Unit_6_Banking_Products.pptx

Banking Products
Unit – 06
Speaker’s Name : D Sreekanth

Wholesale banking
• Wholesale banking refers to doing banking business of
industrial and business entities such as large corporate,
multinational companies, trading houses, financial
institutions, public sector undertakings etc.
• Banks in India have been doing this type of business
traditionally and this segment of business is also called
Corporate Banking/Commercial Banking.
• The main business of this sector pertains in extending
financial assistance by way of working capital, term loans,
project financing, bill/invoice discounting, forex, trade
finance, derivatives transactions, acceptance of bulk
deposits etc.
• Banks extend other facilities such as cash management
services, merchant banking, and advisory services. The
product offerings are suitably structured taking into
account the client’s risk profile and specific needs.
Economic growth is linked to infrastructure development and
requires higher investments.

International Banking
• Every country manufactures certain goods and services beyond its
requirements and they need to sell (export) this surplus production
to other countries.
• Similarly, no country is self-reliant with regard to all its
requirements and hence it needs to buy (import) certain goods and
services from other countries in order to bridge the gap in the
demand and supply in its economy.
• Further, in a liberalized free trade economy, the government and
people of one country may invest capital and labor in another country
and in turn may earn income in the form of profits, dividends,
interest, royalty, etc. The foreign exchange market is the place where
each country/people can pay for their requirements and receive their
entitlements in their own home currency.
• Banks are amongst the active members of the foreign exchange market
and they provide certain types of services to their customers called
International banking services.
• Banking services catering to cross-border transactions is called
International Banking.
• Banks have been traditionally offering various services to the
international business people.

• Example of International Banking:
• Foreign Exchange Services: The company may use
international banking services to convert
currencies when buying parts from suppliers in
different countries.
• Trade Finance: The corporation may obtain letters
of credit or trade financing to facilitate the
import and export of vehicles and components.
• International Treasury Management: The company may
manage its global cash flows and investments
through an international bank's treasury services,
optimizing its liquidity and minimizing risks

Retail Banking
• The banks also were in desperate need for
augmenting their lending portfolio and also to
diversify their portfolio risk.
• Banks took this opportunity to cater to the
multiple banking requirements of the individuals
by segmenting the individuals as a separate
business market and called it by the name of
‘Retail Banking’.
• Thus, we can define Retail Banking as doing
banking business with individual customers.
Retail banking is, however, quite broad in nature
- it refers to the dealing of commercial banks
with individual customers, both on liabilities and
assets sides of the balance sheet.

• Fixed, current/savings accounts on the liabilities side; and
personal loans, housing, auto loans, and educational loans on
the assets side, are the important products offered by banks.
Related ancillary services include credit cards, debit cards
and depository services.
• Today’s retail banking sector is characterized by three basic
features:
• 1. Multiple products (deposits, credit cards, insurance,
investments and securities);
• 2. Multiple channels of distribution (call center, branch,
Internet banking, mobile banking, ATMs, Self-help kiosks
consisting of cash deposit machines, pass book printing
machines, etc.); and
• 3. Multiple customer groups (consumer, small business, and
corporate).

Retail
Products
Retail Deposit
Products
Savings Bank A/c
Recurring Deposit A/c
Current A/c
Term Deposit A/c
Zero Balance A/c for salaried
class people
Small Savings A/c or BSBD A/c
Senior Citizen Deposit A/c
Retail Loan Products
Home Loans
Home Loans to NRIs
Auto Loans
Consumer Loans
Personal loans
Educational Loans
Credit Cards

Retail Products
• Retail Deposit Products
• Savings Bank Account
• Recurring Deposit Account
• Current Account
• Term Deposit Account
• Zero Balance Account for salaried class people
• Small Savings Account for the common man
• Senior Citizen Deposit Accounts

• Retail Loan Products
• Home Loans to resident Indians for purchase of land and
construction of residential house/purchase of ready built
house/for repairs and renovation of an existing house.
• Home Loans to Non-Resident Indians
• Auto Loans - for purchase of new/used four-wheelers and two-
wheelers
• Consumer Loans - for purchase of white goods and durables Loan
against gold jewellery
• Personal loans - for purchase of jewels, for meeting domestic
consumption etc.
• Educational Loans - for pursuing higher education both in India
and abroad
• Credit Cards etc.

Drivers of Retail Business In India
• The economic prosperity and the consequent increase
in purchasing power have given a fillip to a
consumer boom.
• Changing consumer demographics indicate vast
potential for growth in consumption both
qualitatively and quantitatively. India is one of the
countries having highest proportion (70 per cent) of
the population below thirty-five years of age (young
population).
• Convenience banking in the form of debit cards,
internet and phone banking, anywhere and anytime
banking has attracted many new customers into the
banking field.

