B.Com-Banking Law and Practice

B.Com.

Third Year

Core Paper No.15

BANKING LAW AND PRACTICE

BHARATHIAR UNIVERSITY SCHOOL OF DISTANCE EDUCATION COIMBATORE – 641 046

1 B.Com-Banking Law and Practice

(SYLLABUS)

Core Paper No.15 Banking Law and Practice

Objectives : To enlighten the students’ knowledge on Banking Regulation Acts.

UNIT – I Definition of banker and customer – Relationships between banker and customer – Relationships between banker and customer – special feature of RBI, Banking regulation Act 1949. RBI credit control Measure – Secrecy of customer Account.

UNIT – II Opening of account – special types of customer – types of deposit – Bank Pass book – collection of banker – banker lien.

UNIT – III Cheque – features essentials of valid cheque – crossing – making and endorsement – payment of cheques statutory protection duties to paying banker and collective banker – refusal of payment cheques Duties holder id due course.

UNIT – IV Loan and advances by commercial bank lending policies of commercial bank – Forms of securities – lien pledge hypothecation and advance against the documents of title to goods – mortgage.

UNIT – V Position of surety – Letter of credit – Bills and supply bill. Purchase and discounting bill Traveling cheque, , Teller system.

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CONTENT

Lessons TITLE PAGE No. UNIT-I 1 Banker and Customer 4 UNIT-II 2 Bank Account 16 UNIT-III 3 Cheque 57 UNIT-IV 4 Loan 86 UNIT-V 5 Surety 112

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UNIT- I BANKER AND CUSTOMER

CONTENTS 1.0 Objectives 1.1 Introduction 1.2 Banker 1.3 Customer 1.4 Relationship between the Banker and the Customer 1.4.1 General relationship 1.4.2 Special Relationship 1.4.3 Other special features of the Relationship between Banker and customer 1.5 Special Features of Reserve 1.5.1 Local board 1.6 Banking Regulation Act, 1949 1.7 credit control measure

1.0 OBJECTIVE

After studying this lesson, you will be able to: Classify banker, customer and the relationship between a banker and the customer with special features of RB I and the Banking regulation Act, 1949

1.1 INTRODUCTION

Banks play an important role in the economic development of every country. Besides the traditional function, modern commercial banks render multi various services to their customers. There is no unanimous view regarding the origin of the world ‘bank’. The word bank is said to have derived from the French word “Banco” or “Bancus” or “Banc” or “Banque” which means a bench. In fact the early jews in Lombardly transacted their banking business by sitting on benches. When their business failed, the benches were broken and hence the word “bankrupt” came into use. According to another common held view, the word bank might be originated from the German word “back” which means a joint stock fund. In due course, it was Italianised into “banco” Frenchised into “bank” and finally analicised into “bank”. This view is widely prevalent even today.

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1.2 BANKER

A banker may be a person who is doing the banking business. But, on account of the numerous functions performed by modern bankers, it is very difficult to define the term banker. Some of the definitions of the term banker are reproduced to gain insight into the meaning of the term banker. Dr. Herbert L. Hart defined a banker as “one who in the ordinary course of business honours cheques drawn upon him by person from and for whom he receives money on current account”. Dr.Hart has conveyed only a few functions of banks namely accepting deposits of money and paying money by honouring cheques but failed to cover the bending business banks. According to Sir John Paget, “no person or body corporate or otherwise can be banker who does not take deposit accounts, take current accounts, issue and pay cheques and collect cheques crossed and uncrossed for his customers”.

This definition pinpoints that bankers should take deposit accounts, take current accounts, issue and pay cheques and collect cheques crossed and uncrossed for their customers. In India, Banking regulation Act 1949 gave more precise description. According to Sec(B) of the Act, Banking company is “a company which transacts the business of ”. The same Act defined the term Banking as “accepting for the purpose of lending investment, of deposits of money from the public repayable on demand, order or otherwise and withdraw able by cheque, draft, order or otherwise”.

This definition is quite acceptable as it on the principal functions of a Banker, namely, accepting deposits and lending or investment of these deposits and also repayment of the deposits on demand by cheque or otherwise.

Can a money lender be called a Banker?

Although the money lenders lend money which is one of the functions of a banker, they can’t be called bankers because they are not accepting deposits from the public. They rely upon their own resources. In SAMYUKTHA SAMAJAM Vs GOLI KALYANI, it was held that the firm lending money out of its own capital was not a bank. Moreover, their main business is not banking. Money lenders combine banking with trading. In another case, STAFFORD Vs HENRY, it was held that carrying on banking business as a part of any business would not entitle a firm to be called a bank. Further, the money lenders do not issue, and honour cheques which are essential functions of a banker. Hence, money lenders cannot be called bankers.

Similarly some of the financial institutions like Industrial Finance Corporations, Industrial Development Bank of India, Co-operative Land Development Banks, etc, which provide loans to industry and agricultural operations can’t be called Banks as they are not accepting deposits from the public and issue and honor cheques.

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1.3 CUSTOMER

The term customer of a Bank is not defined in law. Different views have been expressed at different times. Some of the widely accepted views are discussed below: In GREAT WESTERN RAILWAY Co., Vs LONDON AND COUNTY BANK, it was held that there must be some sort of Account – either a deposit or current account or some similar relation to make a man a customer of a bank. According to Sir John papet, to constitute a customer, “there must be some recognizable course or habit of dealing in the nature of regular banking business”. This definition of a customer of a bank gives importance to the time element i.e., duration of the dealings between banker and customer and is therefore called the “duration theory”. The same view was expressed in the case of “MATHEWS Vs WILLIAMS BROWN AND Co. The dealings with the banker must be related to the business of banking in order to constitute a customer. With the passage of time the duration of the dealings, however, became unimportance and even a single transaction can constitute a person a customer.

Thus, to constitute a person a customer of the bank, 1. He must have some sort of an account 2. He may have a single transaction 3. He may have frequency of transactions but is not compulsory 4. The transactions must be of a banking nature.

1.4 RELATIONSHIP BETWEEN THE BANKER AND THE CUSTOMER

The relationship between a banker and a customer may be studied under two categories, namely general relationship and special relationship.

1.4.1 GENERAL RELATIONSHIP

There are four types of general relationship between the banker and the customer. They are: i. Debtor Creditor Relationship ii. Agent Principal Relationship iii. Bailor Bailee Relationship iv. Trustee Beneficiary Relationship

Debtor Creditor Relationship: Sir John Page was of the view that the relation of a banker and a customer is primarily that a Debtor and Creditor, the respective position being determine by the existing state of account. Which a person opens an account with the banker there arises a contractual relationship. He is not a depository because he is

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not going to return the same coins and currency notes deposited by the customer. Instead he is required to give the same amount only.

In FOLEY Vs HILL, it was held that money when paid into bank ceases altogether to be the money of the principal; it is their the money of the banker who is bond to return an equivalent by paying a similar amount to that deposited with him when he is asked for it. The money paid to the banker is money of the principal to be placed there for the purpose of being under the control of the banker, it is there the banker’s money, he is known to deal with it as his own, he makes what profit he can. Thus banker is neither a depository nor an agent, but a debtor.

Why is a banker called a privileged debtor? A banker as a debtor is not the same as an ordinary commercial debtor. He enjoys many privileges, which are not at all enjoyed by an ordinary debtor. The privileges enjoyed by a banker are: i) the creditor i.e., the customer must come to the bank premises and make an express demand in writing for repayment of the money deposited by him. Though a cheque or withdrawal slip. In JOACHINSON Vs SWISS BANKING CORPORATION, it was held that an express demand by customer in writing is essential to get back the deposit money. ii) In the case of an ordinary commercial debt, the debtor can pay the money to the creditor at any place. But, in the case of a banking debt, the demand by the creditor must be made only at the particular branch where the account is debt. It was held in CLARE & Co Vs DRESDNER BANK that locality is an essential element a banking debt and the banker should pay the money only when the demand is made at the branch where the account is kept. iii) In the case of an ordinary commercial debt, time is not an essential element, but the demand for repayment of a banking debt (money deposited by the customer) should be made only during the specified banking hours of business. In ARAB BANK Vs BARCLAYS BANK, it was held that a banker is liable to honour a cheque provided it is presented during the banking hours. iv) Unlike the ordinary commercial debt, the banker is able to get the debt(deposits) without giving any security to the lendor (customer) Thus the customer is acting only as an unsecured creditor. V) The law of limitation that is applicable to all debt is not applicable to banking debt. Ordinary debts become bad after the expiry of 3 years from the date of debt, whereas a banker’s debt became had only after 3years from the date on which the demand for repayment is made. iv) An ordinary debt can be closed by the debtor at time whereas a banker cannot close the account of his creditor at anytime without getting his prior approval.

As a banker enjoys all these privileges, he may be called a privileged debtor.

Can a banker be called a creditor? The Debtor – Creditor relationship between the banker and customer holds good in the case of loan, overdraft and cash credit, the banker becomes the creditor and the customer assumes the role of debtor. However, the banker as creditor is always privileged since he advances credit only after obtaining adequate security.

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ii) Agent Principal Relationship :

Modern bankers perform many functions as agents of customers.They buy and sell securities, collect cheques and bills and make payments of insurance premiums, telephone bill etc., An agent, according to Sec 182 of the Indian Contract act is “one who is employed to do any act for another or to represent another in dealings with third person. The banker becomes an agent when collects or makes payment like rent, interest, dividend etc., on behalf of the customer. The relationship between banker and customer is all the above cases is that of an agent and principal. iii) Bailor and Bailee Relationship :

A banker becomes a bailee when receives gold ornaments and important documents for safe custody. In that case he cannot make use of them to his last advantage because he is bond to return the identical articles on demand. A banker does not pay any interest on these articles. It is only the customer who has to pay rent for the safe custody services. Hence a banker acts as a bailee only when he receives articles for safe custody and not when he receives money on . iv) Trustee Beneficiary Relationship :

When money is deposited for a specific purpose, banker becomes trustee for that money till the purpose is fulfilled. Similarly, when a cheque is given for collections, till the proceeds are collected, he holds the cheque as a trustee.

1.4.2 SPECIAL RELATIONSHIP

Besides the general relationship there exists some special which are discussed below: i) Statutory obligation of a banker to honour cheques When a customer opens an account with a bank, there arises a contractual relationship by virtue of which the banker undertakes an obligation to honour his customers cheque. Sec 31 of the Negotiable Instruments Act compels a banker do so and hence it is statutory. But this statutory obligation to honour customers cheque is subject to the following conditions : a) There must be sufficient funds of the drawer(customer) in the hands of the drawee (banker) b) All the required particulars like the name of the payee, the account in words and figures, date, signature of the drawer, etc., must be correctly filled in c) The cheque must be drawn on a printed form supplied by the banker and it should not combine any request to pay the amount. d) The cheque must be honoured only when the funds are meant for its payment.

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e) The cheque must be presented at the branch where the account is kept and during the banking hours. If the cheques are presented after 6 months from the ostensible date of issue, they will be regarded as stale cheque and they will not be honoured. f) There should not be any legal heir like garnishee order attaching the customer account. Consequences of wrongful dishonor (or overriding the obligation to honour cheques)

If a banker wrongfully dishonours a cheque, he becomes liable to compensate the customer for any loss or damage caused to the customer by such dishonour. (MARZETTI Vs WILLIAMS) The words loss or damage do not merely refer to the pecuniary loss that a customer may suffer; it also includes the loss of credit or business reputation. In other words, a customer whose cheque is wrongfully dishonoured is entitled to claim compensation from the banker for injury to his credit although he suffers no pecuniary loss.

When a cheque is wrongfully dishonoured, a banker is liable only to his customer who happens to be the drawer of the cheque in question and he is not at all liable to any other parties.

It may be noted that the words loss pre damage does not depend upon the actual amount of the cheque but upon the damage or loss to one’s credit or reputation. That is why the smaller the amount of cheque the greater the damage, principle of adopted. In fact, the customer suffers more loss of credit when a cheque for a small amount is dishonoured.

Loss on account of dishonour of cheques known as damages may be of two kinds: a) ordinary damage, b) special damage or substantial damage or nominal damage. In case of loss, customer must always prove or plead for such loss or damage. He will get only nominal damages. Trader customers are entitled to claim special damage as they are supposed to suffer more the credit if their cheques are dishonoured. Non-traders are generally allowed only ordinary damages for wrongful dishonour, because it will not affect their credit much. If the dishonour of cheque is willful, the banker is liable to pay vindictive damages.

In DAVIDSON Vs BARCLAYS BANK, the banker of a book maker had dishonoured a cheque for a small of £2-15st by mistake. Keeping in view, his business and the amount of the cheque he was awarded a special damage of £250.

In NEW CENTRAL HALL Vs UNITED COMMERCIAL BANK LTD, it was held that a trader could get special damage as the dishonour of a cheque would affect his major asset, namely his credit and a non-trader could claim only nominal damages. ii. obligation to maintain secrecy of customer’s account :

Another special feature of the relationship between the banker and customer is that the banker should maintain secrecy of his customer’s account. He should not disclose his

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customer’s financial position and the nature of details of his account. The obligation to keep the state of customer’s account secret was a long observed practice; it was legally imposed upon him only by the decision in TOURNER Vs NATIONAL PROVINCIAL AND UNION BANK OF ENGLAND. According to that decision, a banker should not disclose the condition of his customer’s account except on reasonable and proper occasions.

The banker is legally justified in disclosing the state of his customer’s account in the following occasions; a) Under the compulsion of law; b) In the interest of the public; c) In the interest of the bank; d) Under the express or implied consent of the customer

However, great care should be exercised while disclosing the state of the account of the customer. If the banker is careless, he is liable to pay damages: a) To his customer who suffers damage due to unreasonable disclosure. b) To a third party who incurs loss relying upon the information which is untrue and misleading. iii. Banker’s Lien

Another important special feature of the relationship between a banker his customer is that a banker can exercise the right of lien on all goods and securities entrusted to him as banker,

Lien is the right of a person (creditor) to retain the goods in his possession belonged to the debtor settled. For instance, if X owes, Rs.1000 to Y has in his possession some articles belonging to X, Y can retain those articles with him until repays the money that is due to him. This right of Y to retain the goods of X until the amount due to him has been paid is called lien.

Lien is of two kinds, namely particular lien and general lien. Particular lien gives the right to retain the goods in connection with which particular debt arose. For example, a tailor has a lien over the shirt till the stitching charges for the laid shirt due from the owner of the shirt are paid to him.

General lien, on the other hand, gives the right to banker to retain not only the goods in respect of a particular debt but also in respect of the general balance due from the owner of the goods to the person exercising the right of lien.

A Banker’s lien is always a general lien. His general lien confers upon him the right to retain the securities in respect of the general balance due from the customer. In

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BRANDO Vs BARNETT, it was held that bankers have a general lien on all securities deposited with them as bankers by a customer unless there is an express contract. Circumstances for exercising lien:

A banker can exercise his right of lien only when the following conditions are fulfilled. a) There must not be any agreement inconsistent with the right of lien b) The property must come into the laws of the Banker in his capacity as banker c) The possession should be lawfully obtained in his capacity as a banker. d) The property should not be entrusted to the banker for a specific purpose.

A banker has a lien on the following: a) Negotiable (Bill,cheques, etc) and quasi negotiable securities (share certificate, insurance policy, deposit receipts, etc.,) b) Bonds and coupons that are deposited for the purpose of collection c) Securities not taken back after the repayment of the loan

A banker has no lien on the following: a) Safe custody deposits b) Documents entrusted for specific purpose c) Articles left by mistake d) Securities until the due date of a loan e) Deposits f) Stolen bond given for sale if the true owner claims it before the sale is effected. Why Banker’s lien is called an implied pledge? When a customer doesn’t take any steps to clear his arrear, the banker has got the right to sell the securities and goods of the customer after giving a reasonable notice to him. Banker’s lien not only gives the right to retain the goods but also the right to sell the goods and securities of the customer. As the right of sale that is normally available only the case of pledge is available to a banker, the bankers lien is called an implied pledge.

1.4.3 OTHER SPECIAL FEATURES OF THE RELATIONSHIP BETWEEN BANKER AND CUSTOMER a) Right to claim incidental charges b) Right to charge compound interest c) Exemption from the law of limitation

1.5 SPECIAL FEATURES OF RESERVE BANK OF INDIA

In every country there is one bank which acts as the leader of the money market. It improvises controls and regulates the activities of commercial banks and other financial institutions. It is in close touch with the Government as its banker, agent and adviser. It

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issues currency notes on behalf of the Government. This bank is known as the central bank of the country and in India, the central bank is called the Reserve Bank of India. The Reserve Bank of India (RBI) was originally set up as a shareholder’s bank by the Government of India in April, 1935 with share capital of Rs.Five crores, divided into five lakh shares of 100 each fully paid up. The entire share capital was contributed by private shareholders with the exception of the nominal value of Rs.2.2lakhs subscribed by the central Government. The bank was nationalized in 1949. Management : The management of RBI is vested with the Central Board of Directors comprising 20 members. They are a) One Governor and four Deputy Governors appointed by the Central Government. b) Four Directors nominated by the Central Government one from each of the Local Board. c) Ten Directors nominated by the Central Government. d) One Government official nominated by the Central Government. The Governor and Deputy Governors hold office for 5 years and are eligible for reappointment. They are full time officers of the bank. The 10 directors nominated by the Central Government hold office for 4 years. The term of 4 directors appointed from Local Boards is related to their membership in the Local Board. The Governor is the chief executive of the Bank and the chairman of the Board of Directors. In the absence of the Governor, the Deputy Governor nominated by them would exercise his powers. The Central Board must meet at least six times in a year and not less than once in a quarter.

1.5.1 LOCAL BOARD : For each of the regional area of the country, namely Western, Eastern, Northern and Southern are, there is a Local Board with Head Quarters at Mumbai, Kolkata, New Delhi and Chennai. The Local Board consists of four members appointed by the Central Government. They are appointed for a term of four years and eligible for reappointment. The functions of the Board are a) Advising the Central Board as such matters as may be referred to them. b) Performing other duties delegated by the Central Board from time to time.

Functions of the RBI: The functions performed by RBI are broadly divided into monetary and non-monetary functions.

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Monetary functions (Central Banking Functions) 1. Monopoly of note issue: The RBI has the sole right to issue currency notes of all denominations except one rupee note and coins which is the responsibility of the Central Government. The note issue function is performed through two departments, namely the issue department and the Banking department. The issue department holds assets comprising of gold coins, bullion, foreign securities, bills of exchange and promissory notes payable in India and are eligible for purchase by the Bank. For several years the note issue was bared on proportional Reserve system. Now we follow minimum Reserve system. The Banking Department regulates the issue of currency notes into circulation and withdrawal from circulation.

2. Banker to the Government: RBI acts as a Banker to the Central and State Governments. It undertakes to accept money, makes payments and also carried out their exchange remittance and other banking operations free of cost including the management of public debt. RBI makes wage and means advances to the Government for 90 days.

3. Adviser to the Government: RBI advises the Government on all monetary and banking issues like floating of loans, agricultural and industrial and international finance, legislation affecting banking and credit, financial aspects of planning and so on. A fairly large research and statistical organization has been built up by the Bank for performing this function.

4. Banker to the Banker and lender of his last resort: RBI acts as a banker to all banks. It is because of the fact that every scheduled bank is required to maintain with the RBI a specified amount of cash balance and also allowed to borrow from RBI on the basis of the eligible securities. The banks can also get financial accommodation in times of need or stringency by rediscounting the bills of exchange. Hence RBI is not only the banker’s bank, but also the lender of the last resort.

5. Controller of credit: RBI acts as a controller of credit. It can control credit through changing the Bank Rate or through open market operation. RBI can ask any particular Bank the whole Banking system not to lend to particular group of persons or on the basis of certain securities. Thus it control credit.

6. Custodian of foreign exchange: RBI has the responsibility to maintain fixed exchange rates with all other member countries of the IMF. It buys and sells foreign exchange from and to the authorised persons at rates of exchange fixed by the Government. RBI also administers the exchange control system of the country. 7. Moral Suasion: RBI has been exercising moral suasion which implies persuasion and request made by the Bank to commercial banks to follow certain policy. There is no element of legal compulsion or conversion in this method.

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1.6 BANKING REGULATION ACT, 1949

The Banking Regulation Act was passed in 1949 but was amended several times to insert provisions and to amend the existing ones to suit the needs of changing circumstances and to plug the loopholes in the main legislation.

The basic purpose of this Act is to control, monitor and direct the banking companies, to prevent them from wrong and fraudulent practices and ultimately protect the interests of the deposits. Accordingly, every aspect of a banking company is governed by the provisions of the Act of 1949. The Act defines in clear terms the business of Banking and also lays down clearly the main functions and the subsidiary functions to be performed by banking companies in India. It also specifies the business that can’t be undertaken by a banking company.

1.7 RBI CREDIT CONTROL MEASURE

The Credit Control measures of RBI include: a) The bank Rate of the Discount Rate Policy b) Open Market operation c) Variable Reserve Ratio a) Bank Rate has been defined by Section 49 of the RBI Act as “the standard rate at which the Bank is prepared to buy or discount bills of exchange or other commercial papers eligible for purchase under this Act” whenever the RBI increases the Bank Rate, the interest rate prevailing in the market should be changed immediately resulting in control of credit. b) Open market operations refer to the purchase and sale by the central bank, of a variety of assets such as gold, Government securities, foreign exchange and even company shares. But, on practice, they are confined to the purchase and sale of Government securities only, whenever the RBI sells securities, the cash base of the commercial banks will be decreased and whenever the RBI buys securities, the cash base of the banks will be increased. In this way, the open market operations have been used in the course of monetary policy. They are also used as an instrument of public debt management. c) Variable Reserve Ratio: The scheduled commercial banks are required to maintain a specified minimum cash balance with the RBI. By varying the reserve, banks could undertake quantitative credit control effectively.

Selective Credit Control: The quantitative Credit Control weapons, discussed so far, are designed to reduce the volume of credit. But, there is every possibility of credit being

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flow into some undesirable activities such as speculation, hoarding etc., To discourage such activities and to direct the available resources to essential and productive sectors, selective or qualitative credit controls are employed.

The methods selective credit control generally used are – i) Minimum margin for lending against specific securities ii) Ceiling on the amount of credit for certain purpose iii) Discriminatory rates of advance on certain types of advances.

1.8 LET US SUM UP

This chapter discusses the important role being played by Banks in the economic development of every country. Besides the traditional function, modern commercial banks render multi various services to their customers. It defines the term customer and banker and their relationship. The role of RBI and its measures to control credit.

1.9 LESSON END ACTIVITY

1) Define a Banker and customer. 2) Can a money lender be called a Banker? 3) Explain the credit control measures of R B I 4) Write short notes on the special relationship between a banker and customer

BOOK FOR REFERENCE : 1. Sundharam and Varshney, Banking theory Law & Practice, sultan Chand & Sons., New Delhi 2. 2. Banking Regulation Act. 1949. 3. Reserve Bank of India, Report on currency and Finance 2003-2004 4. Basu : Theory and Practice of Development Banking 5. Reddy & Appanniah : Banking Theory and Practice 6. Natarajan & Gordon: Banking Theory and practice.

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UNIT- II

BANK ACCOUNT

CONTENTS 2.0 Objectives 2.1 Introduction 2.2 Opening and running a bank account 2.2.1 Saving Account 2.2.2 Current Account 2.2.3 Fixed Deposit Account 2.2.4 Recurring Deposit Account 2.3 Documents for opening a bank account 2.4 Running a bank account 2.5 Overdraft 2.6 Personal loans 2.7 Main types of saving products 2.8 Main types of Investment products 2.9 Data field 2.10 Deposit 2.10.1 Deposit payment types 2.11 how to open a Account 2.12 Procedures for opening a Savings Bank account 2.13 Pass Book 2.14 Duties of the Collecting bank toits customers 2.15 Lien 2.15.1 principles Governing Banker’s Lien 2.15.2 Relation between lien and set-off 2.16 What you have learnt 2.17 Exercise 2.18 Activity for you

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2.0 OBJECTIVES

After studying this lesson, you will be able to: Classify bank deposit accounts; Discuss the steps to be taken for opening a Savings Bank Account; and Describe the procedure of operating a Savings Bank Account

2.1 INTRODUCTION

A banker or bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. The first modern bank was founded in Italy in Genoa in 1406, its name was Banco di San Giorgio (Bank of St. George). Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is the , a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Many other financial activities were added over time. For example banks are important players in financial markets and offer financial services such as investment funds. In some countries such as Germany, banks are the primary owners of industrial corporations while in other countries such as the United States banks are prohibited from owning non-financial companies. In Japan, banks are usually the nexus of cross share holding entity known as zaibatsu. In France "Bancassurance" is highly present, as most banks offer insurance services (and now real estate services) to their clients.

2.2 OPENING AND RUNNING A BANK ACCOUNT

Bank deposits serve different purposes for different people. Some people cannot save regularly; they deposit money in the bank only when they have extra income. The purpose of deposit then is to keep money safe for future needs. Some may want to deposit money in a bank for as long as possible to earn interest or to accumulate savings with interest so as to buy a flat, or to meet hospital expenses in old age, etc. Some, mostly businessmen, deposit all their income from sales in a bank account and pay all business expenses out of the deposits. Keeping in view these differences, banks offer the facility of opening different types of deposit accounts by people to suit their purpose and convenience. On the basis of purpose they serve, bank deposit accounts may be classified as follows: a. Savings Bank Account b. Current Deposit Account c. Fixed Deposit Account d. Recurring Deposit Account. Let us briefly note the nature of the above accounts. 17 B.Com-Banking Law and Practice

2.2.1. SAVINGS BANK ACCOUNT If a person has limited income and wants to save money for future needs, the Saving Bank Account is most suited for his purpose. This type of account can be opened with a minimum initial deposit that varies from bank to bank. Money can be deposited any time in this account. Withdrawals can be made either by signing a withdrawal form or by issuing a cheque or by using ATM card. Normally banks put some restriction on the number of withdrawal from this account. Interest is allowed on the balance of deposit in the account. The rate of interest on savings bank account varies from bank to bank and also changes from time to time. A minimum balance has to be maintained in the account as prescribed by the bank.

2.2.2 CURRENT DEPOSIT ACCOUNT Big businessmen, companies and institutions such as schools, colleges, and hospitals have to make payment through their bank accounts. Since there are restriction on number of withdrawals from savings bank account, that type of account is not suitable for them. They need to have an account from which withdrawal can be made any number of times. Banks open current account for them. Like savings bank account, this account also requires certain minimum amount of deposit while opening the account. On this deposit bank does not pay any interest on the balances. Rather the accountholder pays certain amount each year as operational charge. For the convenience of the accountholders banks also allow withdrawal of amounts in excess of the balance of deposit. This facility is known as overdraft facility. It is allowed to some specific customers and upto a certain limit subject to previous agreement with the bank concerned.

2.2.3. FIXED DEPOSIT ACCOUNT(also known as Term Deposit Account): Many a time people want to save money for long period. If money is deposited in savings bank account, banks allow a lower rate of interest. Therefore, money is deposited in a fixed deposit account to earn a interest at a higher rate. This type of deposit account allows deposit to be made of an amount for a specified period. This period of deposit may range from 15 days to three years or more during which no withdrawal is allowed. However, on request, the depositor can en cash the amount before its maturity. In that Case, banks give lower interest than what was agreed upon. The interest on fixed deposit account can be withdrawn at certain intervals of time. At the end of the period, the deposit may be withdrawn or renewed for a further period. Banks also grant loan on the security of fixed deposit receipt. 2.2.4. RECURRING DEPOSIT ACCOUNT This type of account is suitable for those who can save regularly and expect to earn a fair return on the deposits over a period of time. While opening the account a person has to agree to deposit a fixed amount once in a month for a certain period. The total deposit along with the interest therein is payable on maturity. However, the depositor can also be 18 B.Com-Banking Law and Practice

allowed to close the account before its maturity and get back the money along with the interest till that period. The account can be opened by a person individually, or jointly with another, or by the guardian in the name of a minor. The rate of interest allowed on the deposits is higher than that on a savings bank deposit but lower than the rate allowed on a fixed deposit for the same period. Recurring Deposit Accounts may be of different types depending on the purpose underlying the deposit. Some of these are as follows:

a. Home Safe Account(also known as Money Box Scheme) Small savers find it convenient to deposit money under this scheme. For regular savings, the bank provides a safe or box (Gullak) to the depositor. The safe or box cannot be opened by the depositor, who can put money in it regularly, which is collected by the bank’s representative at intervals and the amount is credited to the depositor’s account. The deposits carry a nominal rate of interest.

b. Cumulative-cum-Sickness Deposit Account Regular deposits made in this type of account serve the purpose of having money to meet large expenses in case there is sudden illness or other unforeseen expenses. A certain fixed sum is deposited at regular intervals in this account. The accumulated deposits over time along with interest can be used for payment of medical expenses, hospital charges, etc.

c. Home Construction deposit Scheme/Saving Account This is also a type of recurring deposit account in which money can be deposited regularly either for the purchase or construction of a flat or house in future. The rate of interest offered on the deposit in this case is relatively higher than in other recurring deposit accounts. Now with increased inflation rate basic interest rates also in the upward trend. So all private sector and public sector banks are giving better interest rates for fixed and other deposits compared to last few years. There are many types of bank deposit schemes available like i. Demand Deposit Here money is not deposited for a specific time period. Investor can withdraw money at any time. Bank is responsible to return the money on customer’s demand. This account allows you to demand your money at any time. ii. Term Deposit Under this scheme money is deposited for a fixed period of time so it is also called Fixed Deposit. Investor can withdraw the money only after the time period. Premature withdrawals are also allowed by paying a penalty. Interest is calculated on monthly, quarterly or yearly depends on the bank and scheme. Many banks offers loan or

19 B.Com-Banking Law and Practice

overdraft facility as an added features with fixed deposits. Term deposits is a safe investment and it is therefore a very good option for conservative, low-risk investors. iii. Recurring Deposit This is another type of fixed deposit in with investor pay a small amount every month for a specific time period. For example pay Rs.1000/- every month for a period of 5 years. After 5 years he will get the principle with interest accumulated. A Recurring Bank Deposit is a good option for regular savings.

2.3 DOCUMENTS FOR OPENING A BANK ACCOUNT

In order to open a bank account you'll usually be asked to:

• prove who you are

• prove where you live

• prove student status, if relevant

• fill in an application form

• in some cases pay some money into your account For accounts that allow you to borrow or go overdrawn, the bank may want to run a 'credit check'; in other words to get references from previous banks or lenders that you are a reliable customer before opening the account. Why you need to prove your identity You need to prove your identity in order to help banks in the fight against money laundering whereby criminals try to open accounts - often in false names or using stolen identities - with money made from or intended for illegal activities. By law banks must check to make sure they know their customer before letting you open an account or buy their financial products or services.

2.4 RUNNING A BANK ACCOUNT

Your bank will give you information on how to run or manage your account. Account features differ, but typical procedures and documents you'll use or receive may include: Documents/cards • a cheque book and/or cash or to make payments or get cash • paying-in slips to pay in cash or cheques • monthly, quarterly or yearly bank statements

20 B.Com-Banking Law and Practice

Automated procedures • you can set up direct debits or standing orders (automatic transfer arrangements) to pay bills and make other regular payments • you can set up BACS (Bankers' automated clearing service) payments to receive regular payments, like salary, pension, benefits or investment income direct into your account • you may be able to use telephone banking or internet banking to pay bills or move money between accounts Debit cards and credit cards - the difference When you buy goods or get cash with a debit card the money is taken from your bank account right away. With a credit card you get a monthly a bill. If you don't repay the amount owed in full on a credit card, or if you take out cash, the charges are very high.

How debit cards work Debit cards are linked directly to your bank account. You can use them to buy goods or withdraw cash and the amount is taken from your account right away. You can also use debit cards to get 'cash back' from certain shops (you buy goods and also ask for money back from the cashier). The total amount is deducted from your account right away. When using a cash machine or paying for goods with a debit card you'll need to enter your PIN (personal identity number). When buying goods you usually enter it into an electronic hand held device, but in some cases you may have to sign. Most bank accounts offer debit cards. Most debit cards double up as 'cheque guarantee cards', guaranteeing that your cheque will be honoured by your bank up to a stated amount.

What happens if there's not enough money in your account? This will depend on the type of debit card you have: • if you have a ‘’ or ‘Electron’ debit card the balance in your account is checked before each transaction – if there’s not enough money you won’t be able pay or withdraw cash with the debit card without prior agreement • if you have ‘’, ‘Visa’ or ‘Delta’ card your account balance won’t necessarily be checked and the payment may still go through If you go overdrawn the charges you’ll pay will depend on whether or not you have an authorised overdraft arrangement with your bank. If you do, you’ll pay the agreed amount of interest at the end of each month. This is usually much lower than interest charged on credit cards.

21 B.Com-Banking Law and Practice

If you don’t have an overdraft agreement, or you exceed the agreed limit, your bank may allow the payment to go through but you’ll usually pay much higher than if you had an agreed overdraft.

Using a debit card over the phone or internet Debit cards can be used to make payments by phone or over the internet. In this case you'll need to provide certain details that are printed on your card. Find out more and view an example debit card on the FSA website.

How credit cards work Credit cards allow you to 'buy goods now and pay later' - called 'buying on credit'. They aren't linked to your bank account. Like debit cards, they can be used to buy goods in shops over the telephone and internet, with the same details being required. You can also get a '' by drawing money at bank cash machines. Your bank may offer you a credit card, or you can apply for one to any institution offering one. The credit card provider will normally run checks to see if you've had problems repaying debts before offering you one (called a 'credit check').

The risks of using a credit card Think carefully before using a credit card. If you don't repay your bill in full by the date shown you're charged interest on the whole amount of the bill for that month. The rates of interest - indicated by the APR (annual percentage rate) - can be very high indeed. If you take cash out with a credit card you're charged daily interest from the moment you take out the cash until the credit card bill is paid in full. This is an expensive way of borrowing money. Some credit cards also charge you an annual simply for having the card.

Overdrafts and loans - the difference Overdrafts can offer flexible borrowing to meet short-term needs. Personal loans are for fixed amounts and are more suitable for borrowing larger sums over a longer term. If you're considering borrowing, be sure you can afford the repayments.

2.5 OVERDRAFTS

Overdrafts are like a 'safety net' on your current account; they allow you to borrow up to a certain limit when there's no money in your account and can be useful to cover short term cashflow problems. Some bank accounts have a free overdraft built in. If yours doesn't, you'll have to ask your bank for an authorised overdraft facility. Their decision will be based on your bank record and you may have to pay a fee to set it up. You don't have to use an authorised 22 B.Com-Banking Law and Practice

overdraft, but it's there if you need it and you won't pay extra charges for accidentally going overdrawn. You have to pay back your overdraft interest. Rates differ between banks and can be fixed or variable. There may also be an arrangement fee and monthly charges. Unauthorised overdrafts If you go overdrawn without your banks authorisation, the charges are likely to be high. Your bank may also bounce (refuse to pay) cheques you write or refuse to pay direct debits and charge fees for each refused transaction. They may also charge additional administration fees. • Overdrafts - learn more on the Financial Services Authority (FSA) website Opens new window

2.6 PERSONAL LOANS

With a personal loan you borrow an agreed sum and pay it back with interest over a certain length of time (usually one to five years). Interest rates can be fixed or variable. You normally have to stick to a payment schedule. Personal loans can be handy for covering large expenses like buying a car or equipment. An 'unsecured' loan means the lender relies on your promise to pay it back. They're taking a bigger risk than with a 'secured' loan, where they can take whatever you've secured the loan against (like property) if you don't repay it. So interest rates for unsecured loans tend to be higher.

