companies. (g) Gift Cheques: Some banks issue cheques of various denominations to be used on auspicious occasions. (h) Accepting Bills of Exchange on Behalf of Customers: Sometimes, banks accept bills of exchange, internal as well as foreign, on behalf of their customers. It enables customers to import goods. (i) Merchant Banking: Some commercial banks have opened merchant banking divisions to provide merchant banking services. Unit II Customers accounts with bank: The banks are mobilizing the deposits from the public belonging to different walks of life, engaged in numerous economic and business activities and having different financial status. The deposits accounts are primarily classified into the following three types: a. Fixed deposit account b. Savings bank account c. Current account

TYPES OF DEPOSIT ACCOUNTS Fixed Deposit account The deposits accepted by the banks for fixed periods specified in advanced are known as fixed deposits or terms deposits. The banks need not maintain cash reserves against these deposits since fixed deposits are repayable on the expiry of a fixed period determined in advance. Opening of a fixed deposit account: A depositor is required to fill in an application form for opening a fixed deposit account. In which, he must mention the amount and period of deposit. On receipt of application form and money, the banker will take the specimen signatures of the depositor. Fixed Deposit Receipt: It is an acknowledgement of receipt of money on fixed deposit account. It contains on its face, the name of bank and holder of deposit, amount and period of deposit, rate of interest and the date of maturity etc. It is not a negotiable instrument and therefore, it is generally marked as Not Transferable. Savings bank account The 'saving account' is generally opened in bank by salaried persons or by the persons who have a fixed regular income. This facility is also given to students, senior citizens, pensioners, and so on. Features of Saving Account: The main features of saving account in bank are as follows: The main objective of saving account is to promote savings. There is no restriction on the number and amount of deposits. However, in India, mandatory PAN (Permanent Account Number) details are required to be furnished for doing cash transactions exceeding 50, 000. Withdrawals are allowed subject to certain restrictions. The money can be withdrawn either by cheque or withdrawal slip of the respective bank. The rate of interest payable is very nominal on saving accounts. At present it is between 4% to 6% p.a in India. Saving account is of continuing nature. There is no maximum period of holding. A minimum amount has to be kept on saving account to keep it functioning.

No loan facility is provided against saving account. Electronic clearing System (ECS) or E-Banking are available to pay electricity bill, telephone bill and other routine household expenses. Generally, equated monthly installments (EMI) for housing loan, personal loan, car loan, etc., are paid (routed) through saving bank account.

Advantages of Saving Account: The advantages of saving account are as follows: Saving account encourages savings habit among salary earners and others who have fixed income. It enables the depositor to earn income by way of saving bank interest. Saving account helps the depositor to make payment by way of issuing cheques. It shows income of a salaried and other person earned during the year. Saving account passbook acts as an identity and residential proof of the account holder. It provides a facility such as Electronic fund transfer (EFT) to other people's accounts. It helps to do online shopping via facility like internet banking. It aids to keep records of all online transactions carried on by the account holder. It provides immediate funds as and when required through ATM. The bank offers number of services to the saving account holders.

Procedure for opening savings and current accounts: 1. Application for opening the account: A person who is willing to open an account in a bank must submit an application in the prescribed form. 2. Letter of Introduction: The banker before opening up of an account must insist upon the applicant to furnish a proper introduction regarding his identity. 3. Specimen signature: The banker must obtain one or more specimen signature of the applicant in a card called specimen card which is to be indexed and properly filed. 4. Mandate for operation by an agent: In case a customer desires to allow another person to operate his account, the banker must obtain a mandate in writing to that effect. 5. Verification of documents: When an account is to be opened for a company, firm, trust etc, the banker must verify the important documents relevant to them.

6. Opening of an account: After satisfying the above formalities, the customer must pay an initial deposit of Rs. 500. CURRENT ACCOUNT Current bank account is opened by businessmen who have a higher number of regular transactions with the bank. It includes deposits, withdrawals, and contra transactions. It is also known as Demand Deposit Account. Features of Current Bank Account: The main features of current account are as follows:1. 2. 3. Current bank accounts are operated to run a business. It is a non-interest bearing bank account. It needs a higher minimum balance to be maintained as compared to the savings account. 4. 5. 6. 7. 8. Penalty is charged if minimum balance is not maintained in the current account. It charges interest on the short-term funds borrowed from the bank. It is of a continuing nature as there is no fixed period to hold a current account. It does not promote saving habits with its account holders. Banker requires KYC (Know your Customers) norms to be completed before opening a current account. 9. The main objective of current bank account is to enable the businessmen to conduct their business transactions smoothly. 10. 11. There is no restriction on the number and amount of deposits. There is also no restriction on the number and amount of withdrawals made, as long as the current account holder has funds in his bank account. 12. Generally, bank does not pay any interest on current account. Nowadays, some banks do pay interest on current accounts. Advantage of Current Bank Account: The advantages of current account are as follows:1. Current account is mainly opened for businessmen such as proprietors, partnership firms, public and private companies, trust, association of persons, etc. that has a large number of daily banking transactions, i.e. receipts and/or payments. 2. 3. It enables businessmen to carry out their business transactions properly and promptly. The businessmen can withdraw from their current accounts without any limit, subject to banking cash transaction tax, if any levied by the government.

4.

Home branch is that location where one opens his bank account. There are no restrictions on deposits made in the current account opened in a home branch of a bank. However, the current account holder can deposit the cash from any other branch of a bank other than the home branch by paying a nominal charge as applicable.

5.

It helps businessmen to make a direct payment to their creditors by issuing cheques, demand-drafts or pay-orders, etc.

6.

It enables a bank to collect money on behalf of its customers and credits the same in their customers' current accounts.

7.

It enables the current account holder to obtain overdraft (short-term borrowing) facility.

8.

The creditors of the account holder can get credit-worthiness information of the account holder through inter-bank connection.

9.

It facilitates the industrial progress of the country. Without its help, businessmen would face difficulties in running their businesses.

10.

It has the facilities of Internet-banking and mobile-banking to carry out important business transactions with ease and quickly.

Recurring Deposit Account Recurring deposit account is generally opened for a purpose to be served at a future date. Recurring deposit account is opened by those who want to save regularly for a certain period of time and earn a higher interest rate. In recurring deposit account certain fixed amount is accepted every month for a specified period and the total amount is repaid with interest at the end of the particular fixed period. Features of Recurring Deposit Account: The main features of recurring deposit account are as follows: The main objective of recurring deposit account is to develop regular savings habit among the public. In India, minimum amount that can be deposited is Rs.10 at regular intervals. The period of deposit is minimum six months and maximum ten years. The rate of interest is higher. No withdrawals are allowed. However, the bank may allow closing the account before the maturity period.

The bank provides the loan facility. The loan can be given up to 75% of the amount standing to the credit of the account holder.

Advantage of Recurring Deposit Account: The advantages of recurring deposit account are as follows: Recurring deposit encourages regular savings habit among the people. Recurring deposit account holder can get a loan facility. The bank can utilize such funds for lending to businessmen. The bank may also invest such funds in profitable areas. Differences between fixed deposit account and savings bank account: Fixed Deposit account Savings Bank account

It is a time deposit since it is repayable It is a demand deposit since it is only after the expiry of a fixed period. repayable on demand made by the customer. The banker need not maintain cash The banker must maintain sufficient cash reserves for the repayment of these reserves to meet the repayments on deposits demand.

