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PAPER-IX- LAW OF BANKING & NEGOTIABLE INSTRUMENTS

UNIT-I Historical background of Banking system - Evolution of Banks(1) - Classification - Banks and other
Financial institutions - Functions of Banks(3) - Recent trends in Banking system-eBanking system.(4&5)

UNIT-II Relationship between Banker and Customer (6) - Definition - Rights and Duties (of
banker/customer-7&8) - Special types of customers - Customer accounts(9&10) – Overdrafts Bankers
lien and combining of accounts - Appropriation of payments-Claytons Rule - Pass Book - Forgery,
Negligence, Mistake, Wrongful endorsements(11) - Legal protection to paying Banker and collecting
Banker(12) Lawful dishonour of Cheques - Effect of Wrongful dishonour of Cheques. (13)

UNIT-III Kinds of negotiable instruments, Customary / Deemed Negotiable instruments(14) - Essential

features-Features of cheques(13)-Features of NI and act(14) Crossing of Cheques (13) - Holder in due
course and Holder for value(15) - Liability of maker of Notes and acceptor of Bills Drawer of Cheques -
Liability and discharge of Endorser -Consideration Effect of Endorsement - Accommodation Bills –
Discharge from Liability of Notes, Bills and Cheques. Noting and protest - Presumptions as to negotiable
instruments(14)-dishonour of cheques.

UNIT-IV Bank Guarantees - Kinds of Guarantees - Rights and Obligations of Bankers(12) - Letters of
Credit - Types of Letters of Credit(18) – Advances secured by collateral securities - Advances against
Goods and Documents of titles to Goods - Recommendations of committees in improving the Banking
system - Banking Regulation Act 1949(19) - RBI and its promotional role in relation to commercial
Banks(20) The Securitisation and Reconstruction of Financial Assets and enforcement of security Interest
Act, 2002- Salient features(SARFAESI Act)(21)
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1.Write a short note on the evolution of banking system in India?

The evolution of the banking system in India can be divided into three phases:
Phase 1: The Pre-Independence Phase (1770-1947): The first bank in India was the Bank of
Hindustan, which was established in Calcutta in 1770. However, this bank failed within a few
years. During the pre-independence period, there were several other banks that were
established, but many of them failed due to poor management or economic instability.
Phase 2: The Post-Independence Phase (1947-1991)- Public Sector banks: After
independence, the Indian government took several steps to develop the banking system. In
1969, the government nationalized 14 major banks, which came to be known as the public
sector banks. The public sector banks played a major role in providing financial services to
various sectors of the economy, such as agriculture, industry, and small businesses.
Phase 3: The Liberalization Phase (1991-Present): In 1991, the Indian government initiated
several economic reforms, which included the liberalization of the banking sector. This led to
the entry of new private sector banks and foreign banks into the Indian market. The
liberalization of the banking sector has made the Indian banking system more competitive and
has improved the quality of banking services.
The Indian banking system plays a vital role in the Indian economy by providing financial
services to businesses, individuals, and farmers.
Key trends in the evolution of the Indian banking system:
(i) Shift from rural to urban banking: In the past, the Indian banking system was focused on
rural areas. However, in recent years, there has been a shift towards urban banking. This is due
to the rapid growth of the urban population and the increasing concentration of economic
activity in urban areas.
(ii) Growth of digital banking: Digital banking is rapidly growing in India. This is due to the
increasing penetration of smartphones and the internet. Digital banking is making banking
more convenient and accessible for customers.
(iii) Focus on financial inclusion: The Indian government is focused on financial inclusion,
which is the goal of bringing all sections of society into the formal financial system. The
government has launched several initiatives to promote financial inclusion, such as the Pradhan
Mantri Jan Dhan Yojana and the Pradhan Mantri Mudra Yojana. The Indian banking system is
constantly evolving to meet the needs of the economy and the customers. The banking system
is playing a vital role in the economic development of India.
2.Classification - Banks and other financial institutions?
Banks and other financial institutions in India can be classified into different categories based
on their functions, ownership, and regulation. Here is a brief overview of the main types of
banks and financial institutions in India (i) Central bank (RBI) (ii) Commercial banks (iii)
Cooperative banks and (iv) Foreign banks (v) Private banks (vi) Rural banks (vii) Scheduled
banks.
(i) Central Bank: The Reserve Bank of India (RBI) (1935) is the central bank of India, which
acts as the regulator and supervisor of the banking system, the issuer of currency, the
implementer of monetary policy, and acts as the banker to the government and other banks.
(ii) Commercial Banks: These are the banks that accept deposits from the public and lend
money to various sectors of the economy, such as agriculture, industry, trade, and services.
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Commercial banks can be further classified into public sector banks, private sector banks,
foreign banks, regional rural banks, local area banks, small finance banks, and payments banks .
(iii) Cooperative Banks: These are the banks that are organized and operated on the
principle of cooperation, mutual assistance, and democratic control. Cooperative banks provide
credit and banking services to the rural and urban poor, small farmers, and artisans.
Cooperative banks can be further classified into urban cooperative banks and rural cooperative
banks.
(iv) Development Banks: These are the financial institutions that provide long-term
finance and technical assistance to the industrial and infrastructure sectors. Development
banks also promote entrepreneurship, innovation, and economic development. Some of the
development banks in India are Industrial Development Bank of India (IDBI), Small Industries
Development Bank of India (SIDBI), National Bank for Agriculture and Rural Development
(NABARD), Export-Import Bank of India (EXIM Bank), and National Housing Bank (NHB).
(v) Non-Banking Financial Companies (NBFCs): These are the financial institutions
that provide various financial services, such as loans, leases, hire-purchase, insurance, mutual
funds, etc., but do not have a banking license or accept deposits from the public. NBFCs are
regulated by the RBI and are classified into various types based on their activities, such as asset
finance companies, investment companies, loan companies, microfinance companies, etc.
(Bajaj Finance, LIC housing Finance).
3.What are the main functions of Banks?
Function of Commercial Bank: The functions of commercial banks are classified into two
main divisions. (a) Primary functions and (b) Secondary functions.
(a) Primary functions:
1.Accepts deposit: The bank takes deposits in the form of saving, current, and fixed deposits.
The surplus balances collected from the firm and individuals are lent to the temporary
requirements of the commercial transactions.
2.Provides loan and advances: Another critical function of this bank is to offer loans and
advances to the entrepreneurs and collect interest. For every bank, it is the primary source of
making profits. In this process, a bank retains a small number of deposits as a reserve and offers
(lends) the remaining amount to the borrowers in demand loans, overdraft, cash credit and
other loans etc.
(b) Secondary functions:
1.Discounting bills of exchange: It is a written agreement acknowledging the amount of
money to be paid against the goods purchased at a given point of time in the future. The
amount can also be cleared before the quoted time through a discounting method of a
commercial bank.
2.Overdraft facility: It is an advance given to a customer by keeping the current account to
overdraw up to the given limit.
3.Purchasing and selling of the securities: The bank offers customers with the facility of
selling and buying the securities.
4.Locker facilities: A bank provides locker facilities to the customers to keep their valuables or
documents safely. The banks charge a minimum of an annual fee for this service.
5.Paying and gathering the credit: It uses different instruments like a promissory note,
cheques, and bill of exchange.
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4.What are the Recent trends in Banking system?