What does APR mean? APR stands for annual percentage rate. It shows you the actual cost of the loan, as a yearly interest rate. It includes charges and fees as well as interest to help you compare loans on equal terms. • Information on APR from the Financial Services Authority Opens new window

Pros and cons of personal loans Pros: • you can generally borrow larger amounts than with an overdraft • you're free to shop around - you don't need a bank account • interest rates and charges are normally lower than for an overdraft • you know exactly when the loan will be paid off Cons: • loans are less flexible than overdrafts • there may be penalties for paying a loan off early • you can't normally miss a repayment 23 B.Com-Banking Law and Practice

Points to watch out for • don't be persuaded to borrow more than you need or can afford • if the interest rate's variable, make sure you budget for possible increases • some lenders press you to buy insurance to cover the repayments if you get ill or lose your job • Personal loans - more information from the FSA Opens new window

Shopping around for loans There's a wide of loans available, so shop around for the best deal. Compare interest rates, APR, terms (like charges and penalties for paying the loan off early) and how long you can borrow for. You can use the FSA's online calculator to work out typical monthly repayments. • Calculate typical monthly loan repayments online at the FSA website Opens new window • Compare current loan rates online Opens new window

Can you afford to borrow? Whether borrowing through an overdraft or a loan, be sure you can afford the repayments. If you can't, your debts can quickly spiral out of control. It may be that you don’t have a bank account, have a bad credit history (or no credit history at all) and feel that you won’t be able to get the normal low cost credit available from banks or building societies

Main ways to save or invest your money If you've money to spare, you can save and/or invest it. With saving you put your money aside without risk, usually with the chance to earn interest. With investing, there's potential for your money to grow more, but the returns aren't guaranteed. Investing is generally more suitable for the longer term.

2.7 MAIN TYPES OF SAVINGS PRODUCTS

Banks and building societies savings accounts With savings accounts you'll always get back at least the money you paid in plus interest at the rate advertised. There's a wide range of accounts to choose from, with key differences being how quickly you can get at your money, the minimum amount required to keep the account open and the type and rate of interest rate paid.

• Financial Service Authority (FSA) overview of savings accounts Opens new window

24 B.Com-Banking Law and Practice

Cash ISA (Individual Savings Accounts) Most banks and building societies also offer tax-free savings and investment accounts called ISAs. The Cash ISA (one type of ISA) generally contains only cash, so there's no risk to your money. For the tax year 2008-2009 you can save up to £3,600 in a Cash ISA if you're a UK resident aged 16 or over. Read more about ISAs in the section on investment products below.

National Savings and Investments National Savings and Investments (NS&I) are savings and investment products backed by the government. As a result, any money you invest is totally secure. NS&I offers tax- free products (including premium bonds); products offering guaranteed returns; monthly income products; children's savings products - and more.

• Visit the NS&I website Opens new window

Credit Unions Credit Unions are mutual financial organisations which are owned and run by their members for their members who can save with them. Once you've established a record as a reliable saver they will also lend you money but only what they know you can afford to repay. Members have a common bond, such as living in the same area, a common workplace, membership of a housing association or similar. Follow the below to find a Credit Union near you or by looking in the Yellow Pages under 'Credit Unions'.

• FSA information on Credit Unions Opens new window

• Credit Unions - find one near you Opens new window

2.8 MAIN TYPES OF INVESTMENT PRODUCTS

Shares When you buy shares you buy a stake in a company. If the company does well the value of the shares may rise and you may be able to sell them at a profit. You may also get a share of the profits through income payments called dividends. If the company doesn't do well, you may not get any dividends and the value of the shares could fall or, in some cases, cease to have any value at all.

Pooled or collective investments Pooled or collective investments are where small contributions from lots of people make up a single investment fund. They include:

25 B.Com-Banking Law and Practice

• Authorised Unit Trusts

• Open Ended Investment companies (OEICs)

• Investment Trusts

• Exchange Trade Funds

• Unit linked life assurance

• ISAs (see next section) To find out more about each type, including the pros and cons of collective investments and your rights, follow the links below.

• Pooled or collective investments – learn more on the FSA website Opens new window

Individual Savings Accounts (ISAs) An ISA offers tax-free returns. It can be made up of cash, and/or longer term investments like stocks and shares or insurance. You don't pay tax on the interest or dividends (investment income) from an ISA, apart from the 10 per cent tax credit which is deducted from dividend payments before you get them. You also don't pay Capital Gains Tax on gains (profits) from investments in an ISA. There are limits to how much you can pay into an ISA each tax year. For any investment there are two important factors, risk and returns. For share market and Mutual Funds return is more but risk also high. At the same time bank deposits give medium returns with very low risk. It is a very safe method of investing if you are very much cautious about risk factors. You have already learnt that the main banking activities consist of acceptance of deposit from the public for the purpose of lending to businessmen and others who may seek loans. Actually the money deposited in any bank is mostly the saving of the people. As you know, if someone earns money and has regular income, he or she not only spends it for day-to-day expenses but also tries to save a part of the income for future needs. Money may be needed in future for various purposes like medical treatment in case of illness in the family, expenses on account of marriage, or for higher studies of the children, or to celebrate religious festivals, etc. The money saved to meet future needs may be kept at home. But will it be safe at home? It may be stolen. Moreover, the money saved will remain idle at home without any return. So people keep their savings with someone where it will be safe and earn a return. Bank is such a place where money once deposited remains safe and also earns interest. In this lesson, we shall learn about the types of deposit accounts that can be opened in a bank, and also discuss how a savings bank account can be opened and operated.

26 B.Com-Banking Law and Practice

2.9 DATA FIELDS

Enter the following information for each Bank Deposit: Received From-- Choose the type of account from which this deposit was received. Account-- Choose the account from which this deposit was received. Transaction Paid-- Enter the type of transaction that this deposit covers. Reference-- Enter the transaction that this deposit covers. Amount-- Enter the amount of the deposit. Goldenseal fills in the amount automatically if you reference a specific transaction. Date-- Enter the date of the deposit. Record Number-- A record number is entered automatically. Conditions-- Enter any special conditions for this deposit. Comments-- Enter any comments you'd like to make about this transaction.

2.10 DEPOSIT CONDITIONS

Deposits can be labeled with any of the following special conditions: None-- No special conditions. ATM Transaction-- For payments deposited in an automatic teller machine. Cash Transaction-- For deposits made personally. Debit Card-- For deposits applied to a debit card. Electronic Transfer-- For payments deposited electronically. Phone Transfer-- For transfers made by phone. Internet Transfer-- For transfer made over the internet. Other Transfer-- For payments deposited in some other form. 2.10.1 Deposit Payment Types Simple deposits can cover several types of transactions. When making a simple deposit, use None as a breakdown choice. HINT-- To enter a deposit that covers more than one transaction, use a Payment Breakdown.

A. UN ALLOCATED DEPOSITS Some deposit types do not reference a specific transaction: Paid On Account-- A payment received from a customer or project that doesn't cover a specific transaction. Goldenseal subtracts the amount paid "on account" the next time you use the Billing command to create a bill. Received As Gift-- Money you receive that is not credited "on account".

B.TRANSACTION DEPOSITS

27 B.Com-Banking Law and Practice

Some deposit types are income from a specific transaction. Enter one of the following: Billing Record -- The deposit covers one Billing Record. Payment Receipt-- The deposit comes from one Payment Receipt. Rental Transaction-- The deposit covers one Rental Transaction. Sale-- The check covers one Sale transaction. Allowance-- Enter a specific Allowance that this deposit pays for. Available only for Projects. Change Order-- Enter a specific Change Order that this deposit pays for. Available only for Projects. -- This deposit covers the "charge against" half of a Chargeback. Equity Transfer-- Enter a specific Equity Transfers which this payment covers. Available only for Owners. HINT-- To deposit more than one transaction at a time, use a breakdown.

REFUNDS Some deposits come from an expense transaction that is a credit or return (negative balance): Material Refund-- The check will cover one Material Purchase transaction that has a negative balance. Other Cost Refund-- The check will cover one Other Cost transaction that has a negative balance. Payroll Refund-- The check will cover one Payroll Record transaction that has a negative balance. Subcontractor Refund-- The check will cover one Subcontractor Cost transaction that has a negative balance. C. Simple Deposits To deposit a payment from one sale or billing record, follow these steps: 1. Enter the type of transaction into the Payment Type field. 2. Enter the specific transaction being paid into the Transaction field. NOTE-- To view the transaction or transactions that are being paid, choose Detail Transaction from the View menu. Deposits Paid On Account If the deposit does not reference a specific transaction, enter Received On Account into the Payment Type field. Goldenseal will add the deposit amount to the "on account" balance for the payer. Payment Breakdown Create a Payment breakdown to enter a deposit for one or more Sales, Billing Records or Rental Transactions. 28 B.Com-Banking Law and Practice

Goldenseal automatically creates deposits with a Payment breakdown when you use the Deposit Funds command. You can also enter a Payment breakdown like this: 1. Open a Checking Transaction. 2. Click the New button, or choose New Record from the Edit menu. 3. Enter Deposit into the Type popup at the top of the window. 4. Enter Customer into the Received From field. 5. Enter Payment into the Breakdown field. 6. Enter a customer into the Account field. 7. Goldenseal automatically fills in all unpaid Sales for this customers. Turn on the checkmarks for the ones the customer is paying for now. 8. If the customer is only paying for part of a sale, enter the amount into the Amount Paid cell. 9. Click in the Paid By column and enter the payment method for each item. 10. Deposits Status Field 11. The following types of bank transaction status are available: Entered-- The transaction has been entered, but not yet cleared. Cleared-- The transaction has cleared the bank. This status is entered automatically after you enter something into the reconcile field. Canceled-- If you make a transfer between two bank accounts, then delete one of the transactions, then the other is automatically given the Canceled status. Job Cost Only-- For past transactions that have been entered for job costing only. They will not affect the account balance. Planned-- For planned future transactions. They will not affect the account balance. Void-- For canceled transactions. 12. Deposit Posting 13. When you receive payments or make deposits, Goldenseal automatically "posts" the action to the transactions that are included in the deposit. If you include sale, billing record or rental transactions in a payment receipt transaction, Goldenseal changes their status to Paid. Paid transactions will no longer appear as a part of Accounts Receivable. 14. If you include sale, billing record or rental transactions in a deposit, Goldenseal changes their status to Deposited.

29 B.Com-Banking Law and Practice

15. If a payment receipt or deposit covers only part of a transaction, Goldenseal changes its status to Part Paid. The remaining balance will still be included the next time you use the Deposit Funds command, or the next time you create a payment receipt or deposit and reference the partially paid transaction. 16. Using Bank Deposits 17. Bank deposits change the running total and the Current Balance in the bank account, just like any other bank transaction. 18. To see the source of a deposit, choose Detail Transactions from the View menu. 19. When you receive the bank statement that lists a deposit, enter a reconcile period into the Statement field, so you can reconcile the account.

20.

A) Which of the following statements are true and which are false? i. Deposits made in savings bank account serve to meet present as well as future needs. ii. A fixed amount is required to be deposited in a Fixed Deposit Account every month iii. The rate of interest on deposits made in a Recurring Deposit Account is relatively higher than on savings bank deposits. iv. Current Deposit Account can be opened only by businessmen, not by an educational institution. v. Home Construction Saving Deposit Account is a type of recurring deposit account. vi. The rate of interest allowed on fixed deposit depends on the length of the period for which the deposit is made. vii. In the case of savings bank account withdrawal of money is allowed only to the account-holder. viii. Banks do not pay interest on the balance of current deposit account.

B) Fill in the blanks with suitable words. a. Savings Bank Account can be opened with a ______amount of deposit. b. A fixed Deposit Account carries interest at a rate, which is ______than that on savings bank account.

30 B.Com-Banking Law and Practice

c. Overdraft facility is allowed to holders of ______deposit account. d. Money can be withdrawn from current account by issuing ______. e. The rate of interest allowed on the balance of recurring deposit account is ______than the rate allowed on fixed deposit account

2.11 HOW TO OPEN A SAVINGS BANK ACCOUNT

To open a savings bank account in a commercial bank, you have to first decide what amount of money you would like to deposit initially. You may enquire and find out from the nearest bank the minimum amount to be deposited while opening a savings bank account. You have to deposit at least that amount or more, if you want. On entering a bank (any branch of a bank) you will find a counter for enquiry (or a counter with: ‘May I help you’ board). Having known the minimum amount to be deposited, you should ask for a form of application for opening Savings Bank Account. You are not required to pay anything for it. You should then take the following steps: i. Filling up the Form The application form has to be filled up giving the following necessary information: a. Name of the person (applicant) b. His/her occupation c. Residential Address d. Specimen signature of the applicant e. Name, address, account number and signature of the person introducing the applicant Besides the above information you have to give an undertaking that you will abide by the rules and regulations of the bank, which are in force. At the end of the application form, you have to put your signature. (In some banks it is required to attach two passport size photographs of the applicant along with the application.)

31 B.Com-Banking Law and Practice

ii. Proper Introduction Every bank requires that a person known to the bank should introduce the applicant. It may be convenient to be introduced by a person having already an account in that bank. Some banks may accept the attested copy of Passport or Driving Licence, if any, of the applicant. In that case personal introduction is not necessary. Introduction is required to prevent the possibility of opening of account by an undesirable person. iii. Specimen Signature The applicant has to put his/her specimen signatures at the blank space provided on the application form for that purpose. In addition, specimen signatures have to be put separately on a card on which a photograph of the applicant may be pasted, along with his/her name and account number. After the above steps have been taken and the officer concerned is satisfied that the application form is in order, money is to be deposited at the cash counter after filling in a printed ‘Pay-in-slip’. An account number will then be allotted and written on the application form as well as the card having your specimen signatures. At the same time you will be issued a Passbook with the initial deposit recorded in it. All future deposits and withdrawals will also be entered in the passbook, and it will remain with you. If you want to use cheques for withdrawal or payment of money out of your deposits, a cheque book will be issued on your request. A cheque form is a printed form in which you may issue an order to the bank to pay the amount specified in it to a person.

2.12 PROCEDURE FOR OPERATING SAVINGS BANK ACCOUNT

Once you have opened the account, you must also know how to operate the account. In other words, you have to know the procedure to be followed for further deposits to be made in the account and for withdrawing money from the account.

i. Deposit in the Account

How will you deposit money in your account? You have already used a ‘Pay-in-slip’ for deposit of the initial amount while opening your account. It is a printed form, which you get in the bank. Each ‘pay-in-slip’ has two parts divided by perforation, the right-hand part known as ‘foil’ and the left-hand part known as ‘counter-foil’. The slip has to be filled up while depositing cash or a cheque. Separate pay-in-slip form will have to be filled up while depositing both cash and cheques. Suppose you have to deposit cash in your account. The pay-in-slip has to be filled giving the date of deposit, your name or account-holder’s if you deposit money in somebody’s account, account number, and the amount deposited in figures and words. Besides you have to enter on the slip, in the place indicated, how many currency notes of different denominations (Rs. 5, 10, 20, 50, 100, etc.) are being deposited along with the amount against the types of notes. The 32 B.Com-Banking Law and Practice

bank will have a counter for cash receipts. You have to sign and present the pay-in-slip there and also hand over the amount of cash. The receiver will keep the foil (right hand part) of the pay-in- slip while the left-hand part (counter-foil) will be rubber-stamped, signed by him, and returned to you. Specimen of pay-in-slip

ABCD BANK LIMITED Note : Please use separate slips for local, outstation cheques and cash Date : (Date) FOR CREDIT OF SB CA RD CC TL DL OTHERS Branch : (ABCD Branch)

Ac. DELHI NET WEB SERVICES PVT. LTD. 0 0 2 9 0 5 0 0 0 7 7 1 No. BANK BRANCH CHEQUE NO. CASH DEPOSIT Rs. Ps. Your Bank's Your's Branch's Your's Cheque 500 X No. of Total Amount . Name Name No. Pieces 100 X No. of . . . Total Amount . Pieces 50 X No. of . . . Total Amount . Pieces 20 X No. of . . . Total Amount . Pieces 10 X No. of . . . Total Amount . Pieces 5 X No. of . . . Total Amount . Pieces 2 X No. of . . . Total Amount . Pieces 1 X No. of . . . Total Amount . Pieces . . . COINS . .

FOR OFFICE RUPEES (in words) USE TOTAL Grand Total . Deposited Amount in Words TRAN. ID.

JO (Your Signature)

SIGNATURE OF DEPOSITOR

33 B.Com-Banking Law and Practice

Instead of cash, suppose you have to deposit cheque, which you have got in payment of your salary from the office in which you are employed. You may like to deposit it in your bank account instead of going to another bank to encash it. Your bank will collect the amount of the cheque and record it as a deposit in your savings bank account. Todeposit the cheque you have to use the pay-in-slip again, filling in particulars like the date of deposit, the account number, name of the account-holder, the serial number and date of the cheque, name and address of the bank on which the cheque is drawn, and the amount of the cheque in figures and words. After signing the slip, you have to attach the cheque with the foil by an awl , and present the slip at the counter for cheque receipt. The person at the counter will keep the foil with the cheque attached, and return to you the counter-foil with bank rubber stamp and his signature. In some banks, there is a box kept near the counter. The bank rubber stamp is also available at the counter. The depositor is to put the rubber stamp on the foil and counter- foil. Then after separating the counter-foil, the cheque along with the foil is to be dropped in the box through a slit. ii. Withdrawal from Deposit Account You deposit your savings for use in future. The need for money may arise any time. So you should know how to get back your money from the bank. In the above section you have learnt about the procedure for deposit of money in the savings bank account. Let us know the procedure for withdrawal of money from your account. Money can be withdrawn by using a) Withdrawal form b) Cheque c) ATM card

Bank Deposit Account

a. Withdrawal Form: Every bank has printed withdrawal forms, which can be used by account- holders to withdraw cash from deposit accounts. Specimen of withdrawal form The form has to be filled in, mentioning the date of withdrawal, account number, amount to the withdrawn (in figures and words) and the signature of the account holder. You have to produce it along with your passbook at the counter at which your account is handled. At the counter the officer concerned generally passes the form for payment after checking the balance in the account and the signature on the form against the specimen signatures on record. The amount of withdrawal is recorded in the passbook, and payment is made at the counter if the amount is within a certain limit 34 B.Com-Banking Law and Practice

(say, Rs. 5,000), otherwise a disc or token is given which bears a number. This has to be presented at the cash payment counter for receiving the amount withdrawn.

b. Cheque: As an account-holder you can withdraw cash from your savings bank account either by filling in and signing a withdrawal form or by issuing a cheque. Withdrawal forms can be used only by the account-holder, no one else.

………....2008 Pay……...... ……...... or Bearer Rupees……………………………………………… ……………………………………………………

STATE BANK OF INDIA Jawaharlal Nehru University, New Delhi – 110067 MSBL/97 6 5 3 0 0 3 1 1 0 0 0 2 0 5 61 0 Specimen of Cheque Cheques can also be issued for payment to other parties. Thus, a cheque issued to another person can be either encashed by him at the bank, or deposited in his account in some other bank to be collected on his behalf. Withdrawal by issue of cheque requires the same procedure to be followed as that for withdrawal by filling in and signing the withdrawal form explained above. In both cases the amount of withdrawal is recorded in the books of the bank in the relevant savings bank account. Interest allowed on the balance of deposit is also recorded in the relevant accounts maintained in the books of account of the bank. These are also entered in the Pass Book as and when presented by the account-holder to the bank. c. ATM Card: Banks issue ATM card to its depositors for easy withdrawal of money from their accounts. This card is used for withdrawal of money from saving and current deposit account through (ATM). It is a magnetic card, which can be operated by using a particular secrete number. It is the most convenient system of withdrawal of money. d.Teller Counters : To facilitate quick transaction, banks provide teller counters to withdraw money from the deposit account. There are two types of teller counters: a) Manual teller counter; and b) Automatic teller counter. 35 B.Com-Banking Law and Practice

In manual teller counters banks generally allow withdrawal of money from the savings accounts for amount upto a limit (which may be from Rs. 5,000 to Rs. 10,000). The cheque or withdrawal form is presented at the counter and payment is made after verifying the balance in the account, and tallying the specimen signature of the account holder. In automatic teller counters ATMs are installed to handle cash transactions 24 hours without any break. There is no need to appoint any body to verify your balance, compare the specimen signature or hand over or take over the cash. Let us learn how an ATM machine operates. When a bank installs ATMs, it gives a magnetic card along with a secret code number to every accountholder. This code number is called Personal Identification Number (PIN). When a cardholder wants to withdraw or deposit money, first he has to establish his identity to operate the ATM by mentioning his PIN. When an ATM card is inserted into the machine it asks for the PIN. The PIN can be entered either by using the keyboard or touching the screen of the machine. Once the identity is established then money can either be deposited or withdrawn simply by following the instruction given by the machine. For deposit of cash it is required to keep the amount in a special envelop, which is available at the ATM center. After sealing the envelope and writing the necessary information on it, the envelope will be kept near a slit. Then on pressing the deposit button the envelope will automatically be entered into the machine. The bank officials will collect those envelops at regular interval and credit the amount in the respective accounts. Similarly, withdrawal of money can be made by pressing or touching the withdrawal button and then mentioning the amount of money required. The exact amount of money will be made available to you instantly through the outlet. India's banks also have consumer protection for its banking customers. However the catch is that the maximum protection is, to the best of my knowledge, only Rupees one lakh. That works out to less than $2500 per account. Compare that with the $100,000 coverage provided by the US and Canadian banks. The agency that provided deposit insurance for Indian banks is called The Deposit Insurance and Credit Guarantee Corporation (DICGC) If you have a bank account in India and want to check if your account is covered by the DICGC you can do so by using the links provided below:

Are Deposits in Indian banks safe, not to worry! The Reserve Bank of India (RBI) has assured that the deposits of the Indian common man in indian banks are safe and not to worry at all. Due to the financial crisis in US and incertainity of the global financial markets everyone in the world is fearing about their hard earned money kept in their respective country's bank. As far as India is concerned RBI Governor assured that Indian banks are not hit due to the sub prime crisis in US, which is the root cause of the financial turmoil seen in the world economy. All central banks of almost all countries are taking care of their banks- Japan & S.Korea have promised unlimited cover to their banks. Even Indian central bank RBI is injecting about Rs:60,000 crore liquidity by reducing the Cash Reserve Ratio.

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2.13 PASSBOOK

A passbook or bankbook is a paper book used to record bank transactions on a deposit account. Depending on the country or the financial institution, it can be of the dimensions of a cheque book or a passport. Traditionally, a passbook is used for accounts with a low transaction volume, such as a . The bank teller or postmaster writes, by hand, the date and amount of the transaction, the updated balance, and enter his or her initials. In the 20th century, small dot matrix or inkjet printers were introduced to update the passbook at the account holder's convenience, either at an automated teller machine or a passbook printer, either in a self-serve mode, by post, or in a branch. The Post Office Savings Bank introduced passbooks to rural 19th century Britain For people who feel uneasy with telephone or online banking, this is an alternative to obtain, in real-time, the account activity without waiting for a bank statement. However, contrary to the bank statement, the passbook offers fewer details, replacing easy-to- understand descriptions with short codes, also known as mnemonics. Pass Book is a book issued by Bank to an accountholder. It is almost a copy of the account of the customer in the books of bank. The bank keeps the customer informed of the entries made in his account through Pass Book. It is the customer’s duty to check the entries and immediately inform the bank of any error that he may have noticed Now the Reserve Bank of India has directed to formulate bank wise policy / procedures relating to collection of cheques and also provide due disclosure to the customers on the bank’s obligations and the customers’ rights. Wide publicity has to be given to the policy, as formulated hereunder, by placing it on the web-site and also displaying the same on the notice board in the branches. However, it may be noted that the Reserve Bank of India and the Banking Ombudsman would continue to exercise the prerogative to examine any which may arise between the bank and any of its customer, vis-à-vis published policies and procedures. While adopting this policy, the bank reiterates its commitments to individual customers outlined in Bankers’ Fair Practice Code of Indian Banks’ Association. The document recognizes the rights of small depositors & benefit of customers. This document is a broad framework. The detailed operational guidelines on different aspects will be issued from time to time.

GENERAL : (i) The legal relationship between a banker and its customer, so far as bills are concerned is that of an agent and principal respectively. (ii) A Bill of Exchange is an instrument in writing, containing an unconditional order, signed by the maker (drawer), directing a certain person (drawee) to pay a certain sum of money only to a certain person (Payee) or to his order or bearer. (iii) Further, a cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.

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(iv) As per the above description, cheques and hundies will be treated as bills of exchange. (v) A bill of exchange involves three parties, viz. the drawer, drawee and payee. Banks act as collecting agents on behalf of these parties. (vi) Section 131 of Negotiable Instruments Act gives protection to the collecting banker, if the crossed instruments are collected on behalf of a customer who is properly introduced and in good faith and without negligence.

2.14 DUTIES OF THE COLLECTING BANK TO ITS CUSTOMERS

While collecting cheques as agents for collection on behalf of customers, the collecting bank should take care of the following :- (i) Cheques must be presented to the drawee banks for payment with care and diligence. Negligence in selection of agents for collection, where the Bank has no branch, may result in a loss to the customer and consequent liability to the Bank. (ii) Notice of dishonour should be given to the customer if any cheque is not paid on presentation. (iii) Notice of dishonour should also be given where cheques are returned unpaid for other reasons, such as for want of endorsements etc., which can be attended to by the Bank for representation of cheques. (iv) Cheques drawn on the branch and received for collection should either be paid or returned on the same day. (v) Cheques drawn on other local banks received from upcountry branches for collection should be presented to the drawee banks without loss of time. a. Statutory protection : (i) To get protection under Section 131 of the Negotiable Instruments Act, 1881, cheques should be crossed by the customers before they are tendered to the Bank for collection. Affixing the Bank's crossing stamp on cheques at the time of receiving the cheques or thereafter would not suffice for claiming protection under the Act. Branches should, therefore, ensure that only crossed cheques are accepted for collection. For this, customer should be educated/advised to cross the cheques before tendering for collections.

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(ii) Cheques should be collected only for properly introduced account holders of the Bank. It is possible that the branches may be having introduced savings bank accounts, in which case sufficient care must be exercised to ensure that the cheques are accepted for collection only after the accounts are introduced. Further, cheques favouring only account holders should be collected in savings bank accounts. No third party cheques should be accepted in savings bank accounts. Cheques/instruments payable jointly to two or more persons should not be collected for credit of the proceeds in single account of one of the payees or in another joint account wherein name of one of the account holders is mentioned as payee but the name of other account holder is not mentioned in the instrument. (iii) Cheques should be accepted and collected without negligence. b. Negligence : The following acts would generally constitute negligence : (i) To collect cheques which contain irregular endorsement. It is the duty of the Bank to verify the correctness of endorsements on a cheque and to satisfy that the cheques are in order in all respects without any reason to doubt the title of the lodger. (ii) To collect cheques for customers, whose accounts are not properly introduced. (iii) To collect cheques crossed "A/c Payee" for an account other than that of the payee. However, there may be exceptional circumstances when a banker can collect a cheque crossed "A/c Payee" for an account other than that of the payee. The "A/c Payee" crossing on a cheque does not deprive it of its attributes of negotiability and transferability. The paying banker is not concerned with "A/c Payee" crossing. The "A/c Payee" crossing is a direction to the collecting banker for appropriation in terms of the crossing. Generally, if a banker collects a bearer or order cheque crossed "A/c Payee" on account of a third party, who has no title to it, the banker would be guilty of negligence and, therefore, of conversion and would lose the protection under Section 131 of the Negotiable Instruments Act, 1881. The bank would be liable to the true owner of the cheque and not to the drawer of the cheque. The true owner of the cheque is the payee or the endorsee, when it is properly endorsed. A forged endorsement would not convey any title to the endorsee. When a customer draws a cheque, he wishes his banker to pay the cheque to its payee or any other person to the payee's order. So long as the banker pays the cheque in due course (vide Section 10 of the Negotiable Instruments Act, 1881) he is completely discharged. It, therefore, follows that the true owner of a cheque is the person to whom the drawer wishes it to be paid, i.e. the first payee or the second payee (may be subsequent payees) according to the order of the first payee. But the collecting banker should be cautious of collecting such cheques, unless the payee and/or endorsee are very well known to him.

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(iv) To collect for credit of a personal account of an employee, an official or an agent, a cheque payable to his employer, a joint stock company or his principal respectively. (v) To collect cheques payable to a partnership firm for the personal account of its partner. (vi) To collect for the personal account of an employee, an official or an agent, cheques drawn by his employer, joint stock company or his principal respectively favouring third parties. (vii) To collect a cheque drawn by a partner on the firm's account for adjustment of his personal overdraft account. (viii) To collect an instrument payable to a public body or a public official for credit of any other account. (ix) To collect in the personal account of an attorney a cheque signed by him under a Power of Attorney, without proper enquiries. (x) To collect an uncrossed cheque for an accountholder who has no title to it. (xi) If a transaction of an abnormal character, which should normally evoke an enquiry, is not noticed, e.g. to collect a cheque for a fairly large amount immediately after an account is opened although the payee's name is the same as that of the account holder. (xii) To collect a cheque drawn in favour of a firm or company for credit of a person whose spouse is a director, partner, agent, employee or closely connected with the payee of the cheque, without the express sanction of the payee. Apart from the above, branches should note the following : (a) A cheque drawn on behalf of a company or a firm by its director or partner in his own favour should not be accepted for collection either to his account or his wife's account without proper enquiries. (b) A cheque in favour of a joint stock company should not generally be accepted in an account other than that of the company. If such a cheque is tendered for credit of any other account, it may be accepted provided it is properly endorsed in favour of the accountholder and the accountholder is in no way connected with the payee company. (c) A bearer or an order cheque payable to a firm should not be accepted for the credit of the personal account of an individual or a partner unless specifically endorsed in his favour by the firm or another partner of the firm respectively. (d) Where an accountholder is a trustee, collection of cheques representing trust funds in such account should not be accepted. The fiduciary capacity or trusteeship of an accountholder should prominently be noted in the relative ledger folio.

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(e) Protection under Section 131 of the Negotiable Instruments Act, 1881 is available only for collection of cheques and drafts. Analogous instruments, such as orders on a bank with receipt attached, orders on Government departments, postal orders, interest and dividend warrants not drawn in the form of a cheque should be collected only for the account of a payee. (f) Cheques/instruments drawn on private bankers or non-banking agencies other than those permitted under Section 49(a) of the Banking Regulation (Amendment) Act, 1949, should be accepted for collection only from well- known clients and at their risk and responsibility. In the event of a defective title in such a cheque, the Bank will not get protection under Section 131 of the Negotiable Instruments Act as such an instrument is not deemed to be a cheque. (g) A cheque drawn payable to a particular payee only (i.e. "Pay to 'A' only) should be collected only to payee's account. c. Secrutiny of instruments etc : (i) Cheques received for collection should be scrutinised with a view to find out prima facie any defects in them such as alteration in date, payee's name, amount etc. Such defective cheques should not be accepted. (ii) Cheques should be collected only in properly introduced accounts. (iii) Where a bearer cheque is specially crossed to a particular bank, but collected through another bank, the cheque should bear the stamp of the bank to which it is specially crossed or an indication that the cheque is being collected on its behalf. (iv) Hand written additions, if any, on the reverse of the cheques should be authenticated under full signature. d. Documentary bills - Secrutiny of documents etc.:

(i) Bills, like cheques, should be collected only for customers whose accounts are properly introduced. Bills should be made out or endorsed in favour of the Bank or its order. (ii) Hundies and bills drawn in vernacular, other than the regional language, should be accompanied by translation memos giving full particulars of bills, viz. date, name of the drawee, address, amount etc. The translation memo should be prepared by the branch sending the bill for collection. (iii) Branches should act in strict accordance with the instructions given by their customers while collecting various types of bills as agents for collection. To avoid any embarrassment and to safeguard the interests of customers, branches should obtain request letter containing specific instructions from customers tendering bills for collection/purchase/discount.

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(iv) In case bills covering shares and blank transfer deeds, share certificates and transfer deeds should be sent separately by registered post on two consecutive working days. If a customer gives instruction in writing to send both of them together at his risk and responsibility and indemnifies the Bank for doing so, the documents may be sent by the same mail, but in two different packets. Government promissory notes should be cut into two halves and sent separately by registered insured post on two consecutive working days.

(v) Branches should accept for collection bills accompanied by consignee's copies of MTRs and not the other copies. e. Forwarding of outward bills for collection : (i) All the instruments must be sent for collection on the day they are received from the customers or the next working day. (ii) All cheques/instruments and bills should be affixed with the Bank's crossing stamp except shares, Government promissory notes, debentures etc. Similarly round stamp bearing name of the bank, branch and OBC number be affixed on all instruments and paying-in-slips.

(iii) All items received for collection should be entered in the OBC Register and numbered serially. Fresh running numbers should be given at the beginning of each year. The relative instruments and paying-in-slips and /or covering letters should also be given the same numbers and kept in a file, serially arranged, pending realisation. (iv) All cheques and other instruments should be endorsed, wherever necessary. All order cheques/instruments should bear Bank's certificate "Payee's account will be credited on realisation". In case of third party order cheques/instruments all previous endorsements should also be confirmed. (v) Where collection items are forwarded to other banks, authority should be given to such banks to receive payments on our behalf by making endorsement "Pay/deliver to ...... Bank" as agents for collection. (vi) Endorsements should be signed only by an authorised signatory. (vii) Amounts of bills received and entered in OBC Register during the day should be totalled and entries for the aggregate amount passed at the end of the day. (viii) Due dates of usance bills should be recorded in a diary for follow up. f. Branches to whom OBCs should be sent for collection : Bills and cheques should be sent for collection to our branches at the centres where they are payable. Where a customer specifically requests to present the bill (received on collection basis) for payment through another bank, branch should send the bill directly

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to the concerned bank even if we have a branch at the centre. In all other cases, the bills should be sent for collection to banks with whom reciprocal arrangements exist or to any nationalised/scheduled bank. As per H.O. instructions vide circular dated 20-01-2005 w.e.f. 15th February 2005, as the bank has entered into an arrangement with H.D.F.C. Bank Ltd; New Delhi to collect our O.B.Cs. through our New Delhi branch, all branches are advised to forward their O.B.Cs., drawn on any bank, to our New Delhi Panchkuian road branch for collection, if the instrument is drawn on any of the center of the H.D.F.C. Bank Ltd; as per list supplied with the circular. g. Mediate Credit In Respect Of Outstation/Local Cheques: The present ceiling for immediate credit of outstation/local cheques is Rs.15000/-. Normal collection charges may be recovered in case of outstation cheques and a charge of Rs.5/- may be recovered for local cheques. The facility may be extended to all individual depositors without making a distinction about their status i.e. Savings Bank, Current Account, Cash Credit Account etc. The bank will not lay any Separate stipulation for minimum balance for extending this facility. This facility is to be extended to the customers at the bank’s Extension counters subject to the usual precautions taken by the bank in this regard. While immediate credit of cheque will amount to grant of advance, no charging of interest on such cheques of the face value upto Rs.15000/- will not be viewed as violation of R.B.I.’s directive on interest rates on advances.In case where the instrument are credited to the account, in whatever manner, in advance of the date of actual realization of the amount, interest at the stipulated rate (in addition to the usual service charges prescribed by the bank), shall also be charged for the period for which outlay of funds is involved. In the event of the cheque being returned unpaid, the bank can recover interest in conformity with the applicable interest rate directive of Reserve Bank of India for the period the bank is out of funds. a. No interest is to be charged to the customer for the period between the date of credit of the outstation cheque lodged and its return. b. Bank may charge interest from the date of return of the cheque till the reimbursement of money to the bank. c. Where the cheque is credited to a savings bank account, no interest will be payable on the amount so credited if the cheque is returned unpaid.The banks may consider introducing different pay-in-slip superimposing a notice to the effect that in the event of dishonour of the cheque, the customer will have to pay interest for the period the bank is out of funds at the normal rate. A notice regarding the availability of facility should be prominently displayed at each branch. At any point of time the bank may allow withdrawal against such immediate credits maximum to 15000/- against any individual customer.

