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Banking Theory and Practice
Notes Introduction
Previous unit dealt with cash management services provided by banks to its corporate customers.
In this unit you will study all types of negotiable instruments and their various aspects.
“Negotiable instruments are written orders or unconditional promises to pay a fixed sum of
money on demand or at a certain time.” Bills of exchange, checks, promissory notes, drafts, and
certificates of deposit are all examples of negotiable instruments. Negotiable instruments may
be transferred from one person to another, who is known as a “holder in due course”. This
transfer is also known as negotiation of the instrument and upon transfer, the holder in due
course obtains full legal title to the instrument. The transferred by delivery or by endorsement
and delivery.
10.1 Cheques
A very common form of negotiable instrument is a cheque. A cheque is similar to a bill of
exchange; the only difference being that the bank is always the drawee in case of a cheque.
10.1.1 Definition of a Cheque
“Cheque is an instrument in writing containing an unconditional order, addressed to a banker,
signed by the person who has deposited money with the banker, requiring him to pay on
demand a certain sum of money only to or to the order of certain person or to the bearer of
instrument.”
The Negotiable Instruments Act, 1881 defines a cheque as: “a bill of exchange drawn on a
specified banker and not expressed to be payable otherwise than on demand.”
The person who draws a cheque is called the ‘drawer’. The banker on whom it is drawn is the
‘drawee’ and the person in whose favour it is drawn is the ‘payee’. In other terms, a cheque is an
order by the account holder of the bank directing his banker to pay on demand, the specified
amount, to or to the order of the person named therein or to the bearer.
10.1.2 Features of a Cheque
A cheque possesses the following features:
i. Cheque is an instrument in writing: Oral orders are not considered as cheques.
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Caution A cheque must be in writing.
ii. Cheque contains an unconditional order: Every cheque contains an unconditional order
issued by the customer to his bank. A cheque containing conditional orders is considered
invalid and is dishonoured by the bank.
iii. Cheque is drawn by a customer on his bank: A cheque is always drawn on a specific bank
mentioned in that. Cheque book facility is made available only to account holder who is
supposed to maintain certain minimum balance in the account.
iv. Cheque must be signed by customer: A cheque must be signed by customer, i.e. the account
holder. Unsigned cheques or cheques signed by persons other than customers are not
regarded as cheque.
v. Cheque must be payable on demand: A cheque when presented for payment must be paid
on demand. If cheque is made payable after the expiry of certain period of times then it
will not be a cheque.
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