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Old Saturday, April 05, 2014
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Default Banking Notes by Muhammad Ashraf Ali, Member Senior Visiting Faculty, GC University,

" Autograph your work with quality.”
Origin and Evolution of Banking

Explanation of What is a Bank?
If we think of the people in an economy from the point of view of whether they have or do not have spare, extra money or whether they possess or do not possess potentially lucrative ideas of their own to gainfully employ the extra money, we find that the economy is composed of the following four types of people.

1. People with no extra money and no ideas.
2. People with extra money but no ideas (or no time to implement any ideas).
3. People with ideas but not enough money.
4. People with both ideas and extra money.

The first type does not play a major role, they have just enough money to cover their needs, and have no ideas.
People of the fourth type who have extra money, and have ideas as well. They are the self sufficient entrepreneurs who use their own money in their own business ventures.

We will focus our attention on type 2 and type 3.

Type 2 with extra money but no ideas are usually households or investors or retired people. They are the surplus entities.

Type 3 are mostly companies who have no money but they have ideas and time to utilize money in productive enterprises that can generate incomes and cash flows. These are deficit entities.

Banks are actually the intermediaries who collect and gather small individual amounts of money from a large number of households (Type 2) , pool this money and lend the same in large chunks to companies (Type 3) who use the money in cash flow generating production or infrastructure projects.

Companies pay part of the cash flows to banks as interest or profit. Banks keep some to cover their expenses and remuneration for their own services and the balance is paid to households as return/interest as compensation for parting with the money.

Banks thus assist in the setting up of large projects in industry and infrastructure for economic development of the countries and reduction of poverty by pooling the small, idle savings of households for use in industrial enterprises.

The above is by way of understanding the important role of the banks in creating and supporting employment generating productive enterprises. The formal definitions of BANK will follow later in this treatise.

Let’s now look at the financial markets which assist in the channelization of idle resources into productive avenues.


First of all we study the function of the BROKERS in the MARKET mechanism




HOUSE HOLDS →→ →→ →→
(Net Savers) Securities Securities (Net Borrowers)
Surplus Units Stocks/Shares Stocks/Shares Deficit Units
Bonds Bonds
←← ←← ←←

1) Brokers earn BROKERAGE COMMISSION for facilitating direct investment by Net Savers/Surplus Units.
Brokers receive cash from Net Savers and ON-PAY to net borrowers/Deficit Units. They receive share scrips/bonds and ON-PASS to savers/investors/surplus units.
2) Investors i.e. Savers/Surplus Units bear the investment/default risk but also benefit from possible high profits/gains.
3) Brokers do not assume/bear any investment/default risks nor are benefitted from profits/gains on investments.
Disadvantages of Direct Investment to Savers
Risk of financial Loss
Risk of Liquidity Loss

Next we look at the function of BANKS in the MARKET system




(Net Savers) (Net Borrowers)

Current Accounts BANKS &
←← ←←

Advantages of Intermediation

1) Banks (Financial Intermediaries) accept cash from savers/surplus units & give bank
accounts allowing savers liquidity as per deposit terms irrespective of possibility
of default.
2) Financial Intermediaries pool the accounts & deposits and give loans to deficit entities and receive Security Documentations and Collateral.
3) Risk of default in investment in deficit entities is assumed by the financial intermediary.
4) Banks gain from fund based interest income and non fund based business
like imports/exports from the borrowers /deficit units.
5) The savers are benefitted as they do not face investment/default risk or liquidity risk.
Disadvantages of Intermediation
In intermediation the savers get lesser return as compared with direct investment since the intermediary organization does not pass on the full gain to the saver.
Also the Deficit units, the borrowers, have to pay a higher price for the use of funds because they have to pay for both the costs of the intermediary bank and the saver for parting with the money.

Banking, in its most primeval practice, can be traced back to 2000 BC in Babylonia; a more evolved and relatively modern form of banking dates back to early 14th century in Italy.
The term “bank” is derived from the Italian word "banca". The Jews of Lombardy (a province in Italy) used to transact money sitting on benches placed in market places. Those benches were called '“banca” meaning “the money changer’s place”. “Banca” later convened into the word "bank". The first modem bank, “Bank of St. George”, was founded in Italy in 1406. In the beginning banking operations were restricted to the giving and taking of money, whereas today they are engaged in performing many other financial activities like management of investment funds, credit operations and insurance activities.
A bank is defined as an institution which has been licensed by the Central Bank of its country to accept deposits repayable on demand or otherwise, and withdrawal by cheques, draft, order or otherwise. This definition also includes specialized banks such as agricultural banks, investment banks, SME banks, microfinance banks and Post Office Saving Banks, etc. A bank can also be defined as “an institution whose primary activity is to act as a payment agent for customers to borrow and lend".
According to the Banking Companies Ordinance 1962 Sub Section (c): "Banking Company means any company that transacts the business of banking in Pakistan and includes their branches and subsidiaries functioning outside Pakistan of banking companies incorporated in Pakistan inserted by Finance Act 2007)". Section 13 of the Banking Companies Ordinance deals with the minimum paid-up capital and reserve requirement for the commencement of banking business in Pakistan. The authority to alter this requirement lies with the State Bank of Pakistan.
Legal/Statutory definitions of Banking in India and Pakistan:-
India - The Banking Regulations Act 1949 (Section 5 b) defines banking as:
“Banking means the accepting for the purpose of lending or investments, of deposits of money from the public, repayable on demand or otherwise and withdraw-able by cheque, draft, order or otherwise”.

Pakistan - Section 5(b) of the Banking Companies Ordinance 1962 defines “banking” as:
“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”.
Primarily there are two main functions of a bank - accepting money from the depositors and offering that money in the form of loans to the creditors. Depositors lend money to the bank and are paid for it; similarly the bank lends money to the creditors and is paid for it. The earnings of a bank and its shareholders are thus the difference between these two costs - the cost of deposits and the cost of credits. A bank’s primary aim is to keep its depositors and lenders satisfied by giving both parties the maximum benefits in terms of attractive profits and quality services.
At the time of partition there were only a limited number of commercial bank branches present in Pakistan and banking facilities were available only in big cities. With the passage of time, the number of banks and their branches has increased substantially. At present there are more than 10,500 branches of commercial banks providing banking services to more than 30 million customers. Banks have played a vital role in the development of Pakistan’s agricultural and industrial sector.
Every country has its own set of laws and regulations for protection of public interest and to ensure smooth and lawful running of its banks. Similarly, in order to commence banking operations in Pakistan, either domestically or internationally, a bank has to obtain a banking license from the regulator. This license is issued upon ensuring successful adherence and fulfilment of relevant laws and regulations as prescribed by the State Bank of Pakistan. The State Bank of Pakistan is the official regulator of banks in Pakistan as per the Banking Ordinance 1962.
After obtaining a license to operate, a separate license is required to open every new branch under Section 28 of Banking Companies Ordinance 1962. Microfinance banks are licensed under Micro Finance Institutions Ordinance 2001.
The State Bank of Pakistan provides guidance and support to the banking sector for developing and maintaining good business practices. In order to ensure availability of banking facilities to all corners of the country, SBP has instructed banks to open at least 20% branches in rural/under¬served areas. New options for opening sub-branches, sales and service centers and mobile banking units have also been introduced. Banks are being encouraged to enhance their scope towards branchless banking and collaborate by signing Service Level Agreements (SLA) with large companies to extend banking services to the public at non-banking locations. The number of branchless banking accounts has already reached 2.4 million plus and SBP is keen to increase the number of people who have a bank account.
Evolution Of Banking Industry In Pakistan.
Before partition, in the undivided India, the central bank under which banks operated was the Reserve Bank of India and the Reserve Bank of India continued to function as the Central Bank of the banks operating in the newly formed Pakistan.

The then government of the newly established state of Pakistan realized the need to have a central regulatory authority of their own to ensure smooth operations of all the existing and future banks. Despite the shortage of experienced staff and other resources, Quaid-e-Azam Muhammad Ali Jinnah inaugurated The State Bank of Pakistan (SBP) on 1st of July 1948.

In October 1948 Pakistani notes were issued to replace Reserve Bank of India notes. Habib Bank Ltd was already functioning from pre partition days. The National Bank of Pakistan came into being in 1949 as a scheduled bank and to serve as an agent of SBP. Later, Industrial Development Bank of Pakistan and Agriculture Development Bank of Pakistan were formed to support the industrial and agricultural sector. With the development of agriculture, trade and industry, the functions of the state bank became wider. To progress this situation, the State Bank of Pakistan Act 1956 was promulgated. During this period two new banks, Muslim Commercial Bank (MCB) and Pakistan Industrial Credit and Investment Corporation (PICIC), were formed. This was the period of expansion in the banking arena. In late 1959 United Bank Limited (UBL) was established, while Commerce Bank limited and Standard Bank Limited followed soon after.

On 1st of January 1974 banks in Pakistan were nationalized and the Banks Nationalization Act 1974 was promulgated. After nationalization, the formation of new banks in the private sector stopped completely. Due to increasing political interference in the affairs of the banks, business decisions and appointment of staff were not taken on merit. Office discipline deteriorated to a point of non-existence and some nationalized banks were on the verge of collapse.

After 16 years of experiencing nationalization it was realized that, rather than being productive, nationalization actually proved to be quite disastrous for the banking industry. In 1991 the government changed its stance and announced a policy of denationalization of nationalized banks so as to encourage the formation of new banks in the private sector.
Today, the five large network banks - The National Bank of Pakistan, Habib Bank Limited, United Bank Limited, Muslim Commercial Bank Limited and Allied Bank Limited - possess more than 50 % of the country’s deposit base. The remaining 50% is divided between other foreign and private sector banks. Both Muslim Commercial Bank and Allied bank were privatized in 2000 and showed significant improvements in profit and deposit growth. The privatization of Habib Bank and United Bank Limited soon followed. The National Bank of Pakistan, however, is still government owned and is currently the largest bank in deposit base and is almost the sole beneficiary of lucrative government deposits.
Before privatization the five large network banks used to support certain non-lucrative projects on government demand, which included:
• Lending to support projects patronized by influential authorities under government sponsorships.
• Extending loans without requisite collateral.
• Extending loans below market rate returns.
• Utility bill collection below banks cost of management of the bill collection process.
• Over-collection of taxes from these institutions to cover Government revenue shortfall.
• Over-staffing of these institutions with under-skilled ‘preferred’ people.
• Forced branching in unbanked areas.
The above mentioned practices have been reduced substantially as a result of privatization as well as parallel reforms within the sector. Other than the banking industry, Pakistan’s financial sector comprises of the development finance institutions (DFIs), insurance companies, mutual funds, the stock exchange and leasing companies.
The future growth of the banking industry depends on overall economic activity but, more specifically, on the expansion of the industrial sector. The on-going privatization process is providing momentum to the industrial sector which in turn is fuelling the growth of the banking industry.
Steps toward Turnaround
After privatization of the four big banks, the following actions were taken to enhance profitability and reduce costs:
• Headcount reduction to eliminate redundancy by almost 50%.
• Closing down of loss making business areas.
• Merging of close vicinity branches into single units.
• Automation at both head office and branch level.
• Introduction of new products.
• Induction of competitive staff based on merit and emerging requirements.
• Streamlining of the internal audit and compliance functions.
• Increased focus on developing both corporate and consumer portfolios to enhance profitability.
• Streamlining international operations to ensure enhanced profitability.
The above steps have resulted in improvements in the banking arena both in terms of profitability and service standards. These changes have been recognized both locally and internationally, the impact of which can be seen in the form of improved credit ratings by Moody's Investor Services.

Future trends in the Pakistani banking industry
Trends in the Pakistani banking industry in the next few years are likely to be extraordinarily competitive. After a decade of aggressive progress, the industry will take some time for consolidation. Due to the rise in inflation, interest rates will increase farther and the net income spread of the banks will be reduced. Due to the economic uncertainty, the number of non-performing portfolios will also increase. The future approach of the banks will be to focus on Information Technology (IT).
The future success of the banking industry lies in the effective use of information technology, because it benefits the banks and their customers in terms of cost, speed and convenience. At present IT is playing a key role in managing all types of banking operations, product development and improvement of services. It has also helped in defining new customer service standards with the increase in usage of phone banking, Interactive Voice Response (IVR) systems, internet banking, Point of Sale (POS), credit and debit cards. With the increased dependency on the use of information technology, it is imperative that maximum security standards be adopted to ensure the safety, security, and maintenance of e-banking transactions. The number of Automated Teller Machines (ATM) in the country is now well over 5,000. Out of 10,500 branches in the country, more than 8,100 branches are offering real time online banking services. Banks must design infallible data security processes to strengthen controls. Information technology and compliance requirements will, over the next few years, continue to be the most significant determinants of productivity. Skills are a mid-ranking factor among the drivers of productivity, although in the wholesale sectors and in investment and fund management, technical skills will be the most important contributors.

Use of Core Banking System (CBS)
The majority of banks are using the Core Banking System (CBS) as a comprehensive banking solution. It works on a real time basis and the entire banking network resides on one host which leads to efficient reconciliation of head office account entrIes and maintenance of customers’ account details under one CIF (customer information file)
with information on borrowing of all kinds. This system allows an insight of all the relationships a customer maintains with the bank on the basis of a unique ID, generally the CNIC of the customer. In the absence of a core banking system, different departments within banks use different programs for their banking needs. Post implementation of CBS, all functions are centralized at one point of control. All banks in future will move on to implementation of the Core Banking System.
Rules for customers' protection
Since 2008, the State Bank of Pakistan has witnessed an unprecedented growth in consumer banking, which has led to an increase in the grievances of consumers about the products and services of banks/DFIs. In order to deal effectively with these increasing consumer grievances and to put in place an appropriate policy and regulatory mechanism for their redress, SBP has created a Consumer Protection Department. In addition to dealing with and deciding on consumers’ public grievances / complaints regarding consumer products and services, the newly created department also handles complaints related to all types of bank products. It serves a dual purpose, i.e. it protects the customers of the bank and on the other hand it also supports the banking industry by suggesting improvements in banks’ policies. In future, principles-based regulations will be modified for banks’ as well as for customers’ protection.
Centralization of processes
Maximum centralization of processes will be a key factor in future. Account opening, clearing processing inward and outward, collection, Credit Administration department (CAD) affairs, etc will all be centralized. A few major banks have already centralized these functions.
Outsourcing services
Due to unproductive union activities, some banks have started outsourcing various tasks, including security services and hiring of third party staff. In some parts of the world, for example in India, a public sector bank has outsourced work for the installation and maintenance of 1,000 ATMs as part of its plan to scale up alternative channels for business operations. In Pakistan also, instead of setting up a fully fledged department and hiring a huge work force, the trend for allocating specialized jobs to third parties is becoming more popular.
Branchless Banking
It is said that “branchless banking” is the future of Pakistan’s financial sector, as it opens up great opportunities for banks to bring the unbanked segment of society into the financial system. The State Bank of Pakistan, being the central bank of the country, is taking steps to make the branchless banking regulatory framework more flexible to broaden the scope of financial services in line with the other, more traditional banking channels. Branchless banking has huge potential to reach this unbanked and untapped segment of society. This is not only cost effective for the banks but represents an affordable solution for the financially excluded, underprivileged class of society. That is why Pakistan’s financial sector is witnessing a dynamic transition, led by this branchless banking solution. This transition can be witnessed by a comparison of the number of branches versus branchless banking outlets. At present, numbers of branchless banking outlets have reached around 14,000 in around two years, against a total branch network of around 10,500 in 63 years.
According to one estimate, the cost of setting up a conventional branch is 76 times higher than using a third party agent to bring the unbanked areas into the financial system. At present the most popular branchless banking products in the market are “Omni” of UBL, “Easy paisa” of Tameer Bank, MCB Mobile, KASB Mobile and HBL Uphone. According to the SBP disclosure, more than 400,000 branchless/ mobile banking accounts were opened collectively by all banks in the last 18 months. In branchless banking billions of rupees have been transferred from one person to another, from one account to another, and from government to the public sector. The total branchless banking customer accounts is now above 2.4 million.
Priority to the agriculture sector
These days an increasing number of resourceful people are setting up agri-based businesses because real farmers are not getting benefits of agricultural reforms. The major land holding is with the “Zameendars/ Waderas”.
Since 2008 the government has increased the purchase price of wheat, the cost of cotton is increasing worldwide, rice production is increasing although its price is stable, fruit production and exports are also increasing and all these factors have led to an increasing interest in the agricultural sector.

Functions of State Bank of Pakistan

Traditional and Non-Traditional Functions of the State Bank of Pakistan
The State Bank of Pakistan is the Central Bank of the country. In order to achieve its objectives the State Bank performs all the traditional and non-traditional functions. Traditional functions are those which are performed by the central banks of all countries. Non-traditional functions are those which are not traditional or conventional but which SBP has assumed these functions taking into account the specific requirements of the country. In the Statute of the Bank for International Settlements, Basle, Switzerland, a central bank is defined as
'the bank in any country to which has been entrusted the duty of regulating the volume of currency and credit in that country' (Article 56 a).
Traditional functions
Traditional functions performed by Central Banks everywhere are divided into two groups, i.e. primary functions and secondary functions.
Primary functions are issuance of notes, regulation of the financial system, lender of last resort, and conduct of monetary policy.
Secondary functions are management of public debt, management of foreign exchange, advising government on policy matters, securing the payment system and maintaining relationships with international institutions.
1. Sole authority to issue Notes:
Under section 24 of the SBP Act 1956, this is the primary function of the bank - to issue notes in accordance with the requirements of business and the public as a whole. According to section 30 of the SBP Act, assets of the Issue Department (gold / silver reserve, approved foreign exchange, special drawing rights held with IMF and other approved assets.) at no time should fall below its liabilities, i.e. total of notes issued. Out of total assets a minimum Rs.1.2 billion must be kept in the form of gold coins, gold bullion, and silver bullion or approved foreign exchange.
2. Conduct of Monetary and Credit policy:
According to section 9A of the SBP Act, the State Bank of Pakistan is responsible for regulation of the monetary and credit policy of the country in such a manner that it should bring economic stability to the country. The Bank uses direct and indirect instruments for credit control, such as discount rate for three days repo, T-bill auction rate, and open market operations. The Bank also controls credit by prescribing credit ceilings, setting the credit/ debit ratio, and fixing margin requirements. Since 1995, SBP has been controlling liquidity through open market operations.
3. Regulation and supervision of Financial System:
As the central bank, SBP is responsible for safeguarding the soundness of the financial system of the country. Under section 40 A of the Banking Companies Ordinance 1962, it is the responsibility of the SBP to monitor the performance of every banking company and DFIs, as well as Micro Finance banks.
Non-bank financial companies (NBFCs), such as investment banks, leasing companies, mutual funds, Modarba companies, the stock exchange and insurance companies, etc, all fall under the ambit of the Security and Exchange Commission of Pakistan (SECP) which is responsible for monitoring the affairs of these companies.
4. Off-site and on-site monitoring
The Bank monitors banking activities through a combination of off-site monitoring and on-site inspection. Off-site surveillance is conducted by the State Bank through various periodical returns received from banks and DFIs, while on-site inspection is undertaken on the premises of the banks concerned. The purpose of inspection is to check the assets and liabilities as they appear on the books, to evaluate the quality of the assets, to determine compliance with laws, regulations, directives and policy guidelines provided by the State Bank, to judge the soundness of operations and the prudence of lending and investment policies, to appraise the quality of the management and to attempt an estimate of the overall position of the bank.

5. Prudential Regulations
In order to safeguard the interest of depositors and to ensure the safety and soundness of the banks/DFIs, the State Bank has issued Prudential Regulations. The State Bank has devised separate Prudential Regulations for different areas, viz. Corporate and Commercial Banking, Small Enterprise and Medium Enterprise Financing, Consumer Business, Micro Financing and Agriculture Financing.
The Prudential Regulations for Corporate and Commercial Banking govern operations of the financial institutions in respect of their dealing with corporate entities. The Regulations focus on Credit Risk Management, Corporate Governance, Anti Money Laundering and Operations. Regulations for Consumer Financing have been devised to encourage the banks to expand their loan portfolio through creation of new products and to ensure that banks undertake consumer financing in a sensible manner. Consumer financing covers any financing allowed to individuals for meeting their personal, family or household needs and includes credit cards, auto loans, housing finance and other methods of consumer financing.
The Prudential Regulations for Small Enterprises and Medium Enterprises (SMEs) facilitate and encourage the flow of bank credit to the SME sector with the purpose of moving away from collateral-based lending to cash- flow- based lending. The maximum limit of clean financing against personal guarantees has increased to Rs. 5 million for SMEs. This is greater than that for consumer financing as well as for corporate clean financing. The requirement for banks/DFIs to obtain a copy of accounts has been relaxed for exposures of up to Rs. 10 million.
The State Bank has also issued Prudential Regulations for Microfinance Banks and institutions. Microfinance Banks/Institutions (MFBs/MFIs) shall not commence business unless there is a minimum paid-up capital as prescribed in MFIs Ordinance 2001. A MFB/MFI shall also maintain equity equivalent to at least 15% of its risk-weighted assets shall maintain a cash reserve equivalent to not less than 5% of its time and demand liabilities in a current account opened with the State Bank or its agent. In addition to a cash reserve it shall also maintain liquidity equivalent to at least 10% of its time and demand liabilities in the form of liquid assets, i.e. cash, gold and unencumbered approved securities. In particular:
• The MFB/MFI shall not extend loans exceeding Rs. 100,000/- to a single borrower.
• The outstanding principal of the loans and advances, payments against which are overdue for 30 days or more, shall be classified as Non-Performing Loans (NPLs).
6. The Bankers' Bank
The SBP also functions as the bankers' bank. Banks are classified as scheduled and non-scheduled. A scheduled bank is that which fulfils the requirements of a scheduled bank according to section 37(2) of the SBP Act 1956, such as capital and reserves are not less than the requirement prescribed by SBP.
The State Bank maintains an updated list of all scheduled banks at its various offices. These banks are entitled to certain facilities from the State Bank and in return they have some obligations to it. The State Bank provides the following three important services to the scheduled banks:
I. SBP keeps the deposits of commercial banks, which constitute the statutory reserves of scheduled banks. Scheduled banks are required to keep with the State Bank a certain percentage of their demand and time liabilities under Section 36 of SBP Act, 1956.
II. The State Bank also provides wide-ranging remittance facilities to banks at a concessional rate. The Bank provides this facility through the media of its own offices, the branches of National Bank of Pakistan acting as its agents, and treasuries and sub-treasuries holding permanent currency chests at places where the State Bank has no office.
III. In order to streamline payments through the financial system, the Bank also manages the operations of clearing houses. In the major cities, the functions of the SBP clearing house has been handed over to a private agency, namely National Institutional Facilitation Technologies Private Limited (NIFT), to the extent of sorting of payments instruments and preparing clearing schedules.
7. Lender of Last Resort
One of the most important functions of the State Bank is that it acts as the lender of last resort. Under section 17 of the SBP Act 1956, the State Bank provides loan and re-discount facilities to scheduled banks in times of dire need when they can find no other source of funds. These facilities are ordinarily provided by the Bank against government securities, trade bills, agriculture bills, etc. A 3-Day Repo facility was introduced by the State Bank of Pakistan with effect from 1st February, 1992, with the purpose of accommodating the short-term liquidity requirements of financial institutions.

8. Banker to the Government
The State Bank provides business banking facilities to Federal and Provincial Government and some government agencies. These functions performed by the Bank are similar to those ordinarily performed by commercial banks for their customers. The Bank provides the following services to government:
1. Accepts deposits of cash, cheques and drafts by the Government and undertakes the collection of cheques and drafts drawn on other banks. The Bank transfers government funds from one account to another or from one centre to another as advised by them.
2. Federal and Provincial government keep their deposits with the State Bank free of interest. In turn, the State Bank does not charge any commission for the banking services rendered to them.
3. Federal and Provincial government can obtain advances from the SBP subject to mutual agreement in respect of the terms and conditions for such advances.
4. According to section 17, sub section (13) of the SBP Act, SBP, on behalf of Federal, Provincial or Local government, undertakes sale/purchase of gold, silver, approved foreign exchange, securities or shares in any company, and collection of returns on these shares/securities, transaction of Special Drawing Rights (SDR), etc.
{Sometimes called 'paper gold' the SDRs are accounting unit in the books of IMF}

Types of Banks

Primarily all banks gather temporarily idle money for the purpose of lending to others and for investments which bring gain in the form of return, profit and dividends etc.

However, due to the variety of resources of money and the diversity in lending and investment operations, banks have been placed in various categories, such as commercial banks, savings banks, merchant banks, mortgage banks, consumer banks, investment banks, development banks, cooperative banks, eximp banks and central banks etc.
It is important to note that the large banks like Habib, United, MCB etc perform all or many of the functions described under separate categories below and at the same time there are banks which perform only one or more specialized functions. So these types are at times overlapping and not always mutually exclusive.

Commercial Banks
The commercial banks receive deposits from the gen¬eral public which are repayable on demand upon written or¬ders of the depositors. As their most distinctive feature the commercial banks maintain chequeing accounts for the con¬stituents.
The commercial banks are also distinguished for pro¬viding short term finance to trade, commerce and industry for their working capital requirements and short term investment.

Merchant Banks
Merchant banks are those which have been mainly fi¬nancing the domestic and international trade in United King¬dom. During the late eighteenth and early nineteenth centu¬ries the trade between countries was financed by bills of ex¬change by well reputed merchant houses for which they would charge a commission for their service. Thus the business of accepting bills of exchange to finance the trade de¬veloped and gradually these business houses entered into other banking activities and became known as "merchant banks".
Since all the commercial banks, in addition to other banking functions, also deal in trade financing, the term 'merchant banks' have gradually faded away.

Savings Banks
The basic purpose of these banks is to inculcate the habit of savings in the people. The savings bank deposits are not repayable upon only the written orders of the depositor but the depositor or his agent has to appear personally at the saving bank to make withdrawal, and for this purpose he must present a pass book, a certificate of deposit or some similar documents to prove his right to receive payment. Post Office Savings Banks and Savings Account at National Savings Organization are well known operational Savings Banks in Pakistan.

Mortgage Banks
These banks mainly deal in loans for the acquisition or construction of real estate against the security of mortgages. Quite a few such banks are operating in developed part of the world. Savings and Loans associations and farm-loan as¬sociations are some of the well known forms of the mortgage banks. House Building Finance Corporation in Pakistan is a Mortgage Bank.

Consumer Banks
These banks provide finance for purchasing consumer goods for the personal use of the borrowers. For example Car Loans, Consumer durable goods like air conditioners, refrigerators, furniture and House Loans for Residential purposes. Consumer Finance Companies, sales finance companies and credit unions are some of the popular forms of consumer banks. Consumer banks do not give loans for productive/business purposes.

Investment Banks
The investment banks assist industrial / business houses and the government bodies to raise money through the sale of stocks and bonds for usually long term purposes. Main objective of investment banks is to achieve disintermediation where they assist businesses to raise finances for projects directly from the savers through issuance of bonds and issuance of shares. Investment banks serve the investors through floatation of mutual funds. These banks also perform the usual intermediation functions of raising deposits of idle money from the public and finance the business houses and other bodies.
Other functions:-
Assisting Companies in mergers, take-overs.
Consulting services for privatisation.
Services for Public Issues including Underwriting of share issues.
Assisting Companies in the issuance of Term Finance Certificates both Public issues and Private Placements.
Share Brokerage
Managing Mutual Funds.

Development Banks
These banks have been established to provide long term development finance to the trade, commerce, and industry. In Pakistan they are generally government owned
banks, es¬tablished under specially promulgated laws. Zarai Taraqiati Bank of Pakistan, and Industrial Development Bank of Paki¬stan are very well-known development banks. The private commercial banks are usually shy of financing to long term and greenfield projects. This gap is filled by Development Banks.

Cooperative Banks
These were the banks established and registered as cooperative ventures to provide banking facilities to the members of the cooperatives. In Pakistan, the Federal Bank of Cooperatives was such a bank, but now it has been merged with Zarai Taraqiati Bank.
At one stage of history of banking in Pakistan the Cooperative Societies in the country started doing bank type business. They were not properly regulated and they defrauded the general public in a very big way. Subsequently Cooperative Societies were totally banned from conducting bank like business.

