COLLATERAL OR SECURITY
Very easy definition of Collateral or Security as “Something to fall back upon”
This means that when banker provides loans or other financing facility, the banker
need some tangible or intangible to be provided by the borrower to secure it, and if
that loan or facility is not adjusted than banker may adjust them by disposing those
tangibles and intangibles.
Those tangibles and intangibles in brief are:
Land and Building (Tangible)
Plant and Machinery (Tangible)
Stocks and inventories (Tangible)
Guarantees and Bonds (Intangible)
Deposit certificates, Credit balances in accounts. (Tangible)
Bills of exchange and promissory notes (Intangible)
(In above stated categories there are some items where it should be better that
banker must take a letter of intent that the security has been willfully provided by
the borrower and it could prove that the borrower has provided them under
“Banker Customer Relations”)
Qualities of a Good Security:
1. Preferably it should be tangible
2. The owner should have absolute title
3. The ownership not be undivided or disputed
4. If ownership rests with third party then the intention of third party must be
5. Its market and forced sale price can be ascertained/known
6. It should have demand in market
7. Its price should not be subject to drastic change
8. It should not pertain to fashion or season
9. It should be easily saleable
10.It should not be contra banned item
11.It should not be perishable
12.If it is agricultural crop, it must be of current season and loan/finance must
be adjusted before next season
13.Consumer loans are given without any tangible or intangible but only and
only on repayment capacity of the borrower. For salaried persons on the
basis of salary and for small and medium class business, the base is turn
over appearing in statement of account. In this situation the most important
thing is re-verification of the information
14.In case of finance against receivable or sale proceeds, proper recovery of
sale proceeds must be done
RIGHTS AND DUTIES OF BANKER
Under Banker Customer relations there are some rights of bankers towards their
customers and they have to abide by the duties those are legally to be performed by
them. Similarly there are some rights and duties of customers too.
These rights and duties would be discussed in detail in our coming sessions, but
now we would start with one of the most important right of banker and this right is
known as Right to lien.
Right to lien. Lien is the right to retain the property belonging to another until the
debt due from the latter has been paid. According to section 171 of contract act,
1872, a banker’s general lien is of peculiar type, for it extends to all the securities
placed with him by his customer.
The following conditions must be fulfilled before exercising this right:
1. The property of customer must come into the hands of banker as banker of
2. There should not be any entrustment for special purpose.
3. Banker should obtain possession lawfully.
4. There should be no agreement inconsistent with the right of lien.
Following are subject to banker’s lien, and as a matter of practice the bank
obtains letter of lien duly signed by the customer when loans or such facilities
are given to them against these;
1. Bills cheques and documents for collection.
2. Bearer bonds and coupons which are left for collection.
3. Coupons only where bond is in safe custody.
4. Promissory notes, bills of exchange, treasury bills.
5. Securities left after adjustment of an advance or loan.
6. Dividend warrants.
7. Share certificates purchased by the bank for the customer.
Following are not subject to lien:
1. Property of third party, where that third party has not given consent.
2. Bills of exchange and other securities deposited for a specific purpose.
3. On credit balance in respect of contingent libility.
4. Over articles or deposits left for safe custody.
5. Over securities for sale.
FORMS OF SECURITY/COLLATERAL
Securities are of following types:
Tangible: those have physical existence; can be seen touched and felt.
Intangible: those do not have physical existence; cannot be seen touched of felt.
Tangibles are: land building, machinery, plants, goods, stocks, inventories
Intangibles are: Guarantee and Indemnity.
Further more tangibles have been subdivided into moveable and immovable.
Land and Building are immovable. Immovable property cannot go in the custody
or possession of lender, it remains with the borrower but the lender’s charge is
created by keeping it with the borrower.
Plant, Machinery and Vehicles are moveable, but if used for running the business
are supposed to be immovable to the extent that it cannot be given physically in the
custody and possession of lender. But if some one is not using them for the running
of business but is used as trading item only then it can be assumed as movable and
can be given in the custody of lender.
So Plant, Machinery installed in a Project and there are vehicles used to support the
business cannot be kept in the custody of lender but would remain in the custody of
If someone is trading for the same plant, machinery and vehicle as a product and
deals in selling and buying for those; it can be termed as moveable and would be in
the custody of lender for the sake of security.
In brief, Land and building are subject to be in the possession of borrower, but
plant, machinery and vehicles may or may not be in the possession of borrower,
depending upon above stated circumstances. Under these situations following are
the forms of Collateral/Security>
This is the form where the moveable tangibles are in the custody and possession of
lender, and lender keeps them under his lock and key with proper guard and secure
arrangements so that borrower cannot have his access to these items unless and
until the loan against the is not adjusted. These items could be kept in bank
premises, rented godown or in the premises of borrower where bank would have
own lock and key with proper guard and secure arrangements.
