Hundi, bill of exchange VIVA VVIT

HUNDI, CHITTI
LETTER of CREDIT
Bill of
Exchange

Professor & Lawyer
Puttu Guru Prasad
B.Com., M.Com., M.Phil., M.B.A., PGDFTM., AP.SET.,
M.Phil., DRMS., L.L.B., ICFAI TMF., DIRM., L.L.M.,
Pre PhD (PhD)from JNTUK.,
“Diploma in Psychology from YALE
University”
MHRDI’s IIC Ambassador
NSS Certified Program Officer, (A.U)
Senior Faculty for Business Studies, Economics, Accounts
Head, Board of Administration & Management Science,
Bhagavad Gita & CLAT Program Coordinator,
Commerce Department, VIVA-VVIT, Nambur,
My Blog: puttuguru.blogspot.in

Professor & Lawyer
Puttu Guru Prasad

Hundi can be defined as a financial
instrument or a negotiable bill of
exchange, which was used for
carrying out trade and credit
transactions during the Medieval
period in India.
A Hundi is primarily an unconditional
contract or order which warrantees
a monetary payment which can be
transferred by valid negotiation.
‘Hundi’ and ‘Chitti’

Negotiable instruments
• Negotiable instruments are a type of document that
guarantees the payment of a particular amount of
money at a set time or on-demand and the payer's
name is generally mentioned on the document and
• its most common types are
• Bank checks,
• Promissory notes,
• Hundi, Chitti,
• Bills of exchange,
• Letter of Credit
• Customer receipts,
• Delivery orders, etc.
• HAWALA (Not at all Legal)

A bearer cheque can be used
to be payable as Cash or bearer
with a specific name. The bearer
cheque does not have the word
'bearer' on the cheque. The cheque
is payable over the counter to the
bearer or the presenter of the
cheque by the drawee bank. A
bearer cheque can be transferred
to another person.
A crossed cheque is a
cheque that has been marked
specifying an instruction on the
way it is to be redeemed. A
common instruction is for the
cheque to be deposited directly
to an account with a bank and
not to be immediately cashed
by the holder over the bank
counter.

Demand draft
A demand draft is a
negotiable instrument
similar to a bill of
exchange. A bank issues
a demand draft to a
client, directing another
bank or one of its own
branches to pay a certain
sum to the specified
party
A Banker’s cheque is a
type of demand draft issued
by a bank branch on behalf
of its customers for local
use. While demand drafts
are issued by a bank branch
on a specific outstation
branch to facilitate payment
at the place where payee is
located, a banker’s cheque
is meant for a payments in
the same city where the
bank branch is located.

Promissory note
Formal unconditional promise in writing to pay
on demand or at a future date a definite sum of
money. The person who signs the note and
promises to pay is called the maker of the note.
The person to whom payment is to be made is
called the payee of the note.

HAWALA RACKET
• Hawala is thought to come from the Arabic word for "assignment" or "bill of
exchange" or the Hindi word for “HUNDI." In India, it is also famously known
as hundi.
• The system started in South Asian countries, particularly in the Islamic
community during the 8th century, and now it is very popular and used in
every part of the world.
• It was used as one of the modes of transferring money from one person to
another who lives in different places.
• It is one of the traditional banking system, where it is connected with the set
of hawaladars.
• These kinds of traditional banking system induced a major impact on the
formation of the present-day banking system.
• Hawala (sometimes referred to as underground banking) is a way to transmit
money without any currency actually moving.
• Hawala networks have been used since ancient times, and today are widely
found among ex-pats sending remittances home.
• Hawala provides anonymity in its transactions, as official records are not kept
and the source of money that is transferred cannot be traced.
• Money transfer in hawala is arranged through a network of hawaladars or
hawala dealers.

• The purpose of Hundi is, that it will protect the traders from
Dacoit's, Robber’s, Thief’s who attacked them in the journey and
steal valuable money or gold coins from the traders who were
traveling long distances on foot to procure goods.
• Hundis have a very long history in India. Written records show
their use at least as far back as the Twelfth century. Before the
Portuguese or Britishers, the Indian Indigenous traders were well
versed with usage of Hundi instead of Money. For that certain
Communities developed the networking of Individual
Bankers(Shawukars) in all the prominent trade centers
• During the colonial era, the British government regarded the
hundi system as indigenous or traditional, but not informal. They
were reluctant to interfere with it as it formed such an important
part of the Indian economy and they also wished to tax the
transactions taking place within the system.
• The trading communities in India are 1. Gujarathis, 2. Marvadis
Seths, 3. Bengali Baniyas, 4. Tamil Chettiyars, 5. Andhra Vysyas.