Exim Banks
These are usually the government or semi government banks which provide finance and insurance for promo¬tion of imports and exports to trade, commerce and industry. Every country wants to increase its exports to earn valuable foreign exchange but there are many risks for the exporters because the buyers are in distant lands. Exim Banks provide finance for the exporters and provide insurance to the exporters against default of the buyers or country risks. These banks are contributing greatly towards the expansion of international trade of countries, where they func¬tion.

Small and Medium Enterprise Banks. (SME Banks)
SMEs have assumed great importance in the developing countries in recent years. Though they make a huge contribution to trade, commerce and industry yet they have difficulties in raising capital for them. Keeping all these issue in view SME Banks have been established in Pakistan to cater to the fi¬nancial needs of these enterprises. The SME Banks are pro-viding basically short term working capital to the small and medium enterprises in Pakistan.


1) Oxford Advanced Learners English Dictionary
Latest 8th Edition
Oxford University Press
Near Chotti Market Gulberg
Please buy the dictionary which has a CD THAT YOU CAN
SAVE electronic dictionary ON YOUR COMPUTER’S HARD DISK.

2) Oxford Dictionary of Finance and Banking, published by Oxford University Press.

3) Oxford Dictionary of Law, published by Oxford University Press.

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Old Saturday, April 05, 2014
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Default Banking Laws And Regulations

" Success is not something to wait for, it is something to work for.”
Banking Laws and Regulations
Law constitutes the principles and regulations established in a country by some authority, applicable to its people, whether in the form of legislation or of customs and practices recognized and enforced by judicial decision. It is the implementation of social order and justice created by adherence to such a system. The system of judicial administration puts the laws of a community into effect, e.g. all citizens are equal before the law.

The banking business flourishes on the support and confidence of public because they contribute to the capital and deposits of money in the banks. This confidence is strengthened as and when the people find that their interests are being looked after properly by the government and it’s authorized regulatory agencies.

Banks and bank accounts are regulated by Federal statutory law. Banks are established in Pakistan under the Banking Companies Ordinance 1962, regulated by SBP through Prudential Regulations, and Exchange Control Manual. Bank accounts may be established by private and state-owned banks (National Bank of Pakistan) and National Savings centres. All are regulated by the Federal laws. Cheques and related matters (bearer, order, crossing, protection to the bankers, etc) are governed under the Negotiable Instruments Act 1881.

There is an elaborate legal framework for regulation and supervision of banking business in Pakistan. This regulatory process is basically maintained by the State Bank of Pakistan as the central bank of the country, which derives its authority and support from the laws which have been enacted and enforced for banking business.

For smooth running of the banking system it is vital that the public should have confidence in it and be assured that their interest is protected by the government through regulators. One of the most important functions of the State Bank of Pakistan is protection of customers' rights. Most bank customers are laymen, they have very little knowledge of finance to judge the stability and soundness of a bank. Through appropriate laws the state ensures that the money entrusted to a bank by the public is not placed at risk. The failure of a bank is a serious event specially due to the possibility of ‘contagion’-----one bank’s failure can lead to lack of confidence in the financial system resulting in the collapse of the entire system. Hence the need to ensure safety and security of all banks.

Banking in Pakistan is governed by laws enacted by the Government and regulations framed by other state functionaries namely State Bank of Pakistan and the Securities and Exchange Commission of Pakistan. The far reaching influence on banking operations includes rules incorporated in the Foreign Exchange Regulations, Prudential Regulations and circulars issued by State Bank of Pakistan from to time. All banks in Pakistan (except SBP and NBP) are companies incorporated under the Companies Ordinance 1913 and 1984 as amended from time to time and to that extent fall within the purview of Securities and Exchange Commission of Pakistan (“SECP”) but all the Non-Banking Financial Institutions are totally governed by SECP. As such banks have overlapping supervision of SBP and SECP in many respects. The major laws applicable to banking institutions are:
1. Banking Companies Ordinance (BCO) 1962
2. State Bank of Pakistan Act 1956
3. Negotiable Instrument Act 1881
4. Bankers’ Book Evidence Act 1882
5. Electronic Transactions Ordinance 2002
6. Foreign Exchange Regulation Act 1947
7. Financial Institutions (Recovery of Finance Ordinance) 2001*
8. SBP Banking Service Corporation Ordinance 2001
9. Payment Systems and Electronic Funds Transfer Act 2007
10. Banking Tribunals Ordinance 1984
11. Banking Companies Tribunals (Validation of Orders) Act 1994
12. Microfinance Institutions Ordinance 2001

The above listed Acts/laws are briefly discussed below wherever applicable.

State Bank of Pakistan Act 1956:
The preamble of this Act has entrusted the State Bank of Pakistan with the responsibility to “regulate the monetary and credit system of Pakistan and to foster its growth in the best national interests with a view to securing monetary stability and fuller utilization of country’s produc¬tive resources”. Thus State Bank of Pakistan is the central bank of the country. Gradually, State Bank of Pakistan ex¬panded and consolidated over the years.

State Bank of Pakistan was established in 1948 with a paid up capital of Rs. 10 Crores with a mix ownership basis (part Govt. owned and part private owned), wherein 51% of the paid up capital was held by the Federal Government and the balance by the private sector. Following its nationalization in January 1974, the Federal Government assumed ownership of all privately held shares on payment of compensation. The Central Board, comprising of a Governor, one or more Deputy Governors and 7 directors nominated by the Federal Government, manages the SBP. Under the rules the Board is required to hold meetings at least 6 times in each calendar year and at least once in each quarter. Any 3 directors may requisition to the Governor to convene a meeting and 5 directors are mandatory to form a quorum.

Appointment of Governor - Under Section 10 the Governor of the Bank is to be appointed by the President of Pakistan for a term of three years. He will be eligible for another term of three years provided he has not attained the age of sixty-five years.

Criteria for Directors Appointment - Under Section 13
No person shall be or shall continue to be a director of SBP, if he is a MNA or MPA,
is a salaried Government official,
is or has been adjudicated an insolvent, or
has suspended payments or has compounded
{(meaning of Compounded = To settle (a debt, for example) by agreeing on an amount less than the claim; adjust.}
with his creditors,
is lunatic or
of unsound mind or
is a director of another commercial bank.
The elected directors shall hold office for a term of three years. A director loses his office if
he abstains from three consecutive meetings of the Central Board without obtaining leave.

SBP’s Functions - Under Section 17, the SBP’s business and functions extend to a very wide area including;-
1. extension of loans and advances to the Federal and Provincial Governments,
2. providing finance to financial institutions including banks,
3. sale and purchase of government securities including foreign exchange,
4. dealing in gold and bullion, {Bullion = gold or silver in large amounts or in the form of bars}
5. purchase and sale of debentures, (Corporate Bonds are called debentures)
6. custody of monies and securities,
7. acting as banker to the Government and as
8. banker’s bank and
9. last but not the least the Note-Issuing Authority

Prohibitions on SBP functions - Under section 20, the
SBP is not allowed to engage in trade or direct interest in any commercial, industrial or other undertaking except that it may acquire in the course of satisfaction of any of its claims, which shall be disposed of at the earliest.
The SBP is not allowed to purchase its own shares or shares of any other bank or extend loans or advances against the security of such shares or advance money on mortgage or security of an immoveable property (except to its own staff) or make unsecured loans.

Custodian of Foreign Exchange - Under Section 23, the SBP is custodian of foreign exchange and may buy or sell foreign exchange from or to an authorized dealer.

Cash Reserve mandatory for Banks - Under Section 36, all the scheduled banks are required to maintain a Cash reserve with the State Bank at the rate as may be determined by the Bank. {What is Cash Reserve? A percentage usually about 5% of the total Customer deposits in a bank must be deposited with SBP as Cash Reserve on which SBP does not pay any profit.} This rule is intended to bolster the liquidity and financial strength of the commercial bank.

Scheduled Bank — Under Section 37 the State Bank may declare any bank to be the scheduled bank; a bank which is carrying business of banking in Pakistan, has a paid up capital of not less than the amount stipulated and that the State Bank is satisfied that the affairs of such a bank are not conducted in a manner detrimental to the interest of depositors.

Duty to secrecy - Section 52 imposes a duty to maintain secrecy on every officer of the SBP as to the affairs of the Bank or the affairs of any other financial institution that come to his knowledge in performance of his duties.

The Banking Companies Ordinance 1962:
This law is very important and comprehensive. It gives detailed legal requirements of how banks will be formed, and how they will function under the supervision of SBP. This law lists down all the powers that are granted to the State Bank of Pakistan for supervising and controlling the banks in Pakistan. If a bank indulges in activities against the directions of SBP, this law gives authorization to SBP to punish the bank and its employees by imposing penalties, dismissal and replacement of officers including chief executive or directors, cancellation of banking license and even liquidation of the bank.
The object of the above ordinance is to provide general details and guidelines of how Banking Companies would operate their business.

Distinctive Features of a Banking Company
i. Section 8 prescribes that only a company which is allowed by SBP and carries out the business of banking shall use the word “bank” or any of its derivatives as part of its name. Other companies cannot do so.
ii. A company registered as a banking company in Pakistan will be a public limited company, as defined in the Companies Ordinance, 1984. A banking company will also have the word “lim¬ited” or Ltd. in its name.
iii. Section 87 confers the exclusive right to the banks for the use of cheques for withdrawal or transfer of deposits of money.

Banking Business
a. Section 7 of the Ordinance has defined the forms of business in which banking companies may engage. These include accepting deposits, lending or investing funds, making remittances, opening letters of credit, issuing guarantees, underwriting share or bond issue, foreign exchange dealings, etc.
I. Section 9 of the Ordinance defines those forms of business which banking companies are not al¬lowed to engage in. The prohibited activities list includes, buying/selling or bartering of goods or engage in any trade.
II. Section 10 prohibits a banking company from holding of a non-banking asset (immoveable property) for a period exceeding seven years from the date of acquisition except as may be permitted by the State Bank or as is required for its own use.

Prohibition on employment of certain persons - Section 11 prohibits employment by a banking company of a person who is, or at any time has been, adjudicated “insolvent”, or has suspended payment, or has compounded with his creditors, or who is or has been convicted by a criminal court of an offence involving moral turpitude. { turpitude = very immoral behaviour SYN wickedness}

Capital of a Banking Company
a. Section 13 of the BCO, 1962 has authorized the State Bank of Pakistan to determine and pre¬scribe the minimum paid up capital for a bank¬ing company from time to time. (2013 Rs 10 Billion)
b. Minimum General Reserve - Section 13 stipulates maintaining by banks of General Reserves as may be determined and notified by the State Bank from time to time.
{General Reserve is an amount deducted from banks Profits and retained in Reserves Account, which is part of Equity to meet any Bad Debts or other Loss situations for the Bank.}

Board of Directors
Election and tenure of directors – If the Governor SBP finds that the management of a commercial bank is doing acts which are seriously harmful for the sound operation of the bank, under section 15 the State Bank may order any Banking Company to call a general meeting of the shareholders to elect fresh directors of that bank.
A director of a banking company (other than the Chief Executive) shall not hold office for more than six years.
Under Section 15(b) a director shall not hold office for more than 6 consecutive years and under Section 15(c) a director of a banking company shall vacate his office if he has failed to pay any advance or interest thereon and not more than 25% of the total directors could be the “paid executive directors”.

Statutory Cash Requirement. (SCR)
Section 22 of the Ordinance prescribes that every banking company must maintain a certain per¬ cent of its total demand and time liabilities as on the last working day of the week, with the State Bank of Pakistan. The percentage will be noti¬fied by the SBP from time to time. (2013 --5%) (This requirement ensures liquidity of the bank)

Lending against security of own shares - Section 24 prohibits any banking company to give loans and advances against the security of its (banks) own shares or grant unsecured loans or advances to or make loans and advances against guarantee of any of its director or any of the family members of any of its directors, nor to a firm or company in which any of its director is interested as partner, director or guarantor.

Powers of State Bank of Pakistan
Banking Companies Ordinance 1962 has conferred the following powers on SBP:

a. Section 25 has authorized SBP to control ad¬vances by banks. SBP lays down conditions to be fulfilled which are given in Risk Prudential Regulations.

b. Section 25-A authorized the SBP to collect credit information from banking companies and furnish them to other banking companies with¬out disclosing the source of information.

c. Section 25AA has authorized SBP to prepare and submit to the Federal Government every year a special report on cases of write off of loans, mark up and other dues or financial relief through rescheduling and restructuring of loans, etc., where banking companies have deviated from the established banking practices.

d. Section 26 authorises the State Bank of Pakistan to prohibit banking companies incorporated in Pakistan or incorporated outside Pakistan but operating in Pakistan from accepting deposits.

e. No individual, association or a company is authorised to carry on banking business in Paki¬stan without obtaining a licence from the State Bank of Pakistan under Section 27.

f. When banking companies or their branches do not perform their functions properly, Section 27 (4) has authorized the State Bank of Pakistan to cancel the license granted to them. ^

Preparation/display of Balance Sheet. Section 34 prescribes that every banking com-pany operating in Pakistan whether local of for¬eign, shall prepare balance sheet and profit and loss accounts as on the last working day each year, in the format given in Second Schedule of the BCO.
g. Section 38 makes it obligatory to display the copy of this balance sheet & profit and loss ac¬count at appropriate places in branches and prin¬cipal offices in Pakistan.

Unclaimed deposits and valuables
The Section 31 requires that banks maintain record of all unclaimed items and if these remain unpaid or unclaimed for a period of ten years, transfer them to State Bank. This includes all deposits and unpaid instruments such as dividend, drafts, bills of exchange, shares or valuable articles held in safe custody, for which there has been no transaction or no claim except those of a minor or a court of law or a government. The SBP has created a website where information regarding such unclaimed deposits is available.

Trade Unions — At the initiative of the Governor, State Banking Section B was inserted by the Banking Companies (Amendment) Act 1997 which barred any officer or member of a trade union in a banking company from using any bank car or telephone to promote union activities or to carry weapons into the bank premises etc. Any person violating any provisions of this section shall be guilty of an offense punishable with imprisonment that may extend to three years or with fine or with both.

Secrecy Section 33-A of the Act has made it obligatory for each bank to maintain complete secrecy and fidelity relating to the affairs of its customers except when law and practices so permit. In or¬der to enforce this provision this section pre¬scribes that every President, Chairman, Member Board, Auditor, Officer or Employee is required to make a declaration of fidelity and secrecy at the time of joining institutions which are cov¬ered under Banking Companies Ordinance, 1962.
Disclosure of Write Offs Moreover, this section has made it obligatory for every banking company to publish in its annual accounts all such loans as written off or financial relief provided to any customer amount of which is Rs.500,000/- or more.

Power of the State Bank of Pakistan to take the
corrective measures against Banking Companies
a. Sections 41, 41-A and 41-B of the Banking Companies Ordinance, 1962 have conferred the powers to State Bank of Pakistan not only to give directions to the banking companies in Pakistan to manage themselves properly but to impose corrective measures. These powers in¬clude the removal of Chairman and members of the Board of Directors and/or Chief Executive; and appoint its nominees to manage the banking companies. This period can be upto three years.
b. Section 41-C of the Banking Companies Ordi¬nance, 1962 allows that if any persons or bank¬ing company is aggrieved with the orders made under section 41-A, 41-B of State Bank of Paki¬stan may make an appeal to the Central Board of Directors of the State Bank of Pakistan. Their decision shall be final.

Inspection by State Bank of Pakistan
a. Section 40 of the Banking Companies Ordi¬nance. 1962, has made it obligatory for the State Bank of Pakistan to inspect banking companies from to time in order to evaluate their manage¬ment and performance. Sub Section (4) makes it obligatory for banking companies to produce all such books and documents to the inspecting of¬ficer as desired by him.
b. Based on the inspection report State Bank of Pakistan is authorized to impose fines and penal¬ties including the winding up of the banking company under Section 49 of the BCO.1962.
XI. Amalgamation and Winding up of a Banking Company
a. Section 48 of the Banking Companies Ordi¬nance. 1962, allows the amalgamation of banks according to a defined procedure. It includes preparation of a well designed scheme of amal¬gamation containing terms and conditions. This scheme has to be placed in draft form to the shareholders of each of the banking companies concerned separately. When it is approved by a resolution passed by a two-third majority of shareholders of each of the concerned banking companies, it should be submitted to the State Bank of Pakistan for their approval and the merger will take place only after their formal approval.
b. Section 59 of the Banking Companies Ordi¬nance, 1962, clearly lays down that no banking company which holds a licence under section 27 of the Act can voluntarily wind up without first obtaining a certificate from State Bank of Paki¬stan about its inability to repay the creditors.
Sections 60 to 82 of the Ordinance describe the legal and procedural framework for the winding up proceeding. According to these provisions, only the High Courts in Pakistan can allow winding up and in such cases State Bank of Pakistan will be the official liquidator.

2.3.1. Specific methods/areas of regulations – Under BCO 1962 the SBP have the following specific areas for regulating banking institutions:

i. Authorization for banking license
ii. Rules regarding ownership of financial institutions
iii. Criterion regarding adequacy of capital in banks.
iv. Reserves and liquidity ratios compliance by commercial banks
v. Rules regarding foreign currency and other exposures
vi. Deposit insurance
vii. Professional management
viii. Classification of advances (Special meaning of ‘classification’)
ix. Per party limits on banks lending
x. Control on deposit and lending rates
xi. Policy of scheduled banks borrowings
xii. Bank charges and penal (penalty) rates
xiii. Loan write-off procedure

The Banking Companies Ordinance, 1962, (BCO) consolidated basic legal framework and strengthened the Regulatory powers of State Bank.
It empowers:-
a) SBP for close supervision over the affairs of banking companies;
b) prescribes maintenance of required advances/ deposits ratio;
c) give directions to banking companies generally;
d) make advances to banking companies

Banking Mohtasib
2.4.12. Banking Mohtasib - Section 82A was added to BCO which relates to appointment of Banking Mohtasib with powers and responsibility of:

Banking Mohtasib / Ombudsman
Ombudsman means a commissioner appointed by the Government to investigate any complaints against the body concerned. In Pakistan, ombudsman is called Mohtasib. For the banking sector, government has appointed a separate Mohtasib who is appointed for a period of three years and is not be eligible for any extension.
The office of the Banking Mohtasib (BM) was established under banking companies ordinance 1962 by inserting seven sections from 82-A to 82- G on 2nd June, 1997 through the banking companies amendment Act 1997. The purpose of the establishment of Banking Mohtasib is to resolve any complaints from customers against their banks and those of scheduled banks against another bank. This is a free service for the public which covers all banking services.

Powers of Banking Mohtasib (BM)
a) BM can entertain complaints from, customers, borrower, utility bill depositors, banks or from anybody or organization.
b) Banking Mohtasib can award compensation for actual loss suffered and grant of reasonable expenses can be considered by the banking Mohtasib.
c) Banking Mohtasib cannot award damages against the bank. Facilitate amicable settlement of the complaints.
d) Banking Mohtasib shall not entertain any complaint already disposed of by SBP or any court of law.
e) Banking Mohtasib cannot issue a stay order to entertain any complaint, if the matter is pending before any court of law.

Authorities of Banking Mohtasib
Banking Mohtasib is authorized to entertain complaints of the following nature:
A) Banks failure to act according to the banking laws and regulation. Delays or frauds in relation to the payments, collection of instruments or fund transfer.
B) Fraudulent or unauthorized debit entries in the account.
C) Complaints from exporters or importers relating to the banking services.
D) Complaints from holders of foreign currency accounts whether resident or non-resident.
E) Unauthorized operation of lockers.
F) Complaints related to foreign remittances.
G) Complaint in relation to the mark-up based on the ground of violation of an agreement or SBP directives.
H) Complaints relating to the utility bills.

Banking Mohtasib shall not pass any order against bank without giving notice and opportunity of hearing.

Before filing a complaint with the Mohtasib, the complainant should intimate bank in writing about the intention of doing so. In case of no reply or unsatisfactory reply, the complainant can send complaint to banking Mohtasib within 45 day.
The complaint should be made in writing under solemn affirmation or oath, narrating full details of the case / transactions disputed, and also name and address of the complainant.
The Mohtasib can adopt any procedure, he considers appropriate for investigating the complaint.

Banking Mohtasib has the power for the purpose of disposing a case, to require any information documents from banks which are relevant for the purpose of deciding a complaint, subject to the following conditions:
a) Maintain confidentiality as per banking laws and procedure.
b) The documents shall not be provided which may compromise banks position in relation to the other customers account.
c) If banks do not provide information / documents, the bank Mohtasib can add adverse comments in his finding regarding non provision of information/ documents.

Mohtasib will try for an amicable settlement if satisfied with the genuineness of the complaint. In case of failure it may direct concerned bank to:
a) Reconsider the matter.
b) Modify earlier decision
c) To pay compensation fixed by Mohtasib.
d) To take steps to improve efficiency of the bank.
e) Recommend SBP to initiate inquiry against the bank for violation of law, regulations, etc.
• In no case Mohtasib will direct bank to provide finance/ loan to any complainant.

If any bank or its official or complainant is not satisfied with the decision of Mohtasib, he may file an appeal with the Governor of the State Bank of Pakistan within 30 days of passing the order by the Mohtasib. The governor shall decide appeal within 30 days.
Finding of the Mohtasib should be implemented within 40 days of the decision or finalization of appeal from the Governor SBP as the case may be.

If no appeal is filed, the decision of Mohtasib shall be treated as final. If decision of the Mohtasib is not implemented by the concerned bank, SBP may penalize it or may ask for disciplinary action against its officials.
Banking Mohtasib can ask the bank to disclose any information required for disposing the case, ensuring confidentiality as per requirement of law.

2.5. Banker’s Books Evidence Act, 1891:
Prior to passing of Bankers’ Book Evidence Act 1891 bankers were required to produce in the court of law one or more of their original ledgers or other books of account as an evidence, thereby causing inconvenience and disruption to their normal business operations. To remove these formalities, Bankers Book Evidence Act 1876 was passed which was replaced by Bankers Book Evidence Act 1879 with extended provisions.

2.5.1. Banker’s Convenience - Section 5 of the said Act reads as under:
“A banker or officer of a bank shall not in any legal proceeding to which the bank is not a party, be compellable to produce any bankers books, the contents of which can be proved under this Act or to appear as a witness to prove the matters, transactions and accounts therein recorded, unless by order of a Judge made for special cause.

The Act thus absolves banks from:
• Production of original books and
• Appearance in person of banks personnel.

2.5.3. “Certified copy”.
Under section 4, a certified copy of any entry in a bankers book shall in all legal proceedings be received as prima facie evidence of the existence of such an entry and shall be admitted as evidence of the matters, transactions and accounts therein recorded in every case where, and to the same extent, as the original entry itself is now by law admissible, but not further or otherwise.

A certified copy means a copy of any entry in the books of a bank as defined by Section 2(2) bearing at the foot of the entry, a certificate dated and subscribed by the Accountant/Manager of the bank with his name and official designation to the effect:

i. that the entry is contained in one of the ordinary books of the bank.
ii. that the entry was made in the usual and ordinary course of business.
iii. that the book containing the entry is still in the custody of the bank.

Copies of bank record that are not certified within the meaning of Section 2(8) cannot be received as prima facie evidence of existence of entries of which they are copies nor can such copies be admitted as evidence of matters, transactions and account therein recorded.

Electronic Transactions Ordinance 2002
2.5.4. Electronic Transactions. - To cope with the requirements of present day changes involving electronic transactions, the Government promulgated the Electronic Transactions Ordinance 2002. This law is meant to recognize and facilitate documents, records, information, communications and transactions in electronic form and to provide for the accreditation of certification service provider. Various terms used in the Ordinance have been defined as under:

• “Authenticity” means in relation to an electronic document or electronic signature, the identification of an attribution to a particular person or an information system.

• Legal recognition; no document, record, information, communication or transaction shall be denied legal recognition, admissibility, effect, validity, proof or enforceability on the grounds that it is in electronic form and has not been attested by any witness.

• Attestation/Notarization; no electronic document shall require attestation and notarization for a period of 2 years from the date of the Ordinance.
To include the impact of the Electronic Ordinance the Qanun-e-Shahadat Order 1984 has been amended accordingly.
__________________________________________________ _________________________

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Default Banker Customer Relationship

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Banker Customer Relationship

What Is a Banker:
According to Section 3(b) Negotiable Instruments Act (Amendment) 1962 a "Banker means a person transacting the business of accepting, for the purpose of lending or investment, of deposits of money from public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise and includes any Post Office Saving Bank".
Banker has been defined in almost the same terms in section 5(b) of Banking Companies Ordinance 1962.

In simple words we can say banker is one who

(1) Takes deposits of money from the people,
(2) Repays these deposits to the people according to agreed terms and conditions including on demand, and
(3) Lends and/or invests these deposits in profitable ventures.

Who Is a Customer. The term customer has not so far been defined in any banking law, however, some eminent writers on banking and jurists have tried to define it. Sir John Paget says: "To constitute a person being called a “customer” there must be some recognisable course or habit of dealing in the nature of regular banking business". The most important point, according to Sir John Paget, was the sufficiently long "duration" of relationship between the banker and a customer, but it was ruled off by the judgement of Mr. Justice Bailhache in the case of Ladbroke v/s Todd (1914) who observed "the relationship of banker and customer begins as soon as the first cash deposit is accepted or a cheque is paid in and accepted for collection and not merely when it is paid". This was confirmed by Privy Council in the case of Commissioner of Taxation v/s English, Scottish, and Australian Bank (1920). "The word 'Customer' signifies a relationship in which duration is not of the essence. A person whose money has been accepted on the footing that the bank undertakes to honour cheques up to the amount to his credit is, in the view of their Lordship, a customer of the bank in the sense of statute irrespective of what his connection is, of long or short standing". (What is a statute?)

To restate the concept; the word 'Customer' generally denotes a relationship resulting from habit or continued dealings. We know that a person cannot be regarded as a customer of a shop unless he makes a practice or habit of purchasing articles from that shop. An isolated transaction is not sufficient to suggest that the purchaser is a customer. However for a bank customer this habit of dealings is not essential. A person becomes customer as soon as he opens an account with the bank.

On the other hand if a person comes to bank for encashment of cheques daily, which means he is a regular visitor of bank, but these frequent visits, will not entitle him to become a customer of bank. Only the opening of an account establishes the relationship of banker and customer.

In the light of what has been said above and banking practice we can say that any person having an account in a bank is a customer, whatever the nature of his account. Whether or not he operates his account regularly and whether his, account is of long or short duration, the account holder is a customer.

Who Can Be A Customer: The relationship of banker and customer is a contractual one, therefore, any person who has the capacity to enter into a contract, can be a customer.
He / She must, therefore, be a person who:
(i) has attained the age of majority,
(ii) is of sound mind; (when he opens an account he should be capable of understanding it and making a rational judgment as to its effect on his interests)
(iii) is not disqualified from contracting by any law to which he is subject. (should not be a proclaimed offender, should not be undischarged bankrupt and should not be alien enemy) (Who is an undischarged bankrupt?)

However, there is one exception to this law and that a minor can be a customer according to the banking practice. Such accounts are opened only to broaden the banking facilities. These accounts are operated by their guardians or to benefit the minor under Courts Wards Act. A minor,however, cannot operate an account.
(By law the property of a minor can be used for the benefit of the minor only. A loan against the property of a minor should only be given after great care.)

What Is The Nature Of Banker Customer Relationship: As stated earlier, bank relationship is a contractual one and for every valid contract there must be an offer and its acceptance. Similarly, there is an offer and its acceptance in such cases. The depositor offers his/her money and banker accepts or the banker offers to accept deposits and customer in acceptance of this offer, deposits his money.

Types of Relationships
General Relationship: The general relationship of banker customer is that of debtor and creditor; which of these two, entirely depends on the ‘current’ state of account. When the customer borrows from the bank he is debtor and when builds up balance in the account he / she is a creditor of the bank.
This relationship of debtor and creditor was for the first time recognised in 1848 in the case of Foley v/s Hill by the court of law. A customer brought an action against a banker to account for money received, claiming that the relationship was ‘equitable’, akin to that of Principal and Agent and that he was entitled on that basis to know, what had happened to his money and what profit had been derived from it. The court decided that the relationship is that of debtor and creditor and not that of Principal and Agent. The decision enabled the banker to use the money according to their own discretion. When customer deposits money in his account, he has a right to withdraw it, but he cannot enquire about its utilization.