• This falling interest rate contributed to the growth
of retail credit by generating the demand for such
credit.
• After the liberalisation of the economy, the Indian
banks had to adopt the best international practices of
accounting and integrated risk management systems.
• Further the delinquency rate, i.e. defaults in respect
of retail advances was comfortably on the lower side
when compared to the overall bank loans and advances
and retail loans have put comparatively less of a
provisioning burden on banks apart from diversifying
their income streams.
• The thrust on financial inclusion both by Govt. of
India and the Reserve Bank of India, has opened the
flood gates of opportunity for bankers to increase the
customer base and there by extend the retail deposit as
well as retail loan products

Home Loans
• The home loan is the predominant loan in the present
context. Most of the banks are offering these loans at
competitive terms.
• Home loans are available to resident Indians and NRIs.
Growth of housing finance segment has accelerated in
recent years.
• Several supporting policy measures (like tax benefits)
and incentives instituted had played an important role
in this acceleration.
• Housing has emerged as one of the sectors attracting a
large quantum of bank finance.
• Keeping in view the objectives of National Housing
Finance Policy, Banks could deploy their funds under
the housing finance allocation in any of the three
categories, i.e.

• (i) Direct finance,
• (ii) Indirect finance,
• (iii) Investment in bonds of NHB/HUDCO, or
combination thereof.

• Under Direct Housing Finance following types of
loans are included:
• (i) Loan to a person who already owns a house in
town/village where he resides, for
buying/constructing a second house in the same or
other town/village for the purpose of self
occupation.
• (ii) Loan for purchase of a house by a borrower
who proposes to let it out on rental basis on
account of his posting outside the headquarters or
because he has been provided accommodation by his
employer.
• (iii) Loan to a person who proposes to buy an old
house where he is presently residing as a tenant.

• (iv) Loan only for purchase of a plot, provided a
declaration is obtained from the borrower that he
intends to construct a house on the said plot, with
the help of bank loan or otherwise, within such period
as may be laid down by the concerned bank.
• (v) Supplementary finance
• (a) requests for additional finance within the overall ceiling
for carrying out alterations/additions/repairs to the
house/flat already financed can also be considered by the
bank.
• (b) In the case of individuals who might have raised funds for
construction/acquisition of accommodation from other sources
and need supplementary finance, banks may extend such finance
after obtaining pari passu or second mortgage charge over the
property mortgaged in favour of other lenders and/or against
such other security, as may be deemed appropriate.

• The Procedure and Practices for Home Loans
• Target Group: Normally, the target group is the salaried
class, professionals, self-employed and business-men.
Banks fix the age criteria for availing the loan.
• Purpose: The purpose of the loan is for the purchase or
construction of house or flats, repairs and renovation
of house, and in some banks, for purchase of house
sites also.
• Quantum of loan: The quantum of eligible loan is fixed
based on the gross monthly income/net monthly income
(EMI/NMI). For this, banks ask for a salary certificate
for the salaried class or the Income tax return for
others. Bank also ask for the statement of bank account
for a prescribed period.

• Age: Banks fix the lower and upper age for
availing the loan taking in to consideration
the remaining period of service, in the case of
salaried class and the income earning capacity
during the period of loan for others.
• Repayment: Repayment will not ordinarily extend
beyond a person’s age of retirement if he/she
employed or on reaching 70 years of age,
whichever is earlier. The borrower’s credit
history has a vital role to play. A good
repayment record would help customer to avail
a healthy loan amount.

• Security: Generally, the property purchased or
constructed out of the bank loan is taken by way
of mortgage. Sometimes, when the income of the
spouse is taken for arriving at the quantum of
loan, his/her guarantee is also taken as personal
security or he/she is taken as a co borrower.
• Margin: proponents have to contribute a certain
percentage of project cost which depends upon the
cost of the flat, registration charges, stamp duty
etc. RBI has stipulated that banks have to
maintain loan to value ratio as per the cost of
the flat.

• Loan-to Value (LTV) Ratio and Risk weights As
per the guidelines issued by RBI w.e.f 8th
October 2015, the following LTV ratios have to
be maintained by banks in respect of individual
housing loans.

