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Old Sunday, April 06, 2014
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Default Bankers’ Core*1 Business

You are never fully dressed until you wear a smile.
Bankers’ Core*1 Business — Deposits
Money is the raw material for a bank. The bigger the stock of money, the more the business that a bank can conduct and the higher the profits it can make. Deposits are rightly said to be the life blood for a bank.

The Bank as Depository
We have discussed earlier the definitions of ‘bank’ / ‘banking’. One of the basic services rendered by the bank to the public is that of depository, both an essence and an important component of ‘banking’ business.
(*1 The most important or central part of something)

Importance of Deposits - The key to all growth and development of the banking system lies in the mobilization of resources and their judicious utilization. The Section 5(b) of the Banking Companies Ordinance, 1962 defines banking particularly highlighting these aspects:
“Banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise”.

As such the first pre-requisite of banking is the ‘acceptance of deposits’ from the public and then its utilization by way of lending or investment in such a manner that the depositors may also withdraw their funds on demand or otherwise. Impliedly, it further envisages that the investment of funds should be judiciously made so as to be able to generate earnings for paying a reasonable return to depositors of money, besides meeting operational expenses of the bank and providing for reserves and contingencies and paying dividend to shareholders. It implies that deposits are effectively the ‘working capital’ of the banking business. Unless there are resources, neither these can be invested in profit making avenues and ventures nor would it be possible to pay reasonable return to the depositors.

Mobilization of Deposits —
Some banks / DFIs were in the past publicizing their deposit mobilization schemes without disclosing the correct & complete terms and conditions with regard to the rate of return on such deposits. The use of ambiguous terms, like “conditions apply” etc., in advertisements were the cause of complaints to SBP from aggrieved depositors. All the banks/DFls have been directed to ensure that all advertisements in media (print, electronic or in any other form) soliciting deposits from the general public should explicitly indicate the annualized rate of expected return. The words “conditions apply” or other similar wordings should not be used. The schemes on which profit is paid on monthly/quarterly/half yearly or any other regular interval, the expected rate of profit to be paid on such intervals should be clearly indicated in the account opening form or advertising material in bold letters. What is the annualized rate of return?

Core Earning of a bank is the “Spread” of Interest or Profit
Resource mobilization of deposits needs to be done carefully so as to ensure that in the ultimate end, it does not become counter-productive for the bank. In mobilizing deposits, therefore, two basic points viz., average cost of deposits and average return on the investment of deposits, should be kept in view. A prudent banker would always try to maintain a deposit mix which would keep his average cost of deposits within safe limits so as to maintain the profitability and viability for the bank. A question that could arise here is as to what should be the average cost of deposits up to which it may be feasible to go in for mobilization of deposits. State Bank statutory requirement lays down a percentage of total demand and time liabilities to be held in cash (Cash Reserve) with the State Bank of Pakistan free of any return, while another given percentage is required to be held in unencumbered securities, usually this part is held in “approved securities”(approved for investment in statutory liquidity requirement) e.g. treasury bills, etc. The average cost of deposits up to which deposit mobilization could be feasible would have, therefore, to be considered with reference to the average return on the lending or investment of these deposits after meeting statutory (legal) obligations.
{ unencumbered securities= those shares and bonds etc which are NOT placed under lien to somebody. Free of any lien or charge}
In the above paragraph which type of average is envisaged? Simple average or weighted average. What is weighted average?

In mobilizing deposits, there are two factors which are of prime importance. One is the rate of return to the depositors. This should necessarily be competitive with a view to attract deposits in a competitive market. Another important aspect in deposit mobilization is the quantum of efforts that are put in on this behalf. To this end the following guidelines could be of assistance.

i. Identify target market for deposit mobilization. As a first priority potential sources/areas of deposits and the persons, if any, to be contacted in this behalf should be identified. The next step would be to develop contacts and support, as may be considered necessary, for mobilizing these deposits.

ii. In the case of the bank extending letter of credit or guarantee facilities, which either as per SBP’s guidelines or the bank’s own policies, require an amount of margin to be deposited with the bank, it also helps to increase bank’s deposit though in lesser volume.

iii. Branches falling in home remittance areas could do well to contact persons receiving larger foreign inward remittances for opening accounts with their bank and arranging remittances through direct deposit in accounts which would provide quicker credits to their accounts by avoiding delays involved in receipt of funds through instruments of remittance like cheques or drafts. The remitters abroad could also be likewise approached for arranging remittances through their bank for credit to the beneficiary’s account on the same lines with assurances of efficiency of service.

iv. Issuing drafts, pay orders and other forms of remittances are also sources of funds as the float lying with the bank can be large in case of increased volumes of such businesses.

v. Branch deposits should be periodically compared with those of other banks operating in the same areas and the available deposit potential. This would enable the branch officials to make a comparative assessment of their performances and plan their future strategies and line of action in respect of advertising and hiring/training of deposit promotion officers.

Customer’s Bank Accounts - The most basic account is the savings account which cannot be overdrawn. Then there are current accounts which are payable on demand either by withdrawal or by the customer instructing the bank to make payment to a third party. They can be overdrawn by way of overdraft. Then there are foreign currency accounts and a number of other deposit accounts with different features and services. Account holders vary as well, from individuals through multinational enterprises and government agencies. There are special rules relating to account-holding by unincorporated associations, partnerships, executors, minors, mentally ill and so on. Banks themselves hold accounts with other banks as a result of correspondent banking relationship.

Deposits are sources of funds which are used by banks for lending and/or investment purposes. The basic function of any bank is accepting deposits. Deposits can be divided into two main categories: Demand and Time/Term deposits/liabilities. Banks use deposits for lending and investing activities in such a way that withdrawals are possible on demand - both for demand and time deposits. In other words the bank uses the deposits in keeping cash in the bank tills, cash in State Bank account, investments in Treasury Bills, in long term loans to government. The skill of the banker lies in deciding the avenues of investment and lending their volumes in such a manner that the withdrawal needs of the customers are met in an admirable manner and the bank also earns reasonable profit. Please remember that high earning and high liquidity are opposing goals and a challenge for the banker.

Demand deposits/liabilities are accounts, withdrawals from which can be made immediately on demand at any time; whereas in the case of Time/Term deposits/liabilities, funds are available for withdrawal only after a fixed term or determinable period. All deposit products are Liability products and all lending/investment products are Assets products and reported in the balance sheet accordingly.

A bank’s profitability depends on its ability to mobilize deposits effectively. Generating expensive deposits and lending or investing at cheaper/lower interest rates can cause profit erosion. ‘Cost of deposit’ is a term used for the rate that the bank pays to its depositors. This rate must be high enough to attract desirable levels of deposits but low enough to ensure profit sustainability. Banks lend at a particular interest rate which is determined by keeping in view the cost of the bank’s deposits and other factors. It is the treasurer’s job to maintain the pool of the bank’s money in a profitable and feasible manner.
The deposit rates are influenced by the Discount Rate announced by State Bank at the time of announcing monetary police which is done every quarter.
Furthermore, the rate of return on deposits is also linked with Treasury bill rates (T-Bills) and rates of Pakistan Investment Bonds (PIBs). T- Bills are floated by the State Bank to finance short-term gaps between government receipts and expenditure. Pakistan Investment Bonds (PIBs) are issued by the government to borrow in the long-term. The rates of PIBs and are used for determining long-term deposit rates.

SBP has advised all banks and DFls to prominently disclose all terms and conditions for both depositors and debtors, along with the projected rate of return to the depositors and interest or mark-up rates for the debtors. This information must be clearly communicated and disclosed in all forms of communications including in media campaigns.

Section 26-A of Banking Companies Ordinance 1962 pertains to Deposits. The salient features of this section are:
• Banks may accept deposits on participation in profit and loss (PLS).
• Free of interest or return in any other form.
• Banks shall make a complete record of the investment made and funds allocated for liquid assets.
• Deposits which are received on a PLS basis shall be invested by the banks at their absolute discretion in businesses where return is not fixed (interest). Depositors who have invested money on a PLS basis are entitled to receive periodical profits from a share of profits of banks as may be determined by them and in case of loss shall be liable to bear the proportionate loss.

Types of Accounts
An account is a relationship with the customer, operated on a day-to-day basis, into which deposits are received and out of which cheques are paid. A deposit account is usually in credit, but an overdraft facility may be taken by pre-arrangement with the bank. Some deposit accounts are opened for a limited time such as:

1)Notice Account - repayable after a notice period of seven days, or 29 days, etc. Such account is repayable in the future. The condition is that the customer has to give a written notice to the bank seven days or 29 days before the date the customer needs the money depending upon whether the deposit is on 7 days’ notice or 29 days’ notice.

2)Term Deposit Account - repayable after a fixed time ranging from one month to 10 years or even longer. Profit on such deposits is payable either at maturity or yearly, half yearly, quarterly or monthly as per contract.

3.Current Account
A current account is an account from which any part of the balance may be withdrawn on demand. Withdrawal from the account can be made via cheques, direct debit, standing instructions or ATM. Funds in the account can be debited or credited in the form of cash, cheques and financial instruments. No interest / profit is paid on the current account.
These accounts are generally for business purposes and can be overdrawn on arrangement with the bank. Zakat is not deducted on current accounts. The initial deposit can be as per each bank’s own policy.
Before account opening, due diligence should be exercised and all Know Your Customer (KYC) requirements are to be fulfilled (KYC is explained in detail in other hand outs).

4.PLS Savings Account (PLS means Profit and Loss Sharing Basis)
Savings accounts are meant solely for saving purposes. Saving means to set aside money for future use or to retain money to meet future spending needs. Saving accounts have all the features of a current account, except that profit is paid on the balance maintained as per the PLS rules of the bank. Saving accounts are generally opened in the name of individuals but can also be opened in the name of charitable institutions, for provident funds, benevolent funds and pension funds. Initial deposit and minimum balance requirement features can be decided by each bank as per their own policies. Zakat is deducted on the balance maintained on the valuation date (first day of Ramadan). Exemption from Zakat can be claimed by submitting Zakat declaration 30 days prior to the Zakat valuation date.

Different banks have introduced different variation products of saving accounts for individuals and eligible institutions where profit is paid bi-annually. Zakat rules for these accounts are similar to that of the normal saving accounts.

In the past Banks used to pay a very small percentage as profit/interest on Savings Accounts. As per BPRD circular no 7 dated 30th May 2008, SBP has instructed all banks to pay a minimum of mandatory 5% profit to their saving account holders. Please note when rate is quoted without mentioning the period for example per month or per quarter, it means the rate of profit per year.

As per SBP BPRD Circular No.07 of May 27, 2011, State Bank of Pakistan has prohibited all the banks from levying any service charges for opening and maintenance of regular savings accounts with effect from July 01, 2011. This means that the services rendered by banks for the opening and maintenance of regular savings accounts shall be free of charge. There shall be no condition of maintaining a minimum balance for these accounts. These instructions are applicable equally on all existing and new accounts. Similarly, no charges would be recovered by banks at the time of closing an account. Banks shall not demand more than Rs. 100 as an initial amount for opening of regular savings accounts. However, no initial deposit would be required for opening of accounts by (i) Mustahkeen of Zakat, (ii) Students (iii) Employees of Government or of Semi Government institutions for salary and pension purposes (including widows/children of deceased employees eligible for family pension/benevolent fund grant, etc.) and other similar types of accounts.
The banks must also ensure that all terms and conditions for the operation of an account, especially in case of its dormancy, closing and/or subsequent reactivation are brought into the knowledge of the customer at the time of account opening. Key features of the Account Opening Form must be translated into Urdu and a printed copy of such translation shall be shared with the account holders at the time of opening of the account.

5)Basic Banking Accounts (BBA)
Government of Pakistan has been keen on the documentation of the economy so that the economic data available from the financial institutions helps the state in formulating policies and increasing the tax base of the country. This can be achieved if all the people have bank accounts and instead of cash transactions, everybody uses the banks for their buying and selling and other monetary transactions.