Other Relationships:
i) Bailer and Bailee. When the banks provide safe custody / locker facilities to customers for their valuables, the relationship becomes that of bailer and bailee under Contract Act, 1872. It is an old relationship of banker and customer which started from the days of earlier bankers, i.e., goldsmiths. The goldsmiths used to keep the belongings and valuables of public for safe custody with themselves. Later on they started lending a part of that deposit which was nothing but a breach of contract of bailment.
Section 148 of the Contract Act, 1872, defines bailment as

“A bailment is delivery of goods by one person to another for some purpose, upon a contract”.

A distinction should be made between a ‘gratuitous’ bailee and ‘bailee for reward’. A gratuitous (meaning: done without any compensation or reward) bailee is required to “take the same care as a reasonably prudent and careful man may fairly be expected to take of his own property of the like description”. A bailee for reward must take greater care and make use of the most effective appliances available for the safekeeping of the valuables appropriate for the nature of goods entrusted to his care.

The extent and character of bank’s obligations as a bailee will vary with the different forms of deposits. When shares and securities are lodged with instructions to handle them, the banker must have notice of the particulars of the articles bailed, but when articles are put in a sealed box or packet or kept in a safe deposit locker the banker is not supposed to have any notice of the contents. In the latter case, the banker’s obligation is to return the box or packet with seals intact or allow the customer to operate his locker which should be unhampered and inaccessible to the banker independently.

The receipt granted by the banker for safe custody of articles is not a negotiable instrument or transferable document. In case the bailer of a deposited article is unable to call at the bank to take back the articles when required to be withdrawn, the banker should take care to ensure that the person deputed for the purpose is duly authorized by the bailer, otherwise the banker will be liable for conversion.

(ii) Principal and Agent: When bank perform agency service they become agent of their clients and customers, such as collection of cheques etc and payment of premium of insurance company or membership fee to clubs on behalf of their customers under their standing instructions.

(iii)Pawner and Pawnee / Pledger and Pledgee /Mortgagor and Mortgagee: When we make advance to our customer against security it is the relationship of pawner and pawnee. Besides these, bankers also act a Trustee, Executor, Attorney and Guarantor etc.
When a customer pledges his movable property like goods and documents and passes on physical possession thereof to the banker as security for an advance, he becomes the pledger and the banker becomes the pledgee. Similarly when advance to the customer is made against security of immovable property, the relationship becomes that of mortgagor and mortgagee, the customer being the mortgagor and the banker mortgagee.

In terms of the deed of pledge and deed of mortgage executed by the borrower at the time of taking advance, the banker has express authority to dispose of the movable or immovable property of the borrower in case of his failure to liquidate the debt when it becomes due without reference to a court of law.

How Banking Relationship Is Established: The opening of an account establishes the relationship. An account may be opened either by cash deposit or by tender of negotiable instrument for credit to the account. According to the banking practice in Pakistan, accounts are generally opened with cash deposits. If party is well-known a cheque or any other negotiable instrument may also be accepted in lieu of cash.

How Does The Relationship Subsist: This relationship starts with the knowledge about the customer and gradually builds up over a period of time. This relationship continues so long as it is carried out according to the terms of contract embodied in the rules of the bank.
{Subsist = to exist; to be valid}

How And By Whom The Relationship Can be Terminated: This relationship can be terminated by any of the contracting parties, if the party agrees to do so or on the happening of an event that would give to one of the party option to avoid when there is avoidable contract. The relationship can be terminated by the:

1) By Customer: According to terms of the deposits, if it is payable on i) demand by withdrawing whole balance and closing the account, ii) Fixed maturity - the payment of the balance at such maturity.

2) By Bank: The bank may close the account when it becomes unremunerative or tedious or tiresome or for any other reason risky to maintain (Obstinacy of Customer) or when bank exercises the right of set-off. Bank should close the account after proper notice to the customer, otherwise it may drag the bank into litigation.

3) By Operation Of Law:
When the customer
i) dies or
ii) becomes insane or
iii) becomes bankrupt or
iv) the bank itself becomes bankrupt or
v) any other contractual incapacitation of the parties.

Rights And Duties Of Bankers:
Banker has the following rights /duties towards its customers

Rights of Bankers:
1) Payments and receipts must be in business hours:
2) Right to refuse payment of:
i) Stale cheque (dated more than 6 months before presentation)
ii) Post-dated cheque (date which has not yet arrived on the date of presentation)
iii) Undated cheques, or
iv) Any other irregularity in the cheque such as difference in amount written in words and figures or signature differs.
3)Right to debit the account which was previously credited by clearing item which is returned unpaid.
4)Right to have reasonable time for posting.
5)Right to utilize the customer's funds according to its own will.
6) Right to charge for services rendered.

7) Right Of Lien: Lien is a right of a Bank to retain the “property” belonging to a customer until the debt due from the customer is paid. Suppose a customer has not repaid a loan on time or has not paid bank’s charges, etc. The bank receives a dividend warrant from a company for credit to this customer’s account. The bank will have a lien on the proceeds of the dividend warrant till such time the customer clears the banks dues. Items under lien can be sold/appropriated by the bank only after the bank gives due ‘notice’ to the customer.

8) Right Of Set Off: It consists of the right of the bank to fully or partially merge the credit balance of a customer account with a claim that the bank has against the customer. The banker has this right of set off when:
i Account is in the same name and right,
ii There is no contract to the contrary.
The bank can execute the set off only after giving due notice to the customer.

Duties Of Banker:
1) Obligation to pay/honour the cheques:
i. when there is credit balance or
ii. when there are other arrangements like overdraft facilities.
iii. To pay cheques drawn by the customer on the branch of the bank where the account is kept, or under special arrangement at agreed places.

2) To provide a statement containing a copy of his account with the banker at regular intervals;

3) To pay profit/return to the customers on their balances as per agreed rates.

4) To collect the proceeds of cheques and other orders instruments deposited for credit to the account; Collection of cheques and other negotiable instruments - Banker collects cheques and other negotiable instruments on his customer’s behalf from banks and financial institutions on which these are drawn. He thus acts as agent of the customer. Banker as agent has certain responsibilities which he must discharge meticulously. Banker is expected to keep his customer advised of the fate of the instruments under collection. The customer’s account can be debited with the usual commission or collection charges as per bank’s rules and practice. As this service is not rendered free of charge the banker is liable for any inordinate and avoidable delays in the collection or in advising fate of the instrument to the customer.

5) To give reasonable notice to the customer before closing the account or determining the relationship. (In law the word ‘determining’ means ending, closing)

6) To Maintain Secrecy Of Customer's Account: It is most important legal duty of banker not to disclose the state of customer's account to any unauthorised person. The banker cannot disclose the state of account even to the wife or husband of account holder who are otherwise one and the same thing. This duty does not end with the closing of account but it continues even after that. A prudent banker must, therefore, exercise greatest care to observe this duty of secrecy. Any inadvertent disclosure made during the busy time may have serious consequences.
However banker can disclose the state of account on proper and reasonable occasions which are: -
1. Under Compulsion Of Law,
2. In The National Interest,
3. Common Courtesy To Other Banks,
4. In Banks Interest,
5. Expressed Or Implied Consent Of Customer.

Rights and Duties of a Customer Towards the Banker

The customer has the following universally accepted rights:

(1) to draw cheques against his credit balance or in the absence of credit balance there are arrangements for accommodation made with the banker beforehand, to this effect.

(2) to receive a Pass Book or a statement containing a copy of his account with the banker. In case he finds any over-crediting or over-debiting in his account he has a right to get it corrected;

(3) to sue the bank for the costs, loss and damages when his cheque is wrongfully dishonoured;

(4) to sue when the banker has not maintained the secrecy of his account.

(5) to claim for and receive the profit / return on his deposits as promised by the bank.

The customer has the following duties towards his banker:

(1) Negotiable Instruments Act lays down that the customer must present the cheques
for payment and collection within the business hours of his banker.

(2) Negotiable Instruments Act lays down that the customer should see that the
cheque and other instruments are presented for payment within a reasonable time from the date of their Issue.

(3) He should keep his cheque book under lock and key so that no unauthorised person gets access to it. If a customer fails in this duty he is to be held responsible tor his negligence in leaving his cheques unprotected.

(4) He should draw the cheques very carefully and in such a way that there is no room left for any fraudulent alterations and additions.

In the case, London Joint Stock Bank vs. Macmillan and Arthur -(l918-A.C 77) Lord Findlay said: "A cheque drawn by a customer, is in point of law a mandate to the banker to pay the amount according to the tenor of the cheque. It is beyond dispute that the customer is bound to exercise reasonable care in drawing the cheque to prevent the bank from being misled. If he draws a cheque in a manner which facilitates fraud, he is guilty of a breach of duty to himself and the banker and he will be responsible to the banker for any loss sustained by the banker as a natural and direct consequence of this breach of duty."

General Terms and Conditions Applicable to Account Opening
Following are the terms and conditions commonly used by banks in their account opening form.
• Any person(s) opening or operating an account with the Bank will be deemed to have read, understood and accepted the Terms of Account and the applicable Schedule of Bank Charges issued and amended from time to time by the Bank.
• Not more than one account of each category, i.e. foreign currency, current and saving, PLS saving, or similar accounts can be opened in any branch of the Bank.
• Proper identification in the form of Computerized National Identity Card/Passport/Alien Registration Card will be required before the Bank opens any account, at its sole discretion, which will be independently verified by the Bank through NADRA. In case of non-validation or mismatch/ incorrect information, the Bank has the right to stop the transaction till clearance of ambiguity or closure of the account. Each account shall possess a distinctive number, which shall be quoted in all correspondence with the Bank in relation to the account.
• Any change in the address or constitution of the account holder/depositor should be immediately communicated in writing to the Bank. The post office and other agents for delivery shall be considered agents of the account holder(s)/depositor(s) for delivery of letters, remittance etc., and no responsibility shall be accepted by the Bank for delay, non delivery, etc.
• To safeguard the Bank’s interest, the Bank may, at its discretion, and for any other purpose as per the law of the land in force, share any information, details or the data relating to the customer’s transactions with any competent authority or agency. The Bank, in complying with laws and regulations, may intercept and investigate any payment message and other information or communications sent to or by the account holder or on the account holder’s behalf via another Bank. This process may involve making further future enquiries.
• The method of calculating return/profit under the profit/loss sharing scheme is governed by the Bank Rules under prevailing Regulations/Directives of the State Bank of Pakistan and is subject to change without prior notice.
• No profit or interest is paid on current accounts, whether in respect of local or foreign currency.
• Any sum to be deposited in the account should be accompanied by a duly completed deposit slip showing the name and number of the account to be credited and the depositor’s signature. Such deposits must be entered at cash counter only.
• The bank may accept for collection cheques and other instruments promptly but by the account holder/depositor him/herself at his/her sole risk. All cheques and other instruments should be crossed before they are deposited for crediting in the account.
• In the event of any instrument deposited being returned for any reason whatsoever or being returned at any time, although previously advised as paid, the account holder will refund the proceeds of the said instrument and indemnify the Bank against all losses and costs arising there from and authorize the Bank to debit such amount and expenses to any account which the account holder may have with the bank.
• The bank will take due care to ensure that the credit and debit entries are correctly recorded in the accounts of the account holder/depositor, but in case of any error, the Bank shall be within its right at all times to make the correct adjusting entries without prior notice and recover any amount due from the account holder/depositor without prior notice.
• In the case of a deposit maturing on a public or bank holiday, then the Bank shall pay the deposit and/or the interest/return/profit on the next working day when the Bank is open for banking business. Cheques may only be drawn on printed cheques supplied by the Bank. The Bank reserves at all times the right to refuse payment of cheques drawn otherwise.
• Cheques should be signed by the account holder/depositor as per specimen signature supplied to the Bank and any alteration(s) thereon must be authenticated by the drawer’s full signature. In order to comply with any instructions given by the account holder/depositor, the Bank shall only rely on the signature as provided/inscribed by the account holder/depositor on the specimen signature card at the time of opening of the bank account.
• In the case of the Bank receiving notice of the demise of an individual customer, the Bank will not be obliged to allow any operation or withdrawal except on production of the succession certificate or other court orders from a court of competitive jurisdiction.
• In the case of an operating instruction ‘either or survivor’, in the event of the death of either the account holder(s)/depositor, the credit balance in the account will be payable to the surviving account holder(s)/depositor.
• Current/saving accounts that remain inoperative for one year will be classified as dormant. Any change of address/signature(s) can be requested during the period of dormancy of the account, but the account will not be charged for any change in the status of the dormant account. For reactivation of any dormant account, the account holder must in person request a change of status and will produce original CNIC or Passport or Pakistan Origin Card (POC) or National Identity Card for Overseas Pakistani (NICOP) with a photocopy for Branch / Bank attestation.
• If a deposit account / instrument remains inoperative for a period of ten years, then it will become an unclaimed deposit and will be surrendered to SBP as per the provisions of the Banking Companies Ordinance 1962.
• Periodic statements of account shall be issued by the Bank to the account holder / depositor concerned. Any discrepancy in the statement of account should be promptly brought to the notice of the Bank in writing within fourteen days of dispatch, failing which the statement of account shall be deemed to be final and conclusive, for all purposes whatsoever,
• If a statement of account is lost or spoiled, a duplicate statement of account may be provided by the Bank, subject to charge as is applicable under its Schedule of Bank Charges, upon receipt of written request by the customer / account holder only.
• Rupee and foreign currency accounts not meeting the Bank’s minimum balance requirement may be subject, at the discretion of the Bank, to service charges as per the Schedule of Bank Charges. However, the following accounts will be exempted from levy of service charges: I) Students, II) Mustahiqueen of Zakat, III) Employees of Government / Semi-Government institutions for salary and pension purposes, IV) Basic Banking Account. Details of minimum balance requirement service charges with exemptions are listed in the Bank’s Schedule of Charges and are also displayed in all the branches.
• The Bank, at its sole discretion, shall be constrained to close those accounts which show nil balance at the time of half yearly closings. Besides this, the Bank reserves the right to close without prior notice, any account which in its opinion is not satisfactorily operated, or for any other reasons whatsoever. It shall not be incumbent on the Bank to disclose to the account holder / depositor the reason(s) for doing so.
• The account holder / depositor wishing to close the account must surrender unused cheques, if any.
• The Bank shall have discharged its liability with respect to any account so closed by mailing to the account holder / depositor at his/her last known address as per the Bank’s record, a Bank draft in the currency of such account, payable to the account holder / depositor of the amount of the credit balance of such account less deduction(s) in respect of the amount of any claim that the Bank may have on such funds.
• The Bank shall determine from time to time the rate of interest/return/profit payable on the account/deposit in accordance with the prevailing rules and regulations of the State Bank of Pakistan and the policies of the Bank which are subject to change from time to time and the account holder / depositor agrees to accept such rate of interest/return/profit.
• Foreign currency current or savings accounts and time deposits may be established in the U.S. Dollar, Pound Sterling, Euro, Jap Yen and such other currencies as the Bank shall determine/allow and in accordance with the local regulations in force from time to time.

• Profit on foreign currency saving and term deposits is paid at periodic intervals as determined by the Bank and/or upon respective maturity dates of such deposits at such rate as may be determined by the Bank from time to time.

. Foreign currency accounts/deposits are opened and maintained subject
to Foreign Exchange Regulations and Directives of the Government of
Pakistan, or any of the organizations/agencies and State Bank of Pakistan from time to time.

• Zakat, wherever applicable, shall be deducted on valuation data from
applicable accounts having balance in excess of the exempted limit as declared for that particular Zakat year.

. Declaration on prescribed Performa for exemption of deduction of Zakat will be registered with the Bank at least one month prior to valuation date or as per Zakat rules applicable from time to time. Zakat will be deducted as per Zakat and Usher Ordinance 1980.

. ALL applicable taxes shall be recovered as per tax laws in force. The Bank shall within its right make investment of credit balance deposits in any manner at its sole discretion and make use of funds to the best of its judgment in the banking business under the PLS system.

• The account holder/depositor undertakes to reimburse the Bank with any claim in respect of losses/charges on the basis of half yearly/yearly closing of the Bank’s books of account. The Bank would be within its authorized rights to debit their accounts for the amount(s) of such claims/charges in settlement of business accounts of the Bank.

• The Bank is subject to all applicable circulars, orders, directives, rules, regulations, laws, decrees and restrictions issued by competent Government and other regulatory authorities in Pakistan and the liability of the Bank for payment is governed by applicable laws and regulation in force in Pakistan at the relevant time. Repayment of any deposit account, balances, or interest/profit thereon is subject to any acts of the Govt, of Pakistan or the State Bank of Pakistan or any competent governmental and other regulatory authority in Pakistan.

• On a request for Hold Mail service, the Bank will hold all mail addressed to the account holder/depositor. The account holder will collect any mail so held personally, or through an authorized person, unless he/she advises the bank to the contrary in writing. It is acknowledged that the request for Hold Mail service is being made entirely for the account holder’s convenience and at his/her risk and responsibility and without any obligation on the part of the Bank. All transactions will be charged as per Schedule of Charges.

• For a BBA account, a maximum of two deposits and two withdrawals per month are allowed free of charge as per policy in force. However, any transaction in a calendar month over those mentioned above will be charged a flat fee as per the prevailing Schedule of Bank Charges.
• Any existing customer wanting to convert his/her account into BBA can do so by giving a written application to the Branch Manager, after which a new BBA account will be opened. A new account number will be provided to the customer after due account opening procedures, including submission of CNIC, if not provided earlier. The statement of account will be issued once a year. The account is exempt from levy of service charges in the case of not meeting minimum balance requirements. Only one account per CNIC shall be allowed to be opened regardless of the branch. No duplication shall be allowed, even as a joint account or sole proprietorship account.
__________________________________________________ ________________________________
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Default Prudential Regulations for Banks

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Prudential Regulations for Banks

If the banks in Pakistan violate these Prudential Regulations they are liable to face heavy financial penalties and the bank officers can face disciplinary action by the State Bank of Pakistan and the bank can lose their banking licence besides heavy financial penalties.)

5.1. Nature of Prudential Regulations:
Prudential Regulations are both preventive and protective techniques. Preventive regulations forestall crises by reducing the risks facing banks such as controlling and monitoring the management of banks’ capital, solvency (CHECK THE MEANINGS OF SOLVENCY IN THE COMPUTER) and liquidity standards and large exposure limits. Protective techniques provide support to banks once a crisis threatens; lender-of-the-last-resort facilities are of immediate benefits.

In case of Pakistani banks branches functioning overseas the Prudential Regulations or legal requirements of host country shall prevail. The Prudential Regulations do not supersede other directives issued by SBP from time to time.

5.2. Definitions of important terms:

1. Account Holder means a person who has opened any account with a bank or is a holder of deposit / deposit certificate or any instrument representing deposit / placing of money with a bank or has borrowed money from the bank/DFI. A DFI means a Development Finance Institution.

2. Borrower means a person on whom a bank has taken any exposure during the course of business.

3. Contingent liability means: (a) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or
(b) a present obligation that arises from past events but is not recognized because:
(i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient reliability; and includes letters of credit, letters of guarantee, bid bonds / performance bonds, advance payment guarantees and underwriting commitments. (Bid Bond= A guarantee that the firm will enter into a contract if it is awarded to the firm)

4. Documents include vouchers, cheques, bills, pay-orders, and promissory notes, securities for leases / advances and claims by or against the bank/DFI or other papers supporting entries in the books of a bank/DFI.

5. Equity of the borrower includes paid-up capital, general reserves, balance in share premium account, reserve for issue of bonus shares and retained earnings / accumulated losses, revaluation reserves on account of fixed assets and subordinated loans.

6. Exposure means financing facilities whether fund based and / or non-fund based and include any form of financing facility extended or bills purchased / discounted except ones drawn against the L/Cs of banks rated at least ‘A’ by credit rating agency on the approved panel of State Bank of Pakistan.

7. Forced Sale Value (FSV) means the value which fully reflects the possibility of price fluctuations and can currently be obtained by selling the mortgaged / pledged assets in forced / distressed-sale conditions.

8. Government Securities shall include such types of Pak. Rupee obligations of the Federal Government or a Provincial Government or of a Corporation wholly owned or controlled, directly or indirectly, by the Federal Government or a Provincial Government and guaranteed by the Federal Government.

9. Group means persons, whether natural or juridical, if one of them or his dependent family members or its subsidiary, have control or hold substantial ownership interest over the other.

10. Liquid Assets are the assets which are readily convertible into cash without recourse to a court of law and mean--- encashment / realizable value of government securities, bank deposits, certificates of deposit, shares of listed companies which are actively traded on the stock exchange, National Investment Trust (NIT) Units, certificates of mutual funds, Certificates of Investment issued by entities rated at least ‘A’ by a credit rating agency on the approved panel of State Bank of Pakistan. These assets with appropriate margins should be in possession of the bank with perfected lien.

11. Guarantees issued by domestic banks when received as collateral by banks will be treated at par with liquid assets whereas, for guarantees issued by foreign banks, with rating of ‘A’ and above.

12. Medium and Long Term Facilities mean facilities with maturities of more than one year and Short Term Facilities mean those facilities with maturities up to one year

13. NBFC means Non-Banking Finance Company and includes a Modaraba, Leasing Company, Housing Finance Company, Investment Bank, Discount House, Asset Management Company and a Venture Capital Company.

14. Other Form of Security means hypothecation of stock (inventory), assignment of receivables, lease rentals, contract receivables, etc.

15. Readily Realizable Assets mean and include liquid assets and stocks pledged to the banks in possession, with ‘perfected lien’ duly supported with complete documentation.

16. Secured means exposure backed by tangible security and any other form of security with appropriate margins. Exposure without any security or collateral is defined as clean.

17. Equity of the Bank/DFI means Tier-I Capital or Core Capital and includes paid-up capital, general reserves, balance in share premium account, reserve for issue of bonus shares and retained earnings/accumulated losses as disclosed in latest annual audited financial statements. In case of branches of foreign banks operating in Pakistan, equity will mean capital maintained, free of losses and provisions, under Section 13 of the Banking Companies Ordinance, 1962.

18. Nominee Director means a person nominated on the board of a bank/DFI by sponsor(s), persons, company, institution etc. by virtue of his/their shareholding in a bank/DFI.

19. PBA means Pakistan Banks Association.

20. Subordinated Loan means an unsecured loan, extended to the borrower for a minimum original maturity period of 5 years, subordinate to the claim of the bank/DFI taking exposure on the borrower, and documented by a formal sub-ordination agreement between provider of the loan and the bank/DFI. The loan shall be disclosed in the annual audited financial statements of the borrower as subordinated loan.
21. Tangible Security means readily realizable assets (as defined in these Prudential Regulations), mortgage of land, plant, building, machinery and any other fixed assets.

22. Underwriting Commitments mean commitments given by commercial banks/DFIs to the limited companies at the time of new issue of equity/debt instrument, that in case the proposed issue of equity/debt instrument is not fully subscribed, the un-subscribed portion is taken up (purchased) by the underwriting entity.

5.3. The Need for Prudential Regulations
The Basel Accord of 1988 and desirability to avail the benefits of laissez- faire prompted the introduction of Prudential Regulations by State Bank of Pakistan with effect from 1 January, 1992, to counter any adverse impact of a deregulated banking sector in Pakistan. The key objectives of these regulations are outlined below:

a) To protect the safety of public’s savings deposited in Banks.

b) To control the supply of money and credit in order to achieve a nation’s broad economic goals (such as high employment and low inflation).

c) To ensure equal opportunity and fairness in the public’s access to credit and other vital financial services.

d) To promote public confidence in the financial system, so that savings flow smoothly into productive investment.
e) To avoid concentrations of financial power in the hands of a few individuals and institutions.

f) To provide the government with credit, tax revenues and other services.

g) To help those sectors of the economy that have special credit needs (such as housing, small business, and agriculture).

5.4. Categories of Prudential Regulations:
The Prudential Regulations are divided in four categories:

1. Risk Management (R), (Prefix R)
(There are different sets of Risk Regulations for Corporate and Commercial Banking, SME, Consumer, Agriculture and Micro Finance Loans.)
2. Corporate Governance (G),
3. KYC and Anti Money Laundering (M), and
4. Operations (0).

5.4.1. Risk Management
1) Corporate/Commercial Banking
1. The total outstanding exposure (fund based and non-fund based) by a bank/DFI to any single person shall not at any point in time exceed 30% of the bank's/DFI's equity as disclosed in the latest audited financial statements, subject to the condition that the maximum outstanding against fund based exposure does not exceed 20% of the bank's/DFI's equity.
2. The total outstanding exposure (fund based and non-fund based) by a bank/DFI to any group shall not exceed 50% of the bank's/DFI's equity as disclosed in the latest audited financial statements, subject to the condition that the maximum outstanding against fund based exposure does not exceed 35% of the bank's/DFI's equity.
The rationale of this regulation is to diversify the bank’s exposure to a large number of clients. If a bank gives loans only to a small number of clients giving large chunks to each customer the bank’s credit risk will be high. If loans are given to a large number of clients and each customer is given a smaller amount the overall RISK will be lower.

3. Limit on exposure to a single person/Group effective from 31-12-2009 and onward would be as under:
Effective date Exposure limit as a % of bank’s/DFI’s equity (as disclosed in the latest audited financial statements)
For single person For group
Total outstanding(fund and non-fund based) exposure limit Fund based outstanding limit Total outstanding (fund and non-fund based) exposure limit Fund based outstanding limit
31-12-2009 30 20 45 35
31-12-2010 30 20 40 35
31-12-2011 30 20 35 30
31-12-2012 30 20 30 25
31-12-2013 25 25 25 25

1. Contingent liabilities of a bank/DFI shall not exceed at any point in time 10 times of its equity.
Contingent Liabilities are the total of the following commitments undertaken by a bank:-
A. Letters of Guarantee issued by a bank.
B. Letters of Credit issued by a bank.
C. Letters Underwriting the issue of shares or TFC’s to the Public.

Following shall not constitute contingent liabilities for the purpose of this regulation:
a) Bills for collection.
b) Obligations under Letters of Credit and Letters of Guarantee to the extent of cash margin retained by the bank/DFI.
c) Letters of credit/guarantee where the payment is guaranteed by the State Bank of Pakistan/Federal Government or banks/DFIs rated at least 'A' by a credit rating agency on the approved panel of State Bank of Pakistan or Standard & Poors, Moody's, Fitch- Ibca or Japan Credit Rating Agency (JCRA).
d) Non-fund based exposure to the extent covered by liquid assets.
e) Claims other than those related to provision of facilities (fund based or non-fund based) to the banks'/DFIs’ constituents, where the probability of conversion of these claims into liabilities are remote.

1. While considering proposals for any exposure (including renewal, enhancement and rescheduling/restructuring) exceeding such limit as may be prescribed by State Bank of Pakistan from time to time (presently at Rs 500,000), banks/DFIs should give due weightage to the credit report relating to the borrower and his group obtained from Credit Information Bureau (CIB) of State Bank of Pakistan. However, banks/DFIs may take exposure on defaulters keeping in view their risk management policies and criteria, provided they properly record reasons and justifications in the approval form. The condition of obtaining CIB report will apply to exposure exceeding Rs 500,000/- after netting-off the liquid assets held as security.
2. Banks/DFIs shall, as a matter of rule, obtain a copy of financial statements duly audited by a practicing Chartered Accountant, relating to the business of every borrower who is a limited company or where the exposure of a bank/DFI exceeds Rs 10 million, for analysis and record. The banks/DFIs may also accept a copy of financial statements duly audited by a practicing Cost and Management Accountant in case of a borrower other than a public company or a private company which is a subsidiary of a public company. However effective from December 31, 2009, if the borrower is a public limited company and exposure exceeds Rs. 500 million, banks/DFIs should obtain the financial statements duly audited by a firm of Chartered Accountants which has received satisfactory rating under the Quality Control Review (QCR) Program of the Institute of Chartered Accountants of Pakistan. Subsequently, if the firm's rating is downgraded in QCR program, then the financial statements of such borrowers are audited in the subsequent year by a firm having satisfactory rating under QCR.l Banks/DFIs may waive the requirement of obtaining copy of financial statements when the exposure net of liquid assets does not exceed the limit of Rs 10 million. Further, financial statements signed by the borrower will suffice where the exposure is fully secured by liquid assets.
3. Banks/DFIs shall not approve and/or provide any exposure (including renewal, enhancement and rescheduling/restructuring) until and unless the Loan Application Form (LAF) prescribed by the banks/DFIs is accompanied by a 'Borrower's Basic Fact Sheet' under the seal and signature of the borrower as per approved format of the State Bank of Pakistan (Annexure II-A for corporate borrowers and Annexure II-B for individual borrowers).

