Elements of Banking

& Insurance
 Banking

• Cheque
• Different means of Remittances
• Different Types of Accounts
 Insurance
• Marine Insurance
• Fire Insurance
• Privatization
 Cheque

Negotiable Instrument-
A negotiable instrument is a
(1)Written instrument,
(2)Signed by the maker or drawer of the instrument,
(3)That contains an unconditional promise or order to pay
(4)A fixed amount of money (with or without interest in a
specified amount or at a specified rate)
(5)On demand or at an exact future time
(6)To a specific person, or to order, or to its bearer
Negotiable Instrument

Cheque

Bills of
Exchange

Promissory
Note
 Cheque
• Cheque is a very common form of negotiable instrument.
• If you have a savings bank account or current account in a bank, you
can issue a cheque in your own name or in favor of others, thereby
directing the bank to pay the specified amount to the person
named in the cheque.
• A cheque is an instrument drawn on a specified banker and not
expressed to be payable otherwise than on demand Therefore, a
cheque may be regarded as a bill of exchange; the only difference is
that the bank is always the drawee in case of a cheque.
• The maker of a cheque is called the ‘drawer’, and the person
directed to pay is the ‘drawee’.
• The person named in the instrument, to whom or to whose order
the money is, by the instrument directed, to be paid, is called the
‘payee’
 Cheque
• 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.
• From the above dentition it appears that a cheque is an
instrument in writing, containing an unconditional order,
signed by the maker, directing a specified banker to pay, on
demand, a certain sum of money only to,to the order of, a
certain person or to the bearer of the instrument..
• Actually, 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
Cheque
 Features of Cheques
1. An Instrument in Writing
2. Cheque Contains an Unconditional Order
3. Cheque is Drawn by a Customer on His Bank
4. Cheque Must be Signed By Customer
5. Cheque Must be Payable on Demand
6. Cheque Must Mention Exact Amount to Be Paid
7. Payee Must be Certain to Whom Payment is Made
8. Cheque Must be Duly Dated By Customer of Bank
9. Cheque has 3 Parties : Drawer, Drawee & Payee
10. Deliveries- Delivery of the Cheque is Essential
11. The Cheque Must Bear a Date Otherwise it is Invalid and
Shall Not Be Honoured By the Bank
 Essential elements of a Cheque
1. Cheque should be written
2. Cheque is unconditional order
3. Cheque should be drawn on a specific banker
4. The amount in cheque should be certain
5. The person receiving money should be certain
6. Immediate payment on demand
7. Should bear signature of a person drawing a
cheque
 Types of Cheques
1. Open Cheque:
• A cheque is called ‘Open’ when it is possible to get cash over
the counter at the bank. The holder of an open cheque can do
the following:
• I. Receive its payment over the counter at the bank,
• ii. Deposit the cheque in his own account
• iii. Pass it to someone else by signing on the back of a cheque.
 Types of Cheques
2. Crossed Cheque:
• Since open cheque is subject to risk of theft, it is dangerous to
issue such cheques. This risk can be avoided by issuing other
types of cheque called ‘Crossed cheque’.
• The payment of such cheque is not made over the counter at
the bank. It is only credited to the bank account of the payee.
A cheque can be crossed by drawing two transverse parallel
lines across the cheque, with or without the writing ‘Account
payee’ or ‘Not Negotiable’.
 Types of Cheques
3. Bearer Cheque
• A cheque which is payable to any person who presents it for
payment at the bank counter is called ‘Bearer cheque’.
• A bearer cheque can be transferred by mere delivery and
requires no endorsement.
 Types of Cheques

4. Order Cheque:
• An order cheque is one which is payable to a particular
person. In such a cheque the word ‘bearer’ may be cut out or
cancelled and the word ‘order’ may be written.
• The payee can transfer an order cheque to someone else by
signing his or her name on the back of it.
 Types of Cheques
Anti-dated Cheques:
Cheque in which the drawer mentions the date earlier to the
date of presenting if for payment. For example, a cheque issued
on 24th March 2015 may bear a date 4th March 2015.

Post-dated Cheque: Cheque on which drawer mentions a date

which is subsequent to the date on which it is presented, is
called post-dated cheque. For example, if a cheque presented on
8th February 2015 bears a date of 27th March 2015, it is a post-
dated cheque. The bank will make payment only on or after 27th
March 2015.
The Advantages of Using a Cheque:

• More Secure form of transaction.

