Collecting Banker: A Collecting Banker is one who undertakes to collect various types of

instruments representing money in favour of his customer or his own behalf from the drawers of
these instruments; some are negotiable instruments as provided for in the negotiable
instruments Act. 1881 and some are quasi negotiable instruments.

Negotiable Instruments: As per section number 13 of the negotiable instrument Act. 1881, A
negotiable instrument means a promissory note, bill of exchange or cheque payable either to
order or to bearer. A Bankers draft is also negotiable instrument.

a. Promissory Note: A promissory note is an instrument in writing containing an

unconditional under taking signed by the maker to pay on demand or at a fixed or
determinable future time a certain sum of money only to, or to the order of a certain
person, or to the bearer of the instrument.

b. Bill of Exchange: A bill of exchange is an instrument in writing containing an

unconditional order signed by the maker directing a certain person to pay on demand or
at a fixed or determinable future time a certain sum of money only to or the order of a
certain person or to the bearer of the instrument.

c. Cheque: A cheque is a unconditional order of the drawer in writing bearing a date, to

the Banker maintaining his account to pay on demand, to a named person, his order or
bearer, a certain specified sum of money, expressed in both figures and words.

Quasi Negotiable instruments: The negotiable instruments Act. 1881 does not talk of any
other negotiable instruments except bills, promissory notes, cheques and bank drafts. But there
are some instruments which are in practice, treated negotiable for certain events only and are
so regarded by usage and custom. Some of these are documents of tittle of goods and property

while others are documents of value. Such as, Bill of lading, railway receipts, stock and share
certificates, debentures, dividend warrants, interest coupons & treasury bills.

Duties & Responsibilities of Collecting Bankers:

Acting as agent: While collecting an instrument, whether for credit to customers

account or for himself, the Bankers works as agent of his customer. As an agent he has
generally to take such steps & precautions to protect the interest or his customer as a
man of ordinary prudence would take to safe-guard his own interest.

Scrutinizing the instruments: Name of the holder, Branch name, date, amount in world
and figure, any cutting without signature, material alteration of any to be checked
carefully.

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

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

Collecting the proceeds in the payees account: It is the duty of collecting banks to
collect and credit the proceed of the instruments to the proper/correct account.

Notice of dishonor and returning the instruments: If any instrument is dishonored by

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

Collecting Bankers Protection:

Under section 131 of negotiable instrument Act the collecting banker is not liable to the true
owner of a cheque or a bankers draft if his title to the instrument proves defective provided the
cheque or draft was one crossed generally or specially to himself and collected for a customer is
good faith and without negligence.
The above statutory protection is available to the collecting banker only if he fulfills the following
conditions:
i.

The cheque he collected is a crossed cheque.

ii.

He collected such crossed cheque only for his customer as an agent & not as a holder for value.

iii.

He collected such crossed cheque in good faith and without negligence.

No Protection:

Opening of A/c without satisfactory references/ introduction.

Crediting the proceeds of cheque to an endorsee with irregular endorsement.

Crediting the proceed of a cheque to the personal A/c of director, partners or any
employee when it is payable to the company.

Crediting the proceeds of charge to personal name of the official when it is payable to a
govt. agency, autonomous body, or corporation.

Crediting the amount of a cheque in the personal A/c which is drawn by an agent on
behalf of its principal.

When the customer depositing the cheque is of little means and the cheque deposited
suddenly is of sizable amount and the banker credited the proceeds there to without
making proper enquiry.

Cheque drawn by customer is dishonored very often and crediting such account with the
proceeds of collecting cheque without making proper enquiry.

If the crossed cheque is collected and credited the proceed to the other account.

Paying Bankers duties & responsibilities.

A banker on whom the cheque is drawn should pay the cheque, when it is presented for
payment. It is his obligation by section 31 of the NI Act. A banker is bound to honour his
customers cheque to the extent of the fund available & the existence of no legal bar for
payment. The paying banker should use reasonable care and diligence in paying a cheque so
as to abstain from any action likely to damage his customers credit.
At the time of making payment of he should observe the following very carefully:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
xiii.
xiv.

Verification of signature of the drawer.

Verification of the genuineness of he instrument.
Payment not stopped by the A/c holder.
Holders title on the cheque is valid.
A/c is not dormant one.
A/c holder is not bankrupt, deceased and insanse.
A/c is not under subject of liquidation process.
No. Guernsey Order is issued by count.
Properly endorsed.
Cheque is not drawn beyond limit fixed by the drawer is respect of amount.
Instrument being presented is crossed.
Instrument is not state or post dated.
No material alteration is made.
Sufficient balance in the A/c

CHARGING OF SECURITIES
AND DOCUMENTATION
Security for bank advance has no doubt been reduced to secondary importance in the present
context particularly for priority sector advances but it is still very important to influence the
decision of banks in conventional advances. Reserve Bank of India has also stipulated certain
quantitative restrictions on the banks' power to grant clean advances. Banks have prescribed their

own formats for documentation for various types of advances and the borrowers in almost all the
cases have to execute those documents without any choice. It would never be advantageous to
know the general characteristics of securities, methods of their charging and documentation
procedures adopted by the banks.
The securities may primarily be divided in two categories as under

Primary security.

Collateral security.

The assets created by the borrower from the credit facilities granted by the bank form the primary
security for the bank advance as a matter of rule. The bank invariably obtains a charge over those
assets. Similarly, other assets on which the advance is primarily based even if it is not created
from the credit facilities granted by the bank will also be taken as primary security.

In some cases where primary security is not considered adequate or the charge on the security is
open the bank may insist on an additional security to collaterally secure advances granted by it.
Such securities are termed as collateral securities. Collateral security may either be tangible or
third party guarantees may also be accepted.

Bank now grant need based advance after proper assessment and should not normally insist for
collateral security in most of the cases.1bip matter needs to be discussed at die time of
sanctioning of limits. Reserve Bank, of India has advised the banks not to obtain any collateral
security in case of all priority sector advances upto Rs. 25,000. In other cases, it is left to the
mutual agreement of the borrower with the bank.

