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Short notes

Subordinate Debt/subordinated loan/subordinated bond/subordinated debenture/junior debt

subordinated debt is a debt which ranks after other debts should a company fall into liquidation or bankruptcy. Such debt is referred to as 'subordinate', because the debt providers (the lenders) have subordinate status in relationship to the normal debt.

A typical example for this would be when a promoter of a company invests money in the form of debt rather than in the form of stock. In the case of liquidation (e.g. the company winds up its affairs and dissolves), the promoter would be paid just before stockholders — assuming there are assets to distribute after all other liabilities and debts have been paid.

Subordinated debt has a lower priority than other bonds of the issuer in case of liquidation during bankruptcy, and ranks below the liquidator, government tax authorities and senior debt holders in the hierarchy of creditors. Because subordinated debts are repayable after other debts have been paid, they are more risky for the lender of the money. The debts may be secured or unsecured, but have a lower ranking priority than that of any senior debt claim on the same asset.

Subordinated loans typically have a lower credit rating, and, therefore, a higher yield than senior debt. While subordinated debt may be issued in a public offering, major shareholdersand parent companies are more frequent buyers of subordinated loans. These entities may prefer to inject capital in the form of debt, but, due to the close relationship to the issuing company, they may be more willing to accept a lower rate of return on subordinated debt than general investors would.

Subordinated bonds are regularly issued as part of the securitization of debt.

1 a. Describe the main functions of a Commercial Bank?

An institution which carries on the business of banking i.e. accepting deposits and lending money including providing ancillary services. Normally it provides to the needs of trade and commerce mainly. Functions of Commercial Bank are divided into five categories such as:

** General Functions:

- To receive deposits of various types

- To make advance/investment against or without securities

- To create deposits

- To create medium of exchange through cheque, draft , pay order etc

- To issue guarantees

- To discount bills

**Foreign Exchange Functions:

- To make correspondent banking with overseas Banks

- To place foreign currency funds with correspondents abroad

- To issue Letter of Credit

- To issue Back to Back Letter of Credit

- To amend L/cs

- Acceptance of Bill of Exchange and make payment

- To extend investment to

- the importers through creating PAD/LTR?LIM etc

- Sale and purchase of foreign currency

- Maintaining foreign currency accounts

- Inward foreign remittance

** Agency Functions:

- To collect funds and makes payment for the clients

- To work as representative of Central Bank

- To work as Trustee

- To receive rent, dividend, premium etc

- To make payments for utility charges and insurance premium on behalf of the client

- To maintain confidentiality of customers

** Welfare Functions:

- Social welfare functions/ corporate social responsibility

** Other Functions:

- Underwriting

- Work as safe custody through Locker service

- Advice the clients on business matters

- Leasing

- Sale of Prize bond & different kinds of welfare lottery

- Syndication, arrangement of funds

1.b) Discuss the role of Commercial Bank in the economic development of a country:

Commercial banks play an important and active role in the economic development of a country. If the banking system in a country is effective’, efficient and disciplined, it brings about a rapid growth in the various sectors of the economy. The economic significance of commercial banks is given in brief.

Trade Development: The commercial banks provide capital, technical assistance and other facilities to businessmen according to their need, which leads to development in trade.

Agriculture Development: Commercial banks finance the most important sector of the developing economics i.e. agriculture, short, medium and long-term loans are provided for the purchase of seeds and fertilizer, installation of tube wells, construction of warehouses, purchase of tractor and thresher etc.

Industrial Development: The countries, which concentrated on industrial sector made rapid economic development. South Korea, Malaysia, Taiwan, Hong Kong and Indonesia have recently developed their industrial sector with the help of commercial banks.

Capital Formation: Commercial banks help in increasing the rate of capital formation in a country. Capital formation means increase in number of production units, technology, plant and machinery. They finance the projects responsible for increasing the rate of capital formation.

Development of Foreign Trade: Commercial banks help the traders of two different countries to undertake business. Letter of credit is issued by the importer’s bank to the exporters to ensure the payment. The banks also arrange foreign exchange.

Transfer of Money: Commercial banks provide the facility of transferring funds from one place to another which leads to the growth of trade.

More Production: A good banking system ensures more production in all sectors of the economy. It increases the production capabilities of the economy by strengthening capital structure and division of labor

Development of Transport: The commercial banks financed the transport sector. It has reduced unemployment on one hand and increased the transport facility on the other hand. Remote areas are linked to main markets through developed transport system.

Safe Custody: The business concerns and individuals can make themselves tension free by depositing their surplus money in banks. The banks also provide them the facility of lockers to keep their precious articles and necessary documents safe.

Increase in Saving: Commercial banks persuade the people to save more. Different saving schemes with attractive interest rates are introduced for this purpose. Number of bank branches is opened in urban and rural areas.

Construction of Houses: Commercial banks provide credit facilities to their customers for the purchase or construction of houses.

Assistance to Government: By providing funds to government for development programs, the commercial banks share the government for economic stability.

Increase in Employment: A country’s economic prosperity depends on the development of trade, commerce industry, agriculture, transport and communication etc. These sectors are financed by the commercial banks and employment opportunities are increasing.

Saving in Metallic Reserve: Cheques and drafts etc works like money. In this way the need of precious metals to make coins reduces and metallic reserve of the country can be utilized on other important matters

Credit Creation: Commercial banks are called the factories of credit. They advance much more than what the collect from people in the form of deposits. Through the process of credit creation, commercial banks provide finance to all sectors of the economy thus making them more developed than before.

Proper use of Money: People deposit their saving in the banks, so the scattered money becomes a huge amount in the way, which can be used for different projects in a proper way.

Financial Advices: Commercial banks also give useful financial advices to promote the business of their customers, besides credit facilities.

Increase in Investment: Commercial banks mobilize savings of the people. They make them available to the farmers, traders and industrialists for the development of agriculture, trade and industry.

Success of Monetary Policy: Under the supervision of central bank, all scheduled commercial banks make effort for the success and objectives of monetary policy. This joined effort of commercial banks makes the economic development possible.

Use of Modern Technology: The use of modern technology in less developed countries is only possible in the presence of developed commercial banking as it can be the main source of their funds.

These funds are utilized for the import of modern technology from developed countries.

Export Promotion Cells: In order to boost the exports of the country, the banks have established export promotion cells for the information and guidance to the exporters.

Economic Prosperity: Economic prosperity of a country depends on number of factors including the development of commercial banking. A sound banking system promotes the economic status of the people by providing them short, medium and long-term loans.

Training Center: Commercial banks established many trading centers for their employees to modernize the banking system of a country. In this way the banking experts enhance their abilities and contribute towards the development of country.

1.c)**How does Central Bank control money supply & Credit?

Ans: Following instruments/ techniques are using by the Bangladesh Bank to pursue the monetary policy:-

a. Government Treasury Bill auctions: Weekly auctions of 28 days, 91 days, 182 days, 364 days and 2 years Government Treasury Bills are main instruments for monetary management for Bangladesh Bank.

b. Call Money Market: Transactions and volumes in the call money market have grown significantly over the years representing increasing dependence of some of banks on money market liquidity.

c. Repo Auctions: To facilitate liquidity management on a day to day basis, BB introduced daily repo auctions in FY03 to enable banks to place bids for funds collateralized by T- bills. The BB accepts the bids to the extent needed to maintain the intended level of market liquidity, in decreasing order of interest rates quoted for the repo operations.

d. Reverse Repo Auctions: As counterpart to Repo auctions the BB also introduced Reverse repo Auctions in which the banks submit offers of their excess funds, which BB accepts in ascending order of interest rates to the extent needed to maintain the intended level of liquidity.

e. Bangladesh Government Treasury Bond Auctions: the auctions held every after two months for 5years and 10 years maturity Government T-Bonds bearing half yearly interest coupons are being used as the auxiliary instruments for governments debt and monetary policy.

f. Activation of Secondary Market in Government Debt: In continuation of the policy of activating full fledged secondary trading in T-bills and other government securities, BB has appointed 09 primary dealers. The primary dealers are required to participate in T-bill auctions on regular basis.

Following ways BB control credit: The main instruments of selective credit control are:

a. Minimum margins for lending against selected commodities

b. Ceilings on the levels of credit

c. Charging of minimum rate of interest on advances against specified commodities

d. Bank Rate: Whenever BB wants to reduce credit the bank rate is raised and whenever the volume the volume of Bank credit is to be expanded the rate is lowered.

e. Open Market Operations: BB can influence resources of commercial bank by buying or selling Government securities in open market. If BB buys government securities in the market from commercial banks, there is a transfer of cash from BB to Commercial Banks and this increase the cash base of the commercial Banks enabling them to expand credit and conversely if BB sells government securities to the commercial banks therefore cash base is reduced.

f. Variable Reserve requirement: BB is legally authorized to raise or lower the minimum reserves that the commercial banks must maintain against their total deposit. It has got the power to use the variable reserve requirements as an instrument of monetary control.

1.d)** Describe briefly the role of a Central Bank as the “Lender of the Resort”?

Ans: Central Bank act as lender of last resort by extending credit to depository institutions or to other entitles in unusual circumstances involving a national or regional emergency. Commercial Banks borrow money in the form of deposits and then lend those to others. In case Commercial Banks need further funds they can approach Central Bank for discount of bills. The Central Bank of a Country is the last resort of the borrowersby allowing discounting facilities at the bank rate. A lender to whom borrowers may approach when all other lending sources are failed.

2.a. Describes the main functions of a Central Bank:?

Main functions are describes as follows:

-To formulate and implement monetary policy

- To formulate and implement intervention policies in the foreign exchange market

-To hold and manage the official foreign currency reserves of Bangladesh

- The central Bank acts as banker to the Government: Central Bank has the obligation to transact the banking business of the Government.

-The central Bank acts as a banker to the commercial Bank: The commercial Banks keep deposits with Bangladesh Bank and they borrow money from Bangladesh Bank when necessary.

- Central Bank manages the Monetary Policy & Credit Policy of Bangladesh.

-Central Bank is the lender of the last resort of commercial banks: central Bank provides such accommodation to Banks in cases of extreme emergencies.

-Central Bank continuously monitors the activities of Commercial Bank

-Central Bank rates Commercial Bank through CAMELS(Capital, Asset, Management, Earnings, Liquidity, And Sensitivity to market risk)on the basis of their performance.

-Central Bank manage the clearing House of the Commercial Banks for inter Bank transactions

- Central Bank introduces the Core Risk Management guidelines on five major risks.

- Central Bank regularly monitors the loan rescheduling, loan loss provisioning, single borrower exposure limit etc to reduce the non performing loans of Commercial Banks

-Central Bank protects money laundering activities.

2. b. What are the different instruments used by the Bangladesh Bank to pursue its monetary policy: Following instruments/ techniques are using by the Bangladesh Bank to pursue the monetary policy:-

a. Government Treasury Bill auctions: Weekly auctions of 28 days, 91 days, 182 days, 364 days and 2 years Government Treasury Bills are main instruments for monetary management for Bangladesh Bank.

b. Call Money Market: Transactions and volumes in the call money market have grown significantly over the years representing increasing dependence of some of banks on money market liquidity.

