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The moment an individual opens an account with the banker, he becomes a customer of the bank. There exists a
special relationship between the banker and its customer. To understand this relationship, it is important to know who
is a banker and who is a customer.
1.3.1 Banker
A banker is one, who performs the business of banking. The term banking has already been defined earlier. Some of
the salient features of this definition are as follows:
A banking company must perform both of the essential functions, viz. (a) accepting of deposits, (b) lending or
investing the same. If the purpose of accepting of deposits is not to lend or invest, the business will not be called
banking business. The explanation to section 5(c) makes it clear that any company which is engaged in the
manufacture of goods or carries on any trade and which accepts deposits of money from the public, merely for the
purpose of financing its business as such is not deemed to transact the business of banking.
The banker accepts deposits of money and not of anything else. The word public implies that banker accepts
deposits from anyone who is capable of contracting and who offers his/her money for such purpose.
The definition also specifies the time and mode of withdrawal of deposits. The depositor must make a demand for
withdrawing his/her money. The demand should be made in a proper manner and through an instrument in writing and
not merely by verbal order or a telephonic message.
The banker is, thus, an intermediary and deals with money belonging to the public. A number of other institutions
which also deal with money are not designated as banking institutions because they do not fulfil all the above-
mentioned prerequisites.
1.3.2 Customer
There is no statutory definition of the term customer. However, the legal decisions on the matter throw some light on
the meaning of the term. As such a customer is defined as a person who opens a deposit or current account or
negotiates an advance on current or loan account. Accordingly, a person who goes to encash a bearer cheque in the
bank, or visits a bank to deposit application money for allotment of shares of a company shall not be termed as a
customer. Dr. Hart defines a customer as "one who has an account with a banker or for whom a banker habitually
undertakes to act as such". A person (whether an individual, firm, company, society

12 Elements of Banking and Insurance

corporation incorporated by, or under any law), is said to be a customer of the bank when his dealings with the bank
relate to the business of banking, i.e., accepting of deposits and lending of money. So, if a person goes to the bank for
any other purpose like payment of income tax, utility bills, etc., he will not be considered a customer of the bank. To
constitute a customer, a person must
Open a bank accountsaying, current or fixed deposit, in his name by making necessary deposit of money, and
The dealing between the banker and customer must be of the nature and banking business.
1.3.3 Relationship between Banker and Customer
The general relationship between banker and customer is that of debtor and creditor. Sometimes, the banker acts as an
agent or trustee also.
Relationship as debtor and creditor: The moment the customer opens an account with the banker, he becomes debtor
of the customer and the customer becomes his creditor. The banker is then bound to return an equivalent amount of
money, by paying a similar sum to the depositor when he is asked for it. The debtor-creditor relationship between
banker and customer is different from similar relationship in other commercial transactions in the following respects:
The creditor must demand payfnent. In case of ordinary commercial debt, the debtor repays the money on the
specified date, or as per the terms of the contract. But in case of a deposit in the bank, the debtor/banker is not
required to repay the amount on his own accord. The depositor/creditor must make a demand for
the payment.
Demand must be made in the proper manner. The withdrawal should be effected through an order, cheque and draft or
otherwise. These days bankers also make payments when requested through electronic cheques, ATMs, credit cards
and debit cards.
Proper place and time of demand. If the payment is not being demanded through electronic mode, then the
customer/creditor has to make the demand at the proper place and proper time. In other words, he can demand
payment only from that branch of the bank, where he has an account and that too during working hours on a working
day. In ordinary commercial transaction, money can be demanded anytime and anywhere.
Introduction to Banking Business 13
1.3.4 Banker as Trustee
Under certain circumstances, bankers enter into fiduciary relationship of a trustee with their customers. A trustee
holds money or assets and performs certain functions for the benefit of some other person called the beneficiary. For
instance, when a banker receives valuables for safe custody, he acts as a trustee. This property does not pass on to the
banker and it is not available for distribution amongst his general creditors in case of liquidation.
1.3.5 Banker as Agent
A banker acts as an agent of his customer in many ways, e.g., when he buys or sells securities or makes payment of
various dues of his customers, or collects cheques on his behalf. In all these cases, the banker acts as an agent of his

Relationship between Banker and Customer

f A. General Relationship between a Banker and Customer
There are three types of general relationships between the banker and customer. They are:
1. Debtor and Creditor Relationship,
2. Trustee and Beneficiary Relationship, and
3. Bailor and Bailee
4. Pawnor and Pawnee relationship.
5. Agents and Principal Relationship.
1. Debtor Creditor Relations. In the words of Sir John Paget, the relation of banker and
customer is primarily that of debtor and creditor. The respective positions are being
determined by the existing state of the account'. When a customer pays some money to a
banker, it is not held by the banker in a fiduciary capacity. But is replaced by a debt due from
the banker. It is taken as lent to the banker, who agrees to pay on demand an equal amount. It
can be paid in any kind of legal tender. The customer cannot claim the identical coins and
notes. Thus the banker is neither a depository nor a trustee. '" \
that deposited with him when he is asked for it. The money paid to the banker is money of the principal, it is then the
banker's money. He is known to deal with it as his own, he makes what profit he can, which profit he retains to
himself paying back only the principal.
This relation of a debtor and creditor was further explained in Velji Lakham Sey & Co. Vs. Dr^Banaji. It was held in
this case that the amount due to the customer in this relationship cannot be claimed by him from the Bank as a
preferential creditor, when the bank is wound up. 0ut it is open to the customer to give specific direction to the banker
and to appoint him as his agent. This agency creates fiduciary relationship between the banker and customer. This
continues till the termination of agency.
Banker's relationship with the customer is reversed as soon as the customer's account is overdrawn. Banker then
becomes a creditor of the customer who has taken a loan from the banker.
General Features of Debtor and Creditor Relationship
There are some general features to the relationship between banker and the customer as debtor and creditor. They are :
(a) Demand Necessary for Debt due from Banker. The debt due from the banker is different from ordinary
commercial debt. In the case of commercial debt, the creditor demands for its repayment and the debtor may repay on
his own accord. But in the case of bank deposits, the debtor bank does not pay money on its own accord. It is
necessary that the depositor (customer) must demand the money from the bank. The difference is due to the fact that a
banker is not an ordinary debtor ; he accepts the deposits with an additional obligation to pay only when it is
demanded. Hence a banker is considered to be a 'privileged debtor'.
(b) Proper Place of Demand for Payment. A commercial bank may have branches at many places, yet it is
considered as a single unit. However, the customer opens an account in his name in a particular branch. The debtor-
creditor relationship between the bank and the customer exists only with regard to that branch. Hence the customer
can claim money back only from that branch. "The locality is an essential part of a debt due by the banker to the
customer and the banker obligation to repay the debt was confined to the place where the account is kQpt"-
(Joachinson V. Swiss Banking Corporation." The same is also observed in Indo- Allied Industries Ltd. V. Punjab
National Bank.
(c) Proper Time to Demand. The customer can demand repayment only during the business hours of the bank.
(d) Proper Manner to Demand. According to Sec. 5(6) of definition of the banker, deposits are withdrawable by
cheques, drafts, order or otherwise. It cannot be oral demand.
(e) The Demand may be a Part of the Debt. Generally customers withdraw money from bank as only part of their
deposits depending upon the necessity.
(f) Banker and the Law of Limitation. In the case of ordinary or general debt, the
is fulfilled, the banker becomes a trustee for the money. If a customer deposits securities or other valuables for safe
custody, the banker acts as a trustee of the customer. The customer is the owner of valuables deposited with the
3. Bailor and Bailee Relationship. The banker becomes a bailee when he receives gold ornaments and important
documents for safe custody. The banker takes charge as a bailee and not as a trustee. He cannot use them. He does not
pay interest. The articles are kept in safe deposit box.
4. Pawnor and Pawnee Relationship. A pawn is bailment or delivery of goods by a debtor to his creditor to be kept
till the debt is discharged. Banker as a pawnee has to safeguard the securities of pawnor/customer. If the valuable are
stolen, the banker becomes responsible to compensate the customer. He has to return back the valuables when the loan
is discharged.
5. Ageiit and Principal Relationship. Now-a-days, banks perform many functions as agents of customers. They buy,
sell securities, collect cheques and bills and make payments of insurance premiums, membership fee of clubs,
telephone bills etc. The banker becomes an agent when he collects cheques, bills, interest, dividend, rents etc. on
behalf of customer. In all these cases the relationship between banker and customer is that of an agent and principal.
(b) Special Features of the Relationship between Banker and Customer
The special features of the relationship between the banker and customer cover two areas as under:
(i) The general obligation duties of a banker towards customer :
(a) Obligation to honour cheques
(b) Obligation to maintain secrecy of accounts.
(c) Obligation not to close the account of customer without proper notice, (ii) Rights of banker
(a) Right of general lien
(b) Right to set-off
(c) Right of appropriation ^ (d) Right to claim incidental charges, and interest amount etc.