BASIC CHARACTERISTICS OF SECURITIES AND CONCEPT OF MARGIN

The securities acceptable to banks either as primary or collateral must have certain, basic
characteristics as under:

Ascertainment of value. A security will be considered good and will be

acceptable to the bank only if its value can be ascertained with a definite degree

of correctness. Certain articles may be valuable but may not be accepted as

security if the value cannot be ascertained such as paintings/antiques etc.

Marketability. A good security must have a ready market. Raw materials, articles of
necessity, other primary commodities are easily marketable and are considered good
security. Semi-finished goods may be more valuable than raw material for the borrower
but may not be marketable at all and will thus be considered inferior to raw material in as
much as its acceptance as a security is concerned.

Stability in value. A good security should have a stable value over along period. If the
value of a security fluctuates violently over a short period, it may not be considered a
good security and may be accepted by the bank only after keeping a very high margin.

Ascertainment of title and transferability. An asset can be accepted as security by

the bank only when the title over that asset can be ascertained. Furthermore, the title
should be easily transferable. The purpose of obtaining a security is to apply the sale
proceeds of the security if the customer fails to repay the advance. But if the security is
not easily transferable the very purpose of obtaining a security may be defeated.
Immovable property located at a prime location may be very stable in value has a ready
market and the value can also be ascertained but may still not be considered as a good
security due to difficulty in ascertaining the title and elaborate legal process involved for
effecting its sale through a court of law.

Durability. The security accepted by the Bank must be durable. No bank advance is
granted against perishable commodities.

In case loan or advances to Muslims offering their property as primary or collateral

security, it should be ensured, before accepting property as security that such property has
not been alienated under the Muslim Law like 'waqf-ul-ulad' and/or 'Haq-rnehr' in favour
of their wives or for the benefit of their heirs since it will jeopardise the interest of the
banker as lender.

There are circumstances when securities given to the bank as security to cover the
loan, have become void as against income tax dues/arrears of land revenues. To avoid
such an unpleasant situation, the borrower should be asked to furnish income tax
clearance certificate/clearance from local authorities.

There are few other characteristics such as controllability of an asset as a security and
securities having a yield which will enhance their value etc. which are critically analysed
by the bank while accepting any security. The percentage of margin which is kept by the
bank as a cushion for any unforeseen drop in the value of security is directly linked to
various characteristic as discussed above. Lower margin may be prescribed for those
securities which have a stable value and easy marketability whereas higher margins are
prescribed for those securities where fluctuations are wide. Margin fixed on raw material
may be lower as compared to margin on stocks-in-process as the marketability has been
effected in the latter case. The usual margin on advances against life policies is 10% on
surrender value as compared to margin of 50% on shares. This is explained by the fact
that life policies have a stable value which in fact increases with passage of time whereas
share prices are subject to wide fluctuations.

The fixation of margin may also depend on the credit worthiness of the borrower and in
some cases even Reserve Bank may issue directives to the banks.

TYPES OF CHARGES
Security is obtained by the bank as an additional cover against default by the borrower in
repayment of bank's dues. Charging of security means making such security available to the bank
and involves certain formalities. Charging should be legal and perfect so that it is possible to
realise the security if such a need arises. There are six different modes of charging a security as
under:

Pledge. Pledge is bailment of goods by the debtor to the creditor with an intention to
create a charge thereon as security for the debt. It has a legal backing as per the Indian
Contract Act, 1872 wherein the definition of pledge and bailment and also the rights and
liabilities of all the parties to pledge have been clearly spelt out. Important conditions to
be complied with for constitution of a valid pledge are:

There should be bailment of goods which implies that goods should be delivered the
debtor (pledger) to the creditor (pledgee). The delivery may nevertheless be actual
physical delivery or constructive delivery as in case of documents of title to goods.

The bailment must be by the debtor or on behalf of the debtor.

The delivery of goods must be with an intention of the parties to create security for
die debt or performance of a promise.

In pledge the ownership of the goods remain with the borrower whereas physical control over
these goods will be exercised by the bank. The borrower has a right to get the goods returned to
him after payment of debt created here against.

In case of default by die borrower the bank can sell the goods after giving a reasonable notice of
sale as required under Section 176 of the Indian Contract Act,1872. Notice must clearly indicate
the intention of the pledgee to sell the security and is compulsory before the sale can be effected.
If the bank realises more than its dues by such sale, the excess realised will have to be returned to
the borrower. However, if there is any shortfall, die bank can proceed against the borrower in a
court of law for recovery of the balance.

This mode of charge may be considered as an ideal one for the bank as it has full control over the
security and can even realise it without any legal process merely by serving a notice on the
borrower. The borrower however, is put to great disadvantage as he losses coned over the goods
and the account involves operational difficulties. Generally the raw material or finished goods or
stock in-trade etc. not immediately required by the borrower may be offered to the bank for
pledge.

The goods pledged to the bank may sometimes be required by the borrower for undertaking a
small process. The documents of title to goods deposited with the bank in the pledge account may
be required to take delivery from the port/ railway etc. In such situations the bank may
temporarily part with the goods on the borrower signing a 'Trust Receipt'. The possession of
goods legally remains with the bank and the borrower keeps those goods 'in trust' for the bank
during that temporary period. This facility is sometimes given by the bank as a sub -limit of
pledge account for operational convenience.

Hypothecation. Pledge takes away control over the goods from the borrower which
may not be practicable as the borrower would require certain goods under his control to
continue its manufacturing and/or trading activities.
An equitable charge in favour of the bank over the goods is created in such cases without
parting with the possession of the goods. A charge on a property for a debt where neither
ownership nor possession is passed on to the creditor is known as hypothecation charge
Hypothecation agreements obtained by banks generally have a clause under which
hypothecation can be converted into a pledge at, a later date.