(a) While deciding the quantum of loan to be
granted as housing finance, banks should abide
by the following Loan to Value (LTV) and Risk
Weights (RWs):
Category of Loan LTV Ratio (%) Risk Weight (%)
(a) Individual Housing Loans
Up to ₹ 30 lakh
< 80 35
> 80 and < 90 50
Above ₹ 30 lakh & unto ₹ 75 lakh < 80 35
Above ₹ 75 lakh < 75 50
(b) CRE – RH NA 75

• As a counter cyclical measure, for Individual
Housing Loans sanctioned on or after October
16, 2020 and up to March 31, 2022, the risk
weights shall be as per the circular
DOR.No.BP.BC.24/08.12.015/2020-21 dated October
16, 2020 on Individual Housing Loans –
Rationalisation of Risk Weights. The risk
weights are as under :
LTV Ratio (%) Risk Weight (%)
≤ 80 35
> 80 and ≤ 90 50

• Rate of Interest: There are two kinds of interest
rates for housing finance in India - Fixed rate and
Floating rate interests. Some HFC’s have fixed rate
of interest which means that the interest rates
remain unchanged till the reset period as per the
agreement between the lender and person availing the
loan.
• This basically means that a person does not
benefit, even if the rates of interest drop in the
market while the floating rate interest fluctuates
according to the market lending rate. The interest
rates may vary from institutions to institutions.

• Documents Required At the time of applying for the loan, banks
ask for some necessary documents namely;
• (a) Agreement of Sale/Sale deed
• (b) No Encumbrance certificate/NIL EC (for 13 years)
• (c) Parent document for 30 years
• (d) Approved building plan
• (e) Patta (NOC from Housing Board, etc., wherever applicable)
• (f) Valuation report from the Bank’s approved engineer/Architect
• (g) Bank statement for last 12 months
• (h) Salary Certificate for self and spouse (if spouse income is
also taken into account for arriving at the eligibility) and as
proof of employment.
• (i) IT Returns for 3 years in case of
professionals/businessmen/self-employed persons.

• Levy of foreclosure charges/pre-payment penalty The
Committee on Customer Service in Banks (Chairman: M.
Damodaran) had observed that foreclosure charges
levied by banks on prepayment of home loans are
resented upon by home loan borrowers across the
board especially since banks were found to be
hesitant in passing on the benefits of lower
interest rates to the existing borrowers in a
falling interest rate scenario, Having regard to
these observations, RBI instructed that banks will
not be permitted to charge foreclosure charges/pre-
payment penalties on home loans on floating interest
rate basis w.e.f. 05-06-2012.

• Consumer protection measures:
• (a) If an applicant owns a plot/land and approaches
the banks/FIs for a credit facility to construct a
house, before sanctioning the home loan a copy of
the sanctioned plan by competent authority in the
name of a person applying for such credit facility
must be obtained.

• (b) An affidavit-cum-undertaking must be obtained
from the person applying for such credit facility
that he shall not violate the sanctioned plan,
construction shall be strictly as per the
sanctioned plan. Further the undertaking should
specify that it shall be the sole responsibility
of the executants to obtain completion
certificate within 3 months of completion of
construction, failing which the bank shall have
the power and the authority to recall the entire
loan with interest, costs and other usual bank
charges.

• (c) A certificate by an Architect appointed by the
bank be obtained at various stages of
construction of building that the construction of
the building is strictly as per sanctioned plan.
The Architect should also certify at a particular
point of time that the completion certificate of
the building issued by the competent authority
has been obtained. An Architect appointed by the
bank must also certify before disbursement of the
loan that the built up property is strictly as
per sanctioned plan and/or building bye-laws

• (d) where the loan is sought for purchase of
ready built up house/flat, it should be
mandatory for him to declare by way of an
affidavit-cum-undertaking that the built up
property has been constructed as per the
sanctioned plan and/or building bye-laws. In
addition, the undertaking to specify about
obtention of completion certificate also.

Personal Loans
• Generally, banks give a loan against some
security, so that it can fall back on it in case
of a default.
• However, sometimes loans are given against
personal security without any tangible security.
• Examples are salary loan, loan to pensioners, loan
to professionals, etc. Most of the banks give
loans to the salaried class as the source of
income is regular.

• Procedure and Practices for Salary Loans
• Target group: Permanent employees with a
minimum service/experience of say three years,
with a Govt./quasi
Govt./boards/endowments/reputed companies/
corporate industrial establishment, etc. The
stipulation of minimum period of service may
vary from bank to bank.
• Purpose: For meeting of marriage/educational
and medical expenses, to celebrate family
functions and for other household expenses.

• Eligible Amount: The eligible amount of a loan is
calculated based on so many times of the
gross/net salary. While arriving at the quantum of
loan, the minimum take home pay say, forty per
cent of the gross salary, will be stipulated after
the proposed EMI. Some banks consider a greater
amount of the loan, if the employer gives an
undertaking to the bank to recover the EMI from
the salary and remit it into the bank. In
addition, when the salary is credited with an
account, maintained with the branch, banks
normally consider a larger quantum of loan.

