UNIT 2

BANKING TRANSACTION DOCUMENTS

Commercial Banking in India

Commercial banks are the most important components of the whole banking
system.

A commercial bank is a profit-based financial institution that grants loans,

accepts deposits, and offers other financial services, such as overdraft facilities
and electronic transfer of funds.

Commercial banks are financial institutions that accept demand deposits from
the general public, transfer funds from the bank to another, and earn profit.

DRAWINGS:

A drawing account is an accounting record maintained to track money

withdrawn from a business by its owners.

A drawing account is a ledger that tracks money withdrawn from a business,

usually a sole proprietorship or partnership, by its owner(s).

ENDORSING AND CROSSING OF CHEQUES

When the maker or holder of a negotiable instrument signs the same otherwise
than as such maker, for the purpose of negotiable, he is said to endorse the
same. The person who makes an endorsement is known as endorser, while the
person in whose favor it is endorsed is called endorsee.

Essentials of valid endorsement

 It must be on the back or on the face of the instrument or on a slip of

paper attached to it.
 It must be made by the maker or holder of the instrument or by his duly
authorized agent.
 It must be signed by the maker or the holder and if by the maker, he must
sign it again then as a maker.

Crossing of cheque

A cheque is a negotiable instrument. It can either be open or crossed. An open

cheque is the bearer cheque. It is payable over the counter on presentment by
the payee to the paying banker.
A crossed cheque is not payable over the counter but shall be collected only
through a banker. The amount payable for the crossed cheque is transferred to
the bank account of the payee.

Types of cheque crossing are:

1. General Crossing

2. Special Crossing

3. Restrictive Crossing.

A crossing is an instruction to the paying banker to pay the amount of cheque to

a particular banker and not over the counter. The crossing of the cheque secures
the payment to a banker.

It also traces the person so receiving the amount of cheque. Addition of words
‘Not negotiable’ or ‘Account Payee only’ is necessary to restrain the
negotiability of the cheque. The crossing of a cheque ensures security and
protection to the holder.

Types of Cheque Crossing (Sections 123-131 A):

 General Crossing: Cheque bears across its face an addition of two

parallel transverse lines.
 Special Crossing: Cheque bears across its face an addition of the
banker’s name.
 Restrictive Crossing: It directs the collecting banker that he needs to
credit the amount of cheque only to the account of the payee.

General Cheque Crossing

In general crossing, the cheque bears across its face an addition of two parallel
transverse lines and/or the addition of words ‘and Co.’ or ‘not negotiable’
between them.

In the case of general crossing on the cheque, the paying banker will pay money
to any banker. For the purpose of general crossing two transverse parallel lines
at the corner of the cheque are necessary.

Special Cheque Crossing

In special crossing, the cheque bears across its face an addition of the banker’s
name, with or without the words ‘not negotiable’.
In this case, the paying banker will pay the amount of cheque only to the banker
whose name appears in the crossing or to his collecting agent.

Thus, the paying banker will honor the cheque only when it is ordered through
the bank mentioned in the crossing or its agent bank.

Restrictive Cheque Crossing or Account Payee’s Crossing

This type of crossing restricts the negotiability of the cheque. It directs the
collecting banker that he needs to credit the amount of cheque only to the
account of the payee, or the party named or his agent.

FILLING UP OF PAY IN SLIPS:

When you deposit money in a bank at a branch, you need to fill out a deposit
slip to direct the funds to the right account.

The process of filling out parts of a deposit slip varies depending on what
you’re doing. For example, cash and cheques go in different sections, and
getting cash back from your deposit requires an additional step.

Steps on How to Fill Out a Bank Deposit Slip:

1. Provide personal information, including your name and your account

number.
2. Fill in additional details such as the date.
3. If you are encashing the cheque, it is also required you sign the signature
line.
4. List the cash amount of your deposit, if any. This is the total amount of
currency (paper bills and coins) that you’ve brought for depositing into
your account. You’ll notice separate boxes for each entry.
5. List cheques individually, including the cheque number and amount of
each cheque. Each individual cheque gets its own line.
6. If you are depositing money but also would like some of the cashback,
list the amount of cashback you want to receive in the Less Cash
Received section.
7. Add up deposits for a subtotal. This is the total amount of
cash and cheques that you want to deposit.
ACCOUNT OPENING FORM FOR SB ACCOUNT:

APPLICATION AND PREPARATION OF DEMAND DRAFTS

The first step includes visiting the bank and asking for a demand draft form or
you can fill one through online services.
Next, you need to fill in all the necessary details such as

 Payment mode: Cheque or cash,

 Make the demand draft under whose name,
 The total amount,
 Cheque number,
 Your bank account number,
 Encashment details and
 Your signature.

