Content/Index

 - Meaning
 - Types of Negotiable Instruments
 - Meaning and difference between different NI
 - Crossing of Cheque
 - Section 138 or penalty on dishonor of cheque
 - New age clearing System incl CTS
 - Some important concepts (Residual)
Negotiable Instrument - Meaning
 In simple words:
 Negotiable: transferable
 Instrument: a written document by which a right is
created in favor of some person

 NI: A written document creating monetary rights

which is transferable from one person to another
Types
Negotiable by statute
Negotiable by custom or usage

Section 13 of NI Act, 1881:

A Negotiable Instrument means
-a promissory note
-bill of exchange
-or cheque
-payable either to order or to bearer

(Only the above instruments are governed by NI Act. Others by

custom or usage. E.g. railway receipt, hundi, movie ticket)
Negotiable Instrument - Essentials
 In writing
 Freely transferable (by delivery OR by endorsement &
delivery)
 Payable in money + certain
 Unconditional
 Holder/ Property
 Holder in due course
 Essentials of contract
Promissory Note (Sec 4)
 A promissory note is an instrument in writing (not being a
bank-note or a currency note), containing an
unconditional undertaking, signed by the maker, to pay a
certain sum of money only to, or to the order of certain
person, or to the bearer of the instrument.
 (However PN can never be bearer as RBI Act 1934
prohibits)
Essentials
 In Writing
 Two parties (maker and payee)
 Signed by the maker
 Unconditional (on death, specific date)
 Undertaking to pay (not mere acknowledgement)
 Certain
 Sum of money only
 Payee certain and identifiable
 Currency Notes are not promissory notes
Questions/Quiz
 A signs an instrument with the following terms. Is it a
valid promissory note:
 Q. I promise to pay B or order Rs. 500
 Q. I acknowledge myself to be indebted to B in Rs. 1000,
to be paid on demand, for value received.
 Q. I promise to pay Mr. B Rs. 500 and all other sums
which shall be due to him
 Q. I promise to pay Mr. B Rs. 500, 7 days after C’s
marriage to D.
 Q. I promise to pay Mr. B Rs. 500 on D’s death.
 Ans: Y,N,N,N,Y
Bill Of Exchange (Section 5)
 Its an instrument in writing containing an unconditional
order, signed by the maker, directing a certain person to
pay a certain sum of money only to, or the order of a
certain person or to the bearer of the instrument.

 Contrast with: Promissory note (Section 4)- A promissory

note is an instrument in writing containing an
unconditional undertaking, signed by the maker, to pay a
certain sum of money only to, or to the order of certain
person, or to the bearer of the instrument.
Essentials of BoE
 In Writing
 Three parties (drawer, drawee/acceptor and payee)
 Signed by the maker
 Unconditional
 Order to pay
 Certain
 Sum of money only
 Payee certain and identifiable
 May be payable to order of a certain person or to
bearer
Questions/Quiz
 Q. What is the difference between PN and BoE?

 No. of Parties involved,

 Order Vs Promise,
 BoE can be bearer instrument,
 Drawer of BoE is creditor while maker of PN is a debtor
 Acceptance needed for BoE
Cheque (Section 6)
Cheque is a bill of exchange
- drawn on a specified banker
- And expressed to be payable only on demand
Crossing of Cheque
 General crossing – When there are 2 transverse parallel lines
drawn on the upper left-hand corner of a cheque, with or
without the words ‘and Co’, ‘not negotiable’, ‘a/c payee’, the
cheque is said to be generally crossed.
 This means that the cheque can only be deposited in a bank
account and cannot have an OTC payment

 Special Crossing – If these traverse lines contain the name of a

bank, then the cheque is said to be specially crossed.
 This means that the cheque can be deposited in the account
maintained in that bank only (to which it so crossed specially)
and no other bank.
Crossing of Cheque
 The words ‘and Co.’ have no significance as such.

 The words - “A/c payee” or “A/c payee only” written in

between the crossed lines means that it is an account payee
cheque. Such cheque can only be deposited in the payee
account. In other words, the payee cannot endorse the
cheque. This increases the security.

