Paying & Collecting Bank’s Responsibility – [GK Notes]

Paying & Collecting Bank’s responsibilities – Banking General Knowledge Notes: The Bank’s responsibilities are primarily divided into two terms: one is Paying Bank’s responsibilities and the other is Collecting Bank’s Responsibilities. Here we are going to discuss both of them briefly.

Paying Bank’s responsibilities:

If there is sufficient balance in the customer’s account to honour the cheque, the banker is required by Section 31 of the Negotiable Instruments Act, 1881, to pay cheques properly drawn by its customers. When a banker receives a cheque for payment, he or she must either pay it if everything is in order or face the repercussions of refusing to pay it. And if the bank dishonours the check for whatever reason, it must explain why in writing.

Payment in due course: For a cheque payment to be valid, it must be made “in due course,” as defined by Section 10 of the N.I. Act. “Payment in due course” is defined as “payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances that do not provide a reasonable basis for believing that he is not entitled to the amount therein mentioned.”

Apparent Tenor: The banker should note that the cheque should be drawn on the Bank’s printed form and the writing and the drawer’s signature on it should be indelible: the cheque submitted should be drawn on the specific branch of the bank where it is presented for payment. The drawer’s right to payment is limited to that branch alone, not to any other branch of the bank. On the other hand, banks pay the drawer at any branch of the bank if the cheque is marked as At-par at any branch. As a precaution, the cheque should match the serial number in the customer’s cheque book. There should be no instructions from the drawer to prevent the payment of the specific cheque.

Attachment Orders: There should be no Attachment Orders against the account balance from any Competent Authority such as the Court, Income Tax, Enforcement agencies, and so on. If such directives are disobeyed, the bank is responsible for repaying the money to the relevant authority.

Cheque Should not be Mutilated: The check should not be tampered with in any way. A ‘mutilated‘ cheque is one that has been torn to the point of cancellation. The paying banker will normally accept the mutilation if the collecting banker certifies that the cheque was torn accidentally by him or if he guarantees the mutilation. It is not common to accept a payee or endorsee explanation.

Account-holders should sign the Cheque: The cheque should be signed by the account holder/s in accordance with the operating instructions and the specimen signature deposited with the branch.

Forgery of Cheque & material alteration: If any aspect of a cheque is forged, the cheque is invalidated, and the account was debited make invalid. Any “material alteration” to the check shall be authenticated by the drawer with his complete signature. ‘Changes in the date’, amount, payee’s name, from ‘order’ to ‘bearer,’ and cancellation of crossing are all examples of material alteration. If the drawer does not authenticate a material alteration, it becomes invalid.

The date on Cheque: A cheque should not have a future date on it when it is debited from the customer’s account. It also shouldn’t be older than three months. It would not be deemed proper to pay such a check. There should be enough money in the account to cover the check’s debit.

Crossing Cheque: Payment should be made only to a banker if the cheque has a crossing, and if the crossing is special, payment should be made only to the bank to which it is specifically crossed. If a cheque is crossed to more than one bank, one of the banks should be designated as the agent for collection of the other bank, with a clear endorsement on the reverse of the cheque to that effect.

Amount in Words and figure: When the amount stated in words and the amount stated in figures disagree, the amount stated in words should be paid according to Section 18 of the N.I. Act. In practice, however, bankers typically return such checks to the collecting bank.

Only uncrossed cheques are accepted for payment over the counter. Payments should only be made within business hours; otherwise, they will be considered late. The banker may face issues as a result of such payment.

Bearer Cheque: If the cheque is a ‘bearer cheque‘, the signature of the person presenting it over the counter shall be obtained on the reverse of the cheque, as well as his personal identification evidence. A token should be given to him, with the token’s unique number written beneath his signature. If the cheque is otherwise in good order, the money should be paid to him in exchange for the token. Token numbers will be displayed in some banks.

The cheque is treated as payable to the bearer if the payee’s name is not specified in the cheque or if the payee is fictitious or non-existent. A cheque made payable to a certain individual alone, such as “Pay Mr. A only,” should be given to that person only after verification of his identity. If a cheque is made payable to a certain person and there are no phrases forbidding transfer, it is made payable to that person or his order.

Collecting Bank’s Responsibility

Customers’ checks are collected by a banker. While doing so, it risks “Conversion,” which is the illegal taking, using, disposing of, or destroying of goods in violation of the owner’s right of ownership. When a banker collects a check for a customer who is not the genuine owner of the check, conversion occurs. For example, when a bank collects a check drawn in the name of a company and deposits it in the Director’s personal account.

The collecting bank must be cautious in order to avoid conversion. It is required to act in accordance with Section 131 of the Negotiable Instruments Act. If protection is sought under Section 131 of the N.I. Act, the banker must act in good faith; it must collect cheques solely for a customer in the normal course of business, without any carelessness, and by operating sensibly under the different requirements of the NI Act.

Before opening a customer’s account, the banker should gather the proposed customer’s personal information, including an introduction from a current good customer. It is considered neglect if an account is opened without a satisfactory reference, i.e. without a satisfactory introduction.

A collecting bank may face problems when it :

• is not prompt in collecting cheques.
• is not prompt in giving notice of dishonour to the customer, if cheques are dishonoured.
• collects cheques for anyone other than a payee named in the cheque.

Therefore, while collecting cheques, the banker must exercise due care and diligence as required of it in terms of banking law and practice.

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