Payment and Collection of Cheques and Other Negotiable Instruments | PAPER II – PRINCIPLES & PRACTICES OF BANKING | MODULE A: GENERAL BANKING OPERATIONS
Banker – Payment and Collection of Cheques and Other Negotiable Instruments
1. Negotiable Instruments Act
The Negotiable Instruments Act, 1881 governs the law relating to promissory notes, bills of exchange, and cheques. It lays down the rules for payment, collection, endorsement, and liabilities in case of dishonour or forgery.
2. Payment of a Cheque
Payment refers to the process of the drawee bank honouring the cheque issued by the drawer. The banker must ensure authenticity and that there are sufficient funds.
3. Payment in Due Course – Section 10
Section 10 defines "payment in due course" as payment made in accordance with the apparent tenor of the instrument in good faith and without negligence to the person in possession thereof.
4. Liability of the Paying Bank – Section 31
According to Section 31, the drawee bank is bound to honour the cheque if there are sufficient funds. Failure to do so without valid reason renders the bank liable to compensate the drawer for any loss or damage.
5. Collection of Cheques – Duties of a Collecting Bank
The collecting bank acts as an agent for the customer. Its duties include presenting the cheque promptly, exercising due diligence, and ensuring it is not collecting on a forged or altered instrument.
6. Endorsement of Cheques
Endorsement refers to signing on the back of a cheque to transfer rights. It must be done properly to ensure legitimacy of the transaction.
7. Crossing of Cheques
Crossing ensures that a cheque is paid only through a bank account. Types include general crossing (two parallel lines) and special crossing (bank name written between lines).
8. Forged Instruments
If a cheque is forged, the bank must not pay. Any payment on a forged cheque is considered null and void, and the bank bears the loss.
9. Bouncing (Dishonour) of Cheques
When a cheque is returned unpaid, it is considered dishonoured or bounced. Common reasons include insufficient funds, signature mismatch, or payment stop instructions.
10. Cheque Truncation System (CTS)
CTS is a system of clearing cheques electronically by transmitting scanned images and MICR data, reducing physical movement of cheques and speeding up clearance.
MCQs (Multiple Choice Questions)
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What is the purpose of crossing a cheque?
- A. To prevent forgery
- B. To ensure payment through a bank account only
- C. To enhance cheque value
- D. To endorse it
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Under which section is "Payment in due course" defined?
- A. Section 31
- B. Section 10
- C. Section 138
- D. Section 1
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Who bears the loss in case of a forged cheque paid by the bank?
- A. The payee
- B. The drawer
- C. The bank
- D. The endorser
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Which act governs the rules of cheque payments in India?
- A. RBI Act
- B. Banking Regulation Act
- C. Negotiable Instruments Act
- D. Companies Act
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What is CTS in banking?
- A. Cheque Truncation System
- B. Cash Transfer Service
- C. Customer Tracking System
- D. Cheque Tracking Solution
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When does a cheque bounce?
- A. When the cheque is issued
- B. When it is returned unpaid by the bank
- C. When it is endorsed
- D. When it is crossed
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What does a general crossing on a cheque mean?
- A. Only a specific person can cash it
- B. It must be deposited into a bank account
- C. It is payable over the counter
- D. It is invalid
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What is the duty of a collecting bank?
- A. To present the cheque in time and in good faith
- B. To pay cheques
- C. To sign cheques
- D. To issue cheques
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Which section of the Act places liability on the paying banker?
- A. Section 31
- B. Section 138
- C. Section 1
- D. Section 20
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What is endorsement of a cheque?
- A. Canceling the cheque
- B. Signing on the back to transfer rights
- C. Forging the cheque
- D. Crossing the cheque
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