NEGOTIABLE INSTRUMENTS RELATED TO KYC
STATUTORY PROTECTION TO COLLECTING BANKER (Section 131 of NI Act, 1881)
A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or especially to himself shall not, in case the title to the cheque
proves defective, incur any liability to the true owner of the cheque by reason of only having
received such payment.
STATUTORY PROTECTION TO PAYING BANKER (Section 85 of NI Act)
Payment made in accordance with the apparent tenor of the instrument, in good faith and
without negligence to a person who is in possession of the instruments under the
circumstances, which do not afford a reasonable ground to believe that there is any defect in
the title of a person presenting for payment.
What is MATERIAL ALTERATION?
A cheque contains a mandate of the drawer to pay a specified sum of money to the bearer or to his order. Any alteration or correction in the cheque is called as Material Alteration. A cheque with material alteration will be valid only if the drawer has confirmed the alteration with his full signature.
Define HOLDER(Section 8 of NI Act 1881)
Holder of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto.
Define HOLDER IN DUE COURSE (Section 9 of NI Act 1881)
The person, who acquires the instrument in bonafide and for value, the right to possess good title to the instrument. Such person is called “Holder in due course”.
What are AMBIGUOUS INSTRUMENTS?
Where in a bill of exchange, the drawer and drawee are the same person; or where the drawer is a fictitious person or incapable of entering into a contract, such instruments are called Ambiguous Instruments.
What is the impact of MUTILATED CHEQUE?
A cheque should not be mutilated, torn or cancelled. If the cheque is mutilated or torn by
accident, the drawer has to confirm in writing that the cheque can be paid. The bank can be
held responsible for negligence paying the mutilated instrument.
A cheque is presented with amount expressed in figures only. What would you do with the cheque?
Writing the amount both in figures and words is a well established banking practice. If the
amount of the cheque is expressed in words only but not in figures, the bank may get
protection under Sec.10 of NI Act for paying such cheque as the intent of drawer is clear. When the amount is expressed in figures only but not in words, the Bank may not get protection under Sec.10 of NI Act if such cheque is paid, as it will not be deemed as Payment in Due course.
What is the importance of section 138 of NI ACT?
If a cheque is dishonoured, criminal action can be taken against the drawer. This provision
became operational with effect from 1.4.1989. This will prevent drawers from issuing cheque
with dishonest intentions.
Cheques drawn by the customers are not paid after the receipt of the notice of their death.Why?
As per Sec.201 of the Indian Contract Act, Agency and mandates are terminated/withdrawn/
evoked/ cancelled on the death of the principal.
A cheque drawn by the director of a company can be paid even after his death if it is
otherwise in order. Why?
A company is a legal entity having perpetual succession on whose behalf the cheque was
drawn by the director. Hence the death, insolvency or lunacy of the director doesn’t affect the payment of the cheque.
The Negotiable Instruments act, 1881:
Section Topic
6 Definition of a Cheque
9 Holder in due course defined
10 Payment in due course
15 Endorsement
18 When the amount in figures differs from that of in words,
amount in words to be treated as the amount ordered.
20 Holder of an inchoate instrument can complete the
instrument.
26 A Minor can draw, endorse and accept an N.I.
31 Compensation to the drawer for wrongful dishonour
81 Payment of electronic cheque
85 Protection to paying Banker
85A Protection to Paying Banker for Bank Drafts.
87 Material alteration of N.I. renders it void
89 Paying banker is protected where a cheque is materially
altered but does not appear to have been altered
99 Noting
100 Protest
123 General crossing
124 Special crossing
126 Crossed cheque to be paid through a Bank only
127 A cheque specially crossed to a Bank should be paid only
to that Bank.
128 Payment in due course of crossed cheques.
130 'Not negotiable crossing' - transferee cannot have a better
title than the transferor.
131 Collecting Banker's protection
Sec-138: Chq. return for insufficient funds. Drawer is liable for
either punishment upto 2 years or with fine which may
go upto twice the amount, or both if cheque is returned
for want of sufficient balance.
Cheque Truncation System
What is Cheque Truncation?
Cheque Truncation is the process of stopping the physical movement of cheques. As per the
amended Negotiable Instruments Act 1881, in cheque truncation, the movement of the
physical instrument is stopped and replaced by electronic images and associated MICR line of the cheque.
What is Grid Clearing?
Grid Clearing is an arrangement that allows banks to present/receive cheques from/to multiple cities in a Single Clearing House through a service branch at one city.
Who can participate in the Cheque truncation system at Chennai?
The eligibility criteria for banks to participate in CTS at Chennai are similar to those in the
National Capital Region. There can be four types of participants viz.
i. Member banks of the CBCH (Chennai Bankers’ Clearing House)
ii. Sub Member banks who will participate through members
iii. Indirect members who can participate for submission of data and images through a Member bank but will maintain a separate settlement account
iv. Banks not present in CBCH but having presence in other cities when Grid is introduced (to be finalized in consultation with RBI). They can participate through sub membership or indirect membership route.