The banking system in India is undergoing a rapid transformation, driven by various factors such
as digitization, liberalization, regulation, and innovation.
(i) Digitization: Banks are adopting digital technologies to provide seamless, convenience
and secure banking services to their customers. This includes online and mobile banking, digital
payments, biometric authentication, chatbots etc. Digitization also helps banks to reduce costs,
improve efficiency, and enhance customer satisfaction.
(ii) Liberalization: Banks are facing increased competition from new entrants, such as
fintech companies, digital-only banks, payment banks, and small finance banks. These players
offer innovative and customized products and services, catering to the needs of the
underserved and unbanked segments of the population. Banks are also collaborating with
fintech companies to leverage their expertise and reach.
(iii) Regulation: Banks are complying with various regulations and guidelines issued by
the Reserve Bank of India (RBI) and the government, aimed at ensuring financial stability,
consumer protection, and financial inclusion. Some of the key regulations are the
Insolvency and Bankruptcy Code, 2016, the Goods and Services Tax,
2017, the Basel III norms, and the Unified Payments Interface.
(iv) Innovation: Banks are investing in research and development, and adopting emerging
technologies, such as artificial intelligence, blockchain, cloud computing,
and big data analytics, to create new products and services, improve operational
efficiency, and enhance customer experience. Banks are also fostering a culture of innovation
and entrepreneurship and encouraging experimentation and learning.
5.e-Banking system? Types? Benefits?
E-banking system in India refers to the provision of banking services through electronic and
digital platforms, such as the internet, mobile phones, ATMs, and cards. Benefits of e-banking
system
(i)Convenience: It allows customers to access their accounts and perform various
transactions anytime and anywhere, without visiting a bank branch or using physical cash.
(ii)Cost-effectiveness: It reduces the operational costs for banks and the transaction costs
for customers, as well as offers higher interest rates on deposits and lower interest rates on
loans.
(iii)Security & control It uses advanced technologies, such as encryption, biometrics, and
blockchain, to ensure the safety and privacy of customer data and transactions. It provides a
controlled environment to reduce any misrepresentation or frauds etc.
(iv) Inclusion: E-banking system in India enables the financial inclusion of the unbanked and
underbanked segments of the population, especially in rural and remote areas, by providing
them with affordable and accessible banking services. (v)Better efficiency/Less errors: It
permits the computerization of ordinary, regularly scheduled payments and provides further
banking activities to upgrade the efficiency of the business.
Types of e-banking services in India are:
(i) Online banking/Mobile banking/Phone banking: allows customers to access
their accounts and perform various transactions through a website or an app, or through IVRS
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system on their computer or smartphone. Online banking features include balance inquiry,
fund transfer, bill payment, credit card payment, loan application, and investment
management.
(ii) ATM and debit card services: It allow customers to withdraw cash, deposit
cash or cheques, check balance, and transfer funds using an ATM machine or a
point-of-sale terminal. ATM and debit card services also enable customers to make
online or offline purchases using their cards.
(iii) Smart Cards and Electronic clearing cards: Smart cards are cards that
have a microchip embedded in them, which can store information and perform
transactions. Smart cards can be used for various purposes, such as identification,
authentication, access control, and payment. Electronic clearing cards are prepaid
cards that can be used to make payments for various services, such as electricity,
water, telephone, gas, etc. Electronic clearing cards are issued by banks or service
providers and can be recharged online or offline.
(vi) EFT (Electronic Funds Transfer) System: EFT system is a system that
enables the transfer of funds electronically from one bank account to another,
within or across banks. EFT system includes various modes, such as NEFT, RTGS,
IMPS, UPI, and NACH.
(v) ECS (Electronic Clearing Services): ECS is a system that enables the bulk
transfer of funds electronically from one bank account to many bank accounts, or
vice versa. ECS is used for recurring payments, such as salaries, pensions,
dividends, interest, etc.

6.Explain the relationship of a banker and customer in following cases: – As (i)