Following ways BB control credit: The main instruments of selective credit control are:

a. Minimum margins for lending against selected commodities

b. Ceilings on the levels of credit

c. Charging of minimum rate of interest on advances against specified commodities

d. Bank Rate: Whenever BB wants to reduce credit the bank rate is raised and whenever the volume the volume of Bank credit is to be expanded the rate is lowered.

2.c)** Describe briefly the role of a Central Bank as the “Lender of the Resort”?

Ans : Central Bank act as lender of last resort by extending credit to depository institutions or to other entitles in unusual circumstances involving a national or regional emergency. Commercial Banks borrow money in the form of deposits and then lend those to others. In case Commercial Banks need further funds they can approach Central Bank for discount of bills. The Central Bank of a Country is the last resort of the borrowersby allowing discounting facilities at the bank rate. A lender to whom borrowers may approach when all other lending sources are failed.

b. What do you understand by a bank-customer relationship?

bank	customer	Issue
agent	principle	Instrument payment & collection
Bailee	Bailor	Using locker service for valuable items
pledgee	pledgor	Moveable property taking as security
Mortgagee	Mortgager	Unmovable property taking as security
Lessor	Lessee	Lessing premises or locker to customer
Trustee	Beneficiary	Deposit valuables in bank for safe custody
Executer
attorney
guarantor

Banker and Customer Relationship

• The relationship between the banker and customer is very important. Both serve the society to grow and the economy to expand.

It is generally studied under the following two heads.

– General Relationship

– Special Relationship

General Relationship

• Debtor and Creditor:

• The true relationship between banker and customer is primarily of a debtor and creditor.

• When a customer deposits money with a bank, the bank then is the debtor and the customer is the creditor.

• The customer expects from the bank that

– His money will be kept safe by the bank

– It will be returned on demand within business hours

– The money will be intact and safe and will give some thing by the way of return (interest).

• The position is reversed if the customer is advanced loan then the banker becomes creditors and the customer is debtors.

Special Relationship

• Principal and agent:

• The special relationship between the customer and the banker is that of principal and agent.

• The customer (principal) deposits checks, drafts, dividends for collection with the bank.

• He also gives written instructions to the bank to purchase securities, pay insurance premium, installments of loans etc on his behalf.

• When the bank performs such agency services, he becomes an agent of his customer.

Bailer and Bailment relationship

• A bailment is the delivery of goods in trust. A bank may accept the valuables of his customer such as jewellary, documents, securities for safe custody.

In such a case the customer is the Bailer and the bank is bailee

• The bank (bailee) charges a very small amount as service charges for safe custody of the valuables from his customer (bailer).

This relationship between the bank and the customer as bailee and bailer started from the days of earlier goldsmiths

Pawner and Pawnee:

• When a customer Pledge goods and documents as security for an advance he then become Pawner (Pledger) and the bank becomes the pawnee (pledgee).

The pledged goods are to be returned intact to the pawner after the debt is repaid by him.

Mortgager and Mortgagee relationship:

• Mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan.

When a customer pledges a specific immovable property with the bank as security for advance, the customer becomes mortgager and banker is the mortagee

Bank as a trustee

• The bank act as a trustee for his customer in those cases where he accept securities and other valuables for safe custody.

• In such cases the customer continues to be the owner of the valuables deposited with the bank.

Executer, attorney, guarantor

The bank also acts as executor, attorney and guarantor for his customer.

RIGHTS AND DUTIES OF THE CUSTOMER TOWARDS THE BANKER*********

The main rights and duties of a customer towards the banker in brief are as under:

Rights of a customer:

A customer who has deposited money can draw check on his account up to the extent of his credit balance or according to overdrawing limit sanctioned by the bank.

– A customer has the right to receive statement of accounts from the bank.

– A customer has the right to sue the bank for compensation of a wrongful dishonor of his check.

– A customer has a right to sue and demand compensation if the bank fails to maintain the secrecy of his account.

Duties of a customer:

– It is the duty of the customer to present checks and other negotiable instruments during the business hour of the bank.

– The instruments of credit should be presented by the customer with in due time from their dates of issue.

– A customer must keep the check books issued by the bank in safe custody. In case of theft or loss, it is the duty of the customer to report the matter immediately to the bank.

– A customer should fill the check with utmost care.

If a customer find any forgery in the amounts of the check issued by him. It should then immediately be reported to the bank.

RIGHTS AND DUTIES OF THE BANKER TOWARDS THE CUSTOMER

• Duties or obligations of a banker towards the customer

To honor a customer’s check:

The banker is to honor the check of the customers provided the check are:

– Properly drawn

– The customer has balance to his credit

– The loan contract has been signed

– There is no legal bar or restriction attaching to the customer’s funds.

Standing orders

• It is the duty of the bank to abide by the standing orders of the customers in making periodical payments on his behalf such as club, library, insurance premium etc.

Secrecy of the customer’s account:

• The bank owes a contractual duty not to disclose the customer’s financial position without his consent.

• However the obligation of secrecy is not considered essential on the following occasions.

–When a banker is required to give evidence in the court.

–When there is national emergency and disclosure is essential in the public interest.

–When there are clear proofs of treason to the state

When a consent is given by the customer to provide information for the preparation of balance sheet.

Garnishee order
(order of the court):

It is the duty of the banker to abide by the order of the court (garnishee order) and attached the funds of the customer to the creditors who has obtained the order in his favor.

Rights of a banker:

Right to set off:

It is a right of the banker to adjust his outstanding loans in the name of the customer from his credit balance of any of the accounts he is maintaining with the bank.

Right to charge interest, commission etc:

– It is the right of the banker to charge interest commission etc according to the rates for the services the banker has rendered to the customer as agent, trustee etc.

What is meant by Bankers right of set ff?

Right of Set-Off

Right of set-off is an statutory right and is available to any creditor even in the absence of express agreement.

Right of set-off means, where a customer has credit balance in one of his accounts and debit balance in another, the banker has a right to adjust credit balance with the debit balance and to arrive at the net sum due. Such right is known as right of set-off.

Set off is right to combine two or more accounts having debit and credit balance (in same or different branches).

· It is not defined in any Act.

· It can be exercised only where there is relationship of debtor & creditor and creditor & debtor simultaneously. The deposit and loan should be due and lawful (law of limitation does not apply). Available for the deposit of guarantor (after serving a recall notice on him). On a term deposit which has not matured, it is available but it can be exercised only when FDR matures.

· Right can be exercised before meeting the garnishee order or attachment order.

· It cannot be exercised, if the deposit is held as trustee, if held jointly (and loan is in single name), if held by partnership firm (loan in partner’s name).

POSITION OF AVAILABILITY OF RIGHT OF SET-OFF TO BANK

Deposit in the name of	Loan in the name of	Status of availability of right
Single person	Jointly with others	Available
Particle in a firm	Partnership Firm	Available
Single name	Same name	Available
Proprietor	Proprietorship Firm	Available
Joint Account	One of joint holder	Not Available
Partnership Firm	One of partners	Not Available
Trust	Trustee	Not Available
Trustee	Trust	Not Available
Dividend a/c of Co.	Loan a/c of co.	Not Available
Minor (u/g.ship a/c)	Guardian	Not Available
Single person	Single person but different capacity say trustee	Not Avai

Banker’s lien:

Banker’s lien is an enforceable right of a bank to hold in its possession any money or property belonging to a customer and to apply it to the repayment of any outstanding debt owed to the bank, provided that, to the bank's knowledge, such property is not part of a trust fund or is not already burdened with other debts. Banker’s lien is both a possessory lien and a special lien. The bank has the right to seize and sell the defaulting borrower’s property in its possession, after giving a reasonable notice but without going through the foreclosure procedure. Enforcement of a banker’s lien, however, may depend on the type of the property and the reason it was handed over to the bank. Bills of exchange, credit-cash balance, negotiable securities and promissory notes may be claimed under this lien. However, the borrower’s property handed over to the bank for a specific purpose, such as for safe custody for sale through a department of the bank cannot be claimed under banker’s lien.

Lien is creditor’s right (given by debtor) to retain the possession of goods and securities owned by the debtor until the loan has been paid. Lien is not available on deposits.

· Types: Two types of Lien – Particular Lien (u/s 170) available for a series of loans.

· Banker’s Lien: General lien (u/s 171) available to Bankers. It is called implied pledge, due to which right of set off is available.

· Where available: Banker can exercise lien (a) where possession is given by borrower to secure the loan (b) loan is due and lawful, (c) reasonable notice is given, (d) the loan and security is in the same name and same capacity.

· Negative lien- It is an undertaking by the owner of assets for not selling certain assets and not creating any charge on these assets without permission from the creditor. It has no legal force has a moral value only

The limitations on the Banker’s Lien are:

1. The bank does not have a lien on cheques paid into the bank for collection. The bank may have a lien on a cheque it collects for a customer who has an overdrawn account one of which is overdrawn but the payment is to an account in credit the bank may appropriate the cheque and pay it in to the overdrawn account.

2. The lien does not apply to securities kept in safe custody.

3. The lien does not apply to securities, which are held by the customer as a trustee

4. The lien does not arise if there is an agreement to the contrary between the bank and the customer.

Right to lien:

– A banker has the right to retain the property belonging to the customer until the debt due from him has been paid.

What are the difference between private limited &Public limited company?

Public Limited Company	Private Limited Company
A company is called private limited when all its shares are in private hands. Pvt Ltd Company is owned by a group of promoters	On the other hand, the shares in a Public Limited company are open to everyone. The company is not in the hands of a few promoters but the public owns it.
A Private Limited company is a partnership firm.	where as Public Limited company is a full-fledged corporate body.
The shares of a Limited company are listed in the stock exchange.	whereas it is not in the case of Private Limited Company.
Public LTD company simply follow the govt rules and implement as per govt.	Pvt. ltd is wholly private follow the rules and regulation of govt. but implement as its own rules.
whereas in public limited company number of share holders should be minimum 7 but for maximum there is no limit.	In a private limited company number of share holders is between 2 to 50.
where as in LTD there have a govt appoint person.	In Private CEO/ chairman is the owner of the co.
Audit of account is must by performed in Public Ltd.

3. a. What do you understand by Money Laundering: Money Laundering is generally considered as the practice of engaging in financial transactions to conceal the identity, source, and or destination of illegally gained money by which the proceeds of crime are converted into assets which appear to have a legitimate origin. Money Laundering occurs over a period of three steps, which include the physical distribution of the cash (Placement), the second step, involves carrying out complex financial transactions in order to camouflage the illegal source (Layering), and the third step, which involves acquiring wealth generated from the transactions of the illicit funds (Integration)

3. b. Why is it necessary to prevent money laundering:Money laundering is need to prevent because of following reason:

- To resist criminal activities

- For protecting integrity and stability of financial system,

-Preventing the illegal money transfer to abroad

- Money laundering diminishes government tax revenue

-it devastating our economic, social environment

3. c. How can a banker discharge his responsibilities to prevent money laundering particularly in the context of the law currently in force:

Under Act 25the banker can discharge following responsibilities to prevent money laundering.

- Preserving correct and full information of all the clients

- In case of the termination of relationship the records of transaction must be preserved for at least five years

-Providing the records so preserved to Bangladesh Bank on demand

- Providing information to Bangladesh Bank on abnormal transactions and doubtful transaction which are likely to be related to money laundering.