You will get your demand draft once you submit the required application form
along with the services charges. Every bank has its own charge structure. You
need to find out the charge of the bank from which you are availing the demand
draft service. You can make your demand draft either at your own bank or at
any other bank.

You need to give your PAN card details if the sum total is more than Rs. 50,000

If you making a demand draft online then all you need to do is fill in all the
details and then collect the demand draft at the respective branch mentioned by
the bank. You will get your demand draft after 2-5 days by courier.

Features of a Demand Draft

 It can only be paid on demand.

 Under the act of the Negotiable Instruments Act, 1881, in section 85,
complete information has been laid out about demand drafts.
 It shouldn’t be paid to the bearer
 There is a specific amount of charge attached to the demand draft. RBI
decides services charges for demand drafts but each and every bank is
free to have their own service charges.

Preparation of Demand Drafts

Demand Draft is unlike a cheque. While a cheque takes a specified time of a

day or two to get cleared, the same cannot be said for the demand draft. There
are no codified rules as to how long the banks have to take in clearing the DD,
which is why the time taken by each bank varies. Ideally, it takes two business
days for a demand draft to be cleared.

This time can be longer in case there are any issues with the instrument. As
stated earlier, Demand Drafts are executed after several scrutinise and they are
technically drawn by a bank on another bank. In situations where the amount
has to be transferred from one bank to another, there is a possibility of it taking
longer than two days.

Difference between Demand Draft and Cheque

A Cheque is signed by an Individual and therefore there are chances that the
cheque may or may not clear. However, a DD is prepared by the Banker and as
it is signed by a banker, the chances of default are not there.

PASS BOOK

A passbook or bankbook is a paper book used to record bank or building society

transactions on a deposit account.

Credits and deposits

To add credit to an account by bringing cash to a bank in person, the account

holder can fill a small credit slip or deposit slip. The total amount of each note
and coin is counted and entered on the slip, along with who it is paid in by and
the date.

Debits and Withdrawals

Withdrawals normally requir the account holder to visit the branch where the
account was held, where a debit slip or withdrawal slip would be prepared and
signed.

CURRENT ACCOUNT AND TERM DEPOSITS

Current account

Current bank account is opened by businessmen who have a higher number of

regular transactions with the bank. It includes deposits, withdrawals, and contra
transactions. It is also known as Demand Deposit Account.

Current account can be opened in co-operative bank and commercial bank. In

current account, amount can be deposited and withdrawn at any time without
giving any notice. It is also suitable for making payments to creditors by using
cheques. Cheques received from customers can be deposited in this account for
collection.

Current account holder gets one important advantage of overdraft facility.

Features of Current Bank Account:

  Current bank accounts are operated to run a business.
 It is a non-interest-bearing bank account.
 It needs a higher minimum balance to be maintained as compared to the
savings account.
 Penalty is charged if minimum balance is not maintained in the current
account.
 It charges interest on the short-term funds borrowed from the bank.
 It is of a continuing nature as there is no fixed period to hold a current
account.
 It does not promote saving habits with its account holders.
 Banker requires KYC (Know your Customers) norms to be completed
before opening a current account.
 The main objective of current bank account is to enable the businessmen
to conduct their business transactions smoothly.
 There is no restriction on the number and amount of deposits.
 There is also no restriction on the number and amount of withdrawals
made, as long as the current account holder has funds in his bank account.
 Generally, bank does not pay any interest on current account. Nowadays,
some banks do pay interest on current accounts.

Term Deposits

Term Deposits, popularly known as Fixed Deposit, is an investment instrument

in which a lump-sum amount is deposited at an agreed rate of interest for a
fixed period of time, ranging from 1 month to 5 years. Term Deposits can be
availed at financial institutions like Banks, Non-Banking Financial Companies
(NBFC), credit unions, post offices and building societies.