BBAs were introduced by SBP, with special features; vide BPD circular No. 30 dated 29th November 2005, to facilitate banking for low income people in Pakistan. Prior to the introduction of BBAs banks used to collect service charges from all the customers who failed to maintain a minimum balance in their accounts as per each bank's policy. In order to resolve this issue and to facilitate banking for small depositors, SBP has formulated the BBA scheme with the following features:-
• Initial deposit to open a BBA is Rs.1000/-
• No profit is paid on the balance in this account.
• No minimum balance is required and no service charges are to be paid by the customer.
• If an account remains at Nil for a continuous period of six months, the bank has the right to close it.
• Maximum two deposits and two cheque withdrawals are allowed free of charges in a month.
• Unlimited free of charge ATM withdrawals are allowed from bank’s own ATMs.
• In case of withdrawal from ATMs of any other bank, charges will be recovered from the other bank.
• A regular banking account can be converted to a BBA on the customer's request / consent.
• There is NO bar on opening a joint BBA account.

6)PLS Term Deposits
Term deposits are the deposits repayable after a predetermined future date. Such deposit transactions may be for a period ranging from one month to ten years or even longer.
• Profit is paid on the simple interest basis.
• Roll-over option can be made available.
• Zakat is applicable on the face value, if TDR was outstanding on Zakat valuation date or payment of profit whichever is earlier.
• Tax / withholding tax shall be recovered as per law of the land on profit disbursed.(Withholding tax is applicable on all types of accounts where the bank pays profit including savings accounts. Tax rate is 10% on profit.)
Different banks have issued different liability products for RTA (Rupees Transactional Accounts) and Term Deposit Accounts. The applicable rules are within the parameters explained above.

7)Cash Management Account

There are three types

A) Simple Cash Management Account.
A Cash Management Account is a banking service provided to high profile business customers through which they can speedily obtain funds from their collection accounts and transfer to their main account which is usually in overdraft. The remittances are effected through a computer module. The module collects and consolidates data from the customer's bank account in any location in the country. Through cash management, customers can speed up collection of their accounts receivable and utilize their funds to the optimum level. Example PSO cash management account for Petrol pumps proceeds. PSO has an overdraft facility in a Karachi The petrol pumps get proceeds of PSO petrol from vehicle users. Petrol pumps all over Pakistan deposit proceeds in branches geographically close to them. The computer module remits all the amounts to the overdraft facility account at Karachi with advices to all concerned. In this way PSO saves on interest costs as the proceeds of collections are efficiently pooled to reduce the overdraft.

B) Non Discretionary Wealth/Cash Management Account
Through such accounts banks provide the following services.
The customer opens account and enters into an agreement with the bank where the customer deposits funds in the account. Customer makes decision and instructs the bank to invest designated sums in bank deposit schemes, in equity shares, in mutual funds, in bonds issued by private institutions, and/or in securities issued by the government like Treasury Bills, Pakistan Investment Bonds. In return for a fee the bank does all the paper work, invests the funds as desired on behalf of the customer, collects profit, sells the investments when requested. The bank does all the donkey work in the process. The bank handles all the periodical profit and capital gains the Customer earns for the customers account.

C) Discretionary Wealth/Cash Management Account.
The bank and customer enter into an agreement whereby the customer deposits his amount and gives discretionary authority to the bank to invest the amount in securities / avenues as chosen by the investment experts of the bank. The bank hires capable security analysts who invest the amount in shares, bonds or other investments in their best judgement. The bank performs all the sales, purchases, collections for the customer. All profits and capital gains/losses are passed to the customer.

8)Collection accounts
Collection accounts are opened for collection of funds at the request of business customers, charitable institutions and on the instructions of the government in the case of any disaster.
For the scenarios listed above, a main account is opened in any branch of the bank. In addition to this main account, “collection accounts” are opened in other branches from where funds are transferred to the main account as per instruction / arrangement. For example in order to assist the public to donate for the rehabilitation of people displaced by the powerful earthquake in Baluchistan, Prime Ministers Relief Fund has been instituted and collection accounts have been opened in all the commercial bank branches in Pakistan. Amounts credited to these collection accounts are remitted to the Central Relief Fund Account at the disposal of the Central Government.

9)Share Subscription account
When a public limited company floats its shares for subscription, it has to open accounts in banks which are nominated as "bankers to the issue". These banks authorize their branches to collect share applications from the public against deposits of subscription money in a collection account; this is ultimately transferred to a main account of the bank on the closing date of the subscription. If the number of share applications is more than the shares offered, balloting takes place and refunds to unsuccessful applicants are made through the branches where the applications were received. The subscription amount relating to the successful share applications remains available at the disposal of the share issuing Company. Once the funds are transferred to the main company account the subscription account is closed.

Cheque Books and Loose Cheques
Issuance of Cheque Book - Opening of an account like current or savings account would necessarily require issuance of a cheque book to enable the account holder to issue payment instructions. The first cheque book should only be issued once all the formalities have been completed for opening of the account and not before that. Subsequent cheque book should be issued on receipt of proper Requisition Slip (from the cheque book issued) duly signed and the signatures verified. The receipt of cheque book should be acknowledged by the account holder.

Issuance of Loose cheques — Though most banks discourage issuance of loose cheques, on some occasions a customer requests for issuance of a loose cheque leaf.

The following precautions should be taken:

i. A loose cheque should only be issued to an account holder, who calls personally and who is intimately known to the Manager or a Senior Officer of the branch for the purpose of drawing money in cash only. Loose cheque cannot be used for third party payments.

ii. Loose cheques should be issued to customers from a new and full cheque book and not from ‘unused cheques’ which are returned by other account holder.

iii. A record of loose cheques issued should be maintained in the cheque Book Issued Register by allocating last few pages of the register for the purpose separately for Current and Savings Deposit Accounts.

iv. Loose cheque should be issued after completion of the following formalities:
a) The party requiring a loose cheque should sign the loose cheque requisition slip which is attested by an officer, who preferably knows him personally and the signature of the account holder is verified by the Officer In-charge, Deposits Department or the Manager after very carefully examining specimen signature of the account holder available on the bank’s record.

b) A stamp bearing the words “Loose Cheque” is affixed on the face of the cheque at the top. Close to the “Loose Cheque” stamp, words “Not more than Rs so and so may be written as a precautionary measure.
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Old Sunday, April 06, 2014
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Default Payment Methods

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Payment Methods
Payment methods are the instruments which are used by the account holders, whether an individual, a partnership firm or joint stock company, to operate upon the account to meet their payment obligations. These may include paper based or electronic based or a combination of both.

8.1. CHEQUE:
The most popular payment instrument used the world over is ‘cheque’. The facility to draw cheques by a customer to operate upon his account maintained with a financial institution is one of the prerequisites to qualify it as a bank. In fact a cheque is an order given by a customer to his banker to pay a sum of money either to himself or the named payee or to his order. In legal terms, the definition derived from the Negotiable Instruments Act 1881 is given below:

“Section 6 — a cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand”

Thus a cheque is a species of a bill of exchange; its distinguishing characteristics being that:
i. it must be drawn on a banker and
ii. it must be payable on demand.

Let us see, what is Bill of Exchange.
A bill of exchange is defined as:
1. Unconditional order
2. Which is in writing
3. Addressed from one person to another
4. Signed by the person giving it
5. Requiring the person to whom it is addressed to pay
6. Either on demand or at a fixed or determinable future time
7. A sum certain in money
8. to a specified person
or to the order of a specified person or
to the bearer.

Thus wherever the term ‘bill’ is used in the Negotiable Instrument Act, prima facie it covers both bill of exchange and cheques.

8.2. Types of Cheques:

8.2.1. Open cheque — It is payable in cash at the counters of a banker in accordance with the practice of the banks.

8.2.2. Crossed cheques — It is not payable in cash at the counters of a banker but can be collected by a banker who would credit the proceeds to his customer’s account after realization.

8.2.3. Dating a cheque — there is no legal requirement that a cheque should be dated. The Negotiable Instrument Act Section 20 allows an inchoate {meanings: just beginning to form and therefore not clear or developed } instrument to be completed. However, in practice banks do not pay undated cheques.
Ante Dated Cheque. Ante dated cheque is one that bears a date before the date on which it is presented for payment. Such cheque is paid if the period of ante date is less than six months.
Stale Cheque. If however the period of ante- date is six months or more than six months, such cheque will be called a Stale Cheque and will be dishonoured.
Post Dated Cheque. A post dated cheque is one that is presented for payment on a date before the date of issue appearing on the cheque. In other words a cheque is presented for payment but the date written on the cheque has not yet arrived. Such cheque will be dishonoured.
Cheque bearing a Date occurring on a Sunday. This reason does not make a cheque invalid. It is a valid cheque.

8.3. Parties to a cheque — Section 7 of the Negotiable Instruments Act mentions parties as Drawer, Drawee, Drawee-in- case of need, Acceptor, Acceptor for Honour and Payee. However we will only discuss the parties relevant to a cheque i.e. Drawer, Drawee & Payee. (We shall study Negotiable Instruments in detail in a subsequent hand out.)

8.3.1. The Drawer: The maker of the cheque, or to be more exact the account holder, is technically called the drawer (Sec.7). In order to constitute a valid authority, the drawer must sign the instrument, according to the recorded signature with his banker. The word ‘drawer’ is used for bills of exchange including cheques while for Promissory Notes the word ‘maker’ is used. A drawer may be the accountholder himself or a person authorized by him i.e. an agent may be drawer for the principal.

8.3.2. The Drawee: The drawee is the person on whom the instrument is drawn. A cheque is always drawn on a bank where the customer maintains his account. Unlike the drawer, a drawee cannot be a substitute i.e. it must be the named bank.

8.3.3. The Payee: According to Sec.7 of the Act, a payee is the person named in the cheque to whom or to whose order the payment is to be made. If more than one person are named as payee, then the cheque will be payable jointly or alternately.

8.4. Components of a Bill of Exchange (includes a cheque):

8.4.1. Unconditional order — it must be an order and that too unconditional. The words ‘please pay’ or simply ‘pay’ are sufficient to constitute an order. Payment from a particular account or a statement of the transaction e.g. ‘college fee’ does not make it ‘conditional’; In Palmer vs. Pratt (1824) it was held that a bill of exchange payable 30 days after the arrival of the ship Paragon at Calcutta was conditional for the said ship may never have arrived at Calcutta. The printed format of cheque books provided by Banks to their customers to draw cheques do not carry any provision to add any condition to its payment. If a banker is ordered to pay conditionally on the payee’s signing a receipt, the instrument will acquire the status of an order & not a cheque.
8.4.2. It must be in writing. The Bills of Exchange Act, 1882 provides that writing includes printing as well. Accordingly, a cheque prepared on a typewriter would be treated as a valid instrument.

8.4.3. Addressed by one person to another person — a person may be ‘natural person’ or a ‘legal person’ and the latter includes a company; ‘addressed’ requires that the name of the addressee person must appear on the instrument itself. It is not important whether it appears in the top (as on cheques) or at the lower part (as on bills of exchange). The instrument drawn by a Banker upon itself, like banker’s draft is not a bill of exchange as it is not addressed by one person to another.
8.4.4. It must be signed by the person giving it. An unsigned cheque is an incomplete instrument and will be refused by the drawee’s bank for payment.

8.4.5. Pay on demand or at a fixed or determinable future time; on demand refers to ‘demand’ or at sight’ or’ on presentation’ or in which ‘no time is expressed’. A cheque is always payable on demand. The responsibility of the drawee bank originates the moment a cheque is presented for payment. Note: An instrument payable at a fixed or determinable future time is a bill of exchange but it is not a cheque.

8.4.6. Amount certain in money; an amount indicating (a) with interest (b) by stated instalments (c) by stated instalments with a provision that the default in payment of any instalments the whole amount shall become due; is deemed to be certain in money. Where the amount stated in the cheque differs in words and figure, it appears as the instrument would not be an order for payment of a sum certain in money. However, the bill of exchange contemplates the possibility of discrepancy in words and figures and it specifically provides that in such cases, the sum denoted by words is the amount payable. In practice, the bankers usually return such cheques with remarks “words and figures differ”.

8.4.7. Payable to specified person or bearer. Sometimes a customer fills in the cheque stating ‘pay cash’ or ‘order’. Such instruments are not cheques, because ‘cash’ is not a specified person. These are, however, valid orders for payment of money and accordingly paid on presentation. However if the word ‘bearer’ remains on the instrument, it will fall within the definition. In most cases there will be a named payee and it will be payable to his order or bearer.