• Security: Sometimes banks insist on the guarantee of
another person, if there is no collateral security, or
in case, the account is with the branch, a letter giving
an undertaking from the borrower to debit his account for
the EMI. When the employer of the borrower sponsors the
loan, the employer is asked for an undertaking addressed
to the bank to recover the EMI from the salary and remit
into the bank.
• Documents: Proof of employment and salary certificate are
normally obtained. After sanction of the loan, banks
take the necessary loan documents such as; DPN, salary
loan agreement, etc., from the borrower and a guarantee
agreement from the guarantor, if any.

• Other Aspects
• The rate of interest on this loan will be higher than
other loans as there is no collateral security.
• As per RBI notification, banks should not accept
fresh or additional postdated cheques (PDC) or EMI
cheques at locations where ECS facility is available.
Instead ECS (Debit) mandates be obtained. The move is
aimed at cutting usage of cheques and promoting
electronic transfer. It will also save borrowers the
efforts of going to branch for collection of cheque
books.
• Banks allow 36–60 months as repayment period.
• Normally banks levy a certain percentage of the loan
amount; say one per cent, as a processing fee.

Education Loans
• Human resources development and empowerment of
any country is basically dependent upon
education of its citizens. The driving force for
economic growth in the coming years is
dependent on knowledge and information.
• However, the cost of education has been going
up in recent times. In such a situation loans
for education are seen as investments for
economic development and prosperity.

• The objective of Educational Loan Scheme is
providing financial support from the banking
system to meritorious students for pursuing higher
education in India and abroad.
• The main thrust is that a meritorious student,
even if he/she belongs to a poor family, is
provided with an opportunity to pursue education
with the financial support from the banking
system at affordable terms and conditions.

• ELIGIBILITY
• (a) The student should be an Indian national.
• (b) To be eligible for loan the student should
have secured admission to a higher education
course in recognized institutions in India or
abroad through Entrance Test/Merit Based
Selection process after completion of HSC (10
plus 2 or equivalent).
• (c) For admission to some of the post graduate
courses or research programmes instead of totally
relying on marks obtained in the qualifying
examination banks do consider other criteria such
as employability and reputation of the
institution concerned.

• COURSES ELIGIBLE
• Studies in India: (Indicative list)
• Approved courses leading to graduate/post graduate degree
and PG diplomas conducted by recognized colleges/universities
recognized by UGC/Government/AICTE/AIBMS/ICMR etc.
• Courses like ICWA, CA, CFA etc.
• Courses conducted by IIMs, IITs, IISC, XLRI, NIFT, NID etc.
• Regular Degree/Diploma courses like Aeronautical, pilot
training, shipping, degree/diploma in nursing or any other
discipline approved by Director
• General of Civil Aviation/Shipping/Indian Nursing Council or
any other regulatory body as the case may be, if the course
is pursued in India.
• Approved courses offered in India by reputed foreign
universities

• Studies Abroad
• Graduation: For job oriented
professional/technical courses offered by reputed
universities.
• Post-graduation: MCA, MBA, MS, etc.
• Courses conducted by CIMA- London, CPA in USA
etc.
• Degree/diploma courses like aeronautical, pilot
training, shipping etc. provided these are
recognized by competent regulatory bodies in
India/abroad for the purpose of employment in
India/abroad.

• EXPENSES CONSIDERED FOR LOAN
• i. Fee payable to college/school/hostel
• ii. Examination/Library/Laboratory fee
• iii. Travel expenses/passage money for studies
abroad
• iv. Insurance premium for student borrower, if
applicable
• v. Caution deposit, Building fund/refundable
deposit supported by Institution bills/receipts.

• vi. Purchase of books/equipments/instruments/uniforms
• vii. Purchase of computer at reasonable cost, if
required for completion of the course
• viii. Any other expense required to complete the course
- like study tours, project work, thesis, etc.
• ix. While computing loan required, scholarships, fee
waiver etc., if any available to the student borrower
may be taken into account.
• x. If the scholarship component is included in the loan
assessment, it may be ensured that the scholarship
amount gets credited to the loan account when received
from the Government

• QUANTUM OF FINANCE
• Need based finance to meet the expenses worked out
as per para 3 above will be considered taking in
to account margins, subject to the following
• - Studies in India - Maximum up to Rs.10 lakhs. -
• Studies Abroad - Maximum up to Rs 20 lakhs. The
limits are as per the model education loan scheme
brought out by IBA.
• However, some of the banks have their education
loan scheme with higher limit for undergoing
studies at IIMs, ISB or universities/colleges
abroad.

