3ch Collecting Banker

8/8/2019 3ch Collecting Banker

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Prof. Ruchi Mehrotra Alliance Business Academy



Banking is defined in the Banking Regulation Act.

Primary function to accept deposit, lend andinvest.

Secondary functions include opening of Lettersof credit , Issuing Bank guarantees, DemandDrafts

Mail Transfers, Telegraphic Transfers, Collection

of instruments Executor Trustee services, Dealing in Forexrelated transactions



Offering Safe Deposit Locker facilities,accepting Safe custody articles and so on

Offer other services like

ATM, Debit, Credit and other plastic cards Accepting Electricity, Telephone bills , andextending services on behalf of the Serviceproviders



Bancassurance, cross selling of various financialproducts and so on

While the bank is making a person as their customer due care has to be shown taking intoconsideration the latest provisions of KYC norms

A banker should be able to justify beyond doubtthat his customer has become his customer after following all the procedures, norms and he has

acted as a prudent banker.



**. Reserve Bank of India act was introduced in1934 and since then amended from time to timeto include the latest requirements.

A provision was inserted by the InformationTechnology Act,2000 to enable RBI to makeregulations for regulating payment systems of banks and financial institutions



RBI as regulator of banking sector is mainly byvirtue of the provisions of the Banking Regulation

Act RBI inspects banks and exercise supervisory

powers and may issue directions in publicinterest

RBI also collects credit information and makeavailable the same

RBI also imposes penalties wherever applicable



**The Banking Regulation Act authorizes the RBIto cancel the license granted to any bankingcompany. The cancellation may be

on account of a.. The company ceases to carry on bankingbusiness in Indiab.. The company at any time fails to comply withany of the conditions imposed or the company

does not fulfill at anytime any of the conditionsreferred in the act.



** ³Payment in due course´ means paymentin accordance with the apparent tenor of theinstrument in good faith and without

negligence to any person in possessionthereof under circumstances which does notafford a reasonable ground for believing thathe is not entitled to receive payment of theamount therein mentioned.



** A paying banker should not act in a casualmanner. To get appropriate protection under the provisions of NI Act,1881, he should act in

good faith. He should not have any doubt thatthe payment is being made to the incorrectperson. He should act without negligence.



** A Collecting banker should act in good faith.He should collect cheques only for his customer Cheques should have been crossed (Generally

or specially)Without negligence he should act.



**The banker to understand his customer properlyand the collecting banker should not act in a hasteor in a causal manner.The proper identification and opening of accountwith due care assumes lot of importance.A collecting banker cannot avoid hisresponsibility, even at a later date, when it isproved that the account opened was not

properly opened.



** There is no bar as such to collect a third partycheque.However, an account payee crossed cheque,

the collecting banker is not to collect for a thirdparty.He has to make necessary enquiries before anythird party cheques are collected on behalf of itscustomer.



A collecting Banker o either collects a cheque as an agent (when

he collects & credits customers accounts)o or as a holder for value or holder in due

course (when he purchases the chequefrom the customer & makes paymentbefore realization)



Collection of cheques takes place throughcurrent account & savings account (if chequebook facility is provided to SB a/c)

Collection of cheques is a service renderedby banker for which he charges nominalcommission (only for outstation cheques &need not for cheques collected locally)



After receiving cheques, banker has to entryin the book meant for recording the chequessent for collection

Then he sends the local cheques to clearinghouse for collection & outstation chequesthrough post to the respective nearest banks.

Cheques sent may be honoured or dishonoured



If honoured realised amount is credited to thecustomers¶ account.

If dishonoured then required information is

sent to customers.



Collecting Banker regarding collection of cheques holds two positions :-

Holder for value Customers agent for collection



Sometimes as a matter of good gesture,goodwill ± the banker pays the value of cheque to the customer even before it is

collected. In case of open cheques, he acts as thoughhe is a customer himself & collects the valueof cheque from the paying banker.

So he will be collecting the cheques for

himself as he will have already paid the valueto the customer.

T his position is Holder for value.



Even when value of crossed cheque are paidto the customers before collection this may be just one service.

However he purchases the cheque for adiscounted value & so it called as discountingof cheque.