Characteristics of Term Deposits

Term Deposits have unique monetary features that have made them popular
among the investment circles. The essential characteristics of term deposits are:

 Safety of investment: Since interest rates of the term deposit are not
affected by the changes in the economy, it is one of the safest investment
options available.
 Fixed rate of interest: The rate of interest for term deposits are fixed and
are not subject to fluctuations in the market.
 Choice of investment period: The investor has the freedom to choose
the tenor of the investment based on the plans offered by the financial
institution. Normally the interest rate offered by the institution will be
higher for a longer tenure.
  Interest Payment: The investor has the option to choose to receive the
interest income either on maturity or periodically; Monthly, quarterly or
yearly.
 Renewal: An investor who does not require their money on the maturity
of the term deposit has an option to renew the deposit for a fresh term. ‘
 Wealth Generation: The stable interest received on the investment
ensures that the investors’ wealth grows even during difficult times in the
market.
 Penalty on premature withdrawal: Since term deposits come with a
fixed tenor, it is considered ‘locked-in’. If the investor opts to withdraw
from the deposit before the lock-in period ends they are liable to pay a
penalty to the financial institution along with lowered interest income.
 Loan against deposit: If in a contingent situation the investor needs
financial liquidity, they can avail a loan of up to 60-75% of the deposit
amount.
 Taxation on interest: Under the Income Tax Act, the interest earned on
the deposit is taxable income and can be subject to a Tax Deducted at the
Source (TDS).
 Insurance on deposit: Under the RBI regulations, any deposit in a
certified bank is eligible for an insurance cover of up to Rs 1 lakh under
the Deposit Insurance and Credit Guarantee Corporation (DICGC).
 Low investment limit: The lower limit of investment varies as per the
financial institution, but the lower limit is generally Rs 1000. Although,
there is no upper limit on how much can be invested in term deposits.

Types of Term Deposit

 Sweep-in facility term deposit: Sweep-in is a feature that financial

institutions provide where the individual can set an upper limit on their
savings account. Any amount higher than that limit will be converted into
a term deposit. If the savings account faces deficit, then the funds will be
withdrawn from the term deposit with a loss of interest only on the funds
swept in. Sweep-in term deposits usually provide a higher interest rate.
 Cumulative and Non-Cumulative deposits: Cumulative term deposit is
an option provided for investors who don’t need regular monetary income
from the deposit. Hence, the interest earned is reinvested into the deposit
and paid out as a lump sum at the end of the period. A non-cumulative
term deposit is for investors who are looking for a regular interest payout.
With a non-cumulative term deposit, the interest will be credited in the
investor’s account at regular intervals; Monthly, quarterly or yearly.
 Short-term and Long-term deposits: These term deposits have been
classified based on the holding period of the investment. A short term
deposit has a lock-in period ranging from 1 to 12 months. Short term
 deposits are ideal for investors looking for quick returns. Long term
deposits have a lock-in period ranging from 1 to 10 years. These deposits
provide a higher interest rate than the short term deposits.
 Senior Citizen term deposits: An individual over the age of 60 years is
considered a senior citizen. Most banks or financial institutions provide a
higher interest rate on term deposits for senior citizens. Senior citizens are
also eligible for tax-saving term deposits at some banks.
 Special deposit schemes for children: There are a few special deposit
scheme aimed the welfare of children. ‘Sukanya Samriddhi Account’
launched by the government aims at improving the financial stability of
girl children above the age of 10 years.
 Post Office Time Deposit: Post offices also provide certain financial
services. One such service is the Post Office Term Deposit. It can either
be opened as an individual or joint account. One can transfer their post
office term deposit accounts from one post office to another or own
multiple accounts in the same post office.
 Tax-saver term deposits: Tax-saver deposits are eligible for a tax
deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act.

FIXED DEPOSIT ACCOUNT AND FD RECEIPTS

A fixed deposit (FD) is a financial instrument provided by banks or NBFCs

which provides investors a higher rate of interest than a regular savings account,
until the given maturity date. It may or may not require the creation of a
separate account.

Fixed deposits are high-interest-yielding term deposits and are offered by

banks in India. The most popular form of term deposits are fixed deposits,
while other forms of term deposits are recurring deposit and Flexi Fixed
deposits.