Introduction is not necessary for opening It is necessary this account The rate of interest are high Loan facility is available The rate of interest is lesser No loan facility is available

Only a deposit receipt is given on opening A pass book, cheque book and pay-inthis account. slips are provided on opening this account for its operation. It is suitable for investors since it yields It is suitable for small savers since it more return than savings bank account. promotes the habit of savings.

Differences between Fixed deposit account and Current account: Fixed deposit account Current account

It is a time deposit it is repayable only after the It is a demand deposit since it is repayable on expiry of a fixed period demand made by the customer.

The banker need not maintain cash reserves for The banker must maintain adequate cash the repayment of these deposits. reserves to meet heavy repayments on demand.

Introduction is not necessary for opening this It is necessary

account The rate of interest are high Loan facility is available No interest is payable. Overdraft facility is available

Differences between savings bank account and current account savings bank account current account

Its object is to promote the habit of savings Its object is to provide convenience to the among the people Overdraft facility is not available The rate of interest is reasonable. Withdrawals are restricted customers. Overdraft facility is available No interest is payable. There is no such restriction more cash reserves are

Comparatively lesser cash reserves are Comparatively required required

NEW SCHEMES OF DEPOSITS: The new scheme of deposits introduced by various commercial banks is as follows: 1. Super savings scheme: Under this scheme a depositor can make monthly deposits for a period ranging from 15 to 40 years. 2. Cash Certificates: The cash certificates are issued for different denominations and repayable after different periods of maturity. 3. Annuity deposits: This scheme has been introduced to provide regular monthly income spread over a specified period of time. 4. Reinvestment plans: It is a development over the fixed deposit scheme. Interest is calculated periodically and reinvested for earning interest. 5. Perennial premium plan: Under this plan, monthly deposits of specified denominations should be made for a specified period. 6. Educational plan: It is a plan to encourage the parents to save for meeting the educational expenses of their children 7. Deposit scheme for Indians living abroad: (a) Non-resident external rupee account (b) Foreign currency non-resident accounts.

UNIT III TYPES OF CUSTOMERS PRIMARY FUNCTIONS OF A BANKING SYSTEM 1. Attracts deposits of money from the public 2. For this purpose, the bank can open accounts for the public 3. An account can be opened by a person, 4. He is legally capable of entering into a valid contract. Follows the procedure and accepts the terms and conditions under the Indian contract act, 1872. SPECIAL TYPES OF CUSTOMERS I. MINOR 1. Section 3 of the Indian Majority Act, 1875 A person under the age of 18 years is called a Minor. 2. If a guardian is appointed by the court the age of majority is 21 years. Here the name of minor is wards. 3. Natural Guardianship of minor Savings bank account can be opened by minor, represented by his natural guardian, Here, natural guardian is father 4. Guardianship summary MINOR 1.Boy or unmarried girl 1.Father 2. Father is not alive, mother is a guardian. 2. Illegitimate boy or illegitimate unmarried girl 3. Minor married girl 4. Parsis/Christians 1. Mother 2. Mother is not alive, father is alive 1.Husband only 1.Father 2.Father is not alive, mother 3.Both are not alive 4.Persons appointed by court (step father, step mother not included) 5. Muslim 1.Father 2.On death of a father 3.Executor appointed by fathers will GUARDIANSHIP

4. Fathers father Executor appointed by the will of fathers father. 6. Mother as a guardian for opening of accounts if father is alive As per RBI guidelines, no overdraft or loan against such person without fathers consent

7. Testamentary guardian for Hindu minor

A Hindu father by will can appoint a guardian in respect of minor or property. So the testamentary guardian will act as a guardian ,only after the death of father and mother

PRECAUTIONARY MEASURES MINOR 1. Savings bank account only 2. Bank records date of birth of minor 3. Death of Hindu father 4. No overdraft 5. No advance granted to a minor 6. No right to draw, endorse or negotiate a cheque or bill 7. Minor as an agent 8. Minor as a partner. 9. Death of minor II. MARRIED WOMEN 1. A married woman can enter into the contract in her own name. 2. She has the right to acquire and sell the property, to lend and borrow money. 3. Current account can be opened in her name 4. If the death of husband, the wife become widow, the banker should not be liable to pay any amount standing in the joint Account. 5. Husband may be liable for debts of a married women if the loan is taken by his consent of authority and 6. Debt is taken for supply of necessaries and households to her. PRECAUTIONARY MEASURES MARRIED WOMEN 1. Husband is not liable for the debts other than necessaries and households 2. No overdraft for sufficient property 3. Nature of the right to that property

4. No undue influence about providing loan 5. Joint account is safe 6. Hindu married women a. Hindu succession act, 1956 7. Other religions married women a. Indian succession act, 1925 8. Married womens property a. Married womens property act, 1874 III. ILLITERATE PERSONS 1. Open only savings account or fixed deposit account 2. He cannot sign so the banker takes his thumb impression instead of his signature 3. Banker should also get his recent photograph and which should be attested by the first class magistrate, the reason for identification

4. When he withdraw the amount from his account, he personally comes to the bank and puts his thumb impression, in the presence of some responsible officer of the banker IV. TRUSTEE 1. Section 3, of the Indian Trustees Act, 1882 defines trust as it is a relationship which arises where a person holds a property for the benefit of certain other persons or for some objects allowed by law. 2. Trustee is a person, responsibility of managing estate for the benefit of a person or person s according to will. 3. The person with whom the property is vested with is the trustee. He is called trust or confidence responds by him. 4. Trust deed is a document which is created by trust. 5. Settler is the persons who has settled the property, is the authority of the trust. PRECAUTIONARY MEASURES 1. Banker should examine trust deed appointing the person as a trustee 2. Inspect official probate or letter of administration 3. Name of trustees, their powers, functions and the property vested by the trustee. 4. Incase of 2 or more trustees, the banker should get the clear instructions in writing of the persons or persons authorized to operate the account 5. Banker should get specimen signature from authorized persons who is operated by such accounts 6. Trust is an official confidence

7. Trustees cannot delegate their power, they must act personally. Banker should insist on all the trustees signing cheque in the absence of such instructions 8. Banker should see that trust funds are not misapplied 9. Banker should not lend to trustee as he does not have general powers to borrow V. DRUNKEN PERSONS 1. If a person has sound mind, he may enter into a valid contract 2. He is capable of understanding 3. But, if a person alleges that as a result of intoxication, he is incapable of understanding the nature and terms of contract. 4. Is known to the other party invoke the protection of court of law, in setting aside the contract 5. Negotiable instrument transferred to a person who takes it in good faith 6. But drunkard cannot deprive the holder in due course and right of the instrument 7. Bankers have to be careful in getting documents executed by persons, while he is in a state of intoxication 8. Drunkard under the influence of alcoholic drinks, drugs on the same fosting as a lunatic 9. Agreement during drunkard is avoided 10. Banker should not honour cheques, who has written and issued under the influence of liquor 11. He is not capable of understanding the applications of issuing cheques 12. Customer presents his own cheques, when he is drunk, the bank should not make immediate payment 13. Bank should insist upon a customer, getting a witness to countersign, before making any payment against the cheque VI. LUNATICS 1. He is a person of unsound mind, incompetent to enter into a valid contract, because he does not know what is right and what wrong .Indian Contract Act, 1872 is 2. Banker refuses to open an account 3. Getting doctors certificate or court notice 4. The lunatic person avoid debt, the legal representative should prove at the time of borrowing 5. Top stop all the operations of the account, await a court order appointing a receiver 6. Temporary disorder, obtain a certificate from two reliable medical officers.