1. Banks/DFIs shall not provide unsecured/clean financing facility in any form of a sum exceeding Rs 500,000/- (Rupees five hundred thousand only) to any one person. Financing facilities granted without securities including those granted against personal guarantees shall be deemed as 'clean' for the purpose of this regulation. Further, at the time of granting a clean facility, banks/DFIs shall obtain a written declaration to the effect that the borrower in his own name or in the name of his family members, has not availed of such facilities from other banks/DFIs so as to exceed the prescribed limit of Rs 500,000/- in aggregate.
2. For the purpose of this regulation, following shall be excluded/exempted from the per party limit of Rs 500,000/- on the clean facilities:
a) Facilities provided to finance the export of commodities eligible under Export Finance Scheme.
b) Financing covered by the guarantee of Pakistan Export Finance Guarantee Agency.
c) Loans/advances given to the employees of the banks/DFIs in accordance with their entitlement/staff loan policy.
d) Investment in COIs/inter bank placements with NBFCs, provided the investee NBFC is rated 'A+', 'A' or 'A-' for long-term rating and at least 'A2' for short-term rating or equivalent by a credit rating agency on the approved panel of the State Bank of Pakistan or Standard & Poors, Moody's, Fitch-Ibca or Japan Credit Rating Agency (JCRA).n instructions, will be exempted from the aggregate exposure limit.
3. Banks/DFIs shall ensure that the aggregate exposure against all their clean facilities shall not, at any point in time, exceed the amount of their equity. However, investment of banks/DFIs in subordinated and unsecured TFCs, issued by other banks/DFIs to raise Tier-II Capital as per State Bank of Pakistan's instructions, will be exempted from the aggregate exposure limit.

1. While taking any exposure, banks/DFIs shall ensure that the total exposure (fund-based and/or non-fund based) availed by any borrower from financial institutions does not exceed 10 times of borrower's equity as disclosed in its financial statements (obtained in accordance with Para 2 of Regulation R-3), subject to the condition that the fund based exposure does not exceed 4 times of its equity as disclosed in its financial statements. However, where the equity of a borrower is negative and the borrower has injected fresh equity during its current accounting year, it will be eligible to obtain finance up to 4 times of the fresh injected equity (instead of the existing 3 times) provided the borrower shall plough back at least 80% of the net profit each year until such time that it is able to borrow without this relaxation. After 30th June 2009, the borrower will be eligible only up to 3 times of his fresh injected equity.

In exceptional cases, banks/DFIs may allow seasonal financing to borrowers, for a maximum period of six months, not meeting the criteria of 4 times of fund based exposure and 10 times total exposure, subject to the condition that fund based exposure does not exceed 8 times and total exposure does not exceed 12 times of borrower's equity.
2. At the time of allowing fresh exposure/enhancement/renewal, the banks/DFIs should ensure that the current assets to current liabilities ratio of the borrower is not lower than such ratio as may be required under the Credit Policy of the bank/DFI. Banks/DFIs shall prescribe the minimum current ratio under their Credit Policy keeping in view the quality of the current assets, nature of the current liabilities, nature of industry to which borrower belongs to, average size of current ratio of that industry, appropriateness of risk mitigants available to the bank/DFI etc. It is expected that bank/DFI's Credit Policy, duly approved by the Board of Directors, shall emphasize higher credit standards and provide full guidance to the management about the current ratio requirement for various categories of clients and corresponding risk mitigants etc. acceptable to the bank/DFI.
3. For the purpose of this regulation, subordinated loans shall be counted as equity of the borrower. Banks/DFIs should specifically include the condition of subordinated loan in their Offer Letter. The subordination agreement to be signed by the provider of the subordinated loan, should confirm that the subordinated loan will be repaid after that bank's/DFI's prior approval.

4. This regulation shall not apply in case of exposure fully secured against liquid assets held as collateral, as well as in cases where the exposure is taken on Units/Projects revived as a consequence of settlement under Committee for Revival of Sick Industrial Units (CRSIU), Corporate & Industrial Restructuring Corporation (CIRC) and the State Bank of Pakistan BPD Circular No. 29 dated October 15,2002, for a period of five years from the date of such settlement. Export finance and finance provided to ginning and rice husking factories shall also be excluded from the borrowings (exposure) for the purpose of this regulation.

5. Where the banks/DFIs have taken exposure on exceptional basis as provided in para 1 above, they shall record in writing the reasons and justifications for doing so in the approval form and maintain a file in their central credit office containing all such approvals. The Exceptions Approval file shall be made available to the inspection team of State Bank during the inspection.

Banks/DFIs shall not:
a) Take exposure against the security of shares/TFCs issued by them. XYZ bank cannot grant loans against shares issued by XYZ bank.
b) Provide unsecured credit to finance subscription towards floatation of share capital and issue of TFCs.
c) Take exposure against the non-listed TFCs or the shares of companies not listed on the Stock Exchange(s). However, banks/DFIs may make direct investment in non-listed TFCs.
d) Take exposure on any person against the shares/TFCs issued by that person or its subsidiary companies. It means Packages Ltd cannot obtain loan against shares issued by Packages Ltd.
e) Take exposure against 'sponsor director's shares' (issued in their own name or in the name of their family members) of banks/DFIs.
f) Take exposure on any one person (whether singly or together with other family members or companies owned and controlled by him or his family members) against shares of any commercial bank/DFI in excess of 5% of paid-up capital of the share issuing bank/DFI.
g) Take exposure against the shares/TFCs of listed companies that are not members of the Central Depository System. Check on internet the purpose of Central Depository Company.
h) Take exposure against unsecured TFCs or non-rated TFCs or TFCs rated below 'BBB' or equivalent. Exposure may, however, be taken against unsecured/subordinated TFCs, which are issued by the banks/DFIs for meeting their minimum capital requirements, as per terms and conditions stipulated in BSD Circular No. 12 of August 25, 2004.
i) Take exposure against shares unless the beneficiary of the facility is absolute owner of the shares so pledged or has the necessary mandate to pledge the shares of third party as security for availing financing facility from the bank/ DFI.

a) Banks/DFIs shall not own shares of any company/scrips in excess of 5% of their own equity. Further, the total investments of banks in shares should not exceed 20% of their own equity.
The shares acquired in excess of 5% limit due to the underwriting commitments will be sold off/off loaded within a period of three months.
b)Banks/DFIs may also take exposure in future contracts to the extent of 10% of their equity on aggregate basis. In this connection, the 10% exposure limit for future contracts will include both positions taken in futures buying and selling.
c) Banks/DFIs may combine the limits for ready market and future contracts and have the aggregate exposure in shares to the extent of 30% of their equity provided that investment in future contracts shall not exceed 10% of their equity.
d) Banks/DFIs will obtain prior approval from the State Bank while purchasing shares of a company in excess of 5% of their paid-up capital or 10% of the capital of investee company, whichever is lower. These limits will be calculated as under:
e) Regarding strategic investment, the banks/DFIs will exercise proper diligence, as their decision to make strategic investment carries great significance, keeping in view the implications of such investment in terms of liquidity management and long term outlook of the investee companies. In this regard, the banks/DFIs should take into account all relevant factors. Accordingly, the following should be ensured:
x A committee, clearly designated/empowered by the bank, should take the decision for strategic investment.
x All Record of transactions/decisions, taken by the committee, regarding strategic investment should be properly maintained and kept in a separate file, for provision of the same to the SBP Inspection Team during their visit to the bank.
x The banks/DFIs will report their investment in strategic portfolio to the Banking Policy Department, within 2 working days from the date of such investment.
2. Banks/DFIs shall not hold shares in any company whether as pledge, mortgagee, or absolute owner, of an amount exceeding 30% of the paid-up share capital of that company or 30% of their own paid-up share capital and reserves, whichever is less.
4. SECURITY MARGIN : Exposure against the shares of listed companies shall be subject to minimum margin of 30% of their current market value, though the banks/DFIs may, if they wish, set higher margin requirements keeping in view other factors. However, banks/DFIs should not give a margin call until the margin reaches to the level of 25%. Banks/DFIs will monitor the margin on at least weekly basis and will take appropriate action for top-up and sell-out on the basis of their Board of Directors' approved credit policy and pre-fact written authorization from the borrower enabling the bank/DFI to do this.

4. SECURITY MARGIN : Exposure against TFCs rated 'A' (or equivalent) and above by a credit rating agency on the approved panel of State Bank of Pakistan shall be subject to a minimum margin of 10% while the exposure against TFCs rated 'A-' and 'BBB' shall be subject to a minimum margin of 20%.

1. All guarantees issued by the banks/DFIs shall be fully secured. Further the banks/DFIs to hold at least 20% of the guaranteed amount in the form of liquid assets as security.
2. The requirement of security can also be waived by the banks/DFIs in cases of guarantees issued to Pakistani firms and companies functioning in Pakistan against the back to back/counter guarantees of branches of guarantee issuing bank/DFI or banks/DFIs rated at least 'A' or equivalent by a credit rating agency on the approved panel of State Bank of Pakistan or Standard & Poors, Moody's, Fitch-Ibca or Japan Credit Rating Agency (JCRA). Besides, in cases where the counter-guarantee issuing bank is situated in a foreign country, the rating of at least 'A' or equivalent by a local credit rating agency of the respective country shall also be acceptable, provided the guarantee issuing bank in Pakistan is comfortable with and accepts the counter-guarantee of such foreign bank.
However, the prescribed rating requirement for banks situated in foreign countries may be relaxed for transaction amounts up to US$250,000, subject to internal credit controls and approval of the relevant bank/DFI in Pakistan. For transaction amounts greater than US$250,000, banks/ DFIs may approach the State Bank of Pakistan for specific approvals/exemption, on a case-by-case basis, where the prescribed minimum rating requirement cannot be complied with. Banks/DFIs are encouraged to set limits for acceptance of guarantees issued by other banks/DFIs.
3. In case of back-to-back letters of credit issued by the banks/DFIs for export-oriented goods and services, banks/DFIs are free to decide the security arrangements at their own discretion subject to the condition that the original L/C has been established by branches of the guarantee issuing bank or a bank rated at least 'A' by Standard & Poors, Moody's, Fitch-Ibca or Japan Credit Rating Agency (JCRA).
4. The guarantees shall be for a specific amount and expiry date and shall contain a claim lodgement date. However, banks/DFIs are allowed to issue open-ended guarantees without clearance from State Bank of Pakistan provided banks/DFIs have secured their interest by adequate collateral or other arrangements acceptable to the bank/DFI for issuance of such guarantees in favour of Government departments, corporations/autonomous bodies owned/controlled by the Government and guarantees required by the courts.

Classification here means classifying the lending portfolio of a bank into different categories based on the fact whether the loan and / or interest is being repaid to the bank in accordance with the loan contract and whether the other terms and conditions are being met or not. For example whether security as required is present, whether business is running and whether the turnover in the business account with the bank is satisfactory or not. We can classify the students of a college by gender, age or qualifications.

Provisioning is the name given to the process whereby the bank deducts an amount from the profit it has made and places the amount in a separate account called ‘Provision for bad and doubtful debts’ when the bank has come to the conclusion that there are evidences which indicate that either the borrower is willingly avoiding to repay as required or there is an erosion in the ability of the borrower to repay and there is a reduction in the available security and there is a strong apprehension that the customer will fail to repay and the bank will have to suffer a financial loss. The amount that is transferred to provision account does not available to distribute to the shareholders as dividend and can only be used to cover the possible loss in the financing and is used to write off the loan.

Banks/DFIs shall not pay any dividend on their shares unless and until:
a) they meet the minimum capital requirements as laid down by the State Bank of Pakistan from time to time;
b) all their classified assets have been fully and duly provided for in accordance with the Prudential Regulations and to the satisfaction of the State Bank of Pakistan; and
c) all the requirements laid down in Banking Companies Ordinance, 1962 relating to payment of dividend are fully complied.

While extending fund-based facilities to borrowers against hypothecation of stock and/or receivables on pari-passu basis, banks/DFIs shall obtain monthly statements from borrowers that contain a bank-wise break-up of outstanding amounts with the total value of stocks and receivables there-against.


General RISK Prudential Regulations Check-list for SME s

General Regulations covering both 1) SMALL and 2) MEDIUM Enterprises

SME Specific Credit Policy to be formulated by Bank management
Procedures on loan administration, disbursement, and monitoring and recovery mechanism are clearly documented.
Specifications of main functions, role & responsibilities of key positions, as well as delegation matrix for approvals/sanctioning of financing limits.
Borrowers Basic Fact Sheet and e-CIB Report
Duly signed/stamped 'Borrower’s Basic Fact Sheet' (BBFS) obtained.
Duly signed/stamped 'Loan Application Form' (LAF) obtained.
e-CIB report on borrower and on his group is obtained and in case of default proper justification and reasons of default are recorded.
Personal Guarantees
All facilities, except for those secured against liquid assets are backed by PG of the owners of SME's.
PGs of all directors other than nominee directors shall be obtained, in case of limited companies
Limit on Clean facilities
Clean Exposure (facilities secured against personal guarantees only other than consumer financing limits i.e credit card, personal loans) does not exceed Rs 5 M in aggregate from all banks.
Written declaration that clean facilities does not exceed prescribed limit (s) is available
Proper Utilization of Loan
Appropriate system for monitoring utilization of loan is in-place.
In case of Fixed Assets/Project Financing: Appropriate system for monitoring utilization of loan is in-place.
In case of Working Capital/revolving credits: Declaration for utilization of loan for the purpose indended obtained.
Restriction on Facilities to Related Parties
Any of financing bank’s director, its chief executive or major share holding 5% or more of share capital of the Bank or an employee or any dependent family member of these persons is not interested in SME.
An undertaking from SE stating that there is no existence of any interest between the borrower and the above-mentioned related parties is obtained.
Translation of Loan Documents into Urdu Language
Arrangements are in-place for provision of LAF, BBFS and other related documents (except charge documents) on specific request of the customer.
Securities and margin Requirements
All facilities except the ones extended under clean financing are secured appropriately.
General Measures
Pricing policy, processing & documentation fee, prepayement/late-payment penalities etc explicitly mentioned in loan agreement
A transparent, customer focused complaints resolution system is available
An efficient Management Information System (MIS) for SME Finance to effectively cater to needs of the borrower is implemented

Small Enterprises (SE) Specific Prudential Regulations Check- list

Name of the Customer

Definition of Small Enterprise
A Small Enterprise (SE) is a business entity which meets both the following parameters
No: of employees (inclusive of contract employees): upto 20
Annual Sales Turnover : Upto Rs 75 M
Per Party Exposure Limit
The maximum exposure on a counterparty does not exceed Rs 15 M from a Single Bank/ All Banks
Requirement of Audited Accounts
Financials duly signed by the borrower obtained
Repayment Capacity of the Borrower and Cash Flow Based Lending
Cashflows of the borrower properly assessed by applying appropriate techniques
Collateral Valuation
Valuation conducted by Pakistan Banks Associatin (PBA) approved evaluator or Bank's/ DFI own evaluating staff (for exposures upto Rs 5.0M)
Recovery of Outstanding Dues
Incase, cash collection/recovery is done at a place other than authorised place of the business, appropriate secuirty and risk management measures are adopted (including necessary steps such as intimation to the borrower)
General Reserve against Small Enterprise Finance
General reserve atleast equivalent upto 1% of the secured SE portfolio and 2% of the unsecured SE portfolio, is maintained
Classification and Provisioning for Loan /Advances
Classification and Provision guidelines are meticulously observed as required.
Restructuring/Rescheduling of Loan
Guidelines for Restructuring/Rescheduling of Loan are met
Minimum Turnaround Time
TAT for approval process (from the date of receipt of complete information) is within 30 days

Medium Enterprises (ME) Specific Prudential Regulations Check- list

Name of the Customer

Definition of Medium Enterprise
A Medium Enterprise (ME) is a business entity (Ideally not a public limited Company), which meets both the following parameters:
No: of employees (inclusive of contract staff): 21-250 (Manufacturer & Services) OR 21-50 (Traders)
Annual Sales Turnover : Above Rs 75 M and upto Rs 400 M
Repayment Capacity and Cashflow Based Lending
Repayment capacity of the borrower on the basis of asset conversion cycle & expected future cash flow is assessed
Key drivers & risks of borrower’s business and risk mitigants are identified
Rationale & parameters used to project the future cash flows are documented and annexed with cash flow analysis undertaken
Per Party Expsoure Limit
The maximum exposure on a counterparty does not exceed Rs 100 M from a Single Bank.
Total exposure (including leased assets) on a counterparty does not exceed Rs 200 M from All Bank.
Requirement of Audited Accounts
Copy of financial statements duly audited by a practicing chartered accountant to be obtained where the borrower is a limited company and/or the exposure net of liquid assets exceeds Rs 10M.
Classification and Provisioning for Assets
Classification and Provision guidelines are meticulously observed as required.

We are not discussing the remaining categories of Risk Prudential Regulations.
The serious students may visit sbp website for the Regulations.
The regulations appearing in the book by Dr Israr may or may not be uptodate.

In order to ensure that the management of bank should not fall in the hands that might damage both the institution and the banking industry as a whole, the appointment of proposed President/Chief Executive and Directors on the Board require prior clearance from State Bank of Pakistan. A similar type of approach will be observed by the Banks while appointing the key executives of the Bank which will serve as intimation to State Bank of Pakistan.

A. Fit And Proper Test
1. The "Fit and Proper Test" (FPT) is applicable to the sponsors (both individual and companies) who apply for a commercial banking license, the investors acquiring strategic/controlling stake in the banks/DFIs, major shareholders of the banking companies and to the appointment of Directors, CEO, and Key Executives of the banks/DFIs. The fitness and propriety will be assessed on the following broad elements (Annexure VII-B):
a) Integrity, Honesty and Reputation
b) Track Record
c) Solvency and Integrity
d) Qualifications and Experience
e) Conflict of Interest
f) Others

In order to improve the quality of directives originated from the Board, it has been particularly highlighted that their role will be only policy making and general directions, oversight and supervision of the affairs and business of the bank and shall not indulge in day-to-day operations of the business of the bank.

B. Head of Compliane / Compliance Officer:
Banks/DFIs shall put in place a Compliance Program to ensure that all relevant laws are complied with, in letter and spirit, and, thus, minimize legal and regulatory risks. For this purpose, the Board of Directors, or Country Manager in case of foreign banks, shall appoint/designate a suitably qualified and experienced person as Compliance Officer on a countrywide basis, who may be assisted by other Compliance Officers down the line. The Head of Compliance will report directly to the President/Chief Executive Officer of the bank/DFI. The Compliance Officers will primarily be responsible for bank's/DFI's effective compliance relating to:
(a) SBP Prudential Regulations.
(b) Relevant provisions of existing laws and regulations.
(c) Guidelines for KYC.
(d) Anti money laundering laws and regulations.
(e) Timely submission of accurate data/returns to regulator and other agencies.
(f) Monitor and report suspicious transactions to President/Chief Executive Officer of the bank/DFI and

The Board of Directors of a Bank shall also ensure that it receives Management Letter from the external auditors without delay and appropriate action is taken thereon in consultation with the Audit Committee to deal with control or other weaknesses identified therein. A copy of Management Letter should also be submitted to the State Bank of Pakistan for further follow up at their level

With a view to safeguard the interest of prospective investors, depositors and creditors, it shall be mandatory for all banks to have themselves credit rated by a Credit Rating Agency on the approved panel of the State Bank of Pakistan. Further, the banks will disclose their credit rating prominently in their published annual and quarterly financial statements

The Prudential Regulation impresses upon the banks to remain fully conversant about their customers to prevent the possible use of the banking sector for money laundering, terrorist financing, and transfer of illegal / ill-gotten monies. Further, it is not a one time exercise but an on going process and will commence with the start of banker customer relationship and will remain in operation during the currency of each account.

Regulation M-1 Customer Due Diligence (Cdd)1
1. With a view to preserving the integrity and safety of the financial system, it is expedient to prevent the possible use of the banking sector for money laundering and terrorist financing. To this end, Customer Due Diligence/Know Your Customer (CDD/KYC) procedures require special attention and concrete implementation. Accordingly, the following minimum guidelines are required to be followed by banks/DFIs to avert the risks posed by money laundering and terrorist financing activities. However, banks/DFIs are free to take additional measures in line with Financial Action Task Force Recommendations.

The Prudential Regulations have listed different documents that must be obtained from different types of customers while opening each account for the ease and guidance of the banks. During the course of inspection of the banks, the efficacy of KYC system will be checked to ensure effective observance of SBP directives

The banks are required to preserve their record for a minimum period of five years. The records relating to the suspicious transactions reported by the bank shall be retained even after the lapse of this period, till such time the State Bank of Pakistan permits to destroy the same.
Regulation M-4 Correspondent Banking
1. Banks/DFIs shall gather sufficient information about their correspondent banks to understand fully the nature of their business. Factors to consider include:
x Know your customer policy (KYC)
x Information about the correspondent bank's management and ownership
x Major business activities x Their location
x Money laundering prevention and detection measures x The purpose of the account
x The identity of any third party that will use the correspondent banking services (i.e. in case of payable through accounts) x Condition of the bank regulation and supervision in the correspondent's country

Suspicious Transactions
The Banks are also required to report all suspicious transactions through Compliance Officer of the bank to Banking Policy Department of State Bank of Pakistan. The employees of the banks are strictly prohibited to disclose the fact to the customer or any irrelevant quarter that a suspicious transaction or related information is being reported for investigation

Banks have been restrained from window dressing i.e. artificially or temporarily showing an ostensibly different position of bank’s accounts as reflected in their financial statements. Particular care shall be taken in showing the position of deposits, non-performing loans/assets, provision, profit, inter-branch and inter-bank accounts etc.

All entries outstanding in the Inter-Branch Accounts and/or Suspense account must be reconciled /cleared and taken to the proper head of account within a maximum period of 30 days from the date of entry made in the said account

Every Bank shall maintain in Pakistan not less than 80% of the assets created by it against time and demand liabilities. Accordingly assets held abroad shall not, at any point in time, exceed 20% of its time and demand liabilities. All other assets financed from sources other than time and demand liabilities shall be held within Pakistan

In case of FE 25 deposits, these shall not be invested in fund management schemes of other banks, whether in Pakistan or abroad. At the same time amount invested in a single institution should not exceed 25% of total investable funds, available with the investing bank

The prescribed ratio of Cash Reserve /Special Cash Reserve against FE-25 deposit shall be maintained in USD Dollars.

__________________________________________________ _____________________________________
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Default Know your Customer and Anti Money Laundering (AML)

The only way your knowledge and vocabulary can grow is by looking up the meanings of all unfamiliar words in a good New Edition Dictionary. Specialized Dictionaries like the ones on (1) Law and (2) banking and finance can increase your understanding of technical terms and concepts.
Make a resolution that you will look up the words, whose meanings are not clear to you.

Know your Customer and Anti Money Laundering (AML)
(Story BCCI convicted of money laundering and liquidated world wide.)
What is Money Laundering?
Money laundering can be defined as the process whereby the true identity of illegally obtained money is changed or concealed so that it appears to have originated from a legitimate source.

The main purposes of money laundering are to disguise the origin of funds, integrate the funds into economy and spread and diversify the risk of seizure or confiscation of illegitimate funds, and to further finance criminal operations.

Money laundering serves as a form of security for individuals involved in criminal activities.
Cash being a bearer instrument and completely fungible, lends anonymity to a variety of criminal activities and is the preferred medium of exchange in the criminal world. That gives rise to a need for criminals to:

1. conceal the true ownership and origin of the money;
2. maintain control over the money; and
3. alter the form of money to mask its origins.
{ fun⋅gi⋅ble esp. of goods) being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind.}

Three important phases in Money Laundering.

1. Placement
Placement is the first stage of money laundering process. The criminals bring their ill-gotten money into the formal sector. Criminal activities almost always generate proceeds in CASH. Examples are proceeds of narcotics sales, taking bribes, selling smuggled goods. The cash received is introduced to the financial system or retail economy either in bulk or through “structuring” of transactions to avoid attention. This can be done in an increasingly varied number of ways. For example:
1. deposit of cash in banks or other financial institutions;
2. purchase of traveler’s cheques or foreign currency;
3. purchase of insurance, gold, paintings or other high value items;
4. using services of traders who may bank illegal money along with their own funds, for example ill gotten proceeds can be deposited in banks together with legal petrol pump receipts in cash.
The placement stage is most important as far as detection of illegally obtained money is concerned.

2. Layering
This is the usual process of separating the funds from their source and/or consolidating funds and transferring the funds through multiple accounts and financial instruments. Series of transactions are conducted from one account to another and from one institution to another including overseas transfers with the intent of making the money trail as muddy and murky(not clear, dark and dirty with mud etc.) as possible, because if the funds cannot be connected to criminal act, they cannot be seized.
At this stage, the money launderer’s sole objective is to break the link between the illegally obtained money and its source. If a banker comes across a banking transaction which has no apparent economic, commercial or visible lawful purpose, one could suspect that it involves layering.

3. Integration.
The final stage of money laundering, integration is turning the illegally obtained funds into tangible assets, such as real estate, car show room or reinvesting the funds into a business. In situations where the layering process succeeds, integration process effectively returns the laundered proceeds back into the general financial system and the proceeds appear to be the result of or connected to legitimate business activities.
At this stage, it is almost impossible to trace the funds back to their original criminal source.

Banks and financial institutions face the risk of inadvertently becoming involved in the process of money laundering. It would seem that the placement stage represents the most risk to financial institutions, but it can be seen that financial institutions can unknowingly become involved in money laundering at any stage of the process.
The banks normally do not have effective means of knowing whether a transaction stems from or forms part of a wrongful activity. Similarly, in international context, it may be difficult to ensure that cross border transactions on behalf of customers are in compliance with the regulations of another country.
Nevertheless, the staff should not set out to offer services or provide active assistance in transactions, which in their opinion, are associated with money derived from illegal activities.

Bank’s success on this front is dependent upon the prudence and vigilance of every manager and employee. All concerned must adhere to KYC policies and procedures for ascertaining customer’s status and his source of earning, for monitoring of accounts on regular basis, for checking identities and bona fides of remitters and beneficiaries, for retaining internal record of transactions for future reference.
(check bona fides = check to ensure that sb is who they say that they are; check to ensure that sb/sth is honest )

The transactions, which are out of character/inconsistent with the history, pattern, or normal operation of the account involving heavy deposits/withdrawals/transfers should be viewed with suspicion and properly investigated.

The circumstances generally and after the event of 9/11 (What is 9/11?) have invited attention of all concerned to heightened global efforts to prevent the possible use of the banking sector for money laundering, terrorist financing, transfer of illegal / ill-gotten monies, and as conduit for white collar crimes, etc. In order to bring banking operations at the desired level, State Bank of Pakistan has issued a set of Prudential Regulations No. M 1 to M 5 for the purpose.

4.1. Definition of Money Laundering:
There is a lack of consensus amongst even the developed countries about what criminal activities fall within the sphere of Money Laundering. The term Money Laundering was first used in early 1980s. Broadly it refers to:

“It is a process by which large amounts of illegally obtained money are given the appearance of having originated from a legitimate source.”
“The conversion of profits derived from illegal activities into financial assets which consequently appear to have legitimate origin”.
“Money Laundering is a magic trick for wealth creation, a haven for drug traffickers, arms dealers, tax evaders etc”.
{ haven = a place that is safe and peaceful where people or animals are protected: The hotel is a haven of peace and tranquillity. The river banks are a haven for wildlife.— safe haven, tax haven}

4.2. “Know Your Customer (KYC)”
Money laundering is increasingly seen to be within the sphere of responsibility of central banks and regulatory authorities. Money laundering legislation encourages banks to put in place effective procedures to ensure that all persons conducting business with them are properly identified and that transactions which do not appear to be legitimated are reported. In the year 2000 representatives of international banking industry launched the Global Anti Money Laundering Guidelines for Banks & DFIs. These underline legal obligations on banks to know their customers including “beneficial owners” and their “source of wealth”. What is a beneficial owner?