This form of charge is ideal from the point of view of the borrower as he is always in
control of goods offered as security to die bank. In case of default by the borrower, the
bank may take possession of goods and convert it to pledge only with the consent of the
borrower notwithstanding any clause w this effect being included in the hypothecation
agreement. The bank will have to move a court of law for taking physical possession of
goods or their attachment before judgement.

Hypothecation charge extends to all the goods and moveable properties with the borrower
as per the agreement of hypothecation and operations in these accounts are permitted on
the basis of stock statement, submitted by the borrower periodically usually every month.
Hypothecation may, however, be created as a fixed charge over a particular
machinery/vehicle etc.

Assignment. Assignment means transfer of a right, property or debt by one person to

another person. The person transferring the right is known as assignor and the person to

whom the right is transferred is known as assignee. The assignment may be legal in
which case the assignor must give a written notice of the assignment stating the name and
address of the assignee to the debtor or may he equitable where no such notice is sent.
This form of charge is generally adopted for charging of book debts, monies due from
Government (supply bills) and life insurance policies etc. Banks generally go in for legal
assignment and insist for obtaining an acknowledgement of assignment from the debtor.

Mortgage. Mortgage is a mode of charge associated with immovable property.

Immovable property has been defined by Section 3(26) of General Clauses Act, 1887 as
under:

Immovable property shall include land, benefits to arise out of land and things attached to
the earth or permanently fastened to anything attached to the earth".

Section 4 of General Clauses Act, 1887 further provides that the above definition of
immovable property shall hold good under the Transfer of Property Act, 1882 as well.

Section 3 of Transfer of Property Act, 1882 provides that immovable property does not
include standing timber, growing crops or grass. It also provides explanation to the term
"attached to the earth" which means:
(a)

rooted in the earth, as in case of trees and shrubs,

(b)

imbedded in the earth, as in case of walls or buildings, or

(c)

attached to what is so imbedded for the permanent enjoyment of that to which it

is attached.

A similar definition of immovable property has been given by Section 2(6) of the Registration
Act, 1908 as under:

Immovable property' includes land, buildings, hereditary allowances, rights to ways, lights,
ferries, fisheries or any other benefit to arise out of land and things attached to the earth or
permanently fastened to anything which is attached to the earth but not standing timber, growing
crops nor grass".

A point in case may arise in respect of machinery. Machinery which is not permanently attached
to the earth and can be shifted to other place will not be considered as immovable property. But if
a machinery is permanently attached to the earth in, a manner that it cannot be removed from
there, it shall be considered as immovable property.

Section 58 of 'Transfer of Property Act, 1882 defines mortgage as a transfer of an interest in a

specific immovable property for the purpose of securing an existing or future debt. The person
transferring the interest is known as 'mortgagor' and the person to whom the interest is transferred
is known as 'mortgagee'. Indian law recognises six different types of mortgages out of which the
two most acceptable form of mortgages are discussed hereunder :

Mortgage by deposit of title deeds or equitable mortgage. Section 58(f) of the

Transfer of Property Act, 1882 defines equitable mortgage as mortgage created by
depositing title deeds of an immovable property to secure a debt, existing or future. Three
basic conditions to constitute a valid equitable mortgage are

(i)

Delivery of title deeds (original) by the mortgagor to the bank.

(ii)

Existence of a debt, existing or future.

(iii)

Intention of the mortgagor to create a mortgage on that property to secure the

debt.

No equitable mortgage can be created if any of the above three conditions' is not complied with.

This form of mortgage is very popular because it does not require finalisation of any mortgage
deed and its subsequent registration which requires payment of heavy stamp duty. Mortgage is
created simply by depositing the title deeds with the bank with an intention to create a security
and no other agreement etc. is strictly required. Equitable mortgage can, however, be created only
at places as notified by government in this regard.

Simple Mortgage. Section 58(b) of Transfer of Property Act, 1882 relates to simple
mortgage in which the mortgagor personally binds himself to pay the debt and agrees that
in the event of non-payment by him, the mortgager may cause the mortgaged property to
be sold and the proceeds of sale be applied in repayment of debt. The possession of
mortgaged property, however, still remains with the mortgagor. The mortgagee does not

have an absolute right to sell the property in case of default but has to seek intervention
of the court.

A formal mortgage deed will have to be executed for creation of a simple mortgage
which will also be required to be registered after payment of necessary stamp duty which
is quite substantial and in all the cases will have to be borne by the borrower. All efforts
should, therefore, be made to convince the bank to accept equitable mortgage. Simple
mortgage may be resorted to only when equitable mortgage cannot be created as in cases
where title deeds are not available,

In all forms of mortgages the mortgagor has a right of redemption on payment of the debt
after it has become due. The mortgagor also has a right to inspect the documents of title
to goods and make copies of or extracts from the title deeds which are in the custody of
the bank.

Lien. Lien means the right of the creditor to retain the goods or securities of the debtor,
which are in his possession until the debt due from the debtor is paid. It does not require
any specific agreement to support this right. The lien may be general which confers the
right to retain any goods for a general balance of account or it may be particular lien
where goods can be retained by the creditor for a particular debt only. The person
exercising general lien has only a right to retain the goods till the dues are paid and may
not be able to sell those goods.

The right of the banks to general lien is however, considered on a different footing and banks
have a general lien on all securities deposited with them as bankers by a customer, unless there be
an express contract or circumstances that show an implied contract, inconsistent with lien. A
bankers lien is thus more than a general lien, it is an implied pledge. The bank, therefore, has a
right to sell the goods in his possession after giving a reasonable notice. The lien can be exercised
on bills and cheque deposited for collection, dividend warrants received by the banker as a
mandatee from the customer, securities left with the banker after a particular loan has been paid.
The bankers lien however, does not extend to:

(i)

Securities or valuables lying in the locker rented to the customer.

(ii)

Securities deposited upon a particular trust.

(iii)

Securities deposited to secure a specific loan.

(iv)

Securities left with the banks after an advance against them has been adjusted.

(v)

Securities left inadvertently with the bank.

