Principles and Practices of Banking module 2

WELCOME
MODULE – 2
Banker-Customer Relationship
1

Banker-Customer Relationship
 Debtor-Creditor relationship
 Banks as a trustee
 Anti-money laundering
 Deposit products or services
 Payment and collection of cheques and other negotiable instruments
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Synopsis – Module 2

 “Cheque is an instrument in writing containing an unconditional order,
addressed to a banker, sign by the person who has deposited money with
the banker, requiring him to pay on demand a certain sum of money only to
or to the order of certain person or to the bearer of instrument.”
 Section 5 of the Indian Negotiable Instrument Act of 1881 defines the
cheque as “A bill of exchange drawn specially on a specified banker and
not on expressed to be payable otherwise than on demand”.
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Cheques

1. Bearer cheque
2. Order cheque
3. Crossed cheque
4. Post-dated cheque
5. Anti-dated cheque
6. Stale cheque
7. Truncated cheque
8. Dishonour cheque
9. Cancelled cheque
10. Blank cheque
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Types of cheque

1. Bearer cheque - When the words "or bearer" printed on the cheque is not
cancelled, the cheque is called a bearer cheque. A bearer cheque is made
payable to the bearer i.e. it is payable to the person who presents it to the
bank for encashment.
 However, such cheques are risky, this is because if such cheques are lost,
the finder of the cheque can collect payment from the bank. Bearer cheque
can be transferred by mere delivery; they need no endorsement.
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 Order cheque – The word ‘or order’ is written on the face of the cheque,
the cheque is called an order cheque.
 Such a cheque is payable to the person specified their in as the payee, or
to any one else to whom it is endorsed (transferred), sign back on cheque.
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 Crossed cheque - 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.
 General crossing – No cash, only a/c, to named, or an endorsee
 Special crossing - No cash, named bank,
 Not negotiable crossing – Owner has highest authority
 A/c payee crossing - A/c payee in any bank or Special crossing at bank
 Negotiable instrument act 1881
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 Post-dated cheque - A post-dated check (or post-dated cheque) is a check
written with a future date. In other words, the date that appears on the
check is after the date when the check was written. Even with a future
date appearing on the check, the check could clear (be paid from) the
bank account prior to that date.
 Anti-dated cheque – A cheque in which the drawer mentions the date
earlier than the date on which it is presented to the bank.
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 Stale cheque (Expired) - Check presented at the paying bank after a
certain period (typically six months) of its payment date.
 Mutilated cheque - A cheque is said to be mutilated if it is torn into two
or more pieces. Such a cheque, if it presented for payment, will not be
paid by the banker unless the mutilation is confirmed by the drawer of
the cheque
 Gift cheque - Gift Cheque is an instrument after duly purchasing the
same from a bank, payable to a person named therein.
These cheques can be encashed by the named person and got credited
to the named person's account. A small fee is generally collected by the
issuing banker.
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 Traveler cheque – It is secure money while travelling. They can be
exchanged into cash in any local bank of the country you visit and can be
used while paying in the shopping or expenses.
 Blank cheque - a cheque that has been signed but does not yet have
the amount of money written on it. Eg banks use on giving loans.
 Truncated cheque - Cheque truncation is a cheque clearance system that
involves the digitalization of a physical paper cheque into a substitute
electronic form for transmission to the paying bank. The process of
cheque clearance, involving data matching and verification, is done using
digital images instead of paper copies
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The paying banker should take the following precautions before honoring a cheque
1. Proper form of cheque
2. Date of the cheque
3. Language
4. Crossing
5. Amount of check should be clearly in words & numbers
6. Sufficient funds
7. signature
8. Banking hours
9. Mutilated cheque
10. Countermanding order
11. Material alteration
11
Payment & collection of cheques
Source of info : Banking & Financial systems by ‘Dr.Nirmala Prasad & K.Chandrasdass J.Part-B’ PgNo 69
Material Alteration
Date
Amount
Place
Number of parties
Removal of crossing
Converting an order cheque in
to bearer cheque

Circumstances in which a banker should refuse payment:
1. Defective title
2. Notice of death, insanity or insolvency
3. Countermanding order
4. Garnishee order
5. By injunction
6. Notice of closure of accounts
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 Negotiable Instrument Act of 1881 Section 13 of N.I Act simply states that, “negotiable
instrument means promissory note, bill of exchange or cheque payable either to order or to
bearer.”
 NI are documents that guarantee the payment of a specific sum of money, either on demand or
at a set time to a specific person. It is transferrable, the signed document can be transferred
from one person to another. The person who receives the payment, must be named or
otherwise indicated on the document.
 The law recognizes only 3 kind of N.I namely
1. Promissory note
2. Bills of exchange
3. Cheque
 Features of NI
1. Free transfer
2. Right to sue
3. No notice to transfer
4. Presumptions as to negotiable instruments
5. Credit of the party
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Negotiable Instruments
Source of info : Banking theory law & practice by ‘Gordon & Natarajan’ PgNo 69

PROMISSORY NOTE
 Section 4 of the Negotiable Instrument Act 1881 defines Promissory note as: “A promissory
note is an instrument in writing (not being a banker or a currency note) 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.”
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Characteristics of promissory note
1. Instrument in writing
2. Unconditional undertaking
3. A certain sum of money only
4. Signed by the maker
5. The payer must be certain
6. Date of the promissory note
7. Rate of interest
8. Maturity
Parties of the promissory note
1. Drawer and Drawee
2. Holder
3. Payee
4. Acceptor
5. Endorser or Endorsee