4.3. Anti Money Laundering Measures

The SBP has taken the following steps:

a. Under Prudential Regulations, Banks are required to take necessary safeguard at their respective levels against such transactions and use of banking channels for such activities.

b. Specific emphasis on the policy “Know Your Customer”.

c. Anti Money Laundering Unit established at State Bank.

d. Prudential Regulations provide a list of suspicious/suspected transactions for guidance to Bankers.

e. Appointment of Compliance Officer by all banks made compulsory to oversee money laundering measures in their respective institutions.

f. Restrictions on issuance of Rupee Travellers Cheques of denomination above Rs.l0,000.

g. Discontinuation of issuance of bearer instruments such as FEBCs, DBCs, FCBCs and US$ Special Bearer Bonds.

h. Replacement of Money Changers by Exchange Companies and setting up systems for their monitoring.

i. Anti Money Laundering Act has been passed and it is being improved in the wake of increasing terrorism.

j. Pakistan acquired membership of Asia Pacific Group on Money Laundering (APGML), a regional organization for combating money laundering.

k. Coordination with SECP and NAB to chalk out strategies for future course of action.

l. Withdrawal of immunity on Foreign Currency Accounts.
(Immunity meant that a person could keep as much money as he liked in a Foreign Currency and no Govt. entity could ask any questions. This has been withdrawn.)

State Bank Anti Money Laundering Regulations consist of two important Pillars of Protecting the banks from Money Laundering:-

First Pillar------ Comprehensive enquiries/care at the time of opening the account of a prospective customer which involves filling out a “Customer Profile Form”, taking all the

1) pertinent details of the customer,
2) his source of income,
3) the purpose of opening the account,
4) the details of the “beneficial owner”,
5) the expected volume of transactions,
6) the expected approximate amounts of the transactions that will be made,
7) the profession of the account holder,
8) the nature of business and
9) verified address of the customer.

The Branch manager has to make a judgement as to the level of riskiness of the account and if the account is that of a political figure (politically exposed person), the business entails cash transactions, or the use of the banking facilities is complex the branch manager will assign and mark a higher level of risk to the account. Higher risk accounts will be subject to ‘enhanced due diligence’ which means the account will be subject to closer scrutiny. If the manager is not satisfied he will not open the account.

Second Pillar----- Continued and constant monitoring / checking of the transactions being passed over the Accounts. The bank’s duty does not end with due care at the time of opening the account. Bank has a continuing duty under the Anti Money Laundering Act to keep a constant watch on the transactions being passed over the accounts in the bank’s books. If the bank detects that the volume or frequency of transactions is out of line with the indications given by the customer at the time of opening the account the bank must make enquiries.
There is a Head of Compliance in the Head Office and there are Compliance Officers in Branches. The compliance team keeps an eye on the banking transactions being passed over the accounts.
If they detect discrepancy between the nature, size, frequency of transactions indicated at the time of account opening and actual transactions the compliance team considers the discrepancies carefully. In less serious matters the bank may decide to take clarification/explanation from the customer.
If, however, the bank detects any suspicious entries which indicate that the customer is involved in money laundering or other illegal financial activities it is the incumbent duty of the banker to inform the Head of Compliance who should inform the Special Anti Money Laundering Cell created in State Bank of Pakistan. The bank must not inform the customer in question that the bank has reported the account to State Bank of Pakistan.

Practical Steps in :-
Compliance of
Know Your Customer,
Customer Due Diligence and
Enhanced Due Diligence
Walk-in Customers
Walk-in customers are those who just walk into branch premises to open an account or make use of other banking services. The priorities of walk-in customers may be that:
• The branch location is convenient for them
• The customer service of the branch is better than other branches or other banks
• The branch premises are better than other branches or other banks and are equipped with modern facilities
• The size and reputation of the bank is good
• The charges are less than other banks.
Solicited Customers
Solicited customers are those who are contacted by the bank staff with the purpose of establishing a business relationship. Generally these are customers whose credentials are well established and who enjoy a good reputation in the market.
An account is opened by completing an account opening form. This document is the means by which the banker-customer relationship is established. All the requirements of account opening apply to both the customer and the documentation depending on the type of account being opened in the bank.

Account opening basics for People/Natural persons:
For natural persons the following information should be obtained, where applicable:
1. Legal name and any other names used (such as maiden name); (maiden name is the previous name used by a woman before changing her name upon marriage)
2. Correct permanent address (the full address should be obtained; a Post Office box number is not sufficient);
3. Telephone number, fax number, and e-mail address;
4. Date and place of birth;
5. Nationality;
6. Occupation, public position held and/or name of employer;
7. An official personal identification number or other unique identifier contained in an unexpired official document {e.g. passport, identification card CNIC, POC(Pakistan Origin Card), NICOP(National Identity Card for Overseas Pakistanis} that bears a photograph of the customer;
8. Type of account and nature of the banking relationship;
9. Signature.
10. Letter of thanks must be prepared and mailed to the customer on the given address. Cheque book must not be delivered until the customer brings the thank you letter received by him through courier/mail.
11. If the letter of thanks is returned undelivered, it could be an indication that the prospective account holder is a fraudster, branch manager should be informed who should make careful, investigation. The account should be marked caution until the matter is sorted out. The branch manager to decide the action to be taken.

(Story AMExports thank you letter returned. Major fraud of customs deptt. revealed.)
12. The bank should verify the information on the account opening form by the following methods:
a. Confirming the date of birth from an official document (e.g. birth certificate, passport, Identity Card, social security records);
b. Confirming the permanent address (e.g. utility bill, tax assessment, bank statement, a letter from a public authority);
c. Contacting the customer by telephone, by letter or by e-mail to confirm the information supplied after an account has been opened (e.g. a disconnected phone, returned mail, or incorrect e-mail address should warrant further investigation);
d. Confirming the genuineness of the CNIC produced by the customer through online verification from NADRA is essential.

Account opening basics for Companies
For companies the following information should be obtained:
1. Name of institution
2. Principal place of institution's business operations
3. Mailing address of institution
4. Contact telephone and fax numbers
5. Partnership deed
6. Letterhead of proprietorship
7. Some form of official identification number, if available (e.g. tax identification number)
8. The original or certified copy of the Certificate of Incorporation and Memorandum and Articles of Association
9. The resolution of the Board of Directors to open an account and identification (CNIC) of those who have authority to operate the account
10. Nature and purpose of business and its legitimacy.
11. Letter of thanks drill and care if returned undelivered should be exercised for business accounts as well.
Customers Due Diligence (CDD)/ Know Your Customer (KYC)
Customers Due Diligence (CDD)/ Know Your Customer (KYC) are primarily procedures that are required to be implemented by the bank to identify their clients / customers in order to ascertain relevant information pertinent to doing business with them. Financial managers are increasingly recognizing the importance of ensuring that their banks have adequate controls and procedures in place so that they know the customers with whom they are dealing.
Adequate due diligence on new and existing customers is a key part of these controls. Without this, banks may become subject to reputational, operational, legal and concentration risks, which can result in significant financial cost. In Pakistan, CDD/KYC is a regulatory policy requirement to be implemented to check the customer, their sources of funds and nature of business, etc. KYC implementations have become increasingly important globally to prevent theft, fraud, and money laundering activities. KYC should not be treated as just a formality of form filling; in fact it is a process to be undertaken with care. The objective being that account is opened for genuine customers and regular monitoring ensures that it is not used for criminal or money laundering purposes.
The second aspect of CDD/KYC checking is to verify that the customer
is not on any list of known persons suspected or convicted of financial crime or default. SBP issues a ‘negative’ list which is updated from time to time, highlighting such negative persons, companies and associations. Persons or Entities appearing on the negative list are not eligible to open accounts. Computer checking of the negative list is essential when starting any new financial relationship.

Another key aspect of CDD/KYC control is to monitor transactions of customers against their recorded profile, including their historical data.

Banks exercising CDD/KYC monitoring for Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) purposes should use specialized Transaction Monitoring Software, as well as Names Analysis Software and Trend Monitoring Software. Such software should automatically highlight accounts appearing on a negative list and should also generate alerts to identify unusual activities.
Know Your Customer (KYC) policy
According to the SBP Prudential Regulation M-l, banks and DFIs should formulate in writing a comprehensive Know Your Customer (KYC) policy, duly approved by the bank’s Board of Directors and in line with international best practices. This policy should be applicable when starting a new relationship (new account) with the customer and a continuing relationship with existing customers. This has become more important in view of the recent rise in terrorist activities, where terrorists have used banking channels to transfer illegal funds.
Customer Due Diligence (CDD)
The following Due Diligence measures should be taken:
• No account of an anonymous or fictitious person shall be opened or maintained.
• All reasonable measures should be taken to identify beneficial ownership of an account.
• If a customer is acting on behalf of any other person(s), measures should be taken to verify the identity of the other person(s).
• When dealing with any Legal Person (companies, trusts, societies, NGOs, Non-profit Organizations, etc) information must be obtained and verified about the ownership and control structure of the account and about the person(s) who ultimately own(s) or control(s) the account/ customer.
Enhanced Due Diligence (EDD)
Enhanced due diligence should be exercised when dealing with High Risk customers such as:
a) Non-residence customers
b) Private banking companies
c) Legal persons
d) Customers belonging to countries where KYC, CDD, AML regulations are non-existent/not applied
e) Customers in cash-based business
f) Customers whose source of income is not clearly defined
g) Customers dealing in high value items.

EDD should also be used in the following situations:
• Customer who has been refused banking facilities by any other bank/ DFI
• Opening correspondence banking account
• Dealing with no face-to-face / online customers
• Dealing with politically exposed persons (PEP).'Politically exposed persons' (PEPs) are persons holding or who have held a position of public trust.

The following must be carried out at the time of establishing a relationship
with a customer:
1. All prospective customers must be seen face-to-face (except online customers, for whom a separate identification process is defined).
2. Proper completion of Account Opening and KYC forms and authorizations.
3. Documents produced by the customer must be original. In the case of photocopies, each copy must be marked “Original seen" after verifying the original documents.
4. All documentary evidence, information provided and signatures must be consistent.
5. Purpose and reason for opening the account or establishing the relationship.
6. Expected origin and use of funds that are routed through the bank.
7. Prepare and document customer’s business and transaction profile including details of occupation/employment/business activities and sources of wealth and income.
8. Evidence of identity and address of all account holders (including third party mandate) must be obtained and should be independently verified for authenticity.
9. Photocopy of CNIC along with original must be obtained at the time of opening the account. Original may be returned after marking copy “Original seen”.
10. Documents required under SBP Prudential Regulation No. M-l must be obtained.
11. Where there are doubts about the quality or adequacy of previously obtained customer identification material for existing customers, then, on the basis of materiality and risk identification, verification should be carried out at appropriate times.

Purpose of CDD/KYC and AML
The purpose of CDD/KYC and Anti-Money Laundering (AML) procedures is to check the authenticity of the customer and their business account.
For this purpose, the following steps should be taken.

Obtain all necessary identification documents. The customer can provide any of the following verification documents, along with a photocopy, for attestation / verification to the designated officer. The original documents should be returned to the customer after verification / attestation.
2. Passport
3. Pakistan Origin Card (POC)
4. National Identity Card for Overseas Pakistani (NICOP) for accounts other than individual or joint. Various additional documents are required, the details of which are provided in the Account Opening portion of this book. NADRA verification should be completed immediately but no later than 5 working days. In no circumstance should the verification cost of CNIC verification be passed on to the account holder.
Generally, branch staff knows their customers well; the CDD/KYC exercise helps to document their knowledge of the customer. If information is not documented, verbal information will not be acceptable to the regulator.
CDD/KYC should not be merely a form-filling exercise but should be instrumental in building future relationships.
CDD/KYC is an ongoing process and does not end at the account opening stage. Any fresh information regarding the account holder, his/her new business, new sources of funds, or conversion of status from student to business / service, etc should be immediately updated in the AOF and in the computer system.
No customer is exempt from CDD/KYC. They all have to be taken through this route in a very professional manner, without annoying them. The banker should not behave like an investigator or a police officer, but instead be very courteous and tactful in their approach.
CDD/KYC is a very confidential part of the customer AOF and in no circumstances should it be shared with him/her. Do not write generalized statements / words such as “private service”, “business”, etc.; rather be more specific in recording information such as “serving in KESC”, “Kauser Medical Store”, etc.
It is not necessary that all information is backed by documentary evidence, but must be done wherever possible. Ensure that Government accounts are not opened in the personal name of government officials.

For opening any government account (Federal, Provincial, and Local Govt.) in an official capacity, the relevant government officials should produce an authority letter from the department concerned, duly endorsed by the Ministry of Finance or Finance Department of the relevant provincial/ local government.
Additional diligence should be applied to high risk customers who are engaged in cash-based businesses and whose actual source of funds is not clearly identifiable.
As per SBP instruction, any account that has not submitted a CNIC within a specified period can be discontinued.
Bank and DFIs should undertake due diligence and identification of walk- in customers who undertake transactions above the limit prescribed in the bank’s/DFI’s internal policies.
Public figures and politically exposed persons
The term "public figure" applies to a person who performs an important public function and is known by the public at large. Individuals belonging to political and social environments, showbiz, etc. should also be considered as public figures. These people will take advantage of their public figure status in order to achieve personal benefits. Following are a few examples of public figures:
• Head of State (present or past)
• Cabinet Ministers
• Chief Executives of nationalized industries and senior officials of government administration
• Chief Justice of High Courts and judges of Supreme Courts; senior leaders of political parties
• Senior journalists of electronic and print media etc
• Diplomats, Ambassadors and Counsel Generals serving abroad and Foreign Ambassadors and Counsel Generals of Increased Risk Countries
• Heads of Armed Forces (Army, Navy, Air Force, Joint Chiefs of Staff)
• Persons responsible for looking after the public interest at large. This list is only indicative and not exhaustive and is also based on subjective criteria, just to give an idea of PEPs/ public figures. You may be able to think of other examples from your own experience of dealing with such customers.

__________________________________________________ ____________________
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Default Opening accounts for various types of customers

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Looking up their meanings in a good dictionary which also gives examples of sentences in which those words are used.
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Opening accounts for various types of customers
6.5. Opening of Account - Every adult and sane individual can open a bank account, provided he is not insolvent or an un-discharged bankrupt. Joint account can also be opened by two or more individuals. Similarly a group of persons having formed themselves into a ‘partnership firm’ can also open a ‘partnership account’, provided the maximum number of partners is twenty. Whenever the maximum number exceeds this limit, law requires that it should get itself incorporated as a joint stock company under the Companies Ordinance 1984.

A bank account is opened with an initial deposit of money generally in the form of cash. To this end an account opening form is used. The account opening form is required to be completed and signed by the prospective account holder and accepted by the branch Manager or an official duly authorized in this behalf. The completion and signing of the account opening form by the prospective customer and its subsequent acceptance by the bank and deposit of initial amount constitutes a contractual relationship between the account holder and the bank.

It is, therefore, necessary that the bank before entering into this contractual arrangement with the prospective account holder should, among other, be satisfied with regard to his identity, integrity and reliability.

The bank should satisfy itself that it is not opening account of a person, who is non-existent or is a person of questionable integrity and reliability. This underlines the need
and importance of detailed customer due diligence by the bank manager. This entails satisfying himself that the customer is genuine, he is not an imposter, his address is verified, his computerized ID card is genuine, his sources of funds are known and he is a reliable person suitable for maintaining a bank account and is not likely to indulge in money laundering. On satisfaction about the integrity of the new account holders, usual approval for opening the account shall be extended by the Manager himself. Thereafter other formalities like allotment of distinctive account number and recording of customer’s data in the ledger/computer system shall be undertaken.

In the year 2008 State Bank of Pakistan issued instructions that there is no compulsory requirement of INTRODUCTION. Instead the bank opening the account is required to do detailed due diligence to ensure that the account is opened for a person who is properly identified, the bank should make enquiries that he is a genuine person and his address and other details are verified as per the requirements of Prudential Regulations and KNOW YOUR CUSTOMER and the Bank Manager interviews the prospective customer. The manager confirms in writing that he is fully satisfied about the genuineness and suitablility of the customer. The bank manager can call for any documents that he considers appropriate or make any enquiries he deems necessary before approving the opening of the account.
Banks usually open account with a first ‘cash’ deposit and accept ‘cheques’ for deposit only thereafter so as to be certain that the cheque is being collected for a ‘customer’ to be within the protection of Section 131 of the Negotiable Instrument Act.
The essential precautions are:
i. The prospective account holder, preferably, calls at the bank and signs the account opening form in the presence of an authorised bank official.

ii. A new account holder is interviewed by the bank officer in order to reassure himself about the genuineness of the person applying.

iii. To secure identity of the prospective account holder banks’ officers may visit the place of residence and/or business at the address given in the account opening form, tactfully verifying the antecedents of the new customer.

iv. As a matter of routine the Bank Manager sends a ‘letter of thanks’ to the new customer for having opened his account with the bank assuring him of the bank’s courteous and efficient services. The real purpose of this exercise is to eliminate the possibility of the account opener being a “fake” person or an “impersonator” or the address being wrong. If a ‘thank you letter’ is returned undelivered, bank must make detailed enquiries as it may be due to the customer being fake or non-genuine.

v. If the new customer has or had an account in some other bank, that bank may be requested to provide a confidential report on the status of the customer, in accordance with the established practice amongst banks for exchange of information on each other’s customers.

vi. State Bank of Pakistan has given detailed instructions for “Know Your Customer (KYC)/Anti Money Laundering(AML)” due diligence and also a list of minimum documents that are required for opening of an account.

Types of Customers
The relationship of banker and customer is primarily that of debtor and creditor. The amount deposited by the customer becomes bank’s own money once it enters Bank’s kitty. The customer has a choice of action i.e. a right to reclaim the debt from the bank by drawing a cheque or by issuing written instructions. The deposits are obtained from various types of customers with varying features and implications which are discussed below:

7.1. Individual’s Account (Single or Joint,Natural Person/s)
Any person having capacity to make a valid contract can open an account by signing the prescribed account opening form and specimen signature card. The account has attributes of acceptance of deposits and withdrawal through cheques to the extent of credit balance available in the said account. The customer can also give special instructions or standing orders to the bank regarding periodical payments like insurance premium, subscription or for any other services to the debit of his account, which the bank will comply with in the normal course of business.

7.2. Joint Account
7.2.1. Nature of the account — an account opened in the name of two or more natural persons is known as a joint account. In a joint account express instructions must be obtained with reference to its mode of operation i.e., whether one or more of them shall operate singly or jointly. However, if it is silent the operation will be allowed only under the joint signatures of all the joint account holders. It is relevant to signify that the joint account holders are not partnership or trust account. Any one of the joint account holders have a right to ask for stop payment, but subsequent withdrawal of stop payment instructions and request to close the account must be signed by all the joint account holders.

Joint Operation
If a joint account is subject to Operation by Joint signatures, withdrawals will be allowed only if all the joint holders sign the withdrawal. In case of death of a joint holder in a joint operation account, the survivor cannot draw the balance amount and Court Instructions will have to be obtained as to who can draw the funds.

7.2.3. Either or Survivor Letter : This is a special mandate obtained from all the joint account holders authorizing operation by Either or Survivor. In this case any one account holder or survivor can operate the account. This is a convenient arrangement inasmuch as the survivors can automatically continue operation upon the account or can even withdraw the entire balance left after the death of one of the joint account holder. State bank has also given directions to add a column on the back of the form to provide information about “next of kin” enabling banks to correspond in case of death. The next of kin has no authority to draw funds. He is only authorized to receive information about the account in the case of death of account holders.
Due to the above reasons, when a joint account is opened clear cut written instructions should be taken in regard to the operation of account.

7.2.4. — List of Documents to be obtained from
Individual’s Account (Single or Joint)(Natural Person/s):
1. Photocopy of Computerized National Identity Card (CNIC) or passport of the individual attested by a gazetted officer or a Notary Public. This attested copy must be tallied with the CNIC / Passport. Before returning the original CNlC/Passport to the applicant, the bank officer should write on the attested copy “original seen and returned”.
Verification of CNIC. The genuineness of CNIC must be confirmed FROM NADRA through the on-line computerized system.

2. In case the CNIC does not contain the photograph, the bank / DFI should also obtain, in addition to CNIC, any other document such as driving license etc. that contains the photograph. However, if the individual does not have any other valid document which bears photograph, following documents should be obtained:

(i) A copy of the photograph duly attested by a gazetted officer / Nazim.
(ii) A copy of CNIC without photograph duly attested by the same person who has attested the copy of photograph as per Sr. No. (i) above.
(iii) A confirmation in writing from the applicant to the effect that the individual has no other document bearing photograph. The Banks / DFIs (Development Finance Institutions) shall ensure that the CNIC and the photograph are of the same person whose account is being opened with them. The particulars / CNIC of such persons must be verified from NADRA in writing or through its “VeriSys” system by the bank/ DFI.
3) Account Operation Instructions must be selected or mentioned in the joint account opening form.
A) Any one may operate. Also mention ‘Either or Survivor’ and take either or survivor letter if prescribed. In case of death of joint holder the survivor can operate.
B) Joint Operation. (It means all joint holders to sign the operating instructions. In case of death of joint holder the amount will be released only on succession certificate.)
4. In case of a salaried person, attested copy of the service card, or any other acceptable evidence of service, including, but not limited to a certificate from the employer.

5. In case of other professions take some appropriate document which evidences the profession of the account holder.

Sole Proprietorship Account----Documents Required
1) All the formalities/documents discussed above under individual account will be fulfilled for the sole proprietor.
2) Additionally the sole proprietor of a trading concern must sign a declaration that he is the proprietor of the firm.
3) Mandate portion of the AOF should be completed if the proprietor delegates the account operation authority to any other person on his behalf.

The officer of the bank authorizing the opening of a sole proprietor account must undertake extra due diligence and independent enquiry while authorizing such account as sole proprietorship concerns are not registered entities and the only evidence the bank has to the effect that the proprietor owns the concerned business is the undertaking of the customer himself.
Documents like NTN certificate can also be demanded.

7.3. Partnership account:
Partnership has been defined in section 4 of the partnership Act, 1932 as;
“……………..the relation between persons who have agreed to share the profits of the business carried on by all or any of them acting for all.”.

Partnership can be created by agreement whether oral or written. Persons who have entered into partnership are individually called partners; and their collective group is called a firm. Maximum number allowable as partners in any business is 20. Minor partners are not considered for computing maximum number of partners. All acts and deeds done by any partner in the course of the ordinary partnership business will bind the other partners also. Therefore each partner is the principal/agent of the other partners. However, according to section 19 2(b) of the Partnership Act, a partner has no implied authority to open a bank account on behalf of the firm in his own name.
Therefore, a banker should always open a firm’s account in firm’s name and obtain all the necessary details like the nature of business, the names and addresses of all the partners and the names of those who are authorized to operate the account in the name of the firm.
Section 58 of the Partnership Act, 1932 enables any firm to be registered with the registrar of firms, as un-registered firms cannot bring suit to enforce a right arising out of a contract against outsiders. Moreover, a suit filed by an unregistered firm is not maintainable. A partner of a firm can not sue his unregistered firm for damages for wrongful dismissal or for share of profits.
A written agreement made by the partners at the time of forming the partnership is called partnership deed. It spells out all the terms and conditions under which the business of the firm will be conducted and profits/losses to be shared. Nevertheless the liability of partners is unlimited, joint and several, which means that in the event of loss or liquidation of the firm each partner will be liable to meet the liabilities of the firm either singly or collectively with other partners.
Any mandate given by the partners for operating the account ceases to be effective on the death, lunacy or bankruptcy of any partner unless otherwise mentioned in the Partnership Deed. The bank should obtain a fresh mandate from the surviving partners for future operation of the account. Legal heirs of a deceased partner do not automatically become partners in the firm but are only entitled to the share held by the deceased in the firm at the time of his death. In the event of admission of a new partner or retirement of any of the existing partners, the bank should record the changes and obtain a fresh mandate from all the partners for future operation of the account. In the absence of any agreement in the Partnership Deed for the consequences to follow on the death, lunacy or bankruptcy of a partner, the bank should normally freeze the account of the firm and not allow any further debits in the account until proper order of a court is produced.

7.3.1. Opening and operating a partnership account — a partnership account resembles a joint account in that it is opened in the name of more than one person. A partnership, unlike a corporation, does not have a legal personality separate from that of the partners, the account constitutes in effect a joint account of the partners. The account opening form and any mandate on behalf of the partnership should be signed by all the partners.

7.3.2. Dissolution of partnership by death — the doctrine of survivorship is inapplicable to partnership accounts. Unless the partnership agreement provides to the contrary, the firm is dissolved upon the death of one of the partners. Under section 38 of the partnership Act 1890 the surviving partners have the power to continue to act for the firm for the purpose of winding-up its affairs.

7.3.3. Problems of insolvency — under section 33 and 38 of the Partnership Act 1890 a partnership is dissolved by the insolvency of the firm or of one of its partners. After his adjudication, the insolvent partner is unable to bind the partnership. If prior to the commencement of the bankruptcy, he has incurred any debts in the partnership’s name the other partners are liable.

7.3.4. Documents to be obtained;
(i) Photocopy of identity cards of all partners, duly attested and verified from Nadra as mentioned in para 7.2.4.
(ii) Attested copy of ‘Partnership Deed’ duly signed by all partners of the firm.
(iii) Attested copy of Registration Certificate with Registrar of Firms. In case the partnership is unregistered, this fact should be clearly mentioned on the Account Opening Form.
(iv) Authority letter, in original, in favor of the person authorized to operate on the account of the firm duly signed by all the partners.

7.4. Joint Stock Companies
As defined in the Companies Ordinance 1984 a joint stock company is an association of individuals for transacting any business for acquisition of gains, possessing a common capital contributed by members constituting it; such capital being commonly divided in to shares, of which each possesses one or more and which are transferable by the owner. When such an association is incorporated according to law, it becomes “an artificial person created by law with a common seal and perpetual succession” and it is regarded as a legal person, separate and distinct from its members. There is a well known case of “Solomon vs Solomon” where the House of Lords held that since Solomon held 20000 shares out of 20006 shares and the company was therefore a ‘one man company’, nonetheless he was different from the company which he had formed.

7.4.1. Companies accounts
(1) General principles — a company has a legal personality of its own, regardless of whether it is a public corporation or a private company. This means that the companies can enter into contracts in their given name and can sue and be sued.

(ii) Unincorporated associations accounts- Unincorporated associations are mainly bodies such as clubs, literary societies and charitable institutions. The objects of such bodies are primarily non-commercial. Frequently they decide not to incorporate in order to avoid the expenses involved. An unincorporated association would need a bank account to be utilized for the payment and collection of cheques, or even to borrow money to carry out its objectives. Thus a club may wish to raise credit in order to arrange for the acquisition of its premises.

(iii) An unincorporated association does not have an independent legal personality. It follows that such an association can neither sue nor be sued in its own name. Actions have to be brought against the committee that acts on behalf of the body. Usually the liability of members is expressly restricted to the amount of the subscription or membership fee due from them.
In dealing with an unincorporated association the bank has to follow rules dictated both by prudence and by legal considerations. Where the bank accepts an unincorporated body as a customer, the bank should ask for clear instructions as to who is entitled to operate the associations account. Ideally the bank should obtain a copy of the constitution or failing that, a copy of a resolution concerning the opening of and drawing upon the associations account. The bank has to be more cautious when the association requires an overdraft or a loan.

7.4.2. Statutory Companies - These are companies which are incorporated under a special Act of Parliament or Assembly. State Bank of Pakistan is an example of this type.