- Proper risk categorization while opening the bank account

-Up to date KYC fill up

-Monitoring the transaction of the customer where there is any inconsistency with the declared transaction profile by the customer.

- Providing cash transaction report

-Providing suspicious transaction record to Bangladesh Bank.

Cheque

a. What is a cheque? Describes its main characteristics:?

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. 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 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. 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 favor it is drawn is the ‘payee’. 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.

A cheque may be defined as an unconditional order in writing drawn on a banker signed by the drawer, requiring the banker to pay on demand a sum certain in money to or to the order of a specified person or to bearer and which does not order any act to be done in addition to the payment of money.

From the above definitions it appears that an instrument to be a cheque must have the following characteristics:

- It has to be three parties i.e.

- a. Drawer: the party by whom or by whose authority the cheque is signed,

- b. Drawee: the party authorized to pay out the money (banker),

- c. Payee: the party who is to receive the money.

- It must be a unconditional order

- It is an instrument in writing form

- The maker must sign the instrument

- The cheque must be drawn on a specified bank.

- The order must be for certain sum of money only.

- Account must be payable on demand

- Payee of the must be certain.

Material Parts of cheque:

 Name of your bank which is also called the "drawee bank" or paying bank

 "Account Payee Only" crossing is a directive to the collecting bank to pay into the account of the payee

 Payee is the person to whom the cheque is to be made. Ensure that the name of the person is correctly spelt and written close to the words "pay to". Draw a line on the space after the payee's name to avoid alteration

 Date of the cheque. To be able to receive payment, the date must be the current date

 The person who holds and presents the cheque at the bank. It is advisable to cross out "or bearer" to avoid any stolen cheque from being paid out

 The payment amount written in words. The same value will be written in the box beside it. Ensure that the amount in words and figures are written close to the words "Ringgit Malaysia" and "RM" printed on the cheque. Do not leave any gap by drawing a line after them. Make sure that the amount in words and in figures tally, otherwise, the bank will return the cheque

 Your signature as the "drawer" of the cheque

 Serial number of the cheque. Each cheque has a different number for identification purposes

 Thedrawee bank's state and branch code

 Your current account number

 Thedrawee bank's internal code for current account product.

Difference between Open Cheque& Crossed Cheque:

Open Cheque: Cheque which is not crossed and can be cashed anywhere and freely transferable from one person to another without any bar.

Crossed Cheque:Suchcheques are not paid cash over the counter. Crossed cheques are to be deposited into the accounts maintained in a bank which collects the proceeds on behalf of the customer. The cheque is crossed by two parallel lines are drawn across the face of a cheque.

What is a stale Cheque? Can payment be made against a stale Cheque: A Stale Cheque is a cheque that has grown so old or is dated so far back that bankers may refuse to cash it because it is out of date. A cheque may be considered slate after 6 months.

No payment can’t be made against a stale cheque. After expiry of 06 months from the date of the cheques they become stale or out of date, which is not paid by any bank and hence these are returned unpaid requiring the drawer’s confirmation.

##post datedcheques?

Ans: A post dated check is a check on which the issuer has stated a date later than the current date. The issuer does this in order to delay payment to the recipient, while the recipient may accept it simply because the check represents a firm date on which it will be able to deposit the check. This situation represents a risk to the check recipient, since the passage of time may result in there being no cash left in the issuer's bank account to be used to pay the amount listed on the check when it is eventually presented to the bank for payment.

For example, ABC International receives a $500 check payment from a customer for an unpaid invoice on April 30. The check is post dated to May 15. ABC should not record the cash receipt until May 15, nor should it reduce the related accounts receivable balance until May 15. Thus, the post dated check has no impact on the financial statements of ABC International until the date listed on the check.

Realistically, the recipient of a post dated check may never notice that the check has been post dated, and so will record and deposit it at once. The bank is also unlikely to notice the date on the check. In this situation, the check is considered a negotiable instrument, irrespective of the date, and it is likely that the recipient wil receive cash from the bank prior to the date on the check. In such a situation, it is allowable for the check recipient to record a post dated check upon receipt of the check.

Auditors do not like to see post dated checks, since it implies that a business is short on cash, and is attempting to pay bills later than it should. If an auditor sees an ongoing pattern of check post dating, there would be an inclination to delve more deeply into company finances, and perhaps state a going concern issue in the audit opinion that accompanies the financial statements.

A cheque which bears of future date is called post datedcheque. Under this circumstances bank will not pay a post datedcheque till the date thereon arrives.

The risks involved in payment of post datedcheque before the due date are the possibility of the cheque being countermanded , possibility of wrongful dishonor to subsequent cheque issued by the customer and occurrence of customer’s death, bankruptcy etc before the date of the cheque.

Undated Cheque:

No bank will pay an undated cheque. If a cheque is issued without a date, the person receiving it may write in the date on which it was issued - the cheque will not be invalid merely because the drawer omitted to write in the date. No person other than the drawer may change the date written on the cheque.

A cheque bearing a non-existent date, say 31 November, is normally paid on or after the nearest actual date preceding it - 30 November in the example. A cheque that has a long-expired date - usually more than six months previously in the case of personal cheques and three months in the case of company cheques - will not be paid out by the bank, but will be returned to the payee as being stale' or out of date'.

A cheque containing a future date, known as a post-dated cheque', will not be met by the bank on which it is drawn until that date arrives.

Stopping payment

If you wish to stop a cheque, in other words if you want to instruct your bank not to meet the cheque when it is presented for payment, you should do so in writing. The bank will normally ask you to sign a form exempting it from any liability if it overlooks your instruction and pays out the cheque. You are not obliged, however, to sign this and the bank must accept your instruction to stop the cheque.

The words excluding liability' or something similar appearing in the form presented by the bank should be crossed out. The bank may then be held liable if it overlooks your instruction.

A cheque on which payment has been stopped will be returned to the payee with the words payment stopped'.

On the face of it stopping a cheque is a fraudulent act, but a drawer who has a good reason for doing so would not be found guilty of fraud. It would be fraudulent, for example, to stop a cheque for perfectly satisfactory goods or services, with the intention of avoiding payment. However, if you are dissatisfied with goods or services you will be acting legally in stopping payment until the shopkeeper or dealer has dealt satisfactorily with your complaint. If the dispute cannot be satisfactorily resolved, it will be up to the dealer to sue for payment in full, just as for any other debt.

The dealer could, however, also lay a charge of fraud and it would then be up to you to show that you have a good defence.

Generally, a cheque is both an instruction to a bank to pay a payee a certain sum of money and an acknowledgment by a drawer that the payee is owed the sum stated in the cheque. Therefore, the payee may normally sue the drawer on the basis of the cheque alone, not referring to the original transaction such as the contract of sale underlying it, and may obtain a judgment compelling the drawer to pay. Therefore, if you stop payment of a cheque you should be sure that you are acting within your rights.

Difference between Bearer Cheque and Order Cheque:

Order cheques are cheques written to be paid to a specific person or entity (the payee) named in the cheque. Bearer cheques are cheques written to be paid to the person who holds the cheque (the bearer). An “order cheque” can be a “bearer cheque” if the words “or bearer” are not cancelled out. Sometimes, the cheque may be issued to pay “Cash". This is called a cash cheque. In general, issuing of cash cheques is not encouraged as they are exposed to risk of fraud. Some banks may charge a fee for encashment of third party cheques.

Holder in due course

Legal term for an original or any subsequent holder of a negotiable instrument (check, draft, note, etc.) who has accepted it in good-faith and has exchanged something valuable for it. For example, anyone who accepts a third-party check is a holder in due course. He or she has certain legal rights, and is presumed to be unaware that (if such were the case) the instrument was at any time overdue, dishonored when presented for payment, had any claims against it, or the party required to pay it has valid reason for not doing so. Also called protected holder, or bona fide holder for value.

PAYMENT IN DUE COURSE:

A cheque is discharged by payment in due course, that is to say payment made by the drawee-banker to the of the cheque in good faith and without notice that his title to the cheque is defective. The holder to
whom payment is made may be the payee, an indorsee or the bearer according to the nature of the instrument, or the way in which it has been indorsed. A thing is deemed to be done in good faith where it is in fact done honestly, whether it is done negligently or not.

In ordinary circumstances, a cheque drawn in proper form, and complete in every particular, must be paid or refused payment as soon as it is presented. But it the circumstance connected with its presentation are such as to raise reasonable suspicious in the banker would also be entitled to postpone payment it the cheque were drawn in an unusual manner or bore upon its face peculiarities that would raise doubts in and ordinary person's mind as to the genuineness of the order.

b. What is a crossed cheque/ What do you understand by Crossing of a cheque: drawing of two parallel and transverse lines with or without the words across the face of the negotiable instrument is called crossing. It is the instruction given to the paying banker to pay amount of the cheque through a banker only and not directly to the person presenting the same at the counter. Generally crossing is given on the left hand top of the instrument, it may be written, stamped, printed or perforated.

c. What do you mean by general and special crossing: General Crossing:Section 123 of the Negotiable Instruments Act 1881, defines ageneral crossing as follows:“Where a cheque bears a cross its face an addition of the words ‘& company’ or anyabbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines simply either with or without the words ‘not negotiable’ that addition shall be deemeda crossing and the cheque shall be deemed to be crossed generally.”

Some specimens of general crossings are given side show picture:

It is to be noted from the above that the drawing of two parallel transverse lines on theface of the cheque constitutes “General Crossing.” The lines must be (a) on the face of thecheque, (b) parallel to each other, and (c) in cross direction (i.e.,transverse). Inclusion of words ‘and company’ is immaterial and of no special consequence.The effect of general crossing is that the cheque must be presented to the paying bankerthrough any other banker and not by the payee himself at the counter. The collecting bankercredits the proceeds to the account of the payee or the holder of the cheque. The latter maythereafter withdraw the money.

Special Crossing

Section 124 of the Negotiable Instruments Act 1881,

defines a special crossing as follows:“Where a cheque bears a cross its face, an addition of the name of a banker, either withor without the words ‘ not negotiable’, that addition shall be deemed a crossing, and thecheque shall be deemed to be crossed specially, and to be crossed to that banker.” Followingare given specimens of special crossing:

The Special Crossing on the cheque is a direction to the paying banker to honorthecheque only when it is presented through the bank mentioned in the crossing and no other bank. The cheque crossed specially thus becomes more safe than the generally crossedcheque. The banker, to whom a cheque is specially crossed, may appoint another banker as his agent for the collection of such cheques.Besides the above two types of crossing, in recent years, the following types of crossing have been developed:

1.“Not Negotiable” Crossing

2.Restrictive Crossing or Account Payee Crossing

3.Double Crossing

Significance of Crossing:

In the case of general crossing, the addition of the words “& Co.” does not have any legalsigniﬁcance; but the words “not negotiable” have legal signiﬁcance. By crossing a chequegenerally the person who is not entitled to get its payment, is prevented from getting thecheque cashed at the counter of the paying banker.

While in the case of special crossing,the name of the banker must be written on the face of the cheque, to whom or to whosecollecting agent, payment of cheque is to be made. It is to be noted that the lines are not essential for a special crossing. By crossing a Cheque specially, it is quite safer than the generally crossed cheque. In such a case the banker to whom a cheque is crossed specially,may appoint another banker as his agent for the collection of such cheques. Such chequesmay be sent through ordinary post

d. What do you meant by material alteration of a cheque? Why is it so important for a banker?

