Lecture Retail and merchant banking – Lecture 23

After studying this chapter you will be able to understand: What are the main negotiable instruments are? Cheque, types of cheques, bearer cheque, anted – dated cheque, stale cheque, mutilated cheque, post-dated cheque, parties to a negotiable instruments,...

Revise Lecture 23

• What are the main negotiable instruments are?

• CHEQUES

• A cheque is a negotiable instrument

instructing a financial institution to pay a

specific amount of a specific currency from

a specific demand account held in the

maker /depositor’s name with that

institution

• Actually a cheque is an order by the

account holder of the bank directing his

banker to pay on demand, the specified

amount to the order f the person named

therein or to the bearer

• The use of bills of exchange facilitated

trade by eliminating the need for

merchants to carry large quantities of

currency to purchase goods and services

6 Signature of the drawer

7 Routing / account number

8 Fractional routing number

A cheque is generally valid indefinitely or for six months after the date of issue unless

otherwise indicated, this varies depending

on where the cheque is drawn

• Features of a Cheque

Features of a Cheque

• Some important features of a cheque are given below;

1. A cheque must be in writing and duly

signed by the drawer

2. It contains an unconditional order

3. It is issued on a specified banker only

Features of a Cheque

4 The amount specified is to be always

certain and must be clearly mentioned both

in figures and words

5 The payee is always certain

6 It is always payable on demand

7.The cheque must bear a date, otherwise it

is invalid and shall not be honoured by the bank

Features of a Cheque

• The parties to regular cheques include a

maker or drawer, the depositor writing a

cheque, a drawee, the financial institution where the cheque can be presented for

payment, and a payee, the entity to whom the maker issues the cheque

• The drawer drafts or draw a cheque, which

is also called cutting cheque, especially in the United States

Features of a Cheque

• Ultimately, there is also at least one

endorsee which would typically be the financial institution servicing the payee’s account

Lecture 24

• Types of Cheques

Types of cheques

• A cheque used to pay wages due is

referref to as a payroll cheque

• A traveller’s cheque is designed to allow

the person signing it to make an

unconditional payment to someone else

as a result of paying the account holder for that privilege These cheques can usually

be replaced if lost or stolen

Types of a Cheque

• A cheque issued by a bank on its own

account for a customer for payment to a

third party is called a Cashier’s cheque A Treasure’s cheque, a Bank cheque, or a

Bank draft

• A cheque issued by a bank, but drawn on

an account with another bank, is a teller’s cheque In addition banks often sell money orders

Open Cheque:

• A cheque is called ‘open’ when it is

possible to get cash over the counter at the bank The holder of an open cheque can do the following;

• Receive its payment over the counter at the bank

• Deposit the cheque in the bearer’s

account

• Pass it to someone else by signing on the back of a cheque

• Cheques are usually crossed as a

measure of safety

• Bearer Cheque

Bearer Cheque

• A bearer cheque is payable to any person who presents it for payment at the bank

counter It can be transferred by mere

delivery and requires no endorsement

• A cash cheque or a bearer cheque or a

self cheque does not bear the name of the payee

• It simply states that payable to ‘bearer’ or

to ‘self’ or to ‘cash’

• Order Cheque

Order cheque

• An order cheque is a cheque that is

payable to a particular person

• In such a cheque, the word ‘bearer’ may

be cut out or cancelled and the word

‘order’ may be written

• The payee can transfer an order cheque to someone else by signing his or her name

on the back of it

• Anted – dated Cheque

Ante – dated Cheque

• This is a cheque in which the drawer

mentions the date earlier to the date of

presenting it for payment

• For example, a cheque issued on May 20,

2007 may bear a date May 5, 2007

Cheques

• After expiry of that period, no payment will

be made and it is then called a stale

cheque

• Find out from your nearest bank the

validity period of a cheque

Cheques

Mutilated Cheque

• In case a cheque is torn into two or more pieces and presented for payment, such a cheque is called mutilated cheque

• The bank will not make payment against

such a cheque without getting confirmation

of the drawer

• The bank may make payment against

such a cheque if its is torn at the corners and no material fact is erased or

cancelled

Cheques

Post-dated cheque

• This is a cheque on which the drawer mentions a date which is subsequent to the date on which it is presented

• For example, if a cheque presented on May 8, 2007 bears a date of May 25,

2007, it is a post-dated cheque

• The bank will make payment only on or after May 25, 2007

• Parties to a Negotiable Instruments

Negotiable Instrument

Negotiable Instrument

Holder in Due Course

Holder in due course means any person

who for consideration becomes the

possessor of a promissory note, bill of

exchange or cheque payable to bearer or the payee or endorser thereof if payable to order, before the amount mentioned therein becomes payable and without sufficient

cause to believe that any defect existed in the title of the person from whom he

received the title

Negotiable Instrument

Holder in Due Course

The definition specifies that:

1. The holder has to possess the instrument

in due course and before the date of

maturity

2. The consideration must be legal and

adequate

3. There should be sufficient cause to

believe that he possessed the instrument

in good faith and with reasonable care

Negotiable Instrument

Holder in Due Course

4 The holder should not become the holder

in due course even if he received the

instrument without any suspicion or

knowledge about such defects

5 Notice of any defect in the title

subsequent to the date of acquisition should not affect the rights of the holder in due

course