Commercial banks mobilise dormant savings with the public and make them available for productive investment in
various sectors of the economy. Banks thus act as financial intermediaries between lenders and borrowers. The
difference between the interest charged on loans and interest paid on deposits constitutes the profit for the banker.
Interest rates are till recently regulated by the Reserve Bank of India. Now the interest rates are deregulated Banks are
given freedom to determine the rates of interest on deposits of different maturities So to say the rates of interest are
market determined.
Banks mobilise funds in the form of various types of deposits. There are fixed deposits savings deposits, current
accounts etc. Presently new private sector banks and foreign banks are offering several inducements. Life and
Accident insurance covers are provided by banks against certain types of deposits. In the following paragraphs, we
describe the various types of deposits accepted by commercial banks.
1. Demand Deposits or Current Accounts
Current deposits form the most important type of bank deposits. In the case of these deposits, the banker undertakes to
honour his customer's cheques so long as the latter account is in credit. In other words, the customer can withdraw the
whole of the amount standing to his credit (subject to the minimum balance he has to keep) by drawing a single
cheque or a

Current deposits are of great convenience to bank's customers. As cash and cheques are sent to the bank, they are safe.
The customer can secure an overdraft with or without security. The banker has to keep sufficient cash with himself in
order to honour the customer's cheque. No interest is usually allowed on current accounts.
The bank issues a pass book at the time of opening a current account. All transactions in respect of that account are
entered in the pass book and the customer can compare the entries therein with the entries in his own cash book.
Alternatively, monthly statements showing the transactions between the banker and customer are furnished to enable
the customer to compare the transactions entered in the statement with the entries made in his own cash book.
Advantages to the customer of having a current account
Opening of a current account is a source of great convenience to the customer.
(a) As cash, cheques and drafts are deposited in the bank's account, they are perfectly
(b) The customer can make his payments more conveniently. He need not count cash at the time of making payments.
This not only obviates errors but saves time.
(c) Payment to creditors situated at distant places is facilitated by the issue of cheques.
(d) Collection of cheques drawn on banks situated outside his place of business
becomes easier.
(e) The paid cheque form at the bank serves as a receipt. It can be referred to in case of dispute. Normally, however,
the person receiving a cheque will have to give a stamped receipt for the amount of the cheque.
2. Savings Accounts
In order to cater to the needs of people with low incomes and to encourage thrift among such people, post offices in
our country started savings accounts. Originally, a person could open a savings accounts with the post office with an
initial deposit of? 2/-, but now the minimum limit is ? 5/-. The depositor may withdraw money by filling in a
withdrawal slip and presenting it along with the pass bool either in person or through a messenger. Only one
withdrawal is allowed in a week. The Government was able to collect several crores of rupees by way of these savings
Realising that there is much scope for attracting business through the opening of savings accounts, bankers also have
started savings banks departments. A person can normally open a savings account with an initial deposit of? 500.
Interest at the rate of 3.5 per cent is allowed on minimum monthly balances. Money can be withdrawn by filling in a
withdrawal form and presenting it along with the passbook.
Some banks allow cheques to the drawn against savings deposit, provided the minimum balance kept in the bank is ?
1000. All the facilities available to current account depositors
-i.---:* rti TVof ic r.Vipnnes can be deposited for

