Module – 2

Banking Operations
Banking Operations

Banking operations includes a wide range of activities conducted by banks to

provide financial services to individuals, businesses and governments.

Banking Operations are the specific economic activities of banking law which
involves provision of certain financial services to the clients or third party against
payments like opening new bank account, transferring money between the accounts,
accepting cheque, bills and other instrument and assisting customers with
managing their deposits.

Banking operations are dynamic and subject to technological advancements,

regulatory changes & shifts in customer preferences. The efficient management of
these operations is crucial for banks to provide reliable, secure and innovative
financial services to their diverse clientele.

The various banking operations are as follows:

 Customer services: Account Management, Customer support
 Deposits & Withdrawal: Accepting deposits, Withdrawals
 Loans & Credit: Loan origination, Credit facilities
 Payments & Transfers: Domestic transfer, International transfers
 Investment services: Mutual funds and securities, Wealth maximization
 Treasury Management: Currency trading, Risk management
 Technology & Digital Banking: Online banking, Mobile banki
 ATM Operations

Collecting banker
Collecting banker is one who undertakes to collect the amount of cheques, drafts,
bills, pay orders, letter of credit, debenture interest, dividends, etc. on behalf of
customers from the paying banker.

Collecting banker is the one who accumulates the proceeds of a cheque for the
customer. The banker who collects the cheque for the purpose of collection drawn
upon another bank from his customer is known as collecting banker.

 Duties and Responsibilities of collecting banker:

The duties and responsibilitiesof a collecting banker are:
1. Due Care and Diligence in the Collection of Cheques: The collecting banker is
bound to show due care and diligence in the collection of cheques presented to
him. In case a cheque isentrusted with the banker for collection, he is expected to
show it to the drawee banker withina reasonable time.
2. Serving Notice of Dishonour: When the cheque is dishonoured the collecting
banker is bound to give notice of the same to a customer within a reasonable time.
It may be noted here, when cheque is returned for confirmation of endorsement,
notice be sent to his customer. If he fails to give such a notice, the collecting
banker will be liable to the customer for any loss that the customer may have
suffered on account of such failure.
3. Agent for Collection: In case a cheque is drawn on a place where the
banker is not amember of the 'clearing-house', he may employ another banker
who is a member of the clearing-house for the purpose of collecting the cheque. In
such a case the banker becomes asubstituted agent.

4. Remittance of Proceeds to the Customer: In case a collecting banker has

realized the cheque, he should pay the proceeds to the customer as per his
(customer's) direction. Generally, the amount is credited to the account of the
customer. On the customer's request in writing; the proceeds may be remitted to
him by a demand draft.
5. Collection of Bills of Exchange: There is no legal obligation for a banker to
collect the bills of exchange for its customer. But generally, bank gives such
facility to its customers. Incollection of bills, a banker should examine the title of
the depositor as the statutory protection.
6. Customer service: Collecting bankers would provide excellent customer
service to clients addressing their banking needs, enquiry and concerns. This
could involves assisting with account management, explaining banking products
and offering financial advises.
7. Account management: They would manage various types of accounts for
individuals businesses and organizations this includes opening new bank
accounts processing transactions and helping customers with account related
tasks.
8. Financial advice: Depending on their qualifications and training collecting
bankers might offer basic financial advice to the clients helping them to make
informed decisions about savings, investing and managing their finance.
9. Cross selling: Collective bankers might actively promote additional banking
products and services to the clients based on their needs. This involves
complementary products like credit cards, insurance or investment opportunities.
10. Documentation and record keeping: Accurate record keeping is crucial in
banking. Collective bankers need to maintain organised and up to date records of
the customers interactions, transactions and account informations.l
 Precautions to be taken by the Collecting banker:
1. The Collecting Banker has to obtain a consent letter from the customer. It is
advisable for the banker to take an undertaking from the customer, whose
cheque has been received for a value, which the customer will reimburse the
banker, in case the cheque is dishonoured.
 2. Collecting Banker must present the cheque for payment within –a reasonable
time.
3. In case of dishonour, within the reasonable time notice has to be given
byto all the concernedendorsers.

Holder for Value

A Collecting Banker is holder for value if he gives the value of a cheque in

any form to its customers before collecting the proceeds of the cheque
deposited by the latter. He does not remain as an agent for customer but he
becomes the owner of the cheque in his own right since he has paid the value
for it and acquired the ownership right in good faith. In such situation the
banker is called holder for value.
When the collecting banker advances some amount to his customer
before realisation of his cheque, the banker becomes owner of the cheque
and he is termed as holder for value.