Alteration

A cheque may be altered by the drawer or by a third party after it is drawn. For example, thedate of cheque may be altered or the amount payable may be altered. Alteration may be madegenuinely or fraudulently. Alterations may be material or immaterial.

Material Alteration

An alteration is regarded as material when it alters materially or substantially the operationof the instrument and liabilities of the parties thereto. It is deﬁned as “an alteration whichalters the business effects of the instrument if used for any business purpose.” So any changein an instrument which causes it to speak a different language in legal effect from that whichit originally spoke, or which changes the legal identity or the relation of the parties to it, isa material alteration.

Examples of Material Alterations

Material alterations refer to change of the date, place of payment, amount, payee’s name,crossing etc. The following are some of the examples of material alteration:

(a) Alteration of the date of the instrument.

(b) Alteration of the sum payable.

(d) Alteration of the name of the payee.

(e) Alteration of the crossing marks.

(f) Alteration in the rate of interest.

Examples of Authorised Alterations

Under the Negotiable Instruments Act, 1881, the following do not amount to materialalterations:(a) Filling blanks of the instrument.(b) Conversion of blank endorsement into an endorsement in full.(c) Making acceptance conditional.(d) Altering a general crossing into a special crossing.(e) Crossing of an uncrossed cheque.(f) Alteration made with the consent of the parties.

Effects of Material Alteration

A cheque containing material alteration cannot be regarded as a cheque at all. A chequewitherasers and alterations is not valid against the banker. Under the Indian law such a chequeis void. According to Section 87 of the Negotiable Instruments Act “any material alterationrenders the instrument void against anyone who is a party thereto, and who has not consentedto such alteration.” So a banker who ﬁnds a cheque materially altered in its contents hastodishonour it, unless it is duly attested by the full signature of the drawer. Such refusal topay will not amount to wrongful dishonour. Sheldon says “the banker can honour a chequewhich bears the drawer’s conﬁrmation of any alteration.” Material alterations are to beauthenticated by the drawer. But the banker cannot refuse to pay a cheque whose alterationsare not of material signiﬁcance, or which are authorised by Act or which are made with theconsent of the parties. If a banker pays a cheque bearing unauthorised alterations, he cannot debit the drawer’s account and is liable to the true owner. The case illustrating the point isSlingsly and others VsThe West Minister Bank Limited.The banker should take all precautions to see that the cheque is free from materialalterations before paying it. The banker should carefully scan the cheque with the help of the magnifying glass or other mechanical appliances of forgery detection to see that theamount is not altered. However, the paying banker gets protection where the alterationis apparently not noticeable and the payment is made in due course. The paying bankeris also protected, from wrong payment of an altered cheque if the customer is found to have negligently drawn the cheque. It is the duty of the drawer also to draw the chequeswith great care. In Macmillan Arthur Vs London Joint Stock Bank it was stated that “theCustomer is bound to exercise care in drawing the cheque in such a way as not to givescope for alteration.”From the above discussion, it is clear that in order to discharge the parties liable on theinstrument as cheque, an alteration should be a material one and none authorised by the Act and it should also be apparent on the face of the instrument

** A Demand Draft issued by your bank on any of your branches is lost before it reaches the payee. As a banker what steps you will follow when the purchaser demands his money back:

When the Demand Draft is lost a banker can issue a duplicate Demand Draft in lieu of original draft on receipt of application from the purchaser of the draft. Following procedures and formalities have to be done for issuance of duplicate DD:

· The purchaser of the DD has to submit a written application along with a copy of General Diary (G.D.) stating that the purchased DD has been lost and requesting the bank for issuing a duplicate one in lieu of the original

· After receiving the application from the purchaser of the DD , the concerned bank official will verify the signature of the applicant with the original DD application kept with the branch

· Then the DD which has lost has to be marked in the DD issuing register.

· Then the DD issuing branch will immediately issue a stop payment instruction to the drawee branch under intimation to the Head Office.

· Confirmation regarding nonpayment of the lost DD has to be obtained from the drawee branch.

· Head Office, upon receipt of such lost instrument intimation letter from the issuing branch, issues caution circular to all branches regarding loss of the draft asking them to confirm nonpayment of the instrument as well note the same in their lost instrument register for future reference as an extra caution.

· After getting reply from all the branches within stipulated time regarding nonpayment of the instrument and caution marking in their lost instrument register, Head Office issues a permission letter to the issuing branch of the DD for issuing a duplicate DD.

· Getting the approval from HO the issuing branch of the lost DD obtains an indemnity/ protection bond from the purchaser of the DD indemnifying all sorts of future loss and damage due to issuance of the duplicate DD.

· After that the branch issues a duplicate DD marking caution on the face of the DD stating that “Duplicate issued in lieu of Original draft no. …………….Dated………………… for Tk………………” in red ink.

· A note regarding issuance of Duplicate DD has to be made in the DD issuing register and a letter regarding this issuance has to be sent to the drawee branch.

· Since an advice has already been issued for the original DD to the draweebranch, no further advice has to be issued for the duplicate one.

· Charge for issuance of duplicate DD has to realize from the applicant as per tariff schedule.

a. What do you mean by a Collecting Bank?

Ans: The Bank which collects the proceeds of cheques, drafts, pay orders and bills etc from other Banks for deposit into accounts of its customers is called a Collecting Bank.

Discuss the duties and responsibilities of a Collecting Bank

The collecting Bank acts as an agent of his customer and is responsible to him for his acts of omission or mistakes. The duties of a collecting banker towards his customer as follows:

-Presentation of cheques for payment within reasonable time:The banker should collect the cheques sent by the customers, with due care. As per Section-74, they must present the cheques to the drawee bank within a reasonable time. According to the practice followed by bankers, if the collecting and paying bankers are in the same place, the collecting banker should present the cheque before the next clearing immediately after he received. In case of outstation cheques, he should dispatch the same to the drawee banker on the same day after it is received by him. The cheque may also be presented through a clearing house or through the clearing house or through the post.

-Notice of dishonor: In case a cheque is dishonored and returned back by the paying banker to the collecting banker without payment for one reason or the other, the banker must serve a notice of dishonor on his customer to enable the latter to claim the amount from the previous parties including the drawer. If the banker fails to send such notice within a reasonable time, he will be liable to the customer for any loss suffered by him as a result of such omission on the part of the banker. It is to be noted that a cheque is deemed/ consider/ suppose to be dishonored when its payment is refused by the paying banker. But a cheque returned for confirmation of the endorsement of the payee etc, is not deemed as dishonored.

##Are there different kinds overdrafts?

Yes, there are authorised and unauthorised overdrafts.

An authorised overdraft is one where your bank has agreed that you can have an overdraft, which exists for you to take advantage of at any time within an agreed period, up to an agreed amount. It costs you nothing in interest charges if you do not use it.

If, on the other hand, your account goes overdrawn without the banks permission or you exceed the limits set in an authorised overdraft, then this is an unauthorised overdraft.

The bank is not obliged to give you an unauthorised overdraft. As a general rule, when you do not have an authorised overdraft in place, then any cheques or withdrawals for a sum higher than the amount available in your account can be 'bounced' - that is, the bank may not honour them and will probably make a charge for returning the item.

Banks generally encourage customers to agree overdrafts in advance whenever possible.

c. When does a collecting bank lose his protection under the Negotiable Instrument Act 1881?

Ans: According to the section 131 of the N.I. Act “a banker who has in good faith and without negligence received payment for a customer on a cheque crossed generally or specially to himself, shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only having received such payment” This section, no doubt, gives ample protection, in normal circumstances, to the banker who collects cheques on behalf of his customers so long as a cheque happens to be crossed generally or specially to himself when he receives it. He will however not get any protection if the cheque is received uncrossed and the banker puts the crossing himself. In other words this statutory protection is available to a banker only in the case of a “crossed” cheque. In case of an ”uncrossed” or “open”cheque, the collecting banker’s position is that of any other holder for value or holder in due course. Again a banker will be protected only if the collection of the cheque is made on behalf of a customer in the case of collection for a person who is not a customer of the bank, he will not be protected.

6. a. Define Negotiable Instrument” according to N. I. Act 1881: According to section 13 of the Negotiable Instruments Act , A written freely transferable document which creates a right in favor of some person. A Negotiable Instruments is “one the property in which is acquired by anyone who takes it bonafide and for value, even though any defect in the title of the person from whom he took it.”

** Discuss the salient features of a Negotiable Instruments:

The followings are the salient features of the Negotiable Instrument:

- Property in it passes from hand to hand by mere delivery

- The holder in due course is not affected by the defects in title of its transferor or previous holders

- The holder in due courses can sue/go to court in his own name.

- The holder in due course is not affected by certain effect, which might be available against previous holders i.e. fraud to which he is no party.

- It passes from hand to hand like cash and can be conviently assigned in discharge of debts.

6. b. What are the instruments that fall under the purview of the Act1881: According to the Negotiable Instruments Act 1881, the following three are main instruments:

Promissory Note: An instrument in writing containing an unconditional undertaking signed by the maker to pay on demand or at a fixed or determinable future time, a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.

A promissory note is a legal instrument (more particularly, a financial instrument), in which one party (the maker or issuer) promises in writing to pay a determinate sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms. If the promissory note is unconditional and readily salable, it is called a negotiable instrument.

Referred to as a note payable in accounting (as distinguished from accounts payable), or commonly as just a "note", it is internationally defined by the Convention providing a uniform law for bills of exchange and promissory notes, although regional variations exist. Bank note is frequently referred to as a promissory note: a promissory note made by a bank and payable to bearer on demand. Mortgage notes are another prominent example.

Bill of Exchange: Bill of exchange is a written acknowledgement of a debt, written by the creditor and accepted by the debtor. A written, unconditional order by one party (the drawer) to another (the drawee) to pay a certain sum, either immediately (a sight bill) or on a fixed date (a term bill), for payment of goods and/or services received. The drawee accepts the bill by signing it, thus converting it into a post-dated check and a binding contract.

A bill of exchange is also called a draft but, while all drafts are negotiable instruments, only "to order" bills of exchange can be negotiated. According to the 1930 Convention Providing A Uniform Law For Bills of Exchange and Promissory Notes held in Geneva (also called Geneva Convention) a bill of exchange contains: (1) The term bill of exchange inserted in the body of the instrument and expressed in the language employed in drawing up the instrument. (2) An unconditional order to pay a determinate sum of money. (3) The name of the person who is to pay (drawee). (4) A statement of the time of payment. (5) A statement of the place where payment is to be made. (6) The name of the person to whom or to whose order payment is to be made. (7) A statement of the date and of the place where the bill is issued. (8) The signature of the person who issues the bill (drawer). A bill of exchange is the most often used form of payment in local and international trade, and has a long history- as long as that of writing.

Cheque : A cheque is drawn on a specified banker and not expressed to be payable otherwise than on demand.