8.4. Payment in due course - The honouring of customer’s cheque is a contractual obligation of a banker. A valid payment, however, is one which fulfils the requirements laid down under the “Payment in due course”. Section 10 of the Negotiable Instrument Act, 1881 defines as under:

“Payment in due course means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground of believing that he is not entitled to receive payment of the amount therein mentioned”.

A payment made by a banker will constitute as payment in due course if it fulfils the following:

1. Proper form - The cheque must be drawn by the drawer in accordance with the provisions mentioned in Sec. 6 of the Negotiable Instruments Act, 1881. The Banker must ensure before payment that the cheque has been properly filled and no changes have been made to its format like the name of drawee Branch, account number etc.

2. Not crossed - A cheque can be either open or crossed. A crossed cheque is one which is not payable to any person but a collecting banker. A payment of a crossed cheque over the counter would not constitute payment in due course.

3. Drawn on the particular branch - The payment of cheque is contingent on its presentation at the branch where the customer is maintaining his account. However, with the introduction of on-line banking facility the cheques are also encashed on any other branch of the same bank. The customer’s account is ultimately debited at the same Branch where the account is maintained.

4. Payable to bearer or order - When a bearer cheque is presented for payment, the drawee bank is discharged by paying to the bearer who is presenting the instrument by obtaining an acknowledgement of receipt of money on the back of the cheque. However, in case of order cheque, it is the banker’s responsibility to confirm the identity of the payee before making any payment.

5. Not be mutilated - When the appearance of the cheque reveals that it has been torn or worn out and gives sufficient reason to believe the customer’s intention is to withdraw his authority, it is called mutilation. The banker should ensure that the cheque presented for payment has no sign of mutilation.

6. No unauthorized material alterations — Material alterations include the date, the sum payable, the name of payee and alteration of the ‘order’ to bearer but not vice versa. These alterations form part of Section 3 (f). Section 87 says “Any material alteration of a negotiable instrument renders the same void against anyone who is a party thereto at the time of making such alteration and does not consent thereto unless it was made in order to carry out the common intention of the original parties and any such alteration, if made by an endorsee, discharges his endorser from all liability to him in respect of the consideration thereof’.

7. Sufficient funds available - The account on which a cheque is drawn must be in funds to enable the bank to make payment. Section 31 of the Act states “The drawee of a cheque having sufficient funds of the drawer in his hands, properly applicable to the payment of such cheque must pay the cheque when duly required to do so and in default of such payment, must compensate the drawer for any loss or damage caused by such default”.

8. Not be post dated or stale — The responsibility of the paying banker as regards payment or non-payment of cheques drawn on him is quite heavy. If the paying banker honours a cheque which should have been dishonoured, the paying banker may loose the money and if he dishonours it when it should have been paid, he is liable to pay damages for wrongful dishonour. The banker has only two options; (i) honour or (ii) dishonour.

The customer expects that the maker of the cheque may have arranged funds for payment on the date mentioned and if the cheque is presented before mentioned date of payment, it may be returned being post-dated. The other risks include:

a. The customer may countermand the payment before the due date of the cheque by informing the bank in writing. A payment before the due date will not be in accordance with the mandate of the customer and hence cannot be debited to the account.

b. Before the due date the customer may die and the death cancels the mandate given to the bank. If the bank has paid the cheque and the customer dies before that date, the banker will have no mandate to debit the account.

c. Payment of a ‘post-dated’ cheque will not be deemed to be payment in due course and hence the paying banker will not be entitled to statutory protection.

d. The customer may become insolvent or insane before the due date and here again the banker will loose the customer’s mandate

e. If a ‘post-dated’ cheque is paid, it may consume balance which the customer actually had in mind for payment of another cheque and which may have to be dishonoured for lack of funds thus making the banker liable to damages for wrongful dishonour of the cheque.
Dr. Rajanyaam in his article ‘the post-dated cheque and Holder in due course’ writes, “An instrument in the form of a cheque which is ‘post-dated’ is not a cheque in law”. Therefore a banker who pays such an instrument before the due date is unable to debit the customers account with the amount. A post-dated cheque is technically not a cheque until the ostensible date. A cheque by definition is payable on demand and hence a cheque with a date in future is not payable on demand. An Indian writer Parthasarethy in his book “Cheques in Law and Practice, 2 ed. 1972 p. 32 writes “A post-dated cheque till the date thereon arrives, could be treated as a bill payable at a future date”

A cheque is termed ‘out-of-date’ when it is either post dated or stale. If a banker pays a ‘post-dated’ cheque before its due date, he loses the protection eligible under the law. It is also customary amongst bankers in Pakistan that they do not pay cheques which are presented after a period of six months from the date of issue. Such cheques are termed as ‘stale’ as described under Sec. 21 of the Negotiable Instrument Act, 1881 and would be returned by the bank. A bill is not invalid by reason of that it is ‘ante-dated’ or ‘post dated’ or that it bears a date when it was a Sunday. An antedated cheque is one which bears an earlier date than the actual date of drawing. Therefore if on 25th January 2006 a cheque may be written with a date as 25th Dec 2005 it will be an ante-dated cheque.

9. Presented during banking hours - A banker is liable to honour cheques drawn on him, if it is presented for payment during working hours and on banking days only. The banking hours are fixed by banks and non-working days are announced by State Bank of Pakistan in compliance with the Negotiable Instruments Act.

10. No legal bar on payment - A banker would not make payment if the payment has been stopped by the drawer through written notice received by the banker, or the banker has knowledge of any defective title of the person presenting the instrument for payment; or has received a notice of insolvency, insanity or death of the customer, or in case of a company, notice of winding up or a notice of ‘assignment’ of the available credit balance in the account by the customer etc.

Protection to the Paying Banker
Section 89 : Payment of instrument on which alteration is not apparent.

Where a promissory note, bill of exchange or cheque has been materially altered but does not appear to have been so altered, or where a cheque is presented for payment which does not at the time of presentation appear to be crossed or to have had a crossing which has been obliterated, payment thereof by a person or banker liable to pay and paying the same according to the apparent tenor thereof at the time of payment and otherwise in due course, in good faith and without negligence, shall discharge such person or banker liable to pay and paying the same according to the apparent tenor thereof at the time of payment and otherwise in due course, shall discharge such a person or banker from all liability thereon, and such payment shall not be questioned by reasons of the instrument having been altered, or the cheque crossed. The protection will be available only if payment is in due course, in good faith and without negligence.

8.8. Protection to the Collecting Banker — Sec. 131 of the Negotiable Instrument Act provides that where a banker in good faith and without negligence receives payment for a customer of a cheque crossed generally or specially to himself, and the customer has no title or defective title thereto, the bankers shall not incur any liability to the true owner of the cheque by reason only of having received such payment provided the payment has been collected in good faith and without negligence.
Please note that this protection is available only if the collection is in good faith and without negligence. The word negligence here extends to the process of opening of the account in which the amount is credited. The bank must have fulfilled all the required due diligence at the time of opening the account which process should have been executed without negligence.

8.9. Negotiation of Cheques - A cheque is negotiated when the ownership in it is transferred from one person to another in such a manner as to constitute the transferee the holder of the cheque. A cheque payable to bearer is negotiated by simple delivery, whereas a cheque payable to order is negotiated by endorsement and delivery. An endorsement can be made on the back by the holder of the instrument, to another person who takes it as a new holder.

Contributory Negligence by a Drawer
. A customer drawing a cheque in a careless manner which facilitates the material alteration has to suffer the loss. The House of Lords in London Joint Stock Bank vs. Macmillan & Arthur (1918) held that the drawer of the cheque (not the bank) must suffer the loss caused by an alteration in cheque if such an alteration has been facilitated by the customer. (E.g. if the customer leaves spaces in between the digits of the amount and spaces between the words when writing the amount in words. If he does so the amounts on the cheque can be altered without being detected by the bank officer’s examination.

Payment of a Cheque under Forged Signatures:
The most important part of a cheque is the signature of the customer, the authority to execute his instructions and the rest of the cheque is very often permitted to be filled by the subordinates. A cheque by nature is an instruction from the customer to the bank directing it to pay out the money from his account. If therefore the signature of the customer on a cheque is forged then it is not his mandate or order to pay. Therefore, any payment by the bank upon the basis of such a cheque is a payment without authority and would not bind the customer (PLD 1961 Kar. 185)

2. If signatures on cheque or one of the joint signatures to cheque, are not or is not genuine, there is no mandate on bank to pay. Also the question of any negligence on the part of customer, such as leaving cheque book carelessly so that a third party could easily get hold of it, would afford no defence to bank. It was held that the banker was negligent and dishonesty of employee of customer was not proximate cause of loss to bank. (A. I. R 1967 Supreme Court 389)

3. Money paid by bank’s servant under forged cheque cannot be debited to customer, merely because of customer’s negligence in allowing his cheque book to remain unlocked. It is the duty of the employees of the bank to be able to identify the signatures of their customers and if they fail to discharge their duty and thereby suffer loss, there is no reason why the customer should make good that loss. Hence the money paid by the servant of bank under a forged cheque cannot be debited to the customer merely on the ground that the customer was negligent to this extent that he allowed his cheque book to remain unlocked. (A.I. R. 1938 Allahabad 374)

4. As per section 10 of the Negotiable Instrument Act “a payment made in due course i.e. payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned”, gives protection to the paying banker. However, where a payment is made on a forged cheque, it cannot be regarded as payment in due course. It may be that the bank is an innocent victim of the fraud but so is the customer. If there are two innocent parties, the one whose negligence led to the ultimate loss is primarily responsible. (1990 CLC 686).

5. In London Joint Stock Bank Ltd. vs. Macmillan and Arthur (1918) the House of Lords held that the customer is under duty to his banker to exercise reasonable care in drawing cheques so as not to mislead his bank or facilitate forgery. This principle was adopted by the Supreme Court of Ceylon in Kulatilleke vs. Mercantile Bank of India (1958).

6. In Greenwood vs. Martins Bank Ltd. (1932) it was held that if the customer discovers that cheques purporting to have been signed by him have been forged, he must inform his bank immediately.

7. Money paid on a forged cheque is not money paid to the customer and money cannot be debited to customer’s account merely because of his negligence in allowing his cheque book to remain unlocked (PLD 1975 Kar 252).

8. As per Section 29 of the Negotiable Instrument Act a forged cheque is a nullity and confers no title and as per Case Law (PLD 1987 Kar. 599) a cheque on which a customer’s signature as drawer is forged, is not a cheque at all and a banker who pays money on it cannot debit the customer’s account with any payment made thereon.

Considering the above judgments a payment under a forged signature is not payment without negligence and therefore cannot be debited to the account of the customer. However what is a forgery is a matter of fact depending on documentary evidence, views of handwriting experts, etc.

Issuing cheques without arranging funds made a Criminal offence in 2001.
8.12. Dishonour of a cheque — some customers are in the habit of issuing cheques without any regard to the balance in the account or any alternate arrangements therefore. Section 20 of the Financial Institutions (Recovery of Finances) Ordinance 2001 lays down:

“Whoever dishonestly issues a cheque towards repayment of a finance or fulfilment of an obligation which is dishonoured on presentation, shall be punishable with imprisonment which may extend to one year or with fine or with both unless he can establish, for which the burden of proof shall rest on him, that he made arrangements with his bank to ensure that the cheque would be honoured and that the bank was at fault in not honouring the cheque “.