Debtor/Creditor (ii) Trustee/Beneficiary (iii) Bailor/Bailee – (iv) Lesser/ lessee – (v)
Principal/Agent-(vi) Advisor/Client.
The relationship of a banker and customer can be seen in multiple ways. Bankers have a legal
duty to act in the customer's best interests, and customers can expect their bankers to uphold
this duty. The relationship between a banker and a customer is based on contract, trust, and
mutual benefit and governed by various laws and regulations, such as the Banking Regulation
Act, 1949, the Negotiable Instruments Act, 1881, the Consumer Protection Act etc.
(i) Debtor and creditor: When a customer deposits money with a bank, the bank becomes a
debtor, and the customer becomes a creditor. This means that the bank owes the customer the
money that they have deposited, plus any interest that is accrued. In case of loans provided to
the customer bank becomes creditor and customer becomes debtor.
(ii) Banker as trustee (Trustee/Beneficiary): A banker can also act as a trustee for its
customers. This means that the banker has a legal obligation to hold the customer's money and
property in trust for the customer's benefit. For example, if a customer deposits a valuable item
into a safe deposit box, the banker is acting as a trustee for the customer.
(iii) Banker as Bailee (Bailee/Bailor): A banker can also act as a bailee for its customers. This
means that the banker has a legal obligation to take care of the customer's goods while they
are in the banker's possession. For example, if a customer deposits a cheque with a bank, the
banker is acting as a bailee for the customer.
(iv) Banker as Lessor (Lessor/Lessee) A banker can also act as a lessor for its customers. This
means that the banker can lease property to its customers. For example, a bank might lease
office space to a business customer.
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(v) Banker as agent (Agent/Principal) A banker can also act as an agent for its customers. This
means that the banker can represent the customer and act on their behalf. For example, a bank
might act as an agent for a customer when the customer is buying or selling a property.
(vi) Banker as advisor (Advisor/Client): The banker provides the customer with financial
advice and guidance, based on the customer’s needs and goals.
7.What are the obligations(duties) and the rights of a banker?
(i) Right of lien: The banker has the right to retain the possession of the customer’s goods or
securities until the customer pays his dues to the banker.
(ii) Right of set-off: The banker has the right to adjust the balance in one account of the
customer with the balance in another account of the same customer, if the customer fails to
pay his dues to the banker.
(iii) Right of appropriation: The banker has the right to appropriate the payments made by the
customer towards any of his debts unless the customer specifies the debt to be paid.
(iv) Right to charge interest and commission: The banker has the right to charge interest and
commission for the services rendered to the customer, as per the agreed terms and conditions.
(v) Right to close the account: The banker has the right to close the account of the customer, if
the customer does not maintain the minimum balance, or violates the rules and regulations of
the account, or acts fraudulently or dishonestly.
Obligations/Duties of a Bank/Banker:
(i) Duty to honour cheques: The banker has the duty to honour the cheques drawn by the
customer, if there is sufficient balance in the account, and the cheques are in order and
properly presented.
(ii) Duty to maintain secrecy: The banker has the duty to maintain secrecy of the customer’s
account and transactions, unless required by law or consented by the customer.
(iii) Duty to act with reasonable care and skill : The banker has the duty to act with reasonable
care and skill in providing the services to the customer, and to avoid any negligence or mistake.
(iv) Duty to comply with the regulations: The banker has the duty to comply with the
regulations and guidelines issued by the Reserve Bank of India and the government, regarding
the banking operations and customer protection.
(v) Duty to provide information: The banker has the duty to provide information to the
customer about the products and services offered by the bank, the terms and conditions of the
account, the charges and fees applicable, and the grievance redressal mechanism.
8.What are the obligations and the rights of a customer?
(i) Right to withdraw money: The customer has the right to withdraw money from his account,
on demand or as per the terms and conditions of the account, by using cheques, drafts, cards,
or electronic modes.
(ii) Right to receive interest: The customer has the right to receive interest on his deposits, as
per the agreed rate and period.
(iii) Right to transfer funds : The customer has the right to transfer funds from his account to
another account, within or across banks, by using cheques, drafts, cards, or electronic modes.
(iv) Right to stop payment: The customer has the right to stop payment of a cheque issued by
him, by giving notice to the banker, before the cheque is presented for payment.
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(v) Right to nominate: The customer has the right to nominate a person to receive the balance
in his account, in case of his death.
Duties of the customer:
(i) Duty to maintain minimum balance: The customer has the duty to maintain the minimum
balance in his account, as required by the banker, and to pay the penalty for non-maintenance.
(ii) Duty to operate the account: The customer has the duty to operate the account regularly
and properly, and to avoid any overdraft or misuse of the account.
(iii) Duty to inform the banker: The customer has the duty to inform the banker about any
change in his address, phone number, email id, or other details, and to update his KYC
documents.
(iv) Duty to safeguard the instruments: The customer has the duty to safeguard the
instruments, such as cheques, drafts, cards, and passwords, issued by the banker, and to report
any loss, theft, or fraud to the banker.
(v) Duty to pay the charges and fees: The customer has the duty to pay the charges and fees
for the services availed by him from the banker, as per the agreed terms and conditions.

9. What are the types of customer and bank accounts?

Special types of customers: The special types of customers in banking and Ni Act are those
who have some special features that distinguish them from ordinary customers. These
customers require special care and attention from the bankers while opening and operating
their accounts. Some of the special types of customers are:
(i) Minors(18 years): They can open a bank account jointly with their guardian or parent, who
will operate the account on their behalf.
(ii) Married women: They may be subject to the marital rights of their husbands, who may
claim a share in their property or income. The banker must verify the marital status and the
rights of the married women before opening their accounts.
(iii) Paradanashin women: Paradanashin women are those who are secluded from the society
and are under the influence of their husbands or other male relatives. The banker must exercise
extra caution and care while opening and operating the accounts of paradanashin women. The
banker has to ensure that the they understand the nature and terms of the account.
(iv) Illiterate persons: Illiterate persons are not familiar with the banking transactions and the
legal formalities. The banker must take special care and precautions.
(v) Lunatics: Lunatics are those who suffer from mental disorder or incapacity. Lunatics are not
competent to enter a valid contract, and hence they cannot open a bank . They can open a bank
account jointly with their guardian , who will operate the account on their behalf. The guardian
must produce a certificate of lunacy from a competent authority and sign the account opening
form and the cheque book on behalf of the lunatic.
(vi) Joint Hindu families: Joint Hindu families are governed by the concept of coparcenary,
which means that all the coparceners have a common and equal interest in the ancestral
property. The head of the joint Hindu family is called the karta, who has the authority and
responsibility to manage the affairs of the family. The karta can open a bank account in the
name of the joint Hindu family and operate it on behalf of the coparceners.
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(vii) Trustees: Trustees are those who hold the property or funds of another person or entity,
called the beneficiary, for a specific purpose, as per the terms of a trust deed. Trustees can
open a bank account in the name of the trust and operate it on behalf of the beneficiary.
(viii) Partnership: Partnership is a form of business organization, where two or more persons
and are jointly and severally liable for the debts and obligations of the partnership. Partners can
open a bank account in the name of the partnership and operate it on behalf of the
partnership.