No specific letter of lien agreement is necessary as the banks enjoy the right of lien under the
Contract Act. However, in some cases the bank may obtain a specific letter of lien so that the
borrower is not able to contend later that the securities were deposited by him for a specific
purpose inconsistent with the lien.

Negative Lien

The borrower may sometime be having non-encumbered assets which are not charged to the bank
as security. The borrower is thus free to deal with these assets and may even sell them if he so
desires. To restrict this right of the borrower, bank may sometimes request him to give an
undertaking to the effect that he will neither create any encumbrance on these assets nor sell them
without the previous permission of the bank so long as the advance continues. This type of an
undertaking obtained by the bank is known as 'Negative Lien'. Negative lien is in the form of a
personal assurance or undertaking which has binding effect but confers no right on the bank to
proceed against the property itself and thus creates no encumbrance or charge on the property.

Set Off. Set off is the right of combining of accounts between a debtor and a creditor
so as to arrive at a net balance payable to one or the other. Set off in relation to bank
means his right to apply the credit balance in customer's account towards liquidation of
debit balance in another account of the customer provided both the accounts are
maintained by him in the same capacity. The right may not be considered as absolute and
the bank may be required to give a notice for exercising his right of set off. The right of
set off can be applied by the bank only if the following conditions are met:
(a)

The liability of the borrower is for a sum which is certain,

(b)

The repayment of debt is due, and

(c)

Both the accounts are held by the customer in the same capacity.

The right of set off should, however, not be exercised arbitrarily and a notice for combining the
accounts must invariably be served by the bank on the customer.

DIFFERENT TYPES OF BORROWERS/EXECUTION OF

DOCUMENTS
Banks generally grant advance to persons having legal capacity to enter into a contract.
Minors/lunatics/drunken persons etc. who cannot enter into a valid contract may not be favoured
as borrowers and no credit facilities may be sanctioned to such persons.

The borrowers may have different constitution conferring on themselves various legal rights and
responsibilities and banks as creditors will be interested to know the exact constitution of the
borrower. Banks may also require additional undertakings information in some cases. This
information is very essential for the banks while getting the documents executed from the
borrowers. The documents can be executed only by the persons who can validly bind the
borrower. The position regarding obtaining of undertaking/information may differ from bank to
bank. Chart given on the next page gives details of various types of borrowers, the additional
undertakings required by banks and the persons who are authorised to execute the documents
which is based upon the common practice of most of the banks.

S.NO. Constitution of

Additional papers required

Persons authorised to execute the docume

Borrower

1.

Individual

2.

Joint

3.

Sole
Proprietorship

----

Individual in his personal capacity

----

All the borrowers in their personal

capacity binding themselves jointly and
severally.

Declaration regarding his sole interest

in the business.

Sole proprietor in his capacity as sole

proprietor. He is, however, personally
liable for all the dealings and obligation
in the name of business.

4.

Joint Hindu
Family

1. Letter of Joint Hindu Family giving

details of all the male members
including minors

All documents to be signed by Karta of

HUF and all major coparceners in their
capacity as Karta & coparceners and als
in their individual capacity.

2. Declaration to the effect that

the advances will be utilised only
for the family business to be signed
by Karta & all other major
coparceners.

5.

Trusts

1. Copy of trust deed.

2. Legal opinion regarding the power
of trustee to borrow.

6.

Partnership firm

1. Copy of partnership deed.

2. Declaration from all partners to

inform the bank of any change in
constitution.

7.

Limited Companies

1. Articles and Memorandum

Association

All the trustees in their representative

capacity or as per trust deed and suppor
by the legal opinion.

All partners in their representative capa

i.e. as partner and also in their individua
capacity.

2. Copy of Certificate of
incorporation.

Documents to be signed by authorised

persons in terms of board resolution in
their representative capacity. The comm
seal of die company is also required to b
affixed wherever necessary.

3.Copy of Certificate of
commencement of business (only
in case of public limited
companies)

The charge created by the company ove

its assets will also require registration
under Section 125 of Companies Act,
1956.

4.Copy of Board Resolution

empowering the company to
borrow from the bank and also
authorising managing director/
directors/other officers to execute
the documents as required by the
bank.
5.Copy of the resolution of general
body meeting of the company
under Section 293 (1) (D)
authorising the company to borrow
in excess of its own paid up capital
and free reserve.
6.Declaration from the company that
borrowings will remain within the
powers conferred on it as in (5)
above

DOCUMENTATION
Banks have their own standard forms for promissory notes and other documents and no
deviations are normally permitted. The borrowers are expected to execute these documents as
required by the bank. Banks also do not generally give copies of these documents to the borrower
which sometimes creates difficulty when these documents become subject matter of a legal
dispute. The following points must be kept in mind while executing the documents as required by
the Bank.

Precautions while executing loan documents

The following are the precautions, in nutshell, which should be taken care of both by the
borrower as well as banker, at the time of preparation, execution and registration of loan
documents etc.:

(a)

Person, executing the loan documents must be competent to enter into a contract
i.e., he or she should have contractual capacity. Thus, minor, insolvent person,
lunatic etc. are not competent persons to execute documents.

(b)

The loan documents should bear proper type of stamps i.e. adhesive, embossed
etc. Further value of stamp duty should be adequate, keeping in view the laws of
the State in which the documents are executed. The Non-Judicial Stamp papers,
if used, should bear the date, prior to its execution and also the date should not be
earlier than six months. The text of the agreement may be written on the Stamp
papers itself and plain papers (additional sheets) may be used, if required in
addition to Stamp papers.

(c)

No column of the loan documents should be left blank. While executing the
documents, the borrower must sign in full and in the same flow in which his
signatures are available in the bank. The cuttings & over writings must be
avoided and if at all, they become unavoidable, they should be authenticated by
the borrowers by signing in full.

(d)

Sometimes the borrower does not understand the language of the loan
documents. In such a case, a separate letter, in the language of the borrower
should he taken from him stating that the contents of the loan documents have
been well understood by him, including the terms and conditions of the loan
sanctioned. The letter should be got witnessed by another person.