In most of the cases the pledged items are raw material, unfurnished goods,
furnished goods, stocks and inventories. Since these items are for the trading itself
and borrower has to trade with them so they are kept for a temporary period, and
can be termed as security for short term financing and not for a longer period. In
other words currents assets are the items of pledge. These goods are insured for all
possible risks depending upon the nature of goods and risks involved. All expenses
for rent of premises, guard’s salary and insurance premium is paid by the borrower.
For borrower point of view, such security is availed for their short term financing
known as working capital.
The borrower cannot have access to them nor sell them unless the facility is
This is the form where the security is moveable and it remains in the custody of
borrower, but bank has got legal charge on them, meaning by that in case of default
by the borrower bank can take possession of them and can dispose them to adjust
the loan/facility provided.
Under hypothecation there are two situations:
1. Property remains in the custody of borrower; he can use it but cannot sell it.
It happens in the case where financing is given against plant, machinery and
vehicles (Under current consumer financing).
2. Property remains in the custody of borrower and he can sell it also, with the
condition that the over all value of those items should not decrease than the
value declared at the time of taking loan. For example if a departmental
store has been granted loan against the hypothecated goods worth Rs. 10
million, and items include: fabrics, garments, grocery, cutlery, shoes,
electronic items etc, than borrower is free to sell them, but also responsible
to replace the sold items to match the value of these items worth Rs.10
These items are also insured at the cost of borrower.
Where banker charge is created against immovable property, whereby the
borrower can use it but cannot sell it is termed as mortgage. Land and Building
could be the example. Banker creates its charge in a way that in case of default
from the borrower bank can have access to the property and can adjust the loan
by selling that property. In any case borrower cannot sell it without getting
clearance from the bank.
Mortgage could be commercial and non-commercial. If an enterprise borrows
against land and building being used for business or the funds are utilized for
running business, it is termed as commercial mortgage. On the other hand if
some one avails loan for buying land or for constructing house for his personal
use and that land or building has been mortgaged as security it would be
FORMS OF SECURITY/COLLATERAL (Contd)
Lien on Accounts
Another form of security is that borrower provides the banker to mark lien on the
accounts in the bank; those could either be his own but of third party.
The Accounts being maintained are:
Saving Bank Account
Notice Deposit Account
Term deposit or fixed deposit Account
Foreign Currency Accounts; and those are also in the shape of current,
saving or fixed deposit accounts.
(Just for the knowledge of students, it is being informed that in Pakistan Foreign
Currency Accounts can be maintained in Japanese yen, Great Britain Pound, US
Dollar and Euro. Deposit in these accounts must be in foreign currency but
withdrawal can be done both in foreign and local currency depending upon the
choice of customer. Further more deposit of funds in these accounts could be either
by cash or through Cheque.)
Sometime customer offers his balance of his account as security; and bank accepts
it by marking lien on those accounts. In case of current or saving account the
amount offered as security is blocked by the bank and customer would not be
allowed to withdraw to that extent. In case of Notice deposit or term/fixed deposit
the original receipt or certificate is given to the bank and bank keeps it under the
custody until the repayment or adjustment of loan.
Same is the case with foreign currency accounts. Customer would either allow the
bank to block his current or saving account to the extent of the money offered as
security, or would surrender his fixed deposit certificate with the bank to remain
under the custody of bank till the adjustment of loan.
In these entire situations if the customer fails to repay the loan; bank would debit
his account if it is current or saving and if it fixed deposit the bank would en cash
that certificate, adjust the loan and if there is any remaining balance it would be
given to the customer.
Another thing to be noted is that customer would continue to receive the agreed
profit on that deposit and is bound to pay Interest/Mark up on the finance/loan
For further clarification of the students following illustrations are given:
A customer is having is his current account which is his business account and also
has deposited Rs.500, 000/- with the bank in the shape of fixed deposit for ten
years and is availing profit of 12% per annum. To meet his short term commitment
he needs Rs. 100, 000/-. He has got two options; first to get his fixed deposit to get
it encashed, but would loose rate of profit as five are remaining to mature, or the
second option is to request the bank to lend him loan of Rs. 100,000/- for a period
of one month and as security would surrender that fixed deposit certificate to the
bank so that bank may keep it as security. Second option is beneficial for him and
he would surrender it to the bank. The bank would allow him loan and it would be
the most secured loan as the money is already with the bank in the shape of fixed
deposit. In this position both of them have advantages; for customer the interest or
mark-up paid on Rs. 100,000/- would be much lesser than the loss, had he got it en
cashed before maturity. For the bank it is good that it would not loose deposit and
would further earn on loan of Rs.100, 000/- which is secured in all respect. (This
illustration is given for a small amount but practically it could be in millions.)
