Unit 2 : Paying and Collecting Banker

Paying Banker: “Paying banker is a banker, who actually pays a cheque to his
customer or to the order of his customer”.
The paying banker is “the bank on which a cheque is drawn (the bank whose name is
printed on the cheque) and which pays the amount for which the cheque is written and
deducts that sum from the customer’s account”.
The paying banker is the bank whose name is printed on a given cheque. Or he is
the banker who is liable to pay the value of a cheque of a customer as per the contract.
In simple words, Paying banker is a bank on which a cheque or draft is drawn;
the bank which cashes it. It is also called as Accepting Bank, Drawee Bank or Payer
Bank.
Cheque: A cheque is a document that orders a bank to pay a specific amount of money
from a person’s account to the person in whose name the cheque has been issued. The
drawer writes the various details including the monetary amount, date and a payee on
the cheque and signs it, ordering their bank, known as the drawee, to pay that person or
company the amount of money stated.
In other words, a cheque is a negotiable instrument, which can be passed from
hand to hand easily and so it has become a popular mode of payments. A cheque is the
most economical and safe method of money transaction because the transfer cost is very
low and also the possibility of loss is minimum.
Features of a Cheque
1. Instruments in writing: A cheque must necessarily be an instrument in writing.
Oral orders do not constitute a cheque.
2. An unconditional order: A cheque is an order to pay and it is not request.
3. On a Specified Banker: A cheque is always drawn on a particular bank only.
Usually the name and address of the banker is clearly printed on the cheque leaf
itself.
4. Payee to be certain: A normal cheque is one in which there is a drawer, a drawee
whom the amount the cheque payable. The payee must, therefore be a certain
person. He may be a human being or an artificial person like company, trade union
etc.
5. A Certain Sum of Money: A cheque is usually drawn for a definite sum of
money. Bankers request their customers to draw the amount both in words and
figures.
6. Payable on Demand: A cheque is always payable only on demand.

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 7. To be signed by the drawer: The cheque must be signed by the drawer. Normally
he puts the signature at the bottom right hand corner of the cheque. If the signature
differs from the specimen or it is slightly different, the banker will not honour the
cheque.
Types of Cheques
1. Bearer Cheque: When the words “or bearer” on the face of the cheque are not
cancelled, the cheque is called a bearer cheque. The bearer cheque is payable to the
specified therein or to any other else who presents it to the bank for payment. However,
such cheques are risky, this is because if such cheques are lost, the finder of the cheque
can collect payment from the bank.
2. Order Cheque: When the word “bearer” appearing on the face of a cheque is
cancelled and when it its place 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
therein as the payee, or to any one else to whom it is endorsed (transferred).
3. Uncrossed / Open Cheque: When a cheque is not crossed, it is known as an “Open
Cheque” or an “Uncrossed Cheque”. The payment of such a cheque can be obtained at
the counter of the bank. An open cheque may be a bearer cheque or an order one.
4. Crossed Cheque: Crossing of cheque means drawing two parallel lines on the face
of the cheque with or without additional words like “& Co” or “Account Payee” or “Not
Negotiable”. A crossed cheque cannot be encashed at the cash counter of a bank but it
can only be credited to the payee’s account.
5. Anti-Dated Cheque: If a cheque bears a date earlier than the date on which it is
presented to the bank, it is called as “anti-dated cheque”. Such a cheque is valid upto
three months from the date of the cheque.
6. Post-Dated Cheques: If a cheque bears a date which is yet to come (future date) then
it is known as post-dated cheque. A post-dated cheque. A post-dated cheque cannot be
honoured earlier than the date on the cheque.
7. Stale Cheque: If a cheque is presented for payment after three months from the date
of the cheque it is called stale check. A stale cheque is not honoured by the bank.
Duties and Responsibilities of a Paying Banker
A banker has an obligation to honour cheques of its customer, drawn on him and
presented for payment, subject to the condition that there are sufficient funds in the
accounts and the cheque is in order.