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h. Payment/Charging of interest on account of delays in Collection of cheques/instruments : (i) The interest @ as applicable to appropriate tenor of fixed deposit for the period of delayed collection beyond 10/14 days in collection of outstation instruments, without the customer being required to claim it. Interest as above will, however, not be payable if the cheques/instruments are lost in transit. (ii) If the proceeds are to be credited to the borrowal accounts, like cash credit/overdraft/loan etc. interest should be paid at Bank's prime lending rate irrespective of the interest rate applicable to the borrowal account. (iii) These instructions are applicable only for inland instruments i.e. instruments drawn and payable in India. (iv) The interest should be paid without the customer being required to claim it. (v) Besides above banks should also pay penal interest @ -2-% above fixed deposit rate where there is abnormal delay in collection of outstation cheques. ”Abnormal Delay” for this purpose may be treated where there is delay of more than 90 days beyond the normal collection period. As the Reserve Bank of India has instructed that a clear cut staff accountability should be fixed for the delay, the branches are devised to follow the time schedule. i. Follow-up / Fate enquiry : (i) Bills and cheques sent for collection to branches or to other banks should be followed up if their fate is not received within a reasonable period of time. (ii) Fate enquiry should contain OBC number, date, C-Schedule number, amount, brief nature of collection instrument (cheque/DD, documentary etc.) name of the drawee and whether sent by ordinary/registered post etc., to facilitate investigations at the receiving branch. j. Collection of prize money of lottery tickets : Where branches are requested by the winner of a lottery to collect the prize money against presentation of lottery ticket, they should exercise great care as the prize money is payable to the bearer of the lottery ticket. Branch should take following precautions while sending a lottery ticket for collection : (a) Person, on whose behalf the lottery ticket is to be collected, must have a properly introduced current or savings bank account. Branches should exercise extra care about introduction etc. (b) The person tendering the lottery ticket should give a declaration stating that the prize-winning lottery ticket relates to a lottery organised or authorized by the Government mentioning full details, such as the number and date of the government notification relating to the lottery.

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(c) The person should also furnish a letter stating that the Bank may send the lottery ticket by post at his risk for collection of the proceeds. He should also give his consent that in case the lottery ticket is lost, misplaced, intercepted, wrongly delivered or delivered late, he would not hold the Bank responsible to make good the loss to in other than that for which the post office compensates the Bank. (d) The person should also declare that the lottery ticket lodged by him/her for collection was purchased by him/her or purchased by another person for giving benefit to him/her and he/she is entitled to receive payment of the ticket. The collecting branch should preserve these undertakings/declarations carefully and send the lottery ticket for collection. (e) The lottery ticket must be received for collection personally by the Branch Manager/Joint Manager who should sign the counterfoil/acknowledgement. (f) The lottery ticket must be kept in a cover which should be sealed in the presence of the Branch Manager and another officer. (g) The cover should be insured with the post office upto the amount of prize money or the maximum insurance cover that is available from the post office, whichever is lower. Alternatively the cover may be insured with an insurance company upto the full value of the prize money, if the customer so desires. The premium should be recovered in advance from the accountholder. k. Bills sent to agents for collection: (i) Bills sent to other banks for collection should be endorsed in their favour as agents for collection. Bills written in vernacular, other than the regional language, should be accompanied by a certified Hindi/English translation. (ii) Where the collection work is entrusted to our branch and any claim arises due to its negligence the bank would remain liable as the constituent branch cannot be regarded as a separate entity but as one composite entity. (iii) Where the collection work is entrusted to another bank, that bank becomes a sub- agent of our Bank and if any claim arises due to its negligence, our Bank is responsible to the constituent although the agent bank is in turn responsible What is lien? A lien is the right of a creditor in possession of goods, securities or any other assets belonging to the debtor to retain them until the debt is repaid, provided that there is no contract express or implied, to the contrary. It is a right to retain possession of specific goods or securities or other movables of which the ownership vests in some other person and the possession can be retained till the owner discharges the debt or obligation to the possessor. It is a legal claim by one person on the property of another as security for payment of a debt.

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A legal claim or attachment against property as security (right) for payment of an obligation. An enforceable right of a bank to hold in its possession any money or property belonging to a customer and to apply it to the repayment of any outstanding debt owed to the bank, provided that, to the bank's knowledge, such property is not part of a trust fund or is not already burdened with other debts. In Halsbury’s Laws of England ,it is stated: "Lien is ,in its primary sense ,a right in one man to retain that which is in his possession belonging to another until certain demands of the person in possession are satisfied. In its primary sense, it is given by law and not by contract." In Chalmers on Bills of Exchange ,the meaning of the Banker’s Lien is stated : "A bankers’ lien on negotiable securities has been judicially defined as ‘an implied pledge’. A banker has, in the absence of agreement to the contrary ,a lien on all bills received from a customer in the ordinary course of banking business in respect of any balance that may be due from such customer." it should be noted that the lien extends only to negotiable instruments which are remitted to the banker from the customer for the purpose of collection .When collection has been made the process may be used by the banker in reduction of the customer’s debit balance unless otherwise earmarked. We can also refer to Peget’s Laws of Banking ,8th Edn. at page 498 where speaking about the Banker’s lien the learned author has stated that apart from any specific security ,the banker can look to his general lien as a protection against loss on loan or overdraft or other credit facility. The general lien of bankers is part of law merchant and judicially recognised as such. In Chitty on Contracts, it is explained. "The lien is applicable to negotiable instruments which are remitted to the banker from the customer for collection. When the collection has been made, the proceeds may be used by the banker in reduction of the customer’s debit balance ,unless otherwise earmarked." In Byles on Bills of Exchange 26th Edn, by Frank Ryder and Antonio Bueno Sweet & Maxwell 27.- (3) Where the holder of a bill has a lien on it arising either from contract or by implication of law, he is deemed to be a holder for value to the extent of the sum for which he has a lien. A banker has lien on all securities and valuables of his customer, which come into his hands in his capacity as banker in the ordinary course of business. Currie v. Misa (1867) App. Cas.554(H.L.) Where therefore, the customer is indebted to the banker, the lien arises immediately a cheque is paid in for collection -presumably by implication of law. On the other hand if the banker agrees either impliedly, as the result of a course of action, or expressly, that a customer may draw against uncleared effects, the banker has a lien on those effects – arising from contract. So far as the legal requirements are concerned there is no need of any special agreement, written or oral to create the right of lien, but it arises only by operation of law for, under 46 B.Com-Banking Law and Practice

the Indian Law, such an agreement is implied by the terms of Section 171 of the Indian Contract Act, 1872 so long as the same is not expressly excluded .In order that the lien should arise the following requirements are to be fulfilled: (1) the property must come into the hands of the banker in his capacity as a banker in the ordinary course of business ; (2) there should be no entrustment for a special purpose inconsistent with the lien (3) the possession of the property must be lawfully obtained in his capacity as a banker; and (4) There should be no agreement inconsistent with the lien.

2.15 LIEN - AN IMPLIED PLEDGE

Banker’s lien is a general lien recognized by law. The general lien on the banker is regarded as something more than an ordinary lien; it is an implied pledge. This right coupled with rights u/s 43 of the Negotiable Instruments Act, 1881 permits bills, notes and cheques, of the banker, being regarded as a holder for value to the extent of the sum in respect of which the lien exists can realize them when due; but in the case of the other negotiable instruments e.g. bearer bonds, coupons, and share warrants to bearer, coming into the banker’s hands and thus becoming liable to the lien, the character of a pledge enables the banker to sell them on default, if a time is fixed for the payment of the advance ,or, where no time is fixed ,after request for repayment and reasonable notice of intention to sell and apply the proceeds in liquidation of the amount due to him .The right of sale extends to all properties and securities belonging to a customer in the hands of a banker ,except title deeds of immovable property which obviously cannot be sold. The law gives inter alia, a general lien to the bankers - Lloyds Bank v. Administrator General of Burma, AIR 1934 Rangoon 66. To claim a lien, the banker must be functioning qua banker under Section 6 of the Banking Regulation Act-State Bank of Travencore v. Bhargavan ,1969 Kerela .572. It is now well settled that the Banker lien confers upon a banker the right to retain the security, in respect of general balance account. The term general balance refers to all sums presently due and payable by the customer, whether on loan or overdraft or other credit facility.(Re European Bank (1872) 8 Ch App 41) In other words ,the lien extends to all forms of securities deposited ,which are not specifically entrusted or to be appropriated. Case Laws In the matter of Firm Jaikishen Dass Jinda Ram v. Ltd. AIR 1960 Punj.1, two partnership firms with the same set off partners had two separate accounts with the Bank. The Court held that the bank was entitled to appropriate the monies belonging to a firm for payment of an overdraft of another firm. Because although two

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separate firms are involved they are not two separate legal entities and cannot be ‘distinguished from the members who compose them. Mutual demands existed between the bank on the one hand and the persons constituting firm on the other. Nor it could be said that these demands did not exist between the parties in the same right. The court can interfere in the exercise of the Bank’s Lien. In the matter of Purewal & Associates and another v/s and others (AIR 1993 SC 954) where the debtor failed to pay dues of the bank which resulted in denial of bank’s services to him, the Supreme Court of India ordered that the bank shall allow the operation of one current account which will be free from the incidence of the Banker’s lien claimed by the bank so as to enable the debtor to carry on its day to day business transactions etc. and the liberty was given to bank to institute other proceedings for the recovery of its dues. State Bank of India v/s Javed Akhtar Hussain and others it was held by the Court that the action of the bank in keeping lien over the TDR and RD accounts was unilateral and high handed and even it is not befitting the authorities of the State Bank of India .The court relied on the ruling v/s K.V.Venugopalan where it was held by the court that the fixed deposit money lodged with the bank is strictly a loan to the bank. The banker in connection with the FD is a debtor .The depositor would accordingly cease to be the owner of the money in fixed deposit .The said money becomes money of the bank, enabling the bank to do as it likes, that however, with the obligation to repay the debt on maturity .In the same ruling it was further held that the bank being a debtor in respect of the money in FD, had no right to pass into service the doctrine of banker’s lien and the money in Fixed Deposit. In the case State Bank of India Kanpur v/s Deepak Malviya (AIR 1996 All 165) it has been held that section 174 of the Act contemplates that in the absence of a contract to the contrary the Pawnee is under an obligation to return the goods pledged for any debt or compromise for which the goods were pledged. This is a general provision providing for the relationship of a pawnee and a pawner in respect of pledged goods. Section 171 of the Act, providing for banker’s lien, is a specific provision, which has an overriding effect on this general provision, as such, the banker’s lien is also extended to the pledged goods.

2.15.1 Principles Governing Banker’s Lien 1) It has been held in Chettinad Mercantile Bank Ltd. v/s PL.A.Pichammai Achi and Anr.AIR 1945 Mad. 445 that banker’s lien is the right of retaining things delivered into his possession as a banker if and so long as the customer to whom they belonged or who had the power of disposing of them when so delivered is indebted to the banker on the balance of the account between them provided the circumstances in which the banker obtained possession ,do not imply that he has agreed that this right shall be excluded .Banker’s lien can properly be said to arise only in respect of any of the securities held by the bank ,the bank has a lien over these securities and it could hold them against the amount due by the customer.

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2) It is necessary that the ownership of a thing, which is in possession of the bank, must be with the customer and held by the bank as a security otherwise the bank can exercise no right of lien. PNB Ltd.v. Arura Mal Durga Dass and another (AIR 1960 Pun.632.) 3) A bank may not be able to exercise any right of lien over the money deposited by the customer inasmuch as by itself becomes the owner of the money deposited ,but still it has the right to adjust such amounts against any debts due to from the customer. The purpose of lien in such cases is attained by the application of the principle of set off.(AIR 1945 Mad.447) 4) The banker’s lien is subject to any contract to the contrary and one alleging it must prove the existence of such a contract. 5) An insight into the matter of Ltd.v.Thangarajan (2003)46 SCL 237 (Mad) it is pertinent to state certain principles with respect to Banker’s lien that was observed. a) The bank gets a general lien in respect of all securities of the customer including negotiable instruments and FDR s, but only to the extent to which the customer is liable. If the bank fails to return the balance, and the customer suffers a loss thereby, the bank will be liable to pay damages to the customer. In the present matter the Court has based its decision on the principle that in order to invoke a lien by the bank, there should exist mutuality between the bank and the customer i.e. when they mutually exist between the same parties and between them in the same capacity. Retaining the customer’s properties beyond his liability is unauthorized and would attract liability to the bank for damages.

When Is Lien Not Permissible :- However Lien is not permissible in the following cases, viz. (i) Where there is an express contract like by way of counter-guarantee ,providing reimbursement - Krishna Kishore Kar v. United Commercial Bank, AIR 1982 Cal .62. (ii) Where there is no mutual demand existing between the banker and the customer- firm-Jaikishan Dass Jinda Ram v. Central Bank of India,AIR 1960 Punj.1. (iii) Where the valuables are received for safe -custody- Cuthbert v. Roberts ,(1909)2 Ch.226 (CA) and Bank of Africa and Cohen,(1902)2 Ch.129. (Paget’s law of Banking (11th Edition) (iv) Where the entrustment of goods (documents of title) is for a specific purpose stated to banker- Greenhalgh v. Union Bank of Manchester,(1924) 2 K.B.153. (v) When the deposit with the banker is for a specific purpose, if the banker has implied or express notice of such purpose.

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(vi) Where the valuables or documents of title are left in the bankers hands, inadvertently. (vii) Where the banker has only a contingent debt .A contingent debt is that "no amount would be due on the date when he wants to exercise lien" Tannans banking Law. (viii) Where the account is in respect of a trust. Banker’s Lien is not available against Term Deposit Receipt in Joint Names when the debt is due only from one of the depositors In the matter of State Bank of India v. Javed Akhtar Hussain and others, AIR 1993 Bom.87, the appellant bank obtained a decree from against applicant and non-applicant who stood as a surety to the non-applicant No.1 .After a decree was passed, the non- applicant No.2 deposited a sum of Rs.32,793/-in TDR No.856671 with the appellants in joint names of himself and his wife in another branch of the same bank. They were also having RD account. The applicant bank kept lien on both these accounts without exhausting, any remedy against non-applicant No.1.The Court held that the action of keeping lien was a sort of suo muto act exercised by the Bank even without giving notice to the non-applicant No.2 and his wife. The applicant could have moved the court for passing orders in respect of the amounts invested in TDR and RD accounts. However the action of the appellant in keeping lien over both these accounts was unilateral and high- handed. v.Vijay Kumar and Others, AIR 1992 SC 1066 The Supreme Court upheld the right of bankers’ lien and right of set-off, holding that these are of mercantile custom and are judiciously recognised.

Facts In the present matter the bank at the request of the judgment debtor had agreed to furnish the bank guarantee in favour of the High Court of Delhi on the condition that that judgment Debtor should deposit the entire sum of Rs.90,000 in favour of the Registrar of the High Court of Delhi .This was done and the partner of the judgement debtor firm deposited two FDRS of Rs. 65,000 and 25,000 respectively after duly discharging them by signing on the reverse of each FDR. The two FDR s were duly discharged by signing on the reverse of each of them by the judgment debtor and were handed over along with two covering letters on the bank’s usual printed forms on 17.9.1980 at the time of obtaining the guarantee. The relevant clause of the letter read as under: "The Bank is at liberty to adjust from the proceeds covered the aforesaid Deposit Receipt /Certificate or from proceeds of other receipts /certificates issued in renewal thereof at any time without any reference to us ,to the said loan/OD account. We agree that the above deposit and renewals shall remain with the said bank so long as any account is due to the bank from us for the said M/s Jullundur Body Builders singly or jointly with others."

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Held That The bank has general lien over all forms of securities or negotiable instruments deposited by or on behalf of the customer in the ordinary course of banking business and that the general lien is valuable right of the banker judicially recognised and in the absence of an agreement to the contrary, a Banker has a general lien over such securities or bills received from a customer in the ordinary course of banking business and has a right to use the proceeds in respect of any balance that may be due from the customer by way of a reduction of customer’s debit balance. In case the bank gave a guarantee on the basis of the two FDRs it cannot be said that a banker had only a limited particular lien and not a general lien on the two FDRs.It was hence held that what is attached is the money in deposit amount. The banker as a garnishee, when an attachment notice is served has to go before the court and obtain suitable directions for safeguarding its interest.

When does a general lien take effect? A general lien arises out of a series of transactions in the general course of business rather than a single specific transaction such as the repair of a piece of jewellery or a computer. Attorneys, bankers, and Factors usually have general liens to ensure that his client will pay him for services already performed, an attorney may retain possession of the papers and personal property of his client that fall into his hands in his professional capacity. He also has a charging lien on any judgment he has obtained for his client for the value of his services. A banker may retain stocks, bonds, or other papers that come into his hands from his customer for any general balance owed by the customer. A factor or commission merchant may hold onto all goods entrusted to him for sale by the owner of the goods for any balance due. The merchant may sell the goods to satisfy his lien, but he must account to the owner for any excess realized from the sale. General liens occur less frequently than specific liens.

What is set-off? The right of set off is also known as the right of combination of accounts .A bank has a right to set off a debt owing to a customer against a debt due from him. "A legal set-off is “where there are mutual debts between the plaintiff and defendant, or if either party sue or be sued as executor or administrator one debt may be set against the other "(S.13 Insolvent Debtors Relied Act 1728) From a commercial standpoint, a right of set-off is a form of security (right) for a lender. It is an attractive security because its realization does not involve the sale of an asset to a third party. A set-off must be in the form of a cross claim for a liquidated amount and it can be pleaded only in respect of a liquidated claim. Both the claim and the set-off must be mutual debts, due from and to the same parties, under the same right A claim by a person in a representative capacity cannot be set off against a personal claim. Even a

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claim against the estate of a deceased customer cannot be set off against a debt, which was due to the customer from his banker, during the former’s lifetime, whether the accounts are with one or more offices of the banker, it does not materially affect the position in any way. A banker’s right of set off cannot be exercised after the money in his hands has been validly assigned or in any case after he has been notified of the fact of an assignment. (Official Liquidator, Hanuman Bank Ltd. v. K.P.T. Nadar and Others 26 Comp.Cas .81) Judgments indicating certain essentials to the exercising of the right to set off. Punjab National Bank v. Arunamal Durgadas ,AIR 1960 Punj.632 State Bank of India v. Javed Akhtar Hussain ,AIR 1993 Bombay ,87 where it has been established that : (1) Mutuality is essential to the validity of a right of exercising set-off (2) It must be between the same periods.

2.15.2 Relationship between Lien and Set-Off The banker’s right of lien can attach to the money so long as it is earmarked. Where it has ceased to be such a separate earmarked sum, the bank has not the right of set off. ( Radha Raman Choudhary v. Chota Nagpur Banking Association Ltd.(1945) 15 Comp.Cas.4(Pat). There is a distinction between a banker’s lien and the bank’s right to set-off. A lien is confined to securities and property in bank’s custody. Set-off is in relation to money and may arise from a contract or from mercantile usage or by operation of law.

2.16 WHAT YOU HAVE LEARNT

Bank deposits serve different purposes for different people. Keeping in view these differences, banks offer the facility of opening different types of deposit accounts by people to suit their convenience and purposes, as follows: - Savings Bank Account - Current Deposit Account - Fixed Deposit Account - Recurring Deposit Account There are different types of Recurring Deposit Accounts, like Home Safe Account, Cumulative-cum-Sickness Deposit Account, House construction Deposit Account, etc. To open a Savings Deposit Account in a commercial bank, you have to take the following steps: Fill up an application form; ii. Arrange proper introduction on the form by a person known to the bank or an account-holder of the bank;

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iii. Put your specimen signatures on the application form and on a separate card; iv. Deposit the minimum amount of cash or more at the counter with a pay-in-slip filled in and signed by you; v. Having got the account number allotted on your application form, make a request for a cheque book, if you want. Operating the saving bank account involves deposit and withdrawal of money. Money can be deposited in cash or cheques by using pay in-slips. Money can be withdrawn by using withdrawal slip, cheques or ATM card. To facilitate quick transaction banks provide teller counters for withdrawal of money. There are two types of teller counters, one, automatic and other manual. In automatic counters Automated Teller machine is installed to facilitate withdrawal and deposit of cash any time.

2.17 LESSON END ACTIVITY

Intext Questions I. Which of the following statements are true and which are false? (i) Pay-in-slip is required to be used while opening a savings bank account.

Bank Deposit Account (ii) Withdrawal form cannot be used by an account-holder if he/she uses cheques for withdrawing cash from savings bank account. (iii) Asavings bank account-holder cannot introduce another person at the time of opening a savings bank account. (iv) The passbook must be presented by the account-holder for entering deposits and withdrawal by the bank. (v) Application form for opening a savings bank account is available free of charge. (vi) To make payment to a third party by cheque, the name of the party must be mentioned on the cheque. (vii) Cheque book is issued by the bank only on the request made by an account- holder. (viii) A passbook is issued by the bank immediately after opening of the savings bank account.

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II. Fill in the blanks with appropriate words: a. Counterfoil of the pay-in-slip is returned to the ______by the bank. b. The right-hand part of the pay-in-slip is called the ______. c. A cheque needs to be attached to the ______of the pay-in-slip before deposit. d. Before payment of a cheque, the signature of the account-holder is verified with the ______. e. The Teller system helps quick ______of cash by account-holders. f. Deposit of cash into savings bank account can be made at the ______counter.

Questions: 1. Describe the procedure of opening a savings bank account in a bank. 2. State the procedure for depositing cash in the savings bank account. 3. What procedure will you follow for depositing a cheque in your savings bank account? 4. Describe the use of withdrawal form for operating savings bank account. 5. What particulars do you have to fill in the form of application while opening a savings bank account? 6. State how will you withdraw cash from your savings bank account. 7. Describe briefly the use of pay-in-slips for depositing cash or cheques into the savings bank account. 8. What is pay-in-slip? State its utility. 9. Can you withdraw an amount in excess of the balance in your savings bank account? Give reason in support of your answer. 10. What is ATM? How does it help the customers of the bank? 11. While opening a savings bank account, why is it necessary to arrange introduction of the applicant by a person known to the bank? 12. What are the different methods of withdrawing money from the saving bank account? 13. Apart from safe-keeping of money why does a businessman need to have a current account? 14. Describe the procedure of withdrawal and deposit of money through ATM. 15. Explain the utility of Automated Teller Machine.

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Key to Intext Questions 16.1 A) i. True ii. False iii. True iv. False v. True vi. True vii. True viii. True

B) a. Minimum b. Higher c. Current d. Cheque e. Lower

16.2 I i. True ii. False iii. False iv. True v. True vi. True vii. True viii. True

II. (a) Account- holder / depositor (b) Foil (c) Foil (d) Specimen signature (e) Withdrawal (f) Cash receipts

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2.18 ACTIVITY FOR YOU i. Go to the nearest branch of any bank and collect a pay-in-slip form used for depositing money. Try to fill it with the help of imaginary figures. ii. Collect information about a. Minimum amount required to open various deposit accounts; b. Rate of interest payable on savings bank, recurring and fixed deposit accounts; Instead of cash, suppose you have to deposit cheque, which you have got in payment of your salary from the office in which you are employed. You may like to deposit it in your bank account instead of going to another bank to encash it. Your bank will collect the amount of the cheque and record it as a deposit in your savings bank account. To deposit the cheque you have to use the pay-in-slip again, filling in particulars like the date of deposit, the account number, name of the account-holder, the serial number and date of the cheque, name and address of the bank on which the cheque is drawn, and the amount of the cheque in figures and words. After signing the slip, you have to attach the cheque with the foil by an awl pin, and present the slip at the counter for cheque receipt. The person at the counter will keep the foil with the cheque attached, and return to you the counter-foil with bank rubber stamp and his signature. In some banks, there is a box kept near the counter. The bank rubber stamp is also available at the counter. The depositor is to put the rubber stamp on the foil and counter- foil. Then after separating the counter-foil, the cheque along with the foil is to be dropped in the box through a slit. Withdrawal by issue of cheque requires the same procedure to be followed as that for withdrawal by filling in and signing the withdrawal form explained above. In both cases the amount of withdrawal is recorded in the books of the bank in the relevant savings bank account. Interest allowed on the balance of deposit is also recorded in the relevant accounts maintained in the books of account of the bank. These are also entered in the Pass Book as and when presented by the account-holder to the bank.

Book for Reference : 1. Sundharam and Varshney, Banking theory Law & Practice, sultan Chand & Sons., New Delhi 2. 2. Banking Regulation Act. 1949. 3. Reserve Bank of India, Report on currency and Finance 2003-2004 4. Basu : Theory and Practice of Development Banking 5. Reddy & Appanniah : Banking Theory and Practice 6. Natarajan & Gordon: Banking Theory and practice.

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UNIT- III

CHEQUE

CONTENTS 3.0 Introduction 3.1 Essential of Valid Cheque 3.2 Types of Cheque in United states 3.3 Alternatives of Cheque 3.4 Fraud via cheques 3.5 Crossing of Cheques 3.5.1 Types of crossing of cheque 3.6 Endrosement 3.7 Paying Banker 3.8 Collecting Banker 3.8.1 Collecting banker duty of care 3.9 Holder in due course 3.9.1 An overview: Holder due course

3.0 INTRODUCTION

A cheque (spelled check in American English) is a negotiable instrument instructing a financial institution to pay a specific amount of a specific currency from a specified demand account held in the maker/depositor's name with that institution. Both the maker and payee may be natural persons or legal entities. The most common spellings of the word (in all its senses) were check, cheque, and cheque from the 1600s until the 1900s.Since the 1800s, the spelling cheque (from the French word chèque) is standard for the financial sense of the word in the UK, Ireland, and the Commonwealth, while only check is retained in its other senses, thus distinguishing the two definitions in writing. Sources indicate that cheque comes from the Arabic χακκ (∏⇓⎠), which is a written document or letter or note of credit Muslim merchants adopted to carry out their trading. The concept of χakk appeared in European documents around 1220, mostly in areas neighbouring Muslim Spain and North Africa; south France and Italy. On the other hand, check is used for the financial sense in the U.S.The cheque had its origins in the ancient banking system, in which bankers would issue orders at the request of their customers, to pay money to identified payees. Such an order was referred to as a bill of exchange. The use of bills of exchange facilitated trade by eliminating the need for merchants to carry large quantities of currency (e.g. gold) to purchase goods and services. A draft is a bill of exchange which is not payable on demand of the payee. 57 B.Com-Banking Law and Practice

(However, draft in the U.S. Uniform Commercial Code today means any bill of exchange, whether payable on demand or at a later date; if payable on demand it is a "demand draft", or if drawn on a financial institution, a cheque.) The ancient Romans are believed to have used an early form of cheque known as praescriptiones in the first century BC. During the 3rd century AD, banks in Persia and other territories in the Persian Empire under the Sassanid Empire issued letters of credit known as βakks.

3.1 ESSENTIAL OF VALID CHEQUE

Cheques generally contains place of issue, cheque number, date of issue, payee, amount of currency, signature of the drawer. Routing / account number in MICR format - in the U.S., the routing number is a nine- digit number in which the first 4 digits identifies the U.S. Federal Reserve Bank's cheque-processing center. This is followed by digits 5 through 8, identifying the specific bank served by that cheque-processing center. Digit 9 is a verification digit, computed using a complex algorithm of the previous 8 digits. The account number is assigned independently by the various banks. 1. fractional routing number (U.S. only) - also known as the transit number, consists of a denominator mirroring the first 4 digits of the routing number. And a hyphenated numerator, also known as the ABA number, in which the first part is a city code (1-49), if the account is in one of 49 specific cities, or a state code (50-99) if it is not in one of those specific cities; the second part of the hyphenated numerator mirrors the 5th through 8th digits of the routing number with leading zeros removed. A cheque is generally valid indefinitely or for six months after the date of issue unless otherwise indicated; this varies depending on where the cheque is drawn[citation needed]. In Australia, for example, it is fifteen months. Legal amount (amount in words) is also highly recommended but not strictly required.

In the USA and some other countries, cheques contain a memo line where the purpose of the cheque can be indicated as a convenience without affecting the official parts of the cheque. This is not used in Britain where such notes are often written on the reverse side.

3.2 TYPES OF CHEQUES

Based on the location cheques are classified as 1. Local & 2. Outstation cheques

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Based on its value they are classified as 1. Normal & 2. High Value cheques

MAIN FEATURES OF A CHEQUE

Not negotiable crossing

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Account Payee crossing

Currency1 is an important means of payment in India, with 19% of M3 represented by currency, as against its share of 6 to 7% in advanced countries. It is supplemented by cheques and drafts for payments in commercial transactions. Various other paper instruments like a Banker's cheque, Payment order, Payable 'At Par' cheques (Interest/Dividend warrants, refund orders, gift cheques etc.), are also used to cater to the specific payment needs. The statutory basis for these instruments was provided by the Negotiable Instruments Act, 1881 (NI Act). Payment order, Payable 'At Par' cheques (Interest/Dividend warrants, refund orders, gift cheques etc.), are also used to cater to the specific payment needs. The statutory basis for these instruments was provided by the Negotiable Instruments Act, 1881 (NI Act). The NI Act, 1881, defines a Negotiable Instrument as a promissory note, Bill of Exchange or cheque. A Bill of 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. A Hundi is a Bill of Exchange in an Indian language, governed by customs and local usage. The NI Act, however, does not govern Hundis. A Bill of Exchange may therefore, include a Hundi, but Hundi may not be a Bill of Exchange. A cheque is a Bill of Exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. The maker of a cheque is called the 'drawer', and the person directed to pay is the 'drawee'. The person named in the instrument, to whom or to whose order the money is, by the instrument directed, to be paid, is called the 'payee'. A cheque is a Negotiable Instrument, which can be further negotiated by means of endorsement and is payable on demand. A cheque payable to bearer is negotiable by the delivery thereof, and when it is payable to order is negotiable by the holder by endorsement and delivery thereof. A cheque has to be presented for payment by the payee or holder to the acceptor, maker or drawer. A cheque payment is a debit transaction as the transaction regarding the payment of a cheque is initiated by the payee or beneficiary.

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In the United States, cheques are governed by Article 3 of the Uniform Commercial Code. • An order check — the most common form in the United States — is payable only to the named payee or his or her endorsee, as it usually contains the language "Pay to the order of (name)." • A bearer check is payable to anyone who is in possession of the document: this would be the case if the cheque does not state a payee, or is payable to "bearer" or to "cash" or "to the order of cash", or if the cheque is payable to someone who is not a person or legal entity, e.g. if the payee line is marked "Happy Birthday". • A counter check is a bank cheque given to customers who have run out of cheques or whose cheques are not yet available. It is often left blank, and is used for purposes of withdrawal. • Crossed Cheque = Cheque is to be collected by a banker only. • crossed cheque : two parallel lines are made in corner of cheque. it can be endorsed in fovour of any other person. e.g. A issued crossed cheque in the name of B. now, B can endorse this cheque in favour of C by writing and signing on its back and C can get money into his a/c even cheque is in name of B.

A/c Payee Crossing = Proceeds must credited to the bank a/c of the payee. • a/c payee : in between those parralel lines, "account payee" is also written. in above example, if cheque is a/c payee, B cannot endorse in favour of any other person. money will go into B's a/c only. A/c payee crosing does not restrict negotiability. It can still be transfered by endorsement and delivery. Only if the cheque is crossed as "Not Negotiable", the cheque can not be further transfered. In the United States, the terminology for a cheque historically varied with the type of financial institution on which it is drawn. In the case of a savings and loan association it was a negotiable order of withdrawal; if a credit union it was a share draft. Checks as such were associated with chartered commercial banks. However, common usage has increasingly conformed to more recent versions of Article 3, where check means any or all of these negotiable instruments. Certain types of cheques drawn on a government agency, especially payroll cheques, may also be referred to as a payroll warrant.A cheque is a cheque no matter how small the amount. Parties to regular cheques generally include a maker or drawer, the depositor writing a cheque; a drawee, the financial institution where the cheque can be presented for payment; and a payee, the entity to whom the maker issues the cheque. The drawer drafts or draws a cheque, which is also called cutting a cheque, especially in the United States.

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Ultimately, there is also at least one endorsee which would typically be the financial institution servicing the payee's account, or in some circumstances may be a third party to whom the payee owes or wishes to give money. A payee that accepts a cheque will typically deposit it in an account at the payee's bank, and have the bank process the cheque. In some cases, the payee will take the cheque to a branch of the drawee bank, and cash the cheque there. If a cheque is refused at the drawee bank (or the drawee bank returns the cheque to the bank that it was deposited at) because there are insufficient funds for the cheque to clear, it is said that the cheque has bounced. Once a cheque is approved and all appropriate accounts involved have been credited, the cheque is stamped with some kind of cancellation mark, such as a "paid" stamp. The cheque is now a cancelled cheque. Cancelled cheques are placed in the account holder's file. The account holder can request a copy of a cancelled cheque as proof of a payment. This is known as the cheque clearing cycle. Cheques are losing favour, as they can be lost or go astray within the cycle, or be delayed if further verification is needed in the case of suspected fraud. A cheque may thus bounce some time after it has been deposited. Following a report by a working group of the Office of Fair Trading in 2006 [10] maximum times for the cheque clearing cycle for most banks will be introduced in UK from November 2007.[11] The date the credit appears on the recipient's account (usually the day of deposit) will be designated 'T'. At 'T + 2' (2 business days afterwards) the value will count for calculation of credit interest or overdraft interest on the recipient's account. At 'T + 4' one will be able to withdraw funds (though this will often happen earlier, at the bank's discretion). 'T + 6' is the last day that a cheque can bounce without the recipient's permission - this is known as 'certainty of fate'. Before the introduction of this standard, the only way to know the 'fate' of a cheque has been 'Special Presentation', which would probably involve a fee, where the drawee bank contacts the payee bank to see if the payee has that money at that time. 'Special Presentation' needs to be stated at the time of depositing in the cheque. When a maker directs the maker's bank to deduct the funds for the amount of a cheque from the maker's account, thus guaranteeing funds will be available for the cheque to clear, and the bank indicates this fact by making a notation on the face of the cheque (technically called an acceptance), the instrument is then referred to as a certified cheque. In Europe, in the few countries where cheques are still being used, and in the past also in other European countries, (but this has stopped some 20 years ago), a drawer could present a cheque guarantee card with the cheque when paying a retailer. If the retailer wrote the card number on the back of the cheque, the cheque was signed in the retailer's presence, and the retailer verifies the signature on the cheque against the signature on the card, then the cheque cannot be cancelled and payment cannot be refused. Those guarantee cards are out of use in Central Europe for about 15 years.

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A cheque used to pay wages due is referred to as a payroll cheque. Payroll cheques issued by the military to soldiers, or by some other government entities to their employees, beneficiants, and creditors, are referred to as warrants. A traveller's cheque is designed to allow the person signing it to make an unconditional payment to someone else as a result of paying the account holder for that privilege. Traveller's cheques can usually be replaced if lost or stolen, they are often used by people on vacation instead of cash. The use of credit or debit cards has, however, begun to replace the traveller's cheque as the standard for vacation money, with an increase in usage by spenders due to ease of use, and an increase of businesses preferring transfers of this kind over traveller's cheques. This has resulted in some businesses to no longer accepting traveller's cheques as currency.

• A cheque sold by a post office or merchant such as a grocery for payment by a third party for a customer is referred to as a money order or postal order.