Another illustration is Lien of Foreign currency account. The situation is that
customer has got EUR 100,000/-(which is almost equivalent to Rs.8 million) with
the bank, and needs Rs. 2 million for a period of six months to meet his business
commitments or other wise. For him the first option is to withdraw from his
foreign currency account and meet his needs; but he feels that the rate would Euro
would rise in future and within next six months its local value might rise to Rs. 8.2
million, and does not want to loose the gain due to exchange rate rise. Customer
would like to go for next option and which is that he should borrow Rs. 2 million
from the bank by allowing the bank to mark lien in his account to the extent of Rs.
2 million ( Equal to Foreign Currency).
The customer would be financed but his foreign currency account would be
blocked to the extent of Euro 25000/-.
We have now come to know that what collateral/ security and why it is taken by
the bank or why offered by the borrower. But the question lies that to what extent a
bank can allow to borrow against a security. Meaning by that if the value of
security is Rs. 5.million can a bank allow loan for Rs. 5 million or less and if less
than how much less, and what would we call the difference of between the value of
security offered and why that difference is maintained?
One thing is for sure that bank would never allow a customer to avail loan either
more than the value of security or even equal to the value of security.
For example the value of security is Rs.5 million; bank would not allow loan for
Rs. 5 million or more against the same security. Bank must allow below Rs. 5
million; either 4 million 3 million or 2 million.
So there is difference between the value of security and amount of loan that can be
availed. The amount of loan that can be availed against a specific security is
termed as Drawing Power of the borrower. It means that how much power has
borrower got to draw loan against specific security, and what would we term the
difference between the value of security and amount of loan (drawing power). The
term is known as margin.
We can say that difference between value of security and drawing power is
termed as “Margin”
Value of Security 10 million
Drawing Power 7 million
Difference is 3 million (it is known as margin)
Value of Security 500,000
Drawing Power 400,000
Value of Security 500,000
Drawing Power 250,000
In first situation the margin amount is 3 million; which is 30% of value of security,
in second situation the value of margin is 100,000/- which is 20% of the value of
security, and in last case the value of margin is 250,000/- which is 50% of value of
So question arises that why there is variation in the value or percentage of margin
and why this margin is retained. Its simple answer is that it depends upon the
nature of security. If the nature of security is such that it holds all the qualities of
goods security the lesser would be the margin, and if the security is very week and
does not hold qualities of good security the higher would be the margin.
Margin is retained so that the loan could be secured in a way that if the security is
to be sold it must have so much value that it could adjust the loan and expenses to
Here under the first situation where the margin is 30% it might be inventories
having risk of loosing price to the extent of 30%. Under second situation the
security could be land or building which might loose price not above 20% and
under the last situation where the loan amount and margin amount is 50% the
security is very week and might be agricultural crop which might get destroyed if
The amount or value which the borrower is allowed to avail against a security is
termed as drawing power or DP.
It very simple definition is:
Difference between value of security and margin is drawing power. In the above
stated situations the drawing power is:
Value of Security 10 million
Margin 3 million
Drawing Power 7 million
Value of security 500,000
Drawing Power 400,000
Value of Security 500,000
Drawing Power 250,000
FORMS OF FINANCING
Basically we have two forms:
Fund Based: Here the banker provides finance by involving their funds
physically. Or we can say under fund based financing banks funds are involved in
a way that it has to part from their funds and those are at disposal of borrower(s).
Types of fund based financing:
Loan Name in Pakistan. (Demand Finance)
Overdraft. Name in Pakistan (Cash Finance)
Bill Purchased and discounted.
Consortium Loans or Financing
Loan or Demand Finance;
It is the form under which the entire sanctioned/approved finance amount is
credited in the account of borrower. The total funds are put at his disposal by
crediting his account. Its accounting entry is;
Debit Loan or Demand Finance Account
Credit Customer’s Current Account
Following are its characteristics;
Entire amount is credited or given to the borrower in lump sum.
The loaned amount is adjusted in equal and periodic installments
In most of the cases this financing is termed as long term financing’ and
borrower shows it as long term liability in has financial papers; Balance
The collateral/security in most of the cases is fixed Assets.
This finance is mostly used by the borrower for the purchase of fixed assets;
land, building or Plant and Machinery.
The amount adjusted in this type of financing cannot be re-availed under the
same loan. Either it is re-structured or a fresh loan is granted.