The banker is legal processor of theinstrument for value.

To constitute value, there must be, in such a

case a contract between the banker &customer that the bank will, before receipt for the proceeds, honor cheques of the customer drawn against the cheques.



When he pays the value of cheque presentedfor collection, even before it is presented

Where customer pays in a cheque & the

banker expressly or impliedly permits him todraw against it before it is collected When the cheque meant for collection is

obtained in exchange for cash When cheque to be collected is received from

the customer to appropriate the proceedstowards the loan of the customer



When he advances money against thecheque meant for collection

When banker exercises lien on the proceeds

of the cheque to be collected

W hile acting as holder for value enjoyscertain rights & responsibilities.



Proceeds of collection will be retained by thebanker as he has already paid the value tothe customer

He has right to recover the value of chequesent for collection, when it is dishonouredfrom the drawer as well as the endorsers, if any.

If any cheque collected bears a forged

endorsement, the CB has the right to recover the amount from the concerning person or any endorses subsequent to the forgery.



The person who has presented the chequefor collection had obtained the cheque ingood faith without knowing the defective title

in it, & in turn the collecting banker finds thatthe cheque has a defective title.



If a cheque sent for collection bears a forgedendorsement & if the collecting banker collects the cheque for himself, he is liable to

the real owner of the cheque If the cheque presented for collectionpossesses a defective title or having no titleat all & if it is crossed or un-crossed the CB isliable to the real owner of the instrument



Obtain a consent letter from the personpresenting the cheque that he will reimbursethe amount to the CB in case of dishonor.

A letter should be obtained when a chequewith defective title has been presented for collection ± from presenter

Should be presented in a reasonable time ±delayed presentation shoots problems

In event of dishonor CB will sent notice of dishonor to all endorsers & drawer for necessary action to be taken



In this case the CB does not pay the value of cheques to the holder of the cheque onpresentation to collect the value.

He neither discounts nor purchases thecheque. He simply acts as an agent by obtaining the

cheque & sends it for collection to theconcerned branch.

He credits the a/c of the customer only whenthe value is collected or sends a notice of dishonor, if it is dishonored.



While collecting a cheque for customer,banker cannot assert any right of a holder for value.

He will not have any better title than that of

his customer. He will not enjoy any right of his own. Whatever good or defective title his customer

carries, the same title he possesses as he

acts as His agent.



He should execute the collection work ±Honestly & without negligence. If any loss iscaused due to negligence, such loss should

be borne by CB. When CB collects a cheque for his customer having defective title & forged endorsements,he is liable to the true owner of the cheque.

He is not liable to pay when he gets a

statutory protection.



When any outstation cheque for collection isreceived by a CB, he may not have his ownbranch in the place where the paying banker

is. In this case the CB can appoint someother branch to collect the cheque.

What will be type of liability the CB shoulddischarge, if there is any lapse on the agent

appointed for the purpose of collection?



Type of liability the CB should discharge, if there is any lapse on the agent - lies on thetype of agnet appointed for the purpose of

collection? If he is - Sub-agent - if this then CB will have to bear liability for lapses of sub-agent

Substituted agent ± if this then CB need notdischarge any liability caused by the

substituted bank.



Doctrine of conversion ± conversion is an un-authorized interference

with another person¶s property inconsistentwith the owner¶s right of possession.

Any person who however, innocently obtainspossession of the goods of a person who hasbeen fraudulently deprived of them &disposes of them whether for his own benefitor that of some other person is guilty of conversion.

It is applicable to all tangible goods ± like NI¶s



When a CB collects the cheques of customers which have defective titles

The true owner may sue the banker & collect

the money already collected by the banker &paid to the person who presented the chequefor collection.

Banker has to present the cheque for collectionwithin a reasonable time. If banker is in same

town, it should be presented for clearing on thesame day it is presented before clearing hours &on next day if presented after clearing hours.



In case of outstation cheques, he should sendit to his agent on the same day on which thecheque was received for collection.

Otherwise he runs the risk of paying damagesfor delay in acting. The CB should follow normal channel of

collection to avoid delay in collection. If he delays the collection then he will have to

compensate the customer just in case thecustomer draws a cheque against the chequesent for collection.