(e)

In the case of an illiterate borrower who puts his thumb impression on the loan
documents, the bank official in whose presence the documents are executed,
should give a certificate on a separate paper that the contents have been fully
explained to the borrower in a language which he speaks and understands. This
certificate should be got witnessed by independent persons.

(f)

Similarly, in case of a blind person, such a certificate should be obtained from

lawyer or notary public in whose presence the borrower executes documents.

(g)

In case the borrowers reside at different places, the loan documents should he got
executed through the branches of the bank situated at those stations, after
properly verifying the identity of the borrowers. As
regards stamp duty, it should be according to the state which attracts highest
value of stamp duty. The borrowers while signing the documents must put date
and place of execution after their signatures.

(h)

In the case of a partnership firm where a minor is admitted as partner to the

benefits of partnership, he should not be allowed to execute any loan document.
This is so because a creditor i.e. lending banker cannot proceed against the minor
in person. However, minor's share in the firm can be proceeded against, as the
major partners of the firm have executed loan documents, thereby binding each
other by their act of execution. After the minor attains majority and elects to
remain as partner in the firm, the bank should proceed to obtain an undertaking

from him stating that he (minor attaining majority) stands fully liable for the dues
of the bank against the partnership firm.
(i)

Sometimes loan documents are executed by the holder of power of Attorney on

behalf of a trading concern, partnership firm, Hindu undivided family (HUF),
company, individual etc. In such a case, a notice should be sent to the principal,
stating that the attorney has executed the documents on their behalf. A certified
copy of Power of Attorney should be kept along with main loan documents. And
also the letter/confirmation received from the principal in this regard, in response
to the notice should be preserved.

(j)

The borrowers must obtain a copy of the sanction and ensure that documents
only for those facilities which are sanctioned in their favour are executed.

(k)
(l)

All the documents must be completely filled in before their execution.

The guarantee form should be executed if so agreed and stipulated as a term of
sanction.

(m)
Copies of all the documents executed must be obtained and kept on record for
any future reference.

6.0 OBJECTIVES
After studying this unit, you should be able to:
explain the various laws applicable to a paying bank;
explain the responsibilities of a paying bank based on case laws;
explain Courts.
6.1 INTRODUCTION
The Negotiable Instruments Act, 1881 lays down the law relating to payment of
a customer's cheque by a banker and the protection available to a banker. The
relationship between a banker and customer being debtor-creditor relationship
the banker is bound to pay the cheques drawn by his customer. This duty on the
part of the banker, to honour his customers' mandate, is laid down in Section 31
of the Negotiable Instruments Act.
Sections 10, 85, 85A, 89 and 128 of the Negotiable Instruments Act, 1881, grant
protection to a paying banker. We shall in detail, examine individually these
sections and with the help of case laws apply the provisions of these sections to a
given set of facts.
6.2 NEGOTIABLE INSTRUMENTS ACT AND PAYING BANKS
As stated in Part 1.1 of this unit, the customer who has deposited money with a
bank being a creditor has the right to ask back the money from the banker who is
a debtor. The duty on the part of the banker to pay has been laid down in Section
31 of the Negotiable Instruments Act, 1881 in the following terms:
'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 to do so, and, in default of such payment, must compensate the
drawer for any loss or damage caused by such default.'

The following points are important to note:

i. Section 31 Applies Only to Bankers: This is because as per Section 6 of the
Negotiable Instruments
Act, 1881 'cheque' has been defined as a "bill of exchange drawn on a specified
banker and not
expressed to be payable otherwise than on demand'", ii. Sufficient Funds: The
banker should have sufficient funds of the drawer, i.e. there should be
sufficient credit balance in the customer's account, iii. Properly Available: The
funds available in the customer's account should also be properly available
for the payment of the cheque. The funds may not be available to pay the cheque
if:
(a) the banker has exercised his right of set off for amounts due from the
customer, or
(b) there is an order passed by a Court, competent authority or other lawful
authority restraining
the bank from making payment.
iv. When Duly Required to Do So: The banker is duty bound to pay the cheque
only when he is duly required to do so. It means that the cheque must be
properly drawn and signed by the drawer.
v. Compensate the Drawer: In case the banker refuses payment wrongfully, then
he is liable only to the drawer of the cheque and not to any endorsee or holder,
except when
(a) the bank is wound up, in which case the holder becomes a creditor
entitled to make a claim;
(b) the banker pays a cheque disregarding the crossing, wherein the true
owner can hold the
banker liable.
vi. Loss or Damage Caused by Default: A banker is liable to the drawer for any
loss or damage, which may have occurred to the drawer due to the wrongful
dishonour of the customer's cheque.
85
Protection to paying banker: For a paying banker to claim protection under the
Negotiable Instruments Act, one of the criteria he has to satisfy, is that the
payment is in due course. As to what is, payment in due course has been stated
in Section 10, which reads as follows:
Payment in due course: 'Payment in due course' means payment in accordance
with the apparent tenor of the instrument in good faith and without negligence to
any person in possession thereof under circumstances which does not afford a
reasonable ground for believing that he is not entitled to receive payment of the
amount therein mentioned.
From the above definition, it can be seen that payment in due course requires the
payment to be made
(a) in accordance with the apparent tenor of the instrument;
(b) in good faith;
(c) without negligence;
(d) to the person in possession of the instrument; and
(e) while making payment the banker should not have reasons to 'believe'
that the person in possession
of the instrument is not entitled to receive payment of the amount mentioned in
the instrument.
Section 85 of the Negotiable Instruments Act, 1881 grants protection to a banker