 The words ‘Not negotiable’ written in between the crossed

lines restrict the negotiability characteristics and mean that in
the case of transfer, the transferee will not get a title better
than that of a transferor. One should be careful while
accepting a ‘not negotiable’ crossed cheque.
Crossing of Cheque
Some rules relating to cheque
 Cheque is a bill of exchange
 Cheque does not require acceptance
 Cheque bears MICR code (Magnetic Ink Character
Recognition, pin code+bank code+branch code, RBI)
 What is IFSC code? How is it different from MICR

 Validity of cheque – 90 days from date of issue

 Only black/blue ink permitted
 Soft fold a cheque, else can be dishonored
 Can’t generally deposit a post-dated cheque as cheque is
a demand instrument.
Questions/Quiz
Please answer in true/false:

 Q. NI is only created by NI Act? T/F

 Q. NI means which can be negotiated in value. T/F
 Q. PN can be executed by a minor also? T/F
 Q. BoE is a promise to pay and has two parties? T/F
 Q. PN becomes valid only after acceptance. T/F
 Q. Every cheque is a Bill of exchange? T/F

 Ans: F,F,F,F,F,T
Dishonour of Negotiable Instruments
 Dishonour due to Non Acceptance (Sec 91)
 If a bill of exchange is not accepted by drawee or
provided a qualified acceptance its called as dishonor
due to non-acceptance.

 Dishonour due to Non Payment (Sec 92)

 The Promisor / Maker (Promissory Note) Drawee (Bill
of Exchange) Bank (Cheque) did not pay.
Dishonour of PN & BOE
 Noting of Dishonour of PN or BOE by Notary Public.

 Notice to be given by holder of PN or BOE to the

previous holder / drawer / maker of the instrument.

 File a lawsuit for recovery of Money

Dishonour of Cheque?
 Dishonour of Cheque is non payment of money by
bank on which cheque is drawn.
 Reasons for non payment of cheque by Bank
 When the customer has stopped payment
 When the customer has died
 When the customer has become insolvent
 When Bank has received a Garnishee order
• When the customer has lost the instrument and informs
bank
• When the banker has come to know of any defect in the
title of the presenter.
• Where the instrument has been materially altered.
• When the account is closed
Section 138 – Penalty for dishonor of
cheque due to Insufficiency of funds
 Inserted by NI Amendment Act, 1988
 Object: To maintain cheque as an acceptable means of
exchange by imposing criminal liability against persons whose
cheque is dishonored.
 Legal Provision
 “Where any cheque is drawn by a person for payment of any
amount of money to other person for the discharge of any debt
or liability is returned by the bank unpaid, because of the
amount of money standing to the credit of that account is
insufficient to honour the cheque, such person shal be deemed
to have committed an offence shall be punished with
imprisonment for a term which may be extended to 2 years or
fine up to twice the amount of cheque or both.”
Section 138
 Conditions:
 Cheque was issued to discharge a legally enforceable debt or
liability.
 Cheque presented to bank within its period of validity (90
days)
 Cheque dishonored due to amount standing to the credit
being insufficient or exceeding the overdraft limit agreed for
that account.
 Demand for payment made by giving a notice in writing to
drawer within 30 days of receipt of information about
dishonor
 Drawer fails to pay within 15 days of receipt of such notice
 Complaint made within 1 month of the cause of action arising
 Tried by a Metropolitan Magistrate or Judicial
Magistrate of first class, tried to be disposed within 6
months.
 Offence by companies: all person in charge of and
responsible for conduct of business + the company,
liable

 Punishment
 Imprisonment up to 2years or fine twice the amount of
cheque or both.
Statutory Protection to Bankers
 To paying Banker (Section 128):
 When the banker on whom a crossed cheque is drawn
 Has paid the same in due course (in good faith + without
negligence + in accordance with the apparent tenor (as per
instructions on the cheque))
 Drawer and bank entitled to the same right & position, as if
the cheque has been paid to the true owner.