The procedure for opening a savings account is the same as for current account. A pass book is issued to the customer
as in the case of current account. Wherever there is ATM
facility the customer is also given an ATM card.
3. Recurring Deposit Account
Money in this account is deposited in monthly installments (sometimes daily) for a fixed period and is repaid to the
depositor along with interest on maturity. The rate of interest on these deposits is nearly the same as on fixed deposits.
The purpose of these accounts is to encourage regular savings by fixed income groups.
4. Fixed Deposits
Banks accept fixed deposits varying for period three months to five years and more, The depositor cannot withdraw
the amount of the fixed deposit until after the expiry of the period. The bank allows interest on these fixed deposits.
The deposit rate varies, depending upon the period of the deposit. The longer the period of deposit, the higher the rate
of interest allowed.
For instance, on deposits for three months, interest is allowed at the rate 4 per cent, while
on deposits for one year at the rate of 6 per cent and on deposits for more than two years 7 per cent may be allowed.
The rates of interest are periodically revised.
In England, these deposits are called Time Deposits. They can be withdrawn after giving a notice of seven to fourteen
days. For this reason, these deposits are with the bank not for a fixed period of time, but for the period intervening the
date of deposit and the date of withdrawal after giving notice.
Fixed deposits are of great value to the banker. The amount in fixed deposits need not be returned before the due date.
So he can make use of this money in whatever manner he likes and get profit for himself. The bank can know before
hand the time when the repayment is to be made and hence keeps itself in readiness to make the payment on the due
The depositor has to fill in an application form mentioning the amount of deposit, the period of deposit and the name
or names of the persons in whose favour the deposit receipt is to be issued. Banks may fix a minimum amount for a
fixed deposit account. The ICICI bank insists on a minimum balance of? 10,000.
Relationship between the Banker and the person having a Fixed Deposit. We have seen previously that the
relationship between a banker and his customer who opens a current account is that of a debtor and a creditor. In the
case of fixed deposits also the same type of relationship exists. The banker is not the bailee or trustee of the amount
held by him in fixed deposit. He is only a debtor. So he can use the money in whatever manner he pleases and must
return the money on the due date along with interest. The depositor cannot issue cheques against the balance he has in
his fixed deposit account.
Even after the expiry of the period of the fixed deoosit the banker is not th
makes enquiries regarding the prospective customer, but when accepting a fixed deposit, hj does not make any
enquiries. It is not obligatory on the part of the banker to make such enquiries. Hence it is opined that a person with a
fixed deposit is not a customer of the banker in the true sense of the term.
Fixed Deposits-statute of Limitation. There is no clear cut answer to the question when the statute of limitation
commences in the case of fixed deposits either in the Acts or in decided cases. Some contend that it commences from
the due date of payment of the fixed deposit. Some others contend that it commences from the date on which
repayment is demanded. If it is a condition for payment that fixed deposit receipt must be delivered duly signed, it is
clear that the limitation period commences from the date the receipt is delivered. Fixedi Deposit Receipt. The banker
gives a fixed deposit receipt for the amount of the deposit. It is generally marked 'not transferable.' A fixed deposit
receipt is not a negotiable instrument. The transferee of such a receipt does not get a better title to it than the transferor
1 himself had. The banker will therefore be in trouble if he pays the amount to the person who brings it for payments
on the due date. The leading case on point is Pearce V. Creswick, the facts of which are as follows:
A customer had a deposit account in X bank. The bank issued a receipt for the amount deposited. The customer used
to present the receipt every year and take a fresh receipt for the amount with interest added. The customer died and
another person fraudulently obtained the receipt and presented the receipt for payment through another bank N. The
executers of the customer took out an action against the X bank for the amount. It was contended on behalf of X bank
that it was their practice to make payment of such receipts when presented through another bank. It was held that the
alleged custom could not justify the payment.
When therefore a fixed deposit receipt is presented by another person not being the depositor, the banker should
exercise utmost care. If the banker makes payment to an unauthorised persons the depositor can claim the nioney
from the bank, unless he is estopped from doing so, or is guilty of negligence.
In Evans V, National Provincial Bank, the plaintiff had a deposit account with the defendant bank. She endorsed the
deposit receipt in favour of one Mr. Lloyd, who collected the amount through his bank. The court decided that the
deposit receipt was a mere receipt which did not entitle the holder to receive payment. The banker is not authorised to
make payment to the person who presented it for payment. The conduct of the plaintiff did not
amount to estoppel.
The deposit receipt can be transferred to another person by assignment. But when there is an assignment, the debtor
must be notified of the same. In the above case there was no such notice. Therefore, when a deposit receipt is
presented for payment by a person other than the depositor, the banker must ask for confirmation from the depositor.
In certain cases, the fixed deposit receipt may be considered a negotiable instrument. This
Vionr^nQ when on the reverse of the deposit receipt, the form of a cheque is printed, and the
Collection of the amount of fixed deposit. On the expiry of the period of the fixed deposit, the depositor may
present the fixed deposit receipt at the bank and obtain payment. Sometimes the presentment of the fixed deposit
receipt is a condition precedent for obtaining payment. In such a case, the banker may refuse payment unless the
receipt is presented. When the deposit receipt is lost the customer may execute on indemnity bond and obtain
Joint Depositors. Sometimes fixed deposits are received from two or more joint depositors. According to Indian Law,
all the depositors will have to sign in order to obtain payment. If one of the joint depositors dies, his legal heir must
sign. But if the deposit made as formed or survivor (Fors) either or survivor, it should be paid the survivor in the case
of death of the former in the first case; and in the second any one surviving can make a claim.
Nomination. The Banking Regulation Act, 1949 and the Banking Companies (Nomination) Rules 1985 permits the
depositors (Savings, and Fixed Deposits) to nominate a person in form DAI to receive the amount of fixed deposit or
balance in the savings account in the event of death of the account holder. Such nomination can also be varied or
cancelled by the account holders. The bank will give an acknowledgement in writing to the depositor confirming the
nomination. Nomination will facilitate payment of deposit money in the event of death of the depositor without asking
for succession or legal heirs certificate. Nomination facility is also available in respect of safety lockers too.
GENERAL PRECAUTIONS IN OPENING AN ACCOUNT Method of opening the Current or Saving Account
(a) Account Opening form. A prospective customer while requesting the banker to open a current account in his
name fills in an Account Opening Form supplied by the banker. He notifies his willingness to abide by all the rules
and regulations contained in that form. In the Account Opening Form, details regarding the customer such as his
name, office address, residence address, particulars of his employment, name of the employer of firm, the nature of
the account to be opened etc. will have to be given. If he has or had an account with any other banker, details of the
same are to be given
(b) Photographs. The applicant has to give two passport size photographs one to be pasted in the pass book and the
other on speciman signature sheet. The RBI advised banks to obtain from the prospective customers two passport size
photographs at the time of opening of accounts. If the deposit is in the name of minor, the photograph of the guardian
could be obtained. The photographs help to prevent impersonation and fraud. It becomes easy to identify the account
(c) Introduction/ References. The customer has to cite the names of one or two referees about his standing and the
respectability. The banker not only has a personal interview with the prospective customer, but writes to the referees
cited and obtains the necessary


1. The customer has a cheque book with him. He may issue cheques without havil
sufficient balance to his credit. The banker may be unwittingly instrumental!
facilitating deceipt by the customer. ,;
2. The banker should examine whether the prospective customer has the capacity j
contract. He may be an undischarged bankrupt or may be suffering from cer
legal disabilities. 3