• MARGIN
• Up to Rs 4 lakhs Nil
• Above Rs 4 lakhs Studies in India 5% Studies
• Abroad 15% However, up to Rs 7.5 lakhs, margin
will be ‘Nil’, if loan is eligible for the
Credit Guarantee coverage.
• Scholarship/assistantship to be included in
margin. Margin may be brought-in on year-to-
year basis as and when disbursements are made
on a pro-rata basis

• SECURITY
• The loan documents should be executed by the
student and the parent/guardian as joint-
borrower.
• There is no specific restriction with regard to
the age of the student to be eligible for
education loan. However, if the student is a
minor while availing the loan, the security
documents are to be executed by the parent.
• Upon minor attaining the age of majority banks
obtain a letter of ratification.
• In case of a married person, joint borrower
can be spouse or the parent(s)/parents-in-law.

• The security can be in the form of
land/building/Government securities/Public Sector
Bonds/Units of UTI, NSC, KVP, life policy, gold,
and shares/mutual fund units/debentures, bank
deposit in the name of student/parent/guardian/any
other third party or any other tangible security
acceptable to the bank with suitable margin.
• Wherever the land/building is already mortgaged,
the unencumbered portion can be taken as security
on second charge basis provided it covers the
required loan amount.

• REPAYMENT
• Repayment Holiday/Moratorium: Course period + 1 year.
In special circumstances, banks consider moratorium
taking into account spells of under-
employment/unemployment, say two or three times
(maximum of 6 months at a time) during the life
cycle of the loan.
• Banks also encourage student borrowers who want to
set up start-up units by giving moratorium on
repayment of principal and interest during
incubation period which may be considered up to 2
years.
• If the student is not able to complete the course
within the scheduled time, extension of time for
completion of course may be permitted for a maximum
period of 2 years.

• Repayment of the loan will be in equated monthly
instalments for a period of 15 years for all categories.
No prepayment penalty will be levied for prepayment of
loan any time during the repayment period.
• While EMI based repayment is the generally accepted
practice, many times the salary levels at the start of
the career may not facilitate comfortable payment of EMI
in certain cases (e.g. professionals like Doctors).
• Telescoping of repayment with stepped up instalments
with passage of time may be considered by banks in such
cases.

• INSURANCE
• Banks may ask the borrower to arrange for life
insurance policy of the student availing
Education Loan (Source- Model educational loan
scheme for pursuing higher education in India
and abroad- 2015 of IBA.)

SKILL DEVELOPMENT AND ENTREPRENEURSHIP LOAN
SCHEME (SKILL LOAN SCHEME)
• The Govt. of India has launched the National Skill
Development Mission and unveiled the new National Policy
for Skill Development and Entrepreneurship 2015.
• As per the document on the framework of implementation of
the “National Mission for Skill Development” India
currently faces a severe shortage of well-trained, skilled
workers.
• Therefore, India must focus on scaling up skill training
efforts to meet the demands of employers and drive economic
growth.
• Keeping these aspects in mind the earlier model loan scheme
for vocational education and training which was prepared in
2012, has been replaced with a new Skill loan scheme based
on scheme finalized by the department of Financial Services
of Govt. of India.

• Objective - To provide loan facility to individuals who
intend to take up skill development courses
• Eligibility - Any individual who has secured admission in
a course run by Industrial Training Institutes (ITIs),
Polytechnics or in a school recognized by central or
State education Boards or in a college affiliated to
recognized university, training partners affiliated to
National Skill Development Corporation (NSDC)/ Sector
Skill Councils, State Skill Mission, State Skill
Corporation, preferably leading to a
certificate/diploma/degree issued by such organization as
per National Skill Qualification Framework (NSQF) is
eligible for a Skilling Loan.
• There is no minimum course duration. Minimum
Qualification and age - Qualification as specified by the
enrolling institutions and there is no specific
restriction with regard to the age of the student to be
eligible for skilling loan

• Quantum of finance - Max Rs 1,50,000 to cover
tuition fees, other reasonable expenditure
found necessary for completion of the course
including but not limited to assessment fee,
Examination fee, Library charges, Laboratory
fee, Caution deposit, Purchase of books,
equipment’s and instruments.
• Margin - Not exceeding 10% of the total course
expenditure

• Security - No collateral security to be obtained. However,
Banks have option to apply to the National Credit Guarantee
Trust Company Ltd (NCGTC) for credit guarantee against
defaults and NCGTC will provide such guarantee at nominal
guarantee fee which shall not exceed 0.5% of the amount
outstanding.
• Such credit guarantee cover will be for a maximum of 75% of
the outstanding loan amount (including interest, if any).
• In special cases such as the North Eastern region (NE) and
Left Wing Extremism (LWE) affected areas the percentage may
be increased on the discretion of NCGTC. Banks have the
option to recover or not to recover the fees payable for
said guarantee.

