Banking is an important aid to business. Finance which is the foundation of every business activity is provided by banks. Thus banks are considered indispensable spokes in the wheels of commerce.
A bank can be defined as an institution that deals in money. Banks take surplus money from those who are not using it at that time and lend it to those who are in a position to use it for productive purposes. A banker is not just a moneylender. He lends what he has borrowed from others.
There are three main types of accounts that a person can open with a bank, namely fixed deposits, savings bank deposits and current accounts.
fixed deposit account
A customer can deposit his money in the bank for a fixed period. Such an account is called a ‘Fixed Deposit Account’. The tenure of a fixed deposit account usually ranges from three months to five years. The amount deposited before the expiry of the stipulated period cannot be withdrawn. The bank usually allows a higher rate of interest on fixed deposits. The interest rate increases with the tenure of the deposit.
savings bank account
A savings bank account offers limited withdrawal facilities and a moderate rate of interest on deposits. Interest is allowed on the minimum balance in the savings bank account maintained in a particular month.
current account
A current account can be defined as an ongoing account between a banker and a customer. Customers can deposit or withdraw money from the current account whenever they want. There is no restriction on the number of withdrawals, however, minimum credit balance should be maintained as per the rules of the bank. As a rule no interest is allowed on a current account. An exception is however sometimes made if the balance in a current account is not allowed to fall below the prescribed figure.
A prescribed application form has to be filled for opening a current account. The bank usually insists on such person from business venture to be introduced by an existing customer of the bank or other reputed businessman. If the bank is satisfied with the introductory references, it will proceed with the account opening process. Specimen signatures of the customer are usually obtained or affixed on separate cards, which are entered alphabetically for ready reference to verify the signatures when required. If a company wishes to open a current account with a bank, the following documents have to be submitted to the bank:
(1) Certified copy of the resolution of the Board of Directors for opening the account.
(2) A copy of the certificate of incorporation and certificate of commencement of business.
(3) A copy of the Memorandum and Articles of Association of the company.
(4) Specimen signature of the person authorized to operate the bank account on behalf of the company.
If the society or club wishes to open an account, it shall submit a copy of its certificate of registration, a copy of its bye-laws, a copy of the resolution of the managing committee for opening the account and specimen signatures. The person who will operate the account. In case of partnership, a copy of partnership deed is attached with the application for opening of bank account.
The advantages of opening an account with a bank are:
1. Money remains with the bank in safe custody. Hence the risk of keeping large sums of money in the office is avoided.
2. The bank collects the amount of all cheques, bills of exchange etc. deposited in the bank on behalf of the customers.
3. Bank collects dividend on shares, interest on debentures etc. on behalf of the customer. It also pays the premium for life insurance on behalf of the customer.
4. The bank pays interest at a fixed rate on the cash kept with it.
5. The bank allows the customer to overdraw his account, and thus provides financial assistance to the customer.
6. Valuable articles, deeds, securities etc. can also be deposited in the bank for safe custody.
7. There is great convenience in making payments to creditors by merchants as these are done through cheques. Checks also serve as proof of payment in case of disputes.
When the client’s application is accepted, it issues him:
(1) Pay-in-slip book, and
(2) Check book.
The old practice was to give a pass book to current account holders, which is a copy of the customer’s account in the bank’s ledger. However, the modern practice is to send a bank return to the customer at the end of each month, which is a copy of the customer’s account with the bank for the relevant month.
pay-in-slip book
This includes several blank pay-in-slips. These leaflets have perforated leaflets. The customer who wants to deposit money or check into the bank has to fill in the pay-in-slip and hand it over to the cashier along with the money or cheque. The clerk signs and stamps the counterfoil, which is proof of deposit.
Cheque Book,
When a merchant wants to pay off his debts, he signs a written order on his bank authorizing the bank to pay a certain amount to his creditor. The order is known as ‘chcque’. A check can be defined as an unconditional order drawn on a specified banker, signed by the maker, instructing the banker to pay only a certain amount to the person to the order or the holder of the instrument pay the
Checks are drawn on printed forms and prepared in books and supplied by the bank to the customer as and when required.
side of the check
There are three sides to a check:
(1) Drawer.