Here is illustration;
Demand Finance Account;
Date Debit Credit Balance
01.01.07 500,000. (500,000)
31.31.07 50,000 (450,000)
30.06.07 50,000 (400,000)
30.09.07 50,000 (350,000)
31.12.07 50,000 (300,000)
Here loan was debited with Rs. 500,000/- and was adjusted with installments of
Rs.50, 000/- per quarter (three months). Amount in bracket indicates debit balance.
Overdraft or Cash Finance;
Under this form of financing a limit is approved in favour of borrower; and he is
allowed to overdraw his account within that limit. The entire approved amount
may be utilized in single day or as much as he needs in peace meals. Suppose a
customer has got approved facility for Rs. 500,000/- under Cash Finance; at the
time of approval of this type of facility Rs. 500,000/- would not be given to him
nor credited to his account, but he would be allowed to overdrawn his account for
Rs. 500,000/-. This facility is unlike demand finance is on revolving basis. It
means that the amount once availed and adjusted can be re-availed multiple times.
Here is illustration:
Cash Finance Account. (Facility was allowed/approved on Jan.01.2007. and on
that date there were Rs. 50,000/- his own balance in his account)
Date Debit Credit Balance
01.01.07 50,000 His own balance
01.01.07 75,000 (25,000) Account overdrawn by 25000
15.01.07 175,000 (200,000) Account overdrawn by 200,000
17.01.07 100,000 (100,000) Account overdrawn by 100,000
02.02.07 150,000 50,000 His own balance
27.02.07 250,000 (200,000) Account overdrawn by 200,000
04.03.07 150,000 (350,000) Account overdrawn by 350,000
06.03.07 150,000 (500,000) Account overdrawn by total limit
22.03.07 300,000 (200,000) Account overdrawn by 200,000
02.04.07 400,000 200,000 His own balance
20.04.07 300,000 (100,000) Account overdrawn by 100,000
In this illustration it has been noted that this type of finance is running finance and
is operated like a current account; sometime credit balance (his own money) and
sometime debit balance; account overdrawn. Also it shows that twice the facility
was adjusted and again re-availed.
If a customer deposits a cheque in his account which is drawn on other bank and
usually out of city and country and account holder needs to be financed against that
cheque so that later on bank may adjust after that cheque is credited; the finance
thus made is known as finance against bill purchased. Here bill means cheque.
Sometime customer has got post dated cheque/cheques; those are payable on future
date and needs funds currently. He would deposit those cheques to the bank and
bank would pay him by creating finance and also would charge Interest/Mark up
for the remaining period; this finance is termed as finance against bill discounted.
It is a short term financing and is for a temporary period. The term can be well
understood with the term bridge, as bridge means a link between two ends. This
type of financing maintains a link between current financing which is to be
adjusted with immediate expectation of funds.
A person wants to buy a house and he intends to buy after selling his house where
he is residing presently. One option is to sell his house first and then buy new one.
But in this situation he would not have any house to reside. If he contacts banker
for a very short term and temporary loan whereby the banker would lend him to
buy new house first, would shift there and would sell his house and adjust the loan
taken from the bank.
Another illustration is about corporate body (Public Limited Company) which
would start its business after getting funds in shape of share subscription. Before
the shares are offered and subscribed company need funds to establish office and to
meet preliminary expenses. Such expenses are met from the funds borrowed from
the banker for a short and temporary period; and those would be adjusted as soon
as funds are received in shape of share subscription.
But one thing is clear that while allowing bridge financing the lending bank are
sure for the receipt of funds for its adjustment.
In case of bridge financing allowed for purchase of house, banker gets authority to
get the sale proceed of house. In case of allowing financing to corporate body the
bank which lends to the company underwrites or we can say gets authority to get
the funds in the shape of subscription of share.
It is joint financing by two or more financial institution. If a heavy project where
huge financing is needed that cannot be met by single institution then two or more
financial institution gets together and share their lending. In simple words when
more than one lending institution is involved in lending to a person or project the
financing is termed as consortium financing.
On International level when group of countries are lending loan to a country for its
development; it is also consortium financing.
Non-Fund Based: Here banker’s funds are not involved but there is commitment
or undertaking given by it on behalf of its customer. At any stage it might or might
not be converted into fund based financing.
In this respect presently we must only know that following are non-fund based
Letter of credit
Letter of guarantee
It is defined as “A contract to perform the promise, or discharge liability of a third
person in case of his default” A guarantee may be written or oral. Therefore a
guarantee is a promise or undertaking whereby one person promises another person
to discharge the liabilities pf a third person in case the third person fails to perform.
There are three persons or parties.
1. Guarantor; A person who gives guarantee or undertakes the responsibility.
He is also known as surety.