• Moratorium period and repayment of loan - Upon
completion of the course, repayment will start
after a moratorium period as indicated below
• Courses of duration up to 1 year: up to 6 months
from the completion of the course
• Courses of duration above 1 year: 12 months from
the completion of the course.

• The loan will have a tenure as follows:
• Loans up to Rs. 50,000 - Up to 3 years
• Loans between Rs. 50,000 to Rs. 1 lakh - Up to
5 years
• Loans above Rs. 1 lakh - Up to 7 years No
prepayment charges are to be recovered.
• (Source- IBA Model skill loan scheme)

Consumer loans
• Another major category of loans considered by
the banks is the consumer loan. Procedure and
Practices for Consumer Loans
• Target group: Salaried class, pensioners,
professionals, self-employed business persons
and other individuals who have regular income.
• Purpose: For purchase of consumer durables and
white goods like TV, air conditioners,
refrigerators, personal computers and
accessories, etc.

• Eligible amount: While arriving at the quantum of
loan, the cost of the article to be purchased and
the margin be brought by the borrower are taken into
account. The minimum take home pay, say forty per
cent of the gross salary, shall also be ensured
after the proposed EMI.
• Security: Hypothecation of the article purchased out
of the bank loan.
• Margin: Normally a margin of 10–20 per cent is
stipulated.
• Repayment: Banks allow a thirty-six to sixty months’
repayment period.

• Documents: The documents to be obtained are:
• salary certificate for three months for self and spouse (if
spouse income is also taken into account for arriving at the
eligibility)
• IT returns/Form 16, for two to three years in case of
professionals, businessmen, Self-employed persons. Quotations
of the articles selected from a reputed dealer.
• Statement of account/passbook, showing one year’s transactions.
• Post-dated cheques for the future EMI/ECS.
• After sanction of the loan, banks take necessary loan documents
such as DPN, hypothecation agreement, etc., from the borrower
and a guarantee agreement from the guarantor if any.
• Normally banks levy a certain percentage of the loan
amount, say one per cent, as a processing fee.

NEGOTIABLE INSTRUMENTS.
• Negotiable instruments are specialized
financial documents that represent a promise to
pay a specified sum of money to a designated
person or entity. These instruments are
typically transferable from one party to
another, which means they can be used as a form
of payment or as a means of borrowing money.

• The Negotiable Instruments Act, 1881 (hereafter
referred as NI Act) does not particularly define the
term ‘Negotiable Instrument’.
• The NI Act states in its preamble that it seeks to
define the law relating to promissory note, bill of
exchange and cheque and therefore it deals with only
these three kinds of negotiable instruments.
• These negotiable instruments have certain common
features and any instrument that possesses these
features may be considered to be a negotiable
instrument (e.g. bank drafts, government promissory
notes).

• The common features of negotiable instruments are as
follows:
• In Writing: A negotiable instrument must be in
writing. Verbal promises are not considered
negotiable instruments.
• Unconditional Promise: The instrument contains an
unconditional promise to pay a specified amount of
money. In the case of a bill of exchange, it
contains an unconditional order to pay.
• Specific Amount: The instrument must specify a
certain sum of money to be paid. This amount should
be clearly mentioned in both words and figures to
avoid ambiguity.

• Payable on Demand or at a Fixed Time: A negotiable
instrument can be payable either on-demand (e.g.,
a demand draft) or at a fixed future date (e.g., a
post-dated check).
• Date: Every negotiable instrument should bear a
date of issue. If no date is mentioned, it is
presumed to be a demand instrument.
• Signature: The instrument must be signed by the
maker or drawer. This signature signifies the
commitment to make the payment.

• Payee's Name: The instrument may be made payable
to a specific person (order instrument) or to the
bearer (bearer instrument). Order instruments are
transferable by endorsement, while bearer
instruments are transferable by delivery.
• Stamp Duty: Depending on the value and
jurisdiction, the instrument may require
appropriate stamping to be legally valid.
• Crossing (for cheques): In the case of checks,
they may be crossed, indicating that the payment
should be made through a bank and not in cash.

• Place of Payment: The instrument may specify a
place where the payment should be made. If not
specified, it is generally payable at the maker's
place of residence or business.
• Transferability: Negotiable instruments are
designed for easy transfer. Order instruments can
be transferred by endorsement, while bearer
instruments can be transferred by mere delivery.
• Negotiation and Holder's Rights: The holder of a
negotiable instrument has the legal right to sue
in their own name for non-payment.

