Negotiable Instruments: Bearer vs Order

• This document is a study guide for Banking and Insurance Topics for Standard X.

Negotiable Instruments (NIS)

• Negotiable instruments are documents transferable by delivery, creating a right for one person in favor of another.
• The Negotiable Instruments Act doesn't define the term but identifies three types of instruments: Checks, Promissory Notes (PN) and Bills of Exchange (BE).
• Negotiable instruments are crucial for settling dues, facilitating trade, and are nearly equivalent to cash.
• The legislation governing these instruments in India is named "The Negotiable Instruments Act," passed in 1881.
• Negotiable Instruments are independent or 'Stand-alone' instruments, self-sufficient in settling disputes without needing other documents.

Features of a Negotiable Instrument

• It must be in writing and signed by the maker or drawer.
• It has an unconditional order or promise to pay a sum of money.
• A check is always drawn on a specified banker and payable on demand.
• The amount must be certain or ascertainable monetarily.
• It's payable to order or bearer.
• The payee must be a certain person, individual, association, cooperative, or company.
• Completion of PN, BE, or check occurs with delivery, either actual or constructive.

Negotiations by delivery

• A PN, BE or check payable to bearer is negotiable by its delivery.
• A promissory note, bill of exchange or check payable to order requires endorsement and delivery by the holder for negotiation.
• Stamping of promissory notes and bills of exchange is necessary as per the Stamp Act when applicable.
• Currency notes act as promissory notes but as per the Reserve Bank of India Act prohibits any other body or person from undertaking this type of monetary issuance.
• A negotiable instrument is transferable by law until maturity, or in the case of checks, until they become stale, generally three months after the issue date.
• A negotiable instrument gives an absolute title to the transferee, protecting those who receive it in good faith and for value.
• The transferee the negotiable instrument becomes the holder in due course.
• The holder has the right to sue on the instrument in their name.

Types of Negotiable Instruments

• Instruments are classified as 'Bearer' or 'Order' instruments.
• An NI is 'payable to bearer' if expressed to be payable so, or the only/last endorsement is an endorsement in blank.
• In the case of bearer instruments this allows that the bearer may claim the monetary instrument (like money) with no other steps.
• The holder of an NI instrument is said to 'payable to order' where it is indicated to be directly paid when the instrument is received by a person.

Inland Instruments

• An NI instrument drawn or made in India, and made payable, or drawn upon any person, resident in India is an ‘Inland instrument'.
• An inland PN is a paper-based promissory note which is exclusively payable in India.
• Instruments not designed as above are foreign.

Demand and Time Instruments

• A PN or BE, in which no payment time is specified, and a check, specifies the monetary instrument must be payable on demand
• A PN and BE are able to be paid whenever demanded or over a time period.
• Cheques, however, are always payable on demand.

Ambiguous Instruments

• An instrument drawn that can be treated as a PN or BE is ambiguous.
• Once treated as a PN or BE, it can’t be treated differently afterward.

Inchoate Instrument

• An inchoate stamped instrument features partially complete negotiable details.
• The receiving party can complete it up to the stamp's value.
• The signing person is liable to any holder in due course.

Quasi Instruments

• Govt. Promissory notes, Hundis, Railway Receipts, and Bills of Lading in India have been deemed as Negotiable by custom.

Checks

• A check is a “Bill of Exchange” on a specified banker, payable on demand, and includes electronic images of truncated forms.
• It is signed by the maker, containing an unconditional order to pay money which must be certain to the order of a known payee
• A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.
• When the drawer writes a cheque, he/she is instructing his/her bank to pay the amount written on the cheque to the intended party
• Checks are either bearer instruments or order instruments.

Essential Features of a Check

• It must be an instrument in writing, signed by the account holder.
• It contains an unconditional order to the drawee bank to pay.
• It involves money and only money, the amount must be certain.
• Payable 'to order' of a payee or to the ‘bearer' of the instrument.
• The payee must be a certain person.
• Transfer happens by 'endorsement and delivery' or by delivery alone.
• It transfers title.
• The holder can sue on the instrument in their name.

Parties to a Check

• Drawer: The account holder.
• Drawee: The drawer's bank.
• Payee: The entity who is entitled to receive monetary instrument (like money).

MICR Band

• MICR (Magnetic Ink Character Recognition) checks were introduced in 1984. Before that, sorting was done manually.
• Sorting machines read characters printed in special ink containing Iron Oxide.
• Before presentation, the amount is 'encoded' on the MICR white band and the total is derived.

Understanding the MICR Code

• The MICR contains numbers printed with the cheque.
• First number is a 6 digit one which is the issued serial.
• Next 9 numbers include the 3-digit MICR City code (PIN code), the Bank code given by the RBI, and the MICR Branch code.

Types of Checks

• Bearer Cheque: Payable to the payee or anyone presenting it.
• Order Cheque: Payable to the specific payee or their endorsee.
• Crossed Cheque: Requires deposit into the payee’s account..
• Uncrossed/Open Cheque: Payable at the bank counter.
• Post-Dated Cheque: Cannot be honored before the date on the cheque.
• Stale Cheque: Not honored after three months from the date.
• Anti-Dated Cheque: Valid up to three months from the earlier date.

Check Truncation System (CTS)

• CTS is an online image-based clearing system.
• Images and MICR data are captured and transmitted electronically.
• An electronic form cheque is a mirror image of a paper check, signed securely.