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 It is the duty of a paying banker to honour its customer cheques, after taking some
precautions. In other words, the paying banker is under an obligation to honour cheque
subject to some conditions, being satisfied. They are:
➢ There must be sufficient funds in the customer’s account on which cheque is
drawn.
➢ The funds should be properly applicable to the payment of such cheque.
➢ Cheque should be properly drawn and should bot be irregular or ambiguous.
➢ Cheque should be presented during the banking hours of the bank.
➢ Cheques should be presented for payment within the validity period.
Precautions to be taken by the Paying Banker: The paying banker must ensure that
the cheque received for honouring is regular in condition and should take the following
precautions while making payment of customer’s cheques.
1. Proper Form of the Cheque: The cheque must be in proper form. The cheque drawn
by the customer must satisfy all the requisites of a valid cheque. Otherwise, the bank
does not enjoy the statutory protection given to the paying bank.
2. Date of the cheque: If an undated cheque is presented, a bank must refuse to honour
or, either drawer/payee can fill in the date before it is presented. If a cheque is anti-
dated, it may be paid if it has not become stable by that time. If a cheque is post-dated,
he should honour it only on its due date.
3. Amount of the cheque: The amount must be certain and expressed in both words
and figures. If the amount is stated only in figures, the banker should return it with a
remark “Amount required to be stated in words”. However, if the amount stated in words
only, a banker may honour it. If the amount differs, the bank sends back the cheque to
the drawer with remark “Amount in words and figure differ”.
4. Material Alteration: A paying banker should be very cautious in finding the
alteration that may appear on a cheque. Any alteration / correction in cheque must be
made by / with the consent of the drawer and confirmed by the full signature to be valid.
5. Drawer’s Signature: The banker takes specimen signature of his customers at the
time of opening the account. Paying banker must compare the signature with the
specimen signature to ascertain that the cheque bears a genuine signature.
6. Mutilated Cheque: When a cheque is torn in such a way that it’s clear that the
intention was to cancel it, it should be returned with the remark “Mutilated”. When it’s
accidentally torn by the holder, confirmation by the drawer is needed.
7. Balance in Customer’s Account: The paying banker must verify whether the
customer has a credit balance in his account to permit the payment of the cheque.

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Sometimes, a number of cheques could be presented and the credit balance might not
be sufficient to meet them all.
8. Presentation of cheque during working hour: Cheque should be presented for
payment during working hour only. Cheque presented after banking hour should not be
honoured because such payment is not considered as payment in due course.
9. Type of the cheque: Before honouring the cheque, the banker must verify whether
the cheque presented to him for payment is an open cheque or a crossed cheque. If it is
an open cheque, he should make the payment across the counter. If it is a crossed cheque,
he should pay it only when it is presented through bank.
10. Regularity in the endorsement: Negotiable instrument is transferred by delivery
or by endorsement and delivery. While bearer cheques are transferred by mere delivery,
other instruments require endorsement and delivery. When a cheque is presented for
payment, the banker must examine whether all the endorsements on the cheques are
regular.
11. Account: A customer might have opened two or more accounts in the same branch
of a bank. Hence, the paying banker should see that the cheque of one account is not
used for withdrawing money from another account.
Statutory Protection to the Paying Banker: The responsibility of paying bander is
more risk oriented, because the duty of him is to pay the amount of the cheque to the
right person according to the instructions of his customer. If he makes the payment to a
wrong person knowingly or unknowingly, he himself will bear the loss.
1. Protection in case of an Order Cheques: The protection to the paying banker in
case of honouring an order cheque is to be dealt under section 85(1) of Negotiable
Instruments Act 1881. Under this section, the paying banker is protected if he makes
payment of an order cheque with forged endorsement on behalf of the payee. The section
also protects the paying banker if he makes payment of an order cheque with forged
endorsement on behalf of the payee. But the paying banker must fulfil the following two
conditions:
i. Endorsement must be regular
ii. Payment must be made in due course.
2. Protection in case of Bearer Cheques: When a particular cheque includes “or
bearer” on the face of the cheque and which is not cancelled, the cheque is called a
Bearer cheque. This type of cheques are payable to the person specified therein or to
any other else who presents it to the bank for payment. However, such cheques are
associated with risk; this is because if such cheques are lost, the finder of the cheque

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can collect payment from the bank. Section 85(2) provides protection to the paying
banker in respect of bearer cheques.
3. Protection in case of Crossed Cheques: When a particular cheque in which two
parallel lines are drawn on the face of the cheque with or without additional words like
“& Co.” or “Account payee” or “not negotiable” is called as Crossed Cheque. It cannot
be encashed at the cash counter of a bank but it can only be credited to the payee’s
account. The paying banker is protected by section 128. But the banker has to fulfil the
following two conditions.
i. Payment in due course.
ii. Requirement of the crossing.