2. Creditor; a person to whom guarantee is given.
3. Principal debtor; a person on whose behalf guarantee is issued.
Suppose Ameen needs to borrow money from Bashir, but Bashir is hesitant to lend
him foreseeing that he might not return money back. He may ask Bashir to provide
guarantee from some one that in case Bashir does not return then he could get
money from the guarantor. Now if Dawood guarantees Ameen that in case Bashir
does not pay back money, then he would pay it to Bashir.
This is the process of guarantee. Here The Guarantee is being given by Dawood; so
he is guarantor. Guarantee is being given to Bashir; so he is creditor, and the
person on whose behalf guarantee is being given is Ameen; and he is Principal
In all the cases under guarantee; the main and primary responsibility lies with the
person on whose behalf guarantee is given i.e. principal debtor, and responsibility
of guarantor begins where principal debtor fails to perform. In the above case to
return money is primary responsibility of Ameen, and Dawood will only be
responsible to pay to Bashir, when Ameen becomes defaulter. So Bashir would
first ask Ameen to pay back money, and when Ameen refuses to pay, then Bashir
would go to Dawood and Dawood is bound to pay to Bashir.
Above stated example pertains to promise to perform the liability related to
transaction or dealing of money, but practically there are other undertakings also
and those are related to commercial trading and transactions.
Illustration related to other dealing can be done that Police department needs
uniforms for its 50,000/- staff. It would give add in the newspaper so that the
suppliers could offer their rates for the supply of uniforms. The purpose of asking
rates from various suppliers is to get those uniforms at the most competitive price.
Various suppliers would offer their rates and the supplier bidding the minimum
rates would win the tender and would get into an agreement with the police
department to supply them the uniforms not only on the rates quoted, but also of
the quality and quantity within the specified period of time.
Before entering into an agreement Police department would ask the supplier to
provide a bank guarantee; that in case he fails to perform the supply of uniform
as per specified quality and quantity and within the agreed date then they may seek
for the compensation from the guarantor bank. The important thing to be noted
here is that would not undertake to supply uniform but to make payment to the
Police department as agreed in guarantee.
TYPES OF BANK GUARANTEE
Payment Guarantee; In such guarantee bank undertakes to pay money to the
Creditor in case the principal debtor fails to pay money. Here the real dealing is
related to payment of money and not any other commercial dealing.
Example; Shahid is borrowing money from Habib Bank, and United Bank
guarantees Habib Bank that in case Shahid fails to pay money, United Bank would
pay it to Habib Bank.
Example; Adeel has applied for electricity connection of his factory. The
connection of factory would be commercial and would result the bill to the extent
of millions of rupees. Wapda would ask Adeel to provide a bank guarantee from
United Bank that in case the bill is not paid by him, bank must guarantee to make
the bill. Such types of guarantees are very common in our country. Same happens
in case connections of Sui Gas and other utilities.
Bid Bond Guarantee; When some one bid a tender to buy, supply or build any
building in that situation the person who wants to sell, get supplies or want to get
the building constructed; he would need a bank guarantee that in case the bid is
accepted the bidder would enter into agreement and would not escape after the bid
has been accepted.
Performance Guarantee; This guarantee is issued by the bank that the person
entering into contract for supplying goods or construction of any building (building
does not mean any house, it could be hospital, school, plaza, road, bridge or dam)
would act according to the contract in terms of quality, quantity or time period. In
case the person on whose behalf guarantee is issued fails to perform; the bank
issued guarantee would compensate the party to whom the guarantee is issued.
TYPES OF BANK ACCOUNTS
Current Account not operative for six months and Saving Bank Account not
operative for one year is separated as “Dormant Account” These accounts become
dormant from the last date of transaction; whether deposit or withdrawal. A
separate ledger is maintained for such accounts; each for Current and Saving.
When account is segregated as dormant it is not operative in normal manner.
Since such accounts are away from the customer it is separated from other
accounts only to keep them protected from any fraud or loss to the customer.
Following requirements are to be fulfilled;
Any one can deposit money in this account, but if deposited by any one else
it does not become operative but remains dormant.
For withdrawal, customer himself or herself has to come to branch with
some identity, usually NIC, plus any account holder or staff member
confirms that the customer is known to them.
Additional care is taken while making payment from this account and for
this purpose payment will be made with joint supervision.
They have to give an application to the banker in writing if needs to convert
such account from dormant to operative account.
Current account not operative for 02 years and saving account not operative for 03
years are declared as “Inoperative Account” This period is also calculated from
the date of last transaction. It means that a current account not in operation for six
months first becomes dormant and if it continues to remain dormant for 2 years
and six months it is converted into inoperative account. Similarly saving account
not in operation for one year would become dormant and if remains dormant for
further 02 years would be converted into inoperative account.