 To Collecting Bank (Section 131)

 When a banker has in good faith and without negligence,
received payment for a customer
 of a cheque crossed generally or specially to himself
 it shall not incur any liability for the true owner of the cheque,
by reason of only having received such payment.
Quiz
Q. There is cutting in the amount of the cheque. Can a bank refuse payment?

Q. Bank comes to know its customer D has died. Can it honor cheques issued
by D before his death?

Q. A bank gets a partial garnishee order for Rs. 10,000. The customer account
has 30,000. Can it honor a cheque of 15,000?

Q. Will section 138 apply if a gift cheque get dishonored?

Q. A has issued cheque to B but since he needed funds the next day for some
other purpose, he withdrew and forgot to inform B. Now B presents the
cheque to the bank in normal course but it gets dishonored. What line of
action should B take?
Ans: Yes, No. Yes, No, 30D-15D-1 month
Clearing & Settlement System
 What is Clearing Cycle : Refers to the journey the cheque travels
during the course of clearing i.e. to ensure payment of funds
from the drawer’s account to the payee's account.

 There are two types of clearing:

 Inward – Clearing from the Drawer’s bank or Paying Bank’s

perspective. Happens when the customer of the bank has issued a
cheque. Cheque is expected to come in and funds to go out.

 Outward – Clearing from the Payee’s bank or Presenting Bank’s

perspective. When the customer of bank has deposited the cheque
of another bank in his account. The cheque goes out & money
comes in. This is called outward clearing.
CLEARING CYCLE
Clearing Process:
 The clearing process begins with the deposit of a cheque/other
clearing instruments referred above in a bank.
 The bank arranges the cheques submitted to it for clearing bank
wise and presents it in the clearing house to other banks.
 When there are more than one bank branch for a bank in the
clearing area, they would have a coordinating branch/ service
branch to take care of presenting the cheques to the clearing
house.
 Upon receipt of the cheques/other instruments, they are passed
for payment if the funds are available and the banker is satisfied
about the genuineness of the instrument.
 The cheques that are unpaid are returned to the presenting bank
through another clearing called the Return Clearing.
 The realization of the funds occurs after the completion of return
clearing and by the absence of an unpaid cheque
Settlement of Funds:
 The settlement of funds in clearing occurs at several levels.
 The aggregate amount or value of cheques presented by a bank
on other banks represents the claim by that bank on other banks.
 Similar claims are made by all the banks on every other bank in
the clearing. A net settlement is arrived at the clearing house and
the debit or credit position of the bank is determined.
 These are booked in their current accounts maintained by the
settling bank. This represents the inter- bank settlement.
 The settlement of funds between the service branch and the
branch concerned represents the transfer of funds to the branch
level.
 The payment process is completed only when the funds are
debited from the drawer’s account and credited to the payee’s
account.
 This occurs after the completion of the return clearing
mentioned earlier
New-Age Clearing Cycle
 Cheque Truncation System (CTS)
 Reserve Bank of India has introduced Cheque Truncation
System (CTS) or electronic clearing since 2008.
 In this system, the physical movement of cheques to drawer’s
bank is cut short or truncated (it is instead substituted by
transmission through electronic image).