Is there any change in the responsibility of the presenting bank?
As the payment processing is done on the basis of images, the onus of due diligence shifts to
the Presenting Bank, as provided under explanation II to Section 131 of Negotiable Instruments
Act. The member banks have to enforce KYC (Know Your Customer) norms in letter and spirit.
The banks should observe all precautions which a prudent banker does under normal
circumstances, e.g., to check the apparent tenor of the instrument, physical feel of the
instrument, any tampering visible to the naked eye with reasonable care, etc. For enhanced
attention, based on exceptions, the banks may employ suitable risk management techniques like scrutiny of high value transactions, limit based checking by officials, new accounts alerts,etc. The presenting bank takes full responsibility for collecting on behalf of the intended payee and exercises due diligence as per the conditions laid down in the amended Negotiable Instruments Act. RBI has also issued guidelines for Standardisation and enhancement of security Features in cheque forms. The guidelines outlines mandatory security features which can be leveraged by presenting banks while scrutinizing cheques of drawee banks in CTS. These guidelines are called CTS-2010 standard.
CTS-2010 Standard" for Cheque Forms – Specifications:
Paper:
Status quo shall be maintained in relation to paper specifications as it exists currently.
Additionally, paper should be image friendly and have protection against alterations by having chemical sensitivity to acids, alkalis, bleaches and solvents giving a visible result after a fraudulent attack. CTS-2010 Standard paper should not glow under Ultra-Violet (UV) light i.e., it should be UV dull.
Watermark:
All cheques shall carry a standardised watermark, with the words “CTS-INDIA” which can be
seen when held against any light source.
VOID pantograph:
Pantograph with hidden / embedded “COPY” or “VOID” feature shall be included in the
cheques. This feature should not be visible on the scanned image at the resolution specified in CTS but should be clearly visible in photocopies and scanned colour images as resolution used in such cases would be above the prescribed CTS standards.
Bank’s logo printed with invisible ink (ultra-violet ink):
Bank’s logo shall be printed in ultra-violet (UV) ink. The logo will be captured by / visible in UVenabled scanners / lamps.
Field placements of a cheque :
Placement of significant fields on the cheque forms shall be mandated. However, placement of additional fields shall be left to banks.
Mandating colours and background :
Light / Pastel colours shall be mandated for cheques so that Print / Dynamic Contrast Ratio (PCR / DCR) is more than 60% for ensuring better quality and content of images.
Clutter free background :
Background of cheques shall be kept as clutter free as possible for improving quality and clarity of images.
Prohibiting alterations / corrections on cheques :
No changes / corrections should be carried out on the cheques (other than for date validation purposes, if required).
Printing of account field :
All cheques should, as far as possible, be issued with the account number field pre-printed. This should be considered must for current account holders and corporate customers.
Desirable features
In addition to the mandatory security features as above, banks can consider including
additional security features as per their risk perception like
(i) supplementary watermark containing their own logo,
(ii) embedded fluorescent fibres,
(iii) fugitive ink,
(iv) secondary fluorescent ink,
(v) micro-lettering,
(vi) toner fusing,
(vii) check-sum,
(viii) patterns,
(ix) floral designs,
(x) bleeding ink,
(xi) structural magnetics,
(xii)security thread,
(xiii) hot stamped holograms on multi-city cheques and demand drafts,
(xiv) auto-detection tools,
(xv) use of UV band on sensitive and key areas of interest on a cheque such as Legal Amount
Recognition (Amount in Words), Courtesy Amount Recognition (Amount in Figures),
Signature, Beneficiary Name,
(xvi) pre-encoding of amount field on the MICR band for demand drafts / pay orders
(above a self-decided cut-off) before issue to customers,
(xvii) use of check-sum on the face of demand drafts / pay orders (other than the MICR
band), etc.
What is Paper to Follow (P2F) and why is it required?
Paper to Follow is an operational convenience in CTS wherein the drawee bank can request for the physical instrument in case of any doubt or suspicion about the nature of instrument. The drawee bank can request presenting bank for physical instrument, in case, the image it has received for processing is not clear. For Government cheques, Paper to follow is mandatory, since Government Departments continue to receive paid instruments.
The presenting bank can send physical instrument to the drawee bank if, ab initio, it is
identified that the image has failed IQA validation.
How would customer benefit from cheque truncation?
Bank customers benefit in the following ways, if their bank participates in CTS
a) Faster realization and Credit;
b) Extended presentment Window
c) Improved reconciliation services for Corporate Customers and Government Departments
d) Reduction in Geographical dependence
e) Reduced operational risk due to inbuilt security in the workflow
f) Faster Customer Services- reduced TATs on Service Requests, queries and MIS
STATUTORY PROTECTION TO COLLECTING BANKER (Section 131 of NI Act, 1881)
A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or especially to himself shall not, in case the title to the cheque
proves defective, incur any liability to the true owner of the cheque by reason of only having
received such payment.