10.Types of Customer Accounts?

(i) Savings account: It allows the customer to save money and earn interest on it. A savings
account is suitable for customers who want to keep their funds liquid and secure, and do not
need frequent or large withdrawals.
(ii) Current account: It allows the customer to make and receive payments through cheques,
drafts, cards, and electronic modes. A current account is suitable for customers who have high
volume and frequency of transactions, such as businessmen, traders, professionals, etc.
(iii) Fixed deposit account: It allows the customer to deposit a lump sum amount for a fixed
period of time and earn a higher rate of interest than a savings account. A fixed deposit account
is suitable for customers who want to invest their surplus funds for a specific goal or duration.
(iv) Recurring deposit account: It allows the customer to deposit a fixed amount every month
for a fixed period and earn a higher rate of interest than a savings account. A recurring deposit
account is suitable for customers who want to save regularly and accumulate a corpus for a
future need.
11.Explain below mentioned concepts (i) Overdrafts (ii) Bankers lien (iii) Combining of
Accounts (iv) Appropriation of payments (v) Clayton’s rule (vi) Negligence (vii) Mistake(viii)
wrongful endorsement (ix) Forgery.
(i) An overdraft is a type of credit facility that allows a customer to withdraw more money than
they have in their bank account, up to a certain limit. The bank charges interest on the
overdrafted amount, as well as fees and penalties for exceeding the limit or defaulting on the
repayment.
(ii) A banker’s lien is a legal right of a bank to retain the property or securities of a customer as a
security for the general balance of their account. This means that the bank can use the
customer’s assets to recover any debts owed by them, unless there is a specific contract or
agreement that excludes the lien. A banker’s lien is based on the merchant law and is
recognised by Section 171 of the Indian Contract Act, 1872.
(iii) Combining of accounts is a power of a bank to set off the debit and credit balances of
different accounts of the same customer, or of different customers who are jointly liable to the
bank. This means that the bank can adjust the amounts owed or payable by the customer by
consolidating their accounts, unless there is a specific contract or agreement that prevents the
set-off. For example, if a customer has an overdraft in one account and a deposit in another
account, the bank can use the deposit to reduce the overdraft.
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(iv) Appropriation of payments: It is a concept that deals with how a payment made by a debtor
to a creditor is applied to different debts owed by the debtor. The Indian Contract Act, 1872 has
some sections that regulate the appropriation of payments. Sections 59/60/61 of ICA deals
with the appropriation rules
(v) Claytons Rule: Clayton’s Rule is a legal principle that applies to the appropriation of
payments. It states that, in the absence of any express or implied intention by the debtor or
the creditor, the payments are applied to the debts in the order of time, that is, the first
payment is applied to the first debt, and so on. This rule was established in the case of
Devaynes vs. Noble, also known as Clayton’s Case, in 1816. The rule is based on the
presumption that the parties intended to discharge the oldest debts first, unless there is
evidence to the contrary.
(vi) Negligence in banking is a breach of the duty of care that a banker owes to its customers or other
parties during its business. Negligence can result in loss or damage to the customers or other parties and
expose the banker to legal liability. Some examples of negligence in banking are: (i) Failing to verify
the identity and authority of the drawer or endorser of a cheque or other negotiable
instrument. (ii) Failing to honour a valid cheque or other negotiable instrument presented for
payment within the stipulated time. (iii) Failing to detect and prevent fraud, forgery, or
alteration of a cheque or other negotiable instrument. (iv) Failing to maintain proper records
and accounts of the transactions and balances of the customers. (v) Failing to comply with the
statutory or contractual obligations or duties of the banker.
(vii) Mistake in banking is an error or omission that occurs while banking transactions, such as
depositing, withdrawing, transferring, or issuing cheques or other negotiable instruments.
Mistake can be of various types, such as mistake of fact, mistake of law, mistake of identity,
mistake of amount, mistake of account, etc. Mistake can affect the validity, enforceability, or
discharge of the banking contracts or obligations, and can also give rise to claims for
rectification, restitution, or damages.
(viii) Wrongful endorsements in banking are endorsements that are made by a person who is not the
rightful holder of a negotiable instrument, or by a person who has no authority to endorse the
instrument on behalf of the holder. Wrongful endorsements can result in fraud, forgery, or
misappropriation of the instrument, and can affect the rights and liabilities of the parties involved.
(ix) Forgery is a criminal offence that involves making or altering a document or signature with the
intention to deceive or defraud someone. In banking, forgery can occur in various forms, such as forging
the signature of the drawer or endorser of a cheque, altering the name of the payee or the amount of
the cheque, or creating a fake cheque or promissory note. Forgery can cause financial loss and damage
to the reputation of the parties involved.

12.How can a banker protect the interests of the bank while handling cheques, (i)
Obligations As a collecting banker and (ii) Obligations as a paying banker? Legal
protection to paying Banker and collecting Banker?

Legal protection to paying banker and collecting banker refers to the provisions of the Negotiable
Instruments Act, 1881, that safeguard the rights and interests of the bankers who are involved in the
payment or collection of cheques or other negotiable instruments. The act provides different types of
protection to the paying banker and the collecting banker, depending on the nature and mode of the
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instrument, the manner and time of the payment or collection, and the good faith and due diligence of
the banker.
(i) As a collecting banker: The collecting banker is the banker who collects the cheque or other
negotiable instrument on behalf of his customer. Obligations(i)Verify the authenticity of the cheque. (ii)
Make sure that the cheque is properly endorsed. (iii) Ensure that the cheque is not stale (more than 6
months) (iv) Present the cheque for payment promptly (v) Keep a record of all cheques that are
collected.

The collecting banker can claim protection under the following section of the act: Section 131: This
section protects the collecting banker in case of a cheque crossed generally or specially to him. The
section states that if the collecting banker receives payment of the cheque in good faith and without
negligence, he is not liable to the true owner, even if the title of the customer is defective. However,
the collecting banker must ensure that he acts as an agent of the customer and not as a holder for value.

