unit 3.pptx

BANKING THEORY LAW AND
PRACTICE
UNIT - 3
SUBJECT:BANKING LAW AND PRATICE
Mr. A.HARIHARAN
ASSISTANT PROFESSOR, DEPT OF COMMERCE
SRM INSTITUTION OF SCICENCE AND TECHNOLOGY

NEGOTIABLE INSTRUMENTS ACT MEANING
 The Negotiable Instruments Act is a legal framework that governs the
transferability and characteristics of certain financial instruments
known as negotiable instruments. These instruments include
promissory notes, bills of exchange, and cheques. The act provides
rules and regulations to ensure the smooth and standardized
functioning of these negotiable instruments in commercial
transactions.
SUBJECT : BANKING LAW AND PRATICE
Mr. A.HARIHARAN, ASSISTANT PROFESSOR, DEPT OF COMMERCE

FEATURES OF NEGOTIABLE INSTRUMENTS
 Transferability
 Negotiability
 Holder in Due Course
 Presumption of Consideration
 Unconditional Promise or Order to Pay
 Fixed Amount of Money
 Writing and Signature
 Date of Maturity
 No Notice of Defenses
 Circulation in the Market

SIGNIFICANCE OF NEGOTIABLE INSTRUMENTS
 Facilitate Trade and Commerce
 Transferability
 Credit and Financing
 Reduced Risk in Transactions
 Standardization and Uniformity
 Efficiency in Payments
 Documentary Evidence
 Global Trade
 Flexibility in Payment Terms
 Commercial Paper Market

CHEQUES MEANING AND DEFINITION
 A cheque is a bill of exchange in which one party orders the bank to
transfer the money to the bank account of another party. It is a
negotiable instrument that is covered under the Negotiable
Instruments Act, 1881. There are three parties involved in
the transaction – the drawer is the person who writes the cheque, the
drawee is the bank that has to transfer the funds and the payee is
the person in whose name the cheque has been issued. A cheque
can be issued against a savings account or a current account.

FEATURES AND FUNCTION OF CHEQUES
 Features of Cheques:
 Written Order
 Unconditional Promise
 Payment to a Specific Payee
 Drawee Bank
 Amount in Figures and Words
 Signature of the Drawer
 Date
 Crossing
 Open and Bearer Cheques
 Endorsement

Functions of Cheques:
 Payment
 Convenience
 Record Keeping
 Transferring Funds
 Credit and Debt Transactions
 Security
 International Transactions

 MICR:
Magnetic Ink Character Recognition, is a technology used in banking
to process and verify the legitimacy of paper-based documents,
particularly checks. MICR encoding is typically found at the bottom
of checks, and it consists of a series of numbers and characters
printed using magnetic ink.
Dishonor of cheque:
The dishonor of a cheque occurs when the bank refuses to honor or pay
the amount mentioned on the cheque. This can happen for various
reasons, and it is typically communicated to the payee through a
"cheque return memo" or a similar notice. The dishonor of a cheque
can occur at any stage during the processing of the cheque, such as
when it is presented for payment.
Crossing of cheque:
Crossing a cheque involves drawing two parallel lines across the face
of the cheque. This is done to signify that the payment should be
made through a bank and not in cash over the counter. The crossing
adds a layer of security to the cheque transaction and encourages the
payee to deposit the cheque into their bank account rather than
cashing it.

MISTAKES, RECTIFICATION OF ERRORS:
 Mistakes on a cheque can occur during the process of
writing or handling the cheque, and it's important to
address them appropriately to ensure the proper
execution of the payment. Here are common mistakes
that may occur on a cheque and how they can be
rectified:
 Incorrect Amount in Words and Figures:
 Misspelled Payee's Name:
 Wrong Date:
 Signature Issues:
 Stale Cheque:
 Incorrect Account Number or Bank Details:
 Overwriting or Erasures:
 Voiding a Cheque:

 Holder in due course
 A "holder in due course" refers to a person who legally
possesses a negotiable instrument (such as a promissory
note, bill of exchange, or cheque) and meets specific criteria
outlined in commercial law. Being a holder in due course
grants certain rights and protections, allowing the holder to
enforce the instrument free from certain defenses that might
have existed between the original parties.
 Key characteristics of a holder in due course include:
 Legal Acquisition
 Good Faith
 Value Given
 No Notice of Defenses
 Instrument Must Be Complete

