Unit 4: Banking services
Banking Laws & Services notes · PTU syllabus (BCOP 621-18)
On this page
Unit summary
Banks pay and collect cheques, lend against security and provide many fee-based services. This unit covers payment and collection of cheques, duties of the paying and collecting banker and their legal protections, modes of creating security — pledge, hypothecation, mortgage and assignment — fund-based and non-fund-based services, and financial inclusion.
After this unit you can
- Explain the duties and protection of the paying banker
- Explain the duties and protection of the collecting banker
- Explain modes of creating charge — pledge, hypothecation, mortgage and assignment
- Explain fund-based and non-fund-based services and financial inclusion
PTU syllabus topics
- Payment and collection of cheques
- duties of paying and collecting bankers
- legal protections under the Negotiable Instruments Act
- security creation — pledge
- hypothecation
- mortgage
- assignment
- fund-based and non-fund-based services
- financial inclusion
Pledge
Movable goods
With the lender
Hypothecation
Movable goods, e.g. vehicles
With the borrower
Mortgage
Immovable property
With the borrower; lender holds rights
Topic 1
Paying banker: duties and protection
- 1
Proper form
Unconditional order, drawn on the branch
- 2
Date
Not stale (over 3 months) or post-dated
- 3
Amount
Words and figures agree
- 4
Signature
Matches specimen; mandate followed
- 5
Sufficient funds
- 6
Crossing
Pay crossed cheques only through a bank
- 7
Endorsements
Regular for order cheques
- 8
No legal bar
Garnishee order, death, insolvency, stop payment
- When payment must be stopped: customer's stop-payment instruction, notice of death, insanity or insolvency, garnishee order, notice of defect in title, closure of account.
- Protection to the paying banker: Section 85 (payment of order cheques with forged endorsement in due course; bearer cheques payable to bearer), Section 128 (crossed cheques paid in due course), Section 10 (payment in due course).
- No protection if the drawer's signature is forged — the bank bears the loss (unless customer negligence).
Topic 2
Collecting banker: duties and protection
- The collecting banker collects cheques on behalf of its customer — acts as an agent (or holder for value if it has paid in advance).
- Duties: present cheques promptly, give notice of dishonour, credit proceeds promptly (RBI timelines), exercise reasonable care.
- Statutory protection (Section 131): the collecting banker is not liable to the true owner if it collected a crossed cheque in good faith, without negligence, for a customer.
- Negligence examples: opening an account without proper KYC; collecting a cheque payable to a company into an individual's account; ignoring unusual endorsements; account payee cheque credited to another account.
Topic 3
Modes of creating security
Asset
Movable goods
Movable goods (stock, vehicles, book debts)
Possession
With the banker (pledgee)
With the borrower
Law
Section 172, Contract Act
No statutory definition (SARFAESI Section 2(1)(n))
Banker's right
Sell after notice
Convert to pledge, then sell
Risk
Lower
Higher — borrower may sell goods
Simple mortgage
Personal liability; no possession
Mortgage by conditional sale
Ostensible sale, reverts on repayment
Usufructuary mortgage
Possession and rents to mortgagee
English mortgage
Absolute transfer with re-transfer on repayment
Equitable mortgage (mortgage by deposit of title deeds)
Most common for bank loans; in notified towns
Anomalous mortgage
Combination of the above
- Assignment (Section 130, TP Act): transfer of actionable claims — book debts, life insurance policies, receivables — to the bank as security, by written instrument.
- Lien (general lien of banker), set-off and guarantees are other forms of security.
- Registration of charges with ROC (companies) and CERSAI.
Topic 4
Fund-based and non-fund-based services
| Fund-based (bank's funds deployed) | Non-fund-based (contingent, fee income) |
|---|---|
| Cash credit and overdraft | Letters of credit (LCs) |
| Term loans | Bank guarantees — performance, financial, bid bond |
| Bill purchase and discounting | Co-acceptance of bills |
| Working capital demand loans | Standby letters of credit |
| Export credit — packing credit, post-shipment | Underwriting |
| Retail loans — home, car, personal | Advisory, cash management, custodial services |
- Letter of credit: an undertaking by the buyer's bank to pay the seller on presentation of specified documents (UCP 600) — sight or usance, revocable/irrevocable, confirmed, back-to-back, revolving.
- Bank guarantee: undertaking to pay a beneficiary if the customer fails to perform an obligation.
- Non-fund exposures carry credit conversion factors in capital adequacy.
Topic 5
Financial inclusion
Financial inclusion means ensuring access to appropriate financial products and services at affordable cost to vulnerable groups, in a fair and transparent manner (RBI).
- 1
1969
Nationalisation and lead bank scheme
- 2
2005
No-frills accounts
- 3
2006
Business correspondents
- 4
2014
Pradhan Mantri Jan Dhan Yojana
- 5
2015
MUDRA, PMJJBY, PMSBY, APY; payments and small finance banks
- 6
2016 onwards
UPI, Aadhaar-enabled payments, DBT; Financial Inclusion Index (RBI, 2021)
- JAM trinity: Jan Dhan accounts, Aadhaar, Mobile — enables direct benefit transfers.
- PMJDY: zero-balance accounts with RuPay card, accident insurance, overdraft up to ₹10,000; over 55 crore accounts.
- Business correspondents (bank mitras), micro-ATMs, India Post Payments Bank extend reach.
- RBI Financial Inclusion Index rose to about 67 (March 2025).
- Challenges: dormant accounts, digital and financial literacy, cyber fraud, last-mile connectivity.
Key terms
- Paying banker
- The drawee bank that pays a cheque
- Collecting banker
- The bank collecting a cheque for its customer
- Hypothecation
- Charge on movable assets where possession stays with the borrower
- Equitable mortgage
- Mortgage by deposit of title deeds
- Financial inclusion
- Access to affordable financial services for all
Quick revision
- Paying banker checks form, date, amount, signature, funds, crossing; protection under Sections 10, 85, 128.
- Collecting banker protected under Section 131 if in good faith, without negligence, for a customer.
- Security: pledge (possession with bank), hypothecation (with borrower), mortgage (immovable), assignment (actionable claims).
- Fund-based vs non-fund-based (LCs, guarantees).
- Inclusion: PMJDY, JAM, BCs, UPI, FI Index.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.When must a paying banker refuse payment of a cheque?
- Q2.What is Section 131 of the NI Act?
- Q3.Distinguish pledge and hypothecation.
- Q4.What is an equitable mortgage?
- Q5.What is a letter of credit?
- Q6.What is the JAM trinity?
Long-answer questions
- Q1.Explain the duties and statutory protection of the paying banker.
- Q2.Explain the duties and statutory protection of the collecting banker.
- Q3.Explain the modes of creating charge over securities by banks.
- Q4.Explain fund-based and non-fund-based services and the progress of financial inclusion in India.
Stuck on this unit?
Message SBS on WhatsApp for help with Banking Laws & Services, or to ask about studying B.Com at Synetic.