• Can’t be cashed at unsecure area.
• Only person that is signatory of cheque can
cash it.
 The Disadvantages of Using a Cheque:
• It can be only cashed in Bank so Must wait for
bank to open.
• There might be a certain time line or duration
when you can cheque it.
• Only person that is signed to can cash it so
physical presence is needed.
• It has been reported lost or stolen
• The cheque is a forgery or counterfeit
• A court has ordered it not be paid
Bank Draft
 Important Short Notes:

• Travelers' Cheque
• Printed Cheque
• Alteration on a Cheque
• Holder and Holder-in-due-course
• M.I.C.R. Cheque
• At Par Cheque
 Traveller’s cheque
The traveller’s cheques are useful to person who frequently travel within
the country or abroad.
Features of traveller’s cheque:-
 It can be purchased by any one. He need not be a customer of the bank.
 They are issued in different denominations printed thereon eg. Rs 50, Rs
100, Rs 500
 The purchaser has to deposit money with the issuing bank equivalent to
the amount of travellers cheque he intends to buy.
 At the time of purchase, the purchaser shall have to sign at the place
marked when countersigned below with his signature.
 At the time of enchasement, the purchaser is required to sign on
travellers cheque at the specified place and to fill in the date and place of
enchasement.
 They are usually enchasable only at the branches of the issuing bank or
at the branches of the other banks with which the issuing bank may have
arrangement.
There is no expiry period of the travellers
cheque. Unused cheques can be returned
back to the issuing bank and payment can be
obtained for them.
The travellers cheque are issued in single name
only i.e not in joint names, clubs, societies and
companies.
 Printed cheque
Printed cheque forms are supplied by banks to their customers
because this practice has several advantages:-
 Forgery becomes difficult
 Alteration can more easily be detected on a printed cheque form
than ordinary piece of paper.
 By referring to the cheque book records, a banker can easily know
the name of the drawer if the signature is not legible.
 It saves the customers trouble of drafting cheques in accordance
with the requirements of the law.
 It becomes easier to instruct the banker to stop the payment of a
certain cheque by giving him its number.
 The counterfoils in the cheque book can be used as a record of the
various payments made by the customer by means of such
cheques.
 Alteration on a cheque
An alteration can be made by the drawer which is duly
countersigned or initialled. But an alteration on a material
part of a negotiable instrument which is not signed makes
it invalid. On a cheque , alterations of date, amount, name
of payee or of any crossing would be material. therefore,
all these alterations should be signed or initialled.
A banker, however is protected if he pays a cheque with
alterations under the following circumstances:-
 If the alteration is not apparent
 If the payment is according to the apparent tenor of the
instrument
 Holder and Holder-in-due-course
The holder of the negotiable instrument means any
person entitled in his own name to the
possession thereof and to receive or recover the
amount, due thereon from the parties thereto”.
Before a person can claim to be a holder of a
negotiable instrument two things are necessary:
1. He should be entitled in his own name to the
possession of the instrument
2. He should have the right to recover the amount
due thereon from the parties
 Holder in due course
• Holder in due course means any person who for consideration
became the possessor of a promissory note, bill of exchange or
cheque, if payable to bearer, or to payee or endorsee thereof,
if payable to order before the amount mentioned in it became
payable and without having sufficient cause too be believed
that defect existed in the title of the person from whom he
derived his title.
• Conditions:
• He obtained the instrument for valuable consideration
• He became holder of the instrument before its maturity i.e
before the amount mentioned in it became payable.
• He must become a transferee after excercising due care and
caution.
 M.I.C.R. Cheque
With a view to speed up the cgheque clearing process,
both local as well as intercity, the reserve bank of india
has introduced mechanised cheque processing system
using MICR(Masgnetic Ink character recognition).
Technology initially in the four ,merterolpoitian cities
mumbai, kolkata, chennai, newdelhi.
Under this system , the cheques are processed at high
speed on machines. Bank issues cheque, draft and other
payment instrument in MICR format using the special
quality paper and printing specifications. On MICR
instruments, there is code line at the bottom containing
information printed in magnetic ink, which is required
for mechanical processing.
• Benefits of MICR Technology
 The chances of errors are minimized because
the instruments are read by the machines
 The transfer of funds between two banks is
fast and easy
 The work of clearing becomes easy
 The manual working of the staff members has
been reduced
 At Par Cheque
The cheque which is recovered at its face value9
or amount) is said to be at an par cheque. Eg.
The cheque issued by an UTI mutual fund
towards the interest or dividend of mutual
fund in at par cheque.
 Endorsement of Cheque
• When the maker or holder of a negotiable
instrument signs the same, otherwise then as
such maker, for the purpose of negotiation on
the back or face thereof or on a slip of paper
annexed, or so signs for the same purpose a
stamped paper intending to be completed as
negotiable instrument, he is said to endorse
the same.
Essentials of Endorsement
 Types of Endorsement