3. The banker is given protection under Section 131 of the Negotiable Instruments Al in respect of cheques collected
by him. He loses his protection if he does not nu sufficient enquiries about the customer, and may be charged with
neglience as that Section.
4. If the banker has sufficient information about the customer it will help him t decide whether any overdraft may be
allowed to the customer, and to what extent.
5. If the banker has information regarding his profession or occupation, the banker caif
know whether the customer is depositing in the personal account cheques etcj
received by him in his official capacity/ |
6. If the banker inadvertently honours a cheque for which there is not sufficient! balance to the customer's credit, and
as a result the customer's balance is thrown! into debt, he can recover the money easily.
A letter of introduction or reference protects the banker in the following ways : (i) Protection against fraud, (ii)
Protection against inadvertent overdraft, (iii) Protection against undischarged bankrupt.
(iv) Protection against negligence under Section 131 of the Negotiable Instruments Act. 1881.
(d) Quoting of PAN/GIR Number. The Central Board of Direct Taxes made quoting of Permanent Account Number
(PAN) or General Index Numbers (GIR) compulsory with effect from November 1, 1998. PAN shall be quoted at the
time of time deposit exceeding ? 50,000. The person who has no PAN or GIR Numbpr may file Form 60 or Form 61,
as the case may be.
(e) Specimen Signature. Every prospective customer is expected to have read the rules of business of the bank and to
confirm in writing his willingness to comply with and be bound by them before his account is opened. He is required
to supply his bankers with one or more specimen signatures and these are usually entered in a signature book
maintained for the purpose by the bank. The banker is supposed to compare the signature on the cheques issued by the
customer with the specimen signature. The banker cannot debit the customer's account if the cheque is not signed by
the customer. From this it is evident that the specimen signatures are of supreme importance at the time of paying
cheques. Where the specimen signatures are maintained in a book form, an index becomes necessary. The modern
: 4.- ~u^:- - -

If the banker accepts the application form submitted by the customer, a contract is
formed between them, and the person becomes the customer of the bank in the legal sense of
the term when the very first transaction takes place between them. Generally, the customer
deposits some cash at the time of opening the account. That would be the first transaction of
the customer with the bank. Sometimes, the customer deposits a cheque for collection and
credit to his account. Even this is of course the first transaction between them. The banker
must act in good faith and without negligence. The banker must make enquiries about the
customer's employment and other particulars. If the person depositing the cheque happens to
he a married woman, enquiries regarding her husband's occupation will enable the bank to
see that cheques received by her husband in the course of his employment are not deposited
into the bank for collection and credit. It is necessary for the banker to open a current account
only after obtaining full information regarding the prospective customer. .
(f) Mandate. An account holder may empower another person to operate his account on his behalf. Such a mandate is
generally used to operate the account during the temporary absence of the account holder. In the mandate, the reasons
for giving such mandate, agreement if any, the name of the authorised person, the specimen signature shall be
recorded preserved by the banker.
Opening of Accounts. After opening the account, the banker hands over to the customer (1) a cheque book, (2) a
paying-in-slip book, and (3) a passbook.
1. Cheque Book. The customer has to draw a cheque in order to withdraw money from the bank. The cheque may be
in favour of the customer himself or in favour of a third party. The customer must exercise reasonable care to see that
the cheque book does not fall into others' hands. The customer must complete the cheque in all its aspects before
issuing it. He must write the amount both in words and figures. Th bank will dishonour a cheque if there is any
defect in it.
2. Paying-in-slip form. When the customer wishes to deposit money into his current account, he will have to fill in a
form called paying-in-slip form. If cash is deposited the denomination of the notes paid in must be noted in the form.
If cheques are sent for collection and credit, details must be given. Alternatively, the cheques etc. deposited may be
sent along with a letter addressed to the banker.
3. Pass Book. The passbook is a replica of the customer's account in the bank's ledger. The pass book need not be
presented along with the cheque for payment. The pass book may be sent periodically to the bank and the bank enters
all the transactions it has found in its own books in the pass book. The customer may compare the entries in the pass
book with those in his own cashbook and intimate to the bank any discrepancies so that they may be set/right. The
pass book has been described in detail in later.
The pass book is a small handy book issued by a banker to his customer who has a

affairs of his savings current account into the bank. It is so called because it periodically between the customer and the
banker and vice-versa. The pass book con! rules and regulations governing the saving account/current account. The
pass book is headed as given below :
Date Particulars Debit Credit Balance ?
(?) (?) -*,
Features. The important features of the pass book are :
(i) Entries in the pass book are to be made by the bank staff only. The cust

cannot make any entry in the pass book.
(ii) It must be sent by the customer periodically to the banker to up-to-date entries;! (iii) In case of a Savings Account,
the pass book must accompany the withdrav slip, unless there is cheque book facility.
Now a days some banks particularly the new private sector banks and foreign banks: statements of account
periodically (monthly) in lieu of pass book.
Legal Aspects of Pass Book. Though the pass book is an anthenticated copy of i customer's account withjthe bank,
there is no unanimity of views regarding the entries in the pass book.
Is Pass Book a Conclusive Proof of evidence of entries made therein ?
According to Sir John Paget, a learned writer, the proper function of a pass book is to constitute a conclusive and
unquestionable record of the transactions between the banker and the customer and it should be recognized as such
(Devaynes V. Noble). He also added that on delivery of the Pass Book to the customer, he examines it and if there
appears any error or omission brings it back to be rectified, or/if not, his silence is regarded as an admission that the
entries are correct'. This view appears to be reasonable and ideal. But the legal position in. England and India is
different, as can be seen from several legal decisions.
In Kaptigalla Rubber Estates Co. V National Bank of India, it was held by Mr. Justice Bray, that there was no
authority in England to support the view that when the customer takes out a pass book and returns it without
objection^ the account is regarded as settled and is binding on both the banker and the customer. The absurdity of this
proposition was also clearly noted.
In U.S.A., this matter has been dealt with in a way favourable to the banker. In Morgan V. U.S. Mortgage and Trust
Co. the presiding Judge observed thus :' The,deposited who sends his Pass- Book to be written up and receives it back
with his nairl rJifnnc o ,,~.,~u. .-
would give him a correct basis for comparison and verification. This ruling was Id by F H Jackson. According to him,
if a business firm ticks the various items in c Book and returns it to the Bankers, the bankers are entitled to consider
that aspnma
.evidence of its correctness. But in the case of private persons, the same principle cannot
' olied. This seems to be a fair statement of the position.