(ii) As a paying banker: The paying banker is the banker on whom the cheque is drawn and who is liable
to pay the cheque when it is presented for payment. Obligations:(i) Verify the signature of the drawer.
(ii) Make sure that the cheque is properly endorsed.(iii) Check the date of the cheque and make sure
that it is not stale.(iv) Ensure that the cheque is drawn on a valid account.(v) Check the account balance
to make sure that there are sufficient funds to cover the cheque.(vi)Pay the cheque only to the payee or
to a person who is authorized to receive payment on behalf of the payee. (vii)Keep a record of all
cheques that are paid. Bankers are obligated to protect the interests of the bank while handling cheques
by educating customers about cheque fraud and Using fraud detection systems.
The paying banker can claim protection under the following sections of the act: Section 10: This section
defines payment in due course as payment in accordance with the apparent tenor of the instrument, in
good faith and without negligence, to any person in possession of the instrument, who is entitled to
receive the payment. The paying banker must make the payment in due course to avoid any liability to
the true owner of the cheque. Section 85: The section states that if the cheque is endorsed by or on
behalf of the payee, the paying banker is discharged from liability, unless he has reason to believe that
the endorsement is forged. However, if the cheque is crossed specially to another banker, the paying
banker is liable to the true owner for any loss caused by the payment.Section 128: This section protects
the paying banker in case of a crossed cheque. The section states that if the cheque is crossed generally
or specially to the paying banker, and he pays it in due course, he is not liable to the true owner, unless
he has reason to believe that the payment is wrongful.

13) Highlight the features of cheque? Types of Cheques? Types of crossings?

Cheque refers to a negotiable instrument that contains an unconditional order to the bank to pay a
certain sum mentioned in the instrument, from the drawer’s account to the person to whom it is issued,
or to the order of the specified person or the bearer.
Essential Features of a Cheque:1. Instrument in writing 2. It should be drawn on banker 3.
unconditional: A cheque is an order to pay and it is not a request The order must be unconditional.
4.The check must have an order to pay a certain sum 5. It should be signed by the drawer and should be
dated 6. It is payable on demand 7. Validity: A cheque is normally valid for six months from the date it
bears. Thereafter it is termed as stale cheque.

The legal aspects of collection of cheques in India are governed by the Negotiable Instruments Act,
1881. The Act defines a cheque as a bill of exchange drawn on a specified banker and not expressed to
be payable otherwise than on demand. Act deals with the life cycle of cheque includes (i) Presentment
for payment (ii) Payment of cheque (iii) Dishonor of cheque: If the banker refuses to pay a cheque, the
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cheque is said to be dishonored. The holder of the cheque may then sue the drawer or the endorsers for
the amount of the cheque.The Act also provides for the following remedies in case of dishonor of a
cheque. There can be 2 types of dishonour of the chequest (i) Lawful dishonor (ii) Wrongful dishonour.

(i) Lawful dishonour: the situations where a cheque drawn by a person on an account
maintained by him with a banker is returned by the bank unpaid for valid reasons, and the
person does not incur any criminal liability under Section 138 of the NI Act. Reasons: The
cheque is not presented within the period of its validity, which is usually three months
from the date of issue. If the cheque is mutilated, altered, postdated state, account is dormant.

(ii) Wrongful dishonor: The cheque is presented within the period of its validity, but the bank
fails to honour it due to negligence, mistake, or malafide intention. The drawer or the holder of
the cheque can claim compensation from the bank for the wrongful dishonour of the cheque,
and initiate criminal proceedings against the bank under Section 138 of the NI Act, if the bank
fails to make the payment.

(i) Criminal proceedings: The drawer of a cheque can be prosecuted under Section 138 of the
Act if the cheque is dishonored due to insufficient funds. The punishment for the offense of
cheque bouncing is imprisonment up to two years or fine up to twice the amount of the cheque,
or both.
(ii) Civil proceedings: The holder of a dishonored cheque can also file a civil suit against the
drawer or the endorsers of the cheque for the amount of the cheque.
Types of Cheques:
1.Bearer Cheque: Bearer is one of the most common types of cheque. Through a bearer
cheque, whoever presents it to the bank, the payment is made to the same person. This implies
that any individual in possession of the cheque can claim the amount.
2.Self-Cheque: If a cheque has the words’ SELF’ written in the ‘PAY’ line, it is called a self-
cheque. This type of bank cheque allows individuals to withdraw money from their own
accounts.
3.Banker’s Cheque: A banker’s cheque is a cheque issued by banks wherein they debit the
required amount on behalf of a customer and present the same to the recipient in the same city.
The bank guarantees this transaction. And for the same reason, it is considered a secure and
reliable means of fund transfer.
4.Open Cheque: An open cheque may be considered the opposite of a crossed cheque. In this
kind of cheque, the payment can be made to whoever presents the cheque.
5.Post-dated Cheque: Cheques can be issued for a future date.
6.Stale Cheque: Cheques come with a valid period. In India, a cheque is considered stale if it
has not been encashed within 3 months.
7.Crossed Cheque / Account Payee Cheque two parallel lines drawn on the top left side of
the cheque with the text’ a/c payee’. Some cheques may not have this text; in such cases, two
parallel lines are drawn across or on the cheque ensure the payment is only to the specified
person or the bank account.
What is Cross Cheque: A crossed cheque is primarily any cheque that is crossed with two
parallel transverse lines. It simply means that the cheque could only be deposited straightway
into a bank account and would not be instantly cashed by a bank or by any credit institution.
This ensures a level of security for the payer since it needs the funds to be handled with a
collecting bank.Types of crossings:
(i) General Crossing: This type of cheque crossing needs two parallel transverse lines. The
usefulness of this crossing is that the cheque needs to be essentially paid to the bank.
(ii) Account Payee Crossing: It is also known as a restrictive crossing. This kind of cheque
must comprise the words account payee or account payee only. The cheque needs to be
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crossed either generally or specially. The importance of this type of crossing highlights that the
cheque is not negotiable anymore.
(iii) Special Crossing: The special crossing cheque does not need the name of the banker.
The effect of this kind of crossing is that the cheque needs to be funded only to the banker that
it has been crossed.
(iv) Not Negotiable Crossing: In this kind of cheque crossing variety - the paper document
needs to have the words not negotiable. Moreover, the cheque could be crossed specifically or
generally. The cheque stays non-negotiable as well as the title of the transfer would not be
better than the title of the transferor.