Precautionary measure to operate these accounts is same as are applicable for
dormant account, but the difference is that extra care is taken at the time of
withdrawal and converting them into operative accounts.
(The period may vary from bank to bank but it is considered as standard period in
most of the banks)
In Pakistan it is compulsory for every bank to surrender balances of every type of
accounts where there is not any operation for the last 10 years; declaring them as
unclaimed deposits. It includes balances of current accounts, saving accounts, term
and fixed deposits. These balances are surrendered to State Bank of Pakistan with
complete information of the account and account holders.
These balances also include funds lying with the bank in any sector of account or
deposit where no one has claimed them for the last 10 years. Other balances
include funds not clamed under demand draft, payment order, security deposit
receipt or any such type of accounts.
In case of Individual and Joint account either current, saving or fixed deposit;
when account holder or any of the account holder dies the account becomes
How account is marked as Deceased Account:
When banker comes to know from any authentic source of news that account
holder has died; it becomes the duty of banker to declare and mark that account as
deceased account. Here the important thing is that banker would mark it as
deceased only after receiving information from any authentic source or by the legal
heirs of the deceased. Information may come from any known person of account
holder, printed or electronic media, even in small villages such information might
comes from the loud speaker of mosque, but important thing is to confirm and
It is very much possible that the account holder might have died long ago and
banker has not come to know about it, nor any of the legal heirs has contacted the
bank to inform; so the account would be declared dormant on the date when banker
has come to know about the death of account holder.
As soon as information is received changes are made in the system in such a way
that amount is blocked and information is noted on account opening form about the
date and time of information received and also source is noted. In case the
information has been brought by the legal heirs, than it must be in written form and
is kept as record.
What happens when account is marked as “Deceased?”
Money can be deposited
There cannot be any withdrawal, other than bank’s charges or any loan
outstanding against the deceased person
All cheques issued prior to marking of account cannot be honoured
All instructions given by the deceased will be revoked or cancelled forth
Balance would be paid to legal heirs only and that too after they submit
succession certificate from the court of law.
Every bank has set procedure for payment of balances to the legal heirs, but
one thing is common and it is submission of succession certificate and death
As stated above the account would be declared deceased only when bank comes to
know about it; so it is possible that account holder might have died earlier and
banker not knowing it could honour and pay the cheques issued by him or her; in
that case banker would not be held for any loss or violation.
In case of other accounts, such as Joint account or partnership account; the account
would be closed and balance would be paid as instructions contained in account
opening form, but the account would be closed and new account might open if the
remaining persons intend so.
If deceased is one of the signatories in Corporate account, like Limited Company
than account would not be closed but cheque signed by him would not be honoured
and another person would be authorized by the corporate body to operate account .
Illiterate Person’s Account
Any person who cannot sign a firm signature is illiterate person for a banker.
Usually the people are those who cannot sign at all and if sign is in such a raw
position that it can be copied or forged by any one very easily. There can be
situation that a person is highly qualified but for medical reason cannot draw firm
signature or a person who has not seen the gate of school but signs a firm signature
which cannot be easily copied; so the earlier one is illiterate for banker and later
In brief a person who cannot sign or sign in such a way that it can be easily copied
by any one is considered as an illiterate person and accounts pertaining to them are
known as “Illiterate Person’s Account” These accounts are opened and operated
with different way as compared to the person’s account those are not considered as
Requirements to open account
At the time of opening account, account holder has to provide his 02 photographs,
as one has to be attached with account opening form and other with specimen
Places where signature is to be done, there the account holder would affix thumb
impressions. Male would affix left thumb impression and female would affix right
Operation in this account
Any one can deposit funds or cheque in this account
For withdrawal account holder must come himself of herself in the bank
She or he would come to the bank must affix thumb impression in the
presence of officer making payment. If thumb impression is affixed before
coming to bank and not in presence of paying officer; banker may refuse to
pay the cheque.
This account holder cannot issue and give cheque to any other person.
The cheque of this account holder cannot be honoured in clearing or
collection as no one else can get the payment other than account holder.
PURDAH NASHIN ILLITERATE WOMEN
For the reason that she would not provide her photograph, she cannot open account
with bank. She can open Joint account authorizing some one else to operate the
In Pakistan a person not attaining the age of 18 is minor. Person with age of 18 and
above is major.
Minor, if signs a firm signature can open a bank account. But bank usually avoid to
open their account, for the reason that opening of account means entering into a
contract with the account holder and contract acts says that “Contract with a minor
is void” But banker may open saving bank account or fixed deposit account of
minor as in these accounts chances of banker is least and minimum.