The Negotiable Instrument Act does not define a negotiable instrument. But Sec. 13 merely states that a negotiable
instrument means "a promissory note, bill of exchange or cheque payable either to order or bearer whether the words
order, or 'bearer' appear in the instrument or not". The Act deals with only three instruments-promissory notes, bills of
exchange and cheques. There are, besides these, other instruments which satisfy the character of negotiability. In
England, Justice K.C. Wallis defines a negotiable instrument as "one, the property in which is acquired by anyone
who takes it bonafide and for value, not withstanding any defect of title of the person from whom he took it." Thus,
free negotiability is the characteristic feature of negotiable instruments.
According to Thomas an instrument is negotiable when
(i) The instrument is freely transferable (by delivery or endorsement and delivery) annlication of law or bv the
custom of the trade concerned, and
The Negotiable Instruments Act, 1881 does not define a negotiable instrument. Section 13 merely states that "(I) A
'negotiable instrument' means a promissory note, bill of exchange or cheque payable either to order or to bearer.
The Act thus states only three instruments-cheques, bills of exchange and promissory notes-as negotiable instruments.
Hence, they are called negotiable instruments by statue.
Some other instruments have acquired the feature of negotiability by the custom or usage of trade. Section 137 of
Transfer of Property Act, 1982 recognised that an instrument may be negotiable by law or custom. In our country
therefore Government Promissory notes, Shah Jog hundis, delivery orders and railway receipts have been held
negotiable by usage or the custom of trade.
There are several instruments which are not negotiable but can be transferred by delivery or endorsement and
delivery. Yet they cannot confer a better title on the transferee than what the transferor has.
Essential Features of Negotiable Instruments
The features of negotiable instruments are :
1. Contract to pay money. A negotiable instrument contains a contract to pay money only.
2. Transferability. The value in negotiable instrument is easily transferable from person to person. The ownership of
property in the instrument may be passed on by mere delivery in the case of bearer instruments, or by endorsement
and delivery, in the case of order instruments. Thus, the two ways of negotiating the negotiable instruments, therefore,
are (/) delivery and (/'/') endorsement and delivery. The transfer of ownership of a property is complete only when it is
delivered to the transferee. Mere intention to transfer does not amount to transfer of the instrument. It must be actually
delivered to other party. By delivery we mean voluntary transfer of property.
3. Title. A negotiable instrument confers absolute and good title on the transferee who takes in good faith, for value
and without notice of defective title of the transferor. This is the most important characteristic of negotiable
instrument. For instance, a person who takes a negotiable instrument from another person who had stolen from
somebody else will have undisputable title provided he takes it in good faith and for value. He shall not have any
knowledge of the defective title of the transferor. There is a difference between transferability and negotiability. In the
case of commodities which are transferable from person to person, the general rule is the transferor cannot transfer
better title than what he has. But a negotiable instrument stands on different footing. Suppose a person takes a cheque
from another person without knowledge of the latter's defective title to the cheque. Still he will have good title there
to and will not be responsible to the true owner.
4. Recovery of monev. The holder in due mnrs^ i nnt in a/ *m**+<*A u,
maturity. Such a holder in due course has a right to sue upon the instrument in his own name. He can thus recover the
amount from the party liable to pay on the instrument.
5. Evidence. It is capable of easy proof and got special rules of evidence, for example, a presumption that
consideration has been paid in it.
6. Instrument in writing. The law requires that a cheque, bill or a promissory note must be an instrument in writing.
7. Unconditional Order/Promise. A cheque or a bill of exchange contains an order to the drawee to pay money
without attaching any condition. A promissory note contains a promise to pay money to the creditor unconditionally.
8. The amount must be certain. The amount to be paid on the instrument must be certain and specified both in
figures and words.
9. Payable to order bearer. They are to be normally payable to order. They are payable to order if it is expressed to
be so payable or if the last endorsement is a blank endorsement.
Types of Negotiable Instruments
Let us now discuss the different types of negotiable instruments-Promissory Note, Bill of Exchange and Cheque and
their features.
According to Section 4 of the Negotiable Instruments Act, "A Promissory Note is an instrument in writing
containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to or to the order
of, a certain person, or to the bearer of the instrument."
A promissory note is drawn and signed by the debtor. He promises to pay the creditor specified sum of money on
demand or after the expiry of a specified period.
A specimen form of demand promissory note is given below.
Specimen of a Promissory Note
(a) When promise is made to pay money on demand.
Madurai May 4, 2008
On demand, I promise to pay Sri Gupta or order the sum of Rupees Ten Thousand for value received with
interest at 6 per cent per annum.
Sri Gupta 20-7-50 T. Nagar Witnes
s 1.
(b) Where promise to pay money after the expiry of a fixed time.
? 10,000 Madurai
May 4, 2008
Three months after date, I promise to pay Sri Gupta or order the sum of Rupees Ten Thousand for value received.
Sri Gupta 20-7-50 T. Nagar Chennai
Essential Features of a Promissory Note
.1. It is an instrument in writing. The promise to pay a certain sum of money must be
in writing. A mere oral promise to pay does not become a promissory note. The instrument may
be written with pencil or in ink, printing, engraving or lithographing. It may be in any form but it becomes a
promissory note if it satisfies the other features. Though the instrument written with pencil is not prohibited by law, it
is not desirable as alterations can be easily made.
2. It is an unconditional promise to pay. A mere acknowledgement of debt or an oral promise is not adequate. There
must be an express undertaking to pay money. It is an unconditional promise. The promise should not be made
dependent upon the happening of a particular event. But if the time for payment of the amount is to take place after
the lapse of a certain period, say 3 months, the promise is not deemed to be 'conditional'. If A writes to B an I.O.U.-(I
owe you) ? 10,000 is not a promissory note.
"But if A writes to B
I promise to pay B or order ? 10,000"
is the form of the promissory note.
In the case of Balmukand V.Munnalal, iRamji Lal and others, the Punjab and Haryana Court observed (1978) as
follows :
"Before a document can be treated as a Promissory Note, it should be Promissory Note both in form and intent. If
indebtedness is acknowledged in a document in a defined sum of money payable on demand that is enough to make a
document a promissory note and the document need not necessarily say that the debtor promises to repay the amount.
Merely because a document says that the payment to be made when demanded, the undertaking to repay the amount
does not become conditional. The absence of the word 'I promise to pay' makes no difference in the tenure of the
instrument provided it fulfils other conditions of a Promissory Note."
document even though he writes in his own handwriting. It may even be signed by the authorised agent of the maker.
But the authorised agent must state that he is signing on behalf of the principal. There are no restrictions on the form
or place of signature in the instrument. It may be made in pencil or ink or a thumb mark or initials. It is safe that
pencil is not used to prevent the possibility of alterations.
4. The maker must be certain. The identity of the maker must be certain. Normally, the name of his father/mother
and address are stated in the document. The document must clearly indicate the person who binds himself to pay the
money. He may be described even by designation. If two or more persons sign the document, they are making
themselves liable to pay jointly and severally.
5. The payee must be certain. The person to whom the payment is to be made must be certain. The payee is
considered 'certain person' for this purpose even if he is misnamed or is designated by description only (Sec. 5). The
term person includes, besides individuals, bodies corporate, local authorities, societies, association of persons etc. and
payment is to be made to the concerned authority/officer of the institution. In case where there is a mistake in the
name of the payee or his designation, the note is valid, if the payee can be identified by evidence. Even if the note is
executed in favour of person who is dead without the knowledge of his death, the maker is liable to pay to the legal
representatives of the deceased.
6. The promise should be to pay money and money only. The promise should be to pay money only the legal tender
money. The payment shall not be made in goods as alternative or in lieu of money.
7. Amount should be certain. The amount payable is specified and certain. According to paragraph 3 of Section 5,
the sum does not become indefinite because of the following reasons :
(i) There is a promise to pay the amount with interest at specified rate, (ii) The amount is to be paid at an indicated
rate of exchange.
(iii) The amount is payable in installments with the condition that the whole balance shall fall due for payment as a
default being committed in the payment of any one installment.
8. Other Conditions/The other features are the place, date of execution, consideration etc., are to be mentioned.
A bill of exchange is written and signed order directing the person named in it to pay a certain sum of money only to,
or to the order of a certain person or to the bearer. Bills of exchanges arise in business transactions. They normally
arise when goods are sold on credit. The seller (creditor) draws billon the buyer (debtor or buyer) to pay the amount
specified in
(b) A truncated cheque55 means a cheque which is truncated during the course of a clearing cycle, either by the
clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image
for transmission, substituting the further physical movement of the cheque in writing.
Essential Features of a Cheque. From what as been said above, it is clear that a cheque must have all the features of
a bill of exchange, but not all bills of exchange are cheques. So all the features of a bill of exchange must be present
in a cheque, with necessary modification. The essential features of a cheque are described below :
1. A cheque is an instrument in writing. Oral orders do not come under the definition of a cheque. The writing may
be done by means of a pen, pencil, typewriter, or it may be in printed characters. However, banks should discourage
writing with a lead pencil, as it is very easy to make unauthorised alterations, which are difficult to detect. During the
First World War, bankers in Britain honoured several cheques written with indelible pencil by persons serving in the
army, but those were exceptional times. Although there is no legal bar to writing cheques with pencil, bankers should
discourage that practice. They are advised to obtain drawer's confirmation in case the writing is in pencil.
2. It is an unconditional order. The cheque must contain an unconditional order. There should not be any conditions
attached to payment. The word 'order' need not be used for the purpose of conveying the order. The order relating to
payment may be conveyed by the word 'Pay' or words 4Please pay'.
The order to pay should be unconditional. In Section 5, the term 'unconditional' has been explained to some extent. An
order is no unconditional if the order to pay is with the condition that payment should be made on the happening of a
specified event which is bound to happen. For instance, if it is stated that the payment shall be made on X's attaining
majority, or on his grandfather's death, it is not an unconditional order, On the other hand, if the payment is to be
made on X marrying Miss Y , it is a conditional order, because X may or may not many Miss Y.
An order to pay from a particular fund is not an unconditional order. But an indication that the cheque should be
debited to a particular account is unconditional, where the customer maintains more than one account. It does not
become a conditional order merely because it specifies the particular account to which the amount of the cheque is to
be debited.
If it is stated that the amount of the cheque should be paid on the payee giving a receipt for the amount, it is a
conditional order. But if it is not a part of the order, an instruction given to the payee at the foot of the cheque, it is not
deemed a conditional order, in as much as it is addressed to the payee, but not to the banker.
3. It should be drawn on a specified banker. A cheque must be drawn on a specified banker. Orders on individuals
or institutions that are not bankers do not come within the definition of a cheque. For instance, orders on Government
Treasuries cannot be treated as cheques. Bank drafts (cheques drawn by one bank on another or by one branch of a
bank on
4. A cheque must be an order to pay a certain sum of money. The order must be for the payment of a certain some
of money. In other words, it must not relate to the payment of a certain quantity of articles. Further, the amount to be
paid must be certain. In the case of promissory notes, the sum is certain although it includes a certain amount plus
interest at a certain percent for the period of the note. Similarly, if a cheque is drawn in foreign currency, the amount
may be calculated at the ruling rate of exchange. On that account it does not cease to be certain sum of money.
5. It is always payable on demand. A cheque should not be expressed to be payable otherwise than 'on demand'. It is
not necessary to use the words, on demand'. If the drawer of the cheque orders the bank to pay, without specifying the
time of payment, it means that the payment is to be made on demand.
6. The payee must be certain. The person to whom the payment is to be made must be certain. A cheque may be
made payable to certain person, or order or bearer. The term 'person' refers to 'person' in the legal sense of the term,
and a cheque can be made payable to a firm, company, association, etc. The payee is certain not withstanding the fact
that it is made in favour of a particular office such as the Secretary of an Association or Principal of a college. A
cheque can also be made payable to two or more persons (joint payees).
Form of the Cheque
A cheque can take the form of an order written on an ordinary piece of paper, but bankers usually insist upon the use
of printed cheque forms supplied by them to their customers. A cheque is not invalid simply because it is made on an
ordinary slip of paper, but usually the rules for opening an account specify that the customers should make use of
printed cheque forms only. It is by virtue of such a rule that the banker would be justified in dishonouring cheques not
drawn on the printed forms supplied to customers.
Specimen of a Cheque
/ S.B, NO. 40/38 34381 5 C NO..... .........................
A/ ....D/....... .............. ..2004