VII. EXECUTORS AND ADMINISTRATORS TESTATOR: Persons making a will EXECUTOR: He is appointed by the testator his will after his death. ADMINISTRATOR: 1. Who are appointed by the courts, their powers, duties and responsibilities will be defined by the letter of administration by courts. 2. Executors powers and duties mentioned in the will, the will should be probated, certified by competent court as a bona fide document. 3. on death of a customer, his accounts is automatically stopped and the banker should not allow further operations 4. When two or more persons are appointed as executors or administrators, then they should open a joint account with the bank 5. One or more executors may draw cheques on the account, but a letter of authority signed by all the executors stating the name/name of persons 6. Banker should prevent the misappropriation of funds of the deceased 7. Banker should not transfer funds from the personal account of the executors 8. On death, insolvency, insanity or resignation of any of the executor /administrators, the banker can honour the cheques issued by him and can continue to operate the account 9. The executor /administrator may pledge the property of the testator; obtain an overdraft from the banker VIII. CUSTOMERS ATTORNEY 1. A customer may appoint an attorney to deal with his bank account 2. Power attorney may be either special or general SPECIAL POWER OF ATTORNEY The persons so authorized gets power only for some limited purpose mentioned GENERAL POWER OF ATTORNEY The grantor of power authorizes the other person to act on concerning the business. PRECUTIONARY MEASURES 1. Banker gets a copy of the registered document attested by a notary public and keeps it for his own record. his behalf in all matters

2. If specific period is mentioned, it must be noted on the top of the accounts, so that the account does not continue beyond such period. 3. The banker should take note of all the terms of power of attorney. 4. Specific power is granted for opening and operating a bank account by attorney himself. 5. The banker should note down the name and address of the attorney. 6. Signature to be taken from both principal and attorney by the banker. 7. The banker should not accept conditional power of attorney. 8. Attorney as the agent of the principal. 9. If the principal defects insolvency, death or insanity, the authority is vested with the agent. IX. CLUBS, SOCIETIES AND CHARITABLE INSTITUTIONS 1. Render service to the public 2. These are registered under societys registration act or the Indian companies act or the cooperative societies act or Indian trust act PRECAUTIONARY MEASURES 1. INCORPORATION: a. A society gets legal recognition b. It is a property incorporated body c. Not registered; have no legal existence no rights to contract with outside parties 2. CONSTITUTION: a. Registered societies may have its own constitution, charter or memorandum of association, rules and bye laws to carry on its activities b. These documents enable the banker to know exactly the rights and powers of the organization 3. RESOLUTION: a. For opening an account, resolution must be passed, by the managing committee b. Mentioning the names and address of persons who are authorized to operate the account c. Copy of resolution obtained by the banker for his own records 4. DEATH OR RESIGNATION: If an authorized person dies or resigns, the banker should stop the operations of the account till the society nominates another person to operate his account 5. GRANTING LOANS: Here also resolution must be passed .while granting loans the banker should examine the borrowing powers found in the constitution of the club

6. TRANSFER OF FUNDS: The funds of the society are not being credited to the personal account of the person or office bearer. X. JOINT STOCK COMPANIES 1. Capital of the legal company divided into shares 2. Separate legal entity 3. Some shareholder may die or bankrupt, the company is dissolved 4. Liability of the shareholders is limited 5. Shareholder of a company can sell his shares to others without the approval of the company or other shareholders 6. Management is entrusted to directors elected by the shareholders from among themselves 7. Number of shareholders is very large; it is not possible to give the right of management to all shareholders 8. Certain persons are elected as directors democratically by the shareholders 9. Establishment of the company according to the company law 10. The law generally prescribes what should be done and penalties are levied for the infringement of law, but the law of the company prescribes what should be done. PRECAUTIONARY MEASURES 1. The company has to be incorporated 2. 7 persons must sign the memorandum of association and articles of association and submit them to the registrar of joint stock companies 3. Memorandum of association mentioned the name of the company, place of the registered office, objects, capital, and liability of the shareholders willingness to accept 7 members 4. Articles of association is not submitted by the company, the provisions of table-A, apply here. 5. The banker must examine the certificate of incorporation before opening an account 6. Banker ask the resolution of the board of directors appointing him the banker of the company 7. He should be an authorized person to conduct bank transactions, to sign cheques, to accept bill of exchange, to entrust valuables for safe custody 8. Banker must also examine the certificate of commencement of business. After getting

this certificate the company can issue the prospectus

9. After the minimum subscription is collected and the directors have paid their full dues, the registrar issues the certificate of commencement of business .A Company cannot begin without getting this certificate. 10. The banker must also examine the balance sheets, profits and loss accounts of the company for the last two or three years UNIT-IV PAYING BANKER MEANING A banker is bound to honour his customers cheques, to the extent of the funds available and the existence of no legal bar to payment. Then, the cheque must be in order and it must be duly presented for payment at the branch where the account is kept. THE PRECAUTIONS TO BE TAKEN BEFORE HONOURING A CHEQUE I. PRESENTATION OF A CHEQUE. All bankers must note the presentation of the cheque is correct. A. TYPE OF THE CHEQUE. It has two types. They are open cheques and crossed cheques. OPEN CHEQUES are called the payment made at the counter. CROSSED CHEQUES are called the payment must be made only to a fellow banker. SPECIALLY CROSSED CHEQUES are called the payment must be specifically made to that banker, in whose favour it has been crossed. ACCOUNT PAYEE OR NEGOTIABLE CROSSINGS, directed to the collecting banker only. Paying banker pays a cheque contrary to the crossing, he is liable to the drawer and to the true owner and this payment cannot be regarded as a payment in due course. B. BRANCH Cheque is drawn on the branch where the account is kept. If another branch, without any prior arrangement, banker can safely return the cheque. C. ACCOUNT. A customer might have opened two or more accounts in the same branch. Each account

have separate cheque book. A paying banker should see that the cheque of one account, not used for withdrawing money from another account. D. BANKING HOURS Cheque is presented during the banking hours on a business day. It should not be paid on a bank holiday or during non-banking hours on a working day.