• Blank or General
• Full or Special
• Restrictive
• Partial
• Conditional
• Facultative
Types of Endorsement
Types of Endorsement
Types of Endorsement
Types of Endorsement
Types of Endorsement
 Crossing of cheques
Crossing is an instruction given to the paying banker
to pay the amount of the cheque through a banker
only and not directed to the person presenting it at
the counter. A cheque bearing such an instruction
is called a crossed cheque, others without such
crossing are open cheques which may be enchased
at the counter of the paying banker as well.
The crossing on a cheque is intended to ensure that
its payment is made to the right payee.
 Types of crossing/ modes of crossing

1. General crossing
2. Special crossing
 General crossing
“where a cheque bears across its face an addition of
the words “ and company” or any abbreviation
thereof, between two parallel transverse lines or
of two parallel transverse lines simply, either with
or without words, “ not negotiable”; than
addition shall be deemed a crossing and the
cheque shall be deemed to be crossed generally.”
The simplest mode of crossing is to put parallel lines
across the face of the cheque. This is normally
known as general crossing.
 Payment of cheque crossed generally
Where a cheque is crossed generally, the banker
on whom it is drawn shall not pay it otherwise
than to a banker.
Effect:-a cheque crossed generally will be paid to
any bank through which it is presented. The
effect of such crossing is to make the cheque
payable to the collecting banker i.e the paying
banker is precluded from paying cash for the
cheque across the counter.
Significance of general crossing
Not negotiable crossing
Restrictive Crossing
 Clearing system
The clearing process starts with the deposit of a
cheque/ other clearing instruments in bank 1.
the bank 1 arranges the cheques submitted to
it for clearing bank wise and presents it in the
clearing house. Upon receipt of the cheques/
other instruments, they are passed about the
genuineness of the instrument. The said
cheque/ other clearing instruments is then
passed for payment to the beneficiary
customer in bank 2.
Central clearing house: the clearing house is a
voluntary associations of banks under the
management of a bank where the settlement
accounts are maintained. Wherever reserve
bank of india has its office 9 and a banking
department . The clearing house is managed
by it. In the absence by the state bank of india,
its associate banks and in a few cases by public
sector banks.
Settlement banks: the aggregate amount or
values of cheques presented by a bank 1 on
bank 2 represents the claim by that bank 1 on
bank 2. similar claims are made by all the
banks on every other banks in the clearing. A
net settlement is arrived at the clearing house
and the debit or credit position of bank is
determined. These are booked in their current
accounts maintained by settling banks.
 Traditional clearing
Here, the banker should collect the cheque, sent by the
customer, with due care and should present the cheque
to the drawee bank with reasonable time. According to
the practice followed by bankers if the cpollecting and
paying bankers are in the same place, the collecting
banker should present the cheque the next day after he
receives it. I case of outstation cheques, he should
despatch the same to the drawee banker on the day
after it is received by him. The cheque may also be
presnted through house or through the post.
 Three day clearing
In three days clearing a typical cheque is credit
to the beneficiary’s bank account on the 3
working day, here 1st day would be the day of
deposit of cheque, 2nd day clearing and 3rd day
crediting the same.
 Clearing of MICR CHEQUES
With a view to speed up the cgheque clearing process, both local
as well as intercity, the reserve bank of india has introduced
mechanised cheque processing system using MICR(Masgnetic
Ink character recognition). Technology initially in the four
,merterolpoitian cities mumbai, kolkata, chennai, newdelhi.
Under this system , the cheques are processed at high speed on
machines. Bank issues cheque, draft and other payment
instrument in MICR format using the special quality paper and
printing specifications. On MICR instruments, there is code line
at the bottom containing information printed in magnetic ink,
which is required for mechanical processing.
 FEATURES OF MICR CHEQUE
i)Size:
for saving bank account the size of the cheque is
61/2” * 21/2”. Same is applicable to gift
cheques and travelers cheques.
For current account, cash credit accounts, drafts
size of cheque is 8” * 3.66”.
ii) Quality of paper: weight of paper should be
95 grams per sq.meter width.
 MICR codeline
• MICR instruments, there is code line at the
bottom containing information printed in
magnetic ink, which is required for mechanical
processing.
• First three represents city code
• Next three represents bank code
• The last three digits represent the branch code
 Cheque processing with MICR CODE
It is the name of the technology using which code is
printed hence known as MICR code which is printed
with special kind of ink or tonner with specific font.
This ink is readable due to the presence of the
magnetic material , when cheque is inserted in
reading machine, it can read MICR code even if there
are other marks or stamps on it. Thus machine can
identify which bank it belongs to.
This helps a lot in automating the cheque clearing
process and less chances of error as it is automated.
 MICR Equipment
Encoder: this machine is installed at branch amd MICR centre.
It is a small machine which is meant for encoding the
cheques in magnetic ink. It encodes the required
information/ date in magnnetic ink.the amount of all the
cheques which have been encoded is listed separately and
the printout of the total amount is also available.
Reader’/ sorter:-this machine performs following functions-
It reads the info9rmation printed in the magnetic ink on MICR
Band
This machine sorts out the cheques city wise, branchwise
All cheques are listed and printout of the cheques is available.
 Benefits of MICR technology
 The chances of errors are minimized because
the instruments are read by the machines
 The transfer of funds between two banks is
fast and easy
 The work of clearing becomes easy
 The manual working of the staff members has
been reduced
 Precautions to be observed in the use of
MICR Instrument
 It should not be folded
 Nothing should be written on band of codes
 No rubber band should be affixed on the
bandline.
 Pins, staples and gum should be avoided.
 Micr technology: how much successful