There are some of the instruments which possess the characteristics of negotiability, which are:

- Government securities

- Dividend Warrants

- Bank Drafts

- Share warrants

- Hundis

Bill of Entry
A Bill of Entry also known as Shipment Bill is a statement of the nature and value of goods to be imported or exported, prepared by the shipper and presented to a customhouse. The importer clearing the goods for domestic consumption has to file bill of entry in four copies; original and duplicate are meant for customs, third copy for the importer and the fourth copy is meant for the bank for making remittances.
If the goods are cleared through the EDI system, no formal Bill of Entry is filed as it is generated in the computer system, but the importer is required to file a cargo declaration having prescribed particulars required for processing of the entry for customs clearance.
In the non-EDI system along with the bill of entry filed by the importer or his representative the following documents are also generally required:-

· Signed invoice

· Packing list

· Bill of Lading or Delivery Order/Airway Bill

· GATT declaration form duly filled in

· Importers/ CHA’s declaration

· License wherever necessary

· Letter of Credit/Bank Draft/wherever necessary

· Insurance document

· Import license

· Industrial License, if required

· Test report in case of chemicals

· Adhoc exemption order

· DEEC Book/DEPB in original

· Catalogue, Technical write up, Literature in case of machineries, spares or chemicals as may be applicable

· Separately split up value of spares, components machineries

· Certificate of Origin, if preferential rate of duty is claimed

· No Commission declaration

Definition of 'Bill Of Lading'

A legal document between the shipper of a particular good and the carrier detailing the type, quantity and destination of the good being carried. The bill of lading also serves as a receipt of shipment when the good is delivered to the predetermined destination. This document must accompany the shipped goods, no matter the form of transportation, and must be signed by an authorized representative from the carrier, shipper and receiver.

For example, suppose that a logistics company must transport gasoline from a plant in Texas to a gas station in Arizona via heavy truck. A plant representative and the driver would sign the bill of lading after the gas is loaded onto the truck. Once the gasoline is delivered to the gas station in Arizona, the truck driver must have the clerk at the station sign the document as well.

6. c. What do you mean by endorsement? What are its different types: According to N. I. Act 1881, endorsement is, signing for the purpose of negotiation on the back or face of the negotiable instrument or on a slip of paper annexed thereto with the intention to make it so.”Endorsement does not depend on whether the cheque is crossed or uncrossed. A crossed or uncrossed bearer cheque can be transferred by mere delivery, it does not require any endorsement. But a crossed or uncrossed order cheque can only be transferred by endorsement and delivery, it implies that only the order cheques require endorsement.

Endorsements are five types which are stated below:

1. Blank Endorsement: As per section 16 of the N. I. Act, it has to be done merely by putting the signature on the back of the instrument without mentioning the name of the endorsee.

2. Full Endorsement: Such endorsement is done under full signature on the back of the instrument with the instruction to pay to certain person or to the order of that specific person.

3. Partial Endorsement: This kind of endorsement is invalid. No negotiable instrument can be endorsed for a partial amount.

4. Restrictive Endorsement: An endorsee of a negotiable instrument is fully competent to negotiate it further. The N. I. Act also permits restrictive endorsement, which take away the negotiability of such instruments.

5. Conditional Endorsement: Such endorsements are generally not in use, a conditional instrument is one, which makes the transfer of the property in an instrument from the endorser to the endorsee dependent upon the fulfillment of specified condition. Conditional endorsements may be various kinds, which are:

** Endorsement Sans Recourse: An endorser of a negotiable instrument may, by express words in the endorsement, exclude his own liability thereon.

** Facultative Endorsement: The endorsee must give notice of dishonor of the instrument to the endorser, but the latter may waive this duty of the endorsee by writing in the endorsement “Notice of the dishonor waived”

Q.61 How many consumer protection councils are there under the Act?
Ans.: There are two types of these councils –
(i) The Central Consumer Protection council and
(ii) The State consumer protection council.

Meaning and Essentials of Contract:

Q.1. “An agreement enforceable by law is a contract” Comment and explain the essentials of a valid contract in brief.

Ans.: Generally contract means a promise or agreement made by two or more persons enforceable by law. According to Indian Contract Act 1872 Section 2(h) defined. “An agreement enforceable by law is a contract.” Hence, agreement and legal enforceability creates an agreement as contract. Section 10 defines

“All Agreements are contracts if they are made by the free consent of parties, competent to contract for a lawful consideration and with a lawful object and are not hereby expressly declared void. The contract to be made in writing by law of land or in the presence of witnesses or be registered, if required” On the basis of the above definitions and judgment given by judges, help us to mention

the following essentials of a valid contract :

(1) Atleast two parties are required to enter into a contract that is promisor and romisee.

(2) Agreement :Proposal and acceptance must be absolute and unconditional. The two identical Cross-offers and successive counter offer are only offer and not agreement.

(3) The intention should be to create legal relations not the social, domestic, political relations.

(4) Contractual capacity among persons who is not minor, insane and disqualified by law of the land.

(5) Consent or Consensus ad idem. The parties are said to consent when they agree upon the same thing in the same sense. (Section13).

6) Free Consent :According to Section14, the consent is said to be free when it is not caused by

i) coercion, or ii) undue influence, or iii) fraud, or iv) misrepresentation or v) mistake.

(7) Consideration :Except some exceptions, an agreement without consideration is void. It means quid pro-quo. It must be lawful and real and not illusory.

(8) The lawful object and its consideration must be legal.

(9) The agreement must have certain meaning.

(10) An agreement to be valid must be possible to be performed.

(11) The agreements must not be declared void by the law of the land.

(12) Compliance of legal formalities is required.

Hence, every agreement to be enforceable by law must possess all these essential elements for a contract. If any of the element is missing in an agreement, such agreement is not enforceable by law.

Proposal and Acceptance

Q.1. Define offer and acceptance. Explain rules regarding valid acceptance.

Ans.: The term offer is also called proposal. It is defined under Indian Contract Act,1872 Section 2(a), “when one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.”

Acceptance is defined under section 2(b) of Contract Act, 1872 i.e. when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise.

Rules regarding Valid Acceptance :A few important rules of acceptance are as follows in brief :

(1) Acceptance must be absolute and unqualified {Section 7(1)}.

(2) It must be in prescribed manner/reasonable manner {Section 7(2)}.

(3) Acceptance may be given by performance of condition or act required by an offeror {(Section8)}.

(4) It may be given by acceptance of consideration (Section 8).

(5) Acceptance may be express or implied.

(6) It must be given within specified or reasonable period of time.

(7) Acceptance must be given while the offer is in force.

(8) It must be given only after the communication of offer is complete.

(9) Acceptance must be given by the person to whom offer is made.

(10) Acceptance must be communicated, only mental determination or intention to give acceptance is not sufficient.

(11) It must be from competent person/authorized person otherwise it will not be binding. Powell V. Lee (1908)

(12) It should be communicated to the offeror himself, other than him will not create legal obligation.

(13) Acceptance subject to contract is no acceptance. It will not create legal binding.

Note :

(i) A rejected offer cannot be accepted.

(ii) Counter offer does not constitute acceptance.

(iii) Cross offer cannot be assumed as acceptance.

(iv) Silence does not generally amount to acceptance.

(v) Acceptance to offer means acceptance of all terms of offer.

(vi) Sometimes grumbling acceptance is a valid acceptance.

(vii) Enquiring/seeking clarification of offer is not to be assumed as acceptance.

(viii) Circumstances of the acceptance must show the ability and willingness to fulfill the terms of offer.

Capacity to Contract

Q.1. Who can make a valid contract? Discuss the validity of agreements made by a minor.

Ans.: According to Section 11, “Every person is competent to contract who is of the age of majority according to law to which he is subject and who is of sound mind and is not disqualified from contracting by any law to which he is subject.” Hence, the following persons can make valid contract :

(i) Who is major

(ii) Who is of sound mind or sane

(iii) Who is not disqualified from contracting by any law of the land to which he is subject.

Validity of Agreement made by a Minor :

(i) Agreements with or by a minor is absolutely void. Ruling was given in MohriBibee vs. DharmodasGhose.

(ii) No ratification of minor’s contract.

(iii) A minor can be a promisee or beneficiary.

(iv) Restitution/compensation is possible in case of minor under (section 33, specific Relief Act, 1963).

(v) The rule of estoppel does not apply for minor, he can plead his minority.

(vi) No specific performance is possible in case of minor because contract made by him is void {(Mirsarawarjan vs. Fakhruddin 1912) 3 Col. 232)}

(vii) Contract by parents/guardian/manager may be made on behalf of theminor, provided they had authority and benefit to minor

(viii) Minor may be given share in existing partnership business by theconsensus of the partners.

(ix) Minor may be appointed as Agent but principal will be personally liable for his acts.

(x) Acts done by minor is parents will not be liable.

(xi) Guarantee for and by the minor is valid.

(xii) Insolvency Act does not apply on minor; hence, minor cannot be adjudicated insolvent.

(xiii) Minor may be joint promisor under Law of contract.

(xiv) Minor cannot apply for allotment of shares in company, but he can apply for fully paid up share on behalf of his guardian.

(xv) Minor is allowed to make, draw and endorse negotiable instrument but he is not liable for dishonour.

(xvi) Minor cannot enter into service agreement but he can be beneficiary if he has performed his promise.

(xvii) Minor can enter into the contract of Apprenticeship at the age of 14 years if he is physically fit.

(xviii) Minor can become trade union member if he has attained the age of 15 years.

(xix) Marriage contract of minor on behalf of parents is allowed on the ground of the customs of the community.

(xx) Minor is held responsible for torts or civil wrong committed by him

(xxi) Liability of necessaries of life supplied to him or his legal dependents. His property is liable; he is personally not liable.

Q.1. Define Free consent? When does consent become free? Explain rules regarding free consent.

Ans.: According to section 10 of the Indian Contract Act, 1872, “All agreements are contract if they are made by the free consent of the parties competent to contract for a lawful consideration and lawful object and are not hereby expressly declared to be void”. Therefore, free consent is the one of the essentials of valid contract. But free consent is composed of two words free + consent. The term free meant without any pressure. Consent means defined under Section 13.

Two or more persons are said to consent when they agree upon the same thing in the same sense.”

Free consent is defined under section 14 i.e. consent is said to be free when issues not caused by :

(1)Coercion, as defined in section 15, or

(2) Undue influence, as defined in section 16, or

(3) Fraud, as defined in section 17, or

(4) Misrepresentation, as defined in section 18, or

(5) Mistake subject to the provision of section 20, 21 and 22.

Therefore, consent is not free when it has been caused by coercion or undue influence or fraud or misrepresentation and mistake. But if the consent is caused by any one of the first four factors such as coercion, undue influence, fraud and misrepresentation. The agreement is a voidable at the option of the party whose consent was so caused. (Section 19 and 19A). Under such position, the aggrieved party has option to assume the agreement either valid or void. If the contract is caused by mistake of foreign law, the agreement is void under section 20 and 21. Hence, there are two situations i.e. no free consent that is earlier and no consent is as error in consensus. The rules regarding free consent are as follows one by one.

Coercion :Coercion means and includes the use or threatening to use the physical force against a person or property to compel him to enter him into a contract. According to section 15 of the Indian contract Act, 1872.

“Coercion is the committing or threatening to commit any act forbidden by the Indian Penal Code or the lawful detaining or threatening to detain, any property, to the rejudice of any person whatever, with the intention of causing any person to enter into an agreement. “It is immaterial whether IPC is or not enforced in the place where the coercion is employed (Section 15).