• The purpose of Hundi is, that it will protect the traders from Dacoit's,
Robber’s, Thief’s who attacked them in the journey and steal valuable
money or gold coins from the traders who were traveling long
distances on foot to procure goods.
• For Example a trader(BUYER) coming from Punjab to Guntur for
purchasing Mirchi worth of Rs.25 lacks.
• What he will do, first he deposit the money at the Marvadi Seth in
Punjab and get a receipt for Rs. 25 lacks, now the receipt is
exchangeable at Guntur from the family member of same Marvadi
Seth community located in Guntur.
• For the above service they will charge some commission from the
Punjab Buyer. It is the safest business transaction in the olden days to
get the protection from highway robberies. Later on this concept was
developed as (BOE). Well known as Bills of Exchange.
• At this tender age it may not be understood easily. Because you
people lack of business knowledge. But still we are here to help.
• Please contact me with out fear and get clarifications for your genuine
doubts. We are always at your service. We are happy to help you to
understand the concept.
• Kindly go through the ppt today and can discuss it tomorrow class.

■
Instrument Act,
■
Bills Of Exchange, HUNDI, CHITTI, Letter Of Credit (IMPEX)
1. A bill of exchange is a written order binding one
party to pay a fixed sum of money to another party
on demand or at some point in the future.
2. A bill of exchange often includes three parties—the
drawee is the party that pays the sum, the payee
receives that sum, and the drawer is the one that
obliges the drawee to pay the payee.
3. A bill of exchange is used in international trade to
help importers and exporters fulfill transactions.
4. While a bill of exchange is not a contract itself, the
involved parties can use it to specify the terms of a
transaction, such as the credit terms and the rate
of accrued interest.

The advantages of Hundi or
Bill of Exchange
• A buyer can easily be allowed to purchase goods on credit
and accept bills drawn on him by the seller when he is not
prepared to pay cash at the time of purchase.
• Seller prepares the Credit Bill, Buyer put his signature and
obey to pay the credit money with in a stipulated time
period. The Credit bill is going to be submitted in the local
bank for discounting.
• Now, seller can utilize the Hundi/Bill of Exchange to draw
the money in advance for the rotation or turnover of his
business with out waiting for the payment from the debtor
which is due after 3 or 4 months.
• Hundi or Bill of Exchange helps both the Seller as well as
Buyer for the rotation of their business with out loosing the
benefits of daily trading.
All seasonal businesses operates on Hundi/Bill of Exchange

A Hundi for Rs 2500 of 1951, Stamped
in the Bombay Province with a Pre-
printed Revenue Stamp.

Working Model of Bills Of Exchange/Letter of
Credit/Hundi/Chitty/HAWALA
Mirchi Whole
Sale Agent @
GMY
SBI Bank
@
Guntur
MIRCHI
BUYER from
PUNJAB
The Guntur Mirchi Agent Sells Rs.25
Lakhs worth of MIRCHI to PUNJAB
Buyer on Credit, They know each
other for a long time and there are
some Commission Brokers who will
guarantee for the sale
Now the Mirchi Agent
Load the Cargo in the
Rail Wagons to Punjab
and get (RR) Railway
Receipt From the
Railway Authorities
Immediately, the Guntur Agent submits the RR in the Guntur SBI and
Draws the Money worth of Rs.25 Lakh with an acceptable rate of
Discount for a period of 3 months from the Guntur SBI. He use the
money for his business rotation .
As per the Promise the Punjab buyer Pays the Due
Amount Rs.25 Lakhs in the SBI Branch at Punjab at
the end of the 3 months with Interest and Discount
Commission and clears the Guntur Agents Liability to
SBI.
Slide
1
1
2
3
1
2
Professor & Lawyer
Puttu Guru Prasad

Credit/Hundi/Chitty/HAWALA
Mirchi Whole
Sale Agent @
GMY
SBI Bank
@
Guntur
MIRCHI
BUYER from
PUNJAB
The Guntur Mirchi Agent Sells Rs.25
Buyer on Credit, They know each
other for a long time and there are
some Commission Brokers who will
Receipt From the
Railway Authorities
The Guntur Mirchi Agent is already got the sanction of HUNDI facility
from Guntur SBI for Certain Amount depends upon his need of the
business, and submit the RR’s in the bank and gets back Rs 25 Lakhs and
invest in the business for purchasing the Mirchi from the farmers.
The Three Parties to the BILLS Of EXCHANGE
1. DRAWEE– SBI Guntur 3
2. DRAWER--- GMA
3. PAYEE---- Punjab Buyer
Slide
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2
3
1
2
Professor & Lawyer
Puttu Guru Prasad