 It is costly
 This facility is in limited cities of india.
 Precautions are to be taken in handling of the
instruments at customers level.
 Cheque truncation system-CTS
It is defined as a cheque which is truncated
during the courses of clearing cycle, either by
the clearing house or by the bank, whether
paying or receiving payment, immediately on
generation of an electronic image for
transmission, substituting the further physical
movement of the cheque in writing.
 Characteristics of cheque truncation
 It is an electronic image of a paper cheque
 Only the banks involved and the clearing house can truncate
the cheque
 The electronic image of the “ cheque truncation’ will substitute
the physical cheque from the point and time of truncation
onwards.
 Truncation is to be done only during the course of clearing cycle
to reduce the time taken for reliastion.
 The paper cheque, after truncation, is to be kept in the custody
of the bank/ clearing house that truncated the cheque.
 Addition of digital signature of the truncating bank/ clearing
house to the electronic image of cheque truncation is optional
 Ways of truncation
 Using MICR DATA- during encoding at the
collecting bank, the amount as well as payees
name is inserted in the MICR line. The entire MICR
line is captured electronically. The electronic
information is then exchanged with other for
clearing.
 Using Image Processing- it involves scanning of
both sides of the cheque and storing the image in
digital form. The cheque itself is moved to some
offsite storage and the image is used for further
processing.
 Benefits of CTS
• Shorter Clearing Cycle
• Superior verification and reconciliation
process
• No geographical restrictions as to jurisdiction
• Operational efficiency for banks and
customers alike
• Reduction in operational risk and risks
associated with paper clearing
 precautions
Banks should exercise care while stamping the cheque
forms, so that it does not interfere with the material
portions such as date, payees name, amount and
signature.
The use of rubber stamps should not overshadow the
clear appearance of these basic feature of image.
It is necessary to ensure that all essential elements of a
cheque are captured in an image during the scanning
process and banks/customers have to exercise
appropriate care in this regard.
Current status of a cheque truncation in India

The RBI has implemented CTS I the national capital

region(NCR), New Delhi and Chennai with effect from
February 1, 2008 and September 24, 2011.
After migration of the entire cheque volume from MICR
system to CTS, the traditional MICR based cheque
processing has been discontinued in these two locations.
Grid based CTS clearing has been started in Chennai.
CTS has also been implemented in western grid covering
20 mice centre's of maharatra, Gujarat, mp, Chandigarh
and Goa.