Legal Rules relating to Coercion :

(1) Committing any act forbidden by the IPC i.e. killing or beating another person and interfering in the personal freedom of another person etc.

(2) Threatening to commit any act forbidden by the IPC.

(3) Threats to suicide amounts to coercion.

(4) Unlawful detaining of any property.

(5) Unlawful threatening to detain any property

(6) The act of coercion must have been performed with the intention of causing any person to enter into an agreement.

(7) Coercion may proceed either from the party or from a stranger.

(8) Coercion may be directed against the party or any person.

(9) It is not necessary that IPC should be in force at the place where the coercion is applied.

The effect of coercion is voidable at the desire of the aggrieved party.

Undue Influence :Instead of physical force ;when mental force is used for getting the consent of the another party, when a dominant party misuses his influence to dominate the will of the weaker party, to get unfair advantage, in a contract is said to be influenced by undue influence. It is defined under Section 16. The legal rules relating to undue influence :

(1) The relations subsisting between the parties to a contract are such that one of them is in a position to dominate the will of the other due to

(i) Real or apparent authority.

(ii) In case of fiduciary relation.

(iii) In case of persons under mental or bodily stress.

(2) The dominating party uses his position to obtain an unfair or undue advantage over the other party.

Legal effect :Due to undue influence, the agreement becomes voidable at the option of the party whose consent was so caused. The court may set aside any such act under undue influence. A pardanashin woman is also given protection from undue influence.

Fraud :Fraud is intentional misrepresentation or concealment of material facts of an agreement by any party to or by his agent with an intention to deceive and induce the other party to enter into an agreement. According to Section 17, “fraud means and includes any of the following acts committed to a contract or with his connivance, or by his agent, with an intention to deceive another party thereto or his agent, or to induce him to enter into contract.”

(i) The suggestion as a fact of that which is not true by one who does not believe it to be true.

(ii) The active concealment of a fact by one having knowledge or belief of the fact.

(iii) A promise made without any intention of performing it,

(iv) Any other act fitted to deceive, and

(v) Any such act or omission as the law specially declares to be fraudulent.

Essential Elements of Fraud :

(1) There must be a false representation either by words or by spoken words, induce the other party to enter into contract by active concealment of material fact.

(2) It must be done by the party or his agent.

(3) The representation must relate to a fact, the other party has been attracted to act upon the representation leading to fraud.

(4) The representation intentionally done to commit a fraud must have been done before the conclusion of the contract.

(5) The other party must have been deceived by fraud.

Legal Effects :

(1) Contract becomes voidable at the option of the party defrauded,

(2) The defrauded party can sue for damages suffered or ask for restitution, and

(3) The party can insist for the performance of the contract.

Misrepresentation :It is innocent and unintentional false statement of fact told by one party to the other during the course of negotiation is called misrepresentation. According to section 18 misrepresentation means and includes :

(i) The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it is not true.

(ii) Any breach of duty which, without an intention to deceive, gains an advantage to the person committing it or any one claiming under him, by misleading another to his prejudice or to the prejudice any one claiming under him.

(iii) Causing, however, innocently, a party to an agreement to make a mistake as to the substance of the thing which is subject of the agreement.

Essential Elements of Misrepresentation :

(i) It must be a misrepresentation of some material fact;

(ii) It must be made before the concerned party enters into a contract.

(iii) It must be innocent or unintentional statement.

(iv) Misrepresentation may be committed by any of the following ways : (a) By positive statement.

(b) By breach of duty. (c) By causing a mistake by innocent misrepresentation.

Legal Effect of Misrepresentation :An aggrieved party suffering any loss as a result of misrepresentation can either rescind or avoid the contract altogether or can accept the contract but insist that he will be placed in such position in which he should have been, if the misrepresentation made had been true (section 19).

Mistake :Mistake is one of the causes because of which the consent is said not to be free. It is a misconception or misimpression or misunderstanding or erroneous belief about something. According to Section 20, “Where both the parties to an agreement are under a mistake as to a matter of fact essential to an agreement, the agreement is void.”

Mistake may be of two types viz –

(i) Mistake of Law, and

(ii) Mistake of Fact

Mistake of law may be two types :

(i) Mistake of law of the land will be enforceable but mistake of foreign law is void.

(ii) Mistake of fact: is as to material fact of the contract.

Mistake of fact may be of two types :

(1) Bilateral Mistake, and

(2) Unilateral Mistake

(1) Bilateral Mistake :Bilateral mistake is mutual mistake by both the parties to agreement and relating to

(i) Mistake as to subject matter, and

(ii) Mistake as to possibility of performance of the contract.
(iii) Mistake as the subject matter may be as to identity of subject matter, as to existence of subject matter, quality of the subject matter, quantity of product, as to price, mistake as to title, mistake as to existence of State of affairs and (ii) mistake is to possibility of performance. It may be of two types viz Physical and Legal impossibility.

(2) Unilateral Mistake:The unilateral mistake means where one of the parties to a contract is under a mistake. As to the matter of fact, it is unilateral mistake. Such ontract is not voidable. But under such following conditions, contract of unilateral mistake also becomes void :

(i) Mistake as to the identity of the party contracted with,

(ii) Mistake as to identity of attributes of contracting party, and

(iii) Mistake as to the nature of the contract.

Loan and Advance

** What is meant by classification of loans.

Discuss the different types of classification and criteria for each such classification:

Classification of loans:

Classification of loans referred to as problem loans or non performingloans.Classification decided according to the status of non recovery loans and advances. A new system of loan classification has been introduced by Bangladesh Bank under the financial sector reform program (FSRP) in the year 1990. In this system classification of bank’s loans and advances are done considering expired limit, period of past dues and on the basis of qualitative judgment etc in accordance with Bangladesh Bank Guidelines.

Loans and advances have been classified into four groups:

1. Continuous Loans: Loans which are continuing having no definite repayment schedule but with a limit and expiry date are called continuous loan. Like CC(Hypo), Cc (Pledge), Over draft, Secured Over draft.

2. Demand Loans: Loans which are payable on demand. Contingent or forced loan is also treated as demand loan. Like PAD, LIM, FBP, IBP etc

3. Term Loans: Loans which are payable within a specific time period under a specific repayment schedule will be treated as Term loan.

4. Short Term Agriculture & Micro Credit: Short Term Agricultural Credit will be as per list issued by Agricultural Credit and SpecializedProgrammesDepartment (ACSPD) of Bangladesh Bank under the Agricultural Credit Programme. Credit in the agricultural sector repayable within one year will also be included herein. Short Term Micro Credit will include any micro credit not exceeding Tk. 25,000.00 and repayable within 12 months.

Criteria for loan Classification:depend on nonperforming, problematic nature, & future loss loans are now classified in to four categories on the basis of two criteria namely: 1) Qualitative Criteria 2) Objective Criteria, which are described below:

Type of loan	Tenure of loan	Classification status of loan	Provision
Continuous Loan	Less than 06 months	SMA	1%
	06 months or More but less than 09 months	SS	20%
	09 months or More but less than 12 months	Doubtful	50%
	12 months or more	Bad loss	100%
Demand Loan	Less than 06 months	SMA	1%
	06 months or More but less than 09 months	SS	20%
	09 months or More but less than 12 months	Doubtful	50%
	12 months or more	Bad loss	100%
Term Loan	Less than 06 months	SMA	1%
	06 months or More but less than 09 months	SS	20%
	09 months or More but less than 12 months	Doubtful	50%
	12 months or more	Bad loss	100%
Short term loan	12 months	SMA	5%
	More than 12 months but less than 36 months	SS	5%
	More than 36 months but less than 60 months	Doubtful	5%
	More than 60 months	Bad loss	100%

What do you mean by loan classification based on qualitative investment:

Any continuous loan, demand loan or term loan whether classified or not on the basis of objective criteria but if found uncertain or difficult to recover, the said loan will be classified on the basis of qualitative judgment.

As per these criteria, a bank is required to classify a loan if it has reasons to believe that the borrower may not be able to repay the loan due to changes in the circumstances under which the loan was originally sanctioned. Changes in circumstances may include: Adverse financial condition arising out of loss of a part of borrower’s capital, insufficient cash flow to service debt requirements, insufficient of securities or any other unfavorable factors. Besides this the loan may be classified under qualitative judgment if it is found that after rescheduling the loan is not repayable without any reason, not carrying out the rules of rescheduling and habit of exceeding the limit every now and then, suit filed for recovery of loan and loan availed without any sanction from appropriate authority. In such circumstance the loan will be classified as sub standard. When entire loan is not recoverable in spite of proper step, the loan will be classified as doubtful and it will be treated as bad loss under qualitative judgment if no chance is available for recovery of the loan despite utmost efforts.

Discuss the objects and importance of bank loans and advances.?

Ans: To study different types of the loans and advances made by IOB with specific To make suggestions on the reference agar branch . To study in detail the various types of loans on basis of the analysis. and advances offered by IOB with specific reference to a branch.

IVE To assess the bank’s in sanctioning loans and advances to a customer. To contribution towards fulfilling the requirements of the borrower.assess the satisfaction level of the borrower’s in terms of their being benefited by the timely financial accommodation by the IOB with specific reference to branch .

UTILITY OF LOANS AND ADVANCES from banks in keeping with the flexibility in business operations. Traders may borrow money for day to day financial needs availing of the facility of cash credit, bank overdraft and discounting of bills. The amount raised as loan may be repaid within a short period to suit the convenience of the borrower. Thus business may be run efficiently with borrowed funds from banks for financing its working capital (b) Loans and advances are utilized for making payment of requirements. current liabilities, wage and salaries of employees, and also the tax (c) Loans and advances from banks are found to liability of business. be economical for traders and businessmen, because banks charge a reasonable rate of interest on such loans/advances

. The amount of the loan would be repaid by or recovered from the individual over a period of time.

The full amount of the advance would be recovered at the earliest date that a payment is due to the individual.

** Why it is necessary to make provisions against the classified loan:

Sometimes there are such loans which are not recovered by the bank which are fall into category of bad loan. And for these purpose every year bank put asidesome funds from its yearly profit for the protection of banks assets from any future loss because of bad loan.Provision is required so that no future bad loan may not affect the banks business or reputation or not face any problem to pay back money to the depositors. Provision is put aside from the yearly profit of the bank for backing of future adversity. The banks are deprived from the making of profit as because interest on classified loan cannot be revealed as profit of the bank, which is very terrible for them. Moreover the banks have to keep 1% provision from the yearly profit for classified loan &also for the probable loss of thestandard loan.

** Characteristics of good securities:A security to be good must have the following features:

- Good title and easy transferability: Securities having defective title or disputed title are never be considered good security. In case realization of money through selling securities becomes difficult. Securities need to be easy transferability. Security may be legally owned by the borrower but its transfer may be difficult because of a lot of factors. Hence banks prefer securities which can be transferred without any legal complications.

- Marketability: bank considers a security to be a good provided that it is easily saleable or marketable.

- Ascertainable value: price or value determination of security is very important to a bank since it is necessary while selling. There are some securities whose price is very difficult to ascertain from the market. Banks consider securities as good whose value and price are easily determinable.

- Stability of Value: securities should have not only the value but these should also be free from any fluctuations in value. Banks consider securities as good which are not subject to frequent fluctuations in price,

- Worth Storing: banks consider a security good one if it can be stored. Not only the availability of storage facilities banks also intend to be sure that the go downs are conveniently located and well protected from the security point of view.