PAYMENT IN DUE COURSE
 "Payment in due course" is a legal concept associated
with negotiable instruments, such as checks, promissory
notes, and bills of exchange. It refers to the rightful
payment made by a party, typically a bank, in
accordance with the terms of a negotiable instrument.
Payment in due course is a crucial element in the
smooth functioning of financial transactions and the
enforcement of negotiable instruments law.
 Key aspects of payment in due course include:
 Good Faith
 In Accordance with the Instrument
 Proper Timing
 Absence of Forgery or Alteration
 Protects the Paying Party

ENDORSEMENTS – FEATURES, TYPES AND
IMPACTS IN BANKS
 An endorsement on a negotiable instrument, such as a check,
is a signature or other form of authorization by the payee that
signifies the transfer of ownership or the directing of the
payment to someone else. Endorsements play a crucial role in
banking, affecting the negotiation, transfer, and processing of
negotiable instruments.
 Features of Endorsements:
 Transfer of Ownership
 Legal Recognition
 Negotiability

Types of Endorsements:
 Blank Endorsement
 Special (or Full) Endorsement:
 Restrictive Endorsement:
 Conditional Endorsement:
 Qualified Endorsement:
 Impacts in Banks:
 Processing of Payments
 Transferability
 Liability and Protections
 Check Clearing
 Regulatory Compliance

PAYING BANKER
 The term "paying banker" refers to the financial
institution, typically a bank, that is responsible for
making payments on behalf of its customers. The
paying banker plays a crucial role in the banking
system by honoring checks and other payment
instructions issued by its account holders.

Paying Banker - Duties and Liabilities:
 Honoring Customer's Checks:
 Duty of Secrecy:
 Duty to Honor Mandate:
 Duty to Verify Signatures:
 Prompt Payment:
 Paying Banker - Liabilities:
 Liability for Wrongful Dishonor:
 Liability for Negligence:
 Liability for Breach of Duty:
 Liability for Unjust Enrichment:

 Material Alteration:
 Definition:
 A material alteration involves a change in an instrument (such as a check) that
modifies the rights and obligations of the parties involved.
 Effect on Payment:
 If a check is materially altered, the paying banker is discharged from liability if it pays
the altered check in good faith and without negligence.
 Responsibility to Detect Alterations:
 The paying banker has a responsibility to exercise reasonable care in detecting
material alterations on checks presented for payment.
 Refusal of Payment:
 Legal Grounds for Refusal:
 A bank may refuse to pay a check for various legal reasons, such as insufficient
funds, a stop payment order, or a breach of mandate.
 Notice to Customer:
 If a bank refuses to pay a check, it is generally required to promptly notify the
customer of the refusal and the reasons for it.
 Liability for Wrongful Refusal:
 If a paying banker wrongfully refuses to honor a properly drawn and presented
check without valid legal grounds, it may be held liable for damages suffered by the
customer.
 Stop Payment Orders:
 If a customer issues a valid stop payment order before the check is presented, the
bank is obligated to honor the order and refuse payment.

PROTECTION FOR PAYING BANKER
 Payment in Due Course:
 Reliance on Customer's Signature:
 Statutory Protection:
 Material Alteration Rules:
 Stop Payment Orders:
 Electronic Transactions:
 Negotiability Rules:
 Good Faith and Ordinary Care:

COLLECTING BANKER AND CAPACITIES
 A "collecting banker" refers to a bank that collects and
processes instruments (such as checks, bills of exchange, or
promissory notes) on behalf of its customers for the purpose
of crediting the proceeds to their accounts. The collecting
banker acts as an intermediary between the payer's bank and
the payee's account, facilitating the efficient flow of funds
within the banking system.
 Key Capacities of a Collecting Banker:
 Collection of Instruments:
 Agent for the Customer:
 Endorsements and Negotiation:
 Presentment to Drawee Bank:
 Credit to Customer's Account:
 Notification to Customer:
 Risk Management:
 Foreign Collections:

DUTIES AND LIABILITIES OF COLLECTING BANKER
Duties of a Collecting Banker:
 Presentation for Payment:
 Diligence in Collection:
 Verification of Endorsements:
 Notification to Customer:
 Credit to Customer's Account:
 Foreign Collections:
 Reasonable Charges:
 Exercise of Due Care:
Liabilities of a Collecting Banker:
 Liability for Negligence:
 Liability for Wrongful Dishonor:
 Liability for Unauthorized Endorsements:
 Liability for Conversion:
 Liability for Delay:

PROTECTION OF COLLECTION BANKER
 Good Faith and Ordinary Care:
 Payment in Due Course:
 Reliance on Endorsements:
 Protection Against Unauthorized Signatures:
 Statutory Protections:
 Notification of Dishonor:
 Foreign Collection Protections:
 Reasonable Charges:

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