Banking is an important aid to business. Finance which is the foundation of every business activity is provided by banks. Banks are thus regarded as indispensable spokes in the wheels of commerce.
A bank may be defined as an institution which deals in money. Banks draw surplus money from the people who are not using it at the time and lend to those who are in a position to use it for productive purposes. Banker is not merely a money lender. He lends what he has borrowed from others.
There are three main types of accounts which a person can open with a bank, namely, fixed deposit, savings bank deposit and current accounts.
Fixed deposit account
A customer can deposit his money with a bank for a fixed period. Such an account is called ‘Fixed Deposit Account’ . The period in fixed deposit account usually varies from three months to five years. The amount deposited cannot be withdrawn before the expiry of the fixed period. The bank normally allows as higher rate of interest on fixed deposits. The rate of interest increases with the period of deposit.
Saving Bank Account
A saving bank account provides limited withdrawal facility and carries a moderate rate of interest on deposits. Interest is allowed on the savings bank account on the lowest credit balance kept in a particular month.
A current account may be defined as a running account between a banker and a customer. Customers can deposit money into or withdraw money from a current account whenever they like. There are no restrictions to the number of withdrawals, subject, however, to the minimum credit balance to be kept as per the rules of the bank. As a rule no interest is allowed on a current account An exception however is sometimes made if the credit balance in a current account is not allowed to fall below a prescribed figure.
In order to open a current account one has to fill in a prescribed application form. The bank usually insists on such person of business enterprise being introduced by an existing customer of the bank or other reputed businessman. If the bank is satisfied with the introductory references, then it will proceed with opening of the account. The specimen signatures of the client are usually taken or pasted on separate cards which are alphabetically filed for ready referenced to verify the signatures whenever the need arises. If a company wants to open a current account with the bank, the following documents have to be submitted to the bank:
(1) A certified copy of the resolution of the Board of Directors for the opening of the account.
(2) A copy of the certificate of incorporation and cerificate of commencement of business.
(3) A copy of the Memorandum and Articles of Association of the company.
(4) Specimen signatures of the person authorized to operate the banking account on behalf of the company.
If society or club wishes to open an account, it must submit a copy of its certificate of registration, a copy of its bye-laws, a copy of the resolution of the managing committee for the opening of the account, and the specimen signatures of the person who will operate the account. In the case of a partnership the application for the opening of the bank account is accompanied by a copy of the partnership deed.
The advantages of opening an account with the bank are :
1. The money remains with the bank in safe custody. Therefore, the risk of keeping large sums of money in the office is avoided.
2. The bank collects on behalf of the customers the amount of all cheques, bills of exchange etc. deposited in the bank.
3. The bank collects on behalf of the customer dividend on shares, interest on debentures etc. It also makes payment on behalf of the customer the premium on life insurance.
4. The bank allows interest on a certain rate on cash placed in its keeping.
5. The bank allows the customer to overdraw his account, and thus renders financial help to the customer.
6. Valuables, deeds, securities etc. can also be deposited with the bank for safe custody.
7. The payments by the merchants to the creditors are greatly facilitated as these are made by means of cheques. Also the cheques serve as an evidence of payment in case of disputes.
When the application of the customer is accepted, it issues to him:
(1) Pay-in-slip book, and
(2) Cheque book.
The old practice was to give to the current account holders a pass book, which is a copy of customers account in the ledger of the bank. The modern practice, however, is to send to the customer at the end of each month a bank return which is a copy of the customer’s account with the bank for the relative month.
Contains a number of blank pay-in- slips. These slips have perforated counterfoils. The customer who intends to deposit the money or cheque into the bank has to fill up the pay-in-slip and hand over to the cashier along with the money or cheque. The clerk signs and stamps the counterfoil which is evidence of the deposit.
When a trader wants to discharge his debts he signs a written order on his bank authorizing the bank to pay a certain sum of money-to his creditor. The order is known as ‘chcque’. A cheque may be defined as an unconditional order drawn upon a specified banker, signed by the maker, directing the banker to pay on demand a certain sum of money only to the order of a person or to the bearer of the instrument.
Cheques are drawn on printed forms made up into books and are supplied by the bank to the customer whenever required.
Parties to a Cheque
There are three parties to a cheque:
The person who draws the cheque is known as the drawer. The person in whose name the account stands is. the drawer.