The use of printed cheque forms is desirable for the following reasons :
(ii) It makes forgery difficult because the forger will first have to obtain the cheque
book of the customer before he can think of forging his signature, (iii) The alternations are easier to detect when
printed forms are used than when
ordinary slips of paper are used, (iv) Where the drawer's signature is not legible, that banker can know the name of the
drawer by referring to cheque book records, (v) The customer can countermand a cheque by simply intimating the
number of the
cheque to the banker, (vi) The counterfoils of the cheque book serve as a record of the various payments made
by the customer by means of such cheques.
Sometimes bankers supply special cheque forms to some of their important customers with the names of the customer
printed on them.
Magnetic Ink Character Recognition (MICR)
The Reserve Bank of India introduced the MICR technology for clearing of cheques, drafts and other instruments first
in Mumbai in 1987. It was extended to Chennai and Delhi in 1987 and to Kolkata in 1989. It is an important landmark
electronic payments system. Some new electronic payment systems subsequently drew their strength from the
capabilities of MICR based clearing system.
1. Standardization of quality/size, printing of cheques or bank drafts with required space for encoding information at
the bottom.
2. Encoding in magnetic ink specific details on the cheque itself to facilitate mechanical sorting. The code line
contains the details of the numbers printed on the cheque.
(a) First 6 numbers indicate cheque number,
(b) Next 3 numbers indicate city code,
(c) Next 3 numbers indicate Bank Code and
(d) Next 3 numbers indicate Branch code
The process also includes MICR code for routing and using RBFs clearing infrastructure. The magnetized portion
(read bank) when put under MICR equipment allows instant readability and identification.
The following are some of the advantages and limitations of MICR system :
1. Even roughly handled, folded, smeared and over stamped cheques can still be read with a high degree of accuracy.
2. MICR devices speed up data input for the banking industry because cheques can be directly fed into the input
3. The character code on the cheaues usins magnetic ink can also be easilv read by people.