E. MUTILATION. Cheque is torn into pieces or cancelled or mutilated, the paying banker should not honour it, if cheque is torn accidentally, and the drawer must confirm it by writing such as Accidentally torn by me and affixing his full signature. Cheque is torn into two or more pieces, is generally returned with a remark mutilated II. FORM OF THE CHEQUE. A. PRINTED FORM It must be in a proper form. It must satisfy all the requirements of law. If it is failing, the banker may refuse to honour it. The customer should draw cheques only on the printed leaves supplied by the bankers. B. UNCONDITIONAL ORDER. The cheque should not contain any condition. If it is a conditional one, the paying bankers position will become critical and he may not honour it. C. DATE Before honouring the cheque, the date must be put on the instrument, if it not, it is invalid. After 3 months from the date of issue is a stale one. If it is post0dated, he should honour it only on its due date. D. AMOUNT. They should be expressed in both words and figures. If the amount stated only in figures, the baker should return it with a remark. Amount required o be stated in words. There is a difference in the amount stated in words and figures. Then the banker can take any of the following courses available to him. 1. He can dishonour the cheque with a memorandum, words and figures differ, or, 2. He can honour the amount stated in words, or 3. He can honour the smaller amount. Usually paying banker is returns the cheques, in such cases, there is an audit objection of such cheques. E. MATERIAL ALTERATION. If there is any alteration, the banker should return it with a memorandum, Alteration requires drawers confirmation, and he put his full signature, then the banker can have no objection to honour it. III. SUFFICIENT BALANCE. There must be a sufficient balance to honour the cheque. If sufficient funds are not available, the banker justified to returning it. For computing the balance, the banker may combine the accounts of the same customer, if he has more than two, after giving due notice to the

customer. A banker, in order to protect the customer, may combine the accounts and pay a cheque. IV. SIGNATURE OF THE DRAWER. A paying banker is to compare the signature of his customer found on the cheque with that of his specimen signature. If the has been forged for the banker to find it out, even then the banker is liable. If the customer facilitates the forgery of his signature by his conduct, then, the banker will be relieved from his liability. V. Endorsement. Before honouring a cheque, the banker must verify the regularity of endorsement. In case an order cheque, which requires an endorsement before its delivery? VI. LEGAL BAR The existence of legal bar like Garnishee Order limits the duty of the banker to pay a cheque. VII. MINOR PRECAUTIONS. 1. He must see whether there is any order of the customer not to pay a cheque. 2. He must see whether there is an evidence of misappropriation of money. If so, the cheque should be returned, eg., breach of trust. 3. He must see whether he has got any information about the death or insolvency or insanity of his customer. Failure to note those instructions will land him in trouble. CIRCUMSTANCES UNDER WHICH A CHEQUE CAN BE DISHONOURED A. COUNTERMANDING 1. Instruction given by the customer of a bank requesting the bank not to honour a particular cheque issued by him. When such order is received, the banker must refuse to pay the cheque. In case of a company, any director can stop payment of a cheque. So also, any partner or anyone of the joint account holder can stop the payment of a cheque. 2. If a customer informs by telephone or telegram regarding the stopping payment of a cheque, the banker should diplomatically delay the payment, till written instructions are received. 3. If the situation is very critical, he can return the cheque by giving a suitable answer like Payment countermanded by telegram and postponed pending conformation. 4. The drawer alone has the right to countermand the payment of a cheque. In case a cheque is lost by a holder, he should stop the payment only to the drawer, in the case of dishonour of the cheque. 5. A cheque card is a document issued by a bank which enables the holder to encash cheques, up to a stated maximum, at any branch of the issuing bank. It contains an undertaking by the

issuing bank to pay it; it is readily acceptable to all the parties particularly to third parties. Hence, it cannot be countermanded. A stopped payment payment register may be maintained for ready reference. If a banker, by mistake honours a countermanded cheque: 1. The payment does not amount to payment in due course. 2. He will have to answer for having disobeyed his customers mandate, 3. He has no right to debit his customers account with the amount of the countermanded cheque, 4. He may have to dishonour the customers subsequent cheques for want of funds in the account. B. UPON THE RECEIPT OF NOTICE OF DEATH OF A CUSTOMER. 1. When a banker receives written information from an authoritative source that is from nearest relatives, regarding the death of a particular customer, he should not honour any cheque drawn by that deceased customer. 2. If the banker is unaware of death of a customer he may honour the cheque drawn by him. It would be held valid in the fact that the payment has been actually made after his death. C. UPON THE RECEIPT OF NOTICE OF INSOLVENCY. Banker has receives a knowledge of the insolvency of the customer, he must refuse the cheques drawn by him. Banker served the notice of presentation of petition upon which he can take necessary action. D. UPON THE RECEIPT OF NOTICE OF INSANITY. Banker receives a notice of a customers insanity, he is justified the refusing payment of th e cheque drawn by him. Banker should receives the lunacy order, it is advisable to the definite proof of doctors certificate, a court order, etc. E. UPON THE RECEIPT OF NOTICE OF GARNISHEE ORDER. Garnishee refers to the person who has been served with the order. Garnishee Order refers to the order issued by a court attaching the funds of the judgement debtor in the hands of a third party.It comprises two steps. A. GARNISHEE ORDER NISI This order gives an opportunity to the banker to prove that this order could not be enforced. If the banker does not make any counterclaim, this order becomes an absolute one. B. GARNISHEE ORDER ABSOLUTE it is actually attaches the account of the customer. If it is attaches the whole amount of a customers account, then, the banker must dishonor the cheque drawn by that customer.

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 gibing a letter of assignment to the banker. Once, the assignment has been made, the assignor has no legal rights over the bank balance and therefore, if any cheque drawn by him, the banker should refuse to honour it. G. WHEN A BREACH OF TRUST IS INTENDED. In case of a trust account, mere knowledge of the customers intention to use the trust funds for his personal use, is a sufficient reason to dishonor the cheque. 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. A person who brings a cheque, which has been countermanded or which has been forged, has no title to it. I. OTHER GROUNDS. A banker is justified in dishonouring a cheque under the following circumstances: If a cheque is 1. A conditional one 2. Drawn on an ordinary piece of paper. 3. A stale one 4. A post dated one, 5. Mutilated, 6. Drawn on another branch where the account is not kept, 7. Presented during non-banking hours, 8. If the words and figures differ, 9. If there is no sufficient funds, 10. If the signature of the customer is forged, 11. If the endorsement is irregular ,and 12. If a crossed cheque is presented at the counter. STATUTORY PROTECTION TO A PAYING BANKER 1. 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. It is unjustifiable to make the banker responsible for such errors. The law relieves the paying banker from his liability. protection. 2. Origin about statutory protection Stamp Act of 1853 in England. Sec.60 of the Bill of Exchange Act,1882 gives protection to the paying banker. It is statutory

3. Under the Indian Law Sec.85 of the Negotiable Instrument Act, 1881 offers protection to the paying banker in India. 4. Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course. To claim protection, the banker should fulfilled the following conditions. 1. It Should have paid an order cheque. 2. Such cheque should have been endorsed by the payee or his order. 3. It should have been paid in due course. ORDER CHEQUE Eg;- Pay to X or order When such a cheque is paid by the banker, he is entitled to get protection. Endorsement is a must for order cheque. so protection is mainly extended to an order cheque. ENDORSED BY PAYEE OR HIS ORDER. Endorsement by its payee. It must be properly endorsed by him or any person authorized by him to obtain payment. Protection cannot claim if such a cheque is not endorsed by a payee or any third party. PAYMENT IN DUE COURSE 1. APPARENT TENOR OF THE INSTRUMENT. Intention of the parties as it is evident from the face of the instrument. Eg., if a drawer draws a cheque with a post-date, his intention to make payment only after a certain date. If it is paid before due date this payment does not amount to payment in due course. Payment of a countermanded cheque does not amount to payment in due course. 2. PAYMENT IN GOOD FAITH AND WITHOUT NEGLIGENCE. Good faith forms, all banking transactions taken for granted. If negligence, the banker may sometimes be careless in his duties which an act of negligence. If negligence proved, the banker will lose statutory protection under sec.85. 3. 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. HOLDER IN DUE COURSE HOLDER Sec . 8 of the Negotiable Instruments Act defines a holder as holder of a promissory note bill of exchange or cheque, means any person entitled, in his own name, to the ownership and thereof and to receive or recover the amount due thereon from the parties thereto.