 The Cheque Truncation System (CTS) is similar to capturing a

photograph of your deposited cheque. In lieu of physically
transporting paper cheques, CTS converts them to digital images
and data. These digital copies are sent to a central location for
processing, where they verify the authenticity of the cheque and the
account balance of the issuer of the cheque. If everything is in order,
the funds are electronically transferred,
How CTS Work
CTS Procedure
 Customer Deposit the Cheque
 Capturing Image : Cheques are scanned with advanced
scanner for taking high quality image
 Image Data Creation : Information such as A/c No, cheque
no, date, payee details extracted from image and stored in
separate file.
 Data Transmission : Data and image transmitted to
clearing house.
 Clearing House Procedure : Clearing House verify and
validates the images received and Distributes cheques to
appropriate drawee banks using MICR.
 Settlement : Drawee Bank settle the amount by making
payment to the presenter bank and customers account is
updated. Physical cheque is retained by presenter bank.
New Age Remittance System
 What is Remittance
 Remittances are the transfer of funds between parties
as a bill, an invoice, or even a gift.
 Different Remittance Systems in India
 NEFT
 RTGS
 IMPS
 National Electronic Fund Transfer (NEFT)
 National Electronic Funds Transfer (NEFT) is a nation-wide centralised
payment system owned and operated by the Reserve Bank of India
(RBI).
 National Electronic Funds Transfer (NEFT) is a payment system that
facilitates one-to-one funds transfer.
 Using NEFT, people can electronically transfer money from any bank
branch to a person holding an account with any other bank branch,
which is participating in the payment system.
 Fund transfers through the NEFT system do not occur in real-time
basis and the fund transfer settles in 23 half-hourly batches.
 It can be done offline through branches or online through net
banking mobile applications.
 Available 365 x 24 through online mode.
 Any amount can be transferred.
 https://www.rbi.org.in/commonman/English/Scripts/FAQs.aspx?Id=274
Real Time Gross Settlement (RTGS)
 Real Time Gross Settlement, is a system where there is
continuous and real-time settlement of fund-transfers,
individually on a transaction-by-transaction basis.
 Primarily meant for high value transaction above 2 lac
 Money is credited to beneficiary account immediately (real
time)
 It can be done offline through branches or online through net
banking mobile applications.
 Available 365 x 24 through online mode.
 Any amount can be transferred above 2 lacs
 https://www.rbi.org.in/commonman/English/Scripts/FAQs.asp
x?Id=275
Immediate Mobile Payment Services (IMPS)
 It is a real-time instant inter-bank funds transfer
system managed by National payment corporation of India.
 It is available through online mode only
 Money is transferred and credited to beneficiary account
immediately.
 Maximum Amount can be transferred upto ₹ 2,00,000/- to
5,00,000/- depending upon the bank.
 Available 365 x 24 including bank holidays.
Difference between NEFT vs RTGS vs IMPS
Unified Payment Interface (UPI)
 Unified Payments Interface (UPI) is a system that powers
multiple bank accounts into a single mobile application (of any
participating bank),
 merging several banking features, seamless fund routing &
merchant payments into one hood.
 It also caters to the “Peer to Peer” collect request which can
be scheduled and paid as per requirement and convenience
Features of UPI
 Immediate money transfer through mobile device round the clock
24*7 and 365 days.
 Single mobile application for accessing different bank accounts.
 Single Click 2 Factor Authentication – Aligned with the Regulatory
guidelines, yet provides for a very strong feature of seamless single
click payment.
 Virtual address of the customer for Pull & Push provides for
incremental security with the customer not required to enter the
details such as Card no, Account number; IFSC etc.
 QR Code
 Merchant Payment with Single Application or In-App Payments.
 Utility Bill Payments, Over the Counter Payments, QR Code (Scan
and Pay) based payments.
 Donations, Collections, Disbursements Scalable.
 Raising Complaint from Mobile App directly
Digital Rupee
 Digital Rupee also known as CBDC (Central Bank Digital
Currency)
 The Digital Rupee (e₹)or eINR or E-Rupee is a tokenised digital
version of the Indian Rupee, issued by the Reserve Bank of
India (RBI) as a central bank digital currency (CBDC).
 The Digital Rupee is introduced in India to enhance financial
inclusion, providing greater access to formal financial services.
 It aims to promote efficiency in transactions through faster
and more secure digital payment methods, align with the
country's technological advancements, foster a digital-first
economy, reduce dependence on physical currency, and
enable better regulatory control over monetary transactions
while countering potential illicit activities using blockchain
technology.
Types of CBDC
 CBDCs can be broadly categorized into two main
types:
• Retail CBDCs: Designed for use by the general public for
everyday transactions, similar to how cash is used today.
• Wholesale CBDCs: Intended for use by financial
institutions for interbank settlements and other wholesale
transactions.
Use of Digital Rupee
 RBI issue Digital Rupee
 Users can use digital rupee trough digital wallets
provided by authorized financial institutions.
 To load money in wallet it will be transferred from
bank account converted into digital money and loaded
into wallet.
 It can be used for making payment using mobile no or
QR code.
 Users can unload / convert digital rupee through thei
bank account.
Features of Digital Rupee
• The Digital Rupee is issued by the Reserve Bank of India and
is legally recognized as a secure form of payment accepted by
individuals, businesses, and governmental bodies.
• Issuance follows the central bank's financial policies.
• Holders have the freedom to convert Digital Rupee into
physical cash through commercial banks.
• Legal Tender: CBDCs are considered legal tender, usable for
all types of transactions.
• Central Bank Control: CBDCs are controlled and regulated by
the central bank, ensuring stability and trustworthiness.
• Programmable Money: CBDCs can have programmable
features, such as smart contracts, enabling automated, self-
executing financial agreements
Advantages of CBDC
• Financial Inclusion: Provides opportunities for those without access
to traditional banking services, allowing participation in the formal
economy.
• Reduced Transaction Costs: Eliminates intermediaries, leading to
lower transaction costs compared to traditional banking systems.
• Efficiency and Speed: Transactions are processed faster, often
within seconds, regardless of geographical locations.
• Transparency and Security: Blockchain ledger ensures transaction
transparency while maintaining security through cryptographic
protocols.
• Government Control and Regulation: Being centrally regulated, the
RBI can control the supply, circulation, and monetary policies
associated with Digital Rupee.
 Difference Between Digital Rupee and UPI