• Liability for Dishonor: If the instrument is
not honored (i.e., payment is not made as
promised), the party at fault becomes legally
liable and may be sued for non-payment.
• Legal Presumptions: The law provides certain
legal presumptions and rules related to
negotiable instruments to aid in their
interpretation and enforcement.

Types of Negotiable
Instruments
Promissory
notes
Bills of
Exchange
Cheques Other
Delivery
notes
Hundis
Demand
Drafts
Banker’s
Cheques
Travelers
cheques
Postal
Orders
Certificate
of deposits

Promissory notes
• A promissory note, as defined by the Negotiable
Instruments Act, 1881 in India, is a legally
binding financial instrument that contains an
unconditional promise made by one party, known
as the "maker" or "drawer," to pay a specified
sum of money to another party, known as the
"payee" or "holder," on demand or at a fixed
future date. Here are the key elements and
characteristics of a promissory note under the
Negotiable Instruments Act in India:

• Unconditional Promise to Pay: The core feature of
a promissory note is an unequivocal and
unconditional promise to pay a specific sum of
money. There should be no ambiguity or conditions
attached to this promise.
• In Writing: A promissory note must be in writing.
An oral promise to pay does not constitute a valid
promissory note under the law.
• Specific Amount: The amount to be paid should be
clearly mentioned in the promissory note, both in
words and figures, to prevent any ambiguity.

• Payment Date: The note should specify a date for
payment. It can be payable on demand or at a
specific future date. If there's no date
mentioned, it is presumed to be a demand note,
payable upon presentation.
• Promisor's Signature: The promissory note must be
signed by the maker, indicating their commitment
to make the payment. The signature can be
handwritten or in some form of authentication
recognized under the law.

• Payee's Name: The note may be made payable either to a
specific person (an "order" promissory note) or to the
bearer (a "bearer" promissory note). Order promissory
notes can be transferred through endorsement, while
bearer notes can be transferred by delivery.
• Place of Payment: The note may specify a place where
the payment is to be made. If not mentioned, it is
typically payable at the maker's place of residence or
business.
• Stamp Duty: Depending on the value of the note and
local stamp duty regulations, it may require

Bills of Exchange
• “A bill exchange is 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.” (Section 5 of NI Act).

• Unconditional Order to Pay: The primary feature
of a bill of exchange is an unconditional and
written order to pay a specific sum of money.
The order to pay must be clear and unambiguous.
• In Writing: A bill of exchange must be in
writing. An oral order to pay does not
constitute a valid bill of exchange under the
law.

• Three Parties: A bill of exchange involves three
parties:
• Drawer: The party who issues the bill and orders the
payment.
• Drawee: The party upon whom the bill is drawn, and who is
directed to make the payment.
• Payee: The party to whom the payment is to be made. The
payee can be a specific person or the bearer of the bill.
• Payment Date: The bill should specify a date on
which payment is to be made. It can be either
payable immediately upon presentation (a sight
bill) or at a specific future date (a time bill).

• Drawee's Acceptance (Optional): In the case of a bill
payable at a future date, the drawee can choose to
"accept" the bill, thereby confirming their willingness
to pay on the specified date. An accepted bill is known
as a "trade acceptance."
• Place of Payment: The bill may specify a place where
the payment is to be made. If not mentioned, it is
typically payable at the drawee's place of residence or
business.
• Stamp Duty: Depending on the value of the bill and
local stamp duty regulations, it may require

Cheque
• “A cheque is a bill of exchange drawn on a
specified banker and not expressed to be
payable otherwise than on demand”. (Section 6 of
NI Act). Like a bill of exchange, a cheque also
has three parties. The drawer is the account
holder signing the cheque; drawee is always the
bank (branch where the account holder maintains
his account) and the payee is the beneficiary
who will receive the amount mentioned

• Payable on Demand: A fundamental feature of a
cheque is that it is payable on demand. This
means that the payee can present the cheque for
payment at any time after it is issued.
• In Writing: A cheque must be in writing, and it
typically includes the following elements:
• The name of the bank on which it is drawn.
• The amount to be paid, specified both in words and
figures.
• The date of issue.
• The drawer's signature.
• The payee's name or "bearer" (if it is made payable
to the bearer).

• Drawer and Drawee: In a cheque, the party who
writes the cheque and orders the payment is known
as the "drawer." The bank on which the cheque is
drawn is referred to as the "drawee."
• Crossing (Optional): The drawer of the cheque may
choose to "cross" it, indicating that the payment
should be made into a bank account and not in
cash. Crossing adds a layer of security to the
payment.
• Account Payee: The words "Account Payee" may be
added to the crossing, further specifying that the
payment should be credited to the payee's bank
account and not paid in cash.