4. Special type of magnetic ink is required for encoding the characters to be read by the machine.



It has already been stated that the process of earning revenues and profit beg.., with lending. Lending carries certain
risks. A banker has to strive to earn profit withoii exposure to greater risks. Therefore, he should keep in mind
certain basic principle* of lending. However, these principles should be regarded as statements of genei tendencies
only and not irrefutable laws, inelastic and incapable of wider interpretatio^ to meet given circumstances. They are
more akin to economic laws in the sense tha given certain facts and other things being equal a prescribed course
should follov These are not unbreakable laws. These principles are closely interwoven can not be isolated. In
most of the cases, it will be a trade off between advantage supporting one or more principles and the weaknesses
emerging from the failure I satisfy other principles. There are three basic principles behind all bank lending or
it's portfolio i.e. Safety, Liquidity and Profitability. However, neither sufficient nor easily ensurable for
complex lending operations of today. The list not exclusive, one can add more criteria for deciding advances.
O (1) Safety
The safety of funds is the most important principle for a commercial bank. T loan must be safe. It requires that it
should be granted to a reliable borrower whi| can pay from reasonably sure sources within a relatively short period.
The liquidity of advances in the ordinary course of business should be unquestionable and the safetj? requirements
should usually be supported by the deposit of approved security as -aii| insurance against unforeseen developments.
Number of features can be examined iinderi this head to decide whether the proposal is sound enough.
At times banks are under pressure to lend aggressively, but they have to bel defensive at the same time, ensuring that
they do not loose the amount lent. They! can take only calculated risks. This is the reason for the banks to call for
collaterals,! margins and guarntees. However, this may satisfy the criterion merely procedurallyj and legalistically.
Good documentation and inspection are absolute necessities,! however that is not enough. Experience shows that this
inculcates some fear and| discipline. However, when things go wrong these are reluctantly enforced and in courts 1
banks hardly benefit from them. It turns out to be a last resort and only a partial | protection. The safety needs to
be ensured through other measures. Greater] importance should be given to continuous follow up not of security
alone, but of borrower's? operations as well. Banks should develop reliable systems designed in terms of signals] and
actions, for different stages of the health of different categories of borrowers' business ]
mnnrn 7> ///7< /^ /-.^ - L_~--f *i. . *
It has been stated earlier that the liabilities of commercial banks are payable either on demand or on short notice.
Therefore, the bank loans should also be liquid. Liauidity refers to the readiness with which bank can convert its
assets into cash with no or nominal loss. A loan will be liquid, if it has been given for a short period to finance the
trading transactions. The money will get realised when asset financed (inventory) get sold.
Lending for longer period, while borrowing short, exposes to the risk of failure to meet the demand of depositors,
which can prove to be fatal as banks thrive on public confidence.
The principle of liquidity deserves attention on another count. The cost of borrowings from the Reserve Bank of India
depends upon the net liquidity ratio i.e. the ratio between net liquid assets of the bank to its total demand and time
liabilities. If the ratio is below the prescribed limit, the rate of interest charged by the Reserve Bank of India goes up.
However, under the changed banking and lending practices, it is not always easy to satisfy the liquidity requirement.
Once a bank goes beyond the bill discounting business or financing against goods in trade, the decision making
becomes difficult. The lending beyond this, is not self liquidating in nature and no proper and reliable norms have
been developed in relation to medium term lendings. Most often, the tackling is on 'fire fighting' basis.
CJ (3) Profitability
It is obvious, that there is little point in a bank granting facilities which do not produce directly on indirectly some
profit to it. However, in Indian banking it has been the most talked about but least considered canon of
commercial bank lending. In most of the situations cost data relating to most of the activities is not worked out,
which makes it difficult to work out the profitability of individual decisions. The only objective which gets emphasis
is to raise the volume of business. In the absence of functional cost data it becomes impossible to work out
In these days of ever increasing overheads, the margin of profit which can be earned on advances is of paramount
importance. Interest on advances is the main revenue to meet interest on deposits and other expenses and, although
healthy competition among banks ensures that the lending rates are kept to a minimum, it would be foolish to advance
any loan at a known overall loss. The profit may be high where the risk is more, but profitability consideration has to
be moderated to ensure liquidity and safety.
Businessman who require a loan from a bank gives an applications for/loan giving details. The bank in turn will
pv^min^ th^ incm <nni;/*a+;/ f~ &~A ~.,* *u~ r~n.L-..
2. He should satisfy himself that the accommodation is required for productive purposes rather than for unproductive
or speculative purposes.
3. The banker should call for his annual accounts for a period of two or three years. A careful examination of these
accounts yields a lot of useful information bearing on the subject. Also the banker's experience with the customer
affords a helpful guide. If the customer had been punctual in the repayment of debts in the past, it will be a point in
favour of the customer. In addition, a banker, when he is approached for a loan, must look to the following :
1. Financial position of the borrower. An idea of the financial position of the borrower can be gained by an
examination of his balance sheet. The banker should therefore ask for a copy of the balance sheet of the borrower; it
should be seen that it relates to the period immediately preceding the date of application of the loan. In examining the
balance sheet, due regard must be paid to the nature of the business, the manner in which the resources stand invested
and liquidity position. The banker should supplement the information supplied by the borrower through the balance
sheet, with his own independent enquiries. He should ascertain from an enquiry from the referees named by the
borrower as to his financial position, credit standing and recent business dealings.
2. Purpose of the loan. The banker should see the purpose for which money is borrowed, for that determines the
source from which repayment may be expected. If the money is borrowed for repayment of past debts, there is no
increase in the asset position of the borrower. On the other hand, if the money is borrowed for a productive purpose,
repayment, is easier than otherwise. If the money is borrowed for tiding over a temporary deficit of cash, prompt
payment can be reasonably expected. If money is required for augmenting working capital such as purchase of raw
material, payment of wages, etc., advances can be made; in fact bankers supplement the working capital of business
concerns. But if the money is required for the acquisition of fixed assets the banker should not lend, because
investment in fixed assets cannot be got back within a short period.
3. Amount of the loan. The banker should see that the loan asked for is not unduly large, having regard to his own
resources of the borrower. He should take the precaution of not putting all eggs in the same basket; in other words, he
should lend small sums to a large number of customers rather than large sums to a small number of individuals. By
doing so, he will be distributing risk over a wide area so that the failure of a single customer does not involve him in
huge losses.
4. Period of the loan. The banker should not lend for unduly long periods since his own deposits are repayable on
demand, he cannot afford to lock up his funds for long periods. Usually, loans are granted for a period of six months,
but can be renewed. A short period loan thereby becomes a long period one.