7.4.3. Limited Companies — A company may be
(a) a company limited by shares, or
(b) a company limited by guarantee (such as Karachi Stock Exchange) or

Furthermore a private limited company may be:

(i) a single member company(smc), where the name is required to denote as
(SMC Pvt) Limited”

(ii) a two or more but not more than fifty person (the name is required to denote (Pvt) Limited;

(iii) A public limited company which may either be listed (7 members) or unlisted (3 members);

(iv) If the company is limited by guarantee, the name is required to denote (Guarantee) Limited”;

Opening of account of a company not yet incorporated is risky as it has not yet become a legal entity. In such cases usually the Promoters would open account in their individual names.

Documents to be obtained for opening Company Account:

Certified copies of:
(i) Resolution passed by Board of Directors of Company for opening of account specifying the person(s) authorized to operate the account. (This Resolution is the most important document to be taken for opening a limited company account.)
(ii) Memorandum and Articles of Association.
(iii) Certificate of Incorporation.
(iv) Certificate of Commencement of Business.(Only if it is a Public Ltd Company)
(v) Attested photocopies of identity cards of all the directors.
(vi) Fresh List of Directors on Form 29 issued by the Registrar Joint Stock Company.
(vii) Latest Balance Sheet, if it is an on-going company.
For opening an account of a private limited company, Certificate of Commencement of Business is not required.

7.4.4. Memorandum & Articles of Association Memorandum - It sets out the objectives for which a joint stock company is formed and also defines the scope of its activities. It also embodies the address of the registered office of the company, the amount of its capital and its distribution into shares of fixed amount declaring the fact that the liability of the members is limited. Articles - The articles of association contain the rules and regulations for the internal management of the company. Generally they contain:
• Power vested in the directors.
• Election and retirement of directors.
• Procedure for calling of meeting of share holders and directors and passing of resolutions.
• Audit of account of the company and appointment of auditors.
• Company seal and procedure for its use.

7.4.5. Certificate of Incorporation - From the banker’s point of view this document is very important. It is issued by the Registrar of Joint Stock Companies (now SECP) and is conclusive evidence to the effect that all the requirements of the law in regard to formation and registration of the company have been duly complied with, and the company has legally come into existence.

7.4.6. Certificate of Commencement of Business - When the registrar of Joint Stock Company is satisfied that a public limited company has fulfilled all the requirements with regard to the subscription of shares, submission of the statutory declaration and other requirements of the law, the Registrar of Companies issues the certificate of commencement of business.

7.4.7. Balance Sheet - It is a statement of the financial affairs of the company; and the banker can draw its own conclusions about the company from the study of the financial affairs, particularly with reference to past performance. However, balance sheet will not be expected from a newly formed company when opening its account.

7.5. Opening accounts of Associations, Clubs and Societies
As non-trading organizations these are formed for social, cultural, educational, recreational, charitable and community development purposes etc. Some of these institutions are registered under the Societies Registration Act, 1866. A certificate of registration is issued after its bye-laws are approved and found fit for registration. According to the bye-laws, the affairs of the organization are administered by an Executive Committee, or Managing Committee, by whatever name it may be called.

7.5.1. Documents to be obtained:

Certified copies of
(a) Certificate of Registration.
(b) By-laws/Rules & Regulations
(c) Resolution of the Governing Body/Executive Committee for opening of account authorizing the person(s) to operate the account and duly attested copy of the identity card(s) of the authorized person(s).
(d) An undertaking signed by all the authorized persons on behalf of the institution mentioning that whenever any changes take place in the persons authorized to operate upon the account, the banker will be informed immediately.

The unregistered institutions have neither legal entity nor powers to make contracts. Any loan raised from the bank will be extended to the members of the committee in their personal capacity and not in representative capacity as the institution cannot be sued.

7.6. Account opened by Agents
By virtue of a power of attorney executed by the principal (donor), an agent appointed may open and operate a bank account on the principal’s behalf. Power of attorney should bear stamps under the Stamp Act and notarized by a Notary Public. If executed in a foreign country it should also be consularized by the Pakistan Embassy there. When an agent is allowed to open his principal’s account, the banker should carefully scrutinize the power of attorney executed in his favour, in respect of the clauses relating to opening and operation of the account and the borrowing powers, if any. Power of attorney should be registered in the bank’s record. A power of attorney is rendered invalid upon the death, insanity or insolvency of the principal. Therefore, on happening of any of such events the banker must stop all operations on the account. Cheques presented after the principal’s death should be returned and marked “Drawer reported dead.” However, on the agent’s death account will not be stopped and the principal can either operate the account himself or appoint a new agent.

7.6.1. Documents to be obtained:
i) Certified copy of ‘Power of Attorney’.
ii) Duly attested photocopy of identity card of the customer and agent.

7.7. Opening of Trust Accounts:
7.7.1. General principles —Trust accounts are opened mainly by executors appointed as trustees under a will and by persons such as solicitors trust companies who administer family or charitable trusts. A trust does not constitute a legal entity separate from that of the trustees. The broad principal is that the trustees have the legal title in the trust property and the beneficiary of the trust acquires the equitable interest. The trustees’ function is to administer the trust in accordance with the deed under which they hold their appointments. In addition, certain powers and duties are conferred on them by the Trustees Act 1925.

Usually a trust deed requires appointment of two or more trustees. The object of this arrangement is to ensure that the trust property remain under the control of more than one designated person. Trustees are not usually permitted to delegate their authority. For this reason and unless the trust deed makes a stipulation to the contrary, a cheque drawn on the trust account requires the signatures of all the trustees.

As the trustees have only the legal as distinct from the equitable title to the property, the problem of survivorship does not arise. When a trustee dies, another person is appointed either under the provisions of the will or by the court. Until such an appointment is made Section 18 of the Trustees Act 1925 authorizes the surviving trustee or trustees to carry on the business of the trust for the time being.
7.7.2. Duty of the bank - the bank does not incur any liability to the beneficiaries unless it knows that the account involved is a trust account (case law Thomson v Clydesdale Bank Ltd 1893). In this case the owners of certain shares ordered their stockbroker to sell them. Naturally the bank has knowledge if the account is expressly opened as such. The second general principle with regard to bank’s liability is in case of breach of trust. The bank’s concern is to ensure that the trustees act within the scope of their apparent powers. Thus the bank has to ensure that a cheque drawn on the trust account carries all the required signatures. In the absence of express knowledge by the bank of an improper or a fraudulent design perpetrated by the trustees, the bank is not usually liable for their misconduct.

When opening an account in the name of a Trust, bank should ensure that all trustees sign the account opening form or all the trustees who are authorised to operate on the account by a resolution passed by the Trustees. A copy of the Resolution certified by at least two trustees should be obtained and kept on Bank’s record. If the account is opened in the name of trustees, it should not be treated as a joint account. On the ledger sheet as well as on the specimen signature card it should be prominently mentioned in bold letters that it is a Trust Account. The Trust Deed or Instrument of Trust should be carefully examined and copy thereof may be kept in bank’s record. Special attention should be paid to the trustees’ powers and the provision for the appointment of new trustees. Under the Trust Act, 1882, a trustee cannot delegate his powers to co-trustee or to any third party. However, a trustee can appoint an attorney or proxy for an act of routine nature involving no independent direction. Contravention of provisions of section 47 of Trust Act, 1882 by a banker which forbids the delegation of authority by a trustee, may cause breach of trust and the members may by asked to redress the same.

Trust accounts should be handled with utmost care and the transfer of funds from Trust account to the personal accounts of trustees should not be allowed, otherwise the banker will be responsible for the consequences. When dealing with Trust accounts, a banker is expected to be aware of legal position of a Trust. Section 3 of Trust Act 1882, defines Trust:

“A Trust is an obligation annexed to the ownership of property and arising out of a confidence reposed in and accepted by him for the benefit of another or of another and the owner.”

Section 4 of the same Act declares that: “A Trust may be created for any lawful purpose. The purpose of a Trust is lawful unless it is

(a) forbidden by law; or
(b) is of such a nature that, if permitted, it would defeat the provisions of any law; or
(c) is fraudulent; or
(d) involves or implies injury the person or property of another; or
(e) the Court regards it as immoral or opposed to public policy.

Every trust of which the purpose is unlawful is void. And where a Trust is created for two purposes, of which one is lawful and the other unlawful and the two purposes cannot be separated, the whole Trust is void.” Section 6 of the Trust Act authorises the creation of Trust by word of mouth or by any act which reflects the intention of the author of the Trust. Any person who is competent to contract is capable of creating a Trust which must be for a property transferable to the beneficiary. In the event of the death of a trustee out of several trustees the authority may be exercised by the continuing trustees unless otherwise provided for in the Instrument of Trust.

7.7.4. Documents to be obtained:
(i) Attested copy of Certificate of Registration of Trust.
(ii) Duly attested photocopy of identity cards of all the trustees.
(iii) Certified copy of ‘Instrument of Trust’.

7.8. Opening Executors’ / Administrator accounts — An “Executor” is a person to whom the execution of a Will is entrusted by the testator. (Who is a testator?) The executor derives his authority from the will. As such he has to carry out all the directions contained in the testator’s last Will.
An “Administrator” is a person appointed by a court of law to look after the estate of a person who died without leaving a Will or the persons he appointed are incapable of acting as executors. When he dies intestate (i.e. without leaving a Will) the administration is generally granted to his widow or widower or the children of the deceased, as the case may be, or any one else on whom all the heirs agree or the court considers fit for the purpose. A banker should have full knowledge about the legal significance of the “Will” so that he may allow operation on the Executor’s! Administrator’s account accordingly. Section 74 of the Law of Wills lays down that a will may be drawn in any such language that express the intention of the testator clearly. A Will may be oral or in writing and need not be witnessed. The testator under Muslim Law is permitted to give only one-third of his estate to a stranger by Will. The remaining two-third, will only be inherited in accordance with the Muslim Law.

Probate is a certified copy of the Will, issued under the seal of the court. A person who has been named as an Executor in the Will is eligible to apply for a probate. When one or more of the Executors or Administrators die(s), the authority is vested in the survivor/s. If the deceased was the sole Executor or Administrator, a fresh Letter of Administration must be obtained. If the account shows a credit balance, operation on the account should be stopped on the death of the Administrator or Executor until a new one is appointed.

An account opened by Executors or by Administrators constitutes an account of the estate. The Executors are the representatives of the estate and unlike partners, have no personal interest in the account or in the estate’s property. As each Executor has the status of an agent, he is entitled to open an account in the name of the estate and equally is entitled to countermand cheques drawn on it, be they drawn by himself or by another Executor. To avoid conflicts banks usually ask for clear instructions concerning the drawing of cheques on an account of an estate. The bank’s mandate is spelt out in indisputable terms usually each cheque is to be signed by two Executors.

7.8.1. Documents to be obtained:
(i) Duly attested photocopy of identity cards of the Executor/Administrator.
(ii) Certified copy of Letter of Administration or Probate.

7.9. Opening Accounts of Local Bodies - Local bodies are constituted under the Local Bodies Act, such as Municipal Corporations, Municipal Committees etc. They are governed by their own executive committees consisting generally of elected members. They are administered through notifications issued under the Act from time to time. The chairman of these local bodies may be elected by the members or nominated by the Government.

As these bodies derive their authority from the relevant Act, the banker opening their account must see that the request comes from the person authorised to do so. Proper instructions and specimen signatures many be obtained from the person/s authorised to operate the account. Generally no advance is given to a local body unless some statutory provisions authorises them to obtain a loan and provide security for it.

7.10. Opening Shares Subscription Account - whenever a public company issues shares for public subscription it has to open a bank account to which all the receipts would be credited. A bank opening such an account will be known as “Banker to the issue”. This is a collection account and will have only credits with receipt of each application. Once subscription is closed, the sponsor may transfer the funds to their regular account and payments for unsuccessful subscribers made after the balloting, if any. No cheque book is issued.

7.11. Opening Dividend Account - Companies declaring dividend (share of profit) to be paid to shareholders desire to open an account with a bank to which the total amount to be disbursed as dividend is credited and on presentation of dividend warrant, it is debited. If the bank receives an intimation that a dividend warrant has been lost, all precautions should be taken as are applicable to a lost cheque. If a company declares dividend every year, it is preferable to open separate dividend accounts for each year. This facilitates balancing / reconciliation of the accounts.

7.12. Opening Collection Account — quite often a bank may be asked to open a “Collection Account”. As the name indicates it is used for collection of funds e.g. a tea company may have sales all over Pakistan. It may open the main account with the bank’s Karachi branch and collection accounts with other branches from where the funds are transferred to the main account periodically as per arrangements. Another example may be the President’s Collection Fund for disaster relief etc.

7.13. Dormant Account
When does a normal, active account become a DORMANT ACCOUNT?- an account in which there have been no transactions for a sufficiently long period of time, six months for current account and one year for saving account, is usually marked as “Dormant” and any withdrawal there from is first referred to the Branch Manager / in charge deposits department. If an account remains DORMANT FOR 10 YEARS, the amount of the account must be surrendered to State Bank of Pakistan as Unclaimed Balance. The bank continues to keep full record and if the true claimant approaches the bank subsequently the amount can be recalled from State Bank of Pakistan.

7.14. What is a Deceased Account ?- on the death of an individual his account is immediately marked “deceased account” and no further withdrawal / payment is allowed. Depending on the balance in the account, the bank may ask the heirs to produce heirship or a Succession Certificate. In case the amount is small, the bank may, if satisfied, pay the amount on certification by area Nazim / Naib Nazim or Counselor after obtaining an “indemnity” from beneficiaries.

7.14. Closing of Accounts - Every account holder has a right to close his account at any time. Instructions to do so must be given by the account holder in writing and he must surrender any unused cheques before the account can be closed. In case of joint accounts, it can only be closed by all the joint account holders collective instructions. Even if a joint account is operated upon singly, instructions to close it must be given by all the joint account holders. Bank may also close the account of a customer after notifying the bank’s intention and giving him reasonable time to make arrangement to have his cheques in circulation presented for payment before the notice period expires. It is usually done when the customer has become undesirable like:

a. By frequently drawing cheques much in excess of the balance in his account, which have to be returned unpaid;
b. By frequently contravening the “Rules for operation” of the account;
c. By making himself a nuisance during his visits to the bank’s branch and picking up quarrels with the staff unnecessarily.

7.15. Statements of the account — Banks generally provide the balance of an account on request. Full statements of an account are also available either on request or by pre-determined arrangements. In some countries banks return customer’s cheques with statement of account to enable the customer to discover any unauthorized signatures or alteration and to report any discrepancy promptly. Failure to comply precludes the customer from asserting forgeries against the bank unless the bank itself has been negligent in paying the cheques.

The State Bank of Pakistan, vide circular 18 of 2004 has given strict instructions that all banks are required to invariably send the statement of accounts periodically to all their account holders irrespective of the balances in their accounts.
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Default Handling of Customers in certain circumstances.

An Important Skill to Acquire is the “Verbal Communication Skill”
Learn Pronunciation, Learn the Language, and Learn the Use of Words.

During group discussions many people never speak up because they are afraid that people will judge them for saying something stupid. This fear is not really justified. Generally, people are much more accepting than we imagine. In fact most people are dealing with exactly the same fears. By making an effort to speak up at least once in every group discussion you will become a better public speaker. You will instill more confidence in your thoughts and will be recognized as a leader by your peers.

1. Handling of Customers in certain circumstances.
2. Powers of attorney / Mandate
3. Safe custody of customer’s valuables and lockers.

Handling of Customer Accounts in the following Circumstances.
1. Countermand of payment (Stop Payment of Cheque)
2. Notice of Customer’s death
3. Notice of adjudication of customer as an insolvent
4) Notice of customer’s insanity
5) Legal orders attaching customer’s account — A garnishee order

{insolvent = a person who is unable to pay his debts as they arise.}

9.1. Countermand of Payment — countermand refers to stopping payment of the cheque by the drawer himself. It usually arises where a cheque is lost or stolen or some dispute begins between the drawer and the payee. It means that the duty and authority of a bank to pay a cheque drawn upon it are ‘determined/terminated’ through “countermand” of cheque. The bank must comply with its principal’s instructions and stop the process if it is practicable. Countermand instructions must be received before it is presented and paid and a cheque presented in clearing can be countermanded until the time fixed as per Clearing House rules for returning an unpaid cheque.

A cheque backed by a guarantee card cannot be countermanded as the customer has undertaken not to countermand as a matter of guarantee card contract. Moreover a customer may be sued by a holder in due course despite countermand of a cheque. (We will study in a later handout as to who is a ‘holder in due course’.) There cannot be a countermand if a cheque is certified by the bank ‘good’ for payment — if such certification is permitted according to local practice.

The countermand will be regarded as effective only if the bank has actual notice of the countermand. In Curtice vs. London City and Midland Bank (1908) the Plaintiff countermanded the cheque by telegram which was delivered after the bank had closed. It was put into the letter box of the bank by the telegram messenger. The staff cleared the box but somehow ignored the telegram. The cheque was presented and paid during the date. The court of Appeal held that the notification of countermand had to actually come to the bank’s notice. The Court held in favour of the bank.

The bank must ensure that the stop payment instructions are genuine i.e. properly signed bearing reference to the cheque being stopped. If such instructions are given over telephone, a caution may be recorded but the customer should be asked to confirm by written instructions. The signatures should be verified and it should be checked from the ledger if payment has already not been made or that such a cheque is not presented on counter for cash payment or has not been received in inward clearing i.e. every possible effort should be made to ensure that the cheque is not in the process of being paid.

Confirmation of acknowledgement should be prepared and sent to the customer. When a cheque marked for stop payment is presented for payment either at the counter or through clearing the same must be returned only after clearly writing on the face of the cheque itself “Payment countermanded by the Drawer”.

In the past, banks, while acknowledging instructions for “stop payment of cheques” from their customers used to issue ‘disclaimers’ for indemnifying themselves against breach of these instructions by declaring that “the bank will not be responsible if the concerned cheque was paid due to rush of work or any other reason”.

The State Bank of Pakistan has taken exception to such disclaimers which negate the very purpose of stop payment instructions and has strictly directed the banks to discontinue issuance of such disclaimers.
{Disclaimer = a statement in which sb., says that they are not responsible for sth.}

9.2. Notice of Customer’s death-
On notice of a customer’s death the duty and authority of a banker to pay a cheque drawn on him by his ‘dead’ customer ceases. Notice means reliable notice. It is not the customer’s death but the notice of the death that revokes the authority. Hence a cheque paid after the death of the customer but before the bank had notice thereof is a valid payment.

The death of a customer cancels the mandate to the banker. It is of no relevance if the cheque is dated well before the date of the death. On receipt of such information and confirmation, the banker should immediately stop all withdrawals including making payments from the deceased’s account.

The payment of a cheque even after the death of the account holder in the absence of any notice or knowledge of such death will not create any liability to the bank. The bank must ensure that the information regarding death is reliable otherwise returning a cheque on the ground of death of the accountholder whereas he is actually alive will create an embarrassing situation for the bank and may lead to claims for damages. Written information by a relative of the deceased, newspaper report or obituary published in the paper can be relied upon to mark the account deceased.

Credits are allowed to a deceased account but no withdrawals are allowed unless and until the legal heirs produce a ‘Succession Certificate’, Probate*1 or a Letter of Administration.
A succession certificate issued by a court of Law is an instruction to a bank to pay the stated amounts to the named heirs.
A Probate is a will made by the deceased that has been certified by a court of law for execution by an executor named by the deceased.

A Letter of Administration is an appointment by the court of an administrator who is ordered to take charge of the estate and distribute it amongst the named heirs as approved by the court. This happens if the deceased has not left any Will. (What is intestate?)
Kindly note that under Islamic Law a person can ‘will’ i.e. leave instructions that his property may be given to persons other than legal heirs only upto the extent of one third of his property. The remaining two thirds cannot be willed and shall be distributed only to the legal heirs as per Sharia.

9.3. Notice of customer’s insolvency — Insolvency means inability to pay or settle ‘just’ debts. (the word ‘just’ here means justifiable) Once an adjudication order is passed deciding that a person is ‘insolvent’, the property of the customer vests in the Official Assignee or Official Receiver. Hence the balance in the account is no more at the disposal of the account holder. The banker should therefore not honour any cheques issued by the customer even if these are dated before the date of such adjudication order.

A creditor (i.e. a lender) can launch (i.e. move) an application in a court of law requesting the court to declare a person insolvent and appoint a receiver if the debtor has committed an act of insolvency. Very briefly the acts of insolvency are:-

A debtor:-
1. Transfers all or a substantial part of his property to a third person with the intent to prejudice his creditors or prefer one above the other.

2. Transfers his property or a part of it with an intention to defeat or delay his creditors;

3. Transfers his property or a part of it which would be void because of fraudulent preference, if he were adjudged an insolvent.

4. If with intent to defeat or delay his creditors:
i. He departs from or remains out of the country
ii. He departs from his residence or usual place of business or absents himself;
iii. He secludes himself with intent to deprive his creditors of the means of communicating with him.

5. Any of his property is sold in execution of the decree of a court for the payment of money;

6. He petitions to be adjudged an insolvent

7. Gives notice to any of his creditors that he has or is about to suspend payment of his debts

8. He is imprisoned in execution of the decree of any court for the payment of money.

Action by bank or receipt of ‘insolvency’ order.
On receipt of information regarding adjudication (meanings : to make an official decision about who is right in a disagreement between two groups or organizations: in other words passing of a legal order.) that the customer of bank is insolvent and an official receiver has been appointed, the banker must inform the Official Receiver or Assignee as to the bank’s position with the insolvent. On instructions from the Official Receiver, the credit balance in the account, if any, and not under lien to the bank, would be transferred to the Official Receiver or Assignee. However if the customer owes debt to the banker, the banker has the right to realize any securities for payment of its dues and if any excess is left, then it may be transferred to the Official Receiver or the Assignee. In case there is a shortfall in recovery of the bank’s dues, the bank may then inform the official receiver accordingly.

9.4. Notice of customer’s insanity As soon as a banker receives information of the customer developing unsound mind or actually becomes insane, it should immediately stop further operation in the account and any cheque even if it is dated with a prior date, should not be paid and if a Lunacy Order has been issued, its contents should be carefully noted.

9.5. Legal orders attaching customer’s account —
Also called A Garnishee Order*
{Garnishment means A legal procedure by which a creditor can collect what a debtor owes by reaching the debtor's property when it is in the hands of someone other than the debtor}
*is an order of the court in favour of a creditor who has obtained judgment against his debtor, attaching for the discharge of his debt, the funds in the hands of a third party, the garnishee. Thus if “A” obtains judgment in respect of a debt owed to him by “B”, “A” may apply to the court for a garnishee order attaching funds on “B”s bank accounts.

Garnishee proceedings comprise two distinct steps. The first is the issue by the court of a Garnishee order ‘nisi’, which attaches the funds in the hands of the garnishee, but gives him an opportunity of appearing before the court to show cause why funds should not be handed over to the judgment creditor. The second step is taken when the order is made ‘absolute’, and the garnishee is ordered to pay to the judgment creditor either the whole of the funds in his hands or enough to satisfy the judgment debt.

When a garnishee order served on a banker attaches all debts “owing or accruing due,” the whole of a customer’s balance on account is attached, although the amount of the judgment debt may be considerably less than the balance standing to the customer’s credit. The result is that, as from the date of the receipt of the order, the balance on the account must not be interfered with in any way by the banker or the customer. But generally garnishee orders issued by courts mention the amount for which the order is issued and the bank will have to only earmark that amount in the account and the account holder will continue to have free access to the amount in excess thereof.

If the bank has any claim against credit balance, the bank will instruct its solicitor to appear at the hearing of the order; for example, a right to set-off against the credit balance on an advance made to the same customer. But the banker is not entitled to set-off a contingent liability, e.g. in respect of a bill discounted for the customer, or L/C opened for the customer but not yet negotiated.

In short a Garnishee Order must relate to a debt which is due or accruing due at a definite date and not a claim that may become due at a future date. It must be:

i. a deposit payable on demand;

ii. a deposit repayable on the fixed expiry of a fixed notice

iii. a deposit repayable at a fixed future date or after the lapse of a specified

A credit balance in a joint account cannot be attached by a Garnishee Order unless it is issued in the joint names. The future debts are also not affected by the Order. Therefore the safe method would be for the banker to open a fresh account for all subsequent transactions. The following steps are required to be taken:

i. mark the date and time of receipt of the Order

ii. trace out the deposits in the name of the person named in the Order

iii. if the entire amount of the balance is attached the balance in the account is encircled and a note be made to the effect that it has been attached.

iv. Exercise the right of set-off if there is any claim of the bank on the customer

v. Intimate the customer about the attachment Order and he is advised not to issue any cheque.

10.9. Power of Attorney
A power of attorney is a document whereby one person —termed the “donor” or “grantor”- gives another person — termed the “donee”,” grantee” or “attorney”--- authority or power to act as agent on his behalf either for a specific purpose or for general purposes. In the former case it is called a Special Power of Attorney and in the latter case, the instrument is called a General Power Of Attorney. Any person having contractual capacity can appoint an attorney to act on his behalf. The companies Ordinance, 1984 permits a company to appoint an attorney for the purpose of executing deeds on its behalf. Such a power must be given under the company common seal of the company. (A company common seal is an embossed mark usually bearing the name and logo of the company. The Articles of association lays down which type of documents issued by the Company must bear the company common seal to be legally valid.)

A power of attorney is commonly used when the grantor is leaving the country for a certain period or is otherwise unable to attend to his business and wishes to authorize someone else to transact business on his behalf.
A banker who is asked to accept authority of an attorney should require a certified copy of the power of attorney to be placed in his hands, and should record details thereof on the customer’s ledger account, in the register of Securities, and in any other place where the information should be available.

The banker should verify that the original power is duly signed, stamped and notarized.
The banker should ascertain exactly what powers the document conveys, and ensure that the authority is still in force and that it has not been revoked. Usually the banker obtains from the attorney a declaration that the power of attorney has not been revoked and the donor is still alive. A power of attorney becomes invalid on the death of the donor.

10.9.1. Purpose covered by Powers of Attorney.
Whether a power of attorney is for a specific purpose only or is ‘general’ the terms of the document must be strictly construed. It means that the Power of Attorney should be very carefully studied to ascertain the powers that have been granted to the attorney.
(Construe = to understand the meaning of a word, a sentence)
In this respect there is an important distinction between an agent appointed by power of attorney and an agent appointed in some other way. Although it is a general rule of law that the acts of an agent are binding on the principal if those acts are within the agent’s apparent authority, this rule does not apply to an attorney. The scope of the authority of a person acting under a power of attorney is contained within the document, and nothing can be read into the document that is not specifically included therein.

For these reasons, a banker who proposes to accept a power of attorney should ensure that any proposed transaction by the attorney is definitely covered by one of the clauses; otherwise, if the strict letter of authority is not complied with, the banker may render himself liable to the grantor for any loss that may ensue. Thus, power “to operate on any banking account, to draw, sign and indorse cheques and dividend warrants” does not imply power to open a new account or accept bills or to make or indorse promissory notes. Again, power to indorse bills of exchange is not authority to discount such bills on behalf of the principal.

Power to operate banking account does not imply power to overdraw from the account. Power to borrow must be clearly given by the instrument, and borrowing must be carried out in the manner and against the securities therein designated, otherwise the banker will have no recourse against the grantor.

The so-called “general clause” or “omnibus clause” in a general power of attorney commonly authorises the attorney to do “all such other acts and things” as the principal himself could do. But the banker cannot regard this as an authority for any act not specifically covered, e.g. borrowing money.

The banker should rather consider this clause in conjunction with the preceding clauses and take it as authority for any acts necessarily incidental to the powers that are specifically mentioned. Even where power of attorney contains an undertaking by the principal to ratify all acts done by his attorney such an undertaking cannot be applied against the principal in respect of any transaction outside the limits of the powers expressly conferred in the instrument.

Where a Power of Attorney(PA) is presented to a bank, it must examine the same and determine:

1. That the PA has been validly executed.

2. It has been witnessed

3. if it originated in a foreign country, it must be attested by Counselor of the Embassy in that country

4. Determine that the person claiming to be the Attorney is actually that person;

5. Original or a court certified true copy of PA must be retained for record.

6. Bank to ensure that the power of attorney is registered if legally it requires registration.

Mandate — A customer may for his own convenience like to authorize another person or persons to operate the account. Such an authority may be in the form of a ‘Mandate Letter’ or a ‘Power of Attorney’. A mandate contains an authority and a declaration that until the Bank receives a written notice to the contrary, a named person whose specimen signatures are provided on the mandate itself, is authorized to draw cheques notwithstanding that debiting of any such cheque may cause the account to be overdrawn. Without this clear authority in the mandate a bank should not allow payment of a cheque which creates a debit balance in the account.