on his making payment of a cheque. Though this principle may sound as a

simple logic, it is to be noted that the protection granted as per Section 85 is not
absolute.
Section 85 of the Negotiable Instruments Act, 1881 can be explained as follows:
1. 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.
2. Where a cheque is originally expressed to be payable to bearer, the
drawee is discharged by payment
in due course to the bearer thereof, notwithstanding any endorsement whether in
full or in blank
appearing thereon, and notwithstanding that any such endorsement purports to
restrict or exclude
further negotiation.
Section 89 of the Negotiable Instruments Act states the effect of making
payment on instrument on which alteration is not apparent and reads as follows:
Section 89
Payment of instrument on which alteration is not apparent: Where a promissory
note, bill of exchange or a cheque has been materially altered but does not
appear to have been so altered, or where a cheque is presented for payment
which does not at the time of presentation appear to be crossed or to have had a
crossing which has been obliterated, payment thereof by a person or banker
liable to pay, and paying the sum according to the apparent tenor thereof at the
time of payment and otherwise in due course, shall discharge such person or
banker from all liability thereon, and such payment shall not be questioned by
LIABILITY OF PAYING BANKER WHEN CUSTOMER'S
SIGNATURE ON THE CHEQUE IS FORGED
Section 128
Where the banker on whom a crossed cheque is drawn has paid the same in due
course, the banker paying cheque, and in case such cheque has come to the
hands of the payee the drawer thereof, shall respectively be entitled to the same
rights, and be placed in the same position in all respects as they would
respectively be entitled to and placed in if the amount of the cheque, has heen
pair! tn and received by the true owner thereof.
i. When the customer's signature on the cheque is forged there is no mandate to
the hank tn
86
pay. As such a banker is not entitled to debit the customer's account on such
forged cheque: Canara Bank vs Canara Sales Corporation and Others [(1987) 2
Supreme Court Cases 666]: The company had a current account with the bank
which was operated by the company's Managing Director. The Company's
accountant in whose custody the cheque book was, forged the signature of the
Managing Director in forty-two cheques totalling Rs. 3,26,047.92 over a period
of time. This was detected by another accountant. The company immediately on
detection of the fraud demanded the amount from the bank. The bank refused
payment and therefore the company filed a suit against the bank. The bank lost
the suit and took the matter up to the Supreme Court. The Supreme Court
dismissed the appeal of the bank and held that:
"Since, the relationship between the customer and the bank is that of a creditor
and debtor, the bank had no authority to make payment of a cheque containing a

forged signature. The bank would be acting against the law in debiting the
customer with the amount of the forged cheque, as there would be no mandate
on the bank to pay. The Supreme Court pointed out that the document in the
cheque form on which the customer's name as drawer was forged was a mere
nullity. The bank would succeed only when it would establish adoption or
estoppel."
In deciding the case, the Supreme Court relied on its earlier judgement in Bihta
Co-operative Development and Cane Marketing Union Ltd. vs Bank of Bihar
(AIR 1967 Supreme Court 389).
ii. In a joint account if one of the signatures is forged then there is no mandate
and banker cannot make payment: The case law in this case is of Bihta Cooperative
Development and Cane Marketing Union Ltd. vs Bank of Bihar: The
Co-operative Marketing Union had an account with the bank, which was
authorised to be operated by the joint secretary and treasurer of the Co-operative
Marketing Union. On 16 April 1948, the bank made payment of Rs. 11,000 on a
loose leaf cheque and not on a cheque from the cheque book issued to the
Society. Though the two signatures appeared on the cheque, one of them, the
signature of the Joint Secretary was forged. The bank made payment, whereupon
the Co-operative Marketing Union sued the bank for recovery of the money.
Though the bank admitted negligence on its part, it argued that the employees of
the Co-operative Marketing Union were dishonest in the discharge of their duties
and as such it cannot succeed. The matter went up to the Supreme Court and the
Supreme Court, while allowing the case of the Co-operative Marketing Union
held that 'one of the signatures was forged so that there never was any mandate
by the customer at all to the banker and the question of negligence of the
customer in between the signature and the presentation of the cheque never
arose.'
6.4 PAYMENT TO BE IN DUE COURSE FOR BANK TO SEEK
PROTECTION
i. The Supreme Court in Bank of Bihar vs Mahabir Lai (AIR 1964 Supreme
Court 397) held that a banker can seek protection under Section 85 only where payment has been made to
the holder, his servant or agent, i.e. payment must be made in due course.
In this case, the bank had agreed to grant the firm a cash credit facility against
the pledge of cloth bales, on the firm fulfilling certain conditions, one of which,
was that the money for purchasing the cloth would not be directly given to the
firm, but instead, the supplier would be paid the amount by the bank and the
cloth bales would be kept by the bank as pledge for the loan. The firm thereafter
was required to draw a cheque on itself which was handed over to the bank. The
bank instead of handing over cash to the firm's partner to be paid over to the
wholesalers, entrusted it with one of the bank's employees (Potdar) who
accompanied the partner to the wholesalers. However, before the rnoney could
be paid to the wholesalers the Potdar absconded. The bank
87
sought repayment of the money, which was refused by the firm. The bank
therefore sued the firm for the money relying on Sections 85 and 118 of the
Negotiable Instruments Act, 1881. The matter reached the Supreme Court and it
was held that, before the provisions of Section 85 can assist the bank it had to be
established that payment had in fact, been made to the firm or to a person on
behalf of the firm. Payment to a person who had nothing to do with the firm or a
payment to an agent of the bank would not be a payment to the firm.
ii. The Calcutta High Court had occasion to consider as to whether a bank had