Although banks can refuse to repay FDs before the expiry of the deposit, they
generally don’t. This is known as a premature withdrawal. In such cases,
interest is paid at the rate applicable at the time of withdrawal. For example, a
deposit is made for 5 years at 8% but is withdrawn after 2 years. If the rate
applicable on the date of deposit for 2 years is 5 percent, the interest will be
paid at 5 percent. Banks can charge a penalty for premature withdrawal.

Banks issue a separate receipt for every FD because each deposit is treated as a
distinct contract. This receipt is known as the Fixed Deposit Receipt (FDR),
which has to be surrendered to the bank at the time of renewal or encashment.

Many banks offer the facility of automatic renewal of FDs where the customers
do give new instructions for the matured deposit. On the date of maturity, such
deposits are renewed for a similar term as that of the original deposit at the rate
prevailing on the date of renewal.

Fixed Deposit Receipt

A Fixed Deposit Receipt (FDR) is nothing but a document provided by the bank
after the applicant procures a fixed deposit scheme from their bank. This
document contains details such as the individual’s name, age, address, details of
the scheme chosen by them such as deposit amount, tenure and interest rate
applicable on the deposit and so on.

Components and Importance of a Fixed Deposit Receipt

A Fixed Deposit Receipt contains all the details related to the deposit option
procured by the individual. These details include:

 Name of the applicant

 Account Number of the applicant
 Amount of principal that has been placed
 Rate of Interest that is applicable
 Date of Maturity
 Amount of interest that the individual will receive on maturity
 Nominee details
 Instructions regarding maturity date such as account transfer or rollover
amount.

BILLS OF EXCHANGE

A Bill of Exchange is a written document which is duly stamped and signed by

the drawer carrying an unconditional order which directs (not commands) a
person to pay a specific amount to a particular person or to the order of the
particular person or the holder of the instrument.

A bill of exchange is a written agreement between two parties - the buyer and
the seller. It is documentation that a purchasing party has agreed to pay a selling
party a set sum at a predetermined time for delivered goods. The buyer or seller
typically employs a bank to issue the bill of exchange due to the risks involved
with international transactions. For this reason, bills of exchange are sometimes
also referred to as bank drafts.

Bills of exchange can be transferred by endorsement, much like a cheque.

Features of Bills of Exchange

The following are the features of bills of exchange:

 A bill of exchange an instrument in writing.

 It is drawn and signed by the maker i.e. drawer of the bill.
 It is drawn on a specific person i.e. drawee, to pay the specified amount.
 Contains an unconditional order to a person i.e. drawee.
 To make an instrument of value the drawee must accept it.
 The specified amount is payable to the person whose name is mentioned
in the bill or to his order or to the bearer.
 It specifies the date by which amount should be paid.
 Payment of the bill must be in the legal currency of the country.
 It must be properly stamped.
 It must bear a revenue stamp.

PROMISSORY NOTE

A promissory note is a legal, financial tool declared by a party, promising

another party to pay the debt on a particular day. It is a written agreement
signed by drawer with a promise to pay the money on a specific date or
whenever demanded.

This note is a short-term credit tool which is not related to any currency note or
banknote.

Parties of Promissory Note

All promissory notes constitute three primary parties. These include the drawee,
drawer and payee.

 Drawer: A drawer is a borrower or debtor who promises to pay the debt

to the moneylender.
 Drawee: She/He is an individual, in whose favour the note is prepared.
She/He is the creditor and provides goods or services on credit or lends
capital.
 Payee: A payee is someone to whom the payment is made.
Features of Promissory Note
1. Printed/Written Agreement

A promissory should be in writing, and an oral promise to pay money is not

accepted.

2. Pay Defined Amount

It is a promise to pay the money on a particular time or when demanded. The

mentioned amount can neither be added or subtracted.

3. Signed Documents

The document is duly signed and drawn by the drawer and stamped.

4. Unconditional Promise

The promise to pay a certain amount of money must be absolute in all cases. In
such notes, a conditional guarantee is not accepted.

5. Legal Composition

All the payment should be made in the nation’s legal currency.

6. Detailed Information

The note has all the required information including the name of the drawer and
payee, date of maturity, terms of repayment, issue date, name of the drawee,
name, and signature of the drawer, principal amount, and the rate of interest,
etc.

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