A letter of mandate usually has specific clauses conferring upon the concerned person authority to draw, accept, indorse bills of exchange (endorsement = signature of a holder on a bill of exchange) and to receive statement of accounts. Most banks have printed mandate forms covering all the exigencies (exigency=an urgent need or demand that you must deal with SYN demand.) Whenever a mandate is received it must be thoroughly studied to see what powers have been vested in the person.

As soon as a notice of revocation of mandate is received the bank must take immediate measures to ensure that further no actions are allowed under the mandate.

Difference between a Power of Attorney and a Mandate:
1) A Mandate is usually in a form supplied by the bank and signed by the customer naming a certain person to act as his agent whereas a Power of Attorney is more formal document and is specifically typed;

2) A Mandate is restricted in form whereas a Power of Attorney may be general

3) A Mandate is addressed to the Bank only whereas a Power of Attorney is addressed to the world at large

4) Revocation of Mandate is easy; just inform the bank whereas revocation of a Power of Attorney is difficult;

5) A Mandatee cannot execute mortgages whereas an Attorney can;

6) A mandate becomes invalid with the death of the person executing the mandate whereas the position with regard to a Power of Attorney(irrevocable) is different.
{Note by Ashraf Ali “A power of attorney normally dies with the death of the person granting a power of Attorney. Power of attorney given to a bank for operation of account will die with the death of the account holder.
However if a person has given power of attorney to deal with landed property owned by a person after taking financial consideration from the person to whom the power of attorney is granted, the court may allow the operation of the power of attorney even after the death of the giver of the power of attorney due to the reason that the attorney giver had received the value of the property in respect of which the attorney was given}

Safe Custody of Customer’s Valuables and Safe Deposit Locker Facility
(This refers to Banker Customer relationship of Bailer and Bailee.)
One of much appreciated facilities offered by a banker to his customers is that of keeping in safe custody valuables of various kinds, including securities, Jewelry boxes, and documents of title property. Frequently such items are deposited in a locked box or sealed envelope, in which case the banker takes no cognizance
(Cognizance =to understand or consider sth; to take notice of sth)
of the contents. Sometimes, however, share certificates, insurance policies and title deeds are lodged without cover, as also negotiable securities, such as bearer bonds; particularly where the banker is required from time to time to detach and present the coupons for collecting periodical return.

Some banks issue a specific form of receipt for all articles lodged for safe custody, and require the receipt to be returned duly discharged by the customer before the articles can be withdrawn. Moreover, it is normally provided that the depositor shall attend in person to withdraw the articles. If he is unable to do so, he is required to sign an order on the back of the receipt instructing the banker to deliver the articles to the bearer of the document. Receipt given for locked boxes or sealed envelopes should specify “contents unknown.” When articles are deposited in the names of two or more persons, the receipts should be made out in the name of the all parties and the articles should be returned only against signatures of all the depositors, unless the customer has given a mandate that it can be returned to either or some of them.
On the death of the person in whose name the articles are left for safe custody, the banker should not permit dealings with the property except by the deceased’s personal representative after production and record of the succession certificate or, letters of administration, although he should not object to the examination of the articles in his presence by persons properly interested, e.g. the deceased’s personal representatives or near relatives or the family solicitor. A Will contained in a box may be handed over against the signature of all executors mentioned therein, but no other document should be given except after production of probate {probate = order by a court authorizing action on a Will} (or succession certificate or letters of administration) and on the authority of all the personal representatives. Where, for example, several executors are named in a will, the signature of one should not be accepted on behalf of all in acknowledgement of the delivery of articles lodged for safe custody in the name of the deceased.

10.11. Safe Deposit Locker Facility.
Apart from providing facility for accepting valuables for safe custody, safe deposit lockers are also made available to customers on rent. Bank holds the master key and a key for an individual locker is supplied to the customer. The locker can be opened only when both the keys are applied.

As regards articles lodged in a locker, the banker is not concerned with the lodgment and withdrawal of articles in the locker, even if the locker be operated under a double key system, one key being held by the banker (the bailee) and the other by the customer. The bank is only responsible for taking adequate measures to prevent tampering with the structure and safety mechanism of the locker and ensure that the locker is operated by the locker renter.

Customers have to declare that they will not deposit any arms, ammunition or other contrabands in the lockers. (What is a contraband-----check in a dictionary)

When a person deposits money in his account the bank is responsible to return the amount even if the amount is stolen or burnt. However the bank is not responsible for the loss if the articles placed in the lockers are destroyed by circumstances beyond the control of the bank like explosion or fire or otherwise stolen by robbers or thieves. Bank is only responsible to make best efforts to ensure a good security and proper maintenance of the lockers system. The bank encourages that customers should take out insurances with insurance companies for their valuable articles in the lockers .

In Pakistan due to the increase in incidents of lockers being looted by robbers, at the instructions of State Bank, the Commercial banks have arranged insurance of lockers against loss of fire, burglary etc, for amounts ranging from Rs 500,000 to Rs 15 lacs per locker the insurance amount depending upon size of locker. In case the customer is keeping goods worth more than the bank arranged insurance amount, he should make separate arrangement of insurance.
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Default Clearing and Settlement

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greater than the rate of CHANGE.
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Clearing and Settlement

11.1. The Mechanism
Clearing system is a mechanism for calculating and determining each bank’s ‘payments / receipts’ position within the Commercial banks forming part of the system. A clearing system is governed by its rules which, among other things, include ‘timing’ for presentation and return of payment instruments.

Settlement is the transfer of value to discharge a payment obligation. Settlement may be within the branch or within the bank or among other banks. The first two being fairly easy, it is the last part of settlement that involves more banks and settlement is effected through the State Bank of Pakistan. Logistical help since the last few years is obtained from National Institutional Facilitation Technologies (NIFT).

11.2. Payment instruments:
a. First we study the settlement procedure for cheques deposited for credit to an account in the branch drawn on the collecting bank branch itself, where the person who is receiving the payment and the person who is making the payment, both maintain their accounts at the same bank branch – These are also called TRANSFER items since they involve transfer of funds from one account in a branch to another account in the same branch. These cheques are sorted account-wise, particulars such as date; amount and balance in the account checked and signatures verified and then passed on to the counter for posting in the relevant account. If the cheque is passed, credit is afforded to the payee but if the funds in the account are not enough or there is some other reason the cheque will be returned as per practice.

b. Collection of cheques drawn on other branches of the same bank in the town — as soon as the cheques are received these are crossed with the bank’s crossing stamp, sorted out branch wise and then sent to the concerned branch/branches. In the modern times most banks branches are connected ‘on line’ with each other through telephone or satellite links. The account and specimen signatures can be accessed on the system. The cheques drawn on other branches are posted ON LINE and credit afforded to the customer depositing the cheque.

c. Cheques drawn on other banks in the same city/town— the cheques are crossed with bank’s crossing stamp and are sorted and dealt with through the usual clearing procedures which we shall study in detail.

11.3. Items dealt with outside the clearing system:

i. Standing Orders.

ii. Cheques / drafts payable in US Dollars.
(USD instruments drawn on banks in Pakistan are cleared through NIFT system in Karachi which will be explained)

iii. Cheques with attachments

iv. Bills of Exchange other than cheques.

The procedure/process of the Classical Clearing House
Traditionally in all cities it was; and even now in remote towns the “clearing” of cheques still is; undertaken manually in the local State Bank of Pakistan or National Bank of Pakistan.(In those cities where State Bank of Pakistan does not exist, the National Bank of Pakistan performs some functions of State Bank of Pakistan including the Clearing House functions)

Cashiers from all banks who are members of the clearing house gather together in the ‘clearing house’ situated in SBP or NBP and “exchange” the cheques drawn on each other which are listed on clearing schedules.
The clearing is balanced with the help of the State Bank representatives.

For the sake of illustration we assume that there are only three commercial banks in a town. Bank A, Bank B, and Bank C.
On working day 1, customers of all banks deposit cheques in their own banks, drawn on other banks, for credit to their accounts. The bank A customers will deposit cheques drawn on bank B and Bank C, for credit to their account in their own bank A. When the banking hours come to an end the cashier of Bank A will make Clearing Schedules.
He will prepare one add-list of all cheques drawn on Bank B and one add-list of all cheques drawn on Bank C and will add up the totals of the two lists. This grand total is the amount Bank A has to receive from Bank B and Bank C. It is called Outward Clearing total.
On the morning of Day 2 the cashier of Bank A will carry the cheques and lists to the clearing house where he will deliver the clearing schedules with cheques to the two other banks consisting of cheques drawn on them. The total of the two schedules is the ‘Clearing Delivered amount’. All the three banks will similarly exchange the schedules including cheques. Bank A will receive schedules with cheques drawn on itself from Bank B and Bank C. The cashier will total the two schedules which is the ‘Total Clearing Received’ or Inward Clearing. The State Bank Officer will also be in the room. All the cashiers will give their Delivered and Received figures to the State Bank who will make a chart of the delivered and received amounts of each bank. The totals of received and delivered amounts should obviously be equal. The SBP clearing officer will give the figures of each banks delivered and received cheques to the Deposit Accounts Department (DAD).This is the department in SBP where the current accounts of commercial banks are maintained. State Bank will debit each bank with the clearing received by the bank and credit each bank by the amount of clearing delivered by it.

All the cashiers will return to their banks.
Bank A cashier will bring the schedules and cheques drawn on it by Bank B and C. The clearing cheques received will be posted/debited to the respective customer accounts. The total of Clearing Received (inward clearing) will be credited to State Bank account in the accounting books of the bank.
For the clearing delivered/outward clearing the customer’s accounts of those who deposited cheques will be ‘provisionally’ credited and the total of clearing delivered will be debited to State Bank of Pakistan account. Word of caution: the customers will not be allowed to draw amounts against these credits till the next working day because the cheques deposited by them have not yet been ‘cleared’ and are as yet subject to return.

Clearing amounts are settled amongst the banks through the accounts maintained at SBP.
As you know that all banks maintain their accounts at State Bank of Pakistan where the amount of the Statutory Cash Reserve (these days 5% of Customer Deposits) is held.
State Bank officer who presides the clearing house function and has all the figures of clearing will pass the following entries in SBP books:-
Debit: Bank A Total of Inward Clearing Cheques received by Bank A
Credit: Bank A Total of Outward Clearing Cheques delivered by Bank A
Similar entries are passed over the accounts of Bank B and C.

The inward clearing cheques will be posted on the customer accounts. The cheques that are not passed due to shortage of funds in the accounts or other technical reasons like signatures, crossings, endorsements, variance in words and figures, post dated or stale cheques,etc., are returned (to those banks, which had delivered the cheques during the morning session) in the afternoon session of the clearing house which is called ‘Return Clearing Session’. The process for returned cheques is exactly opposite of the main clearing session. The entries passed are opposite. The cashiers bring back to their offices the returned cheques. The accounts of those customers who had been provisionally credited but the cheques deposited are returned, are debited with the amounts of the returned cheques and the cheques are sent back to the customers who deposited the cheques under cover of suitable cheque return memos.
On Day 3 the customers(who deposited cheques) are allowed to draw funds from clearing items credited on Day 2 but not returned.

The above describes how each bank makes payment for the cheques drawn on it and presented by other banks to it in clearing. Also how each bank receives payment for the cheques drawn on other banks. The Return Clearing session is held to clear the cheques that could not be passed.
This is the manual method through the bank cashiers visiting “clearing house”. This method has been used since early times of banking and is still used in smaller towns.

New System of Clearing.
The number of cheques and other instruments received by bankers every day for clearing is currently so huge in large cities and the number of banks and their branches has swelled so much that manual sorting and manual exchange at the SBP clearing house is difficult if not impossible. Hence a clearing system has been devised which enables the banks to outsource the sorting and exchange of the payment instruments and settlement to a third party institution which has latest technology to undertake the task.
Basically the concept is the same. The banks accounts in State Bank are credited and debited with the amounts of cheques delivered or received. Only logistics are different.

11.4. Clearing System — National Institutional Facilitation Technologies (NIFT)

Until a few years ago the cheques sent in clearing used to be collected at the main branches of each bank, sorted out bank-wise and then sent to the clearing house in SBP for exchange of cheques and ultimate debit/credit to the accounts of the concerned banks as described in detail above. The balancing was manual and delays were a common feature.

In 1996 a private company was incorporated by the name of National Institutional Facilitation Technologies (Pvt) Limited (NIFT) to handle this most important segment of banks business. The automated clearing system came into operation in Karachi as the first centre in 1996. Now it has spread to Lahore, Islamabad, Rawalpindi, Faisalabad, Hyderabad, Peshawar, Multan and Quetta and almost all important cities.
The introduction of the automated clearing involved creating local standards for encoding cheques and other instruments, assisting banks in preparing standard code line. The system operation has proven to be a very successful arrangement. The machines sort the cheques for the preparation of schedules with the help of electronic code line which is printed at the bottom of each cheque in machine readable magnetic ink.

NIFT have their own office in each city with modern computers, sorting machines and trained staff. Each bank branch only make a listing of the cheques to be delivered to the other banks through NIFT.
NIFT staff visit the bank branches on Day 1 and collect the cheques from the branches and bring the cheques and listing prepared by the branch to the NIFT office. This is done for all the bank branches in a city. During the night they sort the cheques and make (inward clearing) listings for each bank branch on which the cheques are drawn. The grand total of the listings prepared by the NIFT will agree with the grand total of the listings prepared by the bank branches in respect of the cheques delivered by them. This balancing means that the NIFT prepared listings are correct so far as the amounts are concerned.
Next morning on Day 2 the NIFT staff delivers the cheques to the bank branches on which the cheques are drawn. During the morning time the bank staff examines the cheques and post the cheques to the accounts on which they are drawn. By afternoon the return cheques are decided and return memos prepared. In the afternoon the NIFT staff collects the return cheques and take them to the NIFT office where the record is prepared and return cheques sent to the branches which had delivered the cheques. The branches then debit the accounts which had in the morning been credited with the amounts.

NIFT office advises the State Bank as to the entries to be passed by them on the accounts of the banks in State Bank in respect of clearing. NIFT also advises the banks of the clearing amounts. Please remember that when a bank has more than one branches in one city only the main office in the city maintains account in the State Bank. The number of branches in a city settle clearing amounts with their main office and main office for the net amount settles with state bank.
Note that under NIFT system the bank cashiers do not carry cheques to State Bank or to NIFT office.

11.5. Clearing services offered:

I. Overnight clearing including return cheque processing (24 hour clearing cycle)

ii. Same Day / High Value clearing including return cheque processing (3 hour clearing cycle)

iii. Inter City clearing including return cheque processing (48 hour clearing cycle)

iv. Countrywide Local US Dollar clearing (One week clearing cycle)

11.6. Basic Services and Facilities offered by NIFT:

• Inter-bank clearing and settlement (Inter-bank means between one bank and other banks, i. e. between XYZ Bank and other banks.)
• Intra-bank clearing and settlement (Intra- bank means between different branches of the same bank.)
• Collection and Delivery
• Advices / vouchers for intra-bank and inter-bank accounting
• Direct posting support on media for returns
• Query systems — software and data enabling large member banks;
• Call centres
• Reports and statistics to member banks on a regular basis
• NET for central bank settlement; (NIFT sends information to State Bank of Pakistan to pass debit credit entries over the accounts of banks for settlement of the clearing)

11.7. Clearing may be divided into:

• Outward clearing
• Inward clearing
• Same day clearing (for large amounts)

11.8. Outward clearing:

Outward clearing contains cheques / instruments drawn on banks within the city. These instruments may be:

o Cheques
o Pay Orders
o Pay Slips
o Demand Drafts
o Dividend Warrants
o Telegraphic Transfer Receipts
o Rupee Traveller Cheques

All cheques sent in clearing must have a “clearing stamp” i.e. a combination of two different stamps — one Special Crossing Stamp which bears the name of the bank and the branch name and the other with the words “Clearing” along with bank’s branch name and date.

11.9. US Dollars Instruments Collection and Settlement System
Previously USD cheques deposited in accounts were to be routed through New York, thereby costing time and expense. The State Bank has introduced Local System. Its salient features are as under:

11.9.1. Instruments
All financial instruments (cheques, drafts etc.) denominated in US$ drawn on bank branches in cities Karachi, Lahore, Islamabad, Rawalpindi, Faisalabad, Multan, Sialkot, Peshawar, Quetta, Mirpur (Azad Kashmir) and Hyderabad and several other cities are acceptable for this settlement system. Collection from all other cities is arranged / managed by each bank, by making internal arrangements, through any one of the above cities.

11.9.2. Collection & Settlement Schedule
Initially there were two collection and settlement days per week, i.e. Monday and Thursday. If a collection / settlement day happens to be a bank holiday, then it will be skipped till the next collection/ settlement day.

Each bank designates a branch/Regional/ Head office in Karachi for presenting outward and receiving inward instruments for collection and settlement through National Institutional Facilitation Technologies (Pvt.) Ltd. (NIFT).
NIFT deals with only one designated office of each bank in Karachi for settlement of Karachi and upcountry branches.

Each bank may also designate one branch in each city (i.e. from the coverage list) with whom NIFT and the designated branch of that bank in Karachi, if required, would liaise for issues regarding collection & settlement relating to other branches in that city.

11.9.3. Mandatory Settlement
It is mandatory for the banks operating in Pakistan, whose Head Offices or branch offices are located in Karachi, to be a member of this system., to open US$ settlement account with a minimum balance of US$ 10,000/- for settlement with SBP BSC (Bank) Karachi (i.e. State Bank of Pakistan Banking Services Corporation Bank, Karachi.) and thereafter to maintain sufficient balance to cater to the requirements keeping in view their business volume. The said account will be remunerated on the same interest rate as for Statutory Cash Reserve Requirement (SCRR) for FE-25 and to settle payment of US$ instruments drawn on them through this system or to return unpaid instruments on settlement date. In case the paying bank does not return the original instrument on the settlement date to the presenting bank, it will be assumed that the instrument has been accepted for payment and will be settled through this system accordingly.

11.9.4. Processing Cycle
The collection/settlement is centralized at Karachi. NIFT interfaces with one designated branch of each bank in Karachi only.

Banks route all inward/outward instruments from their branches in Pakistan through their designated branch in Karachi.

NIFT collects / delivers all instruments for inward/outward settlement from the designated branches of Banks in Karachi, process the collection/settlement and deliver a consolidated statement to the respective designated branch of the bank.

Each designated branch in Karachi forwards the instruments received in inward collection to the payee branch of their bank directly for ‘Acceptance’ or ‘Return unpaid’.

The payee branch settles or returns the original instrument, if any, to the designated branch in Karachi. NIFT collects all return instruments from the designated branches in Karachi, process them along with inward collection and then route them to the related designated presenting Bank branch in Karachi.

The Settlement proceeds of the instruments would be communicated to the concerned branch immediately by electronic or any other means on the same day for crediting to the concerned depositor’s account.

11.9.5. Date Stamp
The Collecting Bank will affix the stamp of the date on which outward instruments would be sent to N1FT for collection.

11.9.6. Settlement
The net settlement will take place by debiting or crediting the respective banks’ US Dollar clearing accounts on settlement date.

11.9.7. Settlement Statements
NIFT will provide a statement of collection / settlement statistics on monthly basis to ascertain the expenses payable by the lodging bank to paying bank at the rate of Rs. 100/- per instrument (for cheques drawn on cities other than Karachi) irrespective of whether the instruments are paid or return unpaid.

All other reports and information will be produced and provided on the existing pattern as for rupee clearing. NIFT will provide stationery and usual collection / settlement preparation material to the branches as is being done for PKR clearing systems.

11.9.8. Forced Retention
If for some unavoidable reasons the relevant bank is unable to provide a returned cheque on the specific collection / settlement date due to any reason beyond control, the designated bank office in Karachi will provide to the concerned bank along with inward clearing instruments, with a copy to NIFT, a document on prescribed format (agreed between the banks and NIFT) giving details of the instrument, undertaking that the said instrument will be provided to the lodging bank directly on availability but not later than the subsequent collection / settlement date, that instrument will be considered as returned unpaid.

This process may function in such a manner that the designated bank will furnish the prescribed document in duplicate to NIFT’ in place of the returned document and NIFT will send the first copy to the lodging bank along with other returns, if any, as a return instrument.

11.9.9. Settlement In Case Of Insufficient Balances
At any point in time when the net debit (inward & outward) cannot be paid out of a bank’s US Dollar clearing account (due to insufficient balance) held with SBP BSC(Bank), Karachi, the State Bank reserves the right to adopt a suitable alternate.. This will primarily take the shape of payment through an appropriate overnight SWAP from the Pak Rupees clearing account balance of the bank with SBP to the extent of such shortfall in US Dollar account. (It means that if there is a shortage of funds in the Dollar account, State Bank will debit the relevant banks Pak Rupee Account in which the Bank keeps the statutory cash reserve amount and provide Dollars in the Dollar Account to meet the requirement.)

11.9.10. Settlement Charges
NIFT will charge the presenting bank Rs.100/- per instrument for its services and Rs.100/- for processing a return instrument.
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Default Negotiable Instruments

Do you want success in Life? Begin with a List.
The basic tool of time management is a list, organized by priority, and used as a constant tool for personal management. The fact is that you can't manage time; you can only manage yourself. That is why time management requires self-discipline, self-control, and self-mastery. Time management requires that you make the best choices and decisions necessary to enhance the quality of your life and work. Then you follow through on your decisions.
“We need to be aware of the “opportunity cost” of time not utilized in a productive manner. Always carry a book or a newspaper with you, so that any time that you get free can be utilized in enhancing your knowledge rather than spending that spare time in just looking around”. Remember Time is Money.

Negotiable Instruments
13.1. Background
Before enactment of the (Indian) Negotiable Instruments Act, 1881, the English Law of Negotiable Instruments governed all questions relating to the negotiable instruments arising between Europeans. If, however, the parties were Indians, the law and usages prevailing among the merchants of the respective communities governing such transactions were applied by the courts. There is no doubt that by the time the Indian Negotiable Instruments Act, 1881, was passed, there developed in India a set of rules based on customs and usage relating to ‘Hundis’.

These rules could not have been ignored even by the legislature without consequent hardship to native bankers and tradesmen. It was for this reason that the Act expressly excluded from its operation any local usage relating to instruments in an oriental language.

The Indian negotiable Instruments Act, 1881 and its British counterpart, the Bills of Exchange Act, 1882 codify the English Common Law of negotiable instruments. There is much in common between the Indian Act and the corresponding English Act. It follows therefore, that the reported cases of the superior courts of England are still referred to with advantage for illustrating and explaining analogous propositions arising under Indian and Pakistani Law as well.

13.2. Definition.
“A negotiable instrument is one the property in which is acquired by anyone who takes it bona fide and for value, notwithstanding any defect of title in the person from whom he took it”

It follows that an instrument cannot be “negotiable instrument” unless it is in such a state that the true owner could transfer the contract or engagement contained therein by delivery if “bearer” and by endorsement and delivery if “order instrument”.

It may be laid down as a safe rule that where an instrument is by the custom of trade transferable, like cash, by delivery and is also capable of being sued upon by the person who is “A HOLDER IN DUE COURSE” then it is entitled to the name of a “negotiable instrument” and the property in it passes to a bona fide transferee for the value even though the transferor may not have any title.

13.3. Negotiable Instrument Act, 1881.

This Act includes three instruments within its meaning viz. Promissory Note, Bill of Exchange and Cheque. These have been defined in relevant Sections of the Act as follows:

13.3.1. Promissory Note.
Section 4 of the Act defines a Promissory Note.

“an instrument in writing containing an unconditional undertaking, signed by the maker, to pay on demand or at a fixed or determinable future time a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument”.
Its components therefore are:

1. Unconditional undertaking to pay
2. The sum should be a sum of money and should be certain
3. The payment should be to or to the order of a person who is certain or to the bearer of the instrument and
4. The maker should sign it.

The essential feature of a promissory note is that it is a clearly expressed, unconditional written promise to pay and it is not enough that the substantial effect of the instrument should be to make the executants liable to pay a sum of money. An instrument containing words, “I am liable to pay” without any undertaking, is not a promissory note. An instrument only ‘undertaking to pay interest, there being no unconditional undertaking to pay the principal amount, is not a promissory- note.

Sometimes the abbreviation ‘ pro-note’ is used in place of promissory note.

The basic tests of a promissory note are that the sum of money should be certain as also the payee or promisee. If the rate of interest is specified in the document the certainty to the sum payable is in no way affected as it may be merely a matter of calculation to arrive at the sum payable. Similarly, the payee or bearer must be certain. Where the name of the payee is not given in the body of the document but he has been described as “you,” it cannot be held that the person who advanced the money is a person certain. Therefore, it cannot be held that the document is a promissory note.

If a pro-note does not specify any place where payment is to be made, the presumption is that payment should be made at the place of residence or business of the creditor. As for the Promissory Note being payable otherwise on demand, it should be presented for payment on due date calculated on the basis of the stipulated period or the specified date for payment.

The promissory note has to be in writing, without any condition attached, bearing the signature of the promisor (i.e. the person who makes it) promising to pay a definite amount of money, to the person named therein or to his order or to the bearer of the note, either on demand or at a future fixed date or a date that can be determined.

Thus the following do not fall within the scope of this definition even though signed by “A”.

i) Mr. B. —I.O.U. Rs. 1,000/-
ii) I promise to pay “B” Rs. 500,000/-or to deliver to him my Toyota Corolla Car on 1st January next.
iii) I promise to pay “B” Rs. 500/- seven days after my marriage with “C”.

However, the under noted examples can be termed as Promissory Notes:

i) I acknowledge myself to be indebted to “B” in the sum of Rs. 1,000/- to be paid on demand.
ii) I undertake to pay “B” or to his order a sum of Rs. 5000/- 30 days after date.
iii) I promise to pay the bearer 90 days after sight, a sum of Rs. 5000/-

1. Whenever a bank grants a loan or overdraft, it obtains a Promissory Note from the borrower, which is used as evidence of borrowing in a possible recovery suit in a court of law.

Specimen of Promissory Note
24th December 13
On demand I promise to pay Pakistan Bank Ltd.
a sum of Rs. 8,000/- (Rupees Eight Thousand only).

Revenue Stamp
Sd- Mohammad Ali
20, Martin Road, Karachi

13.3.2. Bill of Exchange
Section 5 defines a Bill of Exchange

“An instrument in writing containing an unconditional order signed by the maker, directing a certain person to pay on demand or at a fixed or determinable future time a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument.”

The essential ingredients of this definition are that it is an order to pay, without any condition, to a specified person or to his order or to the bearer, a definite amount of money either on demand or at a future date which could be determined or at a fixed date in future. The instrument in order to be a valid bill of exchange has to be signed by the maker (i.e. drawer) directing a certain person (i.e. drawee) to pay to the person named therein (i.e. payee) or to his order or to bearer of the bill.

Bill of exchange is an instrument of trade which serves as a bridge between buyer and seller of the goods. Whereas the seller would like to part with his goods only when he is assured that the sale proceeds are in his hands or in the hands of a reliable intermediary, from whom he can receive the same; the buyer, on the other hand is anxious to pay for the goods only when these are in his possession or in the hands of a certain reliable agency (or through documents of title to goods) from where he can obtain delivery thereof.

The seller of the goods will, therefore, draw a bill of exchange upon the buyer for the proceeds directing him to pay the same to his banker to whom he sends the documents of title to goods sold. The bank is instructed to deliver the documents of title to the buyer only when the buyer makes payment as per the bill of exchange. This is how the gap of trust between the two parties (i.e., importer and exporter) is bridged by a bill of exchange.

1. Specimen of Bill of Exchange

A. B. Corporation. 20th December 2013
2, Apex Court,
Karachi Rs. 50,000/-

Thirty days after sight pay M/s Excellent Traders(PAYEE) or order a sum of Rupees Fifty
Thousand only for the value received.