• A cheque issued by a bank on its own account for a customer for payment to a third party is called a cashier's cheque, a treasurer's cheque, a bank cheque, or a bank draft. A cheque issued by a bank but drawn on an account with another bank is a teller's cheque.

• In addition to issuing cashier's and teller's cheques, banks often sell money orders, and traveller's cheques are usually purchased from banks.

• Some public assistance programs such as the Special Supplemental Nutrition Program for Women, Infants and Children, or Aid to Families with Dependent Children make vouchers available to their beneficiaries, which are good up to a certain monetary amount for purchase of grocery items deemed eligible under the particular programme. The voucher can be deposited like any other cheque by a participating supermarket or other approved business.

• Paper cheques have a major advantage to the maker over debit card transactions in that the maker's bank will release the money several days later. Paying with a cheque and making a deposit before it clears the maker's bank is called "kiting" or "floating" and is generally illegal in the United States, but rarely enforced unless the maker uses multiple chequing accounts with multiple institutions to increase the delay or to steal the funds.

Industry trend Cheques have been in decline for many years, both for point of sale transactions (for which credit cards and debit cards are increasingly preferred) and for third party payments (e.g. bill payments), where the decline has been accelerated by the emergence of telephone banking and online banking. Being paper-based, cheques are costly for banks to process in comparison to electronic payments, so banks in many countries now discourage the use of cheques, either by charging for cheques or by making the alternatives more attractive to customers. The rise of automated teller machines (ATMs) 63 B.Com-Banking Law and Practice

has led to an era of easy to cash, which make the necessity of writing a cheque to someone because the banks were closed a thing of the past. Western Europe In most European countries, cheques are now very rarely used, even for third party payments. In these countries, it is standard practice for businesses to publish their bank details on invoices in order to facilitate the receipt of payments. Even before the introduction of online banking, it has been possible in some countries to make payments to third parties using ATMs. One of the essential procedural differences is that with a cheque, the onus is on the payee to initiate the payment in the banking system, whereas with a bank transfer, the onus is on the payer to effect the payment. In Germany and Austria, as well as in the Netherlands, Belgium and Scandinavia, cheques have almost completely vanished in favour of direct bank transfer and electronic payment. Direct bank transfer using so-called Giro accounts (current accounts) has been standard procedure since the 1950s to send and receive regular payments like rent and wages, even mail-order invoices. In the Netherlands, Austria and Germany, all kinds of invoices are commonly accompanied by so-called acceptgiro's (Netherlands) or Überweisungen (German), which are essentially standardized bank transfer order forms preprinted with the payee's account details and the amount payable. The payer fills in his account details and hands the form to a clerk at his bank, which will then transfer the money. Also, it is very common to allow the payee to automatically withdraw the requested amount from the payer's account (Lastschrifteinzug (German) or Incasso (machtiging) (Netherlands)). Though similar to paying by cheque, the payee only needs the payer's bank and account number. Since the early 1990s this method of payment has also been available to merchants. Due to this, credit cards are rather uncommon in Germany and Austria and are mostly used for the credit function rather than for cashless payment. Debit cards, however, are widespread in these countries since virtually all Austrian and German banks issue debit cards instead of simple ATM cards for use on current accounts. Acceptance of cheques has been further diminished since the late 1990s, because of the abolition of the Eurocheque. Cashing a foreign bank cheque is possible, but usually very expensive. In Finland, banks stopped issuing personal cheques in about 1993. All Nordic countries have used an interconnected international Giro system since the 1950s, and in Sweden cheques are now totally abandoned. Also electronic payments across the European Union are now fast and low-cost. In the United Kingdom, Ireland and France, there is still a heavy reliance on cheques by some sectors of the population, partly because cheques remain free of charge to personal customers, but bank-to-bank transfers are increasing in popularity. Since 2001, businesses in the United Kingdom have made more electronic payments than cheque payments [3]. In a bid to discourage cheques, most utilities in the United Kingdom charge higher prices to customers who choose to pay by a means other than direct debit, even if the customer pays by another electronic method. Many shops in the United Kingdom and France no longer accept cheques as a means of payment. An example of

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this is when Shell announced in September 2005 that it would no longer accept cheques in its UK petrol stations. More recently this has been followed by other major fuel retailers such as Texaco, BP, and Total. ASDA announced in April 2006 that it would stop accepting cheques, initially as a trial in the London area, and Boots announced in September 2006 that it would stop accepting cheques, initially as a trial in Sussex and Surrey. Currys (and other stores in the DSGi group) and WH Smith also no longer accept cheques. Cheques are now widely predicted to become a thing of the past in the United Kingdom, or at most a niche product used to pay friends, relatives, private individuals or the few businesses that don't or can't easily accept electronic payment (e.g. very small shops, child's football lessons, piano teacher, driving instructor, etc.). North America The United States still relies heavily on cheques, caused by the absence of a high volume system for low value electronic payments. About 70 billion cheques were written annually in the USA by 2001 though almost 25% of Americans do not have bank accounts at all. When sending a payment by online banking in the United States at some banks, the sending bank mails a cheque to the payee's bank or to the payee rather than sending the funds electronically. Certain companies with whom a person pays with a cheque will turn that cheque into an ACH or electronic transaction. Banks try to save time processing cheques by sending them electronically between banks. Many utilities and most credit cards will also allow customers to pay by providing bank information and having the payee draw payment from the customer's account (direct debit). Canada's usage of cheques is slightly less than that of the United States. The system, which allows instant fund transfers via magnetic strip and PIN, is widely used by merchants to the point that very few brick and mortar merchants accept cheques anymore. Many merchants accept Interac debit payments but not credit card payments, even though most Interac terminals can support credit card payments. Financial institutions also facilitate transfers between accounts within different institutions with the Email Money Transfer service. Cheques are still widely used for government cheques, payroll, rent and utility bill payments, though direct account deposits and online/telephone bill payments are also widely offered.

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Alternatives to cheques 1. Wire/bank transfer (local and international) 2. EU payment 3. Direct debit (initiated by payee) 4. Direct credit (initiated by payer), ACH in the USA 5. Online card payment 6. Third party online payment services (for example PayPal) 7. Postal payments (different names in different countries) 8. Cash (at the counter) 9. POS payments (at the counter)

3.4 FRAUD (IDENTITY THEFT) VIA CHEQUES

Since cheques include significant personal information (name, account number, signature and in some countries driver's license number, the address and/or phone number of the account holder), they can be used for fraud, specifically identity theft. Oversized cheques Oversized cheques are often used in public events such as donating money to charity or giving out prizes such as Publishers Clearing House. The cheques are commonly 18″ × 36″ in size,[18], however, according to the Guinness Book of World Records, the largest ever is 12 m by 25 m.[19] Regardless of the size, such cheques can still be redeemed for their cash value as long as they have the same parts as a normal cheque, although usually the oversized cheque is kept as a souvenir and a normal cheque is provided. A bank may levy additional charges for clearing an oversized cheque. Dishonoured cheques A dishonoured cheque cannot be redeemed for its value and is worthless; they are also known as an RDI (returned deposit item), or NSF (Non-Sufficient Funds) cheque. Cheques are usually dishonoured because the drawer's account has been frozen or limited, or because there are insufficient funds in the drawer's account when the cheque was redeemed (in which case the cheque is said to have 'bounced'). Banks will typically charge customers for issuing a dishonoured cheque, and in some jurisdictions such an act is a criminal action. A drawer may also issue a 'stop' on a cheque, instructing the financial institution not to honour a particular cheque. In the United Kingdom they are typically returned marked "Refer to Drawer" - an instruction to contact the person issuing the cheque for an explanation as to why the cheque was not honoured. This wording was brought in after a bank was successfully

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sued for libel after returning a cheque with the words "Insufficient Funds" after making an error - the court ruled that as there were sufficient funds the statement was demonstrably false and damaging to the reputation of the person issuing the cheque. Cashier's cheques & banker's drafts Cashier's cheques and banker's drafts are cheques issued against the funds of a financial institution rather than an individual account holder, decreasing the likelihood the cheque will bounce. Typically, cashier's cheques are used in the USA and banker's drafts are used in the UK. Though similar, they differ in their mechanics. Cashier's cheques are issued by a bank cashier or head teller (or even by a major company). They are paid from the financial institution's funds immediately, without any clearing period. The financial institution then later takes the value of the cheque from the drawer. Cashier's cheques are perceived to be as good as cash but they are still a cheque, a misconception often exploited by scam artists. The funds behind a banker's draft are paid when the draft is first drawn and are held by the issuing bank until the draft is cashed. Thus the funds of a banker's draft has been allocated and verified before the document is issued, providing a guarantee it will not be dishonoured due to insufficient funds. However, a lost or stolen banker's draft can be stopped like any other cheque so payment is not completely guaranteed. Certified cheque When a certified cheque is drawn, the bank operating the account verifies there are currently sufficient funds in the drawer's account to honour the cheque. A hole is punched through the MICR numbers so the certified cheque will not be processed as an ordinary cheque when it is deposited, and a bank official signs the cheque face to indicate it is certified. Although the face of the cheque is crowded, the back of the cheque is blank and the cheque can be deposited and routed through the banking system like an ordinary cheque. While certified cheques guarantee there are sufficient funds to honour them at the time the cheque is drawn, they cannot guarantee there will be sufficient funds when the cheque is finally cleared for payment. Warrants Warrants look like cheques and clear through the banking system like cheques, but are not drawn against cleared funds in a demand deposit account. Instead they are drawn against "available funds" so that the issuer can collect interest on the float. In the U.S., warrants are issued by government entities such as the military and state and county governments. Warrants are issued for payroll to individuals and for accounts payable to vendors. A cheque differs from a warrant in that the warrant is not necessarily payable on demand and may not be negotiable. Deposited warrants are routed to a collecting bank which processes them as collection items like maturing treasury bills and presents the warrants to the government entity's treasury department for payment each business day 67 B.Com-Banking Law and Practice

Blank cheque A blank cheque (blank check, carte blanche), in the literal sense, is a cheque that has no numerical value written in, but is already signed. In the figurative or metaphoric sense, it is used (especially in politics) to describe a situation in which an agreement had been made that is open-ended or vague, and therefore subject to abuse, or in which a party is willing to consider any expense in the pursuance of their goals Cheque users are normally advised to specify the amount of the cheque before signing it. If created accidentally, blank cheque can be extremely dangerous for their owner, because whoever obtains the cheque could write in any amount of money, and would be able to cash it (to the extent that the chequeing account contains such funds, also depending on the laws in the specific country). The 1994 film Blank Check plays on such a situation. One might give a blank cheque to a trusted agent for the payment of a debt where the writer of the cheque does not know the amount required, and it is not convenient or possible for the writer to enter the amount when it becomes known. In many cases, it is possible to annotate a cheque with a notional limit with a statement such as "amount not to exceed $1000". In theory, the bank should refuse to process a cheque in excess of the stated amount. A traveler's cheque (also traveller's cheque, travellers cheque, traveler's check, or travelers check) is a preprinted, fixed-amount cheque designed to allow the person signing it to make an unconditional payment to someone else as a result of having paid the issuer for that privilege. Usage As a traveler's cheque can usually be replaced if lost or stolen (if the owner still has the nota, issued together with the purchase of the cheque), they are often used by people on vacation in place of cash. The use of credit cards has, however, rendered them less important than they previously were; there are few places that do not accept credit cards (especially international ones such as Mastercard and ) but do accept traveler's cheques – in fact, many places now do not accept the latter. As a result, Travelex now also sells "traveller's cheque cards" which are used like credit cards. In contrast, American Express discontinued their own traveler's cheque cards, announcing they would no longer honor the cards effective October 31, 2007. Traveler's cheques are available in several currencies such as U.S. dollars, Canadian dollars, pounds sterling, Japanese yen, and euro; denominations usually being 20, 50, or 100 (x100 for Yen) of whatever currency, and are usually sold in pads of five or ten cheques, e.g., 5 x €20 for €100. Traveler's cheques do not expire so unused cheques can be kept by the purchaser to spend at any time in the future. The purchaser of a supply of traveler's cheques effectively gives an interest-free loan to the issuer, which is why it is common for banks to sell them "commission free" to their customers. The commission, where it is charged, is usually 1-2% of the total face value sold.

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American Express was the first company to develop a large-scale traveller's cheque system in 1891, and is still the largest issuer of traveler's cheques today by volume. American Express's introduction of traveler's cheques is traditionally attributed to employee Marcellus Flemming Berry, after company president J.C. Fargo had problems in smaller European cities obtaining funds with a letter of credit. However, traveler's cheques were first issued on 1 January 1772 by the London Credit Exchange Company for use in ninety European cities, and in 1874 Thomas Cook was issuing 'circular notes' that operated in the manner of traveler's cheques Legal terms for the parties to a traveler's cheque are the obligor or issuer, the organization that produces it; the agent, the bank or other place that sells it; the purchaser, the natural person who buys it, and the payee, the entity to whom the purchaser writes the cheque for goods and/or services. For purposes of clearance, the obligor is both maker and drawee.

Use and acceptance Upon obtaining custody of a purchased supply of traveler's cheques, the purchaser should immediately write his or her signature once upon each cheque, usually on the cheque's upper portion. The purchaser will also have received a receipt and some other documentation that should be kept in a safe place other than where he or she carries the cheques. When wanting to cash a traveler's cheque while making a purchase, the purchaser should, in the presence of the payee, date and countersign the cheque in the indicated space, usually on the cheque's lower portion (if at a restaurant, it may be helpful to ask the waiter to watch and wait for this to be done). Applicable change for a purchase transaction should be given in local currency as if the cheques were banknotes. Several travellers cheques have been created; the most widely accepted travellers cheques are: • Thomas Cook • American Express

Security concerns It is a reasonable security procedure for the payee to ask to inspect the purchaser's picture ID; a driving licence or passport should suffice, and doing so would most usefully be towards the end of comparing the purchaser's signature on the ID with those on the cheque. The best first step, however, that can be taken by any payee who has concerns about the validity of any traveler's cheque, is to contact the issuer directly; a negative finding by a third-party cheque verification service based on an ID check may merely indicate that the service has no record about the purchaser (to be expected,

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practically by definition, of many travelers), or at worst that he has been deemed incompetent to manage a personal chequing account (which would have no bearing on the validity of a traveller's cheque).American Express has a world wide reputation but their travelers cheques are not readily accepted as advertised. For instance in Thailand, some banks refused to accept the cheques, while others not only charged a transaction fee, they also charged a per cheque charge; and in addition they also required you leave a copy of your passport with the cashing facility. This places your passport information in parts of the world where information security should be a high priority.

Black market One of the main advantage travellers cheques provide, is the replacement if lost or stolen. This feature has also created a black market, where swindlers buy travellers cheques, sell them at 50% of their value to other people (eg travellers, ...) and falsely report their travellers cheque stolen with the company where the cheque has been obtained. As such, they get back the value of the travellers cheque and made 50% of the value as profit. [5]

Deposit and settlement A payee receiving a traveler's cheque should follow its normal procedures for depositing cheques into its bank account: usually, endorsement by stamp or signature and listing of the cheque and its amount on the deposit slip. The bank account will be credited with the amount of the cheque as with any other negotiable item submitted for clearance. In the United States, if the payee is equipped to process cheques electronically at point of sale (see: Check 21 Act), they should still take custody of the cheque and submit it to a financial institution, particularly to avoid any confusion on the part of the purchaser.

Loss or theft Loss or theft of traveler's cheques should be reported immediately to the issuer and to the local police authority. The receipt issued when the cheques were purchased will expedite the refund process On the dishonour of a cheque, one can file a suit for recovery of the cheque amount along with the cost & interest under order XXXVII of Code of Civil Procedure 1908 ( which is a summary procedure and) can also file a Criminal Complaint u/s 138 of Negotiable Instrument Act for punishment to the signatory of the cheque for haring committed an offence. However, before filing the said complaint a statutory notice is liable to be given to the other party. On the dishonour of cheque by the company you can file a suit for recovery of the amount under Order XXXVII of CPC. As you have stated that cheques were dishonoured few months back and you have issued no notice to the company bringing to their knowledge the dishonour of cheques and the life of the cheque is still valid which is usually six months from the date of issue. You please present the cheque again and on

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receipt of the information about the dishonour of the cheque you immediately issue notice within 30 days from the receipt of the information of dishonour of cheque to the company. If the company does not pay the amount within 30 days from the receipt of the notice, you can file complaint under Section 138 of the Negotiatble Instrument Act. The said complaint is to be filed within one month on the expiry of 30 days period of notice. When you have informed the person about the dishonour of the cheque, in case the information is given within 30 days from the dishonour of the cheque, you can file a Complaint under Section 138 of Negotiable Instrument Act within one month after the expiry of notice period of 30 days. The Complaint for cheating is not maintainable legally. However, in certain cases the police have been registering cases of cheating against the accused. You should fill the cheques and present for encashment. The Partnership Firm as well as partners are personally liable and even after dissolution also the firm and partners are liable. Once the cheques are dishonoured you have to file a suit for recovery of the said amount under the summary procedure provided in Order 37 of Code of Civil Procedure, 1908. You should also file a complaint under Section 138 of the Negotiable Instruments Act. For this you will have to first give a notice, within 30 days of the dishonouring of the cheques. Then if payment is not made within 30 days of receipt of notice a complaint has to be filed within 30 days thereafter. Is it true that cheques are only valid for six months? It is common banking practice to reject cheques that are over six months old to protect the payer, on the basis that payment may already have been made by some other means or the cheque may have been lost or stolen. However, this is at the discretion of individual banks. It should not be assumed that cheques in excess of six months old would automatically be rejected - the only certain way to cancel a cheque is to request that a stop be placed on it. Cheques backed by a Cheque Guarantee Card cannot be stopped. It is recommended that, if possible, customers in possession of cheques that are over six months old obtain a replacement. In case of disputes, a cheque remains legally valid to use to prove a debt for six years.

3.5 CHEQUES AND CROSSINGS

WHAT do you understand by "crossing of cheques"? What is the object of crossing? State the implications of the following crossings: i) restrictive crossing; and ii) not- negotiable crossing. (6 marks) When a cheque bears across its face two parallel transverse lines, the cheque is said to be crossed. The lines are usually drawn on the left-hand top corner of the cheque. But they may be drawn anywhere across the face. 71 B.Com-Banking Law and Practice

Crossing affects the mode of payment of the cheque. The cheque is no more payable to the payee or holder at the counter of the bank. The payment of a crossed cheque can be obtained only through a banker. Thus, crossing is a mode of assuring that only the rightful holder gets payment. Even if some wrongful person secures payment it can be traced, because he can receive payment only through an account with a bank. Restrictive crossing: `A/c Payee only' crossing is also called as restrictive crossing since it has the effect of restricting further transfers. It is a directive to the paying bank that the proceeds be released for the account of payee only. But, it is the collecting bank which has to ensure that the proceeds are credited to the account of payee only and no other. If the collecting banker allows the proceeds of the cheque so crossed to be credited to any other account, he may be held guilty of negligence in the event of an action for wrongful conversion of funds being brought against him. Not-negotiable crossing: Crossing whether `general' or `special' may be accompanied by words `not negotiable'. The effect of inclusion of such words will be not to render the cheques `non- transferable'. Such cheques can very well be transferred by endorsement and delivery. But as per Section 130, a person who takes such a cheque shall not have and shall not be capable of giving a better title to the cheque than that which the person, from whom he took it in the first instance, had. What is a restrictive crossing on a cheque Restrictive crossing is usually done on the left hand corner of cheques, a/c payee only being written in between the lines. Basically what this does is that it ensures that the money is not obtained at the counter as a crossed cheque can only be drawn from bank to bank or by a banker.

3.5.1 CROSSING OF CHEQUES Cheques can be of two types:- 1. Open or an uncrossed cheque 2. Crossed cheque

Open Cheque An open cheque is a cheque which is payable at the counter of the drawee bank on presentation of the cheque.

Crossed Cheque A crossed cheque is a cheque which is payable only through a collecting banker and not directly at the counter of the bank. Crossing ensures security to the holder of the cheque

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as only the collecting banker credits the proceeds to the account of the payee of the cheque. When two parallel transverse lines, with or without any words, are drawn generally, on the left hand top corner of the cheque. A crossed cheque does not effect the negotiability of the instrument. It can be negotiated the same way as any other negotiable instrument.

Types of Crossing There are two types of negotiable instruments:- • General Crossing • Special Crossing • Account Payee or Restrictive Crossing • ‘ Not Negotiable ‘ Crossing

General Crossing General crossing is a cheque which bears across it’s face tow parallel transverse lines without any words as (‘and company’ ‘or & Co.’) written in between these two lines, it is called general crossing. In general crossing the name of the banker is not mentioned.

Special Crossing When a cheque bears across its face an addition of the name of the banker, either with or without the ‘not negotiable’ that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed to that banker. Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed or his agent for collection.

Account Payee or Restrictive Crossing This crossing can be made in both general and special crossing by adding the words Account Payee. In this type of crossing the collecting banker is supposed to credit the amount of the cheque to the account of the payee only. The cheque remains transferable but the liability of the collecting banker is enhanced in case he credits the proceeds of the cheque so crossed to any person other than the payee and the indorsement in favour of the last payee is proved forged.The collecting banker must act like a blood hound and make proper enquiries as to the title of the last indorsee from the original payee named in the cheque before collecting an 'Account Payee' cheque in his account.

Not Negotiable Crossing The words 'Not Negotiable' can be added to General as well as Special crossing and a crossing with these words is known as Not Negotiable crossing.The effect of such a crossing is that it removes the most important characteristic of a negotiable instrument

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i.e the transferee of such a crossed cheque cannot get a better title than that of the transferor (cannot become a holder in due course) and cannot covey a better title to his own transferee, though the instrument remains transferable

Crossing and crossed cheque defined (1) Where a cheque clearly bears across the front of the cheque the addition of: (a) Two parallel transverse lines; or (b) Two parallel transverse lines with the words not negotiable between, or substantially between, the lines; the addition is a crossing of the cheque, and the cheque is a crossed cheque. (2) Nothing written or placed on a cheque, other than an addition of a kind referred to in subsection (1), is effective as a crossing of the cheque. (3) Without limiting the generality of subsection (2), the addition of the words not negotiable to a cheque otherwise than between, or substantially between, 2 parallel transverse lines across the front of the cheque is not effective as a crossing of the cheque. Bearer cheque is negotiated by delivery as per Section 47 of NI Act. Where such cheques are endorsed, the paying bank need not verify the regularity or otherwise of the endorsement since such cheques are always bearer and payment to a bearer is considered to be a payment in due course. A paying banker gets protection on payment of bearer cheque with endorsement thereon u/s 85 (2), by taking no cognizance of such endorsement. U/s 35 of NI Act, an endorser is deemed to have impliedly promised that on due presentment, the instrument will be paid and in case of dishonour, the holder will be compensated if he receives a notice of dishonour. As a result, his liability to pay is absolute without any pre-conditions. He is the party, which is liable on the instrument jointly as well as severally.

3.6 ENDORSEMENT

When the marker or holder of an negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, one the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to indorse the same, and is called the endorser

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Endorsement in blank and in full-endorsee [(1)] If the endorser signs his name only, the endorsement is said to be "in blank", and if he adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person, the endorsement is said to be "in full", and the person so specified is called the "endorsee" of the instrument. [(2)] The provisions of this Act relating to a payee shall apply with the necessary modifications to an endorsee. Indorsement for part of sum due.- No writing on a negotiable instrument is valid for the purpose of negotiation of such writing purports to transfer only a part of the amount appearing to be due on the instrument; but where such amount has been partly paid a note to that effect may be indorsed on the instrument, which may then be negotiated for the balance. Conversion of indorsement in blank into indorsement in full.- If a negotiable instrument, after having been indorsed in blank, is indorsed in full, the amount of it cannot be claimed from the indorser in full, except by the person to whom it has been indorsed in full, or by one who derives title through such person. Instrument indorsed in blank.- Subject to the provisions hereinafter contained crossed cheques, a negotiable instrument indorsed in blank is payable to the bearer thereof even although originally payable to order. Position of Acceptor Who Has Paid a Bill Bearing Forged Endorsements "Cocks v. Masterman" what is the position of the acceptor who has paid a bill bearing forged endorsements? Could he be called upon to pay the money again to the last holder for value prior to the forged endorsement? If the acceptor had knowledge of forged endorsement on the bill and refused payment, to whom would the holder look for payment? Would the holder and the last endorser prior to the forged endorsement have equal rights against the acceptor?

3.7 PAYING BANKER

Who is a paying banker 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 Raised Cheque - Responsibility Of Paying Bank Unless Cheque has been Carelessly Prepared By The Drawer

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In case a bank pays a raised cheque, who is liable for the loss? (a) Can the bank charge amount paid to their customers' account, or (b) can they recover from the bank to which they paid it, or (c) from payee, who is a minor? Answer. - The bank can only charge its customer with the original amount of the cheque, unless in drawing it he has neglected to take reasonable and ordinary precautions against forgery. It was held by the House of Lords in Macmillan v. London Joint Stock Bank, that if, owing to the neglect of such precautions, it is put into the power of any dishonest person to increase the amount by forgery, the customer must bear the loss as between himself and the banker. (b) Yes - (c) Yes, and they can take criminal action if he did the raising.

3.8 COLLECTING BANKER

What is collecting banker A collecting banker is one who undertakes to collect the amount of a cheques & bills for his customer from the paying banker. A banker is under no legal obligation to collect cheques drawn upon other banks for a customer. But this function is performed by every modern bank.

3.8.1 Collecting Banker's Duty Of Care Collecting Bank A bank that assists in obtaining payment in accordance with draft payment terms In a series of recent decisions, our courts have recognised the principle that a collecting bank does in fact owe a duty of care to the true owner of a cheque, not to act negligently when dealing with the cheque (Indac Electronics (Pty) Ltd v Volkskas Bank Ltd 1992 1 SA 783 (A), Kwamashu Bakery Ltd v Standard Bank of South Africa Limited 1995 1 SA 377 (D)). This does not mean that a collecting bank will automatically be liable in each instance, as its liability is based in delict, and accordingly the requirements for delictual liability must first be met. As bankers are considered to render a professional service, the standard of care to which they will be held, is that of the bonus argentarius, or reasonable banker. Negligence in this context is present if (i) a reasonable banker would have foreseen that his conduct might reasonably cause another to sustain a patrimonial loss, (ii) would have taken reasonable steps to guard against such an occurrence, and (iii) the defendant banker failed to take such steps (Kruger v Coetzee 1966 2 SA 428 (A) 430 E-F). As regards the duty of care imposed on banks when opening accounts for clients, the courts draw a distinction between new and existing clients of the bank. When dealing with new clients, a reasonable banker should not only satisfy himself as to the identity of the new client, but should also gather sufficient information to enable him to establish whether the person is the actual person or entity 76 B.Com-Banking Law and Practice

which he or she purports to be. Whilst bankers should constantly guard against offending potential new clients, the latter should reasonably expect a thorough probe into their financial affairs (see the Kwamashu case above). When dealing with existing clients wishing to open new accounts, the position is somewhat different. In this instance the bank need not repeat the enquiry process unless there are compelling circumstances justifying such enquiry. A bank would be under a duty to make enquiries where it is put on enquiry or where a transaction is out of the ordinary. The bank is not however required to cross-examine the client to determine whether the customer is lying, nor need the bank enquire as to the source of the client's funds in the absence of compelling reasons to do so (Columbus Joint Venture v Absa Bank Ltd 2000 (2) SA 491 (W)). In terms of section 1 of the Apportionment of Damages Act, 1956 (the "Act"), a plaintiff's claim must be reduced in accordance with his own degree of fault. The concept of "fault" within this context has given rise to uncertainty and it is presently unclear whether section 1 is applicable to intentional or negligent conduct. The South African Law Commission has supported the view that "fault" in section 1 of the Act means "negligence", and has made certain recommendations in this regard. Fault does however include vicarious liability. A party may therefore be held strictly liable for the wrongful conduct of an employee or agent committed in the course and scope of the latter's employment or mandate As long as the incidence of cheque theft and fraud remains high in our country and while banks remain the most realistic source for a victim to recover its loss, claims against collecting banks will continue to burden our courts. Up until 1992 the collecting banker’s liability was quite controversial in our law. In Indac Electronics v Volkskas Bank Limited 1992 (1) SA 783 (A) our Appellant Division brought matters to a head and recognised the existence of a legal duty on the part of the collecting bank to the true owner of a lost or stolen cheque to avoid causing economic loss by negligently dealing with such cheque. In the as yet unreported case of FJS Painting CC v Absa Bank Limited (judgment delivered by the SCA on 28 May 2004) the court had to consider the liability of Absa (the collecting bank). The sole member of FJS Painting CC (“the CC”) was a Mr Beytell. The CC carried on business as a contractor doing mainly painting work. One of the CC’s main clients was Sappi. Before October 1994 Mr Beytell began living with Ms Craythorne. Ms Craythorne was the CC’s bookkeeper and on occasion collected or delivered items for the CC. On 22 October 1994 Mr Beytell was involved in an accident and he passed away. On 1 November 1994 Ms Craythorne opened an account at Absa’s Springs branch in the name of “the sole owner FJS Painting Sheeting”. Ms Craythorne then communicated with Sappi’s commercial manager and represented that she had a 50% interest in the CC.

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Thereafter four cheques were issued by Sappi in favour of FJS Painting Sheeting and Labour Hire Contractor CC. Ms Craythorne took delivery of these cheques. All four cheques were crossed and marked “Not Transferrable For Account Payee Only”. Despite the crossing, Absa collected all four cheques for the credit of the account that Ms Craythorne had opened in the name of “the sole owner FJS Painting Sheeting”. Ms Craythorne subsequently passed away and there was no credit balance in the account that she had opened nor were there assets in her estate at the time of her death. The CC alleged that it was the true owner of each of the cheques and that in breach of the legal duty which Absa owed it, Absa had negligently collected the cheques for the credit of the account opened by Ms Crawthorne and as a result, it suffered a loss in the amount of each of the cheques, totalling R132 864.26. The Supreme Court of Appeal found that the CC was not the true owner of the cheques and therefore was not entitled to the relief claimed. The Court reiterated that in order for ownership of a cheque to be transferred there must be delivery of the cheque by the transferor to the transferee and there must be an intention on the part of the transferor to transfer ownership and an intention on the part of the transferee to receive ownership. The court found that while Sappi delivered all four cheques to Ms Craythorne and did so with the intention of transferring ownership to the CC, Ms Craythorne had no intention of receiving the cheques for the CC. She intended to acquire the cheques for herself. Since the court found that the CC was not the true owner of the cheques, the court dismissed the claim against Absa. In my view the most interesting aspect about this case is an alternative submission made by the counsel for the CC that the legal duty of the collecting bank not to act negligently ought to be extended to a named payee of the cheque, even if the payee is not the owner of the cheque. In a previous decision by the Appellate Division in First National Bank of SA Limited v Quality Tyres (1970) (Pty) Limited 1995 (3) SA 556 (A) at 570B a similar submission was rejected as being “manifestly without merit”. In making this suggestion the CC’s counsel referred to Strydom NO v Absa Bank Bpk 2001 (3) SA 185 (T). In that case, even though the court held that ownership of the cheque was an essential ingredient of the action, the court suggested that the requirement of ownership may well become the subject of debate in the future.

In the FJS Painting CC case, the Supreme Court of Appeal chose not to resolve the debate about whether or not the collecting banker’s duty should be extended to the named payee and stated the following: “The extension of a collecting banker’s liability in this way could have far-reaching and possibly inappropriate consequences, none of which were debated before us. However, on the facts of the present case it is unnecessary to become embroiled in such a debate.” I suspect that if the claim had been pleaded differently by the CC and if in the pleadings the CC had in the alternative alleged that even if it was found not to be the true owner, the collecting bank owed it a duty of care, the Court would have been forced to consider whether the duty of the collecting banker should be extended.

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In the Indac Electronics case, the court highlighted five considerations that are pertinent to the question of whether a collecting bank owes a duty of care to the owner of a lost or stolen cheque: Firstly, courts guard against creating limitless or indeterminate liability in respect of pure economic loss. The court, however, found that the extent of the potential loss is finite (being the face value of the cheque) and the potential claimants are easily predictable and limited to the drawer or the payee of the cheque. By extending the liability of the collecting banker to the party that suffers the loss, I do not believe that the courts will be creating limitless liability, because the party that will suffer the loss will be the drawer of the cheque, the payee of the cheque or, in certain instances, the drawee bank (where the drawee bank acts pursuant to a fraudulent signature). Secondly, in the Indac Electronics case the court recognised that there is constantly a risk that payment of a cheque may be obtained with relative ease by an unlawful possessor and therefore recognised that there is a need for the true owner of the cheque to be protected. In my view there is no reason why this protection should be limited to the true owner and not extended to the drawer, payee or the drawee bank that may suffer the loss. The third consideration that motivated the court in the Indac Electronics case is the fact that a collecting bank should be aware that its failure to exercise reasonable care may result in loss to the true owner of the cheque. The court recognised that the collecting bank is able to reduce, if not avoid, loss to the owner by exercising reasonable care in the collection of the cheque. This consideration can apply equally to motivate why the duty of the collecting banker should be extended to the payee, drawer or the drawee bank, whoever suffers loss. Fourthly, in the Indac Electronics case the court highlighted that the collecting bank is the only party capable of knowing whether the cheque is being collected on behalf of the person who is entitled to receive payment. The drawee bank has to rely on the collecting bank to ascertain whether payment is being collected on behalf of the person who is so entitled. This consideration also does not require the collecting bankers’ liability to be limited to the true owner of the cheque and could be used to motivate an extension of the collecting banker’s duty to the payee, drawee bank or the drawer, whoever suffers the loss. In the Indac Electronics case, the court also pointed out that the drawer or owner of the cheque is unable to take steps to protect itself from the loss it will suffer if the collecting bank negligently collects payment on behalf of a person who is not entitled to the cheque, but the collecting bank who acts negligently and is consequently held liable to pay damages to the owner will always have a claim for reimbursement against its customer who deposited the cheque for collection. In my view this consideration too does not require the liability of the collecting banker to be limited to the true owner of the cheque and could apply equally to motivate the recognition of a duty on the part of the collecting banker to the payee, drawer or the drawee bank, whoever suffers the loss.

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I expect that it will not be in the too distant future that the question, whether the collecting banker’s duty should be extended to the party that suffers the loss, will be debated before our courts. In order to determine whether the duty should be extended, a value judgment embracing all relevant facts and involving considerations of policy would have to be made by our courts. If one has regard to the factors that were taken into account in the Indac Electronics case to recognise the duty of the collecting banker to the true owner of the cheque, it will not surprise me if the court finds that the collecting banker’s duty is not only owed to the true owner of the cheque, but also to the drawer, the payee, or the drawee bank, whoever suffers the loss.

Holder in due course Holder in due course, or (HDC) is a term used in law to refer to an innocent party who purchases a negotiable instrument for value without any apparent defect in the instrument nor any notice of dishonor. (Black's Law Dictionary 2nd Pocket ed. 2001 pg. 322). An HDC must purchase for value, meaning that he or she must pay for the property rather than simply being the beneficiary of a gift, although the value does not have to be 100% of the market value. Depending on the laws of the relevant jurisdiction, when a party sells a negotiable instrument with a non-apparent defect to an HDC, such as by selling them an instrument upon which another has a claim, that HDC takes good title to the property despite the competing claims of the other party unless the other party has a real defense, such as lack of capacity or fraud in the factum. Other parties with claim to ownership will have a cause of action against the party who sold the negotiable instrument to the HDC. Most states in the USA have codified into law Uniform Commercial Code Article § 3-302 defining an HDC and § 3-305 protecting the HDC from most claims by other parties.