Practical & Accounting Steps in Payment of a Cheque

Cash Payment.
Procedure for payment of cheques in cash

 The customer / bearer presents the cheque to the Teller for payment.
 The cheque should not be crossed. If a cheque bears any type of crossing, it can only be credited to an account in a bank, cash cannot be paid.
 The Teller receives the signed cheque from the customer / bearer and asks for one signature on the reverse of the cheque.
 A bearer cheque can be presented by any person. If the cheque is payable to a named person and the word bearer is crossed out, it is treated as an order cheque and the presenter will have to show his CNIC to prove his identity. The officer satisfies himself to ensure that the correct payee has presented the cheque. A copy of the CNIC is retained with the cheque.
 The Teller scrutinizes the instrument for:
- Validity, i.e. stale / post dated
- Amount in words and figures match
- Cheque is not mutilated
- Cheque is bearer
- Alteration / addition / cutting, if any, are authenticated.
 The Teller verifies drawer’s signature from the system and “posts” the cheque. What is the meaning of posting the cheque? Signature verification is of prime importance, because this is the authority by which the customer’s account is debited. Other factors discussed in this hand out are also checked.
 By posting we mean that the details of the cheque are noted on the ledger or computer accounting system of the bank and the balance of the customer is reduced by the amount of the cheque in the banks record. Suppose the previous balance was Rs 100,000/- and the cheque was for Rs 50,000/- this sum will be deducted from the previous balance Rs one Lac and a new balance Rs 50,000/- will be shown on the account.
 By the posting of the cheque the following entries will be passed on the accounting ledger of the bank either manually or through the computer system:-
 Debit: ‘Customer’ account Rs 50,000/- narration ‘cheque no XYZ paid’, and
 Credit: ‘Cash in Hand’ account Rs 50,000/-
 according to the double entry book keeping system.
 In case the cheque amount is in excess of the Teller’s limit, real time (before payment) supervision is required when means a more senior officers scrutinizes the cheque and authorizes payment.
 The cheque is defaced by cancellation either by Teller or by Teller and Supervisor / Operations Manager, if amount exceeds the Teller limit.
 The Teller asks for the signature of the customer / bearer again on the reverse of the cheque to:
 Confirm the identity of the presenter and in acknowledgement for having received the payment.
 The Teller records the denomination on the back of the cheque and cash is delivered to the customer / bearer.
The Teller affixes branch “Cash Paid” stamp with branch name, code and date on the face of the cheque and writes amount paid and signs.

Procedure for payment of cheque in “transfer”
Transfer involves the transaction to be settled between the customers of the same branch or customer(s) of remote branch in the case of authorized system user (Online) branch.
 The Teller receives cheque from depositor along with the deposit slip. The Teller scrutinizes cheque and deposit slip for any discrepancy and confirms that:
 Cheque is signed and drawn in favor of account holder. Alternatively the cheque is payable to bearer or if payable to a third person it is endorsed by the first payee in favour of the account holder.
 If crossed, it is not crossed in favour of some other bank.
 Cheque and deposit slip amount agrees.
 Details and amount on both parts of deposit slip tally.
 Cheque is not stale / post dated or mutilated.
 Alteration / cutting / additions on cheque, if any, are authenticated by the drawer and on deposit slip by depositor. All other factors are also checked.
 Cheque is drawn on the same branch or remote branch. In the case of cheque being drawn on a remote branch, confirms that drawee branch is Online.
 Deposit slip is signed by the depositor.
 The Teller verifies signature, title of account (if mentioned on cheque) and number and posts the cheque against balance available. Signature verification is of prime importance, because this is the authority by which the customer’s account is debited.
 Teller confirms beneficiary account name and number and posts credit in the customer’s account.
 The entries in excess of Teller’s limit will require supervision.
 The Teller affixes Transfer and branch stamp, signs and delivers receipt to the depositor.
 The Teller affixes bank crossing stamp on the face of the cheque and endorsement stamp “Payee’s account credited” on the reverse. The endorsement is signed by the Supervisor. If the cheque is endorsed by the first payee to a second payee the endorsement of first payee should be confirmed by the second payee and the discharge given by the bank will be ‘’first payees endorsement confirmed, amount credited to the account of second payee. (First payees endorsement is confirmed in writing by the second payee and the second payee is the customer of the bank whose account is being credited. The bank therefore confirms the endorsement on the basis of confirmation by the customer whose signatures are available on record.)
For debit/credit to customer account with remote Online branch, system controls / conditions will apply and system will be used for confirming title of account, account number, signature verification and balance confirmation.
When the posting is confirmed the system will pass the following entries on the banks ledger
Debit :Customer account of the drawer of cheque
Credit : Customer account of the ultimate payee of cheque/account on the account credit slip.

Procedure for payment of cheque in inward clearing
When a cheque is used to move funds from Bank ABC to Bank XYZ, branches of both banks located in the same city the process is called ‘local clearing’.
Suppose you work in Faysal Bank Lahore. Your customer gives a cheque to a shop. The shop keeper has his account at Stanchart Lahore. The shop keeper will deposit the cheque ‘drawn on Faysal Bank’ with Stanchart for collection through Clearing and credit to his account.
Stanchart will present the cheque to Faysal Bank for clearing through NIFT.
NIFT will collect/pick up the cheque from Stanchart, make clearing lists and present the cheque to Faysal Bank.
Faysal Bank will debit the account of the drawer of the cheque and make payment to State Bank of Pakistan.
State bank will make payment to Stanchart. Stanchart will credit the shop keeper’s account with the amount. Based on lists from NIFT the State Bank will debit Faysal Bank account and credit Stanchart account in their books.Through this process money has moved from your customers account in FBL to the shop keeper’s account at Stanchart. Here the cheque is a clearing item. For stanchart this transaction is “outward clearing” and for Faysal Bank this is “inward clearing”.
Now we study the practical steps in the drawee bank that is Faysal Bank.
The cheques and other instruments drawn on the same branch of FBL are received from ‘NIFT’ along with forwarding schedule showing number and amount of instruments enclosed.
 Cheques and other instruments are handed over to the respective departments to scrutinize cheques for any discrepancy such as:
- Validity (stale / post dated).
- Amount in words and figures agree.
- Cheque is properly endorsed by beneficiary and the collecting bank Stanchart..
- Cheque bears presenting bank’s clearing and crossing stamps.
- Addition / alteration / cutting, if any, on cheque(s) and other instrument(s), is authenticated.
 If cheques are found to be in order, signature(s) are verified against the bank computer system or manual record. Signature verification is of prime importance, because this is the authority by which the customer’s account is debited. All other factors are also checked.
 The cheques are posted in the respective accounts in the system against available balance through the financial transaction option of the Clearing.
 The branch will ensure that total number and amount of cheques / instruments received through NIFT / Clearing Cell agrees with the amount shown on NIFT / Clearing Cell forwarding schedule.
 Dishonoured cheques / instruments are returned along with the cheque returning memo (showing specific reason for return) duly signed and after entry in the Cheque Returned Register.
 The cheque returning charges are recovered from the bank customers as per schedule of charges.
 Scrutiny of “discharge” by the bank branch which has presented the cheque is important.
 By discharge we mean a statement made by the cheque collecting bank on the back of the cheque over its stamp and signature in which it states as to how the money received by the bank has been or will be utilized/disbursed. Various options are:
 Payees Account Credited
 Payees account will be credited on Realization.
 Received payment
 First payees endorsement confirmed, placed to the account of second payee.
 Collecting banks discharge confirmed.

 The returned cheques are returned to the cheque presenting banks / branches along with the cheque returning memo through NIFT representative.
 NIFT assists in the clearing logistics and paperwork. However the following entries are passed on the banks accounting ledger in respect of inward clearing.
 (What is the meaning of logistics?
 Inward Clearing
 Debit : Customers accounts on whom the inward clearing cheques were drawn.
 Credit : State Bank of Pakistan or National Bank of Pakistan

 Return Clearing
 Debit : State Bank of Pakistan or National Bank of Pakistan
 Credit : Customers accounts whose cheques are returned.

In the next weeks we shall study in detail how the local ‘clearing’ system works.

8.13. Standing Instructions.- Banker extends this service to his customer on a nominal commission fee and posting charges. Payments of periodical nature like monthly subscriptions to clubs, payment of regular fees, remittances to dependents on regular basis, payment of regular insurance premium are made according to the standing instructions of the customer. Customer must keep his account in sufficient funds to enable the banker to execute his standing instructions.
For the above purpose clients give ‘standing instructions’ to the branch maintaining their account to make the periodical payments or remittances by debit to their account. To this end, the following procedure is to be followed by the branch concerned in dealing with such requests when received.

a) The first step would be to verify the signature of the account holder as appearing on the letter received from him containing his standing instructions for effecting certain periodical payments or remittances. The verification of the signature shall be done by the Manager himself or the Officer In-charge of Deposits Department in case of bigger branches.

b) After the account holder’s signature has been verified, his standing instructions would be properly recorded in the Standing Instructions Register maintained at the branch and also on the top of the relative ledger folio of the account under proper authentication of the Branch Manager or the officer-in-charge of Deposit Department as the case may be.

c) On completion of the above action, the said letter shall be filed in the Standing Instructions File maintained at the branch duly ‘page-numbered’ and indexed under proper authentication.

d) A proper date, month, year diary shall be used for ensuring timely execution of client’s standing instructions on due dates and the relative compliance shall be properly monitored by the Branch Manager.

e) Where, however, an account has been classified as ‘Non-Resident Account’ or ‘Blocked Account’, relative instructions of the Exchange Control Manual shall be kept in view, while complying with the standing instructions of the account holder. If the instruction violates the Exchange Control Regulations, the account holder shall be suitably advised about the relative exchange control rules and the bank’s inability to comply with his standing instructions.

8.15. Credit Card (Here the customer basically gets a loan to pay for the purchases) — Credit Cards are both a credit service and a transaction device. The customer at his discretion can use the account and the related credit line to finance purchases or may use the account as an alternative to cash. The credit card market has been segmented by introduction of Silver Card, Gold Card, Platinum Card, etc which offer different features and different payment terms. Some banks have introduced variable pricing arrangements.

A credit card transaction involves three distinct financial contracts among three parties i.e. 1) the ‘card-holder’, 2) the ‘card issuer’ and 3) the ‘dealer’ or ‘merchant’.

First is the contract between the card issuer and the card holder whereby the issuer undertakes to pay for the purchases made by the cardholder within a specified credit limit. The cardholder agrees to reimburse the issuer in the prescribed manner (in other words repay the loan as agreed) and undertakes to pay the applicable credit (interest) charge and annual fee.
The second contract is between the issuer and the dealer/merchant whereby the issuer agrees to pay to the dealer amounts due from cardholder provided the goods or services are supplied on the agreed terms, which means the dealer cannot supply goods or services without making a credit enquiry and approval from the card issuer.
The third agreement is between the dealer/merchant and the cardholder. This agreement remains a contract of sale or a contract for the provision of a service, although payment is expected from the issuer.

8.16. Charge Card- It is a variant of the credit card. However the holder is required to settle the bill promptly and in full when he receives it from the issuer.

8.17. Cheque Card or the cheque guarantee card — In such a case the issuer guarantees payment of cheques drawn by the customer up to an amount specified in the card. Here the issuer agrees to honour a negotiable instrument drawn by the customer whatever the state of his account may be. Such a cheque cannot be countermanded i.e., its payment cannot be stopped by the drawer.

8.18. Debit Card — The holder uses his debit card in specified shops to purchase goods or obtain services. Such a card differs from the other cards in that when the card holder uses his debit card, the price of the goods or the amount to be paid for services is remitted to the retailer by an electronic money transfer through a debit of the sum concerned to the card holder’s bank account.

8.19. Cash card or ATM card - It is used by the customer to obtain cash from an automatic teller machine (ATM) by using the card and personal identification number (PIN) from the keyboard of the ATM terminal. The amount so withdrawn is debited to the account of the customer. Some banks provide other facilities such as ‘balance enquiry’. Cash card differs from all the aforesaid four cards in that in the credit card, charge card and cheque card a transaction between the card holder and the third party is evidenced by a receipt or a voucher and authenticated by comparison of holder’s signatures on the card with signatures given at the time of transaction whereas in case of cash or ATM cards the customer PIN (secret code) is the authority for the transaction.
Nowadays Cards are being issued which function as both ATM Card and Debit Card and these cards are very popular.

_8.7. Banker’s Objections on unpaid cheques
Sometimes cheques have to be returned unpaid for various reasons. Returning of a cheque unpaid for insufficient funds is a very serious matter. May be that it is through oversight that cheque is issued by the drawer in excess of the balance available. Whatever may be the reason, it does create a very bad impression in the market about the prestige and reputation of the drawer. Banks also take great care in ascertaining the funds of the customer that may be under clearance or expected from some sources, before a customer’s cheque is returned unpaid for want of funds. In the past the Banks usually have been giving indirect/vague remarks while returning a cheque such as “Refer to Drawer”.