Other way is that a major known as “Guardian” opens account in the name of
minor, but the opening of account and operation is done by major. Only name of
minor is used as account holder.
In this case any person known as major can open account in the name of minor;
male or female (obviously his or her age must be below 18).
The title of account would be;
Master Zubair Minor
Mr. Shahid Guardian
(Both names would appear in account opening form in the same manner)
This account will be totally operated by the person Mr. Shahid known as guardian
but the owner of the balances in the eyes of law would be Zubair, the minor.
The purpose of maintaining such account is to give legal right of succession to the
minor in case of death of Major.
If Shahid opens his account in his name and he dies, in this case the balance would
be given to the heirs as per “Sharia” but if he opens an account in the name of any
of his son or daughter, naming him or her as MINOR, then the total sum would be
paid to the minor.
When an account is opened in the name of person known as minor, he or she
would be entitled to operate that account after attaining the age of 21 and not 18.
When two or more person open one account jointly, and it is non-commercial or
not pertaining to business the account is known as “Joint Account”
If any business or commercial account is opened by two or more person, it is not
termed as joint account but “Partnership Account”
When joint account is opened, all the account holders would sign account opening
form, but its operation depends on the instructions given by all jointly.
Usually such account is maintained within the family members as; husband and
wife, father and son or daughter, mother and son or daughter, father with mother
and daughter or mother with son and daughter. But it can be opened by two or
more friends or acquaintances also.
This account can be operated by any one, two of them or by all of them, but the
condition is that such instructions must be given by all of the accounts holders
jointly either at the opening of account. The operational instructions can be
changed or revoked even after opening of account any time in future but conditions
rests that all of them would write to the banker jointly.
Accounts of Private and Public Limited Companies are termed as corporate
These are routine accounts and are basically current accounts and are operated like
any other regular current account, but the difference lies that they have to provide
some additional documents before opening the account.
Requirement for Corporate accounts
In addition to account opening form they have to provide the followings
1. Memorandum of Association
2. Articles of Association
3. Certificate of Incorporation
4. Certificate of Commencement of business
5. Resolution from board of directors
6. Last years balance sheet or projected financial statements
For Private limited companies, they need not to provide letter of
commencement of business.
Memorandum of Association
It is charter of company stating name, address, nature and scope of business.
Articles of Association
It contains rules, laws, salaries and authorities of directors.
Certificate Of Incorporation
It is permission letter from Corporate Law authority to confirm that the company
has been legally established.
Certificate Of Commencement Of Business
It is permission from Corporate law Authority to start business, and it is given by
them when the company gets subscription from the share holder. This is not
needed in case of Private Limited Company.
Resolution From Board Of Directors
In this resolution board of directors resolve and confirm that they can open account
with the one or more banker. Unless resolution is passed by the board of directors
that ay which bank they intend to open account, directors are not authorized to
open or operate account.
Last Year Balance Sheet Or Projected Financial Statements
It is mandatory for every banker to know and maintain the maximum information
about source and utilization of funds of account holders. The term is known as
KYC “KNOW YOUR CUSTOMER” and it can be known by the financial
documents of the corporate body and the best available one is Balance Sheet or
Projected financial documents.
Banker Customer Relations
Before we come to Banker Customer Relation, we must know about Banker and
Banker is a legal person who accepts deposit from one customer and lends it to
another customer. The customer depositing money is known as depositor and
person to whom bank lends is called borrower. Banker pays to the depositor and
earns from borrower. What banker pays to depositor is known as Profit and what
earns from borrower is mostly Mark-up (In Pakistan). Rate of mark-up is always
much higher than the rate of profit, and the difference of this mark-up and profit is
spread or Profit of the bank.
A person who maintains his account is customer. Irrespective of the fact that the
person is maintaining Current, Saving, Term and Fixed Deposit and whether
maintains heavy or petty deposit all are equal and respectable as customer of bank.
Person who borrows money from the banker is also customer. It is very obvious
that banker would not lend to any person who is does not maintain any account
Most of the bank’s product and services are for its customer; but there are services
those are provided to non-customers also. The prominent services are transfer of
funds and accepting utility bills.
Some of the Banker Customer relations are
Debtor and Creditor
A Depositor who keeps money with the banker is Creditor and Banker is Debtor.
When a person borrows money from banker; the banker is Creditor and customer is
Principal and Agent
When banker accepts any cheque from its customer to be sent on clearing and
collection and payment to be credited in his account; this act is done by the banker
under principal and customer relation. Here the Customer is Principal and Banker
To elaborate it an illustration is given;
A Customer Saleem has his account with United Bank Limited, and Zubair gives
him a cheque of Rs. 50000/-. Account of Zubair is at Habib Bank Limited and
would be paid by the same bank. Saleem who has received the cheque has to go to
Habib Bank to get cash from there, but it might be difficult for him due to distance,
cost and time involved. Other available option is that Saleem deposits this cheque
to his banker, United Bank to present it on his behalf to Habib Bank, get payment
from that bank and give credit to his account.