3.9 HOLDER IN DUE COURSE

An individual who acquires a negotiable instrument in good faith. Good-faith holder who has taken a negotiable instrument for value, without Notice that it was overdue or had been Dishonored or that there was any defense against or Claim to it. In property law, the innocent buyer or holder in due course is referred to as a bona fide purchaser. Sec.69 INTRODUCTION A person to whom negotiable paper is negotiated may have a right to enforce it according to its tenor notwithstanding his predecessor in title had no such right to enforce it, provided, the negotiation has been made under certain circumstances, and if made under those circumstances, the holder is said to be a holder in due course. We have seen at the outset that the purpose of having a law of negotiable paper is to permit an obligation to pay money to be separated from the transaction of which it was

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originally a part and negotiated as an independent obligation in itself, the floating, uncontradic-table word of the party who gave it that he will pay according to the tenor to any one who holds it at maturity. We have seen that if a debt is not drawn in negotiable form it may be assignable, but in that event the assignment confers no higher right than the assignor has. But in the law of negotiable paper a transferee may reach a plane of greater protection. He cares not what may have been the original transaction, or whether there may be defenses of fraud, breach of contract, failure or lack of consideration, uncredited payment, set-off and the like. These are not available against him and that which he has secured stands enforceable against the debtor pursuant to its terms. But this is true only in case the acquirer took paper negotiable in form which was complete and regular on its face, gave value therefor, obtained his title before the instrument was overdue, and had no knowledge or notice of the defect in his transferor's title. If he did acquire under those circumstances he is known as a holder in due course, and then has the peculiar protection of the law of negotiable paper. Now it is quite apparent that if the party liable on the paper has no defense; if it is a debt he must pay if not transferred then no policy demands that limitations be imposed upon the transfer. Therefore if there are no defenses that could be made against any one, we are not concerned whether a purchaser acquires as a holder in due course or not. He may acquire an overdue instrument, may have it as a gift; and of course has no knowledge or notice of any defense, for our hypothesis is that there is none. Example 34. A gives B a promissory note in payment of a contract to be performed by B. B breaks the contract. B negotiates the note to C. To escape being subject to this defense C must have acquired the note under the circumstances that make him a holder in due course. Example 35. A borrows money from B and gives his promissory note therefore. B negotiates this note to C. As A has no defense against any one, it is useless to inquire whether or not C acquired as a holder in due course. All that interests A is whether C is really the legal owner. C may have acquired the paper by way of gift and may have taken long after maturity. This is immaterial. In the present chapter we shall inquire under what circumstances one must obtain paper in order to be a holder in due course. In making that inquiry we shall assume that there are defenses available against the party from whom the paper was acquired, and therefore available against this taker unless he is a holder in due course. Sec. 70. Who Is Holder In Due Course In order to claim the peculiar advantages of the law merchant, the holder must be a holder in due course, that is, he must have acquired (1) paper complete and regular on its face; (2) for value; (3) in good faith and (4) before the paper was overdue. It is essential that all these circumstances exist to make one a holder in due course. They are discussed in order.

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Sec. 71. Complete And Regular Upon Its Face A holder in due course is one who has acquired an instrument complete and regular on its face. Manifestly one cannot be a holder in due course unless he acquires an instrument negotiable in form, and if it is incomplete or irregular when he obtains it, if in fact it does not lack negotiability, it at least imposes upon him the necessity of inquiry. Example 36. A note was made payable "four...... after date." In A's hands it was subject to the defense of failure of consideration. A sold it to B, who acquired it for value, before it was overdue and without notice of the defense. Held that because of the irregularity or incompleteness B was not a holder in due course and was subject to the defense. Sec. 73. Transferee Must Take In Good Faith To be a holder in due course, a transferee of negotiable paper must acquire it in good faith. (1) In general. If a purchaser has actual notice of an "infirmity in the instrument" or "defect in the title of the person negotiating it,"88 he clearly does not purchase in good faith. But if he have no actual notice, what will constitute lack of good faith? The act says: "To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith."89 A rule applied in some early cases that one who buys under circumstances that would put a prudent man on inquiry is not a holder in due course is supplanted by the simple rule that it is sufficient if one buys in good faith. If that is true, it is not material that he did not use the prudence of an ordinarily prudent man. The rule of the law is deemed the better one because there should be no discouragement to the transfer of paper whose chief use is that of negotiation by setting up a strict standard to which one must conform to be protected against unknown equities. If he buy in good faith, it is enough. "However harsh this rule may, on first impression, seem to be, it is based upon the policy of the law which gives full faith and credit to commercial paper transferred before maturity, so that it may circulate, as far as possible, with all the conveniences of currency." 90

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Nego. Instru. Law, Sec 52 (4). Id. SEC. 56. "Good faith * * * is consistent with negligence, even gross negligence. A blundering fool may therefore be found to have acted in good faith, though under like circumstances, a shrewd business man might be deemed to have acted in bad faith." One may, however, have bad faith even if he does not know the exact trouble if he knows there is or must be something wrong.92 He may be a purchaser in good faith even if negligent, but if he refrains from making inquiry because he fears to do so unless he discover something wrong, he is not a purchaser in good faith.92a And furthermore, we may frequently infer that the purchaser does know of the wrong though unable to prove it except circumstantially by showing the conditions under which he acquired it. (2) Payment of less than face value as showing bad faith. We have seen that one who buys an instrument for less than the face value thereof (1) gives value, and (2) may be for all of that a purchaser in good faith; but the inadequacy of the amount paid may be a circumstance showing lack of good faith. The circumstances of the particular case are all material: the solvency of the maker, the time the paper has to yet run before maturity, whether the paper is secured or not, or any other material facts, are pertinent. If one is offered a note almost due made by a solvent maker, for a great discount, he might thereby be informed that something was the matter with it, especially if some reasonable explanation were not forthcoming; while a note made by one of doubtful solvency, having some time yet to run, might readily enough be disposed of at a considerable discount without advising one that there was anything questionable. Bradwell v. Pryor, 221 111. 606. Schintz v. Bank, 152 111. Ap. 76. Paika v. Perry, 225 Mass. 563, 114 N. E. 830. 92a. Knowlton v. Schultz, 71 N. W. (N. D.) 550. Example 39. A bought from B a note made by C, a responsible person, the note having but 6 weeks to run, for one half its face value. There was a good defense against the note in B's hands. A claimed that C was not a holder in due course as not having bought in good faith: Held: that C's good or bad faith was on this evidence a question for the jury.93 (3) Knowledge that consideration is still unperformed. It has been seen that a recital of a consideration in negotiable paper does not destroy negotiability. It consistently follows from that that a knowledge that there is an executory agreement still to be performed by the payee, does not make one a holder in bad faith, unless he knows that it is still unperformed in violation of the executory agreement.94 83 B.Com-Banking Law and Practice

Legal term for an original or any subsequent holder of a negotiable instrument (check, draft, note, etc.) who has accepted it in good-faith and has exchanged something valuable for it. For example, anyone who accepts a third-party check is a holder in due course. He or she has certain legal rights, and is presumed to be unaware that (if such were the case) the instrument was at any time overdue, dishonored when presented for payment, had any claims against it, or the party required to pay it has valid reason for not doing so. Also called protected holder party who becomes the good faith holder of a negotiable instrument (such as a check, note, or draft), for value received, without knowledge of any claims against it, or that the instrument was dishonored when presented for payment, or in any way defective. Under the Uniform Commercial Code (UCC) the body of law governing legal contracts, the person holding a check endorsed by another is the presumed legal owner, and can sue in his or her own name. A person accepting a third party check is a holder in due course, and holds legal title to the instrument, regardless of any prior claims. By contrast, a good faith buyer of an asset does not necessarily acquire title; for example, an innocent buyer of a stolen car never gains title to the car. A bank acquiring installment loan contracts, as a holder in due course, from a retailer or other lender, can be held liable in some cases for any claims by the original borrower against the seller of the note. This is the Federal Trade Commission's holder in due course rule, intended to prevent abusive credit practices. The rule, issued in 1976,says the holder of a note must honor warranties of the original seller. This means a consumer cannot be required to make payments in situations where the seller of the note refused to honor a manufacturer's guarantee on merchandise that turned out to be defective, or the seller refused to perform work, such as home improvements, financed by an installment note. 3.9.1 Holder In Due Course: An Overview Holder in Due Course (HDC): A holder who (1) acquires a negotiable instrument for value, (2) in good faith, and (3) without notice that the instrument (a) is overdue, (b) has been dishonored, (c) is subject to a valid claim or defense by any person, (d) is part of a series against at least one instrument of which exists uncured default, (e) contains alterations or unauthorized signatures, or (f) is so irregular or incomplete as to call into question its authenticity.

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4.0 LESSON END ACTIVITY

1) What is Holder in Due course and explain its status in the global context? 2) Explain VALUE AND GOOD FAITH 3) Who is a Collecting banker and explain the duties of collecting banker? 4) What are the alternative instruments to cheque? 5) What is Crossing and explain Types of Crossing

Book for Reference: 1. Sundharam and Varshney, Banking theory Law & Practice, sultan Chand & Sons., New Delhi 2. 2. Banking Regulation Act. 1949. 3. Reserve Bank of India, Report on currency and Finance 2003-2004 4. Basu : Theory and Practice of Development Banking 5. Reddy & Appanniah : Banking Theory and Practice 6. Natarajan & Gordon: Banking Theory and practice.

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UNIT- IV

LOAN

CONTENTS 4.0 Introduction 4.1 Types of loans 4.2 Pledge Meaning and definition 4.3 Hypothecation 4.3.1 Hypothecation of securities in capital markets 4.3.2 Uses of Hypothecation 4.3.3 Procedures for pledge and hypothecation 4.4 Mortgage 4.4.1 Mortgage lender 4.4.2 Borrower 4.4.3 Types of mortgage Instrument 4.5 Reverse Mortgage 4.5.1 Types of Reverse Mortgage 4.6 Commercial Mortgage 4.6.1 Types of Commercial Mortgage

4.0 INTRODUCTION

A loan is a type of debt. This article focuses exclusively on monetary loans, although, in practice, any material object might be lent. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. The borrower initially does receive an amount of money from the lender, which they pay back, usually but not always in regular installments, to the lender. This service is generally provided at a cost, referred to as interest on the debt. A loan is of the annuity type if the amount paid periodically (for paying off and interest together) is fixed. A borrower may be subject to certain restrictions known as loan covenants under the terms of the loan.

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Acting as a provider of loans is one of the principal tasks for financial institutions. For other institutions, issuing of debt contracts such as bonds is a typical source of funding. Legally, a loan is a contractual promise between two parties where one party, the creditor, agrees to provide a sum of money to a debtor, who promises to return the money to the creditor either in one lump sum or in parts over a fixed period in time. This agreement may include providing additional payments of rental charges on the funds advanced to the debtor for the time the funds are in the hands of the debtor (interest).

4.1 TYPES OF LOANS

4.1.1 Secured A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan. A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security — a lien on the title to the house — until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it. In some instances, a loan taken out to purchase a new or used car may be secured by the car in much the same way as a mortgage is secured by housing. The duration of the loan period is considerably shorter — often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. A direct auto loan is where a bank gives the loan directly to a consumer. An indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer. A type of loan especially used in limited partnership agreements is the recourse note.A stock hedge loan is a special type of securities lending whereby the stock of a borrower is hedged by the lender against loss, using options or other hedging strategies to reduce lender risk A pre-settlement loan is a non-recourse debt, this is when a monetary loan is given based on the merit and awardable amount in a lawsuit case. Only certain types of lawsuit cases are eligible for a pre-settlement loan. This is considered a secured non- recourse debt due to the fact if the case reaches a verdict in favor of the defendant the loan is forgiven.

4.1.2 Unsecured Unsecured loans are monetary loans that are not secured against the borrowers assets. These may be available from financial institutions under many different guises or marketing packages:

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• • personal loans • bank overdrafts • credit facilities or lines of credit • corporate bonds The interest rates applicable to these different forms may vary depending on the lender and the borrower. These may or may not be regulated by law. In the United Kingdom, when applied to individuals, these may come under the Consumer Credit Act 1974.

4.1.3 Abuses in lending Predatory lending is one form of abuse in the granting of loans. It usually involves granting a loan in order to put the borrower in a position that one can gain advantage over him or her. Where the moneylender is not authorised, it could be considered a loan shark. Usury is a different form of abuse, where the lender charges excessive interest. In different time periods and cultures the acceptable interest rate has varied, from no interest at all to unlimited interest rates. Credit card companies in some countries have been accused by consumer organisations of lending at usurious interest rates and making money out of frivolous "extra charges". Abuses can also take place in the form of the customer abusing the lender by not repaying the loan or with an intent to defraud the lender.

4.1.4 United States taxes Most of the basic rules governing how loans are handled for tax purposes in the United States are uncodified by both Congress (the Internal Revenue Code) and the Treasury Department (Treasury Regulations — another set of rules that interpret the Internal Revenue Code). Yet such rules are universally accepted. 1. A loan is not gross income to the borrower. Since the borrower has the obligation to repay the loan, the borrower has no accession to wealth. 2. The lender may not deduct the amount of the loan. The rationale here is that one asset (the cash) has been converted into a different asset (a promise of repayment). Deductions are not typically available when an outlay serves to create a new or different asset. 3. The amount paid to satisfy the loan obligation is not deductible by the borrower. 4. Repayment of the loan is not gross income to the lender. In effect, the promise of repayment is converted back to cash, with no accession to wealth by the lender.

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5. Interest paid to the lender is included in the lender’s gross income. Interest paid represents compensation for the use of the lender’s money or property and thus represents profit or an accession to wealth to the lender. Interest income can be attributed to lenders even if the lender doesn’t charge a minimum amount of interest. 6. Interest paid to the lender may be deductible by the borrower. In general, interest paid in connection with the borrower’s business activity is deductible, while interest paid on personal loans are not deductible. The major exception here is interest paid on a home mortgage.

4.1.5 Income from discharge of indebtedness Although a loan does not start out as income to the borrower, it becomes income to the borrower if the borrower is discharged of indebtedness. Thus, if a debt is discharged, then the borrower essentially has received income equal to the amount of the indebtedness. The Internal Revenue Code lists “Income from Discharge of Indebtedness” in Section 62(a)(12) as a source of gross income. Example: X owes Y $50,000. If Y discharges the indebtedness, then X no longer owes Y $50,000. For purposes of calculating income, this should be treated the same way as if Y gave X $50,000. For a more detailed description of the “discharge of indebtedness”, look at Section 108 (Cancellation of Debt (COD) Income) of the Internal Revenue Code. Money always plays the most important role in human lives. The desire to fulfill personal needs come to everybody's mind but affording for that is not always possible. But in a country like India, that can't be a barrier to fulfill your and your family's desires. Because, there are hundreds of banks and other financial organizations in the country who provide loans for personal reasons. These kinds of loans are known as personal loans. India is situating on one of the top positions in terms of providing these types of loans.

4.1.6 Personal loans: Personal loans are simply those retail loans which are provided for the purpose of fulfillment of personal needs and expenses of individuals (prospective loan borrowers). The personal loans in India primarily are provided under five major categories. Though the loan amount and the rate of interest vary from bank to bank, but the purposes of providing these loans are same. Apart from the personal purposes, if someone possess the desire to establish his own business then also the Indian banks always welcome by providing the business start-up loans. Here, we will discuss about these kinds of loans.

4.1.7 Consumer Durable Loans : - These kinds of loans are being provided for purchasing consumer durable products like television, music system, washing machines and so on. These are one of the unique kind of loans that are provided by the Indian banks to attract more and more people towards them. Under this category of personal

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loan, you will get an amount ranging from Rs.10,000 to Rs.1,00,000. But there are several banks which provides a minimum amount of Rs.5,000 and the maximum amount of Rs.2,00,000 under this loan. Banks provide this loan for maximum of a time period of 5 years.

4.1.8 Festival Loans: - This kind of personal loan is provided to help people to fulfill their personal and family's desire during the festival time. Usually, leading banks of India provide this loan on the festive season at cheaper or discounted rate. This is the best type of loan for those people who want to avail a small amount of loan. Under this category of loan, banks do provide an minimum amount of Rs.5.000 and you can get an maximum amount of Rs.50,000 under this type of loan. But the festival loan is restricted up to 12 months. Repayment is to be done by equated monthly installments (EMI). The rate of interest on this loan varies from bank to bank.

4.1.9 Marriage Loans: - Nowadays, this type of personal loan is equally getting popular among the people of urban and rural sectors. The loan amount depends on various factors including age of the applicant, security pledged by the applicant (if secured loan), repayment capacity of the applicant etc. Under the marriage loan, the rate of interest is governed by the prevailing market rate at the time when the loan is disbursed.

4.1.10 Pension Loans: - There are several banks in India which take care of the old aged people as well. That's why the people who have retired from their jobs will also be able to avail personal loans. This type of loan is called a Pension loan. Under this kind of loan, the banks provide the maximum amount which is up to 7 to 10 times of the amount which was received as the last pension.

4.1.11 Personal Computer Loans: - In this age of Information technology revolution, having an owned computer almost becomes a necessity. There are several Indian banks which offer loans that fulfill that desires of people. Under this category of loan, up to Rs.1,00,000 of amount can be borrowed. Banks also provide separate loan for purchasing of software and that can be provided up to an amount of Rs.20,000. The rate of interest is being charged according to prime lending rate and there are some banks who charge extra 2% on the loan amount. So, from the above discussion, one thing is quite clear that whatever your purpose is and whenever you need to meet your financial expenses, the Indian banks are always ready to spread their helping hands to you.

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4.1.12 The Indian scenario : There are some times in people's life when they need money, may be for purchasing a new car, for preparing a new house, expanding the business or for some personal reason, but they doesn't have the required money. But in a country like India, that is not a problem at all. Because of the lots of financial institutions in India, getting loan is not an issue now. Such easy availability of loans is one of the reason for booming Indian economy. Now Indian Governments also encourages people and financial institutions for taking loans. With the increasing of strict competition both private and public sector banks are coming out with the innovative loan plans.

There are various types of loans are being provided by Indian banks. The primary categories are Car loans, Cash Rental Loans, Commercial or Business loans, Equipment loans, Real Estate loans, Student loans, Home loans, Mortgage loans and travel loans. One of the top demanding loans nowadays is the loan for business. These loans are now provided by almost all Banks. The primary motto of providing this kind of loan is to help businessmen, traders and professionals to commence a new business or to expand their existing business. Loans to the self-employed professional such as Architect, Chattered Accountant, Doctors are fall in this category. Like other loans, this kind of loans can be of secured type and non-secured type. Under Secure business loans the Banks takes something as security against the loan amount, where in unsecured the entrepreneur doesn't have to keep any security to the Banks. Business loans are mainly categorised into two part, professional loans and trade loans. Self-employed professionals like accountants, Interior Decorators, Architects, Company Secretary can take professional loans. This kind of loans offers very lucrative interest rates, though these are unsecured in nature. The amount of loans are varies in different banks. It depends on the financial condition, his/her repayment capacity and tenure of the loan. Generally, Indian Banks provide amount of Rs.25000 to Rs.25 lakhs under these loans. The most popular banks of providing professional loans are with Baroda Professional Loan, HDFC Bank with Self employed (Professionals) Scheme, with Corp Professional, Union Bank of India with loans to professionals etc. On the other hand, banks provides trade loans to the business persons to expand their business or set up a new business. Under this category of loans the minimum amount provides is Rs. 25,000/- and one can take up to Rs.10 lakhs. The amount of this kind of loans depends on the financial condition of the borrower, age of the borrower, his/her ability to repay the amount etc. another major condition of these loans is, one can take maximum five years to repay the loan amount. Some of the most popular banks of providing trade loans are with Trade Credit Scheme, HDFC Bank with Loan For Private Companies & Partnership Firms, Standard Chartered with Trade Services, State Bank of India with Trade & Service Sector Loan, Union Bank of India with Retail Traders, Bank of Baroda with Baroda Traders Loan etc.

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Nowadays India is in a better position for upcoming business entrepreneurs to get a loan. The primary reason is the easy availability of business loans in India. Indian government is too taking multiple steps to make easy availability of business loans. According to a report of the World-Bank, Indian is now on the 36th position in the World for getting business loans. Except providing funds Indian Bank also provides letters of credit or a guarantee on behalf of the customer to the government departments ,suppliers for the procurement of goods and services on credit.

4.2 PLEDGE MEANING AND DEFINITION

Definition: The transfer of possession of personal property from a debtor to a creditor as security for a debt or engagement; also, the contract created between the debtor and creditor by a thing being so delivered or deposited, forming a species of bailment; also, that which is so delivered or deposited; something put in pawn. 1. A hypothecation without transfer of possession. 2. To give or pass as a security; to guarantee; to engage; to plight; as, to pledge one's word and honor. 3. To invite another to drink, by drinking of the cup first, and then handing it to him, as a pledge of good will; hence, to drink the health of; to toast. 4. A sentiment to which assent is given by drinking one's health; a toast; a health. 5. To bind or engage by promise or declaration; to engage solemnly; as, to pledge one's self. 6. To deposit, as a chattel, in pledge or pawn; to leave in possession of another as security; as, to pledge one's watch. 7. Anything given or considered as a security for the performance of an act; a guarantee; as, mutual interest is the best pledge for the performance of treaties. 8. To secure performance of, as by a pledge. 9. The transfer of possession of personal property from a debtor to a creditor as security for a debt or engagement; also, the contract created between the debtor and creditor by a thing being so delivered or deposited, forming a species of bailment; also, that which is so delivered or deposited; something put in pawn. 10. A person who undertook, or became responsible, for another; a bail; a surety; a hostage. 11. A promise or agreement by which one binds one's self to do, or to refrain from doing, something; especially, a solemn promise in writing to refrain from using intoxicating liquors or the like; as, to sign the pledge; the mayor had made no pledges.

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4.3 HYPOTHECATION

Generally, in English and American law, a contract of mortgage or pledge as collateral for a debt in which the subject matter is not delivered into the possession of the pledgee or pawnee. The arrangement is common with modern mortgages - the borrower retains legal ownership of the property but provides the lender with a lien over the property until the debt is paid off. Hypothecation Hypothecation, or "trust receipts" are relatively uncommon forms of security interest whereby the underlying assets are pledged, not by delivery of the assets as in a conventional pledge, but by delivery of a document or other evidence of title. Hypothecation is usually seen in relation to bills of lading, whereby the bill of lading is endorsed by the secured party, who, unless the security is redeemed, can claim the property by delivery of the bill. Property means i. Immovable property ii. Movable property iii. Any debt or any right to receive payment of money, whether secured or unsecured iv. Receivables, whether existing or future v. Intangible assets, being know-how, patent, trade mark, licence, franchise or any other business or commercial right of similar nature.

Hypothecation means a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance, and includes floating charge and crystallization into fixed charge on movable property.

4.3.1. Hypothecation of securities in capital markets Hypothecation and re-hypothecation, respectively, are commonly used to describe the means by which securities brokers and dealers first extend credit on margin to their customers using pledged securities as collateral, and then pledge the client-owned securities held in the client's margin account as collateral for the brokerage's bank loan. In this example, hypothecation describes the posting of collateral to secure the customer's obligation to the broker; rehypothecation is the pledging by the broker of hypothecated client-owned securities in a margin account to secure a loan to the broker from a bank. This common use of the terms hypothecation and re-hypothecation is technically inaccurate, since the pledgee of the securities collateral, in the case of the broker, may be deemed to have possession of it.

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While rehypothecation is not permitted in some jurisdictions, it is common practice in the United States, generally under the terms of a written collateral agreement that explicitly permits it. In addition to the re-hypothecation of a securities broker-dealer's collateral by re-lending it or posting it as collateral for one of its own obligations, another means of re-hypothecation is the repurchase agreement (or repo). In a two-party repo agreement, one party sells the other a security at a specified price with a commitment to buy the security back at a later date for another specified price. Overnight repos, the most commonly used form of this arrangement, comprise a sale which takes place the first day and a repurchase that reverses the transaction the next day. Term repos, less commonly used, extend for a fixed period of time that may be as long as several months. Open-ended term repos are also possible. A so-called reverse repo is not actually different than a repo; it merely describes the opposite side of the transaction. The seller of the security who later repurchases it is entering into a repo; the purchaser who later resells the security enters into a reverse repo. Notwithstanding its nominal form as a sale and subsequent repurchase of a security, the economic effect of a repo is that of a secured loan.

No creditor's duty of care Since under a strict hypothecation, goods remain in the custody of the borrower or third party, who also enjoys the right to deal with them in the ordinary course of business, the hypothecation itself does not normally impose upon the creditor a duty of care over the hypothecated property. Accordingly, a judgment of the Kerala High Court of India. held that where hypothecated property was lost and the banker was not aware of the loss otherwise than in the ordinary course of business, the surety was not discharged.

4.3.2 Alternative uses of 'hypothecation' A more recent use of the term hypothecation is as a contraction of "hypothetical dedication," as in a "dedicated tax" to be collected for a specific purpose. (This may be a spurious origin of the word, since the original definition of hypothecation as a pledging of assets could also be applied: the expected revenue from the tax in question being pledged to a particular cause). Dedicated taxes are often subject to unexpected shortfalls and surpluses. This may create political pressure to adjust the tax, to budget non- dedicated revenues for the purpose in question, or to reallocate surplus funds to other purposes. Examples of hypothecation in this sense include the gasoline tax in the United States, which is dedicated to the funding of transportation infrastructure. A common example in many European countries is a television licence. Here, all owners of televisions are obliged to pay the government an annual fee to use their televisions. The proceeds of the fee are then used to fund public broadcasting. Another example is a dedicated tax on the private trading of securities (for example, 0.3 cents per dollar traded) used to fund public infrastructure programs directly (such as the building of a water treatment plant) or to pay the finance costs of such programs.

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Pledge and Hypothecation The Depositories Act permits the creation of pledge and hypothecation against securities. Securities held in a depository account can be pledged or hypothecated against a loan, credit, or such other facility availed by the beneficial owner of such securities. For this purpose, both the parties to the agreement, i.e., the pledgor and the pledgee must have a beneficiary account with NSDL. However, both parties need not have their depository account with the same DP. The nature of control on the securities offered as collateral determines whether the transaction is a pledge or hypothecation. If the lender pledgee) has unilateral right without reference to borrower) to appropriate the securities to his account if the borrower (pledgor) defaults or otherwise, the transaction is called a pledge. If the lender needs concurrence of the borrower pledgor) for appropriating securities to his account, the transaction is called hypothecation.

Procedure for Pledge/Hypothecation The pledgor initiates the creation of pledge/hypothecation through its DP and the pledgee instructs its DP to confirm the creation of the pledge. The pledge/hypothecation so created can either be closed on repayment of loan or invoked if there is a default. After the pledgor has repaid the loan to the pledgee, the pledgor initiates the closure of pledge/hypothecation through its DP and the pledgee instructs its DP to confirm the closure of the pledge/hypothecation. If the pledgor defaults in discharging his obligation under the agreement, the pledgee may invoke the pledge/hypothecation. This has to be done after taking the necessary steps under the terms of the agreement with the pledgor and the bye-laws of NSDL and rules and regulations framed by SEBI.

Bailment, mortgage and hypothecation in relation with contract: Bailment. You leave something of value with a friend and ask him to "Hold onto it for you". Once he accepts, he has some duties under the law to care for the item.

Mortgage. You loan money to purchase a house. The loan is secured by the house. If he doesn't pay the mortgage, you get the house.

Hypothecation. Where you pledge an asset as security to borrow money. If you have $1,000 in a bank CD that matures in 1 year, you don't want to withdraw the money and pay a penalty. You borrow $400 and pledge the CD as security. If you don't pay the debt, the lender gets part of your CD..

4.4. MORTGAGE

A mortgage is the transfer of an interest in property (or in law the equivalent - a charge) to a lender as a security for a debt - usually a loan of money. While a mortgage in itself is not a debt, it is lender's security for a debt. It is a transfer of an interest in land (or the

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equivalent), from the owner to the mortgage lender, on the condition that this interest will be returned to the owner of the real estate when the terms of the mortgage have been satisfied or performed. In other words, the mortgage is a security for the loan that the lender makes to the borrower. The term comes from the Old French "dead pledge," apparently meaning that the pledge ends (dies) either when the obligation is fulfilled or the property is taken through foreclosure.[1] In most jurisdictions mortgages are strongly associated with loans secured on real estate rather than other property (such as ships) and in some jurisdictions only land may be mortgaged. Arranging a mortgage is seen as the standard method by which individuals and businesses can purchase residential and commercial real estate without the need to pay the full value immediately. See mortgage loan for residential mortgage lending, and commercial mortgage for lending against commercial property.

4.4.1 Mortgage lender Mortgagee is the legal term for the mortgage lender. The main function of the mortgage is to provide security to the lender. Given the large sum of money involved in financing a property, a mortgage lender will usually want security for the loan that will provide a claim upon that security and will take precedence over other creditors. A mortgage accomplishes this security. The lender loans the money and registers the mortgage against the title to the property. The borrower gives the lender the mortgage as security for the loan, receives the funds, makes the required payments and maintains possession of the property. The borrower has the right to have the mortgage discharged from the title once the debt is paid. If the mortgagor fails to repay the loan according to the conditions set forth by the lender, then the mortgagee reserves the right to foreclose on the property.

4.4.2 Borrower Mortgagor is the legal term for the borrower, who owes the obligation secured by the mortgage, and may be multiple parties. Generally, the debtor must meet the conditions of the underlying loan or other obligation and the conditions of the mortgage. Otherwise, the debtor usually runs the risk of foreclosure of the mortgage by the creditor to recover the debt. Typically the debtors will be the individual home-owners, landlords or businesses who are purchasing their property by way of a loan. Most buyers of real property would have difficulty saving enough money to make an outright purchase of real estate. The use of debt increases a buyer's ability to buy through a combination of down payment and debt. As a result a real estate transaction seldom occurs without buyers relying on borrowed funds.

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4.4.3 Borrowing for investment purposes A side from the absence of large amount of available money, there are several reasons why an investor (including a buyer of real estate) might borrow funds. Some of these include:

• To diversify investments and reduce overall risk by using only part of the available funds for any one investment

• To invest the borrowed funds at a higher rate of interest (yield) than the borrowing rate; for example, a sum is borrowed at an annual interest rate of 7% and used to invest in a project that returns 10%

• To free up equity for other purposes; for example, a commercial enterprise may prefer to use funds to purchase inventory or equipment instead of investing only in land and buildings.

• To obtain a tax benefit. In some countries (such as Canada), mortgage interest is not tax deductible, but loans made for investment purposes are.

4.4.4 Other participants Because of the complicated legal exchange, or conveyance, of the property, one or both of the main participants are likely to require legal representation. The terminology varies with legal jurisdiction; see lawyer, solicitor and conveyancer. Because of the complex nature of many markets the debtor may approach a mortgage broker or financial adviser to help them source an appropriate creditor, typically by finding the most competitive loan. The debt is, in civil law jurisdictions, referred to as hypothecation, which may make use of the services of a hypothecary to assist in the hypothecation.

4.4.5 Default on Subdivided Property When a tract of land is purchased with a mortgage and then split up and sold off, then the "inverse order of alienation rule" applies to find out who will be liable for the default. Basically, when a mortgaged tract of land is split up and sold off, then upon default, the mortgagee forecloses and proceeds against lands still owned by the mortgagor, then liability attaches in a backward fashion, or in an 'inverse order' as they were sold. So if A acquires a 3-acre (12,000 m2) lot by mortgage then splits up the lot into three 1 acre lots (A, B, and C), and sells lot B to X, and then lot C to Y, retaining lot A for himself then, upon default, the mortgagee will go after lot A, the mortgagor, and if that sale does not satisfy the default, then the owner of lot C will be liable, then the owner of lot B. The idea is that the first purchaser should have more equity and subsequent purchasers receive a diluted share.

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4.4.6 Legal aspects Mortgages may be legal or equitable. Furthermore, a mortgage may take one of a number of different legal structures, the availability of which will depend on the jurisdiction under which the mortgage is made. Common law jurisdictions have evolved two main forms of mortgage: the mortgage by demise and the mortgage by legal charge. 4.4.7 Mortgage by demise In a mortgage by demise, the mortgagee (the lender) becomes the owner of the mortgaged property until the loan is repaid or other mortgage obligation fulfilled in full, a process known as "redemption". This kind of mortgage takes the form of a conveyance of the property to the creditor, with a condition that the property will be returned on redemption. Mortgages by demise were the original form of mortgage, and continue to be used in many jurisdictions, and in a small minority of states in the United States. Many other common law jurisdictions have either abolished or minimised the use of the mortgage by demise. For example, in England and Wales this type of mortgage is no longer available, by virtue of the Land Registration Act 2002.

4.4.8 Mortgage by legal charge In a mortgage by legal charge or technically "a charge by deed expressed to be by way of legal mortgage", the debtor remains the legal owner of the property, but the creditor gains sufficient rights over it to enable them to enforce their security, such as a right to take possession of the property or sell it. To protect the lender, a mortgage by legal charge is usually recorded in a public register. Since mortgage debt is often the largest debt owed by the debtor, banks and other mortgage lenders run title searches of the real property to make certain that there are no mortgages already registered on the debtor's property which might have higher priority. Tax liens, in some cases, will come ahead of mortgages. For this reason, if a borrower has delinquent property taxes, the bank will often pay them to prevent the lienholder from foreclosing and wiping out the mortgage. This type of mortgage is most common in the United States and, since the Law of Property Act 1925, it has been the usual form of mortgage in England and Wales (it is now the only form – see above).In Scotland, the mortgage by legal charge is also known as standard security. In Pakistan, the mortgage by legal charge is most common way used by banks to secure the financing. It is also known as registered mortgage. After registration of legal charge, the bank's lien is recorded in the land register stating that the property is under mortgage and cannot be sold without obtaining an NOC (No Objection Certificate) from the bank.

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4.4.9 Equitable mortgage In an equitable mortgage the lender is secured by taking possession of all the original title documents of the property and by borrower's signing a Memorandum of Deposit of Title Deed (MODTD). This document is an undertaking by the borrower that he/she has deposited the title documents with the bank with his own wish and will, in order to secure the financing obtained from the bank.

History At common law, a mortgage was a conveyance of land that on its face was absolute and conveyed a fee simple estate, but which was in fact conditional, and would be of no effect if certain conditions were met – usually, but not necessarily, the repayment of a debt to the original landowner. Hence the word "mortgage" (a legal term in French meaning "Dead Pledge"). The debt was absolute in form, and unlike a "live pledge" was not conditionally dependent on its repayment solely from raising and selling crops or livestock or simply giving the crops and livestock raised on the mortgaged land. The mortgage debt remained in effect whether or not the land could successfully produce enough income to repay the debt. In theory, a mortgage required no further steps to be taken by the creditor, such as acceptance of crops and livestock in repayment. The difficulty with this arrangement was that the lender was absolute owner of the property and could sell it or refuse to reconvey it to the borrower, who was in a weak position. Increasingly the courts of equity began to protect the borrower's interests, so that a borrower came to have an absolute right to insist on reconveyance on redemption. This right of the borrower is known as the "equity of redemption". This arrangement, whereby the lender was in theory the absolute owner, but in practice had few of the practical rights of ownership, was seen in many jurisdictions as being awkwardly artificial. By statute the common law's position was altered so that the mortgagor would retain ownership, but the mortgagee's rights, such as foreclosure, the power of sale, and the right to take possession, would be protected. In the United States, those states that have reformed the nature of mortgages in this way are known as lien states. A similar effect was achieved in England and Wales by the Law of Property Act 1925, which abolished mortgages by the conveyance of a fee simple.