14. What is Negotiable Instrument Act? Explain the Features of a Negotiable Instrument?
Negotiable Instruments are written contracts whose benefit could be passed on from its original holder
to a new holder. The Negotiable Instruments Act, 1881 (NI Act) is a law of India that governs negotiable
instruments, such as cheques, bills of exchange, and promissory notes. The NI Act provides a legal
framework for the transfer of negotiable instruments and sets out the rights and duties of the parties
involved. There are Customary NI: Negotiable instruments recognised by usage or custom are: (i) Hundis
(ii) Share warrants (iii) Dividend warrants (iv) Bankers draft (v) Circular notes (vi) Bearer debentures (vii)
Debentures of Bombay Port Trust (viii) Railway receipts (ix) Delivery orders.
Features of a negotiable instrument: A negotiable instrument is a document that satisfies the following
conditions:a. It must be in writing. b. It must be signed by the maker or drawer c. It must contain an
unconditional undertaking to pay a certain sum of money to a certain person or to the bearer of the
instrument. d. It must be payable on demand or at a fixed or determinable future time. e.It must be
freely transferable by delivery or endorsement.
Essential elements /Presumptions of a negotiable instrument (i) Parties: The maker or drawer, the
payee, and the holder (ii) Consideration: The consideration for the making or drawing of a negotiable
instrument may be any of the following:-Money, Goods,Services,A bill of exchange, A promissory
note(iii) Value: Value may be given for a negotiable instrument at the time of its negotiation or
afterwards.(iv)Transferability: A negotiable instrument is freely transferable by delivery or
endorsement.(v) Negotiability: The negotiability of a negotiable instrument cannot be destroyed by a
subsequent act or agreement.(vi)Discharge: A negotiable instrument can be discharged by
payment, cancellation, or novation. These instruments would be bound by some presumptions like 1.
Consideration 2.Date and time 3.Order of bearer4. Holder in due course 5.Acts prima facie evidence
Advantages of negotiable instruments (i) They are freely transferable, which makes them a convenient
medium of exchange. (ii) They can be used to raise money by discounting them with a bank or other
financial institution. (iii) They provide security to the holder in the event of default by the maker or
drawer.
Negotiable instruments are used in a variety of commercial transactions, including1. Making payments
to suppliers and employees 2. Raising money to finance business operations.3. Providing security for
loans and other financial obligations
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15. Who is a holder in due course explain in brief about a holder in due course and holder in value?
Holder in due course: A holder in due course is a person who takes a negotiable instrument in
good faith and for value, without notice of any defect in the title of the person from whom he
derived his title, or of any defense available to any prior party against him.
To be a holder in due course, a person must(i)Take the instrument in good faith (ii) Take the
instrument for value (iii) Take the instrument without notice of any defect in the title of the
person from whom he derived his title, or of any defense available to any prior party against
him.
Holder in value: A holder in value is a person who takes a negotiable instrument for
consideration, which may be in the form of money, goods, services, or another negotiable
instrument.
To be a holder in value, a person must(i) Take the instrument for consideration. (ii) Give value for the
instrument in good faith or as a part of an antecedent debt.
Difference between a holder in due course and a holder in value is that a holder in due course takes
the instrument free from all defenses, while a holder in value does not. This means that a holder in due
course can enforce the instrument even if there is a defense available to the maker or drawer against a
prior party. However, a holder in value can only enforce the instrument if the maker or drawer has no
defense against him. Rights of a holder in due course: (i) To enforce the instrument against the
maker, drawer, and all prior endorsers (ii) To take the instrument free from all defenses available to
prior parties (iii) To negotiate the instrument to another person.
16.What do you mean by endorsements? Explain the legal requirements of
endorsements?

Endorsements in Banking: An endorsement on a negotiable instrument, such as a cheque or

promissory note, is a written or printed signature or a stamp that signifies the transfer of the
instrument from one party to another. The party making the endorsement is known as the
endorser, and the person to whom the instrument is endorsed is the endorsee. Endorsements
play a crucial role in the negotiation and transfer of financial instruments.

Legal Requirements of Endorsements:.There are some common principles and legal

requirements associated with endorsements:(i) Signature: An endorsement must be signed by
the person making it, i.e., the endorser. (ii) Placement of Endorsement: Endorsements are
typically made on the back of the negotiable instrument, although certain instruments may have
designated spaces for endorsements.(iii) Clear Intent to Endorse: The language used in the
endorsement should clearly indicate the endorser's intention to transfer or negotiate the
instrument. Ambiguous or conditional endorsements may raise legal issues, so it's advisable to
use clear and unambiguous language.
Endorsement Types: (i) Blank Endorsement: The endorser signs the back of the instrument
without specifying a particular endorsee, making it payable to the bearer. This allows anyone in
possession of the instrument to negotiate it.(ii) Special or Restrictive Endorsement: The
endorser specifies the particular person to whom the instrument is payable. For example, "Pay
to the order of John. (iii) Qualified Endorsement: The endorser disclaims liability by using
language such as "Without Recourse." This means that the endorser is not responsible if the
instrument is dishonored.