The bank on which the cheque is drawn is known as the drawee. A cheque is always drawn on a bank.
The person in whose favor the cheque is made payable is the payee. If the cheque is drawn payable to self, the drawer himself would be the payee of the cheque.
Before the bank makes payment on the cheque, it ensures itself that the cheque is in order. The bank must verify the signature of the drawer. The bank ensures that amount written in words tallies with the amount written in figures. If it does not the bank is at liberty to refuse payment of the cheque. There should not be any material alteration on the cheque. All material alterations must be initialed by the drawer. The bank will also see that the customer has sufficient funds out of which the payment of the cheque is to be made. If the bank is satisfied about all these points it is only then that it will make the payment.
Bearer and Order Cheques.
A cheque may be made payable to a bearer or to order. A bearer cheque may be made payable to the bearer i.e. it can be encashed by any person who presents it to the bank for payment. The bank is under no obligation to ascertain that the payment has been made to the right person. An order cheque on the other hand is made payable to a particular person or order. An order cheque can be transferred only by endorsement and delivery.
When a cheque is to be sent through post, it is desirable to draw two parallel lines with or without the words ” & Co.” between the lines. This is called crossing the cheques. Crossed cheques cannot be encashed at the counter but can be collected only by a bank from the drawee bank. If the payee has no banking account, he must get a person possessing a bank account to cash that cheque for him. Crossing thus provides a protection and safeguard to the owner of the cheque as by securing payment through a banker it can be easily detected to whose use the money is received.
Crossing may be general or special. A general crossing is one where two parallel lines are drawn across the face of a cheque with or without the words’ & Co.’ but not including the name of a bank.
Where a cheque is crossed generally, the paying banker shall not pay it except to a banker. Sometimes the words ‘Not negotiable’ appear in crossing. These two words do not meem that the cheque cannot be transferred. It simply means that the person holding such a cheque gets no better title than that of his transferor and cannot convey a better title to his own transferee. Sometimes the words ‘Account Payee only’ are inserted between two parallel lines constituting a crossing. This is a direction to the collecting banker to collect the cheque and to place the amount to the credit of the payee only.
A special crossing is one which requires the name of the bank to be added across the face of the cheque either with or without the words ‘not negotiable’. A special crossing makes the cheque more safer than a general crossing because the payee or holder cannot receive payment except through the banker named on the cheque. Special crossing may take anyone of the following forms.
Endorsement is the act of signing a cheque for the purpose of transferring it to somebody else. Under Negotiable Instruments Act it means the writing of ones name on the back of the instrument or any paper attached to it with the intention of transferring the rights therein. A bearer cheque can be transferred by mere delivery but an order cheque is transferred by endorsement and delivery. Endorsements are usually made on the back of the cheque, though they can be made on its face as well. If, however, no space is left on the instrument, it may be made on a separate paper attached to it.
Endorsement on the cheque must be made in proper fashion, otherwise the bank will not pay it.The endorser’ must sign his name exactly as it has been written on the cheque. He must sign his name with the same spellings as already appear on the cheque. He may, if he, likes put down the correct spellings after he has signed in the manner already appearing on the cheque. Where a cheque is endorsed on behalf of a company, a firm or some other institution, the person signing the endorsement must so sign as to make it clear that he is so doing on behalf of the company or the firm and not in his personal capacity.
Dishonor of Cheques
When the bank’ refuses to make the payment of the cheque, the cheque is said to be dishonored. The cheque is dishonored due to the following reasons:
(1) When the customer has died and the bank has notice of his death.
(2) Where the customer has become insolvent or an order of adjudication has been passed against him.
(3) When the bank has received an order from the court prohibiting payment out of the funds belonging to the customer.
(4) When a customer becomes a lunatic and the banker has got notice of his insanity.
(5) Where the drawer countermands payment.
(6) When the customer has not got sufficient funds with the bank and there is no overdraft arrangement.
(7) Where there are material alterations or signatures of the drawer or endorsees are irregular.
(8) Where the cheque is presented before the ostensible date or six months after the date of the cheque.
A slip is generally attached with the dishonored cheque by the bank stating the reasons of dishonor.
Effects not cleared =The proceeds of the cheques or bills paid in by the drawer have not been collected and credited to the drawer’s account.
Payment stopped = Notice to stop payment having been received from the drawer.
Endorsement irregular = The endorsement by the payee on the back of the cheque not having been properly made.