Credit/Hundi/Chitti/HAWALA
Mirchi Whole
Sale Agent @
GMY
SBI Bank
@
Guntur
MIRCHI
BUYER
from
PUNJAB
The Guntur Mirchi Agent Selling Rs. 25
Buyer on Credit, They know each other
for a long time and there are some
Commission Brokers who will
The
PUNJAB
Buyer
Promised
to pay
Rs25
Lakhs
after
3months
to Guntur
Mirchi
Agent via
SBI of
Punjab
The PUNJAB Buyer after unloading the MIRCHI
from the Railway Wagons, starts selling the
Mirchi in Punjab and collect the money from
sales and pay Rs 25 Lakh Due amount to the SBI
on the name of the Guntur Mirchi Agent
Receipt From the
Railway Authorities
Slide
3
1
2
3
1
2
3
Professor & Lawyer
Puttu Guru Prasad, VIVA - VVIT

Advantages of Hundi and Bill of Exchange
• 1. It will facilitate Credit Transactions between the Seller and Buyer.
( at this juncture the student have to understand the difference between Cash sales
and Credit Sales)
• 2. It will promote the Turnover of the Business for both Seller and
Buyer
• 3. The Seller can use this facility and get the money from the bank
immediately
• 4. The buyer by utilizing this facility can pay the money after a month
or 3 months time
• 5. The Rotation and Turnover of the business will improve
• 6. Especially in the seasonal business the need for the money is
heavy, to fulfil the heavy need of the cash the seller will utilize the
bill of exchange/hundi
• 7. It will enhance the need for trust worthiness and good business
relations and reputation of the traders.
• 8. Those who have the good will only utilize the bill of exchange from
the banks
• 9. Any trader, if he looses good will then he cannot get the support
from the banks.

Hundi as practiced by Indian Merchant Communities

“Hundi" is basically a bill of exchange. It came into vogue during the Medieval period. Emerging after the Turkish conquest
of North India, it's usage became much more widespread during the Mughal period. “SHROFFS" specialized in dealing with
Hundis. The term is derived from the Sanskrit word hundi which means ‘to collect’.
Hundi was basically a paper document promising payment of cash at a later time at a particular place. There were a lot of
problems to carry large amount of cash over long distances . So the merchants used to give their money to the Shroff, who
issued a Hundi to the merchant. Then, at the place of his destination, the merchant would encash his hundi from the
Shroff's agent .In course of time, Hundi itself became a medium of payment. It could be used for any transactions, and could
be freely transferred after endorsement. According to Irfan Habib,” The negotiability of Hundi led to a situation in which a
large number of Hundis were simply drawn up and honored against other Hundis, without the intermediation of actual cash
payments. “
The use of Hundi became so widespread that even the Imperial Mughal State was using it. In 1599,the Mughal State sent
Rs.3,00,000 to the army in Deccan through a Hundi. The tributes coming from the Golconda Sultan (Rs.10,000,00) and the
Khokhar Chief(Rs.50,000) were sent via Hundis to the Mughal Emperor.
The Shroffs generally had their agents at important commercial centers of the Empire to honor and encash the Hundi.
Generally, members of the same family worked as agents in different cities. Big Shroffs had agents even abroad.
For issuing the Hundi, a commission was charged. The commission amount was variable, and it depended on the prevailing
rate of interest and the money supply. If money supply was good, the commission charges would drop, and vice versa.
Generally, for a Hundi issued at Patna to be encashed in Agra, the commission charge was around 1.5% of the amount. For
Patna to Surat, the rate was around 7–8%.
The Vaishya/Vaish/Baniya community is known for their excellent trading techniques and business acumen. Shroffs, Sheths,
Showkars, Bhat's managed the trade in the states of Gujarat and Rajasthan, In western India, these groups were called
Mahajan, Nagarathal or Nattukotai Chettiyars were important traders from the South, Punjabi and Multani merchants
handled business in the northern region