The State Bank of Pakistan vide its circular 22 of 2005 has directed the banks/ DFIs to give specific and clear reason for dishonouring a cheque. The reason ‘refer to drawer’ is vague and does not indicate a clear reason and it is not used now.

From the year 2001 issuing cheques without making arrangements of appropriate overdraft limit or sufficient balance in the account to meet the cheque has been made a criminal offence which carries a punishment of one year imprisonment. This is all the more reason that bank should not use any vague reason for returning a cheque unpaid.

Other reasons for which cheques are returned unpaid:

i. Cheque is post-dated or ‘out of date’
When a cheque is drawn in a date in advance, i.e. the date which is yet to arrive, it is called ‘post-dated cheque’.
When a cheque, at the time of its presentation, has been in circulation for more than six months from the date it was drawn it is called, ‘out of date, or ‘stale cheque.’

ii. Cheque is mutilated
If, at the time of presentation, a cheque appears torn or mutilated, it will be returned with the reason ‘cheque mutilated, requires drawer’s confirmation’. The rationale for returning such cheque is that the drawer may have intended to cancel the cheque.
If the mutilation occurs at the collecting banker’s end, it must be confirmed by the concerned bank.

iii. Crossed cheque
“Crossed cheque it must be presented through a bank”. When a crossed cheque is presented for cash payment over the counter, it is returned with this objection.
The payment of a crossed cheque can only be made to a banker of the beneficiary.

iv. “Effects not cleared, present again”
There may be some instruments which the customer has deposited for collection and which are still in the course of clearance. In such cases the objection of ‘effects not cleared’ is used.

v. Exceeds arrangements
“Exceeds arrangements.” Cheques that are issued by the customer within the amount of the accommodation (overdraft limit) agreed with the bank are paid. However cheques which exceed the limit agreed with the bank are returned with this reason.

vi. Drawer’s signature differs with the specimen filed with the bank.
This reason is obvious from its wording.

vii. Alteration in date/figures/words/name of payee etc.
“Alteration requires authentication by drawer’s full signatures”.
This too needs no explanation.

viii. Payee’s endorsement required/irregular/illegible.
This is also self-explanatory.

ix. Amount in words and figures differs.
This reason is used when the amount given in figures does not tally with the amount given in words.

x. “Clearing stamp required”.
Sometimes, clearing stamp is not affixed by the collecting bank when sending cheques through clearing. This objection is used in such cases.

XI) “Clearing bank’s discharge required/ irregular/ illegible”.
The paying banker is making the payment of a cheque to the clearing bank which has placed a ’clearing’ stamp on the face of the cheque.
The clearing banker should give a discharge on the back of the cheque and confirm how the amount received by the clearing bank is utilized.
If the cheque is marked account payee the discharge will be ‘Payees account credited’.
If the amount has been credited to a second payee on endorsement by the first payee, the discharge will be ‘first payees endorsement confirmed, placed to the account of second payee’.

The objections on unpaid cheques are numerous. Each objection should fit with respect to specific situations. The objections here-above are commonly used in the day-to-day practical banking operations.
“Whenever you find yourself on the side of the majority, it is time to pause and reflect.” -Mark Twain
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Default General Banking Operations

The bad news is that Time is limited.
However, the good news is that you have total control
on the use of Time available.
Ask yourself as often as possible.
Is , what I am doing now the best use of my Time, at this Time?
Carry a book with you and when you have spare Time
Read it to expand your learning.
Time is finite!
Avoid waste.
Time Management makes the difference between SUCCESS and FAILURE.

General Banking Operations
The following topics are discussed in this Handout:
i. Appropriations.
ii. Rule in Clayton’s Case, 1816.
iii. Banker’s duty of secrecy.
iv. Banker’s right of set off.
v. Banker’s right of lien.

(Appropriation= Allocation of a sum of money for some particular purpose.)
When a customer pays in money or when money is received from a third party for credit, the customer has the right to appropriate the money, i.e. to stipulate (Stipulate= to state clearly and firmly that sth must be done, or how it must be done) that the funds are to be placed to a specified account or applied in payment of a particular debt, or applied specifically to meet certain cheques or bills.

Such appropriation can be made by the customer at the time of deposit or later before the banker has appropriated the funds to any other use. Moreover, the customer can withdraw or vary his appropriations so long as the banker has not irrevocably disposed of the funds, according to the customer’s original appropriation. The banker is bound to act on the customer’s instructions whatever the state of accounts between them. Thus he cannot apply a credit paid by a customer in reduction of the customer’s overdraft if the customer directs that the credit is to meet cheques drawn by him.

In the absence of any appropriation by the customer, the banker can apply payment received to lessen or wipe off any debt owing to him by the customer, including even a debt which is statute-barred (i.e. time barred). The appropriation by the banker need not be made immediately. It may be made at any time before it is communicated to the customer; but once made and communicated to the customer, it cannot be varied or revoked by the banker, and is binding both on him and the customer.( What is time barred? When somebody lends money and the borrower does not return the debt within a reasonable time the lender has a right to file a recovery suit in a court of law. Law has defined a finite time period after the amount becomes due for payment within which a legal suit can be filed. Once this date has passed the court will not entertain the suit.)
The person paying in the money has the primary right to say as to what account it shall be appropriated. The creditor, if the debtor makes no appropriation, has the right to appropriate. If neither exercises the right of appropriation and if there is nothing more than a current account or a particular account kept by the creditor, and he credits money to a particular account then the court concludes that the appropriation has been made, and having been so made it is final and neither the creditor nor the debtor can seek to vary that appropriation.

10.2. Rule in Clayton’s Case 1816
When there is a running or current account between the parties and provided that there has been no appropriation by the debtor or the creditor, then the law appropriates the payment and, according to law, it is the first item on the debit side that is discharged or reduced by the first item on the credit side. The appropriation of successive payments in, is deemed to have been made in accordance with the Rule in Clayton’s Case (Deveynes v. Noble, 1816) viz, “the money first paid in is deemed to have been the first drawn out”, i.e. ‘the credits in order of entry in the account are deemed to have discharged debits in the order in which they appear’.
The effect of the Rule can be seen from the following example.

You know that if a guarantor dies, the estate of the dead person will be responsible for the debt outstanding on the date of death, but the estate will not be responsible for the debts incurred after the death of the guarantor.
Suppose a guarantor of an overdraft facility dies at the time when the person whose account he has guaranteed owes the bank Rs. 10,000/-. If the account is continued unbroken after the guarantor’s death, all future payments-in will go to reduce the debit balance of Rs. 10,000/- existing at the time of the guarantor’s death and all payments out will constitute a new debt not covered by the guarantee. Thus, if the customer pays into the unbroken account Rs. 10,000/- after the guarantor’s death and draws out Rs. 5,000/-, the effect of the Rule will be that the debt covered by the guarantee will be wiped out, and the customer will owe the bank Rs. 5,000/- and this Rs, 5000/- debt will not be covered by the deceased’s guarantee. If a banker or his customer wished to make an appropriation otherwise than in accordance with this Rule, he should indicate his intention clearly and unmistakably to the other party.

This principle is of importance in its effects on the rights of a banker in respect of an overdraft in current account in circumstances such as:-

(a) When a customer dies
(b) When a partner of a Partnership dies
(c) The constitution of a partnership is changed, or
(d) When a guarantee is terminated by death or bankruptcy of the guarantor.

To prevent the operation of the rule (which, it should be noted, applies only to a current or running account), the banker must stop/break the account i.e. discontinue all operations thereon, and open a new account, if possible, getting the consent of the parties concerned to the action taken.

Thus in Royal Bank of Scotland V. Christie, 1840, where a banker on the death of a partner in a partnership firm, allowed the surviving partners to continue operations on the account, it was held that the deceased partner’s estate was discharged as from the date when the payments made in after the partner’s death the debt due from the firm at the time of his death stands adjusted.

10.3. Banker’s Duty of Secrecy.
A banker must not disclose the state of his customer’s account or any information concerning the customer or his affairs, “except upon reasonable and proper occasion” (Hardy V. Veasey, 1868) and a customer who can show that his credit or reputation has suffered in consequence of an unjustifiable disclosure of his affairs by his banker may be awarded damages for breach of contract.

The obligation to observe secrecy does not end even with the closing of the customer’s account.

There is a leading case on the duty of secrecy on banks; Tournier vs. National Provincial and Union Bank of England (1924). The plaintiff had taken a loan from the defendant bank and on nonpayment of an installment, the branch manager during conversation with the employer company of the plaintiff had disclosed the status of the account (overdrawn), that promises of repayment were not being carried out and that the plaintiff was involved in betting. Based on such information the employer company of the plaintiff did not renew his employment contract. Tournier brought an action against the bank for damages for ‘slander’ and for ‘breach of implied term of the contract between him and the bank’ that the bank would not disclose to third parties the state of his account or any transaction relating to it. The court held that the duty of banker as to secrecy is not absolute but qualified and under the following circumstances the bank may divulge information about the customer:

i. Where disclosure is under compulsion of law;

ii. Where there is a duty to public to disclose;

iii. Where the interest of bank requires and

iv. Where the disclosure is made by the express or implied consent of the customer.

In Pakistan we have specific laws governing secrecy. These are briefly given below:

1. BCO Section 82F. Power to call for information. — The Banking Mohtasib shall have the power for purposes of disposing a case, to require a bank to disclose to him any information subject to certain conditions which include that the Banking Mohtasib shall make every endeavour to ensure that banking confidentiality is maintained as required by banking law and procedure and shall take no action which is violative thereof. The Banking Mohtasib may call for any or all such documents that are relevant or pertinent for purposes of deciding a complaint: Provided that he shall not be entitled to call for unrelated documents or documents which may compromise the bank’s position in relation to other customers, provided further that in cases where the Banking Mohtasib is investigating case of corruption, he shall have greater latitude in relation to the inspection of documents. However in the event of a bank refusing to furnish information, or copies of relevant documents, the Banking Mohtasib shall not be authorized to compel the bank to comply with his order but he may draw an adverse inference and comment on the same in his findings.

2. BCO Section 93 - Exchange of information - Banking companies may exchange on confidential basis amongst themselves, either directly or through the Pakistan Banking Council, information about their respective clients.

3. Bankers Books Evidence Act 1891.. s. 6 Inspection of books by order of Court or Judge. On the application of any party to a legal proceeding, the court or a judge may order that such party be at liberty to inspect and take copies of any entries in a bankers book for any of the purposes of such proceedings, or may order the bank to prepare and produce, within a time to be specified in the order, certified copies of all such entries, accompanied by a further certificate that no other entries are to be found in the books of the bank relevant to the matters in issue in such proceeding and such further certificate shall be dated and subscribed in the manner herein before directed in reference to certified copies
4. Supply of information to Income Tax Office. - Section 176 of Income Tax Ordinance 2001 the Commissioner Income Tax may, by notice in writing, require any person to furnish to the Commissioner or an authorized officer any information relevant to any tax under this Ordinance as specified in the notice. The Commissioner may impound
{meanings (of the police, courts of law, etc.) to take sth away from sb, so that they cannot use it}
any accounts or documents produced as above and retain them for so long as may be necessary for examination or for the purposes of prosecution.

5. Section 19 of the National Accountability Bureau Ordinance, 1999 (NAB) - All banks and financial institutions are legally bound to disclose information to NAB upon request, during an ongoing investigation. The Chairman NAB or any authorized officer may, during the course of an inquiry in connection with contravention of the provision of this Ordinance require any bank or financial institution, notwithstanding anything contained in any other law for the time being in force, to provide any information relating to any person whosoever, including copies of entries made in a bank’s or financial institution’s books such as ledgers, day books, cash books and all other books including record of information and transactions saved in electronic or digital form, and the keepers of such records are under an obligation to certify the copies in accordance with law.

10.4. Banker’s Opinions.
The practice of bankers giving “Confidential opinions” to one another and to the so-called “trade protection agencies” concerning the credit and standing of customers, is so well established that, provided the information is honest and fair and has been given in the usual way and in the ordinary course of business, it is unlikely that a customer could successfully object to it. Unless a customer expressly instructs his banker not to give such opinions, he must be regarded as having given his implied consent to this recognized practice when he opens his account.

