(Chapter 5) Collecting and Paying Banker

Collecting Banker: A Collecting Banker is one who undertakes to collect various types of instruments representing money in favour of his customer or his own behalf from the drawers of these instruments; some are negotiable instruments as provided for in the negotiable instruments Act. 1881 and some are quasi negotiable instruments.

Negotiable Instruments: As per section number 13 of the negotiable instrument Act. 1881, “A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer”.  A Banker’s draft is also negotiable instrument.

1. Promissory Note: A promissory note is an instrument in writing containing an unconditional under taking signed by the maker to pay on demand or at a fixed or determinable future time a certain sum of money only to, or to the order of a certain person, or to the bearer of the instrument.

2. Bill of Exchange: A bill of exchange is an instrument in writing containing an  unconditional order signed by the maker directing a certain person to pay on demand or at a fixed or determinable future time a certain sum of money only to or the order of a certain person or to the bearer of the instrument.

3. Cheque: A cheque is a  unconditional order of the drawer in writing bearing a date, to the Banker maintaining his account to pay on demand, to a named person, his order or bearer, a certain specified sum of money, expressed in both figures and words.

Quasi Negotiable instruments: The negotiable instruments Act. 1881 does not talk of any other negotiable instruments except bills, promissory notes, cheques and bank drafts. But there are some instruments which are in practice, treated negotiable for certain events only and are so regarded by usage and custom. Some of these are documents of tittle of goods and property while others are documents of value. Such as, Bill of lading, railway receipts, stock and share certificates, debentures, dividend warrants, interest coupons & treasury bills.

Duties & Responsibilities of Collecting Bankers:

• Acting as agent: While collecting an instrument, whether for credit to customer’s account or for himself, the Bankers works as agent of his customer. As an agent he has generally to take such steps & precautions to protect the interest or his customer as a man of ordinary prudence would take to safe-guard his own interest.

• Scrutinizing the instruments: Name of the holder, Branch name, date, amount in world and figure, any cutting without signature, material alteration of any to be checked carefully.

• Checking the endorsement: Bankers has to check the instrument whether it has been endorsed properly.

• Presenting the instrument in due time: It is the responsibility of the collecting bank to present the instrument in due time to the paying bank.

• Collecting the proceeds in the payee’s account: It is the duty of collecting banks to collect and credit the proceed of the instruments to the proper/correct account.

• Notice of dishonor and returning the instruments: If any instrument is dishonored by the paying bank it should be informed   to the customer on the business day following the receipt of the unpaid instruments.

Collecting Banker’s Protection:

Under section 131 of negotiable instrument Act the collecting banker is not liable to the true owner of a cheque or a banker’s draft if his title to the instrument proves defective provided the cheque or draft was one crossed generally or specially to himself and collected for a customer is good faith and without negligence.

The above statutory protection is available to the collecting banker only if he fulfills the following conditions:

i.              The cheque he collected is a crossed cheque.

ii.             He collected such crossed cheque only for his customer as an agent & not as a holder for value.

iii.            He collected such crossed cheque in good faith and without negligence.

No Protection:

• Opening of A/c without satisfactory references/ introduction.
• Crediting the proceeds of cheque to an endorsee with irregular endorsement.
• Crediting the proceed of a cheque to the personal A/c of director, partners or any employee when it is payable to the company.
• Crediting the proceeds of charge to personal name of the official when it is payable to a govt. agency, autonomous body, or corporation.
• Crediting the amount of a cheque in the personal A/c which is drawn by an agent on behalf of its principal.
• When the customer depositing the cheque is of little means and the cheque deposited suddenly is of sizable amount and the banker credited the proceeds there to without making proper enquiry.
• Cheque drawn by customer is dishonored very often and crediting such account with the proceeds of collecting cheque without making proper enquiry.
• If the crossed cheque is collected and credited the proceed to the other account.

Paying Bankers duties & responsibilities.

A banker on whom the cheque is drawn should pay the cheque, when it is presented for payment. It is his obligation by section 31 of the NI Act. A banker is bound to honour his customers cheque to the extent of the fund available & the existence of no legal bar for payment. The paying banker should use reasonable care and diligence in paying a cheque so as to abstain from any action likely to damage his customers credit.

At the time of making payment of he should observe the following very carefully:

i.              Verification of signature of the drawer.

ii.             Verification of the genuineness of he instrument.

iii.            Payment not stopped by the A/c holder.

iv.           Holders title on the cheque is valid.

v.            A/c is not dormant one.

vi.           A/c holder is not bankrupt, deceased and insanse.

vii.          A/c is not under subject of liquidation process.

viii.         No. ‘Guernsey Order’ is issued by count.

ix.           Properly endorsed.

x.            Cheque is not drawn beyond limit fixed by the drawer is respect of amount.

xi.           Instrument  being presented is crossed.

xii.          Instrument  is not state or post dated.

xiii.         No material alteration is made.

xiv.         Sufficient balance in the A/c