HOLDER IN DUE COURSE A holder in due course is the person 1. Who receives an instrument innocently, 2. Who has paid value for the same 3. Who has received the instrument before its maturity 4. Who is in possession of the instrument as a bearer or payee or endorsee. RIGHTS AND PRIVILEGES OF A HOLDER IN DUE COURSE 1. He obtains a better title to the instrument than that of a true owner. 2. The defective title of the previous endorsers will not adversely affect his rights. 3. he can pass on a better title to others, since, once the instrument passes through his hands, it is purged of all defects. 4. Until the instrument is finally discharged, every party to that instrument is liable to him. 5. Even the drawer of a negotiable instrument cannot claim invalidity of the instrument against him. 6. His claim cannot he denied on the ground that the payee has no capacity to endorse. 7. The principle of stopped is applicable against the endorser to deny the capacity of previous parties. 8. Thus, the title of a holder in due course is supreme. RECOVERY OF MONEY PAID BY MISTAKE By mistake, a banker may pay money to a wrong person. Can a banker recover money paid by mistake?. As a general rule, a person who has committed mistake, has every right to rectify the same. But, in rectifying mistake, he should not bring any disadvantage to a party. The banker can recover the money paid by mistake without adversely affecting the other party. MONEY CAN BE RECOVERED 1. MONEY RECEIVED MALAFIDE IS RECOVERABLE. When a person receives money paid by mistake, he is not entitled to received that money, then, the banker is entitled to recover the same. 2. MONEY PAID UNDER A MISTAKE OF FACT IS RECOVERABLE. The money wrongly paid is recoverable, for eg.,Banker pays money to X, thinking that he is Y. so X is under a legal duty to pay the money back to the banker. 3. MISTAKE BETWEEN THE PARTY PAYING AND PARTY RECEIVING Then the money is recoverable. If a banker by mistake, pays a cheque to X, the payee in the absence of sufficient balance in the account of the drawer. Banker cannot recover the money paid by mistake, because the mistake is between the banker and the drawer not a receiving party.

MONEY CANNOT BE RECOVERED. 1. MONEY PAID UNDER A MISTAKE OF LAW IS NOT RECOVERABLE. When a banker pays money mistaking law, he cannot recover it. Overpaid of money could not be recovered. 2. MONEY PAID ON A NEGOTIABLE INSTRUMENT TO AN INNOCENT HOLDER IS NOT RECOVERABLE. When money is paid by mistake on a negotiable instrument to a holder in due course, it cannot be reclaimed after a lapse of time. Eg., a banker who pays a bill to an innocent holder by mistake cannot recover the money because, after a lapse of time, he cannot trace his previous parties to make them liable. 3.When a person, who receives money in good faith by mistake, alters his position relying upon it, need not return the same. 4. MONEY PAID TO AN AGENT BY MISTAKE. Where a banker pays money by mistake to an agent, who in turn has paid the same to the principal or used it before the mistake is found out, the money cannot be recovered. COLLECTING BANKER When a customer of a banker receives a cheque drawn on any other banker, 1. Either to receive its payment personally or through his agent at the drawee bank or 2. To send it to his banker for the purpose of collection from the drawee bank MEANING OF COLLECTING BANKER The banker is deputed to collect the amount of the cheque from another banker is called collecting banker. BANKER AS A HOLDER FOR VALUE Apart from the question of the forged endorsement, if the customer has either no title to the cheque or his title is defective, the banker is the holder in due course with a good independent title against all the prior parties on the cheque. The title of the holder in due course is superior to that of the true owner. BANKER AS AN AGENT He has to act only as an agent of the customer. So he cannot have a title better than that of the customer himself. So, a collecting banker cannot choose the capacity in which he wants to act at his discretion. During collection, if a banker, in his capacity as an agent, collects a cheque which belongs to some other person, to the account of his customer, he will be held liable for conversion of money received.

STATUTORY PROTECTION TO A COLLECTING BANKER. 1. THE CHEQUE MUST BE A CROSSED CHEQUE. The statutory protection is available to the banker only in case of cheque crossed generally or specially himself. It is essential that the cheque is crossed before it is deposited with the collecting banker, otherwise the banker will be liable for conversion if the title of the customer proves to be defective or it is forged one. 2. THE PAYMENT MUST BE RECEIVED FOR THE CUSTOMER. The statutory protection is available only when the banker collects the cheque on behalf of a customer, when the customer who has an account with the banker. The statutory protection cannot be availed of in case of a cheque sent to the banker by a person who is not a customer of the banker. 3. COLLECTIONS ON BEHALF OF CUSTOMERS AS AN AGNET The above protection can be claimed by a banker only for those cheques collected by him as agent of his customers. If he acts as a holder for value, he will acquire a personal interest in them, and so, he cannot claim protection under Sec.131. The collecting banker does not lose any statutory protection if he credits his customers account with the amount of the cheque before its realization but the customer is allowed to draw the amount only after its realization. 4. IN GOOD FAITH AND WITHOUT NEGLIGENCE A collecting banker must act in good faith and without negligence. This applies to the whole transaction from the receipt of the cheque from the customer to the receipt of the proceeds from the paying banker. Good faith is not very material because, joint stock banks do not act otherwise than in good faith. 5. BASIS OF NEGLIGENCE 1. The term negligence means interpreted by courts of law frequently to the detriment of bankers. It is flexible and is ever expanding in its scope as new circumstances arise. 2. The liability for negligence imposes on the banker a statutory duty to the true owner. According to Sir John Paget, the assumption of this duty to a stranger must be regarded as part of the price paid by bankers for protection. Negligence studied under the following heads. 1. GROSS NEGLIGENCE If a banker is completely careless in collecting a cheque, then, he will be held liable under the ground of gross negligence. A. Collecting a cheque crossed a/c payee for the other than the payees account.