If any instruction is given regarding theappropriation of collection proceeds, the CBshould follow. Otherwise, risk of non-

compliance of request of customer will beaccounted for. In case of dishonor the CB should inform /

sent notice of dishonor to the concernedcustomer.



The CB should always accept cheque for collection which are genuine & are only for genuine customers.

The customers who open account for sake of getting the cheque collected, the CB should getproper introduction from his account holder of integrity.

The genuinity of the title of instrument should be

tested before accepting the cheque for collection. He must also ascertain whether all endorsements

on the cheque are valid.



The CB while receiving the cheque for collection should see that only the crossedcheque is given for collection.

If uncrossed is presented, he must get itcrossed by the customer before it is sentfor collection. The CB does not get anystatutory protection for open cheques.



NI Act 1881, provides some protection. Sec131 & 131A of the Act deals with theprotection given to the CB.

Sec 131 lays down that µa banker who has ingood faith & without negligence, receivedpayment for a customer, of a cheque crossedgenerally or specially to himself, shall not incase the title to the previous cheque proves

defective, incur liability to the true owner of the cheque by reason only of having receivedsuch payment¶.



The cheque must be crossed before it ispresented for payment by the customer whopresents it for collection

An open cheque cannot be collected or whensent for collection after crossing by thecollecting banker, he will not get statutoryprotection opening the account.

It is the duty of the banker to ascertain the name of

husband & his employer when the banker has to openan a/c in the name of a married woman. It amounts tonegligence when he opens the a/c without ascertainingthe details of her husband.



Not verifying the name & his position of astranger, who is given as reference to openan account.

Not verifying regularity of endorsements onan order cheque or draft collected by thebanker.

Wrong credit of customer¶s private account of the proceeds of a cheque which should have

been credited to the a/c in an official capacityof the customer.



Collecting the A/C payee crossed cheque to aparty other than the payee named in thecheque.

When a customer presents a cheque for collection which may lead to suspicion & if theenquiry is not made in such circumstances.

Not verifying the existence of authority

If CB avoids all these circumstances he will begiven protection u/s 131 of NI Act.



Sec 131 A of NI Act, also gives protection tothe collecting banker as regards the draftcollected by him having forged endorsementor the draft having defective title or no title atall.

However, all conditions laid down in Sec 131should be satisfied.



As bills of exchange are NOT CROSSED soprovisions of Sec 131 & 131A do not apply tothem.

The CB has no obligation to collect the billson behalf of customers. However, as matter of routine service the bills are also collected.

but the proceeds should be remitted to thetrue owner or else he will not get statutory

protection



Even if bills having defective title or no title arecollected the CB is liable to the true owner.

He must make sure that the bill presented for

collection has genuine title & is free of defects. Only bills of trusted customers must becollected



The bill on realization should be credited tothe customers a/c & be informed accordinglyto the customer.

The bill should be presented for collectionwithin a reasonable time, after the lapse of the stipulated time in the bill either to theacceptor or to the drawee.

If bill is dishonored on due date- Customer

should be informed through a notice of dishonor within reasonable time.



Sometimes cheques are drawn on banker himself by one customer for another customer.

Here banker will act as both paying banker &collecting banker

He will get protection under both capacities, if he satisfies the conditions relating to both theprovisions.

But it is easier to get protection as payingbanker than as a collecting banker.



** A contract of indemnity has two parties... The indemnifier has to make good the loss assoon as it occurs... There are only two parties to a contract of indemnity and hence only one contract... An indemnity is for the reimbursement of loss



**Issuing of Bank guarantees is one of thefunctions of a banker.It is a Non fund based finance extendedThe bank to secure the bank guarantee inaddition to necessary securities will have toobtain a Counter guarantee or Counter indemnity to safe guard their interest



**Bank guarantee is the commitment given bythe issuing bank (Guarantor) to the beneficiary.If the claim is made by the beneficiary within theguarantee period and as per the terms andconditions of the bank guarantee, then the bankshould make the payment without fail and alsowithout any delay.

3ch Collecting Banker

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