Negotiable Instruments (Part 3) PDF

Banking and Insurance Dr. Ruchi Jain Week 4_V3 Week 4 : Video...

Banking and Insurance Dr. Ruchi Jain Week 4_V3 Week 4 : Video 3 Negotiable Instruments (Part III) Dear learners ,Namaskar In the previous video, we learned about the promissory notes and bill of exchange. let's discuss cheques and other negotiable instruments in this video. The Negotiable Instruments Act, Section 6, defines a cheque. According to this," 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 checque and a cheque in electronic form. It must be in writing, made by the drawer, and payable on demand to the specified person or bearer. Recent changes by the RBI (CTS 2010) have brought about a significant evolution in chequeche processing. Electronic clearing now accepts digital images, known as truncated checques, for payment, broadening the definition to include electronic forms. As per the RBI guidelines, banks must issue "CTS 2010" standard multicity/payable at par checques. The bank's logo is printed in invisible ink on these cheques, along with a Void Pantograph on the left, standardized date format, printer's name, "CTS 2010" designation, rupee symbol, and signature space indicator. The top displays the bank or branch address along with the IFSC code. Account holders should only use these cheques, and the cheque book should be kept securely. Dear learners we will discuss the Cheque Truncation system in detail further. © All Rights Reserved. This document has been authored byDr.Ruchi Jain and is permitted for use only within the course "Banking and Insurance” delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author. 1  Banking and Insurance Dr. Ruchi Jain Week 4_V3 Now let's see the parties to a cheque. Drawer: The maker of the cheque. Drawee: The person directed to pay, typically the banker. Payee: The person named in the instrument to receive the payment. Endorser: The payee or holder, if the payee endorses the cheque. Endorsee: The party in whose favor the endorsement is made. If the drawer writes the cheque to himself, the drawer and payee are the same. A cheque is a negotiable instrument, payable on demand, and can be further negotiated through endorsement. Feature of a Cheque: Let's examine the essential features of a cheque. 1) The first feature is an unconditional written order. A cheque is an unconditional order to the bank for payment, meeting specific requirements to be valid under the Negotiable Instruments Act. 2) The second feature is that cheques must be in writing and printed form, which means they must be written, preferably in ink. Printed cheques are advantageous, reducing forgery risks and providing functional benefits to both bankers and depositors. 3) Next is Payable on Demand. Cheques are payable only on demand, requiring presentation for payment. 4) Another feature is the date of the cheque. Cheques must have a complete and valid date, avoiding post-dated or stale cheques. The date format must align with accepted practices. 5) Next is Payee. The person named on the cheque to whom the payment is directed. It can be payable to the bearer or an account, depending on the type of cheque. 6) The next feature is Amount. The amount on the cheque must be certain, expressed in words and figures, with a match between the two. Section 18 of the Negotiable Instruments Act guides handling discrepancies. 7) The other feature is alterations. valid alterations must be made by the drawer and confirmed with a full signature. Material alterations without confirmation may result in the cheque being returned unpaid. © All Rights Reserved. This document has been authored byDr.Ruchi Jain and is permitted for use only within the course "Banking and Insurance” delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author. 2  Banking and Insurance Dr. Ruchi Jain Week 4_V3 8) Next is the signature. The drawer's signature must align with bank records. Any doubt or mismatch may lead to the cheque being returned as a "signature mismatch." 9) The last feature is endorsements. Endorsement made at the reverse of the instrument for the transfer of the cheque from one person to another done by the payee or holder. These features ensure the authenticity, security, and proper negotiation of a cheque. Now, let's explore the other negotiable instruments based on their usage. These are Demand Drafts, Banker's Cheques or Pay Orders, and Dividend or Interest Warrants Demand Draft:A demand draft can be defined as the bill of exchange payable on demand, drawn by one branch of a bank on another branch or at corresponding banks. It is issued for secure payments on request. Demand Drafts (DD) are issued by a bank's branch in a different city, payable in any other city. In the case of banks without branches in certain locations, use correspondent banks, issuing DDs payable at those branches. Banks issue demand drafts on customer requests, collecting the full value along with a commission. The features of bank drafts are: Drawn by a bank at another branch or a different bank. Prepaid instruments. Do not get it returned for financial reasons. Payable on demand. Payment can be stopped only if it is lost or misplaced. Serve as a secured mode of payment. Signed by a banker. Banker’s ceque: Second is the banker's cheque. It is also called pay orders or the manager's cheque. These are issued by a bank's branch in the same city, and the collection time for banker's cheques is similar to that of a local cheque. Hence, we can conclude that demand drafts (DDs) and banker's cheques are prepaid instruments issued by banks. Banker's cheques are payable locally, while Demand Drafts can be payable in different cities. © All Rights Reserved. This document has been authored byDr.Ruchi Jain and is permitted for use only within the course "Banking and Insurance” delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author. 3  Banking and Insurance Dr. Ruchi Jain Week 4_V3 They provide secure means of payment and have distinct features, like being prepaid and non- returnable for financial reasons. We can also see the key differences between cheques and Demand Drafts, which lie in issuer, prepaid nature, and returnability. Cheques can be countermanded and may be returned for financial reasons, while Demand Drafts are drawn by banks, prepaid, and non-returnable for financial reasons. These distinctions highlight the secure and prepaid nature of demand drafts and banker's cheques in contrast to traditional cheques. Dividend or Interest Warrants are the next negotiable instrument. A dividend or interest warrant allows a company or organization to pay dividends or interest to a shareholder or bondholder through a bank. Similar to cheques, these warrants are issued on printed forms, drawn on a bank, and specify the payable amount to the named individual(s). For added security, they can be crossed. Many warrants state their validity period at the top typically three months from the date of issue, but this does not alter their fundamental nature as cheques. I hope this overview provides a comprehensive understanding of negotiating instruments. In the next video, we will discuss endorsements. Till then, happy learning. © All Rights Reserved. This document has been authored byDr.Ruchi Jain and is permitted for use only within the course "Banking and Insurance” delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author. 4