BILL OF EXCHANGE
 Section 5 of the Negotiable Instrument Act 1881 defines Bill of Exchange as: “An instrument
in writing containing an unconditional order, signed by the maker, directing a certain person
to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of
the instrument.”
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Characteristics of Bill of Exchange
2. Unconditional undertaking
4. Signed by the maker
5. The payer must be certain
6. Date of the bill of exchange
7. Rate of interest
8. Maturity
Parties of the Bill of Exchange
1. Debtor and Creditor
2. Drawer and Drawee
3. Acceptor
4. Holder
5. Endorser and Endorsee

CHEQUES
 Section 5 of the Indian Negotiable Instrument Act of 1881 defines the cheque as “A bill of
exchange drawn specially on a specified banker and not on expressed to be payable otherwise
than on demand”.
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Characteristics of cheques
2. Unconditional order
4. Signed by the drawer
5. Payee must be certain
6. Date of the cheque
7. Amount
8. Specified banker
9. Payable on demand
Parties of the cheques
1. Drawee
2. Payee
3. Payee banker
4. National automated clearing
house. NPCI

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Deposit products or services
Retail Banking Product Portfolio
Deposit Loans & Adv Services
Fixed A/c
Savings A/c
Current A/c
Recurring A/c
NRI A/c
Corporate salary
A/c
Demat A/c
Minor A/c
Senior
citizenship A/c
Housing Loan
Personal Loan
Vehicle Loan
Educational
Loan
Professional
Loan
LAS &
Securities
Govt scheme
loans
Credit card
Debit card
Net banking
Mobile banking
Phone banking
ATM
Smart card’s
Cheque

Chart showing relationship b/w A Banker & A Customer
General Relationship Special Relationship
Not a
Depos
itory
Not a
Trustee
Not
an
Agent
Debtor
&
Creditor
Privileged Debtor Privileged Creditor
1.Express demand by the
credit necessary
2.Demand only at a
particular branch
3.Only during banking
hours
4.Get money from
customer without security
5.Law of limitation does
not apply
6.Can combine accounts
with the consent of the
customer
When the customer
acts as a creditor, he
acts as an unsecured
creditor. But, the
banker acts as a
secured creditor
Obligation
to honor
cheque
Banker’s
Lien
Duty to
maintain
secrecy of
his
customer
a/c
Right to
claim
incidental
charges
Right to
change
compou
nd
interest
Exemption
from law
of
limitation
act
Correct
Dishonor
Wrongful
Dishonor
No Liability
Nominal
Damage
Special
Damage
Loss of
Credit is less
Loss of credit
is greater
Particular General Conditions
(Banker’s lien is general)
1.No agreement inconsistent with
the right of lien
2.Property must be obtained
lawfully
3.Not for a specific purpose
Not an absolute one but
qualified
Grounds for disclosure
1.Under the compulsion
of law
2.Under the public
interest
3.Under bankers own
interest
4.Under the express or
implied consent of the
customer
Source of info : Banking & Financial systems by ‘Mithani & Gordan’ Part-B. PgNo 26

 The word ‘Laundry’ literally means ‘Cleaning’. Metaphorically, money laundering
means “Cleaning of Money”. It is the process by which illegal funds and assets are
converted into legitimate funds and assets.
 Money laundering as per section 3 of the Prevention Money Laundering Act
“Whosever directly or indirectly attempts to indulge or knowingly assists or
knowingly is a party indulge or knowingly assists or knowingly is a party or is
actually involved in any process or activity connected with the proceeds of crime
and projecting it as untainted property shall be guilty of offence of money
laundering.”
PROCESS OF MONEY LAUNDERING
 Money laundering is a single process however, its cycle can be broken down into
three distinct stages namely
1. Placement stage
2. Layering stage
3. Integration stage
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Anti-Money Laundering
Source: http://www.nja.nic.in/4.1.%20Paper-%20Money%20Laundering_1_%20Paridhi%20Saxena.pdf

 Following are the various measures adopted all over the world for money laundering, even
though it is not exhaustive but it encompasses some of the most widely used methods:
1. Structuring deposits
2. Shell companies
3. Third-Party cheques
4. Bulk cash smuggling
 Money Laundering generally refers to ‘Washing’ of the proceeds or profits generated from:
CRIMINALACTIVITIES
1. Kidnapping
2. Extortion
3. Bribery & corruption
4. Gambling, robbery, cheating
5. Counterfeiting & Forgery
6. Terrorist act
7. Smuggling (arms, people, goods)
8. Drug trafficking
9. Prostitution
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 Thus, the impact of money laundering can be summed up into the following points:
1. Potential damage to reputation of financial institutions and market
2. Weakens the “democratic institutions” of the society
3. Destabilizes economy of the country causing financial crisis
4. Give impetus to criminal activities
5. Policy distortion occurs because of measurement error and misallocation of resources
6. Discourages foreign investors
7. Causes financial crisis
8. Encourages tax evasion culture
9. Results in exchange and interest rates volatility
10. Provides opportunity to criminals to hijack the process of privatization Contaminates
legal transaction.
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