5. Security. The banker should see what security is offered for the loan. He must take the
Calculations regarding the financial rate of return, net profit to sales, net profits to capital return of equity capital etc.,
have to be made.
Repayment capability is judged by taking into account 'interest coverage' and 'debt service coverage' ratios. In case
the profit after tax (but before interest is deducted) is three times the annual interest, the interest coverage ratio is
considered to be satisfactory.
The repayment schedule has to be fixed up. This depends on net income flows. I
The project report is prepared and submitted to the bank by the enterpreneur. The bank
will evaluate the various parameters used in formulation. In the top of it, it will consider the
managerial competence to ground the project, operate it and successfully run. ]
Managerial Competence
The managerial competence of the top management personnel is weighed by the banker. It means that the competence
of the management to manage the project will be appraised. In the ultimate analysis, the quality and competence of
the management is the factor that makes or mars the project. The loan application from competent material persons
will receive consideration for granting of a loan.
To sum up, the financial institution/bank makes project appraisal to satisfy itself regarding the following:
1. The total estimated cost of the project is based on facts and figures.
2. Estimates of operating costs are reasonable.
3. Cash flows presented during the life time of the project are reasonable.
4. The break even analysis is sound.
5. The project will generate adequate surplus/profit to repay the loan in the stipulated period.
6. There is sound competence of management personnel.
Let us illustrate the above procedure with the example of a loan proposal submitted by a borrower for purchase of a
The loan application has to provide details regarding the cost of the truck, the manufacturer's name, and other
technical specifications. The applicant has to state the purpose for which the truck is proposed to be purchased. If it is
for commercial use, that is for transporting material, the applicant has to be provide details regarding the places
between the truck operates, the estimated rent or freight charges etc. The daily running charges are to be estimated-oil
consumed, driver charges etc.
The repayment schedule together with the installment amount will be fixed by the bank. The banker has to appraise
whether the borrower can repay the loan according to the/ installments schedule.
The truck will be insured. There may be accidents and loss may arise. This will be hv an insurance oolicv. The banker
grants loan for a fixed period and will intimate


Loans and advances constitute by far the most important revenue of investment of banker's resources and are the
principal source of profit. Other sources of income such as bank commission and bank charges are comparatively
small. Banks provide accommodation to industrial and commercial establishment by discounting their bills of
exchange and by granting term loans, overdrafts and cash credits.
Advances by Indian banks generally take four forms-loans, overdrafts, and cash credits and discounting bills of
1. Loans. A loan is a type of advance made by the banker to the borrower with or without security. Under loan
system, credit is given for a definite purpose and for a predetermined period. After the loan is sanctioned, the bank
either credits accounts of the borrower or pay the amount in cash. It is given for a fixed period at a agreed rate of
interest. Repayment is made either in installments or at the expiry of a certain period. The customer has to pay interest
on the total amount even if he uses loan partially. No cheque book is issued on a loan account.
Loans may be demand loans or term loans or bridge loans.
Demand Loans. These are sanctioned against goods and documents of title of the goods, banks' own fixed deposits,
gold ornaments etc. Generally such loans are sanctioned for short periods.
Term Loans. These are the loans granted for a fixed period exceeding one year and is repayable as per schedule of
repayment. If the loan is for a period between one and five years, it is called medium term loan. If the period of the
loan exceeds five years, it is called long term loan.
Bridge Loan. As per RBI directive, a bridge loan can be sanctioned by banks for the following purposes :
(a) against public issue of equity in India for which SEBI approval is obtained.
(b) against term loan commitments of financial institutions and other banks which are
facing temporary liquidity constraints.
Bridge loans should be within five per cent of banks' incremental deposits of the previous year. The loan is against the
amount covered by underwriting. It should be ensured that 75% of the issue is underwritten by banks, financial
institutions etc.
2. Overdrafts. 'Overdraft' means allowing the customer to overdraw his account. It is allowed only to current account
holders. Unlike a loan account, an overdraft is a running account wherein the balance will be fluctuating from debit to
credit or vice-versa. Under overdraft arrangement, the customer is allowed to draw cheques upto the agreed limit over
and above the credit balance in his account. Generally, overdraft is granted for short periods.
There are two types of overdrafts-clean overdraft and secured overdraft. It is customary

tangible security such as government securities, shares, bonds, LIC policies, NSCs, Units of Mutual Funds etc.
3. Cash Credit. A cash credit is similar to an overdraft. In the case of an overdraft, the arrangement is in relation to
the customer's current account, and the customer is permitted to overdraw from his account, upto the limit agreed
upon. In the case of a cash credit, the customer continuously avails himself of the bank credit without at any time
keeping a credit balance. Usually cash credit is allowed against either a bond of credit by one or more sureties or
certain other securities. A cash credit differs from an overdraft in that it is usually a more permanent arrangement.
This is a favourite mode of borrowing by large commercial and industrial concerns in India on account of the
advantage that the whole amount need not be drawn at once, and can be drawn as and when required. Further the
borrower can put back any surplus amount which he may find with him for the time being. As in the case of an
overdraft, the banker usually provides the half-interest clause in respect of the undrawn balance. It is thus a running
account wherein a limit is sanctioned to the customer against pledge or .hypothecation of stocks. It is meant to
provide working capital funds for meeting day-to-day expenses for purchase of raw-materials, for their conversion
into finished products.
4. Discounting Bills of Exchange. The banker may also provide accommodation to the customer by discounting bills
of exchange. These trade bills generally arise out of commercial transactions.. A person selling goods may draw on
the buyer a three months bill for the amount of sale. By this, the buyer is given credit for three months and the seller,
if he so desires, can realise cash immediately by discounting the bill with the banker. In other words, a commercial
bill is the means by which the seller is enabled to sell his goods on credit and at the same time realise the sale
proceeds in cash.
A bill may be a demand bill or usance bill. When the bill is payable after a certain period, say three months, it is called
a usance bill. It may be a clean bill or documentary bill. When the relevant trade documents such as a bill of lading or
railway receipt, insurance policy, invoice, etc., are attached to the bill it is called a documentary bill. The bill may be
drawn on against acceptance or payment. When the dqcuments attached to a bill are to be delivered to the purchaser
of goods when it is accepted, it is called a D/A bill. On the other hand, when the document is to be delivered only if
payment is made it is called a D/P bill. When the bill is not accompanied by the relevant trade documents it is called a
clean bill. Sometimes a bill is drawn not on the basis of any trade transaction, but with a view of mutual
accommodation of the parties. In that case it is called as accommodation bill. An accommodation bill is not self
liquidating, because there is no trade transaction as its basis. Therefore, the banker does not usually lend on the basis
of such a bill.