 A Collecting Banker becomes the holder for value in the following

ways:
 When collecting banker pays the amount or value of cheque presented
for collection even before it is cleared or collected.
 When a part of cheque amount is given to the customers by collecting
banker before its realisation or clearance.
 By giving cash over the counter for the cheque at the time it is
deposited for collection.
 By allowing the customers to draw the full amount of cheque before
its realisation.
 When the collecting banker settles the loan amount due from
customers with the cheque amount given for collection even before its
realization.
 When collecting banker reduces an overdraft with the amount for
collection before it's realization.

 Rights of Collecting Banker as holder for value:

The collecting banker undertakes risk also, when he acts as a holder for value.
He will be in difficulty if one endorsement process to be forged one. The
banker will be liable to the true owner of the cheque. However, the banker can
recover the amount from his customers.
 The proceeds of collections will be retained by the bankers.
 In case the cheque is dishonoured, the collecting banker recover the
 money paid from all or any endorser of the cheque.
 If the cheque collected had forged endorsement, the collecting banker
has the right to recover the amount from all the concerning endorsers
subsequent to forgery.

Holder in due course

A holder means any person entitled in his own name to the possessionof the
negotiable instrument and to recover or receive the amount due thereon from the
parties liable thereto. A holder must, therefore, have the possession of the
instrument and alsothe right to recover money in his own name.
A holder in due course is a person who takes the instrument in good faith andfor
value.
Holder in due course is a person who has collected the negotiable instruments
such as a promissory note, bills or cheque for a value with good faith and without
the knowledge of any apparent defect in the instruments or any notice of
dishonour.
Thus, a holder in due course must satisfy the following conditions:
1. He must have obtained the instrument for valuable consideration or value.
Consideration must not be void or illegal. The consideration must be valuable
and lawful.
2. He must have become a holder of the instrument before the date of its maturity.
3. He must have become a holder of the instrument in good faith.
4. He must have taken the instrument complete and regular on the face of it.

 Statutory Protections to the Collecting Banker:

Collecting banker must satisfy the following conditions to get the
statutory protections under section 131 of Negotiable Instrument Act.
Collecting Banker, while presenting the cheque to the paying banker to
collect amount for customer there will be a risk, to minimise the risk
and to get statutory protections the Collective bankers should follow
the below procedures:
a. Collecting for a Customer:
A banker must collect a cheque or any other form of Negotiable Instrument only
for a customer. Here, customer is predicted as one who has opened a savings
bank current account with the banker. Then also to come under the purviewof the
term "Customer", those savings or current account should have proper
introduction, asrequired by law.
b. The cheque presented to the bank for collection should be crossed generally
or specially:
In the capacity of "agent for collection", the banker collects the cheque on behalf
of his customer, that also when presented to him.
The collecting banker gets protection in case of crossed cheques under certain
conditions:
1. The cheques must be crossed before it presented for payment by the customer
who present it for collection. Should check whether the cheque is generally
crossed or specially crossed.
2. An open cheque cannot be collected or when sent for collection after
crossing by thecollecting banker he will not get statutory protection.
3. The collecting banker can get shelter under section 131 only when he collects
the cheque as a collecting agent and not as a holder for value or for a non-
account holder.
c. In good faith:
"Good Faith" means good faith on the ownership of the cheque. The collecting
banker should accept cheque for collection only on good faith i.e. there should not
be any grounds to doubt the ownership of the customer on the cheque. Otherwise,
there should not be any ambiguity on ownership of the cheque. If any doubt arises, the
bankershould clarify it, before proceeding for the collection of cheques.

d. Without Negligence:
In common terms 'Negligence' means failure to take proper care over something.
In legal terms it is a "breach of a duty of care which results in damage" On
undertaking to collect a cheque for a customer, if the collecting banker fails to
exercise utmost care in fixing the ownership of the customer on the cheque, he is
said to be negligenton his duty.

e. Agent for collection:

Section 131 gives statutory protection to the collecting banker onlywhen he acts as
"agent for collection" and not as a “hold of a value”. As an agent the collecting
banker credits the amount of the customers only after realisation of the cheque. In
such case only, he can avail the protection under 131 provided he acted in good
faith and without negligence.

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