Foreclosure and non-recourse lending In most jurisdictions, a lender may foreclose on the mortgaged property if certain conditions – principally, non-payment of the mortgage loan – apply. Subject to local legal requirements, the property may then be sold. Any amounts received from the sale (net of costs) are applied to the original debt. In some jurisdictions, mortgage loans are non-recourse loans: if the funds recouped from sale of the mortgaged property are insufficient to cover the outstanding debt, the lender may not have recourse to the borrower after foreclosure. In other jurisdictions, the 99 B.Com-Banking Law and Practice

borrower remains responsible for any remaining debt, through a deficiency judgment. In some jurisdictions, first mortgages are non-recourse loans, but second and subsequent ones are recourse loans. Specific procedures for foreclosure and sale of the mortgaged property almost always apply, and may be tightly regulated by the relevant government. In some jurisdictions, foreclosure and sale can occur quite rapidly, while in others, foreclosure may take many months or even years. In many countries, the ability of lenders to foreclose is extremely limited, and mortgage market development has been notably slower. At the start of 2008, 5.6% of all mortgages in the United States were delinquent. By the end of the first quarter that rate had risen, encompassing 6.4% of residential properties. This number did not include the 2.5% of homes in foreclosure. Mortgages in the United States

4.4.3 Types of mortgage instruments Two types of mortgage instruments are commonly used in the United States: the mortgage (sometimes called a mortgage deed) and the deed of trust.[5]

The mortgage In all but a few states, a mortgage creates a lien on the title to the mortgaged property. Foreclosure of that lien almost always requires a judicial proceeding declaring the debt to be due and in default and ordering a sale of the property to pay the debt. Security Deed The deed to secure debt is a mortgage instrument used in the state of Georgia. Unlike a mortgage, however, a security deed is an actual conveyance of real property in security of a debt. Upon the execution if such a deed, title passes to the grantee or beneficiary (usually lender), however the grantor (debtor) maintains equitable title to use and enjoy the conveyed land subject to compliance with debt obligations. Security deeds must be recorded in the county where the land is located. Although there is no specific time within which such deeds must be filed, the failure to timely record the deed to secure debt may affect priority and therefore the ability to enforce the debt against the subject property.

The deed of trust The deed of trust is a deed by the borrower to a trustee for the purposes of securing a debt. In most states, it also merely creates a lien on the title and not a title transfer, regardless of its terms. It differs from a mortgage in that, in many states, it can be foreclosed by a non-judicial sale held by the trustee.It is also possible to foreclose them through a judicial proceeding.[citation needed]

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Most "mortgages" in California are actually deeds of trust. The effective difference is that the foreclosure process can be much faster for a deed of trust than for a mortgage, on the order of 3 months rather than a year. Because the foreclosure does not require actions by the court the transaction costs can be quite a bit less. Deeds of trust to secure repayments of debts should not be confused with trust instruments that are sometimes called deeds of trust but that are used to create trusts for other purposes, such as estate planning. Though there are superficial similarities in the form, many states hold deeds of trust to secure repayment of debts do not create true trust arrangements.

Mortgage lien priority Except in those few states in the United States that adhere to the title theory of mortgages,[9] either a mortgage or a deed of trust will create a mortgage lien upon the title to the real property being mortgaged. The lien is said to "attach" to the title when the mortgage is signed by the mortgagor and delivered to the mortgagee and the mortgagor receives the funds whose repayment the mortgage secures. Subject to the requirements of the recording laws of the state in which the land is located, this attachment establishes the priority of the mortgage lien with respect to most other liens on the property's title. Liens that have attached to the title before the mortgage lien are said to be senior to, or prior to, the mortgage lien. Those attaching afterward are said to be junior or subordinate. The purpose of this priority is to establish the order in which lien holders are entitled to foreclose their liens in an attempt to recover their debts. If there are multiple mortgage liens on the title to a property and the loan secured by a first mortgage is paid off, the second mortgage lien will move up in priority and become the new first mortgage lien on the title. Documenting this new priority arrangement will require the release of the mortgage securing the paid off loan.

4.6 REVERSE MORTGAGE

Reverse mortgages are powerful tools that help eligible homeowners obtain a tax-free cash flow. Over two hundred thousand people have already used Reverse mortgages to enhance their retirement. A reverse mortgage is a government sponsored and insured loan that requires no payments during the period of time you live in your home. Reverse mortgages enable eligible homeowners to access the money they have built up as equity in their homes.

Qualifications for reverse mortgage eligibility: • You must be a t least 62 years old. • You must own and occupy your home as your primary residence during the term of the loan.

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• Your home must be: A single-family residence, buildings with 1-4 Units, Condos, and Mobile homes built on a permanent foundation after July 1976. Coops do not qualify, except in parts of New York & Los Angeles. • Counseling by a HUD approved counselor is required, prior to or after completing a HUD application. Benefits of a reverse mortgage: • Retain the ownership of your home for life. The remaining equity will be passed on to your heirs. • Proceeds from reverse mortgages are tax-free. Proceeds could be used for: In- home care, Home repairs & improvements, paying off an existing mortgage, Education of grandchildren, Hospital & health care costs, paying off taxes and credit card debt, buying a second home, and Travel. Let your home pay you back! • No loan repayment or payments as long as you live in your home. • No income, medical or credit requirements.

4.6.1 Types of reverse mortgage • There are three types of reverse mortgages - federally insured, lender insured and uninsured. • Three distinct reverse mortgage products are - Home Equity Conversion Mortgage (HECM), Fannie Mae Home Keeper® reverse mortgage, and Cash Account. These products differ by type of residential property for which a reverse mortgage can be taken, payment types, loan amount, processing fees, and interest on the loan balance. The types of mortgage that are accepted in the Indian mortgage industry for the facilitation of mortgage loan are varied. Until recently, the Indian mortgage market was under the unorganized sector. The Government of India liberal economic policy in the late 1990s the facilitated the entry of foreign institutional investors (FIIs) and foreign direct investment (FII) in the Indian market. The Indian markets which were previously closed to such investments registered tremendous economical growth across all industry sectors. In the last 15 years, the growth of the manufacturing industry in India propelled the growth of infrastructure industry in India. Furthermore, with the growth of infrastructure industry in India, the Indian mortgage loan industry witnessed tremendous growth. Today, the organized mortgage loan sector of India is registering astronomical growth and it is estimated to be US$ 18 billion industry. The Indian mortgage loan industry is consistently registering 20-50 % growth on a year-on-year basis, from the year 2000 onwards.

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Huge real estate requirements in India and their subsequent development have fueled its growth. The mortgage industry of India could break open from its age old image of being housing mortgage facilitator only. Today, the types of mortgage that are being accepted as collateral are varied and not confined to residential property only. The types of mortgage accepted as collateral security for facilitating mortgage loans in India are as follows - • Amusement parks • Bowling centers • Casinos • Auto care centers • Auto dealerships • Car washes • Parking garage • Truck terminal • Conveniences stores • Distribution centers • Fitness centers • Franchises • Funeral homes • Gas stations • Golf courses • Malls • Retail (anchored, single tenant, unanchored) • Mobile home arks • Movie theaters • Resort • Restaurants • Hotels • Motels • Hospitals • Medical clinics • Medical offices • Nursing homes

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• Rehabilitation facilities • Skilled nursing facility • Special purpose property • Child care centers • Independent living facilities • Mixed use properties • Single family • Offices (multi-tenant, single tenant) • Warehouse • Industrial parks • Industrial buildings • Land developments • Mini warehouses • Office buildings • Outlet centers • Educational institutions • Training institutions

The following types of rates are prevalent in the Indian mortgage market - • Fixed Mortgage Rate - in this case the rate of interest remains fixed throughout the loan term. The mortgage rates do not vary according to market conditions. In other words, the rate of interest is pre-fixed during the process of borrowing and it generally varies between 12.5% and 25 %. • Flexible Mortgage Rate - is one in which the interest rate varies according to market movements. This type of interest rate is called 'adjusting' or 'floating' rates. The risk factor is high in this type of interest rates.

Some of the well-known mortgage-financing companies offering various types of mortgage in India are as follows - • LIC Housing Finance • HDFC • ICICI Home Finance • SBI Housing Finance • UCO Bank

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• State Bank of India • • • United Bank of India • United • Bank of Baroda • • Citi Bank • HSBC • Standard Chartered Bank

4.6.2 Commercial Mortgage Until recently, the Indian commercial mortgage industry was under the unorganized industry. The government of India's liberal economic policy in the early 1990s changed the whole scenario of mortgage loan market in India. Especially, the Indian commercial mortgage sector witnessed a sea of change in the last 15 years. The last decade and half witnessed an astronomical rise of the Indian manufacturing industry which accelerated the growth of infrastructure industry in India. Furthermore, with the growth of infrastructure industry in India, the Indian mortgage loan industry witnessed a tremendous growth. Today, the organized commercial mortgage loan sector of India is registering huge growth and it is estimated to become a US$ 18 billion industry in the time to come. The Indian commercial mortgage loan industry is consistently registering 20-50 % growth on a year-on-year basis from the year 2000 onwards. This industry is regarded as a sleeping giant with respect to its huge business potential in India. Huge real estate requirements for new office spaces and commercial business places and its subsequent development have fueled tremendous growth of Indian commercial mortgage industry

4.7 TYPES OF MORTGAGES - MORTGAGE LOAN TYPE

1) Fixed Rate Morgage 2) The Adjustable Rate Mortgage (ARM) 3) Interest Only Mortgage 4) Biweekly Mortgage 5) Two Step Mortgage 6) Federal Housing Authority (FHA) Mortgage 7) Veterans Affairs Loan 105 B.Com-Banking Law and Practice

The seller accepted your offer and the mortgage lender approved your home loan application. So what type of residential mortgage do you pick given the choices available in the market today? There are quite a few considerations: What is your future earning potential, how long do you plan to keep the house and where do you think mortgage interest rates are going. Finally, how big should your mortgage loan be? The basic rule is the annual upkeep of your property (mortgage payments, utilities and insurance) should not exceed 30% of your gross annual income. Read on to find which home loan is the best mortgage suited for you.

4.7.1 Fixed Rate Mortgage This is the most common type of residential home loan. The mortgage loan is repaid through fixed monthly payments of principal and interest over a set term. The borrowing rate stays the same over the life of the residential mortgage loan. The term of the home mortgage can be 10, 15, 20 or the popular 30 year fixed rate mortgage term. The way fixed mortgage loans are structured, the mortgage interest is front loaded. In the first years of the residential loan, the bulk of the monthly payments go to paying mortgage interest. It’s only later that you will start significantly building equity in your home as more of your mortgage payments go towards paying down the mortgage loan principal. A fixed rate mortgage is ideal for those who intend to stay in their properties for a long time. The Advantages Stability: With your mortgage rates fixed, the loan period set, you know what your mortgage payment will exactly be for the whole life of the residential loan. Given the certainty of your mortgage loan payment, you can plan your finances accordingly. Lower payments in a low mortgage interest rates environment: A lower monthly mortgage payment frees up your purchasing power and gives you greater financial flexibility. Using a 30 year fixed mortgage of $150,000 as an example, if the borrowing rate is 6.50%, the monthly payment would be $948.10. If the mortgage interest rate is 8.50%, the mortgage monthly payment would amount to $1,153.37. The difference in monthly payments is $205.27. The Disadvantages Affordability: If mortgage interest rates are high, you might have difficulty making the high mortgage payments. The home loan in this situation might not be approved. High payments in a high mortgage rate environment: Nobody wants to be saddled with high home mortgage payments over the long term. When borrowing rates are lower, you can refinance your mortgage. A refinance mortgage is the process of replacing your current mortgage with a new residential mortgage with better borrowing terms. 4.7.2 The Adjustable Rate Mortgage (ARM) The adjustable rate mortgage is usually referred to as an ARM. An arm adjustable rate mortgage is a combination of a fixed rate mortgage and a floating rate mortgage. At the beginning of the mortgage term, the mortgage rate is fixed for certain periods. These

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periods could be for 3, 5, 7 or 10 years. After this period expires, the mortgage interest rate becomes adjustable. A popular ARM home loan is the 5 1 ARM Mortgage. Five denotes that the period and the borrowing rate are initially fixed for 5 years. After the fifth year, the mortgage rate becomes adjustable. Conversion Options: Some ARM home loans come with options to convert them to a fixed rate mortgage based on a pre-determined formula, during a given time period. Example: the 1-year treasury bill adjustable may be converted to a fixed mortgage rate during the first five years on the adjustment date. Meaning, you have the option to convert during the 13th, 25th, 37th, 49th and 61st months of the mortgage loan. Components of an ARM Adjustable Rate Mortgage There are several components that go into calculating the adjustable rate of an ARM mortgage. Index: This is the market derived interest rate which is used as a base to set future rates of the ARM mortgage loan. Depending on the index chosen, the home borrowing rate could be adjusted monthly, quarterly, semi-annually or annually. The index could be pegged to the following: Treasury Bill Rates, The Prime Rate, Libor and 6 month CD. These indexes are usually published in the newspaper. Margin: This is the spread added to the index to determine the actual rate charged to the mortgage borrower. Example: Index is based on One Year Treasury Bills 3%. The margin is 2%. The mortgage rate the borrower pays is 5%. Rate = Index Rate + Margin Adjustment Period: This is the duration for which the mortgage interest rate is fixed. If the adjustment period is one year, then the interest rate will remain fixed for one year, after which time it will adjust. Adjustment Cap: This is the maximum the interest rate can adjust either up or down for each adjustment period. Example: The adjustment cap is 1 point. The index based interest rates since the last adjustment period went up 1.5 points. The most you will be paying would be 1 point due to the cap. Lifetime Cap: The maximum mortgage interest rate charged over the duration of the arm mortgage loan. The cap can be as high as 6%. The cap is based on the interest rate from the first year adjustment period. The rate is 5%. The highest the mortgage interest rate can go is 11% (Base Rate + Lifetime Cap). The Advantages Teaser Rate: This is the starting interest rate of the arm adjustable rate mortgage. It is usually referred to as the teaser rate, since it is lower than the fully indexed rate. The initial low mortgage rate is used to attract people. An arm mortgage is ideal for people who intend to stay in their homes for no more than 5 to 7 years. The benefits of an arm are realized at the beginning.

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Affordability: If current mortgage rates and housing prices are high, this may be the only home loan option available to you. You may have a better chance of getting the home loan since the lender incorporates the gross monthly income and the monthly loan payment amount to determine how much you qualify. The monthly amount will be less with a lower interest rate so you might qualify for more. Interest rates have peaked: By going with an adjustable rate mortgage arm at the peak of the interest rate cycle, the successive rates will be lower as interest rates go down. Your monthly home mortgage payments will be lower. The Disadvantages Complicated to understand: Unlike a fixed rate mortgage that is simple to understand, there are many variables that go into calculating adjustable rate mortgage loans. Interest rates have bottomed out: By going with an adjustable rate mortgage arm at the bottom of the interest rate cycle, successive borrowing rates will likely go higher as interest rates go down. Your monthly mortgage payments will become less affordable. Uncertainty: If you plan to be at your property for more than 7 years, you will be dealing with the uncertainty associated with an ARM mortgage. After each adjustment period, you will bet getting new mortgage payments.

4.7.3 Interest Only Mortgage An interest only home mortgage features no payments of principal made at the beginning of the home loan. The monthly payments consist only of mortgage interest only. Due to the lower monthly mortgage payments, you qualify for a bigger residential loan. An interest only home mortgage allows you to buy more home while keeping your monthly mortgage payments low. Not Interest Only For The Whole Mortgage Loan Term The interest only payments do not go on for the whole term of the home loan mortgage. Interest only mortgage payments periods range from 1 year up to half the term of the mortgage loan. Interest only loan mortgages are available in adjustable rate mortgage format and fixed mortgage format. Bigger Monthly Mortgage Payments After the interest only payment is over, you will begin making payments on your mortgage principal. Your monthly mortgage payment will go up considerably. For example, you took out a 15/30 year interest only mortgage. After the 15th year, the principal balance will be amortized over 15 years. With a $175,000 home loan with a mortgage borrowing rate of 6.50%, the interest only monthly payment is $947.92. When the principal payments kick in after the 15th year, the mortgage monthly payment jumps to $1,524.44.

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The Advantages Lower mortgage payments: The lower monthly mortgage payments let you purchase a home where a fixed mortgage loan would not. You get to jump on the housing bandwagon Free up cash to invest the money elsewhere: Instead of using the cash to pay down your mortgage principal, you can invest in other vehicles such as stocks and mutual funds to generate a superior return. The Disadvantages Income Risks: There are no assurances that your income will rise fast enough to cover the higher monthly mortgage payments. Property Risks: Instead of the property rising fast enough to pay off your interest only home mortgage, it could stay at current levels or even drop. As a result, you might require another loan just settle the interest only mortgage loans. No guarantee of getting superior returns in other investments: If you used the money to generate returns in investments such as equities and mutual funds, there is no guarantee you’ll make money.

4.7.4 Biweekly Mortgage Mortgage payments are made every two weeks. The amount paid is half of what your monthly mortgage payment would be. On an annualized basis, there are two extra payments in a year. You will be making 26 biweekly mortgage payments instead of 24 payments. Save Thousands On Mortgage Interest And Pay Off Your Mortgage Quicker A bi weekly mortgage program has you paying down your principal mortgage earlier. As a result, you’ll save significant amounts in mortgage interest and pay off your home mortgage years earlier. Example: 30 year fixed mortgage $175,000 Interest Rate: 6.75% By opting for a bi weekly mortgage payment plan for this mortgage, you will be saving $54,257.52 in mortgage interest. Your mortgage will be paid off 5 years 9 months earlier. 4.7.5 Two Step Mortgage A two step mortgage is essentially a 30 year mortgage with special features: Convertible or non-convertible. These mortgage loans are also known as 5/25s and 7/23s. The 5/25s has a fixed interest rate for the first five years and then switches to either a 25 year fixed mortgage rate or a 1 year adjustable mortgage rate. The 7/23 has a fixed interest rate for the first seven years and then converts to a 23 year fixed or a 1 year adjustable. The starting home loan rate is lower than a 30-year fixed. However, it is higher than a 1-year

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ARM mortgage. This type of residential mortgage is less risky than a mortgage ARM initially since the adjustment interval is longer.

4.7.6 Federal Housing Authority (FHA) Mortgage A FHA mortgage is a residential loan insured by the FHA that is part of the U.S. Department of Housing and Urban Development (HUD). FHA loans have lower mortgage down payment requirements and were easier to qualify for than conventional loans. The goal of the FHA is to make housing affordable and stimulate demand.

The best feature of an FHA loan is the low downpayment. The down payment mortgage can be as low as 2% but you will be required to pay pmi private mortgage insurance. FHA loans are also assumable so you can take over from the property seller if you qualify. This could save you significant amounts of money and hassles. The FHA mortgage loan amounts are determined by the median prices of different cities within a specific region.

4.7.7 Veterans Affairs Loan The U.S. Department of Veterans Affairs guarantees mortgage loans for veterans and service persons. It does not underwrite the residential loans. The guaranty allows veterans to get home mortgage loans with good borrowing terms, usually with little or no down payment. To be eligible for the VA loan, you must have served 180 active days service since September 1940. If you enlisted after September 7, 1980 you need to have two years of service. You do need to get a certificate of eligibility from the Department of Veterans affairs as proof of service. Veterans are not permitted to pay points to the mortgage lender on these types of mortgage loans. You can prepay a VA loan without penalty and the residential loan is assumable, meaning the property buyer can take over the mortgage if the property is sold. This feature can save a buyer significant amounts of money in mortgage interest payments. The buyer still needs to meet the requirements of the current mortgage banker. The homebuyer takes over payment on the existing mortgage and pays the difference between the mortgage balance and the selling price. You should always verify first whether the mortgage home loan you are securing is assumable.

4.8 LESSON END ACTIVITY

1) What is a Loan and what are the various Types of loans? 2) Explain Pledge and Hypothecation 3) Write short notes on Hypothecation of securities in Capital markets 4) What are the uses of hypothecation and pledge 5) What is a mortgage and explain the types of mortgage? 110 B.Com-Banking Law and Practice

Book for Reference : 1. Sundharam and Varshney, Banking theory Law & Practice, sultan Chand & Sons., New Delhi 2. Banking Regulation Act. 1949. 3. Reserve Bank of India, Report on currency and Finance 2003-2004 4. Basu : Theory and Practice of Development Banking 5. Reddy & Appanniah : Banking Theory and Practice 6. Natarajan & Gordon: Banking Theory and practice.

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UNIT - V

SURETY

CONTENTS 5.0 Introduction 5.1 Letter of credit 5.1.1 Documents called for under a DC 5.1.2 Legal Basis for LC 5.1.3 Risks involved in a DC translation 5.1.4 Format for Letter of Credit 5.2 Bill of exchange 5.2.1 Drafts or Bill of Change 5.3 Credit Card 5.3.1 Benefits to Customers 5.3.2 Prepaid Credit card 5.3.3 Collectable Credit card 5.4 Automated Teller Machine 5.4.1 Hard ware 5.4.2 Soft ware

5.4.3 Relative devices

5.0 INTRODUCTION

A surety is a person who agrees to be responsible for the debt or obligation of another. Furthermore, a surety is also a "security against loss or damage or for the fulfillment of an obligation, the payment of a debt, etc.; a pledge, guaranty, or bond."[1] The situation in which a surety is most typically required is when the ability of the primary obligor or principal to perform its obligations under a contract is in question, or when there is some public or private interest which requires protection from the consequences of the principal's default or delinquency. In most common law jurisdictions, a contract of suretyship is subject to the statute of frauds (or its equivalent local laws) and is only enforceable if recorded in writing and signed by the surety and the principal.

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If the surety is required to pay or perform due to the principal's failure to do so, the law will usually give the surety a right of subrogation, allowing the surety to "step into the shoes of" the principal and use his contractual rights to recover the cost of making payment or performing on the principal's behalf, even in the absence of an express agreement to that effect between the surety and the principal. The act of becoming a surety is also called a guarantee. Traditionally a guarantee was distinguished from a surety in that the surety's liability was joint and primary with the principal, whereas the guaranty's liability was ancillary and derivative, but many jurisdictions have abolished this distinction. In the United States, under Article 3 of the Uniform Commercial Code, a person who signs a negotiable instrument as a surety is termed an accommodation party; such a party may be able to assert defenses to the enforcement of an instrument not available to the maker of the instrument

Usage There are several uses of the word "guarantee" in today's parlance, however the following should be used in legal documents. Guaranty is the actual document containing language of assurance. Guarantor is the entity giving the guaranty and guarantee is the entity receiving the guaranty. Following conventional English spelling rules, therefore, the plural of guaranty or verb usage of the word should be guaranties, as in "The seller (guarantor) guaranties something to the buyer (guarantee)."

Example A guarantee should be absolute with no chance of ambiguity or rebuttal. An example: I spoke with Jesse this morning and he gave me the "guarantee" that the game was on at 1:00pm. The comment that the game is on at 1:00pm is an absolute, which can be verified, therefore making Jesse's "guarantee" irrefutable. A guarantee should be based on fact, which can be relied upon by others to make decisions; and not an opinion that requires interpretation. A surety bond is a contract among at least three parties:

• The principal - the primary party who will be performing a contractual obligation

• The obligee - the party who is the recipient of the obligation, and

• The surety - who ensures that the principal's obligations will be performed. Through this agreement, the surety agrees to uphold—for the benefit of the obligee—the contractual promises (obligations) made by the principal if the principal fails to uphold its promises to the obligee. The contract is formed so as to induce the obligee to contract with the principal, i.e., to demonstrate the credibility of the principal and guarantee performance and completion per the terms of the agreement. Contract bonds guarantee a specific contract. Examples include performance, bid, supply, maintenance and

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subdivision bonds. Commercial bonds guarantee per the terms of the bond form. Examples include license & permit, union bonds, etc. Individual Surety Bonds are the original form of suretyship. The earliest known record of a contract of suretyship is a Mesopotamian tablet written around 2,750 BC. There is evidence of Individual Surety Bonds in the Code of Hammurabi and in Babylon, Persia, Assyria, Rome, Carthage, the ancient Hebrews and later England. It wasn't until 1837 that the first Corporate Surety was organized, The Guarantee Society of London. In 1865, the Fidelity Insurance Company became the first US Corporate Surety company, but the venture soon failed. Surety bonds are also used in other situations, for example, to secure the proper performance of fiduciary duties by persons in positions of private or public trust. A key term in nearly every surety bond is the penal sum. This is a specified amount of money which is the maximum amount that the surety will be required to pay in the event of the principal's default. This allows the surety to assess the risk involved in giving the bond; the premium charged is determined accordingly. If the principal defaults and the surety turns out to be insolvent, the purpose of the bond is rendered nugatory. Thus, the surety on a bond is usually an insurance company whose solvency is verified by private audit, governmental regulation, or both. The principal will pay a premium (usually annually) in exchange for the bonding company's financial strength to extend surety credit. In the event of a claim, the surety will investigate it. If it turns out to be a valid claim, the surety will pay it and then turn to the principal for reimbursement of the amount paid on the claim and any legal fees incurred. A bail bond is a type of surety bond used to secure the release from custody of a person charged with a criminal offense. Under such a contract, the principal is the accused, the obligee is the government, and the surety is the bail bondsman, and if the accused fails to appear, a fugitive recovery agent is the surety. Surety defined. A surety is one who, at the request of another and for the purpose of securing to the latter a benefit, becomes responsible for the performance by the latter of some act in favor of a third person or hypothecates property as security therefor. Surety appearing as principal may show status as surety - Exception. One who appears to be a principal, whether by the terms of a written instrument or otherwise, may show that the person in fact is a surety except as against persons who have acted on the faith of that person's apparent character of principal. Limitations on liability of surety. A surety cannot be held beyond the express terms of the surety's contract and if such contract prescribes a penalty for its breach, the surety cannot be liable in any case for more than the penalty. Interpreting contract of suretyship. In interpreting the terms of a contract of suretyship, the same rules are to be observed as in the case of other

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contracts. Suretyship survives judgment. A surety still occupies the position of surety even though a creditor recovers a judgment against the surety. Exoneration of surety - Methods. A surety is exonerated: 1. In like manner with a guarantor; 2. By performance of the principal obligation or tender of such performance duly made as provided in this code; 3. To the extent to which the surety is prejudiced by any act of the creditor which would naturally prove injurious to the remedies of the surety or inconsistent with the surety's rights, or which lessens the surety's security; or 4. To the extent to which the surety is prejudiced by an omission of the creditor to do anything when required by the surety which it is the creditor's duty to do. Rights of surety same as rights of guarantor. A surety has all the rights of a guarantor whether the surety becomes personally responsible or not. Surety may require creditors to proceed against principal. A surety may require the surety's creditor to proceed against the principal or to pursue any other remedy in the creditor's power which the surety cannot pursue and which would lighten the surety's burden. If the creditor neglects to do so, the surety is exonerated to the extent to which the surety is prejudiced by such neglect. Surety may compel principal to perform obligation when due. A surety may compel the surety's principal to perform the obligation when due. Reimbursement of surety by principal - Claims for reimbursement against others. If a surety satisfies the principal obligation, or any part thereof, with or without legal proceedings, the principal is bound to reimburse the surety for what the surety has disbursed, including necessary costs and expenses. A surety has no claim, however, for reimbursement against other persons though they may have been benefited by the surety's act, except as prescribed by section 22-03-11. Remedies of surety - Contribution from cosureties. A surety, upon satisfying the obligations of the principal, is entitled to enforce every remedy which the creditor then has against the principal, to the extent of reimbursing what the surety has expended, and

5.1 LETTER OF CREDIT

A letter of credit is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking (it can also be revocable, confirmed, unconfirmed, transferable or others e.g. back to back: revolving but is most commonly irrevocable/confirmed) to a beneficiary against complying documents as stated in the Letter of Credit. Letter of Credit is abbreviated as an LC or L/C, and often is referred to as a documentary credit, abbreviated as DC or D/C, documentary letter of credit, or simply as credit (as in the UCP 500 and UCP 600). Once the beneficiary or a presenting bank acting on its behalf, presents to the issuing bank or confirming bank, if any, on or before the expiry date of the LC, documents

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complying with the terms and conditions of the LC, the applicable UCP and international standard banking practice, the issuing bank or confirming bank, if any, is obliged to honour irrespective of any instructions from the applicant to the contrary. In other words, the obligation to honour (usually payment) is shifted from the applicant to the issuing bank or confirming bank, if any. Non-banks can also issue letters of credit, however beneficiaries must balance the potential risk of payment default.

The LC can also be the source of payment for a transaction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. They are also used in the land development process to ensure that approved public facilities (streets, sidewalks, stormwater ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. In executing a transaction, letters of credit incorporate functions common to giros and Traveler's cheques. Typically, the documents a beneficiary has to present in order to receive payment include a commercial invoice, bill of lading, and documents proving the shipment was insured against loss or damage in transit. However, the list and form of documents is open to imagination and negotiation and might contain requirements to present documents issued by a neutral third party evidencing the quality of the goods shipped, or their place of origin.

Terminology

The English name “letter of credit” derives from the French word “accreditation”, a power to do something, which in turn is derivative of the Latin word “accreditivus”, meaning trust. S.‘The Application of the Letter of Credit Form of Payment in International Business Transactions’ (2001) 10 Int’l Trade L.J. p. 37. In effect, this reflects the modern understanding of the instrument. When a seller agrees to be paid by means of a letter of credit, the creditor/seller is looking at a reliable bank that has an obligation to pay the amount stipulated in the credit notwithstanding any defence relating to the underlying contract of sale. This is as long as the seller performs their duties to an extent that meets the requirements contained in the LC.

How it works

A business called the InCosmetika from time to time imports goods from a business called BLISS, which banks with the ABC Bank. InCosmetika holds an account at the . InCosmetika wants to buy $500,000 worth of merchandise from BLISS, who agrees to sell the goods and give InCosmetika 60 days to pay for them, on the condition that they are provided with a 90-day LC for the full amount. The steps to get the letter of credit would be as follows:

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• InCosmetika goes to The Commonwealth Bank and requests a $500,000 letter of credit, with BLISS as the beneficiary.

• The Commonwealth Bank can issue an LC either on approval of a standard loan underwriting process or by InCosmetika funding it directly with a deposit of $500,000 plus fees which are typically between 1% and 8% of the face value of the LC.

• The Commonwealth Bank sends a copy of the LC to the ABC Bank, which notifies BLISS that payment is available and they can ship the merchandise InCosmetika has ordered with the full assurance of payment to them.

• On presentation of the stipulated documents in the letter of credit and compliance with the terms and conditions of the letter of credit, the Commonwealth Bank transfers the $500,000 to the ABC Bank, which then credits the account of BLISS for that amount.

• Note that banks deal only with documents required in the letter of credit and not the underlying transaction.

• Many exporters have mistakenly assumed that the payment is guaranteed after receiving the LC. The issuing bank is obligated to pay under the letter of credit only when the stipulated documents are presented and the terms and conditions of the letter of credit have been met.

Availability

• DC being an irrevocable undertaking of the issuing bank makes available the Proceeds, to the Beneficiary of the Credit provided, stipulated documents strictly complying with the provisions of the DC, UCP 600 and other international standard banking practices, are presented to the issuing bank , then :

• i.if the Credit provides for sight payment – by payment at sight against compliant presentation

• ii.if the Credit provides for deferred payment – by payment on the maturity date(s) determinable in accordance with the stipulations of the Credit; and of course undertaking to pay on due date and confirming maturity date at the time of compliant presentation

• iii.a.if the Credit provides for acceptance by the Issuing Bank – by acceptance of Draft(s) drawn by the Beneficiary on the Issuing Bank and payment at maturity of such tenor draft, or

• iii.b. if the Credit provides for acceptance by another drawee bank – by acceptance and payment at maturity Draft(s)drawn by the Beneficiary on the Issuing Bank in the event the drawee bank stipulated in the Credit does not accept Draft(s) drawn on it, or by payment of Draft(s) accepted but not paid by such drawee bank at maturity;

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• iv. if the Credit provides for negotiation by another bank – by payment without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit, (and so negotiated by the nominated bank )

• Negotiation means the giving of value for Draft(s) and/or document(s) by the bank authorized to negotiate, viz the nominated bank. Mere examination of the documents and forwarding the same to DC issuing bank for reimbursement, without giving of value / agreed to give, does not constitute a negotiation. 5.1.1 Some of the Documents Called for under a DC • Financial Documents Bill of Exchange, Co-accepted Draft

• Commercial Documents Invoice, Packing list

• Shipping Documents Transport Document, Insurance Certificate, Commercial, Official or Legal Documents

• Official Documents License, Embassy legalization, Origin Certificate, Inspection Cert , Phyto-sanitary Certificate

• Transport Documents Bill of Landing (ocean or multi-modal or Charter party), Airway bill, Lorry/truck receipt, railway receipt, CMC Other than Mate Receipt, Forwarder Cargo Receipt, Deliver Challan...etc

• Insurance documents Insurance policy, or Certificate but not a cover note. Guidance on Preparation of Documents under a Letter of Credit

Some of Major Terms and Conditions in a DC

• Expiry date of the DC for presentation of Shipping docs for Negotiation / Honor • Shipment expiry date within which the goods should be on board the named mode of transport • Currency and amount, maximum that can be drawn under the DC, and tolerance if any • Applicant and Beneficiary

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• Ports of loading and delivery • Availability of the DC by By Negotiation / Sight payment / Deferred payment / Acceptance with • Availability of the DC with a specific nominated bank to make the proceeds available to the beneficiary • Goods description • Presentation should be made to whom and when and how, and within what period • Reimbursement , is available to be nominated bank , how and when. • Charges , what are all to account of the applicant and beneficiary • Confirmation , of the DC to be effected by whom, and charges to whose a/c and of course • Instructions to nominated bank • Sender to receiver information • Exclusions to UCP 600 or any other specific waviers or restrictions, perhaps like, all Docs should be in English and should contain DC no, or due to OFAC and other sanctions certain type of tax will not be handled and honored, etc etc. Legal principles governing documentary credits One of the primary peculiarities of the documentary credit is that the payment obligation is abstract and independent from the underlying contract of sale or any other contract in the transaction. Thus the bank’s obligation is defined by the terms of the credit alone, and the sale contract is irrelevant. The defences of the buyer arising out of the sale contract do not concern the bank and in no way affect its liability. Article 3(a) UCP states this principle clearly. Article 4 the UCP further states that banks deal with documents only, they are not concerned with the goods (facts). Accordingly, if the documents tendered by the beneficiary, or his or her agent, appear to be in order, then in general the bank is obliged to pay without further qualifications. The policies behind adopting the abstraction principle are purely commercial and reflect a party’s expectations: firstly, if the responsibility for the validity of documents was thrown onto banks, they would be burdened with investigating the underlying facts of each transaction and would thus be less inclined to issue documentary credits as the transaction would involve great risk and inconvenience. Secondly, documents required under the credit could in certain circumstances be different from those required under the sale transaction; banks would then be placed in a dilemma in deciding which terms to follow if required to look behind the credit agreement. Thirdly, the fact that the basic function of the credit is to provide the seller with the certainty of receiving payment, as long as he performs his documentary duties, suggests that banks should honour their

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obligation notwithstanding allegations of misfeasance by the buyer. Finally, courts have emphasised that buyers always have a remedy for an action upon the contract of sale, and that it would be a calamity for the business world if, for every breach of contract between the seller and buyer, a bank were required to investigate said breach. The “principle of strict compliance” also aims to make the bank’s duty of effecting payment against documents easy, efficient and quick. Hence, if the documents tendered under the credit deviate from the language of the credit the bank is entitled to withhold payment even if the deviation is purely terminological. The general legal maxim de minims non curat lex has no place in the field of documentary credits.

The price of LCs All the charges for issuance of Letter of Credit, negotiation of documents, reimbursements and other charges like courier are to the account of applicant or as per the terms and conditions of the Letter of credit. If the LC is silent on charges, then they are to the account of the Applicant. The description of charges and who would be bearing them would be indicated in the field 71B in the Letter of Credit.