- Low maintenance cost: Bank prefers securities which have low maintenance cost. Generally they prefer go downs maintained by well reputed firms instead of one maintained by banks themselves to minimize cost.

- Perish ability: Perish ability goods are not good securities to the banks.

- Free from liability: Securities consider to be good when it is free from any liabilities. Properties which are already mortgaged can’t be good security.

** Loan Syndication: Loan syndication means joint financing by more than one banks and or non banking financial institutions to the same project / borrower against a common terms and conditions governed by a common document.

** What is Bankruptcy Law?

Bankruptcy has no proper definition in the bankruptcy law. Usually bankruptcy means the person who is unable to pay the loan. Bank can suit a file under bankruptcy law against the borrower who is unable to pay back the loan. Then the suit is executed under bankruptcy law. A person who is declared bankrupt cannot participate in any social activities like election, government job or cannot avail any loan from bank. After declaration of bankruptcy by the court, the borrower has to give all his belongings keeping minimum requirements to the receiver who is nominated by the court for allocation of the property among the lenders.

** Discuss how Bankruptcy Act help in managing the loan portfolio of Bank:

In Bangladesh the bankruptcy law which was established in 1920 was revised and made effective from 11^th March 1997. The law is revised basically for defaulters against whom lawful action can be taken. The main characteristic of revised act is that, a suit can be filed by the lender/ bank when the loan amount is more than tk. 5.00 lac. In Adalat except section 11 of bankruptcy law no other law will be executed for any kind of issues and after appeal of bankruptcy within 60 days the case will besettled. Under bankruptcy law the court gives the notice to the defendant. But the announcement of bankruptcy revealed through government gazette or any other ways. In case of more than one (01) year suit cannot filed under bankruptcy law.

** What is a purpose of ArthaRinAdalat? How does it help in recovering the stuck up loans:

ArthaRinAdalatAin- 2003 enacted/performed by the Parliament on March 01, 2003 and the act came into force from May 01 2003. ArthaRinAdalat 2003 was imposed over previous active ArthaRinAdalat 1990. Purpose of ArthaRinAdalatAin 2003 is necessary for recovering bank’s non-performing or bad loan or stuck up loans.

For recovering the stuck up loans ArthaRinAdalatAin 2003 & amendment 07 is very important which are below in details:

Sale security by financial institutions:Financial Institution shall not file suit before sale of property kept with its custody as lien or pledge and adjust the proceeds there against to the default loan. If a financial institution sanction loan against mortgaged property or hypothecation of moveable properties and execute power of attorney in its favor to sell the property, then financial institution shall sale the property first and appropriate the sale proceeds against the outstanding loan and the file a suit. If a financial institution fails to deliver physical possession of a property sold may apply to District Magistrate for help to handover the peaceful possession of the same (Section12)

Settlement Conference: A court may stay a suit if the Board of directors of a financial institution is agreed for settlement conference and the court shall preside/control over the conference that is to say a solenama to be executed between the parties and it will be held in camera. The court shall dispose/arrange of the suit within 60 days from the settlement. It may be extended for another 30 days upon application of the parties. No appeal or revision shall lie before any higher court if a suit is decided under this section. (Section 21)

Mediation: Court may refer a suit for mediation or stay a suit after receiving application that the parties are interested to settle the suit by way of mediation, if any decision is not given by settlement conference i.e. through executing a solenama between the parties. (Section 22)

Limitation of Alternative Approach: Parties of any suit can go for either settlement conference or mediation. (Section 23)

Special Step in a Suit for high claim: A suit claiming more than 5 crore if decided to settle in the alternative way of settlement conference or mediation under Section 21/22, the court shall inform the matter to the chief executive officer of the concerned financial institutions.

**How does Central Bank control money supply & Credit: Following instruments/ techniques are using by the Bangladesh Bank to pursue the monetary policy:-

a. Government Treasury Bill auctions: Weekly auctions of 28 days, 91 days, 182 days, 364 days and 2 years Government Treasury Bills are main instruments for monetary management for Bangladesh Bank.

b. Call Money Market: Transactions and volumes in the call money market have grown significantly over the years representing increasing dependence of some of banks on money market liquidity.

Following ways BB control credit: The main instruments of selective credit control are:

a. Minimum margins for lending against selected commodities

b. Ceilings on the levels of credit

c. Charging of minimum rate of interest on advances against specified commodities

d. Bank Rate: Whenever BB wants to reduce credit the bank rate is raised and whenever the volume the volume of Bank credit is to be expanded the rate is lowered.

** Describe briefly the role of a Central Bank as the “Lender of the Resort” : Central Bank act as lender of last resort by extending credit to depository institutions or to other entitles in unusual circumstances involving a national or regional emergency. Commercial Banks borrow money in the form of deposits and then lend those to others. In case Commercial Banks need further funds they can approach Central Bank for discount of bills. The Central Bank of a Country is the last resort of the borrowersby allowing discounting facilities at the bank rate. A lender to whom borrowers may approach when all other lending sources are failed.

What is the difference between primary security and collateral security?

Primary security is the asset created out of the credit facility extended to the borrower and / or which are directly associated with the business / project of the borrower for which the credit facility has been extended. Collateral security is any other security offered for the said credit facility. For example, hypothecation of jewellery, mortgage of house, etc.

Primary security means the security on which the loan has been given. For example, Term loan on plant and machinery plant and machinery will be primary security. Apart from that the company has given its building as additional security. Then the property will become Collateral security.

Primary Security refers to the asset directly created out of Bank finance. For example, where a Bank finances the purchase of a home, the home is the primary security. In the same way, a car purchased with the help of a Bank loan, is the primary security for that loan. Bank creates a charge against this primary security, to secure its loan. This charge gives the Bank the legal authority to dispose off the asset, and apply the proceeds therefrom, to the loan amount in default.

Collateral Security refers to certain additional security obtained by the Bank to secure the loan. For example, say, a Bank has financed the purchase of machinery by a Pharmaceutical manufacturing company. This machinery would be the primary security for this loan. In addition, the Bank may obtain collateral security in the form of the factory building owned by the company, as additional security. This will guard Bank's interests in the event of the primary security not having sufficient value to liquidate the loan. Sometimes, on account of adverse market conditions, the value of the primary security gets eroded, exposing the Bank to a higher risk than it had originally bargained for.

Additionally, loans can also be secured with the help of personal security of the borrower. Obtaining personal security of the borrower enables the Bank to proceed against the borrower and his personal estate, to recover the loan.
Once a Bank secures its loans with proper security, the possibility of default is reduced, and even in case of default, the amount of loss it is likely to suffer is lesser than otherwise.

Difference between Financial and Operating Lease

Lease basically is of two types one is called financial lease and other is operating lease, let’s look at the differences between financial operating lease in order to get a better understanding about both financial and operating lease –

1. While financial lease is a long term arrangement between the lessee (user of the asset) and the owner of the asset, whereas operating lease is a relatively short term arrangement between the lessee and the owner of asset.

2. Under financial lease all expenses such as taxes, insurance are paid by the lessee while under operating lease all expenses are paid by the owner of the asset.

3. The lease term under financial lease covers the entire economic life of the asset which is not the case under operating lease.

4. Under financial lease the lessee cannot terminate or end the lease unless otherwise provided in the contract which is not the case with operating lease where lessee can end the lease anytime before expiration date of lease.

5. While the rent which is paid by the lessee under financial lease is enough to fully amortize the asset, which is not the case under operating lease.Lease means that you pay a certain amount per month and at the end of your term (usually two-three years) you have to return the veh to the dealer OR you can choose to refinance to purchase the car.
Buying basically means that the dealership sends your information to different banks and the bank with the best deal loans you the money and you pay off the loan to own the car.
Leasing has its pros and cons. If you have good credit, you can lease a really nice car (maxda rx8 or shelby mustang) for as low as $300 where as purchasing the car would be $500 (with NO money down).dealerships like to lease because a leased car can be sold as a used veh later and the profit margins on used veh are much higher. This only works for really nice veh (usually LX) because cheaper cars lose value too fast.
Just remember that if you lease and at the end decide to purchase the car, you pay for the accessed value on the car...payments you have already made do not count, its not lease to own.

Describe the procedure of lendings against the following securities

a. financial obligations

b. work order

c. immovable properties

d. Trust receipts

Advances Against Real Estate(immovable properties)

By the term ‘real estate’ is meant all types of immovable properties including tangible assets like land, building etc. Generally, commercial banks do not favour granting of loans andadvances against the security of real estates due to a number of risks and demerits. Thecommercial banks accept real estate as security in the exceptional cases only, i.e., if thecustomer has no security to offer except real estate.

Causes of Refusing Real Estate as Security

The commercial banks do not stand in a position to accept real estate as security for their advanceson account of a number of difﬁculties or drawbacks. These difﬁculties are discussed below.

1. Customer’s title.

2. Heavy expenses.

3. Valuation.

4. Legal formalities.

5. Loss of liquidity.

6. Delay in realisation.

7. Administration of properties.

8. Maintenance.

1.Customer’s Title:

While advancing loans against real estate, customer’s title is themajor problem. It is very difﬁcult for the banker to ﬁnd out the customer’s interest in the property. When the customers offer property as security particularly in caseof agricultural lands etc., the banker has to spend much more time and money toverify the title of the borrower on one side and on the other side, the property may be disputed one.

2.Heavy Expenses:

Whereas the bank takes decision to grant loans and advancesagainst the immovable security, the customer has to spend heavy amount inmortgaging the property. In such circumstances, the customer wants to take loan fora long period as legal mortgage is not only expensive but also inconvenient. It is tobe noted here that legal mortgage is not a good idea for the customer because it mayput an additional burden upon him (customer).

3.Valuation:

Another major problem is valuation of property before the bank. A banker can not rely on its own judgement for this purpose. The value of immovableproperty depends upon the type of construction, location etc. For such conﬁrmations,the banks have to employ qualiﬁed valuers for the purpose.

4.Legal Formalities:

While advancing against real estate or property, a number of legal formalities, such as preparation of the mortgage deed, its registration, payment of stamp duty etc., must be completed by the banker and the customer.

5.Loss of Liquidity:

When the customers offer immovable property as security, theydemand to take loan for a long period because they have to spend much of their timeand money on the compliances of papers. In such case if the commercial banks grant loans and advances for a long period, these will affect their liquidity position since,if the customers do not repay loans and advances, it will be very difﬁcult for the bankers to dispose off their immovable properties in the market.

6.Delay in Realisation:

In case the mortgager is unable to repay the amount due from him, the banker has to undergo many formalities before the sale of the mortgagedproperty can be completed. Consequently, the banker has to wait for many months, because it is not possible for the customers to get back banker’s moneys.

7.Administration of Properties:

As the mortagagee of land and buildings, the bankermay be required to administer the land and buildings and also collect rents and keepaccounts.

8.Maintenance:

In case the customer fails to repay the loan, the banker has to recoverthe loan by selling its mortgaged property. It is very difﬁcult for the banker to lookafter the maintenance of the property.

