Responsibility of Paying Bank | PAPER II – PRINCIPLES & PRACTICES OF BANKING | MODULE A: GENERAL BANKING OPERATIONS

Banker - Responsibility of Paying Bank

---

1. Negotiable Instruments Act and Paying Banks

The Negotiable Instruments Act, 1881 governs the liabilities and protections related to negotiable instruments such as cheques. A paying bank is responsible for making payments on cheques presented to it and must ensure that the payment is made in accordance with the law.

2. Liability of Paying Banker when Customer’s Signature on the Cheque is Forged

If the signature of the customer is forged, the cheque is considered invalid. A paying banker has no authority to debit the customer’s account and is liable for any payment made on such a cheque.

3. Payment to be in Due Course for Bank to Seek Protection

To be protected under the Negotiable Instruments Act, the bank must make payment in due course. This means payment must be made:

• According to the apparent tenor of the instrument
• In good faith and without negligence
• To the person in possession thereof

4. Payment in Good Faith without Negligence of an Instrument on which Alteration is not Apparent

If a cheque appears regular and no visible signs of tampering exist, the bank is protected for payment made in good faith, even if it later turns out the cheque was altered. The bank must not be negligent in detecting visible alterations.

5. Payment by Bank Under Mistake – Whether Recoverable

If a bank makes a payment under a mistake of fact (e.g., misreading a cheque), it may be able to recover the amount, provided the payee has not changed position in reliance on the payment. However, mistakes of law generally cannot be recovered.

6. Cheque Truncation

Cheque Truncation is the process of stopping the physical movement of cheques and instead processing them electronically. This improves efficiency and reduces the scope for fraud. It is regulated under the Negotiable Instruments Act with specific rules for image and MICR data handling.

---

MCQs (Multiple Choice Questions)

1. When is a paying banker not liable for payment on a cheque?
   • a) When the signature of the customer is genuine
   • b) When payment is made in due course
   • c) When the customer's signature is forged
   • d) When the cheque is post-dated
   Answer: c) When the customer's signature is forged
2. Under which Act are the responsibilities of paying bankers governed?
   • a) RBI Act, 1934
   • b) Banking Regulation Act, 1949
   • c) Negotiable Instruments Act, 1881
   • d) Companies Act, 2013
   Answer: c) Negotiable Instruments Act, 1881
3. What does “payment in due course” mean?
   • a) Payment made to account holder only
   • b) Payment made before bank closing hours
   • c) Payment made in good faith and without negligence
   • d) Payment made after verifying with the drawer
   Answer: c) Payment made in good faith and without negligence
4. In which of the following cases is the bank protected?
   • a) Payment made on a forged signature
   • b) Payment made on altered cheque with visible changes
   • c) Payment made in good faith on instrument without apparent alterations
   • d) Payment made without signature verification
   Answer: c) Payment made in good faith on instrument without apparent alterations
5. Which is true about a forged cheque?
   • a) It is binding on the customer
   • b) The bank is not liable
   • c) It is not a valid instrument
   • d) It can be honoured if payee is known
   Answer: c) It is not a valid instrument
6. What does cheque truncation involve?
   • a) Physical transport of cheques
   • b) Manual verification of signatures
   • c) Image-based electronic processing of cheques
   • d) Destroying cheques after issuance
   Answer: c) Image-based electronic processing of cheques
7. Can a bank recover a mistaken payment?
   • a) Always, regardless of reason
   • b) Only if mistake is of law
   • c) Only if mistake is of fact and no change in payee’s position
   • d) Never
   Answer: c) Only if mistake is of fact and no change in payee’s position
8. What is the liability of a paying banker for altered cheque with no visible changes?
   • a) Always liable
   • b) Not liable if paid in good faith
   • c) Liable if cheque is old
   • d) Liable if drawer is unknown
   Answer: b) Not liable if paid in good faith
9. Which of the following is not required for "payment in due course"?
   • a) Made according to apparent tenor
   • b) Made to holder of instrument
   • c) Made after confirming drawer’s location
   • d) Made without negligence
   Answer: c) Made after confirming drawer’s location
10. A cheque with visible alteration should be:
    • a) Paid immediately
    • b) Paid after confirming with the drawer
    • c) Refused by the bank
    • d) Paid if alteration helps payee
    Answer: c) Refused by the bank

---

Previous Chapter Cash Management Services and Its Importance

Next Chapter Responsibility of Collecting Bank

---

Chapter Index:-

• PAPER II – PRINCIPLES & PRACTICES OF BANKING

• MODULE A: GENERAL BANKING OPERATIONS

• Banker-Customer Relationship
• AML-KYC Guidelines
• Operational Aspects of KYC
• Opening Accounts of Various Types of Customers
• Operational Aspects of Deposit Accounts
• Operational Aspects of Handling Clearing/Collection/Cash
• Banker’s Special Relationship
• Foreign Exchange Remittance Facilities for Individuals
• Operational Aspect of NRI Business
• Foreign Currency Accounts for Residents and Other Aspects
• Cash Management Services and Its Importance
• Payment and Collection of Cheques and Other Negotiable Instruments
• Responsibility of Paying Bank
• Responsibility of Collecting Bank
• Ancillary Services
• Financial Inclusion & Financial Literacy
• Customer Service Guidelines
• Duties & Rights of a Banker and Customer Rights
• Grievance Redressal & RBI Integrated Ombudsman Scheme 2021
• The Consumer Protection Act, 2019: Preamble, Extent and Definitions
• The Right to Information Act, 2005

Author: Bank Theory