Endorsements are crucial for the transferability and negotiation of negotiable instruments.
Properly executed endorsements ensure the legal validity of the transfer and provide a clear
chain of ownership for the instrument. It's essential for individuals and businesses to be aware
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of the legal requirements associated with endorsements to avoid issues with negotiability and
enforceability.
17. Write about bank guarantee and types of guarantees?
A bank guarantee refers to a promise provided by a bank or any other financial institution that
if a certain borrower fails to pay a loan, then the bank or the financial institution will take care
of the losses.
Kinds of Bank Guarantee(i) Deferred payment guarantee: This refers to a bank guarantee or a
payment guarantee that is offered to the exporter for a deferred period or for a certain time
period. When a buyer purchases machinary the seller will give credit to the buyer when the
buyer's bank gives a guarantee that it will pay the unsettled dues of the buyer to the seller.
Under this type of guarantee, payment will be made in installments by the bank for failure in
supplying raw materials, machinery or equipment.
(ii) Financial guarantee: It assures that money will be repaid if the party does not complete a
particular project or operation entirely. According to the financial guarantee agreement, when
there is a delay in the completion of the project, the bank will make the payment.
(iii) Advance payment guarantee: An advance payment will be made to the seller. There will
also be a guarantee that if the seller fails to deliver the service or product accurately or
promptly, the buyer will receive a refund of the payment.
(iv) Foreign bank guarantee: It is provided by a bank on behalf of a borrower. This will be
offered on behalf of the foreign beneficiary or creditor.
(v) Performance guarantee: In this case, compensation of money will be made by the bank
when there is any delay in delivering the performance or operation. Payment will have to be
made even if the service is delivered inadequately.
(vi) Bid bond guarantee: There will be a supply bidding procedure. This will be conducted by
the contractor for industrial project . The contractor of the project will guarantee that the best
bidder will have the capability and authority to implement a project as per his preferences. The
bid bond will be given to the owner of the project as a proof of guarantee and the bond will
imply that the project will have to be devised according to the bid contract.

18. What are the various types of letters of credit? Who are the different bankers involved in letter of
credit transactions? Documents handled under Letters of Credit?
Letters of credit are a valuable tool that can be used to facilitate international trade and to finance
complex transactions. They offer several benefits to both buyers and sellers, including reduced risk,
increased flexibility, and improved cash flow. Types of Letters of Credit: There are many different types
of letters of credit, but the most common are:
(i) Commercial letters of credit: These are the most common type of letter of credit and are used to
facilitate international trade. (ii) Standby letters of credit: These are used to guarantee the performance
of a contractual obligation. (iii) Revocable letters of credit: These can be cancelled by the issuing bank at
any time without the consent of the beneficiary. (iv) Irrevocable letters of credit: These cannot be
cancelled by the issuing bank without the consent of the beneficiary. (v) Confirmed letters of
credit: These are backed by the confirming bank, which guarantees payment to the beneficiary even if
the issuing bank defaults. (vi) Unconfirmed letters of credit: These are not backed by a confirming
bank, and the beneficiary bears the risk of non-payment by the issuing bank.
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Bankers Involved in Letter of Credit Transactions (i) Issuing bank: This is the bank that issues the letter
of credit on behalf of the buyer. (ii) Advising bank: This is the bank that advises the beneficiary of the
letter of credit.(iii) Negotiating bank: This is the bank that purchases the beneficiary's drafts and
presents them to the issuing bank for payment. (iv) Confirming bank: This is the bank that guarantees
payment to the beneficiary even if the issuing bank defaults. (v) Paying bank: This is the bank that pays
the beneficiary on behalf of the issuing bank.
Flow of a Letter of Credit Transaction: 1. The buyer applies for a letter of credit with their bank. 2.The
issuing bank issues the letter of credit and advises the beneficiary through their bank. 3.The beneficiary
ships the goods or provides the services to the buyer.4. The beneficiary presents the required
documentation to the negotiating bank.5.The negotiating bank purchases the beneficiary's drafts and
presents them to the issuing bank for payment. 6. The issuing bank pays the negotiating bank. 7.The
negotiating bank pays the beneficiary.
Benefits of Letters of Credit: Letters of credit offer a number of benefits to both buyers and sellers,
including: 1. Reduced risk: Letters of credit reduce the risk of non-payment for both buyers and sellers.
2.Increased flexibility: Letters of credit can be used to facilitate international trade and to finance
complex transactions. 3. Improved cash flow: Letters of credit can improve cash flow for both buyers
and sellers.
Documents handled under Letters of Credit: The documents handled under letters of credit (LCs) are
the documents that the beneficiary must present to the issuing bank in order to receive payment.
(i) Commercial invoice (ii) Bill of lading: This document is issued by the carrier and provides evidence of
the shipment of goods. It includes information such as the name of the vessel, the port of loading, and
the port of discharge (iii) Packing list: includes the number of units, the weight, and the dimensions. (iv)
Certificate of origin (v) Insurance certificate (vi) Inspection certificate (vii) Phytosanitary certificate: This
document certifies that the goods are free from pests and diseases that could harm plants.
19. Recommendations of committees improving banking system in India?
Banking Sector Acts and Reforms: The transformation of India’s banking sector has been
significantly influenced by a series of crucial reforms and acts aimed at aligning the industry
with global standards. These reforms encompass a wide range of measures, including
liberalization, deregulation, privatization, and technological advancements. Reforms initiated by
the Narasimham Committee in the 1990s, such as enhanced capital adequacy norms and risk-
based supervision, have played a pivotal role in reshaping the banking landscape.Over the
years, several committees were formed to recommend measures and suggest reforms to
strengthen the banking sector.
1. Narsimham Committee I (1991): Headed by M. Narasimham, former RBI Governor, this
committee suggested measures to strengthen the banking system. The recommendations
included reducing government interference, increasing the role of the RBI in supervising banks,
and enhancing transparency. The committee also proposed reducing the statutory liquidity
ratio (SLR) and cash reserve ratio (CRR) to improve banks’ liquidity.
2. R. H. Khan Committee (1997): This committee examined the effectiveness of the financial
system for the small-scale sector and the role of primary dealers. It made recommendations to
improve credit delivery to the small-scale sector and enhance the functioning of primary
dealers.
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3. Narsimham Committee II (1998): committee focused on reviewing the progress of reforms. It