When bank would do this act; it would be done under the relation of Principal and
Bailor and Bailee
When movable property which a person gives in the custody of banker for purpose
of safe custody; the relations so established are Bailor and Bailee. Here Customer
is Bailor and banker is Bailee. Example can be given for hiring of Safe Deposit
Lockers where a customer keeps his valuables in the bank’s premises. Other than
Safe Deposit Vault customer can hand over any valuable items or documents to the
banker to keep it in its own safe.
Pawner and Pawnee
When any borrower provides his movable property to banker to be kept as security
against borrowing; the relation so established are Pawner and Pawnee. Instance can
be given when goods are pledged with the borrower to the banker. Customer would
be Pawner and banker would be Pawnee.
Mortgagor and Mortgagee
Under the situation when borrower offers his immovable property as security
against borrowing the relations so established are Mortgagor and Mortgagee.
Illustration can be given as Mortgage of property of borrower by the banker.
Stop Payment Instruction
Account holder has right to instruct his banker to Stop Payment of his cheque
either issued in favour of some one or it is blank. Some time account holder can
instruct his banker to stop payment of full cheque book or remaining cheques after
If a cheque is issued in favour of some one, customer would write to banker to stop
payment of cheque giving following information;
Date of issuance
Amount of cheque
Name of person to whom issued
Customer may or may not write the reason for stopping the payment; he could
simply write that he intends not to pay the cheque.
As stated earlier, customer may instruct to stop payment of numerous cheques. It
usually happens when the cheque book is either lost or stolen. In such situation
customer would write that cheques from this number to that number have been lost
or stolen and if any of these cheques are presented should not be paid.
On receipt of such instructions bank verifies signature of account holder from
specimen signature card and if found genuine would accept and entertain this
Banker would feed that cheque number in system (Computer) and block its
payment. Any time that cheque is presented to the banker; system would not accept
it and payment would not be made.
As already discussed, whenever cheque is returned, banker must state reason for
returning it and that too in writing. In this case the true and genuine reason would
be written and it would be “PAYMENT STOPPED BY DRAWER” Same would
be the case when instructions are to stop payment of numerous cheque.
STOP PAYMENT INSTRUCTIONS ON PHONE OR E-MAIL
In rare cases customer is in such an awkward position that he cannot come to bank
to instruct stop payment of cheque and informs bank not to pay the cheque. It
happens only when the cheque has been lost, misplaced or looted and has been
issued as BEARER. Main reason is that the customer is afraid that by the time he
reaches the bank; cheque may be presented and paid. Therefore he gives phonic
instruction or could send e-mail. The problem with the banker would be that bank
accepts and accommodate only instructions those are in writing. Apprehension for
the bank is that if it acts on verbal instruction the customer might say later on that
he did not instruct so; and if such situation arise banker might face allegation of
“Wrongful Dishonour of Cheque”
On other hand if banker refuses to accept such instruction, its customer may face
loss of money due to wrong or false payment.
This situation is handled in a way that both ends are saved. Banker accepts this
instruction from customer with the condition that banker would not honour and pay
cheque for a limited period and in between that period customer must come and
give instruction in writing.
So payment would not be made between these periods and if cheque comes during
that period, cheque would be returned with following reason;
PAYMENT PENDING REQUIRE DRAWER”S CONFIRMATION
Later on customer would come and give instruction in writing and then banker
would have genuine ground to return it with reason as “Payment Stopped by
Drawer”. If during this time customer does not come and give instruction in
writing then banker has no option but to pay it. The condition would be that cheque
is otherwise in order.
Removal of Stop Payment Instruction
Customer has right to cancel or revoke his stop payment instructions, but he would
do it by giving such cancellation instruction in writing. In that case he would write
to banker and banker would release this cheque or numerous cheques from system
and if cheque is presented would be paid.
STOP PAYMENT IN JOINT ACCOUNT AND PARTNERSHIP ACCOUNT
In Joint account any one of joint account holder can stop payment of cheque
whether he or she is authorized signatory or not, but in account opening form
appear as one of the joint account holder. Same would apply in Partnership account
where any partner can give instruction to stop payment of cheque issued and
signed by other partner/partners. In both cases banker is bound to accept and act on
As far as Cancellation of Stop Payment is concerned; it must be done by all the
Joint account holders in case of joint account and all partners in case of partnership