MODULE 4
Paying and Collecting Banker
Paying Banker
• The relationship between a banker and a customer is primarily that of
debtor and creditor
• When a bank accepts the deposits from a customer, it becomes the
debtor of the customer
• Bound to return to the customer on his order or on demand.
• It is the obligation of the bank to honour the cheques issued by the
customer if the following conditions are fulfilled:
(a) there is sufficient balance in the account of the customer;
(b) the cheque is properly drawn and presented; and
(c) there is no legal restriction on payment.
Meaning – paying Banker
The banker who is liable to pay the value of a cheque of a customer as
per the contract, when the amount is due from him to the customer is
called “Paying Banker” or “Drawee Bank.”
The payment to be made by him has arisen due to the contractual
obligation.
He is also called drawee bank as the cheque is drawn on him.
Precautions to be taken by Paying Banker
1. Proper Form
2. Open or Crossed Cheque
3. Place of Presentment of Cheque
4. Date of the Cheque
5. Mutilated Cheque
6. Words and Figures
7. Alterations and Overwritings
8. Proper Endorsements
9. Sufficiency of Funds
10. Verification of Drawer’s Signature
Dishonour of Cheques
1. When the Customer Countermands/cancels the Payment
2. Notice of the Customer’s Death
3. Notice of Customer’s Insanity
4. Notice of the Customer’s Insolvency
5. Receipt of the Garnishee Order
6. Notice of Assignment
7. Trust Accounts
8. Suspicion about the Title over the Cheque
A banker may also dishonour a cheque without incurring any liability in
the following cases:
1. Post-dated Cheques
2. Insufficiency of Funds
3. Presentation of Cheque
4. Joint Accounts
5. Material Alterations
6. Stale Cheques
7. Drawer’s Signature
8. Difference between Words and Figures
9. Endorsement
10. Proper Form of the Cheque
Bank’s Replies / Remarks on Dishonoured
Cheques
R.D.
N.S.
E.I.
E.N.C.
D.D.
W & FD
Bank’s Replies / Remarks on Dishonoured
Cheques
R.D. (Refer to Drawer)
N.S. (Not sufficient), N.E. (No. Effects)
E.I. (Endorsement Irregular)
E.N.C. (Effect is not cleared)
D.D. - “ Drawer Deceased”
W & FD - “Words and Figures Differ”
Protection Available Under the Negotiable
Instruments Act
1. Protection in Case of Bearer Cheque.
2. Protection in Case of Order Cheque.
3. Protection in Case of Crossed Cheque.
4. Protection in Case of Obliterated Cheque.
5. Protection in Case of Drafts.
Protection in Case of Bearer Cheque.
Payment of bearer cheque Section -85(2) of [Link] provides that
The above section specifies that a cheque which is ‘once a bearer is always bearer’ (which means if a cheque
is originally drawn as a bearer cheque remains always bearer irrespective of any endorsements on the back
of the instrument). Therefore banks are not required to verify the regularity of the endorsement on the back
of the cheque if any and they are protected from liability if they have made payment of an uncrossed bearer
cheque to a bearer in due course.
Protection in Case of Order Cheque.
Payment of order cheque Section -85(1) of [Link] 1881 provides that
“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”
The above section provides protection to paying banker if he has made payment of an order cheque
in due course (within the meaning of sec.10 of [Link].) and if the proceeds credited to the account
of an endorsee if and only if the endorsement is regular.
Protection in Case of Crossed Cheque.
Payment of ‘Crossed cheque’ Section -[Link] [Link] 1881 provides that “Where the banker
on whom a crossed cheque is drawn has paid the same in due course, the banker paying the 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 if the amount of the cheque had been paid to and
received by the true owner thereof”.
The paying banker of a crossed cheque shall satisfy the following condition to be eligible for
protection under related NI acts.
1. Payment shall be made in due course.
2. Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise
than to a banker.
3. Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise
than to the banker to whom it is crossed or his agent for collection.
In following cases paying banker does not get statutory protections if he makes the
payment of a cheque;
a) Materially altered or signature of the drawer is forged or payment made of a
crossed cheque with an irregular endorsement. b) Makes payment of a crossed
cheque to a person otherwise than to the banker then he is liable for the loss to the
true owner of the cheque.
• Protection in Case of Order Cheque: In case the payment is made to a
person other than the payee, the paying banker does not get any
protection under the Negotiable Instruments Act.
• If the endorsement is regular and payment is made in due course, the
paying banker gets the protection under Section 85 (1) of the
Negotiable Instruments Act, 1881.
• In case, payment is made to a wrong person whose signature is not
according to specimen signature, the protection is given to a banker
under Section 16 (2) of the Negotiable Instruments Act : “It is not
possible for a banker to know each of the endorsers and their
signatures.”
For getting the protection, the banker should note the following:
(a) Regular Endorsement: According to Section 85 (1) of the Act the
endorsement should be regular. For example, if a cheque is payable to a
right person and signature is bearing same name and the same spellings
this is known as regular endorsement. Though this is not a valid
endorsement.
(b) Payment in Due Course: According to Section 10 of the Act the cheque
should be paid in due course. In case the payment is made on forged
signature of the endorser and not that of the drawer, the banker gets
statutory protection under Section 10 of the Act. 3.
"Payment in due course" means payment in accordance with the apparent
tenor of the instrument in good faith
Collecting Banker
Meaning
Collecting banker means the banker who collects the cheques and
bills on behalf of the customers. In other words, every crossed
cheque is necessarily to be collected through any bank, which is
known as collecting banker.
While collecting the cheques of a customer, the banker may act in
the capacity of either
(a) as a holder for value, or
(b) as an agent of the customer.
Conversion by collecting bankers
• According to Dictionary of Banking, “Conversion is a legal term signifying
wrongful interference with another person’s property inconsistent with
another’s right of possession.”
• Conversion applies only to tangible property and not to debts.
• Negotiable Instruments are included in the term ‘property’.
• The collecting banker may be charged for conversion if he collects a cheque
for a customer having defective title to it.
• The collecting banker while collecting the payment of a cheque to which his
customer has defective title, deprives the true owner of the cheque to
receive payment. So he incurs a liability to the true owner of the cheque.
• The principle which is applied here is that a rightful owner of the cheque
can recover the same from anyone who takes it without his authority and in
whose hands it can be traced.
In the following cases, the banker is liable for conversion to the true
owner :
(a) when he collects a cheque, a bill of exchange, or a promissory note
bearing a forged endorsement or in respect of which the customer
has no title at all;
(b) when he borrows for his customer the proceeds of a cheque on
which the customer has no title or only defective title;
(c) when he takes as holder for value, a cheque marked ‘not
negotiable; and
(d) when he delivers to the wrong person the goods entrusted with
him for safe custody.
In the following cases, the banker is not liable for conversion to the
true owner of a cheque:
(a) Where there is no forgery and the instrument comes into the hands
of the holder in due course; and
(b) Where there is forgery and the instrument is a cheque, payment
whereon has been made in due course by the banker.
Duties and Responsibilities of a Collecting
Banker
1. Due care and diligence in the collection of cheque
2. Serving notice of dishonour
3. Agent for collection
4. Remittance of proceeds to the customer
5. Collection of bill of exchange