Dishonour of Cheque: A cheque is said to be dishonoured when it is refused to accept

or pay when presented to the bank. It is a condition in which the paying banker does not
pay the amount of the cheque to the payee.
Grounds for Dishonour or Circumstances or Reasons for Dishonour of Cheques
1. Insufficiency of funds: When adequate funds are not available in the account of a
customer, then the cheque can be dishonoured. If the banker pays a countermanded
cheque, he will not only be required to reverse the entry but also be held liable to pay
damages for dishonouring the cheques presented subsequently which would have been
honoured otherwise.
2. Notice of the Customer’s Death: The banker should not make payments on cheques
presented after the death of the customer. He should return the cheque with the remark
‘Drawer Deceased’.
3. Notice of the Customer’s Insolvency: A banker should refuse payment on the
cheques soon after the customer is adjudicated as insolvent.
4. Receipt of the Garnishee Order: Where Garnishee order is received attaching the
whole amount, the banker should stop payment on cheques received after the receipt of
such an order. But if the order is for a specific amount, leaving the specified amount,
cheques should be honoured if the remaining amount is sufficient to meet them.
5. Presentation of a post dated cheque: The banker may refuse the cheque when the
cheque is presented before the valid date.
6. Stale Cheques: When the cheque is presented after a period of three months from
the date it bears, the banker may refuse to make payment.
7. Material Alterations: When there is material alteration in the cheque, the banker
may refuse payment.

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8. Drawer’s Signature: If the signature of the drawer on the cheque does not tally with
the specimen signature, the banker may refuse to make payment.
Types of Dishonour of Cheque: Dishonour of cheque can be divided into two
categories:
1. Rightful Dishonour
Dishonour of cheque by the drawee banker for any of the reasons specified above or for
any other rightful reason. In this case there is no remedy available against the banker
but the holder in due course has remedy both civil and criminal against the drawer.
2. Wrongful Dishonour
Dishonour of cheque by the banker due to negligence or carelessness by its employees.
The drawer may bring an action against the bank for losses suffered by him. The payee
has no action against the banker in this case.
Consequences of wrongful dishonour of Cheque
(i) Wrongful dishonour of the customer's cheque makes the Bank liable to compensate
the customer on contractual obligations as well as for injury to his creditworthiness. A
return of a cheque would cause injury to the drawer’s reputation.
(ii) Quantum of Damages is not limited to the actual pecuniary loss sustained by reason
of such dishonour. When the customer is a trader he is entitled to claim substantial
damages even if he had suffered no actual pecuniary loss sustained by such dishonour,
if he can show that his creditworthiness had suffered by the dishonour of the cheque.
(iii) A non-trader is not entitled to recover substantial damages unless the damage he
has suffered is alleged and proved as special damages, otherwise he would be entitled
to nominal damages.
(iv) The Plaintiff's evidence on the transaction was vague, ill-defined and indeterminate
and further he had not proved any actual or special damages, unless special damages are
claimed and proved nominal damages will be awarded.
Collecting Banker
A Collecting banker is one who undertakes to collect cheques, drafts, bill, pay order,
traveller cheque, letter of credit, dividend, debenture interest, etc., on behalf of the
customer. For undertaking this collection, the collecting banker will be charging
commission.
What are the Duties and Responsibilities of a Collecting Banker?
The duties and responsibilities of a collecting banker are discussed below:
1. Due care and carefulness in the collection of cheque.
2. Serving notice of dishonour.
3. Agent for collection.
4. Payment of interest to the customer.
5. Collection of bills of exchange.

1. Due Care and carefulness in the Collection of Cheques: The collecting banker is
bound to show due care and carefulness in the collection of cheques presented to him.

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In case a cheque is entrusted with the banker for collection, he is expected to show it to
the drawee banker within a reasonable time.