Endorsement

• An endorsement transfers a negotiable instrument and allows negotiation. Endorsement can be in blank or in full. Partial or conditional endorsements are also possible.
• Describe the role of parties to Negotiable Instruments
• Evaluate the key responsibilities of suitable examples to Negotiable Instruments

Bills of Exchange (BE)

• A "bill of exchange" is a written instrument that outlines instructions, signed by the maker, to pay a certain monetary amount only to the individual identified or the receiver of the documentation.
• BE’s should be writing, directed unconditionally, and signed by the drawer; The drawer, drawee, and payee should be identifiable.
• The bill orders payment of a defined monetary sum, either on sight or at a certain time. Acceptance is essential

Promissory Notes (PN)

• A "promissory note" is a written document containing an unconditional pledge or guarantee of debt, signed by the maker, to be paid only to a single individual for instrument purposes
• Maker pays amount, Payee is to whom amount is payable, and a holder is either payee or the person to whom the note can be endorsed.
• The instrument needs to be writing and signed to a credible standard. A signature or notation is acceptable, but not implied and must acknowledge the payment and must be stamped.
• Amount must always be legal tender of India (or otherwise declared as the agreed amount).
• A PN must always include the amount which is to be paid back with added amounts to the order at known periods of time.
• Can only be created by the Reserve Bank and the government to be valid.

Comparison Between PN and BE

• A PN has only a promise while the second entails a certain order.
• Primary liabilities are that of the Drawee from the Drawer, even with drawees failing.
• There needs to be an amount that signifies a ‘demand’ to the paper in order to be present it as such.
• Parties will initially start with two people, and move onto three as the steps are undertaken for money exchange.
• Instruments cannot be given until conditions are fulfilled.

Parties to a Bill of Exchange

• Drawer: Maker the BE.
• Drawee: Pays money on the instrument in the order of the drawer.
• Payee: Receiver of the instrument. Negotiable Lending
• In lending, money is provided on the condition of future repayment with interest.
• Secured loans have backing, while unsecured do not.
• Lenders look for 5 C's of Character, Capacity, Capital, Collateral and Conditions alongside points such as profits, borrowers and markets.

Types of Advances

• Money must be provided conditionally that the amount borrowed will return (with interest) at an understood date.

Secured Bank

• A bank is inclined to see recover after the conclusion of loans.
• Security is needed for the initial borrowing amounts at lending to allow recovery of loans effectively.

Unsecured Bank

• As the name notes, such loans are not backed up by primary backing or collateral

Creating

• Creating charge: Lied, pledge and hypothecation are all ways securities are obtained for lender use.

Secured Loans

• For gold there are no required caps of Loan-Value, typically private lenders have a high value with most maintain a 70%.
• The most common use is to sanction loans within standard procedures, getting the policy assigned security by the lender.

Loan

• Term deposits are always possible, but may not be void under minors and other circumstances.
• RBI Guidelines: Every bank must lend 40% of the total advances from priority sectors to build and purchase.
• New or used four wheelers can be availed to the bank.

Exports and Imports

• Banks grant credit to exports and import.
• RBI Guidelines: The RBI handles all banks in India, due to the importances attached by the government to make them exporters in finance.

Unsecured Loan

• Unsecured Loan include: Children’s Education, Occasional Medic Events etc.
• Installments are sent by bills, and grace periods are possible to ensure the billing allows the rate.
• Interest rates are typically around 18%-20%.

Short, Medium and Long Term Lending

• Loans in banks are the easiest finance to give by them. The payment involves interest which is calculated.

Bank Loans

• Banks charge variable rates and have various clauses and application fees
• Bank Loan advantages are easy, medium funding and have taxes calculated to expense
• Loans come with prepayment (fee) penalties.
• Classifications include term and corporate

Cash

• Demand is important, and used to both manage capital requirements which are similar.
• Disturbing their cash plans may not be necessary when the bank can give surprise money and is very adaptable.

Overdrafts

• Have higher rates that differ from certain fees.
• The main difference is that cash credits has companies inventory. (as collateral).
• Loans have different facilities and requirements.
• Bank Drafts, is certain and cannot be found dishonoured
• Transfers are done through processes as the above.

Definition of Remittances

• A cheque can order from one branch to another.
• Remittances is a utility service of bank

Electronic Banking (E - Banking)

• Doing its best is the reserve bank to look for alternate payment methods
• Faster payments are common, the various routes include things like mobile phone drops and internet

Online Banking

• There is a direct relationship from banking needs to this, allowing computer use as a way.
• The Television can allow for better operational remote.

Safe Deposit Lockers

• A safe box to store valuable goods inside of a bank.
• Every safe needs the signature of customers in order to secure the lock.

Life Insurance

• Life Insurance's a financial source for risks of life and death.

Essential Life Insurance

• Those which exist from both accidents/sickness.
• All insurance is a type with the purpose of creating an instrument to protect.

Life Insurance Policies

• Savings and security are the most important factors of life insurance to provide.

Risk Cover Insurance

• Life Insurance is today full of uncertainties. In this scenario Life Insurance ensures that the loved ones of the Insured continue to enjoy good quality of life and the same should not be affected by any unforeseen circumstances ###Planning Life Stage Needs
• Insurance, retirement, building, and other various methods of planning, are all steps toward building up an individual into retirement.

Savings

• Saving is an important habit to maintain and build to various needs at life.
• The body will regulate all insurance.

Fixed and Floating

• Fixed: When the interest applied is constant from the beginning to the end.
• Floating: The rate of interest is determined by market based condition, as the nature of the loan is not set in stone and can be agreed.

General and Non-Life Insurance

• The scope of these cover various problems such as: Damage, Accidents, and Credits.
• Marine Insurance
• This notes the loss or damage by various means to transit (or damage of loss)

Fire Insurance

• Notes losses such as accidents or damage to properties for specific periods caused by fire.
• Insured covers the damage of building to a reasonable status as such.
• Claims must be filed if there is an accident or risk in business occurs.
• A "specific policy" can insure at limited value to maintain the policy

Types

The list, types, and processes of insurance can be easily organized at the above points, for use in better planning and development.