emphasized the need for structural reforms, consolidation of the banking sector, and the
establishment of strong and autonomous regulatory bodies. The committee recommended
reducing the government’s stake in public sector banks (PSBs) to less than 33% and enhancing
corporate governance standards in PSBs. Moreover, the committee suggested the adoption of
international accounting standards and the introduction of risk-based supervision.
4. Raghuram Rajan Committee (2008): This committee was appointed to examine financial
sector reforms in India. It provided recommendations to strengthen the banking system,
enhance financial inclusion, and promote financial stability.
5. Financial Sector Legislative Reforms Commission (Srikrishna) (FSLRC) (2011):Headed by
Justice B. N. Srikrishna, the FSLRC aimed to review and restructure the legal and regulatory
framework of the financial sector in India. It aimed to consolidate and streamline the laws
governing the financial sector, including banking, insurance, securities, and pensions.
6. 4R Framework (Recognition, Recapitalization, Resolution, and Reforms):
Introduced in 2017, the 4R framework was part of the government’s strategy to address the
issue of mounting bad loans in the banking system. It focused on recognizing stressed assets as
non-performing assets (NPAs) promptly, recapitalizing banks to improve their financial health,
establishing mechanisms for the timely resolution of stressed assets, and undertaking structural
reforms to improve the governance, risk management, and operational efficiency of banks.

20.RBI and its promotional role in relation to commercial Banks? Describe Banking Regulation
Ac,1949.
Various promotional functions performed by the Reserve Bank of India are given below.
1.Promotion of banking habit: The Reserve Bank of India helps in mobilizing the savings of the
people for investment. It expanded banking system throughout the nation by setting up of
various institutions like UTI, IDBI, IRCI, NABARD etc. Thereby it promoted banking habit among
the people.
2.Providing Refinance for Exports: The Reserve Bank of India is providing refinance for export
promotion. The Export Credit and Guarantee Corporation (ECGC) and Export Import Bank were
established initially by the Reserve Bank of India to finance the foreign trade of India. They
finance foreign trade in the form of insurance cover, long-term finance and foreign currency
credit.
3.Providing credit to agriculture promotion/ Small scale industrial unit: The Reserve Bank of India
makes institutional arrangements for rural or agricultural finance. For example, the bank has set
up special agricultural credit cells. It has promoted regional rural banks with the help
of commercial banks. It has also promoted NABARD. Commercial banks lend loans to small-
scale industrial units as per the directives issued by the Reserve Bank of India time to time. The
Reserve Bank of India encourages commercial banks to render guarantee services also to small-
scale industrial sector.
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5.Providing indirect credit to cooperative sector and arrangement for industrial finance: The RBI has
directed NABARD to give loans to State Cooperative Banks, which in turn lend loans to
cooperative sector. Hence, the Reserve Bank of India provides indirect finance to cooperative
sector in India. The Reserve Bank of India makes institutional arrangement for industrial
finance. For instance, it has brought into existence several development banks such as the
Industrial Finance Corporation of India, the Industrial Development Bank of India, which
provide long-term finance to industries
6.Execrcising control over monetary and banking system of the country: The Reserve Bank of
India is vested with enormous and extensive powers regarding supervision and control over
commercial banks, cooperative banks and also non-banking institutions receiving deposits. The
Banking Regulation Act prescribes extensive requirements as minimum regarding the paid-up
capital, reserves, cash reserves and liquid assets.
Banking Regulation Act, 1949: An important legislation, it regulates and supervises the banking
sector in India. It empowers the Reserve Bank of India (RBI) to regulate banks and their
operations. The act defines the powers and functions of the RBI, licensing of banks, provisions
for capital requirements, and regulations related to the management and administration of
banks. Additionally, it establishes the Deposit Insurance and Credit Guarantee Corporation
(DICGC) to insure bank deposits etc.

21. Explain important provisions of SARFAESI Act, 2002?

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 (SARFAESI Act) is an Indian law that empowers banks and other financial institutions to recover
their non-performing assets (NPAs) without the intervention of the court. The SARFAESI Act defines
secured assets as any asset that is secured by a mortgage, pledge, hypothecation, or lien.
The Act provides several important provisions to help lenders recover their dues, including:
Securitization: Act allows banks and financial institutions to securitize their NPAs and sell them to asset
reconstruction companies (ARCs). This helps to transfer the risk of recovery to the ARC and frees up the
lender's capital.
Reconstruction: Act also allows ARCs to reconstruct NPAs by restructuring them, rescheduling them, or
selling them to new borrowers. This helps to revive the businesses of borrowers in default and reduce
the overall level of NPAs in the financial system.
Enforcement of security interest: The Act gives banks and financial institutions the power to enforce
their security interests in the assets of borrowers in default without the intervention of the court. This
includes the power to take possession of the assets, sell them, or lease them out.
The SARFAESI Act has been a significant step in addressing the problem of NPAs in the Indian banking
system. The Act has helped to reduce the time and cost of recovery, and it has also made it easier for
lenders to recover their dues from borrowers in default.
Here are some of the important provisions of the SARFAESI Act:
Power of banks and financial institutions to enforce security interest: The SARFAESI Act gives banks
and financial institutions the power to enforce their security interest in secured assets without the
 18

intervention of the court. This includes the power to take possession of the assets, sell them, or lease
them out.
(i) Procedure for enforcement of security interest: Act prescribes a detailed procedure for the
enforcement of security interest. This includes the requirement to give notice to the borrower and the
opportunity to repay the loan before taking any action to enforce the security interest.
(ii) Establishment of Asset Reconstruction Companies (ARCs): Act provides for the establishment of
ARCs. ARCs are specialized institutions that purchase NPAs from banks and financial institutions and
attempt to recover them.
(iii) Securitization: Act allows banks and financial institutions to securities their NPAs. Securitization is
the process of converting NPAs into marketable securities.
(iv) Recovery of costs and expenses: The SARFAESI Act allows banks and financial institutions to recover
the costs and expenses incurred in enforcing their security interest from the proceeds of the sale of the
secured assets.

An appeal against the action of any bank or financial institution to the concerned debts recovery
tribunal and second appeal to the appellate debts recovery tribunal.

The SARFAESI Act has been a valuable tool for banks and financial institutions in their efforts to recover
their NPAs. The Act has helped to reduce the time and cost of recovery, and it has also made it easier for
lenders to recover their dues from borrowers in default.