2. Serving Notice of Dishonour: When the cheque is dishonoured, the collecting

banker is bound to give notice of the same to his customer within a reasonable time. It
may be noted here, when a cheque is returned for confirmation of endorsement, notice
must be sent to his customer.
3. Agent for Collection: In case a cheque is drawn on a place where the banker is not
a member of the ‘clearing-house’, he may employ another banker who is a member of
the clearing-house for the purpose of collecting the cheque. In such a case the banker
becomes a substituted agent.
4. Payment of Interest to the Customer: In case a collecting banker has realised the
cheque, he should pay the interest to the customer as per his (customer’s) direction.
5. Collection of Bills of Exchange: There is no legal obligation for a banker to collect
the bills of exchange for its customer. But, generally, bank gives such facility to its
customers.

Statutory protection to Collecting Banks under the negotiable instruments Act.

The protection provided by Section 131 is not absolute but qualified. A collecting
banker can claim protection against conversion if the following conditions are fulfilled:
1. Good Faith and Without Negligence
Statutory protection is available to a collecting banker when he receives payment in
good faith and without negligence. The phrase in “good faith” means honestly and
without notice or interest of dishonesty or fraud and does necessarily require
carefulness. Negligence means failure to exercise reasonable care. The banker should
have exercised reasonable care and diligence.
2. Collection for a Customer
Statutory protection is available to a collecting banker if he collects on behalf of his
customer only. If he collects for a stranger or noncustomer, he does not get such
protection. A bank cannot get protection when he collects a cheque as holder for value
3. Acts as an Agent
A collecting banker must act as an agent of the customer in order to get protection. He
must receive the payment as an agent of the customer and not as a holder under
independent title. The banker as a holder for value is not competent to claim protection
from liability in conversion. In case of forgery, the holder for value is liable to the true
owner of the cheque.
4. Crossed Cheques
Statutory protection is available only in case of crossed cheques. It is not available in
case uncrossed or open cheques because there is no need to collect them through a
banker. Cheques, therefore, must be crossed prior to their presentment to the collecting
banker for clearance.

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HOLDER: Holder is an individual who has lawfully received possession of a
Commercial Paper, such as a cheque and who is entitle for payment on such instrument.
Section 8 of Negotiable Instrument Act 1881 defines ‘Holder’ as, “The holder of
a promissory note, bill of exchange or cheque means, any person entitled his own name
to the possession thereof and to receive or recover the amount due thereon from the
parties thereto. Where the note, bill or cheque is last or destroyed its holder is the person
so entitle at the time of such loss or destruction”.
Holder for Value: Holder for value is a holder to whom an instrument is issued or
transferred in exchange for something of value as a promise of performance or a
negotiable instrument. Example: A banker becomes a holder for value when the value
of cheque is paid before the collection of the cheque.
Holder in Due Course: A holder in due course is known as “bonafide holder for value
without notice”. A holder in due course is a person who acquires a promissory note, bill
or cheque banafide for value and maturity. In other words, a holder in due course is a
person who takes the instrument in good faith and for value.
Distinction between Holder and Holder in Due Course
Sl No. Basis Holder Holder in Due Course1
1 Entitlement Holder is entitled in his Holder in due course
own name to the acquires the possession
possession of the of the instrument for
instrument. consideration.
2 Consideration Consideration is not Consideration is
necessary. The instrument necessary for becoming
may be given as a gift or a holder in due course.
donation.
3 Maturity Holder may acquire the Holder in due course
instrument before or aftermust get the possession
its maturity. of the instrument before
its maturity.
4 Title Holder does not acquire Holder in due course
good title, if the title of acquires good title even
any of the prior parties though there was defect
was defective. in the time of any prior
parties.
5 Presumption Every holder may not be a Every holder in due
holder in due course. course is a holder.
6 Right to Recover the A holder has a right to A holder in due course
Amount recover the amount due on can recover the amount

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 the instrument from the due on the instrument
transferor only from whom from any of the prior
he has obtained the parties till the
instrument. instrument is duly
discharged.
7 Privileges Holder does not enjoy any Holder in due course
special privileges. enjoys certain special
privileges.

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