Basis Digital Rupee UPI

UPI is a way to move

Similarity Digital Rupee is money. money.
with It is a Legal Tender (Electronic form UPI applications are methods
money of sovereign currency). of transferring funds or
payment methods.

UPI is an overlay
infrastructure on top of any
Store of Digital Rupee is a store of value like
form of store value like bank
value currency.
account that encompass the
normal currency.

Money is transferred from one Money is transferred from

Transfer
digital wallet to another. one bank account to another.
 Difference Between Digital Rupee and UPI
Basis Digital Rupee UPI

Takes place according to

Settlement Instant/immediate
the settlement cycle.

Anonymity is possible due to the

Anonymity is not
Anonymity product design. It will be available in
possible.
some form in the coming months.

Form Denomination based just like physical

Amount based
factor currency

Digital Rupee in the digital wallet is

equivalent to physical cash in a Since the amount is kept
physical wallet. Once the customer in a bank account, the
Interest loads digital rupee in a digital wallet, it customer can earn
is treated as cash withdrawn from the interest on the account
bank account. Hence the customer balance.
can’t earn interest on the amount.
Endorsement (Section 15)
 When the maker or holder of a NI
 signs the same, otherwise than as such maker,
 for the purpose of negotiation,
 on the face or back thereof or on a slip of paper annexed
thereto
 he is said to have endorsed the same and is called
endorser.
Types of Endorsement
 Blank Endorsement – if the endorser signs his name only

 Full Endorsement – if the endorser adds a direction to

pay the amount to or to the order of a specified person

 Restrictive endorsements – When the endorser restricts

the right of further negotiation or limits purpose E.g. “Pay
D only”, “Pay D, for the benefit of F”
Holder in Due Course
Section 9:
 Any person
 Who for consideration
 Became possessor/payee/endorsee of a NI
 Before the date mentioned in it became payable
 Without having sufficient cause to believe that any
defect existed in the title of the person from whom he
derived title.

[For consideration + before maturity + in good faith]

Reference
 Essentials of Banking & Insurance, Dr Sunil Kumar
 Negotiable Instrument Act, 1881
https://www.indiacode.nic.in/handle/123456789/2189?sam_
handle=123456789/1362

 RBI Website on CTS clearing

https://www.rbi.org.in/commonperson/English/Scripts/FAQs.a
spx?Id=273

 Short video on Negotiable Instrument & Endorsement:

https://youtu.be/7OdoVXAjKmc?si=ZrpbS0YVj1Wj02In