If he collects a cheque crossed A/c payee for any person other than the payee, then, this fact will be proves as an evidence. B. Failure to verify the correctness of endorsement if a banker omits to verify the correctness of endorsements on cheques payable to order, he will be deprived of the statutory protection. C. Failure to verify the existence of authority in the case of per pro signatures. If a collecting banker fails to verify the existence of authority in the case of per pro signatures, if any, it will be proved as an evidence of gross negligence II. NEGLIGENCE CONNECTED WITH THE IMMEDIATE COLLECTION On the face of the cheques, there is a warning that there is misappropriation of money, the collecting banker should not disregard such warnings, he should make some reasonable enquiry and only after getting some satisfactory explanations, he can proceed to collect cheques. A. Collecting a cheque drawn against the principals a/c to the private a/c of the agent without enquiry. Collecting a cheque payable to the principals A/c. to the Private A/c of the agent without enquiry, constitutes negligence, which, deprives the banker of the protection guaranteed under sec.131 B. Collecting a cheque payable to the firm to the private a/c of a partner without enquiry. The banker had collected a cheque payable to the firm to the private account of the partner, who was authorised to operate be account. conversion. C. Collecting a cheque payable to the company to the private account of a direction or any other officer without enquiry. The banker had collected a number of cheques payable to the one man company, to the private account of a sole director, he was held to be negligent and answerable to debenture holders, D. Collecting a cheque payable to the employer to the private account of the employee would constitute negligence. E. Collecting a cheque payable to the trustee, to the private account of the person operating the trust account is another instance of negligence of a banker. It was held that the banker was liable for

III. NEGLIGENCE UNDER REMOTE GROUNDS The bankers have been held negligent under those situations which are branded as remote grounds. 1. Failure to ascertain the name of the employer of a new customer constitutes negligence under sec. 131. In the case of married woman, failure to verify the name of the employer of her husband constitutes negligence. 2. Omission to obtain a letter of introduction from a new customer causes negligence. 3. Failure to enquire into the source of supply of large funds into an account which has been kept in a poor condition for a long time constitutes negligence. IV. CONTRIBUTORY NEGLIGENCE It is possible that a collecting banker, even after accepting negligence on his part, can plead for contributory negligence. That is , if the customers negligence is the proximate cause for the loss, then, the customer will be liable. DUTIES OF A COLLECTING BANKER (i) EXERCISE REASONABLE CARE AND DILIGENCE IN HIS COLLECTION WORK: When a banker collects a cheque for his customer, he acts only as an agent of the customer. As an agent, he should exercise reasonable care diligence and skill in collection work. He should observe atmost care when presenting a cheque or a bill for payment. (ii) THE BANKER MUST PRESENT THE CHEQUE FOR PAYMENT WITHOUT ANY DELAY. If there is delay in presentment, the customer may suffer losses due to the insolvency of the drawer or insufficiency of funds in the account of the drawer or insolvency of the banker himself. Recently, the Coimbatore District Consumer Disputes Redressed Forum awarded a damage of Rs.2,000/- for the negligence of Dr.Nanjappa, Road Branch of the Vijaya Bank for having sent a cheque for collection after a delay of 20 days. (iii) NOTICE TO CUSTOMER IN THE CASE OF DISHONOUR OF A CHEQUE. If the cheque, he collects, has been dishonoured. He should inform his customer without any delay. The N.I Act has prescribed a reasonable time for giving the notice of dishonor. If he fails to do so, and consequently, any loss arises to the customer, the banker has to bear the loss.

(Iv) PRESENT THE BILL FOR ACCEPTANCE AT AN EARLY DATE If a banker undertakes to collect bills, it is his duty to present them for acceptance at any early date. Sooner a bill is presented and got accepted, earlier is its maturity. However, presentment for acceptance is excused in the following cases: (a) Where a bill is payable on demand, (b) Where the drawee is either a fictitious person, dead, insane or bankrupt or a person having no capacity to enter into a contract, (c) Inspite of a reasonable diligence on the part of the banker, the presentment cannot be affected, (d) Where although the presentment is not quite regular, the drawee has refused to accept it on some other ground. (V) PRESENT THE BILL FOR PAYMENT The banker should present the bills for payment in proper time and at proper place. If he fails to do so and if any loss occurs to the customer, then the banker will be liable. According to Section 66 of the N.I Act a bill must be presented for payment on maturity. (VI) PROTEST AND NOTE A FOREIGN BILL FOR NON-ACCEPTANCE In case of dishonor of a bill by non-acceptance or non-payment, it is the duty of the collecting banker to inform the customer immediately. In the absence of specific instructions, collecting bankers do not get the inland bills noted and protested for dishonor. If the bill in question happens to be a foreign bill, the banker should have it protested and noted by a Notary Public and then forwarded it to the customer. UNIT-V CHEQUE- MEANING A cheque is a bill of exchange drawn upon a specified banker and payable on demand (sec-6). 1. It is always drawn on a specified banker. 2. It is always payable on demand.

BILL OF EXCHANGE Bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument. REQUISITES OF A VALID CHEQUES 1. IT MUST BE AN INSTRUMENT IN WRITING The bankers insist upon the customers to draw cheques only in the printed forms supplied to them and by means of a pen. This is in order to avoid unauthorised alterations. 2. IT MUST BE AN ORDER Cheque must contain an order to pay. It should not contain any words of courtesy like please, kindly, etc. The word order need not form part of it. The word pay itself implies an order. 3. THE ORDER MUST BE UNCONDITIONAL The payment of a cheque should not be made as dependent upon the happening of an event or fulfillment of a condition. The crossing made by the drawer of a cheque is not a condition but it is an instruction to the banker regarding the manner of payment. Eg., pay to --- provided the receipt form at the foot hereof is duly signed , stamped and dated by him 4. IT MUST BE DRAWN ON A SPECIFIED BANKER A cheque must be drawn by a customer only on the particular branch of a bank where he keeps his account. The name and address of the drawee bank are specified in the printed forms of the cheques. 5. PAYEE MUST BE CERTAIN The payee is a person to whom the amount of cheque is payable. Person may be human being and artificial persons like companies, institutions, societies and other association of persons etc. The payee may mentioned by his name or designation like secretary, manager, etc. For e.g., 1.Pay to ---order it means pay to the drawers order though the blank space has not been filled up. 2.Pay two---or order payee is not certain and so the blank space remains unfilled by the drawer. 3. pay to---or bearer- it its payable to the bearer though the payees name is not mentioned. 4. Pay to Raman only- it is payable to the payee only and not to his order of bearer. 5. Pay to Raman and Murugan- there is more than one payee. All of them must sign it for getting payment.

6. AMOUNT MUST BE CERTAIN The amount of a cheque must be certain and must be stated in words and figures. The amount stated in words and figures differs, the amount in words shall be taken as a correct one. The amount may also be drawn in foreign currency.The word only must be added after writing the amount in words. 7. IT MUST BE DATED The cheque must be dated by the drawer.Any holder can fill up the date within a reasonable time as per Section 20 of the Negotiable Instruments Act. The failure to write the date will not make a cheque as invalid because it is always payable on demand. 8. IT MUST BE SIGNED BY THE DRAWER. The cheque must be signed by the drawer or a person authorised by him to do so. The signature must be made in the bottom of the right-hand side corner of a cheque. The signature must correspond to the specimen signature. Otherwise the banker need not honour the cheque. Facsimile or rubber stamp signatures may also be allowed by the bankers and followed by the signature of an authorised person. In case of illiterate persons, a cheque may be signed by means of Left-hand thumb impression preferably witnessed in the presence of banker. 9. PAYABLE ON DEMAND A cheque is always payable on demand. It must be presented to the banker for payment. Presentment itself is a demand, the words on demand need not be used in a cheque. PRINTED FORM OF CHEQUES Cheques in printed form supplied by the banks are made as a condition for opening an account. ADVANTAGES: 1. It reduce the work of a customer. 2. Forgery and alterations can be easily detected 3. Stop payment can be easily done. 4. Counterfoils can be kept as vouchers. 5. Protect the banker from heavy operating expenses. 6. Special printed forms containing names of customers supplied by advertising the customers business. DRAWING UP OF A CHEQUES 1. The cheque must be drawn by a customer on the bank in which he maintains his account. 2. The customer is the drawer. 3. The banker is the drawee of a cheque. banks useful for