5.1.2 Legal Basis for Letters of Credit Although documentary credits are enforceable once communicated to the beneficiary, it is difficult to show any consideration given by the beneficiary to the banker prior to the tender of documents. In such transactions the undertaking by the beneficiary to deliver the goods to the applicant is not sufficient consideration for the bank’s promise because the contract of sale is made before the issuance of the credit, thus consideration in these circumstances is past. In addition, the performance of an existing duty under a contract cannot be a valid consideration for a new promise made by the bank: the delivery of the goods is consideration for enforcing the underlying contract of sale and cannot be used, as it were, a second time to establish the enforceability of the bank-beneficiary relation. Legal writers have analyzed every possible theory from every legal angle and failed to satisfactorily reconcile the bank’s undertaking with any contractual analysis. The theories include: the implied promise, assignment theory, the novation theory, reliance theory, agency theories, estoppels and trust theories, anticipatory theory, and the guarantee theory. [4] Davis, Treitel, Goode, Finkelstein and Ellinger have all accepted the view that documentary credits should be analyzed outside the legal framework of contractual principles, which require the presence of consideration. Accordingly, whether the documentary credit is referred to as a promise, an undertaking, a chose in action, an engagement or a contract, it is acceptable in English jurisprudence to treat it as contractual in nature, despite the fact that it possesses distinctive features, which make it sui generis. Even though a couple of countries and US states (see eg Article 5 of the Uniform Commercial Code) have tried to create statutes to establish the rights of the parties involved in letter of credit transactions, most parties subject themselves to the Uniform

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Customs and Practices (UCP) issued by the International Chamber of Commerce (ICC) in Paris. The ICC has no legislative authority, rather, representatives of various industry and trade groups from various countries get together to discuss how to revise the UCP and adapt them to new technologies. The UCP are quoted according to the publication number the ICC gives them. The UCP 600 are ICC publication No. 600 effective July 1, 2007. The previous revision was called UCP 500 and became effective 1993. Since the UCP are not laws, parties have to include them into their arrangements as normal contractual provisions. It is interesting to see that in the area of international trade the parties do not rely on governmental regulations, but rather prefer the speed and ease of auto-regulation International Trade Payment methods • Advance payment (most secure for seller) Where the buyer parts with money first and waits for the seller to forward the goods • Documentary Credit (more secure for seller as well as buyer) subject to ICC's UCP 600, where the bank gives an undertaking (on behalf of buyer and at the request of applicant ) to pay the shipper ( beneficiary ) the value of the goods shipped if certain docs are submitted and if the stipulated terms and conditions are strictly complied. • Here the buyer can be confident that the goods he is expecting only will be received since it will be evidenced in the form of certain docs called for meeting the specified terms and conditions while the supplier can be confident that if he meets the stipulations his payment for the shipment is guaranteed by bank, who is independent of the parties to the contract. • Documentary collection (more secure for buyer and to a certain extent to seller) subject to ICC's URC 525, sight and usance, for delivery of shipping documents against payment or acceptances of draft, where shipment happens first, then the title documents are sent to the [collecting bank] buyer's bank by seller's bank [remitting bank], for delivering documents against collection of payment/acceptance • Direct payment (most secure for buyer) Where the supplier ships the goods and waits for the buyer to remit the bill proceeds, on open account terms

5.1.3 Risk situations in a DC transaction General Risks • If goods are being offered for sale at a price that is too good to be true, then it probably is too good to be true’

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Fraud Risks

• The payment will be obtained for nonexistent or worthless merchandise against presentation by the Beneficiary of forged or falsified documents.

• Credit itself may be forged. Sovereign and Regulatory Risks

• Performance of the Documentary Credit may be prevented by government action outside the control of the parties. Legal Risks

• Possibility that performance of a Documentary Credit may be disturbed by legal action relating directly to the parties and their rights and obligations under the Documentary Credit Force Majeure and Frustration of Contract

• Performance of a contract – including an obligation under a Documentary Credit relationship – is prevented by external factors such as natural disasters or armed conflicts Risks to the Applicant

• Non-delivery of Goods

• Short Shipment

• Inferior Quality

• Early /Late Shipment

• Damaged in transit

• Foreign exchange

• Failure of Bank viz Issuing bank / Collecting Bank Risks to the Issuing Bank

• Insolvency of the Applicant

• Fraud Risk, Sovereign and Regulatory Risk and Legal Risks Risks to the Reimbursing Bank

• no obligation to reimburse the Claiming Bank unless it has issued a reimbursement undertaking.

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Risks to the Beneficiary

• Failure to Comply with Credit Conditions

• Failure of, or Delays in Payment from, the Issuing Bank

• Credit Issued by Party other than Bank

Risks to the Advising Bank

• The Advising Bank’s only obligation – if it accepts the Issuing Bank’s instructions – is to check the apparent authenticity of the Credit and advising it to the Beneficiary Risks to the Nominated Bank

• Nominated Bank has made a payment to the Beneficiary against documents that comply with the terms and conditions of the Credit and is unable to obtain reimbursement from the Issuing Bank Risks to the Confirming Bank

• If Confirming Bank’s main risk is that, once having paid the Beneficiary, it may not be able to obtain reimbursement from the Issuing Bank because of insolvency of the Issuing Bank or refusal of the Issuing Bank to reimburse because of a dispute as to whether or not payment should have been made under the Credit Risks in International Trade

• A Credit risk is a risk from a change in the credit of an opposing business.

• An Exchange risk is a risk from a change in the foreign exchange rate.

• A Force majeure risk is 1. a risk in trade incapability caused by a change in a country's policy, and 2. a risk caused by a natural disaster.

• Other risks are mainly risks caused by a difference in law, language or culture. In these cases, the cargo might be found late because of a dispute in import and export dealings To understand L/C it is also important to know the various kinds of L/C:- Irrevocable - A letter of credit that cannot be amended or canceled without prior mutual consent of all parties to the credit.

Revocable - A letter of credit that can be canceled or altered by the drawee (buyer) after it has been issued by the drawee's bank.

Transferable - A letter of credit that can be redirected at the sellers request.

Sight - A letter of credit that requires payment to be made upon presentation of documents. 123 B.Com-Banking Law and Practice

Time Draft - A letter of credit that states payment is due within a certain time (usually 30, 60, 90, or 180 days), in other terms allows credit to the buyer.

5.1.4. FORMAT FOR LETTER OF CREDIT(FOB) Preferred Format for Letter of Credit [ Bank/Issuer name, address and telephone number ] [ Date ] Letter of Credit Number ______Amount: $______U. S. To: Re: Irrevocable Letter of Credit issued on behalf of [ Name of developer ] Dear Sirs: The Issuer opens its Irrevocable Letter of Credit in your favor available in the following manner and on the following terms: 1. Issuer: [ name of bank/issuer ] 2. Beneficiary: 3. Customer: [ name of developer ] 4. Project: [name of project, site, subdivision ] 5. Obligation of Issuer: The Credit is irrevocable. 6. Transferability: The Credit is to be non-transferable. 7. Total: The sum total of the Credit is $______U. S. 8. Purpose: To provide surety for a developer’s bond required by County Code Section 155-58 to ensure construction of required public improvements at [ name of project, site, subdivision ] to include installation of [ list of public facilities to be constructed/installed ] in accordance with the specifications of the County of Warren, Virginia. 9. Default: In the event that any or all of the above-stated public improvements are not constructed and/or installed in accordance with the specifications of the County of Warren within eleven (11) months from this date, the Beneficiary may upon written notice to Issuer and Customer at the addresses noted herein demand and receive payment from the Issuer in cash in the entire amount of $______if one of the required public improvements have been constructed and/or installed or in such lesser amount as may be required to complete construction and/or installation of the aforesaid improvements if said improvements have been partially constructed and/or installed. All drafts drawn under this Letter of Credit shall contain the clause “Drawn under [ name of Issuer ] Letter of Credit Number ____.” 124 B.Com-Banking Law and Practice

The Issuer shall have ninety (90) days from the receipt of said notice to effect a cure by procuring completion of construction and/or installation of the aforesaid public improvements in accordance with the specifications of the County of Warren, Virginia, and thereby receive a refund of any sum paid in default.

10. Addresses: Issuer: __[ name of Issuer ] __[ street address ] __[ city, state, zip ] Customer: __[ name of Customer ] __[ street address ] __[ city, state, zip ] Beneficiary:

11. Termination: This is a continuing agreement and shall remain in full force and effect until written notice is received by the County of Warren that it has been terminated and revoked.

12. Miscellaneous: This Letter of Credit and the terms hereof shall be binding upon the respective parties, heirs, executors, administrators, successors and assigns. None of the terms of this agreement or its provisions may be waived, altered, modified or amended except in writing signed by the Beneficiary and the Issuer.

13. Applicable Law: This Letter of Credit is to be governed by the Uniform Commercial Code of the State of Virginia.

Given under our hands this _____ day of ______, 200___.

[ Issuer Bank name ], Issuer

By: ______

____[ Title ]_____

Seen: ______

Customer

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II . Format of letter of credit IRREVOCABLE LETTER OF CREDIT FORMAT (Use letterhead of issuing institution) Dear Director: We hereby establish our irrevocable Standby Letter of Credit No. ______in your favor, at the request of and in lieu of a surety bond for ( operator's name and address ) in the full amount of (in words ) U.S. Dollars $______, available upon presentation by you, or any Environmental Protection Division ("Division") employee acting under your authority, of: (1) Your sight draft or demand for payment, bearing reference to this Letter of credit No.______; (2) Your signed statement reading as follows: "I certify that the amount of the draft is payable pursuant to the Georgia Comprehensive Solid Waste Management Act and the regulations adopted pursuant thereto." This letter of credit is effective as of (Date) and shall expire on (Date at least one year later), but such expiration date shall be automatically extended for a period of (at least one [1] year) on (Date) and on each successive expiration date, unless, at least 120 days before the current expiration date, we notify both you and (Operator's Name) by certified mail that we have decided not to extend this letter of credit beyond the current expiration date. In the event you are so notified, the credit established by this letter shall be available upon presentation of your sight draft or demand for payment for 120 days after the date of receipt of such notice by both you and (Operator's Name), as shown on the signed return receipt. The credit established by this letter and our obligation to pay same shall not be affected by the receivership, bankruptcy, or insolvency of debtor or the attachment of his property. Nor shall this credit or our obligation to pay same be affected by any security agreement or other agreement between (Operator's Name) and our bank. Whenever this letter of credit is drawn on under and in compliance with the terms of this credit, we shall duly honor such draft

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upon presentation to us, and we shall pay the amount of the draft directly to you, as Director of the Division or in accordance with your instructions. This letter of credit is subject to the most recent edition of the Uniform Customs and Practice for Documentary Credits, published by the International Chamber of Commerce of the Uniform Commercial Code. Sincerely, [Signature(s) and title(s) of official(s) or issuing institution] [Date] This letter must be submitted to: Denny Jackson, Program Manager Georgia Environmental Protection Division Solid Waste Permitting Program 4244 International Parkway, Suite 104 Atlanta, Georgia 30354 ST

5.2 BILL OF EXCHANGE

A bill of exchange or "Draft" is a written order by the drawer to the drawee to pay money to the payee. The most common type of bill of exchange is the cheque (check in American English), which is defined as a bill of exchange drawn on a banker and payable on demand. Bills of exchange are used primarily in international trade, and are written orders by one person to his bank to pay the bearer a specific sum on a specific date sometime in the future.Prior to the advent of paper currency, bills of exchange were a more significant part of trade. They are a rather ancient form of instrument. Bills of exchange may be defined as a commitment subscribed by your customer to pay a certain amount on a given date upon presentation of the bill of exchange. They can be used to materialize installment payments. For example, you have accepted that your customer pays the invoice amount in 3 monthly installments of 1000 USD each. You will issue 3 bills of exhange of 1000 usd each and maturing in month in month m, m+1 and m+2. The bills of exchange will be sent to your customer for acceptance(customer signs them). Once accepted they will be returned to you. You will have to post accounting entries. But note that even though the accepted bills of exchange can be considered as payment, you cannot clear the outstanding customer invoice until the bills are effectively paid at maturity date. You then have to post the bills of exchange as a special GL transaction. 127 B.Com-Banking Law and Practice

Again once you have received the bills of exchange you may decide to discount them right away with your bank and this is done with or without recourse. Depending on the option choosen, accounting entries are different. by discounting the bills you receive payment of the bill and this can be used to clear the outstanding customer invoice. But note that until the bill is finally paid by the customer at maturity date you remain liable. You account for this liability by making postings which will show the discounted bills of exchange as a contingent liability. They do not show in the balance sheet itself but appear in an appendix of the balance sheet. In brief, a "bill of exchange" or a "Hundi" is a kind of legal negotiable instrument used to settle a payment at a future date. It is drawn by a drawer on a drawee wherein drawee accepts the payment liability at a date stated in the instrument. The Drawer of the Bill of Exchange draw the bill on the drawee and send it to him for his acceptance. Once accepted by the drawee, it becomes a legitimate negotiable instrument in the financial market and a debt against the drawee. The drawer may, on acceptance, have the Bill of Exchange discounted from his bank for immediate payment to have his working capital funds. On due date, the bill is again presented to the drawee for the payment accepted by him, as stated therein the bill. Letter of Credit (LC) is a declaration of financial soundness and commitment, by a bank for its client, for the amount stated in the LC document, to the other party (beneficiary) named therein. The LCs may or may not be endorse-able. In case of default of payment by the party under obligation to pay, the LC issuing Bank undertakes to honour the payment - with or without conditions. Normally, there may be sight LCs or DA LCs containing a set of conditions in both the cases. There "may be" Bills of Exchange(s) drawn under the overall limits of the LC amount for payment later on. In the Westminster system (and, colloquially, in the United States), a money bill or supply bill is a bill that solely concerns taxation or government spending (also known as appropriation of money), as opposed to changes in public law. Purchasing and discounting of bills of exchange is another short term method of profitable instrument of banks funds. Bills of exchange can be discounted on rebate before its due date. The rebate or discount is earning of the bank. The bills of exchange usually mature within 90 days. In case a bill, say of rupees 2000 due 90 days hence is discounted today at 20 percent per annum, the borrower is paid rupees 1900. the bank however collects the full amount of rupees 2000 of the bill from drawer on maturity. The drawer or maker of the bill is expected to pay the bill on maturity. The bank by discounting the clean or documentary bill advances the amount to the payee. On maturity of the bill the amount is collected from the drawer. The discount is the safe earning of the bank because the bill of exchange is a negotiable instrument. If at any time the bill is dishonoured the payee is responsible to make the full payment of the bill to the bank. On the maturity of the bill there is certainly of payment to the bank. It is thus a short term advance with certainly of payment. As the date of payment to the bank is sure the short term advance is quite liquid

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5.2.1 Drafts or Bills Of Exchange Besides promissory notes, another form of obligation given for money loaned is the "draft," or "bill of exchange," like the following specimen: A bill of exchange may properly be defined as a draft drawn by a party doing business at one place upon a different party residing in some other place at a greater or less distance, for a sum of money representing a bona fide business transaction between the "drawer," who signs the "bill" or "draft," and the "acceptor," who agrees to become responsible for its payment by writing his name across the face of the draft.

5.3 CREDIT CARD

A credit card is part of a system of payments named after the small plastic card issued to users of the system. The issuer of the card grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user. A credit card is different from a , where a charge card requires the balance to be paid in full each month. In contrast, credit cards allow the consumers to 'revolve' their balance, at the cost of having interest charged. Most credit cards are issued by local banks or credit unions, and are the same shape and size as specified by the ISO 7810 standard. Credit cards are issued after an account has been approved by the credit provider, after which cardholders can use it to make purchases at merchants accepting that card. When a purchase is made, the credit card user agrees to pay the card issuer. The cardholder indicates his/her consent to pay, by signing a receipt with a record of the card details and indicating the amount to be paid or by entering a Personal identification number (PIN). Also, many merchants now accept verbal authorizations via telephone and electronic authorization using the Internet, known as a 'Card/Cardholder Not Present' (CNP) transaction. Electronic verification systems allow merchants to verify that the card is valid and the credit card customer has sufficient credit to cover the purchase in a few seconds, allowing the verification to happen at time of purchase. The verification is performed using a credit card or Point of Sale (POS) system with a communications link to the merchant's . Data from the card is obtained from a magnetic stripe or chip on the card; the latter system is in the United Kingdom and Ireland commonly known as Chip and PIN, but is more technically an EMV card. Other variations of verification systems are used by e Commerce merchants to determine if the user's account is valid and able to accept the charge. These will typically involve the cardholder providing additional information, such as the security code printed on the back of the card, or the address of the cardholder. Each month, the credit card user is sent a statement indicating the purchases undertaken with the card, any outstanding fees, and the total amount owed. After receiving the

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statement, the cardholder may dispute any charges that he or she thinks are incorrect (see Fair Credit Billing Act for details of the US regulations). Otherwise, the cardholder must pay a defined minimum proportion of the bill by a due date, or may choose to pay a higher amount up to the entire amount owed. The credit provider charges interest on the amount owed if the balance is not paid in full (typically at a much higher rate than most other forms of debt). Some financial institutions can arrange for automatic payments to be deducted from the user's bank accounts, thus avoiding late payment altogether as long as the cardholder has sufficient funds.

Interest charges Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid. For example, if a user had a $1,000 transaction and repaid it in full within this , there would be no interest charged. If, however, even $1.00 of the total amount remained unpaid, interest would be charged on the $1,000 from the date of purchase until the payment is received. The precise manner in which interest is charged is usually detailed in a cardholder agreement which may be summarized on the back of the monthly statement. The general calculation formula most financial institutions use to determine the amount of interest to be charged is APR/100 x ADB/365 x number of days revolved. Take the Annual percentage rate (APR) and divide by 100 then multiply to the amount of the average daily balance (ADB) divided by 365 and then take this total and multiply by the total number of days the amount revolved before payment was made on the account. Financial institutions refer to interest charged back to the original time of the transaction and up to the time a payment was made, if not in full, as RRFC or residual retail finance charge. Thus after an amount has revolved and a payment has been made, the user of the card will still receive interest charges on their statement after paying the next statement in full (in fact the statement may only have a charge for interest that collected up until the date the full balance was paid...i.e. when the balance stopped revolving). The credit card may simply serve as a form of , or it may become a complicated financial instrument with multiple balance segments each at a different interest rate, possibly with a single umbrella , or with separate credit limits applicable to the various balance segments. Usually this compartmentalization is the result of special incentive offers from the issuing bank, to encourage balance transfers from cards of other issuers. In the event that several interest rates apply to various balance segments, payment allocation is generally at the discretion of the issuing bank, and payments will therefore usually be allocated towards the lowest rate balances until paid in full before any money is paid towards higher rate balances. Interest rates can vary considerably from card to card, and the interest rate on a particular card may jump dramatically if the card user is late with a payment on that card or any other credit instrument, or even if the issuing bank decides to raise its revenue.

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5.3.1 Benefits to customers Because of intense competition in the credit card industry, credit card providers often offer incentives such as frequent flyer points, gift certificates, or cash back (typically up to 1 percent based on total purchases) to try to attract customers to their programs. Low interest credit cards or even 0% interest credit cards are available. The only downside to consumers is that the period of low interest credit cards is limited to a fixed term, usually between 6 and 12 months after which a higher rate is charged. However, services are available which alert credit card holders when their low interest period is due to expire. Most such services charge a monthly or annual fee.

Grace period A credit card's grace period is the time the customer has to pay the balance before interest is charged to the balance. Grace periods vary, but usually range from 20 to 40 days depending on the type of credit card and the issuing bank. Some policies allow for reinstatement after certain conditions are met. Usually, if a customer is late paying the balance, finance charges will be calculated and the grace period does not apply. Finance charges incurred depend on the grace period and balance; with most credit cards there is no grace period if there is any outstanding balance from the previous billing cycle or statement (i.e. interest is applied on both the previous balance and new transactions). However, there are some credit cards that will only apply finance charge on the previous or old balance, excluding new transactions.

Benefits to merchants For merchants, a credit card transaction is often more secure than other forms of payment, such as checks, because the issuing bank commits to pay the merchant the moment the transaction is authorized, regardless of whether the consumer defaults on the credit card payment (except for legitimate disputes, which are discussed below, and can result in charges back to the merchant). In most cases, cards are even more secure than cash, because they discourage theft by the merchant's employees and reduce the amount of cash on the premises. Prior to credit cards, each merchant had to evaluate each customer's credit history before extending credit. That task is now performed by the banks which assume the credit risk. For each purchase, the bank charges the merchant a commission (discount fee) for this service and there may be a certain delay before the agreed payment is received by the merchant. The commission is often a percentage of the transaction amount, plus a fixed fee. In addition, a merchant may be penalized or have their ability to receive payment using that credit card restricted if there are too many cancellations or reversals of charges as a result of disputes. Some small merchants require credit purchases to have a minimum amount (usually between $5 and $10) to compensate for the transaction costs, though this is strictly prohibited by credit card companies and must be reported to the consumer's credit card issuer.

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In some countries, for example the Nordic countries, banks guarantee payment on stolen cards only if an ID card is checked and the ID card number/civic registration number is written down on the receipt together with the signature. In these countries merchants therefore usually ask for ID. Non-Nordic citizens, who are unlikely to possess a Nordic ID card or driving license, will instead have to show their passport, and the passport number will be written down on the receipt, sometimes together with other information. Some shops use the card's PIN for identification, and in that case showing an ID card is not necessary.

Parties involved

• Cardholder: The holder of the card used to make a purchase; the consumer.

• Card-issuing bank: The financial institution or other organization that issued the credit card to the cardholder. This bank bills the consumer for repayment and bears the risk that the card is used fraudulently. American Express and Discover were previously the only card-issuing banks for their respective brands, but as of 2007, this is no longer the case.

• Merchant: The individual or business accepting credit card payments for products or services sold to the cardholder

• Acquiring bank: The financial institution accepting payment for the products or services on behalf of the merchant.

• Independent sales organization: Resellers (to merchants) of the services of the acquiring bank.

• Merchant account: This could refer to the acquiring bank or the independent sales organization, but in general is the organization that the merchant deals with.

• Credit : An association of card-issuing banks such as Visa, MasterCard, Discover, American Express, etc. that set transaction terms for merchants, card-issuing banks, and acquiring banks.

• Transaction network: The system that implements the mechanics of the electronic transactions. May be operated by an independent company, and one company may operate multiple networks. Transaction processing networks include: Cardnet, Nabanco, Omaha, Paymentech, NDC Atlanta, Nova, TSYS, Concord EFSnet, and VisaNet.

• Affinity partner: Some institutions lend their names to an issuer to attract customers that have a strong relationship with that institution, and get paid a fee or a percentage of the balance for each card issued using their name. Examples of typical affinity partners are sports teams, universities, charities, professional organizations, and major retailers. The flow of information and money between these parties — always through the card associations — is known as the interchange, and it consists of a few steps.

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Transaction steps • Authorization: The cardholder pays for the purchase and the merchant submits the transaction to the acquirer (acquiring bank). The acquirer verifies the credit card number, the transaction type and the amount with the issuer (Card-issuing bank) and reserves that amount of the cardholder's credit limit for the merchant. An authorization will generate an approval code, which the merchant stores with the transaction. • Batching: Authorized transactions are stored in "batches", which are sent to the acquirer. Batches are typically submitted once per day at the end of the business day. If a transaction is not submitted in the batch, the authorization will stay valid for a period determined by the issuer, after which the held amount will be returned back to the cardholder's available credit (see authorization hold). Some transactions may be submitted in the batch without prior authorizations; these are either transactions falling under the merchant's floor limit or ones where the authorization was unsuccessful but the merchant still attempts to force the transaction through. (Such may be the case when the cardholder is not present but owes the merchant additional money, such as extending a hotel stay or car rental.) • Clearing and Settlement: The acquirer sends the batch transactions through the credit card association, which debits the issuers for payment and credits the acquirer. Essentially, the issuer pays the acquirer for the transaction. • Funding: Once the acquirer has been paid, the acquirer pays the merchant. The merchant receives the amount totaling the funds in the batch minus the "discount rate," which is the fee the merchant pays the acquirer for processing the transactions. • : A chargeback is an event in which money in a merchant account is held due to a dispute relating to the transaction. Chargebacks are typically initiated by the cardholder. In the event of a chargeback, the issuer returns the transaction to the acquirer for resolution. The acquirer then forwards the chargeback to the merchant, who must either accept the chargeback or contest it. Secured credit cards A secured credit card is a type of credit card secured by a deposit account owned by the cardholder. Typically, the cardholder must deposit between 100% and 200% of the total amount of credit desired. Thus if the cardholder puts down $1000, they will be given credit in the range of $500–$1000. In some cases, credit card issuers will offer incentives even on their secured card portfolios. In these cases, the deposit required may be significantly less than the required credit limit, and can be as low as 10% of the desired credit limit. This deposit is held in a special savings account. Credit card issuers offer this because they have noticed that delinquencies were notably reduced when the customer perceives something to lose if the balance is not repaid. The cardholder of a secured credit card is still expected to make regular payments, as with a regular credit card, but should they default on a payment, the card issuer has the 133 B.Com-Banking Law and Practice

option of recovering the cost of the purchases paid to the merchants out of the deposit. The advantage of the secured card for an individual with negative or no credit history is that most companies report regularly to the major credit bureaus. This allows for building of positive credit history. Although the deposit is in the hands of the credit card issuer as security in the event of default by the consumer, the deposit will not be debited simply for missing one or two payments. Usually the deposit is only used as an offset when the account is closed, either at the request of the customer or due to severe delinquency (150 to 180 days). This means that an account which is less than 150 days delinquent will continue to accrue interest and fees, and could result in a balance which is much higher than the actual credit limit on the card. In these cases the total debt may far exceed the original deposit and the cardholder not only forfeits their deposit but is left with an additional debt. Most of these conditions are usually described in a cardholder agreement which the cardholder signs when their account is opened. Secured credit cards are an option to allow a person with a poor credit history or no credit history to have a credit card which might not otherwise be available. They are often offered as a means of rebuilding one's credit. Secured credit cards are available with both Visa and MasterCard logos on them. Fees and service charges for secured credit cards often exceed those charged for ordinary non-secured credit cards, however, for people in certain situations, (for example, after charging off on other credit cards, or people with a long history of delinquency on various forms of debt), secured cards can often be less expensive in total cost than unsecured credit cards, even including the security deposit. Sometimes a credit card will be secured by the equity in the borrower's home. This is called a home equity line of credit (HELOC).

5.3.2 Prepaid "credit" cards A prepaid credit card is not a credit card, since no credit is offered by the card issuer: the card-holder spends money which has been "stored" via a prior deposit by the card- holder or someone else, such as a parent or employer. However, it carries a credit-card brand (Visa, MasterCard, American Express or Discover) and can be used in similar ways just as though it were a regular credit card. After purchasing the card, the cardholder loads the account with any amount of money, up to the predetermined card limit and then uses the card to make purchases the same way as a typical credit card. Prepaid cards can be issued to minors (above 13) since there is no credit line involved. The main advantage over secured credit cards (see above section) is that you are not required to come up with $500 or more to open an account. With prepaid credit cards you are not charged any interest but you are often charged a purchasing fee plus monthly fees after an arbitrary time period. Many other fees also usually apply to a prepaid card.

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Prepaid credit cards are sometimes marketed to teenagers for shopping online without having their parents complete the transaction. Because of the many fees that apply to obtaining and using credit-card-branded prepaid cards, the Financial Consumer Agency of Canada describes them as "an expensive way to spend your own money". The agency publishes a booklet, "Pre-paid cards", which explains the advantages and disadvantages of this type of prepaid card.

Features As well as convenient, accessible credit, credit cards offer consumers an easy way to track expenses, which is necessary for both monitoring personal expenditures and the tracking of work-related expenses for taxation and reimbursement purposes. Credit cards are accepted worldwide, and are available with a large variety of credit limits, repayment arrangement, and other perks (such as rewards schemes in which points earned by purchasing goods with the card can be redeemed for further goods and services or credit card cash back). Some countries, such as the United States, the United Kingdom, and France, limit the amount for which a consumer can be held liable due to fraudulent transactions as a result of a consumer's credit card being lost or stolen.

Security Credit card security relies on the physical security of the plastic card as well as the privacy of the credit card number. Therefore, whenever a person other than the card owner has access to the card or its number, security is potentially compromised. Merchants often accept credit card numbers without additional verification for mail order purchases. They however record the delivery address as a security measure to minimize fraudulent purchases. Some merchants will accept a credit card number for in- store purchases, whereupon access to the number allows easy fraud, but many require the card itself to be present, and require a signature. Thus, a stolen card can be cancelled, and if this is done quickly, will greatly limit the fraud that can take place in this way. For internet purchases, there is sometimes the same level of security as for mail order (number only) hence requiring only that the fraudster take care about collecting the goods, but often there are additional measures. The main one is to require a security PIN with the card, which requires that the thief have access to the card, as well as the PIN. The PCI DSS is the security standard issued by The PCI SSC (Payment Card Industry Security Standards Council). This data security standard is used by acquiring banks to impose cardholder data security measures upon their merchants. Problems A , combining credit card and debit card properties. The 3 by 5 mm security chip embedded in the card is shown enlarged in the inset. The contact pads on the card enable electronic access to the chip.

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The low security of the credit card system presents countless opportunities for fraud. This opportunity has created a huge black market in stolen credit card numbers, which are generally used quickly before the cards are reported stolen. The goal of the credit card companies is not to eliminate fraud, but to "reduce it to manageable levels". This implies that high-cost low-return fraud prevention measures will not be used if their cost exceeds the potential gains from fraud reduction. Most internet fraud is done through the use of stolen credit card information which is obtained in many ways, the simplest being copying information from retailers, either online or offline. Despite efforts to improve security for remote purchases using credit cards, systems with security holes are usually the result of poor implementations of card acquisition by merchants. For example, a website that uses SSL to encrypt card numbers from a client may simply email the number from the web server to someone who manually processes the card details at a card terminal. Naturally, anywhere card details become human-readable before being processed at the acquiring bank, a security risk is created. However, many banks offer systems where encrypted card details captured on a merchant's web server can be sent directly to the payment processor. Controlled Payment Numbers which are used by various banks such as (Virtual Account Numbers), Discover (Secure Online Account Numbers, (Shop Safe), 5 banks using eCarte Bleue and CMB's Virtualis in France, and Swedbank of Sweden's eKort product are another option for protecting one's credit card number. These are generally one-time use numbers that front one's actual account (debit/credit) number, and are generated as one shops on-line. They can be valid for a relatively short time, for the actual amount of the purchase, or for a price limit set by the user. Their use can be limited to one merchant if one chooses. The effect of this is the users real account details are not exposed to the merchant and its employees. If the number the merchant has on their database is compromised, it would be useless to a thief after the first transaction and will be rejected if an attempt is made to use it again. The same system of controls can be used on standard real plastic as well. For example if a consumer has a chip and pin (EMV) enabled card they can limit that card so that it be used only at point of sale locations (i.e restricted from being used on-line) and only in a given territory (i.e only for use in Canada). There are many other controls too and these can be turned on and off and varied by the credit card owner in real time as circumstances change (ie, they can change temporal, numerical, geographical and many other parameters on their primary and subsidiary cards). Apart from the obvious benefits of such controls: from a security perspective this means that a customer can have a chip and pin card secured for the real world, and limited for use in the home country assuming it is totally chip and pin. In this eventuality a thief stealing the details will be prevented from using these overseas in non chip and pin (EMV)countries). Similarly the real card can be restricted from use on-line so that stolen details will be declined if this tried. Then when the card user shops online they can use virtual account numbers. In both circumstances an alert system can be built in notifying a user that a fraudulent attempt has been made which breaches their parameters, and can provide data on this in

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real time. This is the optimal method of security for credit cards, as it provides very high levels of security, control and awareness in the real and virtual world. Furthermore it requires no changes for merchants at all and is attractive to users, merchants and banks, as it not only detects fraud but prevents it. The Federal Bureau of Investigation and U.S. Postal Inspection Service are responsible for prosecuting criminals who engage in in the United States, but they do not have the resources to pursue all criminals. In general, federal officials only prosecute cases exceeding US $5000 in value. Three improvements to card security have been introduced to the more common credit card networks but none has proven to help reduce credit card fraud so far. First, the on-line verification system used by merchants is being enhanced to require a 4 digit Personal Identification Number (PIN) known only to the card holder. Second, the cards themselves are being replaced with similar-looking tamper-resistant smart cards which are intended to make forgery more difficult. The majority of smartcard (IC card) based credit cards comply with the EMV (Europay MasterCard Visa) standard. Third, an additional 3 or 4 digit code is now present on the back of most cards, for use in "card not present" transactions. See CVV2 for more information. The way credit card owners pay off their balances has a tremendous effect on their credit history. All the information is collected by credit bureaus. The credit information stays on the credit report, depending on the jurisdiction and the situation, for 1, 2, or even 10 years after the debt is repaid. Profits and losses In recent times, credit card portfolios have been very profitable for banks, largely due to the booming economy of the late nineties. However, in the case of credit cards, such high returns go hand in hand with risk, since the business is essentially one of making unsecured (uncollateralized) loans, and thus dependent on borrowers not to default in large numbers. Costs Credit card issuers (banks) have several types of costs: Interest expenses Banks generally borrow the money they then lend to their customers. As they receive very low-interest loans from other firms, they may borrow as much as their customers require, while lending their capital to other borrowers at higher rates. If the card issuer charges 15% on money lent to users, and it costs 5% to borrow the money to lend, and the balance sits with the cardholder for a year, the issuer earns 10% on the loan. This 5% difference is the "interest expense" and the 10% is the "net interest spread". Operating costs This is the cost of running the credit card portfolio, including everything from paying the executives who run the company to printing the plastics, to mailing the statements, to

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running the computers that keep track of every cardholder's balance, to taking the many phone calls which cardholders place to their issuer, to protecting the customers from fraud rings. Depending on the issuer, marketing programs are also a significant portion of expenses. Charge offs When a consumer becomes severely delinquent on a debt (often at the point of six months without payment), the creditor may declare the debt to be a charge-off. It will then be listed as such on the debtor's credit bureau reports (Equifax, for instance, lists "R9" in the "status" column to denote a charge-off.) The item will include relevant dates, and the amount of the bad debt. A charge-off is considered to be "written off as uncollectable." To banks, bad debts and even fraud are simply part of the cost of doing business. However, the debt is still legally valid, and the creditor can attempt to collect the full amount for the time periods permitted under state law, which is usually 3 to 7 years. This includes contacts from internal collections staff, or more likely, an outside collection agency. If the amount is large (generally over $1500–$2000), there is the possibility of a lawsuit or arbitration. In the US, as the charge off number climbs or becomes erratic, officials from the Federal Reserve take a close look at the finances of the bank and may impose various operating strictures on the bank, and in the most extreme cases, may close the bank entirely. Rewards Many credit card customers receive rewards, such as frequent flier points, gift certificates, or cash back as an incentive to use the card. Rewards are generally tied to purchasing an item or service on the card, which may or may not include balance transfers, cash advances, or other special uses. Depending on the type of card, rewards will generally cost the issuer between 0.25% and 2.0% of the spread. Networks such as Visa or MasterCard have increased their fees to allow issuers to fund their rewards system. Some issuers discourage redemption by forcing the cardholder to call customer service for rewards. On their servicing website, redeeming awards is usually a feature that is very well hidden by the issuers. Others encourage redemption for lower cost merchandise; instead of an airline ticket, which is very expensive to an issuer, the cardholder may be encouraged to redeem for a gift certificate instead. With a fractured and competitive environment, rewards points cut dramatically into an issuer's bottom line, and rewards points and related incentives must be carefully managed to ensure a profitable portfolio. Unlike unused gift cards, in whose case the breakage in certain US states goes to the state's treasury, unredeemed credit card points are retained by the issuer. Fraud The cost of fraud is high; in the UK in 2004 it was over £500 million. When a card is stolen, or an unauthorized duplicate made, most card issuers will refund some or all of 138 B.Com-Banking Law and Practice

the charges that the customer has received for things they did not buy. These refunds will, in some cases, be at the expense of the merchant, especially in mail order cases where the merchant cannot claim sight of the card. In several countries, merchants will lose the money if no ID card was asked for, therefore merchants usually require ID card in these countries. Credit card companies generally guarantee the merchant will be paid on legitimate transactions regardless of whether the consumer pays their credit card bill.