In Szek v. Lloyds Bank 1908, the giving of a “Confidential Opinion” by a banker to a representative of a recognized trade protection society was not questioned.

A confidential opinion should be essentially of a general nature, embodying the banker’s considered and truthful opinion as to the general reputation and financial position of his customer, but the bank should omit specific details which might infringe upon the customer’s right to secrecy concerning his account.

It is a sound rule to answer as generally as possible and to say as little as possible. Provided the banker gives a truthful opinion that is warranted by the information at his disposal, he is quite safe, even though his opinion turns out to be misleading.

In no circumstances should the banker give actual figures relating to the account or disclose the customer’s balance. But if he is asked whether he considers his customer “Good for trade credit of Rs. 50,000/-” he is entitled to say “Yes” or “No” though, if he has to give a negative opinion, he should make his answer as guarded as possible.

A banker who makes an unauthorized disclosure concerning his customer’s affairs is liable to the customer for damages arising out of breach of contract, and these damages are likely to be assessed on a heavier scale if the opinion contains unwarranted or unjustified remarks detrimental to the credit of the customer.

If the banker makes an unauthorized disclosure, e.g. to another banker, and by mistake says something untrue about his customer, it is doubtful whether he would be liable to his customer on the grounds of libel, as has been sometime suggested, because, such a communication in the ordinary course of business would probably be regarded as privileged, so long as the banker had acted without malice. But a bank manager who maliciously (malice= a feeling of hatred for sb that causes a desire to harm them) gives an unfavorable opinion about a customer may render himself personally liable for libel (or slander if the opinion is given orally) and it is probable that the bank also would be liable.

Summary of conditions under which the banker may divulge the information of an Account.
i) UNDER COMPULSION OF LAW: When a banker is called upon by court of Law or by Income Tax Commissioner he can disclose the actual state of affairs i.e. actual balance, but for this a notice must be received from the competent authority. Bankers Books Evidence Act, 1891 permits banks to produce copies of entries in bank’s books to a court of law instead of actual books. This provision avoids attendance in court with actual books of account.

ii) IN THE NATIONAL INTEREST: Bank is duly bound to inform the appropriate authorities when its customer dealings are not in the national interest like using the account for money laundering and financing illegal activities.

iii) COMMON COURTESY TO OTHER BANKS: It is a generally established practice among bankers to give confidential opinion about their customers to fellow bankers when asked to do so. It is not breach of secrecy, and a customer cannot object to it. In other words we can say that it is an implied condition of the agreement entered into at the time of opening account. The Banker giving opinion must not disclose the actual figure standing in the account of his customer, he should only give opinion in code words such as good, fair, satisfactory and unsatisfactory etc. which are meant for this purpose. The information must be carefully worded and it must be mentioned in the confidential opinion that neither the bank nor its officials are responsible for this information. It should be sent to bank concerned in sealed envelope along with covering letter, but this confidential opinion should not be signed by banker. A covering letter, enclosing the confidential opinion may be signed by a bank officer.

iv) IN BANKS INTEREST: In case of stuck up advances or other disputes banks have to resort to legal proceedings. In all such situations banks have to disclose all the detailed information to the courts of law to get the legal remedy.

v) EXPRESSED OR IMPLIED CONSENT OF CUSTOMER; Customers authorise the banks to give some information about their accounts to their lawyers, accountants and income tax advisors etc. for doing the needful. When such information is sought bankers provide it to the authorised persons.

vi) TRADE PROTECTION ASSOCIATIONS: Bankers some times give general information to Trade Protection Associations such as Chamber of Commerce and Industry etc. which are working for the promotion of commerce and industry of the country. Such information must be general and actual position of customer must not be disclosed.

10.5. Banker’s Right of set-Off.
If a customer has two or more accounts at the same bank, one or more in credit and the other or others in debit, the banker, in the absence of any contrary agreement, or earmarking, has the right, on giving notice to the customer, to set-off the credit balance against the debit balance. In certain cases where combination of two accounts is immediately necessary to ascertain the true (net) state of account between the banker and his customer (e.g. on the death or bankruptcy of the customer; or on service of garnishee order), the right of set-off may be exercised without notice.

In case of ordinary trade debts, the rule is that a creditor may, without notice to his debtor, set off a credit balance due to the debtor against the debt due by him. But the debt owing by a banker to his customer on current account is not the same as an ordinary debt. It involves an obligation on the banker’s part to honor cheques drawn by the customer against the balance outstanding, and because the banker renders himself liable if the customer suffers damages through the wrongful dishonor of any cheques so drawn. This exercise of right of set off against balance in current account should, therefore, be done only after due notice to the customer.

Hence, if the exercise of the right of set-off would involve the return of a customer’s cheques drawn against a credit balance, the banker must not exercise the right without giving reasonable notice to his customer. Moreover, the keeping for two accounts in the name of the same customer involves an implied agreement on the part of the banker to keep the accounts distinct, and, that being so, reasonable notice of his intention to combine them must be given to the customer. In the case of Buckingham v. London & Midland Bank, 1895, the bank had, without notice to the customer, combined a loan account and a current account in the same name, and had dishonored cheques drawn upon the latter. It was held that, owing to the bank’s failure to give notice, the customer was entitled to damages.

Again on the happening of any event that determines (In law the word “determine” means “to end; to terminate”) the banker’s duty to pay a customer’s cheques, e.g. on the death or bankruptcy of the customer, or on service of a garnishee order attaching the customer’s credit balance, the banker is entitled without notice to set-off the balance on separate accounts in order to ascertain the net amount owing to him.
Moreover, if the customer prejudices {to prejudice = to injure or harm, as by some judgment or action} the banker’s right in respect of a security, e.g. by giving a second charge over the property, the banker can exercise his right of set-off without giving notice to the customer.
The Following Is A Summary Of The Conditions Relating To The Application Of The Right Of Set Off.

(i) When account is running: In this case notice from banker is a must, otherwise if a cheque which is drawn properly is dishonoured; the bank’s position may become very embarrassing.

(ii) When operation on account is stopped: As in the case of death, bankruptcy, the right accrues automatically. When a deceased customer had two accounts, one is running in debit and other in credit balance, the banker can adjust debit balance from an account having credit balance before paying the amount to legal heirs of deceased.

1. Debit balance of trust account can be set off against credit balance of trustee's private account as the trustee is personally liable. ,
2. If a customer has more than one account and garnishee order is served on the bank attaching credit balance. In such case debit balance of an account can be transferred to an account having credit balance.
3. A deposit account against overdraft accounts.
4. A Joint credit Account against individual overdraft account when all the joint account holders individually guarantee the overdraft.

1. Debit balance of a trustee or executor against credit balance of the trust.
2. Credit balance of the executor against the debit balance of the deceased.
3. The debit balance of the executor against credit balance of the deceased.
4. Partner's debit balance against partnership credit balance.
5. If O/D is granted to Local Authority in respect of one undertaking it cannot be adjusted by appropriation from the Local Authority's other credit balance.
6. Where banker has knowledge of Trust fund.
7. Where there is an agreement that right of set off will not be exercised.

10.6. Banker’s Right of Lien
A lien is the right of one person to retain property in his hands belonging to another, until certain legal demands against the owner of the property by the person in possession are satisfied. Thus a creditor who has in his possession goods of his debtor may have a lien over the goods in respect of the money due by the debtor. Lien does not as a general rule give the person exercising the lien any power to sell the goods or security retained by him.

Lien may be particular or general. A particular lien is so called because it confers a right to retain the goods in connection with which a particular debt arose, whereas a general lien confers a right to retain goods, not only in respect of the debt incurred with them, but also in respect of the general balance due by the owner of goods to the person exercising the right of lien. In other words, a particular lien applies only to one transaction, or certain transactions, whereas a general lien extends to all transactions between the parties. Certain persons who act as agents on behalf of others e.g. solicitors, bankers, stock brokers, produce brokers and factors {factor = a person who carries on business transactions for another; commission merchant; agent for the sale of goods entrusted to his possession; an agent, as a banking or finance company, engaged in financing the operations of certain companies, or in financing wholesale and retail sales, through the purchase of accounts receivable}
have a right of general lien over all goods and securities of their clients or customers that come into their hands as agents in the ordinary way of business.

No special arrangement or agreement is necessary to create the right of lien; it arises out of the course of dealings between the parties. Nevertheless the right of lien may be expressly conferred by agreement, or it may be definitely excluded either by arrangement between parties or by the existence of a contract or of circumstances inconsistent with the exercise of the right of lien.

Banker’s lien is a “general lien”. However, it cannot be regarded as extending to every type of “security” that comes into a banker’s hands. The term “security” is intended to mean “such securities as promissory notes, bills of exchange, coupons, bonds of foreign governments, etc.” Nevertheless, in a number of cases banker’s lien has been held to cover non-negotiable securities.

In Re-Bowes 1886, the assumption seems to have been that banker’s lien would attach to a policy of insurance; in United Services Company, 1871, banker’s lien was held to attach to share certificate, and in Jeffreyes v. Agra and Mastermans’s Bank, 1886, a form of deposit receipt was held to be subject to banker’s lien.

All securities that come to the banker’s hands in the ordinary course of business as a banker will be subject to his lien, provided there is no express or implied contract to the contrary. But it is not always easy to decide when securities do come into the hands of the banker in the ordinary course of business as a banker. He unquestionably has a lien on bills of exchange, promissory notes, cheques, coupons and dividend warrants, handed to him for collection, and probably also over a certificate for shares purchased by him on behalf of a customer. But where articles are handed to a banker solely for safe custody, the banker is acting merely as a bailee and as such has no lien over the articles.

A general lien cannot arise in respect of securities deposited for a special purpose only, although circumstances may be such as to create a particular lien in respect of the securities. Thus a banker cannot have a general lien in respect of property of customer pledged as security for a particular debt. For example, if A has two overdrafts at a bank, and has pledged securities for repayment of one overdraft specifically the bank can only use the security to adjust that overdraft and only the surplus, if any, can be used to pay off or reduce the other overdraft.

No lien arises in respect of property which comes to the banker’s hands by mistake, or which is placed in his hands to cover an advance that is not yet granted. Banker’s right of sale of securities placed under lien should be distinctly understood. Banker’s lien has come to be regarded as an “implied pledge” and a pledge gives the pledgee a right of sale. But a banker’s right of sale is generally considered as extending only to fully negotiable securities such as, bearer bonds, coupons and share warrants payable to bearer. In respect of such securities the right of sale may be exercised by the banker without the consent of the customer if the latter cannot pay or refuses to pay what he owes, although reasonable notice of the intention to sell should be given to the customer.

It is not however clear whether the banker’s right of sale extends to securities which are not fully negotiable. Most cases concerning lien have applied to negotiable instruments and in the absence of legal decision on the matter, it seems advisable to regard a banker’s lien on non-negotiable securities as conferring only a right to retain them until his demands have been satisfied. To release such property, the banker would probably have to apply to the court.

The following is a summary of the conditions relating to a lien by bank.
A special or particular lien is right to retain goods in respect of which the debt was incurred e.g. Railways Authorities have lien on goods which were entrusted to them for transport pending payment of carriage.

It is a right to retain not only for which a debt is incurred on particular goods but for the general balance due. The bankers, solicitors and stock-holders have general lien. A banker's lien is a special type of general lien. It includes a right of sale after reasonable notice. A banker has a general lien on all securities deposited with him as banker by a customer, unless there is contract to the contrary.
The following conditions must be present in order to exercise this right:

i That the property of customer must come into the hands of banker as a banker of
ii. There should not be any entrustment for special purpose.
iii. Banker should obtain possession lawfully.
iv. There should be no agreement inconsistent with the lien.

1. Bills, cheques and documents for collection. (This is bank’s ordinary business).
2. Bearer bonds and coupons which are left for collection.
3. Coupon only where the bond is in safe-custody.
4. Promissory Note, Bill of Exchange, Treasury Bills, Coupon Bonds of foreign countries, deposited with bank.
5. Securities left after adjustment.
6. Dividend, Interest warrant or stocks and debenture certificates issued in the name of bank for the account of the customer.
7. Shares certificates purchased by the bank for customer.