made payment in due course or not in the case of Bhutoria Trading Company
(BTC) vs Allahabad Bank (AIR 1977 Cal. 363) the facts of which are as follows:
BTC, a limited company, had sold some jute to WFD another limited company,
for payment of which WFD issued an un-crossed cheque payable to BTC or
order which was delivered to one of the officials of BTC. The official using the
company's seal endorsed the cheque as manager and encashed it over the
counter. BTC later sued the bank for recovery of the money on the grounds of
damages or in the alternative on the grounds of money had and received by the
bank. The Court held that:
'The Expression payment in due course has been defined in Section 10 of the
Negotiable Instruments Act to mean payment in accordance with the apparent
tenor of the instrument in good faith and without negligence to any person in
possession thereof, under circumstances which do not afford reasonable ground
for believing that he is not entitled to receive payment of the amount therein
mentioned. It can hardly be questioned that the payment by the defendant bank
of the cheque in question has been made by the defendant bank in accordance
with its apparent tenor. The cheque is an un-crossed cheque payable to the
plaintiff or order. The cheque was endorsed by the plaintiff through its Manager.
The fact that Jethmall is the Manager is borne out by the seal of the company
which is unquestionably an authentic seal. The seal of the Manager is also
equally authentic. That the payment was made in good faith has not been
disputed for all practical purposes. There is not a grain of evidence before the
Court from which it remotely appears that the payment was not made in good
faith. Now that the entire evidence is before the Court, the question of onus to
prove good faith loses much of its importance. No negligence has been proved
against the bank. The defendant bank insisted on identification of Jethmall and
Jethmall was, in fact, identified by Kishanlal Maheswari, a constituent of the
bank, the defendant No. 3. The defendant bank therefore took all reasonable
precautions even though the circumstances in which the cheque was presented
for payment did not afford any reasonable ground for believing that Jethmall
was not entitled to receive payment of the amount mentioned therein. The
plaintiff having failed to prove the trade practice which he alleged and the bank
having paid the cheque, in accordance with the apparent tenor of the instrument,
in good faith, and without negligence, to Jethmall who was in possession
thereof, the defendant is entitled to succeed. There were no circumstances which
afforded any reasonable ground for believing that he was not entitled to receive
payment of the cheque. It must be held that the bank made the payment in due
course. The learned Judge, in our opinion has rightly pointed out that payment in
due course is necessarily payment in the ordinary course.
iii. Whether payment made by a bank was payment in due course would depend
on the facts of a given case. In Madras Provincial Co-operative Bank Ltd. vs
Official Liquidator, South Indian Match Factory Ltd. (AIR 1945 Mad 30) the
Court held that payment to a liquidator against the cheque presented across the
counter was not a payment in due course and the bank was not entitled to seek
protection under Section 85 of the Negotiable Instruments Act.
In this case the Official Liquidator of the Company had sold certain properties of
the company, for which payment was made by the purchaser by giving a cheque
in favour of the liquidator. The liquidator presented the cheque over the counter
and obtained payment in cash which hemisappropriated. He was later prosecuted and convicted and
removed from
office. His successor proceeded against the bank for recovery of the amount on

the ground that the bank was negligent and the amount was wrongly paid. The
Court held that under Section 244A of the Indian Companies Act, 1913, an
official liquidator was required to open an account with a bank and pay therein
moneys received by him in the course of the liquidation. Rule 66 of the Rules
framed by the Madras High Court under the Act required that all bills and other
securities payable to the company or to the liquidator should, unless the judge
otherwise directs, shall as soon as they came into the hands of the liquidator, be
deposited by him in the bank. From the cheque itself the bank had noticed that it
was payable to the liquidator in his official capacity. That the bank realised this
in full was shown by the fact that it called for the order of his appointment. The
learned judge therefore concluded:
We have no doubt that the officers of the bank did not realise, as they should
have done, that the bank was doing something improper, but in the
circumstances there was negligence. They knew or must have deemed to have
known that this money could only be collected by the payee through his own
bank and therefore it was most improper on his part to ask for payment over the
drawee's counter. In our judgement there was a clear breach of a statutory duty
placed upon the bank and the learned judge was right in holding the bank liable.
6.5 PAYMENT IN GOOD FAITH WITHOUT NEGLIGENCE OF AN
INSTRUMENT ON WHICH ALTERATION IS NOT APPARENT
i. The effect of Sections 10 and 89, and Section 31 was considered by the
Supreme Court in Bank of Maharashtra vs M/s Automotive Engineering Co.
(1993) 2 SCC 97.
The question, which arose for consideration in this appeal, was whether the
paying bank was bound to keep an ultraviolet ray lamp and to scrutinise the
cheque under the said lamp even if no infirmity on the face of the said cheque on
visual scrutiny was found.
Briefly stated, the respondent, a partnership firm, opened a current account with
the Wagle Industrial Estate branch of the appellant bank. The said branch was in
the industrial area on the outskirts of City of Bombay, where forgery of cheques
were rampant and although other branches of the appellant bank were provided
with ultraviolet ray lamps, the said branch was not provided with such lamp. On
26 May 1967, one Shri Shah, as a proprietor of Messrs Imperial Tube and
Hardware Mart, opened an account, in the name of his firm, with a branch of the
Union Bank of India.
Shri Shah presented a cheque dated 29 May 1967 for Rs. 6,500 in favour of his
firm to Union Bank of India. On presentation of the cheque through clearing, the
appellant bank passed the cheque and debited the amount to the account of the
respondent. Later on, on receipt of the objection from the respondent-defendant,
the said cheque was examined under the ultraviolet ray lamp when it transpired
that the original cheque was issued in favour of Shri G.R. Pardawala and the
amount of the said cheque was Rs. 95.98. The writing on the cheque was
chemically altered with regard to date, the name of the payee and also the
amount. The respondent made demands to the appellant bank to credit the
amount to its account.
The appellant bank filed a suit in which the agent of the appellant bank was
examined, who stated that before passing the said cheque for payment he had
checked the serial number and date of the cheque and had compared the
signature of the respondent with the specimen signature and that from visual
appearance of the cheque no infirmity was noted by him and from the tenor of
the cheque it appeared to be a genuine one.