1. Shah Jog Hundi:
“Shah” means a respectable and responsible person or a man of worth in the bazar. Shah Jog
Hundi means a hundi which is payable only to a respectable holder, as opposed to a hundi
payable to bearer. In other words, the drawee before paying the same has to satisfy himself that
the payee is a ‘SHAH’.
2. Jokhmi Hundi:
A “jokhmi” hundi is always drawn on or against goods shipped on the vessel mentioned in the
hundi. It implies a condition that money will be paid only in the event of arrival of the goods
against which the hundi is drawn. It is in the nature of policy of insurance. The difference,
however, is that the money is paid before hand and is to be recovered if the ship arrives safely.
3. Jawabee Hundi:
According to Macpherson, “A person desirous of making a remittance writes to the payee and
delivers the letter to a banker, who either endorses it on to any of his correspondents near the
payee’s place of residence, or negotiates its transfer. On the arrival, the letter is forwarded to
the payee, who attends and gives his receipt in the form of an answer to the letter which is
forwarded by the same channel of the drawer or the order.” Therefore, this is a form of hundi
which is used for remitting money from one place to another.
4. Nam jog Hundi:
It is a hundi payable to the party named in the bill or his order. The name of the payee is
specifically inserted in the hundi. It can also be negotiated like a bill of exchange. Its alteration
into a Shah Jog hundi is a material alteration and that renders it void.

5. Darshani Hundi:
This is a hundi payable at sight. It is freely negotiable and the price is regulated by demand and
supply. They are payable on demand and must be presented for payment within a reasonable
time after they are received by the holder.
6. Miadi Hundi:
This is otherwise called muddati hundi, that is, a hundi payable after a specified period of time.
Usually money is advanced against these hundis by shroffs after deducting the advance for the
period in advance. These were the best types of hundis. Now, there are additional types of
hundis which are as follows:
7. Dhani Jog Hundi: A hundi which is payable to “dhani” ,that is, the owner.
8. Firman Jog Hundi: A hundi which is payable to order if it can be negotiated by endorsement
and delivery.

Types of Hundi
Shah jog Hundi: This is drawn by one merchant on another, asking the latter to pay
the amount to a third merchant. In this case the merchant on whom the hundi is
drawn is of some 'credit worthiness' in the market and is known in the bazaar.
A SHAH JOG hundi passes from one hand to another till it reaches the final recipient,
who, after reasonable enquiries, presents it to the drawee for acceptance of the
payment.
SHAH JOG means co-operation in Hindi and Gujrati, the predominant languages of
traders. The hundi is so named because it required the co-operation of multiple
parties to ensure that the hundi has an acceptable risk and fairly good likelihood of
being paid, in the absence of a formalized credit monitoring and reporting framework.
Darshani Hundi: This is a hundi payable on sight. It must be presented for payment
within a reasonable time after its receipt by the holder. Thus, it is similar to a demand
bill.
Muddati Hundi: A muddati or miadi hundi is payable after a specified period of time.
This is similar to a time bill.
There are few other varieties; the Nam-jog hundi, Dhani-jog hundi, Jawabee hundi, Jokhami
hundi, Firman-jog hundi, etc.

Types of Hundi
Nam-jog hundi - such a hundi is payable only to the person whose name is mentioned
on the Hundi. Such a hundi cannot be endorsed in favour of any other person and is
akin to a bill on which a restrictive endorsement has been made.
Furman-jog Hundi - such a hundi can be paid either to the person whose name is
mentioned in the hundi or to any person so ordered by him. Such a hundi is similar to
a cheque payable on order and no endorsement is required on such a hundi.
Dhani-jog Hundi - when the hundi is payable to the holder or bearer, it is known as a
dhani jog hundi. It is similar to an instrument payable to bearer.
Jokhim-Hundi - normally a hundi is unconditional but a jokhim hundi is conditional in
the sense that the drawer promises to pay the amount of the hundi only on the
satisfaction of a certain condition. Such a hundi is not negotiable, and the prevalence
of such hundis is very rare these days because banks and insurance companies refuse
to accept such hundis.
Jawabi Hundi - if money is transferred from one place to another through the hundi
and the person receiving the payment on is to give an acknowledgement (jawab) for
same, then such a hundi is known as a Jawabi Hundi.
Khaka Hundi - a hundi which has already been paid is known as a Khaka Hundi.
Khoti Hundi - In case there is any kind of defect in the hundi or in case the hundi has
been forged, then such a hundi is known as a khoti hundi.

Hundi, bill of exchange VIVA VVIT

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