4. The payee is the person to whom the cheque is payable. 5. The cheque must be drawn without any mistake. Otherwise, the banker refuse to honour it. 6. The customer must be very careful while drawing a cheque and he should not draw a cheque without sufficient balance in the particular account unless the overdraft has been arranged. DEMAND DRAFT It means an instrument drawn by one branch of a bank upon another branch of the same bank later to pay a certain sum of money to the person named therein or to his order. BANKERS CHEQUE OR PAY ORDER Cheque is payable only at the issuing bank and it is not transferable. It is issued by a banker for the following purposes. 1. for making the payments of his own. 2. for payment of remittances received for the persons who are not maintaining the account. 3. for facilitating the customers to make local payments. CONSEQUENCES OF DRAWING UP OF A CHEQUE WITHOUT SUFFICIENT BALANCE As per section 138 of the Negotiable Instruments Act, a person who is drawing a cheque without sufficient balance in his account will be liable for punishment under a criminal offence. The following conditions must be fulfilled. 1. The cheque should have been issued to settle a debt or for a consideration. 2. The cheque should be presented within a reasonable period of time i.e., before 6 months from the date of issue. 3. The cheque should be dishonoured only due to the reason of insufficiency of funds in the account of the drawer. 4. The payee should have made a demand for payment of that dishonoured cheque through a written notice within 15 days of the return of the cheque in question. 5. The drawer should have make failed to make payment of the amount within 15 days of the receipt of the notice. Finally, the drawer is found guilty of a criminal offence on the basis of the above conditions, he will be punishable with imprisonment for one year or a fine of twice the amount of the cheque or both.

TYPES OF CHEQUES 1. ANTE-DATED CHEQUE A cheque which bears a date prior to the date of its issue is known as an ante-dated cheque. The banker may honour it when it is presented for payment before the expiry of 3 months from its date 2. POST DATED CHEQUE A cheque which bears a date subsequent to the date of issue is called post-dated cheque. E.g: if a cheque drawn on 10th October bears the date of 10th November , the cheque is a post dated one 3. STALE CHEQUE A cheque will become invalid after a period of 3 months from the date of its date, it is called stale cheque. So the banker refuses to pay cheques which are presented for payment after the expiry of a certain period. 4. ORDER CHEQUE A cheque is an order cheque if it is expressed to be payable1. To the order of a certain person (e.g., Pay to Narayanan or order) or 2. To a certain person without restricting its further transfer (e.g., Pay to Narayanan) 3. If it is not an order cheque Pay to Narayanan only. Since it is payable to Narayanan alone. 5. BEARER CHEQUE A cheque is a bearer cheque if, 1. It is express to be payable to the bearer e.g., Pay to .(or bearer); or 2. The only or last endorsement on it is blank. 3. A bearer cheque is transferable. 6. MARKING OF A CHEQUE When a cheque is marked or certified as good for payment by the drawee bank, it is called marking of a cheque. Marking is done on the face of the cheque by the drawee banker with his seal and initials. The drawee bank has sufficient funds of the drawer to pay the cheque on the date of marking it. TYPES OF CROSSING I. GENERAL CROSSING ESSENTIALS OF GENERAL CROSSING 1. Two parallel lines in the face of the cheque. 2. Lines must be crosswise direction (transverse).

3. Between the lines , the words and company or its abbreviation ,may be written. 4. Not Negotiable may also be included in a crossing. EFFECTS OF GENERAL CROSSING 1. Cheque is generally crossed , the payment should be made only through an account in the same bank or in another bank. The payment should be made only to the banker. 2. If a crossed cheque is paid across the counter, the payment will not be considered as payment in due course, and the paying banker will lose statutory protection. Specimen of general crossing

II. SPECIAL CROSSING Where a cheque bears across its face an addition of the name of the banker, either with or without the words Not Negotiable, and the cheque shall be deemed to be crossed specially and to be crossed to that banker

ESSENTIALS OF SPECIAL CROSSING 1. Name of a banker must be written across the face of a cheque in addition to the name of the specified banker. 2. The parallel transverse lines or words like not negotiable, Account Payee only may also be added with such name.

3. NOT NEGOTIABLE CROSSING If the words Not Negotiable are added in the crossing of the cheque. When a cheque bearing not negotiable crossing is transferred, the transferee will not get a better title when there is a prior bad title. This type of crossing gives protection to the true owner of a cheque. Every subsequent holder of a cheque must be cautious regarding the title of the previous endorsers. The transferee will get a better title if the following conditions are satisfied:1. The transferee has received the cheque for a consideration. 2. There should not be a prior bad title to the cheque. 4. ACCOUNT PAYEE CROSSING The words Account Payee is added in the crossing of the cheque. It is an instruction to the collecting banker, that he should collect the cheque for credit to the payees account only. The paying banker must confirm from the collecting banker that the payment is being received for credit to the payees account only if there is any endorsement in the cheque. 5. DOUBLE CROSSING A banker in whose favour a cheque is crossed specially may cross it again in favour of another banker being his agent for collection. This can be done only when the banker in whose favour the cheque has been crossed specially does not have a branch at the place where the cheque is payable.

6. OBLITERATING A CROSSING When the crossing of a cheque is erased by a dishonest person and the banker has made payment on that cheque as an open cheque, the banker will not be liable if, 1. The obliteration of crossing is not apparent; 2. The payment has been made in due course.

OPENING OF CROSSING The cancellation of crossing of a cheque is known as opening of crossing. The drawer can alone cancel the crossing. He can do so by writing Pay Cash followed by his full signature after striking off the crossing. SPECIMEN OF DISHONOURED CHEQUE

PASS BOOK MEANING OF PASS BOOK It is an authenticated copy of the customers account with the bank. It is written by the bank and handed over to the customer for his reference. It passes between the banker and customer periodically, it is known as pass book. A pass book is a booklet wherein a banker records his customers account as it appears in his ledger. It is called passbook because it passes between the hands of a banker and his customer very often. LEGAL EFFECTS OF ENTRIES IN THE PASS BOOK THE POSITION IN INDIA If a customer does not examine the pass book, we cannot claim that he was accepted it as a settlement of account. What are the real effects of entries in a pass book are, we have to carefully analyse the type of entries. The entries in a pass book may be of two kinds viz., I. A correct entry and II. A Wrong Entry 1. CORRECT ENTRY A dispute does not arise in respect of a correct entry and therefore we can boldly say that a correct entry constitutes a settlement of account as between a banker and a customer. 2. WRONG ENTRY Suppose a banker may commit an error in a pass book. The wrong entry may again be either