The Trial Court dismissed the suit on the ground that by not providing the
facility of ultraviolet ray lamp, the appellant bank had failed to discharge proper
care and, therefore, did not pass the said cheque with the due diligence.
89
On appeal, the District Judge, while agreeing that no abnormal features to
suspect the genuineness of the cheque could be found on visual inspection of the
cheque, was of the view that the appellant bank was not entitled to protection for
the lapse in subjecting the said cheque for scrutiny under the ultraviolet ray
lamp.
On further appeal, the High Court of Bombay, while accepting the finding that
the cheque in question apparently did not show any sign of alteration, held that
the appellant bank did not act with proper care and caution in not providing
necessary device for detecting forged cheques. Since the absence of such a lamp
amounted to negligence on the part of the appellant bank, no protection was
available because payment was not made in due course.
The appellant bank preferred this appeal to the Supreme Court. The Supreme
Court allowed the appeal of the bank on the following grounds:
(i) Section 89 of the Negotiable Instruments Act gives protection to the paying
banker of a cheque which has been materially altered but does not appear to
have been so altered, if payment was made according to the apparent tenor
thereof at the time of payment and otherwise in due course.
(ii) Section 10 of the said Act defines payment in due course to mean payment in
accordance with the apparent tenor of the instrument in good faith and without
negligence to any person in possession thereof under circumstances which do
not afford a reasonable ground for believing that he is not entitled to receive
payment of the amount therein mentioned.
(iii) Section 31 of the said Act obliges the drawee bank having sufficient funds
of the drawer in its hands properly applicable to the payment of such cheque to
make payment of the cheque when duly required to do so.
(iv) On analysing the evidence, the Courts below have held that on visual
examination no sign of forgery or tampering with the writings on the cheque
could be detected. It was found that the agent of the appellant bank had verified
the serial number and signature on the cheque and had compared the signature on the cheque with the
specimen signature of the respondent and on scrutiny of
the cheque visually, no defects could be detected by him. There were sufficient
funds of the drawer with the appellant bank, which had no occasion to doubt
about the genuineness of the cheque from the apparent tenor of the instrument.
There was no evidence to hold that, the payment was not made in good faith.
Simply, because the ultraviolet ray lamp was not kept in the branch and the said
cheque was not subjected to such lamp would not be sufficient to hold the
appellant bank guilty of negligence, more so when it has not been established on
evidence that the other branches of the appellant bank or the other commercial
banks had been following a practice of scrutinising each and every cheque or
cheques involving a particular amount under such lamp by way of extra
precaution.
(v) In such circumstances, it is not a correct legal proposition that the bank, in
order to get absolved from the liability of negligence, was under an obligation to
verify the cheque for further scrutiny under advanced technology or for that
matter, under ultraviolet ray lamp, apart from visual scrutiny even though the
cost of such scrutiny was only nominal and it might be desirable to keep such
lamp at the branch to take aid in appropriate case.

(vi) The Courts below were not justified in holding that the bank had failed to
take reasonable care in passing the cheque for payment without subjecting it to
further scrutiny under ultraviolet ray lamp because the branch was in the
industrial area where such forgery was rampant and other branches of the
appellant bank were provided with such lamp.
The appeal was, therefore, allowed and the Suit of the appellant bank was
decreed only for the principal amount without any interest on the same.
ii. The protection granted to a banker under Section 89 had come up for
consideration before the Calcutta High Court in Brahma Shumshere Jung
Bahadur vs Chartered Bank of India, Australia and China (AIR 1956 Cal. 399):
PAYMENT BY BANK UNDER MISTAKE WHETHER RECOVERABLE
The question whether a bank paying a forged cheque can recover the same from
the payee was considered by the Calcutta High Court in United Bank of India vs
AT Ali Hussain & Co. (AIR 1978 Calcutta 169).
In this case, a cheque for Rs. 5,000, purportedly drawn by a company was
presented by the collecting bank to the paying bank, and was paid. The signature
as well as all other writings on the cheque were forged. The forgery was so
perfect that it was not possible even for a trained eye to detect it. The paying
bank, having subsequently come to know of the forgery, filed a suit against the
collecting bank and the payee of the cheque, for recovery of the amount paid, on
the ground of payment under mistake. Defending the suit, the collecting bank
contended that it received the cheque in the ordinary course of its business, and
presented the same for encashment in good faith. The payee contended, that he
received the cheque from some persons claiming to be representatives of a
company, in the ordinary course of business, towards payment of the price of the
goods to be supplied by him, that he acted in good faith, having no reason to
suspect that the cheque was forged, and that he parted with the goods only on
receipt of intimation from the collecting bank that the cheque had been
encashed.
The Trial Court having dismissed the suit on the ground that the paying bank
had no cause of action, an appeal was preferred to the High Court.
Decision: The High Court dismissed the appeal and held that both from the point
of view of equitable principles and the doctrine of estoppel, the paying bank was
disentitled to recover the money either from the collecting bank or the payee. In
the course of his judgement, M.M. Dutt. J. said:
The evidence on record supports the findings of the learned Judge that the
forgery was so accurate that it was not possible even to a trained eye to detect
the same. In these circumstances, it is difficult to hold that the plaintiff bank had
acted carelessly or negligently. The encashment was made by the plaintiff bank
on the mistaken belief that the cheque was a genuine one. The defendant United
Bank had nothing to do with the question as to whether the cheque was genuine
or forged. In due course of business, it presented the cheque to the plaintiff bank
for collection and after the cheque was encashed, intimation was given by it to
its constituent, namely, the defendant No.l, and the latter, in its turn, sold goods
to the persons who came with the forged cheque as the representatives of the
Metal Alloy Co. Thus, it appears that the parties in the suit acted in good faith in
due course of business. It was due to
92
the mistake that was committed by the plaintiff bank that it had to suffer the loss
of the said sum of Rs. 5,200. Upon the consideration of the principles of law as

noticed above, it seems to us that so long as the status quo is maintained and the
payee has not changed his position to his detriment, he must repay the money
back to the payer. If, however, there has been a change in the position of the
payee who, acting in good faith, parts with money to another without any benefit
to himself before the mistake is detected, he cannot be held liable. Equity
disfavours unjust enrichment. When there is no question of unjust enrichment of
the payee by reaping the benefit of an accidental windfall he should not be made
to suffer, for he would be as innocent as the payer who paid the money acting