STATUTORY PROTECTION TO PAYING BANKER (Section 85 of NI Act)
Payment made in accordance with the apparent tenor of the instrument, in good faith and
without negligence to a person who is in possession of the instruments under the
circumstances, which do not afford a reasonable ground to believe that there is any defect in
the title of a person presenting for payment.
What is MATERIAL ALTERATION?
A cheque contains a mandate of the drawer to pay a specified sum of money to the bearer or to his order. Any alteration or correction in the cheque is called as Material Alteration. A cheque with material alteration will be valid only if the drawer has confirmed the alteration with his full signature.
Define HOLDER(Section 8 of NI Act 1881)
Holder of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto.
Define HOLDER IN DUE COURSE (Section 9 of NI Act 1881)
The person, who acquires the instrument in bonafide and for value, the right to possess good title to the instrument. Such person is called “Holder in due course”.
What are AMBIGUOUS INSTRUMENTS?
Where in a bill of exchange, the drawer and drawee are the same person; or where the drawer is a fictitious person or incapable of entering into a contract, such instruments are called Ambiguous Instruments.
What is the impact of MUTILATED CHEQUE?
A cheque should not be mutilated, torn or cancelled. If the cheque is mutilated or torn by
accident, the drawer has to confirm in writing that the cheque can be paid. The bank can be
held responsible for negligence paying the mutilated instrument.
A cheque is presented with amount expressed in figures only. What would you do with the cheque?
Writing the amount both in figures and words is a well established banking practice. If the
amount of the cheque is expressed in words only but not in figures, the bank may get
protection under Sec.10 of NI Act for paying such cheque as the intent of drawer is clear. When the amount is expressed in figures only but not in words, the Bank may not get protection under Sec.10 of NI Act if such cheque is paid, as it will not be deemed as Payment in Due course.
What is the importance of section 138 of NI ACT?
If a cheque is dishonoured, criminal action can be taken against the drawer. This provision
became operational with effect from 1.4.1989. This will prevent drawers from issuing cheque
with dishonest intentions.
Cheques drawn by the customers are not paid after the receipt of the notice of their death.Why?
As per Sec.201 of the Indian Contract Act, Agency and mandates are terminated/withdrawn/
evoked/ cancelled on the death of the principal.
A cheque drawn by the director of a company can be paid even after his death if it is
otherwise in order. Why?
A company is a legal entity having perpetual succession on whose behalf the cheque was
drawn by the director. Hence the death, insolvency or lunacy of the director doesn’t affect the payment of the cheque.
The Negotiable Instruments act, 1881:
Section Topic
6 Definition of a Cheque
9 Holder in due course defined
10 Payment in due course
15 Endorsement
18 When the amount in figures differs from that of in words,
amount in words to be treated as the amount ordered.
20 Holder of an inchoate instrument can complete the
instrument.
26 A Minor can draw, endorse and accept an N.I.
31 Compensation to the drawer for wrongful dishonour
81 Payment of electronic cheque
85 Protection to paying Banker
85A Protection to Paying Banker for Bank Drafts.
87 Material alteration of N.I. renders it void
89 Paying banker is protected where a cheque is materially
altered but does not appear to have been altered
99 Noting
100 Protest
123 General crossing
124 Special crossing
126 Crossed cheque to be paid through a Bank only
127 A cheque specially crossed to a Bank should be paid only
to that Bank.
128 Payment in due course of crossed cheques.
130 'Not negotiable crossing' - transferee cannot have a better
title than the transferor.
131 Collecting Banker's protection
Sec-138: Chq. return for insufficient funds. Drawer is liable for
either punishment upto 2 years or with fine which may
go upto twice the amount, or both if cheque is returned
for want of sufficient balance.
Cheque Truncation System
What is Cheque Truncation?
Cheque Truncation is the process of stopping the physical movement of cheques. As per the
amended Negotiable Instruments Act 1881, in cheque truncation, the movement of the
physical instrument is stopped and replaced by electronic images and associated MICR line of the cheque.
What is Grid Clearing?
Grid Clearing is an arrangement that allows banks to present/receive cheques from/to multiple cities in a Single Clearing House through a service branch at one city.
Who can participate in the Cheque truncation system at Chennai?
The eligibility criteria for banks to participate in CTS at Chennai are similar to those in the
National Capital Region. There can be four types of participants viz.
i. Member banks of the CBCH (Chennai Bankers’ Clearing House)
ii. Sub Member banks who will participate through members
iii. Indirect members who can participate for submission of data and images through a Member bank but will maintain a separate settlement account
iv. Banks not present in CBCH but having presence in other cities when Grid is introduced (to be finalized in consultation with RBI). They can participate through sub membership or indirect membership route.