The person who draws the check is called the drawer. The person in whose name the account is held. shelf.
(2) Drawee
The bank on which the check is drawn is known as the drawee. A check is always drawn on a bank.
(3) Payer.
The person in whose favor the check is payable is the payee. If the check is payable to self, the payee of the check shall be the payee of the cheque.
Before making payment on a cheque, the bank makes sure that the check is in order. The bank should attest the signature of the drawee. The bank ensures that the amount written in words matches with the amount written in figures. If this does not happen, the bank is free to refuse payment of the cheque. There should not be any material change on the cheque. All material changes must be initialed by the drawer. The bank will also see that the customer has sufficient funds out of which the check is to be paid. If the bank is satisfied with all these points then only it will make the payment.
bearer and order check,
A check may be made payable to a bearer or order. Bearer check can 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 not bound to ensure that the payment is made to the correct person. On the other hand an order check is payable to a particular person or order. Order checks can be transferred only by endorsement and delivery.
crossing check
When a check 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 checks cannot be cashed over the counter but can only be collected by the bank from the drawee bank. If the payee does not have a banking account, he should meet someone with a bank account to encash the cheque. The crossing thus provides a safety and security to the owner of the check as by securing the payment through a banker it can be easily traced for whose use the money has been received.
Crossing can be general or special. A normal crossing is one where two parallel lines are drawn on the face of the check with or without the words ‘& Co.’ But the bank name is not included.
Where a check is generally crossed, the payee shall not pay it except the banker. Sometimes the words ‘not negotiable’ appear at the crossing. These two words do not mean that the check cannot be transferred. It simply means that the person holding such a check does not have superior title to its transferor and cannot convey superior title to the transferee on his own. Sometimes the words ‘Account Payee only’ are inserted between the two parallel lines forming the crossing. It is an instruction to the collecting banker to receive the check and credit the amount to the credit of the payee only.
A special crossing is one in which the name of the bank is required to be added to the front of the check either with or without the words ‘not negotiable’. A special crossing makes the check more secure than normal crossing because the payee or holder cannot receive payment through the banker named on the cheque. Special crossing may take any of the following forms.
Approval
Endorsement is the act of signing a check for the purpose of transferring it to someone else. Under the Negotiable Instruments Act, it means that someone’s name is written on the back of the instrument or on any paper attached thereto with the intention of transferring the rights therein. Bearer check can be transferred only by delivery but order check is transferred by endorsement and delivery. Endorsements are usually made on the back of the check, although they can also be made on the check itself. However, if no space is left on the instrument, it may be made on a separate paper attached to it.
The endorsement on the check must be done in a proper manner, otherwise the bank will not pay it. The endorser should sign his name exactly as it appears on the cheque. He should sign his name in the same spelling as it is already written on the cheque. If he wishes to write the correct spelling after signing the check in the manner already displayed, he may do so. Where a check is endorsed on behalf of a company, a firm or any other institution, the person signing it should make it clear that he is doing so on behalf of the company or firm and that his Not in personal capacity.
dishonor of checks
When the bank refuses to honor the cheque, the check bounces. A check gets dishonored due to the following reasons:
(1) When the customer dies and the bank receives intimation of his death.
(2) Where the subscriber has become insolvent or an order of adjudication has been passed against him.
(3) When the bank has received an order from a court restraining it from making payments out of funds belonging to the customer.
(4) When a customer becomes insane and the banker gets information about his insanity.
(5) Where the drawer contests the payment.
(6) When the customer does not have sufficient funds with the bank and does not have an overdraft facility.
(7) Where there are material changes or the signatures of the drawer or endorsers are irregular.
(8) Where the check is presented before the date of its appearance or six months after the date of the cheque.
A slip is generally attached to the dishonored check by the bank, mentioning the reasons for dishonor.
Effect Not Cleared = The proceeds of the checks or bills paid by the drawer have not been collected and deposited into the account of the drawer.
Stopped Payment = Intimation to stop payment on receipt of payment from the drawer.
Endorsement Irregular = The endorsement has not been done properly by the payee on the reverse of the cheque.