1. When it is not the property of the customer. If the banker is unaware the lien not affected.
2. Securities deposited for particular purpose.
3. Credit balances in respect of contingent liability of bills not yet due (Bill Purchased).
4. Bonds when customer himself cuts the coupons thereon for collection, presumption being that bonds are left for safe custody.
5. Articles left for safe custody.
6. Securities given for sale.
7. Documents and valuables inadvertently left with the bank.
8. Balances not due.
9. Trust accounts.
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Default Remittances

Don’t wait for your ship to come in, swim out to it.
Be Proactive, rather than Reactive.
Remittances can be defined as an act of transferring money to a distant place. Banks issue remittances on behalf of customers after receiving the value of remittance and related charges/Govt taxes, if any, are taken care of. Payment in cash is not only very risky but also time consuming. Remittances as such play a vital role in day-to-day business. Remittances payable within the country are called ‘In Land Remittances’. Remittances payable outside the country and received from foreign countries are called ‘Foreign Remittances’.
In order to provide for an ownership structure in Pakistan for remittance facilitation, State Bank of Pakistan, Ministry of Overseas Pakistanis and Ministry of Finance launched a joint initiative called ‘Pakistan Remittance Initiative’. This initiative has been taken to achieve the objective of facilitating, supporting, faster, cheaper, convenient and efficient flow of remittances. This initiative shall take all necessary steps and actions to enhance the flow of remittances.
Types of Inland Remittances
• Pay order
• Demand draft
• Telegraphic transfer
• Cashier’s cheques / banker’s cheques / Rupee traveler’s cheques
• Online transfer
• 1. Pay order (PO)
Pay order is an order to pay a certain amount of money mentioned in the instrument on demand to the payee. The bank is discharged by payment in due course. Pay order is generally used for making local payments and the same is done by the branch that issues it. This is an order instrument and transferred through negotiation. This is like a Banker's Cheque but issued locally for local payments. This is different from a demand draft which is payable for outstations and is generally used for outstation payments.

Issuance procedure
• Request shall be received on standard application form or on customer’s written request.
• In the case of a walk-in customer, the necessary KYC (know your customer) procedures should be completed, such as address of the purchaser, telephone number(s) and a photo copy of the CNIC for due diligence. Check that all required information on the application is completed and that it is duly signed.
• If the pay order is to be issued against cash, then the same needs to be collected along with charges and a cash-received stamp is affixed onto the pay order application.
• If the pay order is to be issued against a cheque, then it should be posted in the account. Service charges, if not collected in cash, will have to be posted in the customer’s account through a debit voucher. A transfer stamp needs to be affixed onto the voucher and the pay order before issuing it, either manually or through the system.
Issuance of Pay order / Cashier cheque

Customer approaches the bank for issuance of PO/CC
Request will be received either on standard application form or customer written request In the case of walk-in customer, required KYC should be completed, such as:
Address and telephone number(s) of the purchaser.
Photo copy of CNIC and its comparison with original for due diligence. Purpose of remittance.

Dealing officer must check that all required information in the application form is completed and it is signed

If PO/CC is to be issued against cash, then same shall be collected along with charges and cash received stamp shall be affixed onto application form

If PO/CC is to be issued against cheque, it shall be posted in the account. If charges are not included in the cheque separately, debit voucher shall be prepared and charges shall be recovered

Cheques will be cancelled and transfer stamp must be affixed onto all related vouchers

Duplicate copy shall be handed Pay order/cashier cheque shall be prepared as per details in the application, either manually or through system
It shall be signed by the maker and counter signed by the checker
over to the customer

Payment of Pay Order
When a pay order is presented for payment, the banker should check the
• Issued by the same branch and duly signed by authorized officers.
• There is no alteration on the instrument.
• If presented in clearing, special crossing and clearing stamp is affixed and endorsement is given on back of the instrument.
• Pay order date should not be more than six months old, otherwise it will require revalidation.
After checking all the above points the pay order should be posted in
the register / system and should be marked as paid.
Duplicate issuance
• The purchaser of the pay order should submit an application for loss of the pay order and issuance of a duplicate.
• Signature of the purchaser should be verified from the original application form.
• Prescribed indemnity on required value of stamp paper should be obtained; signed by the purchaser and duly witnessed.
• Approval from competent authorities of the bank for issuance should be obtained.
• Duplicate pay order should be issued and new numbers of the duplicate pay order should be written on PO application form.
• Application from the purchaser, along with original instrument, requesting cancellation of pay order is required.
• The banker should verify the signature of the purchaser from the pay order application form.
• If pay order was issued other than in personal name, clearance / discharge from beneficiary must be obtained.(Note by Ashraf. This precaution has resulted from forgeries and frauds observed in Govt Departments. A person x has to obtain a license from a govt. deptt. The department demands that x submits a pay order as fee for Rs 100,000/- payable to the govt deptt. x pays the amount to a bank, obtains a payorder payable to govt. deptt., delivers the payorder to the govt department. The govt clerk shows pay order received to the officer who signs the licence. The clerk delivers the licence to x. Subsequently the clerk after taking a bribe from x delivers the pay order to x. x returns the pay order to the bank and takes refund. In order to control such frauds the govt departments have asked the banks that they should not refund the pay orders made out in favour of the govt departments unless a responsible govt officer does not authorize refund of such a pay order in writing. Surprisingly the government is unable to discipline its employees and is throwing the burden of preventing frauds by their staff on the banks.
• Pay order should be marked as cancelled and the signature portion of the pay order should be torn out.
• Cancellation should be marked in the PO register / system.
• Proceeds of the pay order should be credited to the customer’s account after recovering cancellation charges.
• If pay order was issued for walk-in customer, another pay order in the name of the purchaser should be issued instead of refunding the amount in cash.

• 2. Demand Draft (DD)
A demand draft is a value received instrument issued by the bank. It is issued in order to pay money drawn by one branch of a bank upon another branch of the same bank or its correspondent. Since this is an order instrument, the drawee bank is discharged by payment in due course and the instrument is transferred through negotiation. DDs are generally drawn on other cities with an objective of making payments there.
• Request should be received on standard application form or on customer's written request / instruction.
• In the case of a walk-in customer, the necessary KYC (know your customer) procedures should be completed, such as address of the purchaser, telephone number(s) and a photo copy of the CNIC for due diligence.
• Check that all required information on the application is completed and that it is duly signed.
• If DD is to be issued against cash, then the same needs to be collected along with charges and a cash-received stamp is affixed onto the pay order application.
• If DD is to be issued against a cheque, then it should be posted in the account. Service charges, if not collected in cash, will have to be posted in the customer's account through a debit voucher. A transfer stamp needs to be affixed onto the voucher and the DD before issuing it, either manually or through the system.
• DDs should be prepared according to the draft application form, signed by two authorized officers and should be delivered to the purchaser.
• Relative credit advice should be prepared and dispatched to the drawee's branch.
• Amount on the draft is protected from risk of alteration by use of ‘protectograph machine’{I.e. a machine by which the figures showing amounts are EMBOSSED on the draft or mail transfer so that it cannot be altered}
When a draft is presented for payment, the banker should check the following: -
• Draft is drawn on the branch where it is presented for payment.
• Signed by authorized officers with attorney number.
• Signature should be verified from power of attorney book.
• There is no alteration on the instrument and it is in order in all respects. In the case of any alteration, the same should be duly authenticated under joint signatures.
• If presented in clearing, a special crossing and clearing stamp is affixed and endorsement is given on the back of the instrument.
• DD date should not be more than six months old, otherwise it will require re-validation.
• After checking all the above points, the DD should be posted in the register / system and should be marked as paid.
Duplicate issuance
• The purchaser of the draft should submit application for loss of the demand draft and issuance of duplicate.
• Signature of the purchaser should be verified from the original application form.
• Drawee branch should be informed about the loss of the draft, with request to mark caution for its payment.
• On receipt of confirmation that draft is outstanding, prescribed indemnity on required value of stamp paper should be obtained, signed by the purchaser and duly witnessed.
• Duplicate demand draft should be issued with a note "duplicate draft is issued in lieu of original draft no dated ".
• New number of the duplicate draft should be written on draft application form.
• If purchaser wants his money back, drawee branch should be asked to remit back money by debiting their DD payable account and by issuing a credit advice.
• On receipt of funds, the same should be credited to customer's account.
• Application from purchaser along with original instrument requesting cancellation of the demand draft.
• The banker should verify signature of the purchaser from the draft application form.
• If demand draft was issued in other than a personal name, clearance/discharge from beneficiary must be obtained.
• Draft should be marked as cancelled and signature portion of draft should be torn out.
• Cancellation should be marked in the DD issue register / system.

• Proceeds of the draft should be paid by debiting suspense account and crediting customer’s account(s) respectively.
• On receipt of credit advice, the suspense account created in lieu of the cancelled DD should be reversed within a maximum of 30 days.
3. Telegraphic transfer (TT)
Telegraphic transfer is a transfer of money by cable or through telegraph from one branch of a bank to another branch of the same bank or its correspondent of a named beneficiary. TT message is prepared under test number. The authenticity of the TT message should be confirmed by the drawee branch by verifying a secret test number. When the test is confirmed, the proceeds of the TT are credited in the account of the beneficiary.
• Customer should apply for remittance of funds through TT on standard application form or on instructions letter duly signed.
• If remittance is requested against deposit of cash, it should be counted and a received cash stamp should be affixed.
• If cheques are tendered along with remittance application they should be posted in the customer’s account and vouchers for the charges should also be prepared and posted.
• The details of the TT should be entered in the TT issue register.
• TT message should be prepared and test should be applied.
• The message should be transmitted by a cable/telegraph/telex.
• Delivery of message over phone should be avoided.
• On receipt of message at the DRAWEE branch, test should be verified on the message.
• If test is not agreed, message should be sent to the issuing branch for revision of test.
• If test is agreed, “Test Agreed Stamp” should be affixed on the message.
• Vouchers shall be prepared by debiting head office account of issuing branch and crediting bills payable TT payable account.
• If beneficiary’s account is in the same branch, bills payable TT payable shall be debited and customer’s account will be credited.
• If beneficiary’s account is in another branch, TT receipt should be issued in the name of the beneficiary and paid in normal clearing.