• Post-Dated Cheques: A post-dated cheque contains a
date in the future when it can be presented for
payment. It is a common practice for transactions
where the payer wants to delay the payment.
• Holder's Rights: The holder of a cheque has the
legal right to present it for payment, and the
bank is obligated to honor it if there are
sufficient funds available in the drawer's
account.
• Dishonor and Legal Consequences: If a cheque is
not honored due to insufficient funds or other
reasons, the payee has the right to take legal
action to recover the amount. The drawer may face
penalties for issuing a dishonored cheque.

Crossing of cheques
• Crossing a cheque is a practice in which two
parallel lines are drawn across the face of the
cheque, along with the addition of certain
words or notations. This is done to specify how
the payment should be made and to enhance the
security of the transaction. In India, the
crossing of cheques is governed by the
Negotiable Instruments Act, 1881, and it serves
several important purposes:

• Security: Crossing a cheque makes it more secure
by reducing the risk of theft or fraudulent
alterations. When a cheque is crossed, it can only
be credited to the bank account of the payee, and
it cannot be encased over the counter for cash.
• Payment to Bank Account: A crossed cheque is meant
to be paid into the bank account of the payee, as
indicated by the crossing. This helps ensure that
the funds are deposited directly into the intended
recipient's account.

• Non-Negotiable: A crossed cheque is considered
non-negotiable, meaning it cannot be
transferred to another person by mere
endorsement. It can only be deposited into the
specified payee's bank account.
• Drawer's Signature: The drawer must sign the
cheque on the face of it, often near the
crossing, to authenticate the transaction

Types of Cheque Crossing
• General Crossing (Section 123):
• A general crossing involves drawing two parallel lines
across the face of the cheque without any additional
instructions. This crossing signifies that the cheque is to
be paid into a bank account, and it cannot be encased over
the counter for cash. The words "or bearer" are usually
omitted in the case of a general crossing.
• Example:
• Suppose you issue a cheque for INR 10,000 to John Smith, and
you draw two parallel lines across it without any additional
words. In this case, John Smith can deposit this cheque into
his bank account at XYZ Bank, and the funds will be credited
to his account.

• 3. Account Payee Crossing (Section 131):
• An account payee crossing involves drawing two parallel
lines across the cheque and adding the words "Account
Payee" between the lines. This crossing is used to
emphasize that the payment should be credited only to the
bank account of the payee and should not be paid in cash.
The words "or bearer" should not appear on an account
payee crossed cheque.
• Example:
• Suppose you issue a cheque for INR 15,000 to David
Johnson, and you draw two parallel lines across it with
"Account Payee" written between the lines. In this case,
David Johnson can only deposit this cheque into his bank
account, and it cannot be encased for cash.

• Special Crossing (Section 124): In a special
crossing, the cheque is crossed with the name of a
specific bank or a specific branch of a bank
written between the parallel lines. This specifies
that the payment should be made only through that
particular bank or branch. The words "or bearer"
are also omitted in a special crossing.
• For example, if you write "Axis Bank" between the
lines, it means the cheque can only be credited to
an Axis Bank branch, and not to any other bank.

Other Negotiable Instruments
• In addition to promissory notes, bills of exchange, and
cheques, which are the primary types of negotiable
instruments under the Negotiable Instruments Act, 1881 in
India, there are some other forms of negotiable
instruments that are recognized and used in specific
contexts. These include:
• Demand Draft (DD): A demand draft is similar to a cheque,
but it is issued by a bank on behalf of a customer and is
payable on demand. It is often used for secure and
guaranteed payments.
• Banker's Cheque: A banker's cheque, also known as a bank
draft, is a type of demand draft issued by a bank and
drawn on the bank's own account. It is commonly used for
high-value transactions

• Certificate of Deposit (CD): While not a
traditional negotiable instrument in the sense of
promissory notes or bills of exchange, a
Certificate of Deposit is a time deposit issued by
a bank for a specified period. It can be
transferred or sold in the secondary market.
• Traveler's Cheques: Traveler's cheques are pre-
paid instruments issued by banks for travelers to
use when traveling abroad. They provide a secure
means of carrying and accessing funds while
abroad.

• Postal Orders: Postal orders are financial instruments
issued by postal authorities. They are used for
remittance or payment and are often employed for small-
value transactions. They are backed by the postal
system's guarantee.
• Delivery Orders: Delivery orders are instruments used to
direct the delivery of goods to a specified person or
order, or to the bearer. They are often used in trade and
commerce, particularly in cases involving the delivery of
goods or commodities.
• Hundi: Hundis are a type of bill of exchange widely used
in some regions of India. There are different types of
hundis, each with its specific features and use cases.

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