Revenues Offsetting costs are the following revenues:

Interchange fee In addition to fees paid by the card holder, merchants must also pay interchange fees to the card-issuing bank and the card association. For a typical credit card issuer, revenues may represent about a quarter of total revenues.. These fees are typically from 1 to 6 percent of each sale, but will vary not only from merchant to merchant (large merchants can negotiate lower rates, but also from card to card, with business cards and rewards cards generally costing the merchants more to process. The interchange fee that applies to a particular transaction is also affected by many other variables including the type of merchant, the merchant's total card sales volume, the merchant's average transaction amount, whether the cards are physically present, if the card's magnetic stripe is read or if the transaction is hand-keyed or entered on a website, the specific type of card, when the transaction is settled, and the authorized and settled transaction amounts. Interchange fees may consume over 50 percent of profits from card sales for some merchants (such as supermarkets) that operate on slim margins. In some cases, merchants add a surcharge to the credit cards to cover the interchange fee, enouraging their customers to instead use cash, debit cards, or even cheques.

Interest on outstanding balances Interest charges vary widely from card issuer to card issuer. Often, there are "teaser" rates in effect for initial periods of time (as low as zero percent for, say, six months), whereas regular rates can be as high as 40 percent. In the U.S. there is no federal limit on the interest or late fees credit card issuers can charge; the interest rates are set by the states, with some states such as South Dakota, having no ceiling on interest rates and fees, inviting some banks to establish their credit card operations there. Other states, for example Delaware, have very weak usury laws. The teaser rate no longer applies if the customer doesn't pay his bills on time, and is replaced by a penalty interest rate (for example, 24.99%) that applies retroactively.

Fees charged to customers The major fees are for:

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• Late payments or overdue payments • Charges that result in exceeding the credit limit on the card (whether done deliberately or by mistake), called overlimit fees • Returned cheque fees or payment processing fees (eg phone payment fee) • Cash advances and convenience cheques (often 3% of the amount). Transactions in a foreign currency (as much as 3% of the amount). A few financial institutions do not charge a fee for this. • Membership fees (annual or monthly), sometimes a percentage of the credit limit. • Exchange rate loading fees (these may sometimes not be reported on the customer's statement, even when they are applied) Neutral consumer resources Canada The Government of Canada maintains a database of the fees, features, interest rates and reward programs of nearly 200 credit cards available in Canada. This database is updated on a quarterly basis with information supplied by the credit card issuing companies. Information in the database is published every quarter on the website of the Financial Consumer Agency of Canada (FCAC). Information in the database is published in two formats. It is available in PDF comparison tables that break down the information according to type of credit card, allowing the reader to compare the features of, for example, all the student credit cards in the database. The database also feeds into an interactive tool on the FCAC website. The interactive tool uses several interview-type questions to build a profile of the user's credit card usage habits and needs, eliminating unsuitable choices based on the profile, so that the user is presented with a small number of credit cards and the ability to carry out detailed comparisons of features, reward programs, interest rates, etc.

History The concept of using a card for purchases was described in 1887 by Edward Bellamy in his utopian novel Looking Backward. Bellamy used the term credit card eleven times in this novel. The modern credit card was the successor of a variety of merchant credit schemes. It was first used in the 1920s, in the United States, specifically to sell fuel to a growing number of automobile owners. In 1938 several companies started to accept each other's cards. Western Union had begun issuing charge cards to its frequent customers in 1914.[citation needed] Some charge cards were printed on paper card stock, but were easily counterfeited. The Charge-Plate was an early predecessor to the credit card and used during the 1930s and late 1940s. It was a 2 1/2" x 1 1/4" rectangle of sheet metal, similar to a military dog tag, that was embossed with the customer's name, city and state (no address). It held a 140 B.Com-Banking Law and Practice

small paper card for a signature. It was laid in the imprinter first, then a charge slip on top of it, onto which an inked ribbon was pressed.[26] Charga-Plate was a trademark of Farrington Manufacturing Co. Charga-Plates were issued by large-scale merchants to their regular customers, much like department store credit cards of today. In some cases, the plates were kept in the issuing store rather than held by customers. When an authorized user made a purchase, a clerk retrieved the plate from the store's files and then processed the purchase. Charga-Plates speeded back-office bookkeeping that was done manually in paper ledgers in each store, before computers. The concept of paying different merchants using the same card was invented in 1950 by Ralph Schneider and Frank X. McNamara, founders of Diners Club, to consolidate multiple cards. The Diners Club, which was created partially through a merger with Dine and Sign, produced the first "general purpose" charge card, and required the entire bill to be paid with each statement. That was followed by Carte Blanche and in 1958 by American Express which created a worldwide credit card network. Bank of America created the BankAmericard in 1958, a product which, with its overseas affiliates, eventually evolved into the Visa system. MasterCard came to being in 1966 when a group of credit-issuing banks established Master Charge; it received a significant boost when Citibank merged its proprietary Everything Card, launched in 1967, into Master Charge in 1969. The fractured nature of the U.S. banking system meant that credit cards became an effective way for those who were traveling around the country to move their credit to places where they could not directly use their banking facilities. In 1966 Barclaycard in the UK launched the first credit card outside of the U.S. There are now countless variations on the basic concept of revolving credit for individuals (as issued by banks and honored by a network of financial institutions), including organization-branded credit cards, corporate-user credit cards, store cards and so on. In contrast, although having reached very high adoption levels in the US, Canada and the UK, it is important to note that many cultures were much more cash-oriented in the latter half of the twentieth century, or had developed alternative forms of cash-less payments, such as or the (Germany, France, Switzerland, and others). In these places, the take-up of credit cards was initially much slower. It took until the 1990s to reach anything like the percentage market-penetration levels achieved in the US, Canada, or the UK. In many countries acceptance still remains poor as the use of a credit card system depends on the banking system being perceived as reliable. In contrast, because of the legislative framework surrounding banking system overdrafts, some countries, France in particular, were much faster to develop and adopt chip-based credit cards which are now seen as major anti-fraud credit devices. The design of the credit card itself has become a major selling point in recent years. The value of the card to the issuer is often related to the customer's usage of the card, or to the customer's financial worth. This has led to the rise of Co-Brand and Affinity cards - where the card design is related to the "affinity" (a university, for example) leading to

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higher card usage. In most cases a percentage of the value of the card is returned to the affinity group.

5.3.3 Collectible credit cards A growing field of numismatics (study of money), or more specifically exonumia (study of money-like objects), credit card collectors seek to collect various embodiments of credit from the now familiar plastic cards to older paper merchant cards, and even metal tokens that were accepted as merchant credit cards. Early credit cards were made of celluloid plastic, then metal and fiber, then paper, and are now mostly plastic. Controversy Credit card debt has soared, particularly among young people. Since the late 1990s, lawmakers, consumer advocacy groups, college officials and other higher education affiliates have become increasingly concerned about the rising use of credit cards among college students. The major credit card companies have been accused of targeting a younger audience, in particular college students, many of whom are already in debt with college tuition fees and college loans and who typically are less experienced at managing their own finances. A 2006 documentary film titled Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders deals with this subject in detail.[27] The nonprofit group Americans for Fairness in Lending works with Maxed Out to educate Americans about credit card abuse. Another controversial area is the feature of many North American credit card contracts. When a cardholder is late paying a particular credit card issuer, that card's interest rate can be raised, often considerably. With universal default, a customer's other credit cards, for which the customer may be current on payments, may also have their rates and/or credit limit changed. This universal default feature allows creditors to periodically check cardholders' credit portfolios to view trade, allowing these other institutions to decrease the credit limit and/or increase rates on cardholders who may be late with another credit card issuer. Being late on one credit card will potentially affect all the cardholder's credit cards. Citibank voluntarily stopped this practice in March 2007 and Chase stopped the practice in November 2007. The fact that credit card companies can change the interest rate on debts that were incurred when a different rate of interest was in place is similar to adjustable rate mortgages where interest rates on current debt may rise. However, in both cases this is agreed to in advance, and is a trade off that allows a lower initial rate as well as the possibility of an even lower rate (mortgages, if interest rates fall) or perpetually keeping a below-market rate (credit cards, if the user makes his debt payments on time). Another controversial area is the trailing interest issue. Trailing interest is the practice of charging interest on the entire bill no matter what percentage of it is paid. U.S Senator Carl Levin raised the issue at a U.S Senate Hearing of millions of Americans whom he said are slaves to hidden fees, compounding interest and cryptic terms. Their woes were heard in a Senate Permanent Subcommittee on Investigations hearing which was chaired 142 B.Com-Banking Law and Practice

by Senator Levin who said that he intends to keep the spotlight on credit card companies and that legislative action may be necessary to purge the industry. In the United States, some have called for Congress to enact additional regulations on the industry; to expand the disclosure box clearly disclosing rate hikes, use plain language, incorporate balance payoff disclosures, and also to outlaw universal default. At a congress hearing around March 1, 2007, Citibank announced it would no longer practice this, effective immediately. Opponents of such regulation argue that customers must become more proactive and self-responsible in evaluating and negotiating terms with credit providers. Some of the nation's influential top credit card issuers, who are among the top fifty corporate contributors to political campaigns, successfully opposed it. Hidden costs In the United Kingdom, merchants won the right through The Credit Cards (Price Discrimination) Order 1990 to charge customers different prices according to the payment method. As of 2007, the United Kingdom was one of the world's most credit- card-intensive country, with 2.4 credit cards per consumer. In the United States, until 1984 federal law prohibited surcharges on card transactions. Although the federal Truth in Lending Act provisions that prohibited surcharges expired that year, a number of states have since enacted laws that continue to outlaw the practice; California, Colorado, Connecticut, Florida, Kansas, Massachusetts, Maine, New York, Oklahoma, and Texas have laws against surcharges. As of 2006, the United States probably had one of the world's if not the top ratio of credit cards per capita, with 984 million bank-issued Visa and MasterCard credit card and debit card accounts alone for an adult population of roughly 220 million people. The credit card per US capita ratio was nearly 4:1 (as of 2003) and as high as 5:1 (as of 2006). Redlining Credit Card redlining is a spatially discriminatory practice among credit card issuers of providing different amounts of credit to different areas, based on their ethnic-minority composition, rather than on economic criteria, such as the potential profitability of operating in those areas. Credit card numbering The numbers found on credit cards have a certain amount of internal structure, and share a common numbering scheme. The card number's prefix, called the Bank Identification Number, is the sequence of digits at the beginning of the number that determine the bank to which a credit card number belongs. This is the first six digits for MasterCard and Visa cards. The next nine digits are the individual account number, and the final digit is a validity check code. In addition to the main credit card number, credit cards also carry issue and expiration dates (given to the nearest month), as well as extra codes such as issue numbers and

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security codes. Not all credit cards have the same sets of extra codes nor do they use the same number of digits.

Credit cards in ATMs Many credit cards can also be used in an ATM to withdraw money against the credit limit extended to the card, but many card issuers charge interest on cash advances before they do so on purchases. The interest on cash advances is commonly charged from the date the withdrawal is made, rather than the monthly billing date. Many card issuers levy a commission for cash withdrawals, even if the ATM belongs to the same bank as the card issuer. Merchants do not offer cashback on credit card transactions because they would pay a percentage commission of the additional cash amount to their bank or merchant services provider, thereby making it uneconomical. Many credit card companies will also, when applying payments to a card, do so at the end of a billing cycle, and apply those payments to everything before cash advances. For this reason, many consumers have large cash balances, which have no grace period and incur interest at a rate that is (usually) higher than the purchase rate, and will carry those balance for years, even if they pay off their statement balance each month.

Credit cards as funding for entrepreneurs Credit cards are a creative, yet often risky way for entrepreneurs to acquire capital for their start ups when more conventional financing is unavailable. It is rumoured that Larry Page and Sergey Brin's start up of Google was financed by credit cards to buy the necessary computers and office equipment, more specifically "a terabyte of hard disks". Similarly, filmmaker Robert Townsend financed part of Hollywood Shuffle using credit cards. Director Kevin Smith funded Clerks in part by maxing out several credit cards. Actor Richard Hatch also financed his production of Battlestar Galactica: The Second Coming partly through his credit cards. Famed hedge fund manager Bruce Kovner began his career (and, later on, his firm Caxton Associates) in financial markets by borrowing from his credit card

5.4 AUTOMATED TELLER MACHINE

An automated teller machine (ATM) is a computerized telecommunications device that provides the customers of a financial institution with access to financial transactions in a public space without the need for a human clerk or bank teller. On most modern ATMs, the customer is identified by inserting a plastic ATM card with a magnetic stripe or a plastic smartcard with a chip, that contains a unique card number and some security information, such as an expiration date or CVC (CVV). Security is provided by the customer entering a personal identification number (PIN). Using an ATM, customers can access their bank accounts in order to make cash withdrawals (or credit card cash advances) and check their account balances as well as

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purchasing mobile cell phone prepaid credit. ATMs are known by various other names including automated banking machine, money machine, bank machine, cash machine, hole-in-the-wall, cashpoint, Bancomat (in various countries in Europe and Russia), (after a registered trade mark, in Portugal), and Any Time Money (in India The first mechanical cash dispenser was developed and built by Luther George Simjian and installed in 1939 in New York City by the City Bank of New York, but removed after 6 months due to the lack of customer acceptance. Thereafter, the history of ATMs paused for over 25 years, until De La Rue developed the first electronic ATM, which was installed first in Enfield Town in North London, United Kingdom on 27 June 1967 by Barclays Bank. This instance of the invention is credited to John Shepherd-Barron, although various other engineers were awarded patents for related technologies at the time. Shepherd-Barron was awarded an OBE in the 2005 New Year's Honours List. The first person to use the machine was the British variety artist and actor Reg Varney. The first ATMs accepted only a single-use token or voucher, which was retained by the machine. These worked on various principles including radiation and low-coercivity magnetism that was wiped by the card reader to make fraud more difficult. The machine dispensed pre-packaged envelopes containing ten pounds sterling. The idea of a PIN stored on the card was developed by the British engineer James Goodfellow in 1965. In 1968 the networked ATM was pioneered in Dallas, Texas, by Donald Wetzel who was a department head at an automated baggage-handling company called Docutel. In 1995 the Smithsonian's National Museum of American History recognised Docutel and Wetzel as the inventors of the networked ATM.[citation needed] ATMs first came into wide UK use in 1973; the IBM 2984 was designed at the request of Lloyds Bank. The 2984 CIT (Cash Issuing Terminal) was the first true Cashpoint, similar in function to today's machines; Cashpoint is still a registered trademark of Lloyds TSB in the U.K. All were online and issued a variable amount which was immediately deducted from the account. A small number of 2984s were supplied to a US bank. Notable historical models of ATMs include the IBM 3624 and 473x series, Diebold 10xx and TABS 9000 series, and NCR 5xxx series. Location ATMs are placed not only near or inside the premises of banks, but also in locations such as shopping centers/malls, airports, grocery stores, petrol/gas stations, restaurants, or any place large numbers of people may gather. These represent two types of ATM installations: on and off premise. On premise ATMs are typically more advanced, multi- function machines that complement an actual bank branch's capabilities and thus more expensive. Off premise machines are deployed by financial institutions and also ISOs (or Independent Sales Organizations) where there is usually just a straight need for cash, so they typically are the cheaper mono-function devices. In Canada, when an ATM is not operated by a financial institution it is known as a "White Label ATM". In North America, banks often have drive-thru lanes providing access to ATMs.

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Many ATMs have a sign above them indicating the name of the bank or organization owning the ATM, and possibly including the list of ATM networks to which that machine is connected. This type of sign is called a topper. Financial networks Most ATMs are connected to interbank networks, enabling people to withdraw and deposit money from machines not belonging to the bank where they have their account or in the country where their accounts are held (enabling cash withdrawals in local currency). Some examples of interbank networks include PULSE, PLUS, Cirrus, Interac and LINK. ATMs rely on authorization of a financial transaction by the card issuer or other authorizing institution via the communications network. This is often performed through an ISO 8583 messaging system. Many banks charge ATM usage fees. In some cases, these fees are charged solely to users who are not customers of the bank where the ATM is installed; in other cases, they apply to all users. Many people[who?] oppose these fees because ATMs are actually less costly for banks than withdrawals from human tellers.[citation needed] In order to allow a more diverse range of devices to attach to their networks, some interbank networks have passed rules expanding the definition of an ATM to be a terminal that either has the vault within its footprint or utilizes the vault or cash drawer within the merchant establishment, which allows for the use of a scrip cash dispenser. ATMs typically connect directly to their ATM Controller via either a dial-up modem over a telephone line or directly via a leased line. Leased lines are preferable to POTS lines because they require less time to establish a connection. Leased lines may be comparatively expensive to operate versus a POTS line, meaning less-trafficked machines will usually rely on a dial-up modem. That dilemma may be solved as high- speed Internet VPN connections become more ubiquitous. Common lower-level layer communication protocols used by ATMs to communicate back to the bank include SNA over SDLC, TC500 over Async, X.25, and TCP/IP over Ethernet. In addition to methods employed for transaction security and secrecy, all communications traffic between the ATM and the Transaction Processor may also be encrypted via methods such as SSL. Global use There are no hard international or government-compiled numbers totaling the complete number of ATMs in use worldwide. Estimates developed by ATMIA place the number of ATMs in use at over 1.5 million as of August 2006. For the purpose of analyzing ATM usage around the world, financial institutions generally divide the world into seven regions, due to the penetration rates, usage statistics, and features deployed. Four regions (USA, Canada, Europe, and Japan) have high numbers of ATMs per million people and generally slowing growth rates. Despite the large number of ATMs, there is additional demand for machines in the Asia/Pacific 146 B.Com-Banking Law and Practice

area as well as in Latin America. ATMs have yet to reach high numbers in the Near East/Africa. The world's most northerly installed ATM is located at Longyearbyen, Svalbard, Norway. The world's most southerly installed ATM is located at McMurdo Station, Antarctica. While ATMs are ubiquitous on modern cruise ships, ATMs can also be found on some US Navy ships. In the United Kingdom, an ATM may be colloqually referred to as a "Cashpoint", named after the Lloyds Bank ATM brand, or "hole-in-the-wall", an expression. after which the equivalent Barclays brand was later named. In Scotland the term Cashline has become a generic term for an ATM, based on the branding from the Royal Bank of Scotland. In the Republic of Ireland, an ATM is commonly referred to as a "Banklink", named after the Allied Irish Bank brand of machines. The slang term "Drink-link" is used to describe ATMs as they are very often used on nights out when extra cash is called for.

5.4.1 Hardware An ATM is typically made up of the following devices: • CPU (to control the user interface and transaction devices) • Magnetic and/or Chip card reader (to identify the customer) • PIN Pad (similar in layout to a Touch tone or Calculator keypad), often manufactured as part of a secure enclosure. • , generally within a secure enclosure. • Display (used by the customer for performing the transaction) • Function key buttons (usually close to the display) or a Touchscreen (used to select the various aspects of the transaction) • Record Printer (to provide the customer with a record of their transaction) • Vault (to store the parts of the machinery requiring restricted access) • Housing (for aesthetics and to attach signage to) Recently, due to heavier computing demands and the falling price of computer-like architectures, ATMs have moved away from custom hardware architectures using microcontrollers and/or application-specific integrated circuits to adopting a hardware architecture that is very similar to a personal computer. Many ATMs are now able to use operating systems such as Microsoft Windows and Linux. Although it is undoubtedly cheaper to use commercial off-the-shelf hardware, it does make ATMs vulnerable to the same sort of problems exhibited by conventional computers.

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Business owners often lease ATM terminals from ATM service providers such as United Cash Solutions.

Vaults The vault of an ATM is within the footprint of the device itself and is where items of value are kept. Scrip cash dispensers do not incorporate a vault. Mechanisms found inside the vault may include: • Dispensing mechanism (to provide cash or other items of value) • Deposit mechanism, including a Cheque Processing Module and Batch Note Acceptor (to allow the customer to make deposits) • Security sensors (Magnetic, Thermal, Seismic) • Locks: (to ensure controlled access to the contents of the vault) ATM vaults are supplied by manufacturers in several grades. Factors influencing vault grade selection include cost, weight, regulatory requirements, ATM type, operator risk avoidance practices, and internal volume requirements. Industry standard vault configurations include Underwriters Laboratories UL-291 "Business Hours" and Level 1 Safes, RAL TL-30 derivatives, and CEN EN 1143-1:2005 - CEN III/VdS and CEN IV/LGAI/VdS. ATM manufacturers recommend that vaults be attached to the floor to prevent theft.

5.4.2 Software With the migration to commodity PC hardware, standard commercial "off-the-shelf" operating systems and programming environments can be used inside of ATMs. Typical platforms used in ATM development include RMX, OS/2, and Microsoft operating systems (such as MS-DOS, PC-DOS, Windows NT, Windows 2000, Windows XP Professional, or Windows XP Embedded). Java, Linux and Unix may also be used in these environments. Linux is also finding some reception in the ATM marketplace. An example of this is Banrisul, the largest bank in the south of Brazil, which has replaced the MS-DOS operating systems in its ATMs with Linux. is also migrating ATMs to Linux. Common application layer transaction protocols, such as Diebold 911 or 912, IBM PBM, and NCR NDC or NDC+ provide emulation of older generations of hardware on newer platforms with incremental extensions made over time to address new capabilities, although companies like NCR continuously improve these protocols issuing newer versions (latest NCR Aptra Advance NDC Version 3.x.y (Where x.y are subversions). Most major ATM manufacturers provide software packages that

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implement these protocols. Newer protocols such as IFX have yet to find wide acceptance by transaction processors. With the move to a more standardized software base, financial institutions have been increasingly interested in the ability to pick and choose the application programs that drive their equipment. WOSA/XFS, now known as CEN XFS (or simply XFS), provides a common API for accessing and manipulating the various devices of an ATM. J/XFS is a Java implementation of the CEN XFS API. While the perceived benefit of XFS is similar to the Java's "Write once, run anywhere" mantra, often different ATM hardware vendors have different interpretations of the XFS standard. The result of these differences in interpretation means that ATM applications typically use a middleware to even out the differences between various platforms. Notable XFS middleware platforms include Triton PRISM, Diebold Agilis, CR2 BankWorld, KAL Kalignite, NCR Corporation Aptra Edge, Phoenix Interactive VISTAatm, and Wincor Nixdorf Protopas. With the move of ATMs to industry-standard computing environments, concern has risen about the integrity of the ATM's software stack.

Security Security, as it relates to ATMs, has several dimensions. ATMs also provide a practical demonstration of a number of security systems and concepts operating together and how various security concerns are dealt with.

Physical Early ATM security focused on making the ATMs invulnerable to physical attack; they were effectively safes with dispenser mechanisms. A number of attacks on ATMs resulted, with thieves attempting to steal entire ATMs by ram-raiding. Since late 1990s, criminal groups operating in Japan improved ram-raiding by stealing and using a truck loaded with a heavy construction machinery to effectively demolish or uproot an entire ATM and any housing to steal its cash. Another attack method is to seal all openings of the ATM with silicone and fill the vault with a combustible gas or to place an explosive inside, attached, or near the ATM.[29] This gas or explosive is ignited and the vault is opened or distorted by the force of the resulting explosion and the criminals can break in. Modern ATM physical security, per other modern money-handling security, concentrates on denying the use of the money inside the machine to a thief, by means of techniques such as dye markers and smoke canisters.

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Transactional secrecy and integrity The security of ATM transactions relies mostly on the integrity of the secure cryptoprocessor: the ATM often uses commodity components that are not considered to be "trusted systems". Encryption of personal information, required by law in many jurisdictions, is used to prevent fraud. Sensitive data in ATM transactions are usually encrypted with DES, but transaction processors now usually require the use of Triple DES.[31] Remote Key Loading techniques may be used to ensure the secrecy of the initialization of the encryption keys in the ATM. Message Authentication Code (MAC) or Partial MAC may also be used to ensure messages have not been tampered with while in transit between the ATM and the financial network.

Customer identity integrity There have also been a number of incidents of fraud where criminals have attached fake keypads or card readers to existing machines. These have then been used to record customers' PINs and bank card information in order to gain unauthorized access to their accounts. Various ATM manufacturers have put in place countermeasures to protect the equipment they manufacture from these threats. Alternate methods to verify cardholder identities have been tested and deployed in some countries, such as finger and palm vein patterns, iris, and facial recognition technologies. However, recently, cheaper mass production equipment has been developed and being installed in machines globally that detect the presence of foreign objects on the front of ATM's, current tests have shown 99% detection success for all types of skimming device.

Device operation integrity Openings on the customer-side of ATMs are often covered by mechanical shutters to prevent tampering with the mechanisms when they are not in use. Alarm sensors are placed inside the ATM and in ATM servicing areas to alert their operators when doors have been opened by unauthorized personnel. Rules are usually set by the government or ATM operating body that dictate what happens when integrity systems fail. Depending on the jurisdiction, a bank may or may not be liable when an attempt is made to dispense a customer's money from an ATM and the money either gets outside of the ATM's vault, or was exposed in a non-secure fashion, or they are unable to determine the state of the money after a failed transaction. Bank customers often complain that banks have made it difficult to recover money lost in this way, but this is often complicated by the bank's own internal policies regarding suspicious activities typical of the criminal element. Customer security In some countries, multiple security cameras and security guards are a common feature.[38] In the United States, The NY State Comptroller's Office has criticized the NY 150 B.Com-Banking Law and Practice

State Department of Banking for not following through on safety inspections of ATMs in high crime areas. Critics of ATM operators assert that the issue of customer security appears to have been abandoned by the banking industry; it has been suggested that efforts are now more concentrated on deterrent legislation than on solving the problem of forced withdrawals. At least as far back as July 30, 1986, critics of the industry have called for the adoption of an emergency PIN system for ATMs, where the user is able to send a silent alarm in response to a threat. Legislative efforts to require an emergency PIN system have appeared in Illinois, Kansas and Georgia, but none have succeeded as of yet.

Alternative uses Although ATMs were originally developed as just cash dispensers, they have evolved to include many other bank-related functions. In some countries, especially those which benefit from a fully integrated cross-bank ATM network (e.g.: Multibanco in Portugal), ATMs include many functions which are not directly related to the management of one's own bank account, such as:

• Deposit currency recognition, acceptance, and recycling • Paying routine bills, fees, and taxes (utilities, phone bills, social security, legal fees, taxes, etc.) • Printing bank statements • Updating passbooks • Loading monetary value into stored value cards • Purchasing

o Postage stamps.

o Lottery tickets

o Train tickets

o Concert tickets

o Shopping mall gift certificates. • Games and promotional features • Donating to charities • Cheque Processing Module • Adding pre-paid cell phone credit.

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Increasingly banks are seeking to use the ATM as a sales device to deliver pre approved loans and targeted advertising using products such as ITM (the Intelligent Teller Machine) from CR2 or Aptra Relate from NCR. ATMs can also act as an advertising channel for companies to advertise their own products or third-party products and services. In Canada, ATMs are called guichets automatiques in French and sometimes "Bank Machines" in English. The Interac shared cash network does not allow for the selling of goods from ATMs due to specific security requirements for PIN entry when buying goods. CIBC machines in Canada, are able to top-up the minutes on certain pay as you go phone's. • Biometrics, where authorization of transactions is based on the scanning of a customer's fingerprint, iris, face, etc. Biometrics on ATMs can be found in Asia. • Cheque/Cash Acceptance, where the ATM accepts and recognise cheques and/or currency without using envelopes Expected to grow in importance in the US through Check 21 legislation. • Bar code scanning • On-demand printing of "items of value" (such as movie tickets, traveler's cheques, etc.) • Dispensing additional media (such as phone cards) • Co-ordination of ATMs with mobile phones • Customer-specific advertising • Integration with non-banking equipment

Reliability Before an ATM is placed in a public place, it typically has undergone extensive testing with both test money and the backend computer systems that allow it to perform transactions. Banking customers also have come to expect high reliability in their ATMs, which provides incentives to ATM providers to minimize machine and network failures. Financial consequences of incorrect machine operation also provide high degrees of incentive to minimize malfunctions. ATMs and the supporting electronic financial networks are generally very reliable, with industry benchmarks typically producing 98.25% customer availability for ATMs[63] and up to 99.999% availability for host systems. If ATMs do go out of service, customers could be left without the ability to make transactions until the beginning of their bank's next time of opening hours. Of course, not all errors are to the detriment of customers; there have been cases of machines giving out money without debiting the account, or giving out higher value notes as a result of incorrect denomination of banknote being loaded in the money

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cassettes. Errors that can occur may be mechanical (such as card transport mechanisms; keypads; hard disk failures); software (such as operating system; device driver; application); communications; or purely down to operator error. To aid in reliability, some ATMs print each transaction to a roll paper journal that is stored inside the ATM, which allows both the users of the ATMs and the related financial institutions to settle things based on the records in the journal in case there is a dispute. In some cases, transactions are posted to an electronic journal to remove the cost of supplying journal paper to the ATM and for more convenient searching of data. Improper money checking can cause the possibility of a customer receiving counterfeit banknotes from an ATM. While bank personnel are generally trained better at spotting and removing counterfeit cash, the resulting ATM money supplies used by banks provide no absolute guarantee for proper banknotes, as the Federal Criminal Police Office of Germany has confirmed that there are regularly incidents of false banknotes having been dispensed through bank ATMs. Some ATMs may be stocked and wholly owned by outside companies, which can further complicate this problem. Bill validation technology can be used by ATM providers to help ensure the authenticity of the cash before it is stocked in an ATM; ATMs that have cash recycling capabilities include this capability.

Fraud As with any device containing objects of value, ATMs and the systems they depend on to function are the targets of fraud. Fraud against ATMs and people's attempts to use them takes several forms. The first known instance of a fake ATM was installed at a shopping mall in Manchester, Connecticut in 1993. By modifying the inner workings of a Fujitsu model 7020 ATM, a criminal gang known as The Bucklands Boys were able to steal information from cards inserted into the machine by customers. In some cases, bank fraud could occur at ATMs whereby the bank accidentally stocks the ATM with bills in the wrong denomination, therefore giving the customer more money than should be dispensed.[69] The result of receiving too much money may be influenced on the card holder agreement in place between the customer and the bank. In a variation of this, WAVY-TV reported an incident in Virginia Beach of September 2006 where a hacker who had probably obtained a factory-default admin password for a gas station's white label ATM caused the unit to assume it was loaded with $5 USD bills instead of $20s, enabling himself—and many subsequent customers—to walk away with four times the money they said they wanted to withdraw. ATM behavior can change during what is called "stand-in" time, where the bank's cash dispensing network is unable to access databases that contain account information (possibly for database maintenance). In order to give customers access to cash, customers may be allowed to withdraw cash up to a certain amount that may be less than 153 B.Com-Banking Law and Practice

their usual daily withdrawal limit, but may still exceed the amount of available money in their account, which could result in fraud. Card fraud In an attempt to prevent criminals from shoulder surfing the customer's PINs, some banks draw privacy areas on the floor. For a low-tech form of fraud, the easiest is to simply steal a customer's card. A later variant of this approach is to trap the card inside of the ATM's card reader with a device often referred to as a Lebanese loop. When the customer gets frustrated by not getting the card back and walks away from the machine, the criminal is able to remove the card and withdraw cash from the customer's account. Another simple form of fraud involves attempting to get the customer's bank to issue a new card and stealing it from their mail. Some ATMs may put up warning messages to customers to not use them when it detects possible tampering The concept and various methods of copying the contents of an ATM card's magnetic stripe on to a duplicate card to access other people's financial information was well known in the hacking communities by late 1990. In 1996 Andrew Stone, a computer security consultant from Hampshire in the UK, was convicted of stealing more than £1 million (at the time equivalent to US$1.6 million) by pointing high definition video cameras at ATMs from a considerable distance, and by recording the card numbers, expiry dates, etc. from the embossed detail on the ATM cards along with video footage of the PINs being entered. After getting all the information from the videotapes, he was able to produce clone cards which not only allowed him to withdraw the full daily limit for each account, but also allowed him to sidestep withdrawal limits by using multiple copied cards. In court, it was shown that he could withdraw as much as £10,000 per hour by using this method. Stone was sentenced to five years and six months in prison. By contrast, a newer high-tech modus operandi involves the installation of a magnetic card reader over the real ATM's card slot and the use of a wireless surveillance camera or a modified digital camera to observe the user's PIN. Card data is then cloned onto a second card and the criminal attempts a standard cash withdrawal. The availability of low-cost commodity wireless cameras and card readers has made it a relatively simple form of fraud, with comparatively low risk to the fraudsters. In an attempt to stop these practices, countermeasures against card cloning have been developed by the banking industry, in particular by the use of smart cards which cannot easily be copied or spoofed by un-authenticated devices, and by attempting to make the outside of their ATMs tamper evident. Older chip-card security systems include the French Carte Bleue, Visa Cash, , Blue from American Express and EMV '96 or

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EMV 3.11. The most actively developed form of smart card security in the industry today is known as EMV 2000 or EMV 4.x. EMV is widely used in the UK (Chip and PIN) and other parts of Europe, but when it is not available in a specific area, ATMs must fallback to using the easy to copy magnetic stripe to perform transactions. This fallback behaviour can be exploited. However the fallback option has been removed by several UK banks, meaning if the chip is not read, the transaction will be declined.

5.4.3 Related devices A Talking ATM is a type of ATM that provides audible instructions so that persons who cannot read an ATM screen can independently use the machine. All audible information is delivered privately through a standard headphone jack on the face of the machine. Alternatively, some banks such as the Nordea and Swedbank use a built-in external speaker which may be invoked by pressing the talk button on the keypad. Information is delivered to the customer either through pre-recorded sound files or via text-to-speech speech synthesis. A postal interactive kiosk may also share many of the same components as an ATM (including a vault), but only dispenses items relating to postage. A scrip cash dispenser may share many of the same components as an ATM, but lacks the ability to dispense physical cash and consequently requires no vault. Instead, the customer requests a withdrawal transaction from the machine, which prints a receipt. The customer then takes this receipt to a nearby sales clerk, who then exchanges it for cash from the till. A Teller Assist Unit may also share many of the same components as an ATM (including a vault), but they are distinct in that they are designed to be operated solely by trained personnel and not the general public, they do not integrate directly into inter bank networks, and are usually controlled by a computer that is not directly integrated into the overall construction of the unit.

5.5 LESSON END ACTIVITY

1) What is a Letter of Credit and explain its legal basis? 2) What are the risks involved in a DC translation? 3) Write a formal Letter of credit with imaginary figures 4) What is a Bills of exchange and how it differs from Letter of Credit? 5) Explain the difference between a Credit Card and Debit Card 6) How does the ATM work?

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Book for Reference: 1. Sundharam and Varshney, Banking theory Law & Practice, sultan Chand & Sons., New Delhi 2. Banking Regulation Act. 1949. 3. Reserve Bank of India, Report on currency and Finance 2003-2004 4. Basu : Theory and Practice of Development Banking 5. Reddy & Appanniah : Banking Theory and Practice 6. Natarajan & Gordon: Banking Theory and practice.

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