Is there any change in the responsibility of the presenting bank?
As the payment processing is done on the basis of images, the onus of due diligence shifts to
the Presenting Bank, as provided under explanation II to Section 131 of Negotiable Instruments
Act. The member banks have to enforce KYC (Know Your Customer) norms in letter and spirit.
The banks should observe all precautions which a prudent banker does under normal
circumstances, e.g., to check the apparent tenor of the instrument, physical feel of the
instrument, any tampering visible to the naked eye with reasonable care, etc. For enhanced
attention, based on exceptions, the banks may employ suitable risk management techniques like scrutiny of high value transactions, limit based checking by officials, new accounts alerts,etc. The presenting bank takes full responsibility for collecting on behalf of the intended payee and exercises due diligence as per the conditions laid down in the amended Negotiable Instruments Act. RBI has also issued guidelines for Standardisation and enhancement of security Features in cheque forms. The guidelines outlines mandatory security features which can be leveraged by presenting banks while scrutinizing cheques of drawee banks in CTS. These guidelines are called CTS-2010 standard.
CTS-2010 Standard" for Cheque Forms – Specifications:
Paper:
Status quo shall be maintained in relation to paper specifications as it exists currently.
Additionally, paper should be image friendly and have protection against alterations by having chemical sensitivity to acids, alkalis, bleaches and solvents giving a visible result after a fraudulent attack. CTS-2010 Standard paper should not glow under Ultra-Violet (UV) light i.e., it should be UV dull.
Watermark:
All cheques shall carry a standardised watermark, with the words “CTS-INDIA” which can be
seen when held against any light source.
VOID pantograph:
Pantograph with hidden / embedded “COPY” or “VOID” feature shall be included in the
cheques. This feature should not be visible on the scanned image at the resolution specified in CTS but should be clearly visible in photocopies and scanned colour images as resolution used in such cases would be above the prescribed CTS standards.
Bank’s logo printed with invisible ink (ultra-violet ink):
Bank’s logo shall be printed in ultra-violet (UV) ink. The logo will be captured by / visible in UVenabled scanners / lamps.
Field placements of a cheque :
Placement of significant fields on the cheque forms shall be mandated. However, placement of additional fields shall be left to banks.
Mandating colours and background :
Light / Pastel colours shall be mandated for cheques so that Print / Dynamic Contrast Ratio (PCR / DCR) is more than 60% for ensuring better quality and content of images.
Clutter free background :
Background of cheques shall be kept as clutter free as possible for improving quality and clarity of images.
Prohibiting alterations / corrections on cheques :
No changes / corrections should be carried out on the cheques (other than for date validation purposes, if required).
Printing of account field :
All cheques should, as far as possible, be issued with the account number field pre-printed. This should be considered must for current account holders and corporate customers.
Desirable features
In addition to the mandatory security features as above, banks can consider including
additional security features as per their risk perception like
(i) supplementary watermark containing their own logo,
(ii) embedded fluorescent fibres,
(iii) fugitive ink,
(iv) secondary fluorescent ink,
(v) micro-lettering,
(vi) toner fusing,
(vii) check-sum,
(viii) patterns,
(ix) floral designs,
(x) bleeding ink,
(xi) structural magnetics,
(xii)security thread,
(xiii) hot stamped holograms on multi-city cheques and demand drafts,
(xiv) auto-detection tools,
(xv) use of UV band on sensitive and key areas of interest on a cheque such as Legal Amount
Recognition (Amount in Words), Courtesy Amount Recognition (Amount in Figures),
Signature, Beneficiary Name,
(xvi) pre-encoding of amount field on the MICR band for demand drafts / pay orders
(above a self-decided cut-off) before issue to customers,
(xvii) use of check-sum on the face of demand drafts / pay orders (other than the MICR
band), etc.
What is Paper to Follow (P2F) and why is it required?
Paper to Follow is an operational convenience in CTS wherein the drawee bank can request for the physical instrument in case of any doubt or suspicion about the nature of instrument. The drawee bank can request presenting bank for physical instrument, in case, the image it has received for processing is not clear. For Government cheques, Paper to follow is mandatory, since Government Departments continue to receive paid instruments.
The presenting bank can send physical instrument to the drawee bank if, ab initio, it is
identified that the image has failed IQA validation.
How would customer benefit from cheque truncation?
Bank customers benefit in the following ways, if their bank participates in CTS
a) Faster realization and Credit;
b) Extended presentment Window
c) Improved reconciliation services for Corporate Customers and Government Departments
d) Reduction in Geographical dependence
e) Reduced operational risk due to inbuilt security in the workflow
f) Faster Customer Services- reduced TATs on Service Requests, queries and MIS