4. Cashier cheque / banker's cheque
A cashier cheque is a kind of a draft drawn by a branch on its Head Office or Main Office. Cashier cheques are a guaranteed form of payment. This is an order instrument that can be paid when presented at the counter, but generally issued as a crossed cheque. This is a very customer-friendly instrument as it serves the purpose of both demand draft and pay order. A pay order is issued and paid by the same branch; a DD is paid by the branch on which it is drawn, whereas a cashier cheque can be paid at any branch of the bank. Any customer, including walk-in customers, can order a cashier’s cheque from any bank simply by handing them the money over the counter, but if he/she has an account with the bank it is sometimes cheaper.
In western countries such as the UK, cashier cheques are issued with special characteristics, such as:
• Generally issued with enhanced security features, including special bond paper.
• These are designed to decrease the vulnerability to items being counterfeited.
• The cheque is generally signed by one or two bank employees; however, some banks issue cashier’s cheqes featuring a signature of the bank’s or other senior official.
A cashier cheque includes the name of the issuing branch and its code, instrument number, date, drawn on main office and amount in words and figures. It can be issued for any amount and requires the signatures of two authorized officers.
• Application for issuance of cashier cheques should be submitted on a standard form or can be issued against a customer’s written instructions.
• Customer’s name, address and telephone number should be obtained on the application form.
• If purchaser is a walk-in customer, copy of CNIC should be obtained along with original for attestation. This is SBP’s minimum requirement for walk-in customers.
• If a cashier cheque has to be issued against cash, then cash should be counted and “Received Cash Stamp” should be affixed onto the application.
• If a cheque is tendered along with an application, it should be posted in the customer's account and a transfer stamp should be affixed on both the cheque and the application form.
• A cashier cheque of the required amount should be issued under full signature and attorney number.
• Post the details of the cashier cheque in the system; as such, details of the instrument are updated at Head Office record online and on real time basis.
• After posting in the system, the instrument may be delivered to the customer.
• Dispatch related credit advice to the cashier cheque cell.
• Cashier cheque can be paid in cash, transfer or clearing.
• Before encashment, dealing officer should verify signatures on the instrument.
• It is advisable that before encashment, a list of lost instruments should be referred to.
• For walk-in customers, a copy of CNIC should be obtained.
• In the case of a lost instrument being presented for payment, it should be marked as Reported Lost and returned to the presenter.
• The dealing officer, after satisfying himself about the authenticity of the instrument, should cancel it in the same manner as other instruments are cancelled and post the same in the system. The holder should be paid in the mode it was presented for payment (cash, transfer, clearing) and a stamp shall be affixed. (Explain in what meanings the word cancel is used in practical banking)
5. Rupee Traveler's Cheques (TC)
Cheques issued in Pak rupees by the banks to their customers who wish to travel within the country are called Rupee Traveler's Cheques. Each cheque has a space for the customer to sign immediately on receipt of the cheque and another space to sign in the presence of the paying banker at the time of encashment.
• Application of issuance of rupee traveler's cheque should be submitted only on the standard form.
• Customer's name, address and telephone number should be obtained on the application form.
• If purchaser is a walk-in customer, copy of CNIC should be obtained along with original for attestation.
• If TCs have to be issued against cash, then the same should be counted and a "Received Cash Stamp" should be affixed onto the application.
• If a cheque is tendered along with the application, it should be posted in the customer's account and a transfer stamp should be affixed on both cheque and application form.
• TCs of the required denomination should be issued under full signature and attorney number, in the name of the beneficiary, the details of whom should be written on the application form. TCs should be issued after obtaining first the signature on each TC and on the purchase receipt.
• Related credit advice should be dispatched to the TC's cell.
• TCs can be presented for payment either in cash, transfer or in clearing.
• Authenticity of the TC should be checked by verification of the signature on the TC and signature of the purchaser on the purchaser receipt.
• Customer should be asked to put his/her signature in the second space.
• For walk-in customers, a copy of CNIC should be obtained.
• After verification of signature and CNIC, payment can be made.
• If presented in clearing, crossing, clearing, discharge on the reverse should be verified and if everything is in order, cheque should be marked as cancelled, and related credit advice should be issued.
6. Online Transfer
Online transfer means transfer of funds electronically through a computer system. In a cash-free world all transactions can be done electronically. To receive money the customer should have a bank account in the country, but to transfer money, a walk-in customer can also make use of the online fund transfer facility. This is a highly effective and secure way to transfer money.
Through an online system, branches are linked to computer centers and customer's account records are held and processed centrally. Details of counter transactions are transmitted for action from branch terminals online and on a real time basis. This online service can be used for inquiry purposes and for actual banking transactions. The funds are generally available to the beneficiary within minutes and there is no receiver fee. The processing of online funds transfer should be in line with the provisions given in the Payment System and Electronic Funds Transfer Act 2007.
Procedure for online transfer
• Customers can apply for online transfer either through a standard application form or by using deposit slips. These slips are designed in a manner so that a depositor can write the name of a local branch where the cash is deposited and name of the remote branch where funds have to be credited.
• Before accepting an online transfer it should be checked if the remote branch is computerized and online.
• If cash is deposited, a 'received cash' stamp should be affixed onto the application form after counting the cash and recovering charges.
• The customer's cheque and written instructions can also be accepted for online transfer.
• In the case of written instructions, vouchers for debit of the customer's account should be prepared for remittance amount plus charges.
• If the remitter is a walk-in customer, a copy of CNIC should be obtained along with the original for attestation.
• After all cheques are cleared, access to the remote branch should be made and vouchers should be posted. After posting and supervision, fund transfer through the online system should be completed on a real time basis.
In recent times, fraudulent activities in processing of online cash payment of cheques have increased. Fraudsters use chemicals to change the words and figures of the cheque, converting small amounts into large amounts. With a view to preventing fraud and payment of tampered cheques, the following additional control steps may be taken for payment of online cash cheques over the counter:
• Collection of photo copy of CNIC of bearer of cheque and its verification from original.
• All cheques presented for online cash payments should be checked under an ultra violet lamp which can detect whether cheques have been tampered with. These lamps are not costly and can be purchased from local markets.
For online payment of cheques of large amounts, a call back process must be followed by the payee branch. This can be done by referring the details of the cheque to the drawer branch for a call back verification of the cheque with the account holder.
ii. Foreign Remittances
(explain similar modes used for foreign remittances as for inland remittances.
The inward remittances increase our foreign exchange reserves and thus encouraged.
Outward remittances use up valuable foreign exchange so restrictions placed on outward remittances against Pak rupees.)

It is important for the government to know statistics about earning and spending foreign exchange so detailed procedures for reporting foreign remittances have been put in place.

12.3. Outward Foreign remittances;
A remittance abroad involves foreign exchange, the grant of which is subject to the approval of the Foreign Exchange Department of State Bank of Pakistan. For certain specified purposes and for restricted amounts, authorized dealers have been delegated authority to sanction remittances on behalf of State Bank. Except for cases falling under this category, in all other cases prior approval of the Foreign Exchange Department, SBP, on the appropriate form, must be obtained before effecting any remittance.

(According to the current exchange rules, if a person maintains a foreign currency account in a bank the amount debited to the foreign currency account can freely be remitted inside or outside Pakistan in foreign currency without approval from State Bank of Pakistan)

The usual type of remittances and the relevant chapter of the Exchange Manual pertaining to the regulations regarding remittances abroad against payment of Pakistan Rupees are as follows:

i. Travel Allocation Chapter XVIII: - Example remittance or issue of currency notes or traveler’s cheques to travelers for holiday or business trip abroad.

ii. Private Remittances Chapter XVII: - Example remittances for purposes like appearing in foreign examinations, education, etc. Some remittances are approved by commercial banks themselves when the applicants meet the criteria laid down by SBP in the Exchange Manual. For others application is made to SBP.

To facilitate payments abroad, Pakistani banks maintain foreign currency accounts with banks in the principal financial centers of the world which are called Nostro accounts. Before deciding on which correspondent a drawing is to be made a reference should be made to the list of correspondent banks and their agency arrangements. In case a bank does not maintain an account in the country on which the drawing is being made, reimbursement to the drawee bank should be provided as laid down in the agency arrangements. (Explain agency arrangements)

Remittances in currencies not quoted by the banks in Pakistan;
Remittances should normally be effected in currencies the rates for which are quoted by banks. Remittances may also be made in other currencies in special cases provided a provisional deposit sufficient to cover the expected cost is obtained and held in sundry creditors account.

When a remittance is received in Foreign Currency for payment in Pak Rupees the Bank Purchases (buys) foreign currency and pays out Pak Rupees.
When a remittance is SENT in foreign currency against payment in Rupees the bank SELLS foreign currency and charges (debits) the customer in Pak Rupees.

(Society for Worldwide Interbank Financial Telecommunication)
Compared to dispatch of draft and Mail Transfer, and even TT, the SWIFT is a very secure system. The movement of funds is instantaneous. SWIFT was established in 1973 by 239 banks in 15 countries as a non-profit bank-owned cooperative society. The SWIFT transactions relate to remittances, bank transfer and even documentary credits. By using standard format for each type of transaction the transactions are easy to reconcile. The system offers efficiency, speed, accuracy and security and therefore almost all foreign remittances are made by means of SWIFT, now a days.

The SWIFT is a computerized payments system. In the sending bank branch the message is input by one authorized officer and it is approved for dispatch by two different authorized officers, all three using their own passwords. The computer system converts the message into codes so that it cannot be stolen during transmission. At the destination bank branch authorized officers can retrieve the message through their passwords and take action on the payment instructions. It is a highly secure and instantaneous payments system and is used the World over.

12.6. Inward Foreign Remittances
The term “inward remittance means purchase of foreign currencies in whatever form and including M.T., T.T., draft, travelers cheques, drafts under travelers letters of credit, bills of exchange, currency notes and coins and debit to foreign banks’ non-resident Rupee accounts in Pakistani Banks. A Rupee account opened by Standard Chartered London in the books of Standard Chartered Lahore is called Vostro account.

There is no restriction on receipt of remittances from abroad either in foreign currency or by debit to non-resident Rupee accounts of banks’ overseas branches or correspondents. Banks may freely purchase T.Ts, M.Ts, drafts, bills etc., expressed and payable in foreign currencies or drawn in Rupees on banks’ non-resident Rupee accounts.


12.7. Outward Foreign Remittances
The term “outward remittance” means sale of foreign exchange in any form and includes T.Ts, M.Ts, drafts, travelers cheques, travelers letters of credit, foreign currency notes and coins etc and credit to non-resident Rupee account. Foreign outward remittances are subject to foreign exchange regulations of State Bank of Pakistan.

12.8. Mode of Remittances
The Exchange Control Manual lays down that where remittances can be effected by MT or TT the issuance of draft should be avoided. However, where this course of action will cause inconvenience or hardship to the remitter, demand draft crossed “Payees A/c only” may be issued. Advice of draft issued should be dispatched promptly. Delay in this regard may put the beneficiary to considerable inconvenience. Generally, the correspondents also hold instructions that in case of payment of a draft of large amount, a cable should be sent to the issuing branch if the draft advice is still unreceived.

12.9. Cancellation of foreign Remittances

12.9.1. Cancellation of Outward Remittances
In the event of any outward remittance which has already been reported to the State Bank being subsequently cancelled, either in full or in part, Authorised Dealers must report the cancellation of the outward remittance as an inward remittance. The return in which the reversal of the transaction is reported to SBP should be supported by a letter giving the following particulars:

(a) The date of the return in which the outward remittance was reported.
(b) The name and address of the applicant.
(c) The amount of the remittance as effected originally.
(d) The amount cancelled.
(e) Reasons for cancellation.

12.9.2. Cancellation of Inward Remittances

In the event of any inward remittance which has already been reported to the State Bank, being subsequently cancelled either in full or in part, because of non-availability of the beneficiary, Authorized Dealers must report the cancellation of the inward remittance as an outward remittance on form ‘M’. The return in which the reversal of the transaction is reported to SBP should be supported by a letter giving the following particulars:

(a) The date of the return in which the inward remittance was reported.
(b) The name and address of the beneficiary.
(c) The amount of the purchase as effected originally.
(d) The amount cancelled.
(e) Reasons for cancellation.

Reporting of Incoming and Outgoing Foreign Remittances
to State Bank of Pakistan
Now we discuss the Purpose and System of Reporting of Incoming and Outgoing Foreign Currency Remittances to and from the people, government and businesses in Pakistan to the Statistics Department in State Bank of Pakistan.

In order to decide the Import Export policy, determine budget allocations to various sectors of the economy, make decisions regarding monetary policy, fiscal policy, trade policy, customs duties, etc., the State Bank of Pakistan and the Government of Pakistan specially the Ministry of Finance and Ministry of Commerce need STATISTICS of values and volumes of Visible and Invisible Imports and Exports of Pakistan.

To gather such statistics the SBP has laid down a detailed system for strict compliance by virtue of which, whenever any commercial bank receives foreign currency for any purpose or sends out foreign currency for any purpose the bank prepares details of each transaction specially giving the PURPOSE OF INWARD OR OUTWARD REMITTANCE, VALUE AND NATURE OF GOODS IMPORTED OR EXPORTED. Depending upon the amount the bank also gives the name and address of the customer involved.

Following Forms are used for Reporting inward and outward foreign currency remittances:-

Supporting Form Purpose
E Form All remittances coming into Pakistan showing inward receipt of proceeds of export of goods from Pakistan are reported on E form.

R Form All incoming remittances showing amounts received for invisible exports, Remittances from Pakistani expatriates, etc.

I Form All remittances going out of Pakistan being payments for goods imported into the country.

M Form All remittances going out of Pakistan for invisible imports, travel, education, holiday, etc.

Such comprehensive statistics has to be sent by each bank to the state bank of Pakistan on the 3rd day of each month relating to the full previous month.
Heavy penalties are levied if the bank delays in conveying this information.
This statistics is important for the Financial Managers of the country.
“Whenever you find yourself on the side of the majority, it is time to pause and reflect.” -Mark Twain
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