To (DRAWEE) For A. B. Corporation.
M/s Fairdeal Traders, Sd- A. Rahim
37-Jail Road Proprietor
(The above is an example of Usance Bill. In case the above bill of exchange is drawn by an exporter the exporter delivers this Bill of Exchange to its bankers. The exporters bankers send this B of E to the importers bank together with a bill of lading evidencing shipment of related good. The importer accepts the Bill of Exchange indicating a date on which they will make payment. In case that the bank considers the customer sufficiently credit worthy the bank can deliver the bill of lading against acceptance of bill. On maturity of bill the bank presents the bill to the importer, collects the amount and remits the amount to the exporters bank.)

13.3. 3. Differences between a Bill of Exchange and a Promissory Note:

1) A promissory note has two parties; a bill of exchange has three parties;
2) A promissory note is an “unconditional promise or undertaking to pay” whereas a bill of exchange is an “unconditional order or direction to pay”;
3) A promissory note is written by the borrower whereas a bill of exchange is prepared and issued by the lender;
4) A promissory note is mainly used in domestic business whereas a bill of exchange is mainly used in international trade;
5) Whenever a bank grants a loan or overdraft, it obtains a promissory note from the borrower of funds. The promissory note is used as an evidence in case of a recovery suit in a court of law.

13.4. Bankers Draft;
A demand draft is also a bill of exchange. It is an order to pay money drawn by one office of a bank upon another office of the same bank or upon an office of a different bank. It is covered under Sec. 85 (a) of the Negotiable Instruments Act.

Specimen of Bank Draft

No. BD-00XXX Pakistan Bank Ltd. 20th Dec. 2013.
51, Martin Road, Karachi
(Protectographed) Not over Rs. 25,000/-
Rs. 25,000/-
On demand pay to Mohammad & Bros. or order a sum of Rupees twenty five
thousand only, for value received.

Pakistan Bank Ltd. For Pakistan Bank Ltd.
5, Site Ram Road, Karachi Sd- Officer
Lahore Sd)- Manager

A draft is a bill drawn by one bank on another bank or on its own branch. It is a bill of exchange and a negotiable instrument (AIR 1962 KAR 210). The relationship between the holder of DD and the bank issuing a demand draft is that of creditor and debtor (PLD 1952 Dacca)

13.5. A cheque;
The cheque has been defined in Sec 6 of the Negotiable Instruments Act, 1881. A cheque is also a bill of exchange which is drawn on a banker and expressed to be not payable other than on demand. The differences between a cheque and a bill of exchange are:

1. A cheque is always drawn on a banker while a bill of exchange may be drawn on any person;
2. A cheque is always payable on demand while a bill of exchange may be usance also i.e. it can be payable at a given future date or a determinable future date;
3. A cheque does not need acceptance while a bill of exchange drawn payable after a period would require acceptance by the drawee;
4. A cheque is presented for payment only while a bill of exchange may be presented for acceptance if it is a usance bill;
5. Grace period:
There is no grace period in a cheque.
Three grace days are allowed in calculating the maturity date of the bill of exchange.

(The following stipulations regarding dishonor, noting, protesting of Bill of Exchange also apply to the Promissory Notes)
13.6. Dishonor of a Bill of Exchange or Promissory Note.
One of the essential features of a bill of exchange is that the bill payable on a fixed or determinable future date must be presented to the drawee for acceptance first and then presented for payment on determinable due date. If a bill is accepted by drawee, it is an expression of his intention to pay by signing the bill with due date. If, however, the drawee declines to accept, the bill will be treated as dishonored by non-acceptance. A bill will be considered to have been dishonored by non-payment if its payment is not made on due date after acceptance. In these cases, the legal requirement is that the unaccepted or unpaid bill should be handed to a ‘Notary Public’ for noting and protesting, which will be the legal proof of the drawee having refused to accept or pay the bill and this noting and protesting will enable future legal action against the drawee.

Both in case of dishonor by non-acceptance and dishonor by non-payment, the holder of the dishonored instrument must give notice of dishonor to all the parties whom the holder seeks to make severally liable thereon. If the holder seeks to make several parties jointly liable, notice to some of them will be sufficient. It will also suffice if the notice is given by some party who remains liable on the instrument, and not by the holder.
(Severally= separately: Tenants are jointly and severally liable for payment of the rent.)

13.8. Notary Public
It includes a person appointed by the Central Government to perform the functions of a notary public under Negotiable Instruments Act, 1881 (Section 2(g)) and a notary appointed under Notaries Ordinance, 1961 (XIX of 1961).

13.9. Noting;
Section 99 of the Negotiable Instruments Act, 1881 provides: “When a Promissory Note or a Bill of Exchange has been dishonored by non-acceptance or non-payment, the holder may cause such dishonor to be noted by a notary public upon the instrument, or upon a paper attached thereto or partly upon each.”

Such note must be made within a reasonable time after dishonor and must specify the date of dishonor, the reason, if any, assigned for such dishonor or if the instrument has not been expressly dishonored, the reason why the holder treats it as dishonored and the notary’s charges.

13.10. Protest; (Protesting has a special meaning in respect of negotiable instruments.)
Section 100 deals with the “Protest”. It says, “When a promissory note or a bill of exchange has been dishonored by non-acceptance or non-payment, the holder may, within a reasonable time, cause such dishonor to be noted and certified by a notary public. Such a certificate providing formal evidence of dishonor of a bill of exchange is called “protest.”

When the acceptor of a bill of exchange has become insolvent, or his credit has been publicly impeached, before the maturity of the bill, the holder may, within a reasonable time, cause a notary public to demand better security of the acceptor, and on its being refused may, within a reasonable time, cause such facts to be noted and certified as aforesaid. Such certificate is called a protest for better security.

13.11. Drawer, Drawee and a Drawee-in-case of Need. (Section 7)

13.11.1. Drawer
A Drawer is the maker of the bill;

13.11.2. Drawee
A Drawee is the person on whom the bill of exchange is drawn and is directed to pay.

13.11.3. Drawee-in-case of Need
When in the bill or in any indorsement thereon, the name of any person is given in addition to the drawee, to be resorted to in case of need, such a person is called ‘drawee in case of need’. (in case of need = e.g. if the bill is returned unaccepted or unpaid.)

13.12. Acceptor;
“After the drawee of a bill of exchange has signed his assent upon the bill and delivered the same or given notice of such signing to the holder or to some person on his behalf, he is called Acceptor”.

13.13. Acceptor for Honor;
“When a bill has been noted or protested for non-acceptance or for better security and any stranger person accepts it supra protest for honor of the drawee or for any one of the endorsers or for the drawer, such a person is called Acceptor for Honor”.
(‘Supra protest’, an acceptance of a bill by a third person after protest for nonacceptance by the drawee.)

It may be mentioned that a drawer is primarily liable to the holder of bill of exchange until it is accepted. Once a bill is accepted the Acceptor becomes primarily liable.

13.14. Payee;
The person named in the instrument to whom or to whose order the money is payable is called ‘Payee’.

13.15. Holder in due course;
It has been defined in Section 9 of the Negotiable Instruments Act1881, that “Holder in due course means any person who “for consideration” becomes the possessor of a promissory note, bill of exchange or a cheque, if payable to bearer or endorsee thereof, if payable to order, before it became overdue, without notice that the title of the person from whom he derived his title was defective.”
{What is the meaning of ‘for consideration’=when something is obtained in return for something or some benefit given}
In regard to the defective title the law further clarifies in Section 58 of the Negotiable Instruments Act 1881, which says “ when a promissory note, bill of exchange or cheque has been lost or has been obtained from any maker, drawer, acceptor or holder thereof by means of an offence or fraud, or for an unlawful consideration, neither the person who finds or so obtains the instrument nor any possessor or endorsee who claims through such person is entitled to receive the amount due thereon from such maker, drawer or acceptor unless such possessor or endorsee is, or some person through whom he claims, was a “holder thereof in due course.”

The following points emerge from these two sections of the Negotiable Instrument Act:

a) Unless a person proves that he is a holder in due course within the meaning of Sec. 9 he cannot have a better title than that of the intermediate holders themselves.

b) It is only a person who comes into possession of a negotiable instrument having obtained “for consideration” and being a bona fide transferee that can be a holder in due course within the meaning of section 9.

13.16. Presentment for acceptance;
Promissory notes, bills of exchange and cheques must be presented for payment to the maker, acceptor or drawee thereof respectively, by or on behalf of the holder. In default of such presentment, the other parties thereto are not liable thereon to such holder.

Sec. 77 of Negotiable Instruments Act, 1881 deals with “liability of banker for negligently dealing with bill presented for payment.” According to this section when a bill of exchange accepted payable at a specified bank has been duly presented there for payment and dishonored, if the banker so negligently or improperly keeps, deals with or delivers back such bill as to cause loss to the holder, he must compensate the holder for such loss.

13.17. Difference in words and figures;
Section 18 states that if the amount undertaken or ordered to be paid is stated differently in figures and in words, the amount stated in words shall be the amount undertaken or ordered to be paid, provided that if the words are ambiguous or uncertain the amount may be ascertained by referring to the figures.

However in practice based on the plea of “good faith and without negligence”, the banks usually return such an instrument with the remarks “amount in words and figures differs”;

13.18. Inchoate stamped instrument;
(Meaning of Inchoate: just beginning to form and therefore not clear or developed: inchoate ideas = incomplete ideas)

Section 20 states that where one person signs and delivers to another a paper stamped in accordance with the law relating to stamp duty chargeable on negotiable instruments, either wholly blank or having written thereon an incomplete negotiable instrument, in order that it may be made, or completed into a negotiable instrument he thereby gives prima facie authority to the person who receives that paper to make or complete it as the case may be into a negotiable instrument for the amount if any specified thereon or where no amount is specified for any amount not exceeding in either case, the amount covered by the stamp.

Thus a negotiable instrument though inchoate but properly stamped does not lose its validity and enforceability merely because it was not wholly or partially filled in at time of execution and delivery thereof.

Most Important feature of a Negotiable Instrument Restated (From Internet)

“The holder in Due Course of a Negotiable Instrument can get a better title than the transferor.”
Explanation of the Concept.
The most remarkable feature of a negotiable instrument is that if it is negotiated to a person who acquires the instrument
i) In good faith
ii) For value
iii) Without notice of any defects in its title
then, the transferee is a holder in due course and can enforce the instrument without being subject to defenses which the maker of the instrument would be able to assert against the original payee, except for certain real defenses which are rarely applicable.
The holder in due course rule is what makes the free transfer of negotiable instruments feasible in the modern industrial economy: a person or company who purchases such an instrument in the ordinary course of business can reasonably expect that it will be paid when presented to the maker, without involving itself in a dispute between the maker and the person to whom the instrument was first issued.
The foregoing is the theory and the letter of the law: of course, in reality the issuer of an instrument who feels he has been defrauded or otherwise rawly dealt with by the payee may nonetheless refuse to pay the holder in due course, requiring the latter to resort to litigation to recover on the instrument.
“Whenever you find yourself on the side of the majority, it is time to pause and reflect.” -Mark Twain
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Default Crossings and Endorsements

"Only those who constantly retool themselves
stand a chance of staying employed in the years ahead."
Learn New Skills.
I would recommend you to learn ‘touch-typing’
which will increase your effectiveness appreciably.
What is Touch Typing?
Crossings and Endorsements
14.1. Background;
The crossing of a cheque is a feature of law in Pakistan adopted from laws applicable in British India. In United Kingdom the use of the term ‘crossings’ originated in the eighteenth century. When the employees of different banks brought their cheques to the clearing centre, for the sake of identification and to facilitate remittance, they wrote the names of their banks on the face of cheques. In UK the crossed cheques were governed by the Crossed Cheques Act, 1856.

Please note a Common characteristic of ALL TYPES of crossings. If an instrument, cheque, draft, etc is crossed----whatever the type of crossing----the paying bank will not pay cash against a crossed instrument, it can only be credited into a bank account.

14.2. Types of crossing;
The first type of crossing is known as “general crossing” and consists of placing of two parallel transverse lines across the cheque. These lines may be with or without the words “and company” or an abbreviation thereof such as “& Co”. The second type is known as “special crossing” which carries name of the bank collecting the cheque on the face of the cheque. The effect of a crossing on the cheque is that it can only be collected by a bank for a customer and cannot be paid over the counter to the payee or holder in cash.

14.3. Definition;
Section 123 of the Negotiable Instruments Act, 1881 says:
“Where a cheque bears across its face an addition of the words ‘and company’ or any abbreviation thereof between two parallel transverse lines simply, either with or without the words ‘not negotiable’ the addition shall be deemed to be a crossing and the cheque shall be deemed to be crossed generally”

14.4. Features of a ‘general crossing’;
(a) Two parallel transverse lines drawn across the face of the cheque;
(b) With or without the words ‘and company’;
Cash cannot be paid against a generally crossed cheque.
Amount can be paid only to a bank, to any bank where the payee has an account.

14.5. Special Crossing;
Section 124 of the Act defines it as under:
“Where a cheque bears across its face an addition of the name of a banker, that addition shall be deemed to be a special crossing and the cheque shall be deemed to be crossed ‘specially’. A ‘specially crossed’ cheque can be paid to (i.e. it can be collected by) only that bank whose name is written in the special crossing and by no other bank.”

14.6. Difference between ‘general’ and ‘special’ crossings
i. In general crossing two parallel transverse lines are necessary whereas in special crossing need not; Just the name of a bank written across a cheque constitutes special crossing.

ii. In special crossing the name of the collecting bank appearing on the face of the cheque is necessary whereas in general crossing it does not appear.

iii. A cheque crossed generally can be collected by any bank whereas a cheque crossed specially must be collected by only that bank whose name appears across the face of the Cheque;

All other crossings can be cancelled by the “drawer” of the cheque but a special crossing can be cancelled only by the bank in whose favour it is specially crossed.

iv. A cheque may bear more than one banks name where the other bank is acting as collecting agent for the bank where the payee of the cheque maintains his account.

14.7. “Not negotiable”;
According to Section 130 of the Act, if in a crossed cheque, the words ‘Not Negotiable’ appear, the holder taking the cheque shall not have and shall not be capable of giving, a better title to the cheque than that which the person from whom he took it, had. ‘Not Negotiable’ crossing does not restrict further transferability of a cheque. It is freely transferable by delivery in case of bearer and by indorsement and delivery in case it is an order cheque. The effect of these words on a cheque is that it is a warning to the payee or holder that if the cheque had a defective title, the indorsee or holder thereof will not acquire a better title than that of the transferor. By the same token the holder will not be capable of passing a better title than that of his own to the subsequent holder.

To reiterate a negotiable instrument is one the property in which is transferred by mere delivery or by endorsement and delivery. Moreover a ‘holder in due course’ who receives the instrument ‘for value’ and ‘in good faith’, ‘without notice of any defect’ in its title can get a better title than the previous holder.
If an instrument is marked ‘not negotiable’ then the subsequent holders do not get a better title than the previous holders.

An example will explain the impact of ‘Not Negotiable’ crossing. Person “A” stole a cheque bearing ‘Not Negotiable’ crossing, then he indorsed it to “B” for valuable consideration. A, having stolen cheque has no title to it and he cannot pass on any title to any subsequent holder thereof. This is so only if the cheque is crossed Not Negotiable. Although “B” received it for value and without notice that the title of “A” was defective but it was clearly marked ‘not negotiable’ which is a declaration that this instrument is devoid of the important quality of negotiability and he ‘B’ cannot get a better title than ‘A’. Since the title of ‘A’ was defective-----the title of ‘B’ will also be defective.
A non negotiable crossing means that the cheque is devoid of its quality of negotiability and an endorsee will receive the cheque subject to any defects in the title of the endorser.

In the above example if the cheque was not marked “non-negotiable”, ‘B’ who had received the cheque for valuable consideration without knowledge of any defect in its title would get a better title than A and the person B could enforce the cheque against the drawer and the endorser ‘A’.

14.8. “Account Payee Only Crossing”;
In Pakistan it is a crime to credit “Account Payee Only” cheque to any account other than the payee named in the cheque.

Section 123A was added to the Negotiable Instrument Act, 1881 by an amendment Ordinance of 1962. It states that where a cheque crossed generally bears across its face an addition of the words “account payee” between the two parallel transverse lines constituting the general crossing, the cheque besides being crossed generally, is said to be crossed “account payee”. When a cheque is crossed “account payee”, it shall cease to be negotiable and it shall be the duty of the banker collecting payment of the cheque to credit the proceeds thereof only to the account of the payee named in the cheque.
{Transverse= placed across sth}

The practice of using this type of crossing has been in vogue since the 19th century. Such a cheque is not transferable but valid only between the parties. It is said that the safest crossing will be the combination of two crossings i.e. “Account Payee only” along with “Not Negotiable”.
{Vogue= a fashion for something}

“Account Payee Only” crossing means that in addition to the restriction that the payment cannot be made in cash and can only be collected by a bank the proceeds of an “Account Payee Only” cheque CAN only be credited TO THE ACCOUNT OF THE PAYEE NAMED IN THE CHEQUE. Such cheque cannot be endorsed or transferred to any other person or institution.

In Pakistan it is a crime to credit such cheque to any account other than the payee named in the cheque.

14.9. Purpose and benefits of Crossing;
A crossing though not affecting the negotiability of the cheque does restrict its presentation through a bank i.e. it has to be deposited in an account thereby minimizing the risk of fraud which could be easier if the cheque was paid on the counters of a bank. Moreover the crossing gives directions to the paying banker to pay the proceeds to the collecting bank.

When sending a cheque to a beneficiary by mail or courier or through a person whom you cannot rely upon fully, it is better to cross a cheque preferably “Account Payee Only” because if it is so crossed it can only go into the bank account of the named payee and the chance of somebody else obtaining the money in question is minimized appreciably.

14.10. Who can cross a cheque?
According to Section 125 of the Negotiable Instrument Act

a) Where a cheque is uncrossed, the holder may cross it generally or specially;
b) Where a cheque is crossed generally, the holder may cross it specially;
c) Where a cheque is crossed generally or specially, the holder may add the words ‘not negotiable’;
d) Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker, his agent, for collection;
e) When an uncrossed cheque or a cheque crossed generally comes to the hands of a banker, he may cross it specially to himself’.

14.11. Duties of a Bank with regard to crossed cheques
As explained earlier Section 126 of the Act states that a cheque crossed generally must be paid only to a banker and a cheque crossed specially shall only be paid to the banker named therein. As per Section 127 of the Act a cheque may bear second special crossing in favor of a second bank which is acting as an agent for collection for the first banker.

14.12 A. Protection to the Paying Banker when paying a crossed cheque - Sec. 128 of the Negotiable Instruments Act deals with payment in due course of a crossed cheque and makes it obligatory to a banker that payment of a crossed cheque must be made only ‘in due course’ which implies payment in good faith and without negligence to a banker. However, if he makes payment in contravention of this section, he loses the legal protection and will have to compensate the customer for any loss suffered by him by such payment. The protection is available if the banker makes payment in good faith and without negligence of a cheque crossed generally to a banker and if crossed specially, the banker to whom it is crossed or his agent for collection, being a banker.

Protection regarding Payment of Instrument on which alteration is not visible.
Where a Cheque has been materially altered but does not appear to have been so altered.
Sec. 89 provides a relief to the banker in the case of payment of an instrument on which alteration is not apparent and states that if a cheque presented for payment has been altered but does not appear to be altered or it has been crossed but does not appear to be crossed or has had a crossing which has been expunged at the time of presentation. In such a situation, the banker may make the payment according to the apparent tenor of the instrument. If the payment made is in due course and made in good faith without negligence the bank shall be discharged from all liabilities.

14.12B. Protection to the Collecting Banker when collecting a crossed cheque — 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.
(Note the different types of protections available to the collecting banker and the paying banker provided they have acted in good faith and without negligence.)

14.13. Who can open a crossing on a cheque?
We have earlier mentioned as to who can add crossing on the cheque. However as to who can remove the crossing is a totally different matter. A crossing being a material part of the cheque, its cancellation can only be done by the drawer of the cheque i.e. only a person who issued the cheque can open the crossing. This is for general crossing. However for cancellation of ‘special crossings’ these can only be removed by the banker whose name appears in the crossing.

14. 14. Indorsements
“Indorsun” is Latin word and from it “Indorsement” is derived, the literal meaning of which is “on the back or reverse.” But its legal definition under Section 15 of Negotiable Instruments Act, makes things clearer: “When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to indorse the same and is called the “indorser.”

The following points emerge from this definition:
• Indorsement means the writing of a person’s name either on the back or the face of a
negotiable instrument.

• In the event of insufficient space on the instrument, indorsement can even be made on a piece of paper annexed to the instrument, technically called “allonge.” The Indorsement should be so made that part of the name appears on the instrument and partly on the piece of paper attached as “allonge.”

• The Indorsement should be made only when the instrument is intended for negotiation as per definition of ‘negotiation’ given in Section 14 of Negotiable Instruments Act which reads: “when a promissory note, a bill of exchange or cheque is transferred to any person by the holder thereof, the instrument is said to have been negotiated.”

• Negotiation thus means the transfer of a ‘negotiable instrument’ to a third party in such a way that the third party is constituted as the holder of the instrument who is entitled to
the possession of the same in a manner that he can sue upon it in his own name.

• There is no exact form of indorsement prescribed in banking law, but the bankers have developed their own principles in consonance with the basic legal requirements in this

Bankers in Pakistan generally observe the following principles:

a) The indorser’s name must be exactly in the same spelling as written in the instrument as payee or indorsee, i.e. it should be verbatim.

b) Indorsement should be made in payee’s or indorsee’s hand writing only. Signature in the form of facsimile is not acceptable.

c) Vernacular indorsement is not acceptable unless it is confirmed and guaranteed by the collecting banker.

14.15. Types of Indorsements
Indorsements are of the following types:

i) “In blank” indorsement,
ii) “In full” indorsement,
iii) Conditional indorsement,
iv) Restrictive indorsement,
v) Partial indorsement.

14.15.1. “In blank” — If the indorser signs his name only, the indorsement is said to be “in blank- and if he adds a direction to pay the amount mentioned in the instrument, to or to the order of, a specified person the indorsement is said to be “in full” and the person so specified is called the indorsee of the instrument (Section 16(1)). “The provision of this Act relating to a payee shall apply with necessary modification to an indorsee.” (Section 16(2)).

In a blank indorsement, the indorser signs his name only. It is also called “general indorsement.” The instrument bearing a blank indorsement becomes payable to bearer. It is thus negotiated to subsequent holders by mere delivery as in case of an instrument payable to bearer.

14.15.2. “In full”
As mentioned earlier in Section 16 of the Negotiable Instruments Act, if an indorser specifies with his signature the name of the person to whom the instrument is made payable, this indorsement is called an indorsement “in full” or “special indorsement.”

14.15.3. Conditional
According to Section 52, conditional indorsement is one where an indorser makes such liability or the right of the indorsee to receive the amount due thereon dependent upon the happening of a certain event which may or may not take place or excludes his own liability thereon when signing his name, e.g. “Pay XY & Co. at his risk and responsibility” or “Pay XY & Co. or order without recourse to me.”

14.15.4. Restrictive
When an indorser attaches a condition with his signature which prevents further negotiation of the instrument, it is called “restrictive indorsement.” For example, if a bill of exchange is endorsed as “Pay XY only” or “Pay XY for the account of DE” etc. it restricts further negotiability. The indorsee has no power to transfer his rights to any one thereafter.

14.15.5. Partial
Under Section 56(1), negotiation by indorsement must be of the entire instrument. Under 56 (2) an indorsement which purports to transfer to the indorsee only a part of the amount payable or which purports to transfer the instrument to two or more indorsees severally, is not valid as a negotiation of the instrument; but where such amount has been paid in part, a note to that effect may be indorsed on the instrument, which may then be indorsed for the balance.

14.16. Who can indorse?
(Bona fide = [usually before noun] (from Latin) genuine, real or legal; not false: a bona fide reason Ç is it a bona fide, reputable organization)
A bona fide payee, indorsee or holder of an order instrument can endorse as an individual, if endorsed to him as such, or as partner if made payable to a partnership firm or as Chairman, Director, Secretary, or Manager if made payable to a joint stock company, as per following examples:

14.16.1. Indorsements by individual;
The name of the indorser should correspond exactly to the name of the payee written in the instrument. Titles of courtesy, rank, marital status are not to be prefixed with Indorsements.

a) Payee: Ahmed Hussain
Regular: Ahmed Hussain
Irregular: Ahmad Hossain

b) Payee: Mufti Samee-ullah Khan
Regular: Samee-ullah Khan
Irregular: Mufti Samiullah Khan

14.16.2. Indorsements by agents for individuals.
Indorsement must indicate that the agent is signing on behalf of the payee under proper authority.

a) Payee: Abdul Mannan
Regular: Abdul Mannan
By Shahzad Khan
(his) attorney

Irregular: Abdul Mannan
Shahzad Khan

b) Payee: Rizwan Rasheed

Regular: For and on behalf of Rizwan Rasheed
Shahzad Khan

14.16.3. Indorsement by a firm as the agent to an individual.
Indorsement must indicate that firm is signing as an agent of the individual.

a) Payee: Imtiaz Shafi

Regular: for and on behalf of Imtiaz Shafi
Shafi &Co.

Irregular: Imtiaz Shafi
Shafi & Co.

14.16.4. Indorsement by Joint Payees.
In case of joint payees, all payees must endorse individually or one of them should sign under an authority from rest of them.

a) Payee : Muhammad Imran & Saleem Butt
Regular: Muhammad Imran (Both signing individually)
Saleem Butt
Muhammad Imran
For self & Saleem Butt

Irregular: Muhammad Imran (Both names written in the same handwriting)
Saleem Butt

14.16.5. Indorsement by firms as an agent of another firm. A firm can indorse as an agent on behalf of another firm.
a) Payee: Messrs Karman Shah & Co.

Regular: Per pro Karman Shah & Co.
Shahjee & Co.

Irregular: Shahjee & Co. for Karman Shah & Co.

14.16.6. Indrosement for and on behalf of a firm.
A person indorsing an instrument for and on behalf of a firm, the indorser must indicate his designation.

a) Payee: Messrs Karman Shah & Co.

Regular: for and on behalf of
Karman Shah & Co.
Syed Ali

Irregular: for and on behalf of Karman Shah & Co.
Syed Ali

14.16.7. Indorsement for Joint Stock Company.
A person indorsing an instrument on behalf of a Joint Stock Company must be a duly authorized official or agent who must indicate his authority and designation thereon.

a) Payee: Messrs Salman Jamal & Co. Ltd.

Regular: Per pro Salman Jamal & Co. Ltd.
Mansoor Ali

Irregular: Per pro Salman Jamal & Co. Ltd.
Mansoor Ali

b) Payee: Messrs A B Fashion & Co. Ltd.
Regular: A B Fashion & Co. Ltd.
Shahid Ahmed

Irregular: Per pro A B Fashion & Co. Ltd.
Shahid Ahmed

14.16.8. Indorsements by Clubs, Societies, Administrators, Trustees etc
Indorsements by persons on behalf of the institutions like clubs, societies, trusts etc. must be made by an authorized office bearer who must indicate his designation.

a) Payee: Karachi Services Club
Regular: for and on behalf of
Karachi Services Club
Sheraz Khan
(Hony. Secretary)

Irregular: Karachi Services Club
Sheraz Khan

b) Payee: Lawyers Forum
Regular: for Lawyers Forum
Wali Khan

Irregular: for and on behalf of Lawyers Forum
Wali Khan

14.9. Liability of indorser
Sec 35 states that in the absence of a contract to the contrary, the indorser of a negotiable instrument, by indorsing it, engages that on due presentment it shall be accepted and paid according to its tenor and that if it be dishonored he will compensate the holder or subsequent indorser who is compelled to pay it for any loss or damage caused to him by such dishonor. Every indorser after dishonor is liable as upon an instrument payable on demand.

It may be noted that “dishonor by drawee is necessary”. Therefore a holder cannot come straight to an indorser and demand payment. The instrument has to be presented to the drawee and if he refuses to pay, only then the holder can claim from the indorser.
“Whenever you find yourself on the side of the majority, it is time to pause and reflect.” -Mark Twain
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