I. Favourable to a customer, or II. Favourable to a banker Errors may be committed by the banker while recording entries in the pass book. EFFECTS OF WRONG ENTRIES IN THE PASS BOOK 1. EFFECTS OF ENTRIES FAVOURABLE OR ADVANTAGEOUS TO THE CUSTOMER. The pass book belongs to the customer but are entries made by the banker. Therefore, the customer is entitled to believe them as correct and to act on the basis of such entries. If a wrong credit is made to his account, the pass book will show a higher balance and the entry will become favourable to the customer. 1. A pass book record can be used as an evidence against a banker. 2. If the customer acts upon them as bonafide so as to alter his legal position, the banker is stopped from rectifying the same. 3. If the customer withdraws money by relying on the balance in the pass book, the banker cannot recover the amount wrongly paid. 4. But the customer must prove that, A. He had acted in good faith without knowledge of the wrong entry in the pass book; B. He had altered his position by spending the same. C. The customer believes that it is true, D. The wrong entry is communicated to the customer. 2. EFFECTS OF ENTRIES FAVOURABLE OR ADVANTAGEOUS TO THE BANKER. The wrong entries favourable to the banker are, I. Complete omission of a credit entry. II. Under statement of the amount of credit entry. III.WRONG debit entry. IV. Over statement of the amount of debit entry. THE LEGAL EFFECTS OF THE ABOVE ENTRIES ARE AS FOLLOWS: The customer on finding out the mistakes can get it rectified. However, he will not be entitled to do so if it is proved that I. Where a customer has voluntarily taken up the duty of examining his pass book and if he is negligent of verifying those entries, then, the liability falls only on the customer. Those entries constitute a settled account. II. The entries in the pass book amounted to settlement of account;

III. The position of the banker has been subsequently altered. DUPLICATE PASS BOOK 1. If the pass book is lost or torn, a duplicate pass book can be obtained from the bank on payment of a certain amount. 2. This amount will differ from bank to bank. 3. It depends upon the number of entries to be made from the ledger. CONFIRMATION SLIPS Recent days, the banks are getting confirmation slips signed by the customers regarding the balance in the account from time to time.In this case, the customer cannot object to any debit entry preceding the balance confirmed by him. PRECAUTIONS TO BE TAKEN BY THE BANKER AND CUSTOMER 1. The customer must submit the pass book with bank regularly and periodically for recording the entries. 2. After making entries, the accountant or other responsible officer of the bank must verify the entries and put his initials. 3. Then, the pass book must be handed over to the customer to ensure the secrecy of its contents. 4. The customer must verify the entries in the pass book after receiving it from the bank. If any mistake is found, he must inform the banker for getting it rectified. MATERIAL ALTERATION 1. Material alteration refers to change introduced on a cheque , which affects its fundamental character. 2. If the alteration is material, it renders the cheque invalid. 3. Any change in any instrument, which makes it speak a different language, for all legal purposes, from what is spoke originally. ALTERATION THAT AMOUNTS TO A MATERIAL ALTERATION 1. It must affect the fundamental character of the instrument. 2. It must substantially change the rights and liabilities of the parties to the instrument. 3. It should change the legal character of the instrument. 4. It should speak a different language from what it spoke originally, 5. It must have taken place without the knowledge of the drawer, 6. It must have taken place after the cheque has been issued.

EFFECT OF MATERIAL ALTERATION According to sec. 87 of the Negotiable Instruments Act, if a cheque is materially altered, it cannot be regarded as a cheque. Therefore, the material alteration renders the cheque void. A material alteration affects the parties at the time of alteration and it does not affect parties, subsequent to such an alteration. According to Sec.88 of the Negotiable Instruments Act, an acceptor or endorser is bound by his acceptance or endorsement notwithstanding any previous material alteration on it. EXAMPLES OF MATERIAL ALTERATION 1. ALTERATION OF DATE Date is an important part of a cheque, because, it fixes the period of limitation for obtaining payment. The date may be altered with a view to prepone or post-pone payment. If the date is altered without the consent of the drawer, it amounts to a material alteration. So the original intention of the drawer has been changed due to this unauthorised alteration. 2. ALTERATION OF PLACE OF PAYMENT A cheque must be always drawn only on a specified banker. Particularly, it must be drawn on a particular branch, in which the account is kept. If the place of payment is altered, no banker will pay the cheque. It amounts to a material alteration. 3. ALTERATION OF CROSSING Crossing is a material part of a cheque. Hence, alteration of crossing or addition thereto, not authorised by the drawer, amounts to a material alteration. Eg.,The word Not Negotiable added to cheque have struck through and it is not confirmed. Where there is an unauthorised opening of crossing i.e., writing pay cash against a crossing amounts to a material alteration. 4. ALTERATION OF THE WORDS OR ORDER OR OR BEARER. If the words or order on the face of an order cheque are altered to or bearer, the cheque becomes payable to bearer, for the time being. Any person can alter a cheque payable to bearer to that payable to order since, it does not affect the fundamental character of the instrument. 5. ALTERATION OF THE AMOUNT The amount column is a very important material part of a cheque. In fact, some persons try to alter this part of a cheque, because, they stand to get much benefits only from the alteration of the amount. It is easy to introduce alterations in the amount. At the same time, it is very difficult to detect. The following points will clarify this matter.

1. If the amount is altered, and if it is apparent, a banker should not honour the cheque. If he does so, he will be liable to the drawer for having honoured a materially altered cheque. 2. If the amount is skilfully altered that the banker cannot find it out, even then, the banker is liable, if he honours the cheque. However, the innocent he may be, he cannot escape from his liability. 3. If a customer draws a cheque in such a way as to facilitate fraud, then, he has to bear the loss. 4. If he draws a cheque by leaving blank spaces before and after the amount and, if the amount is altered because of his carelessness, then, the banker will not be liable. 5. If both the banker and the customer are innocent as regards an alteration, then, the banker will have to bear the loss. 6. ALTERATION OF PAYEE. If the payees name without the knowledge of the drawer, it amounts to a material alteration. The banker paid the cheque without making any reference to the original payee. It was held that the banker was negligent, and so, he was held liable. 7. ALTERATION BY AN OUTSIDER. Alteration made by an outsider on a cheque must be considered as an alteration made by the holder himself, as; it is the duty of the holder to preserve the instrument free from such forgeries. MATERIAL ALTERATION AND THE BANKER 1. The material alteration renders the cheque invalid. So, the paying banker should not honour it. 2. The banker should return the cheque to the drawer with remarks like Alteration requires drawers confirmation. 3. The drawer should confirm the alteration by his full signature. So a banker should prefer full signature to initials, as initials can be forged easily. 4. If the cheque is drawn by two or more persons jointly, material alteration requires the signature of all the drawers. 5. In the case of cheques drawn by registered companies and other corporate bodies, material alteration must be confirmed by those persons who are authorised to operate the account. 6. In case of a partnership firm, any partner can authorise the alteration. 7. A banker who is honouring a materially altered cheque is not eligible for any legal protection, because, he is said to be negligent in his duty. If a banker honours a materially altered cheque, he has no authority to debit the drawees account. So, he could bear the loss.

STATUTORY PROTECTION IN THE CASE OF MATERIALLY ALTERED CHEQUE A paying banker cannot claim any statutory protection for a materially altered cheque. Sec. 85 of the Negotiable Instruments 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 3. The banker has made the payment in due course.