Precautions in Advancing Against Real Estate

While lending money against the security of real estate, the banker should take the followingprecautions:

1.Veriﬁcation of Title:

While advancing money against the real estate as security,the banker should verify the title deeds of the customer very carefully. The bankershould also examine the deed through its solicitors. It should be also necessary forthe banker to verify if his borrower’s property is disputed or not.

2.Tenures of Land:

Before accepting real estate as security, the banker should see that the borrower’s land must be freehold, leasehold or state-owned. In addition, theremay be several changes in the land tenure frequently. While advancing loans, the banker should have knowledge regarding these changes because these are materialfacts for the bank.

3.Expert Valuation:

The valuation of property is a very difﬁcult task. Though the bank is not a valuer but where the loan is granted against real estate as security, the bank should entrust this difﬁcult task to the expert valuers. The value of propertydepends upon the following:

(a) The location of the property.

(b) Ownership right.(c) The rental value.(d) The type of construction(e) The size and structure of land.

4.Margin:

While lending against the real estate, the banker should keep adequatemargin. The banker should not grant loans and advances to the extent of more than50 to 60 per cent of the real value of the borrower’s property. For instance, wherethe value of the property is Rs. 5,000/-, the banker should grant loans and advancesagainst the property for less than Rs. 3,000/-. By doing so, the banker may have toavoid involved risks.

5.Insurance:

Before granting loans, the banker should examine that the properties of the borrowers are insured against ﬁre and other calamities and the policy should beassigned in favour of the bank.

6.Tax and Rent Payment:

Before accepting real estate as security the banker shouldobtain the receipt for the payment of house-tax and other taxes and must be kept alongwith title deeds. The banker should also see that all dues are regularly paid or not.

7.Legal Mortgage:

According to Section 59 of the Transfer of Property Act, 1882,“Whereas the principal money secured is one hundred rupees or more, a mortgageother than a mortgage by deposit of title deeds (equitable mortgages) can be effectedonly by a registered instrument signed by the mortgager and attested by at least twowitness.” Whereas the borrower happens to be a joint stock company, all mortgagesmust be registered with the Registrar of Companies within 30 days of the date of their creation.

8.Clearance of Income Tax:

Before accepting real estate as security, the bankershould obtain a certiﬁcate from the borrower issued by Income Tax Ofﬁce about the clearance of the property of the borrower. Under Section 230 A of the IncomeTax-Act, 1961, registration of any property (other than agricultural land) is valuedat more than Rs. 50,000/- is a must.From the above discussion, it has been seen that making of advances on thesecurity of real estate is not popular kind of business with commercial banks becausecommercial banks are not in a position to take their own judgement. These dependupon others both as regards the valuation of the immovable property offered assecurity as well as the title deeds of the person proposing to mortgage the same.

Advance Against Fixed Deposits Receipts(Trust Receipts)

The term ‘Fixed Deposit’ means the money or deposit which is repayable on the expiry of aﬁxed period of time. This time-period may vary from 15 days to 60 months. In case a persondeposits his surplus funds or money with the bank for some ﬁxed period, he (customer) isissued ‘Fixed Deposit Receipt’ by the bank. The Fixed Deposit Account cannot be withdrawn before the expiry date, as mentioned in the Fixed Deposit Receipt. But sometimes, depositormay require advance-money before the due date of maturity. In such case, ordinarily banksextend advancing facility to their customers, but it should be noted here that banks are not bound to extend such facility. Another option is beneﬁcial for the banker and the customer.Suppose, a ﬁxed deposit is made for 36 months and the customer demands money after one ortwo months, it will be better for the customer to take loan against his Fixed Deposit Receipt. Insuch case the banker will gain by charging a higher interest rate than allowed on deposits.

Precautions in Advancing Against Fixed Deposit Receipt

While granting loans and advances against Fixed Deposit Receipts, the banker should takethe following precautions:

1.Receipt must be Issued by Concerned Bank:

When the bank grants loans andadvances against the Fixed Deposit Receipt, it should be issued by the bank itself.The bank should not grant loans and advances on the Fixed Deposit Receipt which has been issued by another bank. For instance, State Bank of India issued a FixedDeposit Receipt to Mr. A and in case Mr. A requires money against such receipt, it will be good for State Bank of India to sanction loan against the receipt, as in suchcase, there will be no risk for the banker.2.

2.Original Depositor:

While advancing money, the banker should see that loan must be granted to the person whose name has been entered in Deposit Receipt. In casethe Fixed Deposit Receipt is in favour of two or more than two persons, the loan issanctioned to one of them, the banker should obtain a letter of authority on whichthe signatures must be made by depositors.3.

3.Maintain Ledger and Register:

Where the banker grants loans and advancesagainst the Fixed Deposit Receipt, the banker should made a note of its lien acrossthe receipt as well as in the Fixed Deposit Ledger and Register.4.

4.Margin:

The loan must be granted by the banker with the margin of 5 to 10 per cent.The bank should not sanction loan exceeding the Fixed Deposit Receipt value. Forinstance, Mr. A has been issued a Fixed Deposit Receipt of Rs. 10,000 on January 11,1993 and in case he demands loan on March 4, 1993, the banker should not sanction loan more than Rs. 9,500.

5.Interest Rate:

In case the bank advances money against the Fixed Deposit Receipt,the banker should get 2 per cent higher interest rate than what is payable by the bank on the deposit, if the deposit is in the name of the borrower only. For example,in case the deposit carries interest at 12 per cent per annum, the bank must becharged interest on loan against such a deposit at 14 per cent per annum.6.

Others:

(a) The banker should discourage the loans to a minor against the FixedDeposit Receipt on account of legal complication. (b) The banker should take actualpossession of the later signed by the depositor or depositors, in case the customerfails to pay the loan on due date.

Loan Syndication

Syndicated loans are loans made by two or more lenders and administered by a common agent using similar terms and conditions and common documentation. Also called participated loans or syndicated loans.According to Business Credit, most loan syndications take the form of a direct-lender relationship, in which the lead lender is the agent for the other lenders in the origination and administration of the loan, and the other lending banks are signatories to the loan agreement. In the last several years the popularity of this type of loan has exploded. By 2000, the total annual volume of syndicated loan issuance had risen to $1.2 trillion, a $100 billion increase over the year before. The businesses that are choosing this option to finance their growth have expanded beyond the Fortune 500 companies that were its first users. Initially developed to address the needs of huge, acquisition-hungry companies, they have now become a flexible funding source for both mid-sized companies and smaller companies that are on the cusp of moving into mid-sized status. In fact, syndicated loans for as little as $10 million have become commonplace.

Most successful small companies that have evolved to the point where they are straining at the boundaries of that "small" designation have always dealt with one or a few individual banks, negotiating individual loans and lines of credit separately with each institution. The next financing step, however, may be to consolidate banking activity through one syndicated facility. Corporate Cashflow Magazine' s Thomas Bunn noted that while business owners and executives are sometimes loathe to run the risk of alienating banks with which they have long done business, the simple reality is that "companies can outgrow their traditional banks and need new capabilities or an expanded bank group to fund their continued growth."

Of course, businesses can always choose to simply increase their stable of lending institutions, but this has several drawbacks. "Managing multiple bank relationships is no small feat," said Michael Fidler and Patricia Neumeyer in Business Credit. "Each bank needs to come to an understanding of your business and how its financial activities are conducted. A comfort level must be established on both sides of the transaction, which requires time and effort…. Negotiating a document with one bank cantake days. To negotiate documents with four to five banks separately is a time-consuming, inefficient task. Staggered maturities must be monitored and orchestrated. Moreover, multiple lines require an inter-creditor agreement among the banks, which takes additional time to negotiate."

Given these obstacles, business owners and executives often express interest in syndicated loans, which offer consolidation of effort and the possibility of making new banking contacts. Lenders support their use as well. "Lenders like syndications because they permit them to make more loans, while limiting individual exposures and spreading their risk within portfolios more widely," explained Fidler and Neymeyer. "Moreover, administration of the loan is extremely efficient, with the agent managing much of the process on behalf of the participants."

Syndicated loans hinge on the creation of an alliance of smaller banking institutions who, by joining forces, are able to meet the credit needs of the borrower. This creation is spurred by selection of an agent who manages the account. "In consultation with the borrower, the arranger will assemble a group of banks to form a syndicate, with each bank lending portions of the required amount," explained John Tsui in Lodging Hospitality. "The loan normally is signed six to eight weeks after the mandate has been awarded, and after signing, the borrower can draw down funds."

Borrowers taking out syndicated loans pay upfront fees and annual charges to the participating banks, with interest accruing (on a quarterly, monthly, or semiannual basis) from the initial draw-down date. "One advantage of syndication loans is that this market allows the borrower to access from a diverse group of financial institutions," said Tsui. "In general, borrowers can raise funds more cheaply in the syndicated loan market than they can borrowing the same amount of money through a series of bilateral loans. This cost saving increases as the amount required rises."

Advantages of syndicated loans

Sharing of credit risk between various financial institutions

Facilitates huge investments

Borrowers to access from a diverse group of financial institutions

Syndicated loan facilities can increase competition for the business, prompting other banks to improve in their services

In addition, economists and syndicate executives contend that there are other, less obvious advantages to going with a syndicated loan. These benefits include:

· Syndicated loan facilities can increase competition for your business, prompting other banks to increase their efforts to put market information in front of you in hopes of being recognized.

· Flexibility in structure and pricing. Borrowers have a variety of options in shaping their syndicated loan, including multicurrency options, risk management techniques, and prepayment rights without penalty.

· Syndicated facilities bring businesses the best prices in aggregate and spare companies the time and effort of negotiating individually with each bank.

· Loan terms can be abbreviated.

· Increased feedback. Syndicate banks sometimes are willing to share perspectives on business issues with the agent that they would be reluctant to share with the borrowing business.

· Syndicated loans bring the borrower greater visibility in the open market. Bunn noted that "For commercial paper issuers, rating agencies view a multi-year syndicated facility as stronger support than several bilateral one-year lines of credit."

Disadvantages of Loan Syndication

Need for each bank to understand the business activities

Negotiating documents with 4 to 5 banks is a time consuming process

Inter creditor agreement required between banks, which takes additional time

Roles in syndicate loans

Lead managers

Participating bank

Underwriting bank

Facility Manager / Agent

BASEL-II : A set of banking regulations put forth by the Basel Committee on Bank Supervision, which regulates finance and banking internationally. Basel II attempts to integrate Basel capital standards with national regulations, by setting the minimum capital requirements of financial institutions with the goal of ensuring institution liquidity.

Basel II is the second of the Basel Committee on Bank Supervision's recommendations, and unlike the first accord, Basel I, where focus was mainly on credit risk, the purpose of Basel II was to create standards and regulations on how much capital financial institutions must have put aside. Banks need to put aside capital to reduce the risks associated with its investing and lending practices

Basel II, initially published in June 2004, was intended to create an international standard for banking regulators to control how much capital banks need to put aside to guard against the types of financial and operational risks banks (and the whole economy) face. One focus was to maintain sufficient consistency of regulations so that this does not become a source of competitive inequality amongst internationally active banks. Advocates of Basel II believed that such an international standard could help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In theory, Basel II attempted to accomplish this by setting up risk and capital management requirements designed to ensure that a bank has adequate capital for the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability.

Politically, it was difficult to implement Basel II in the regulatory environment prior to 2008, and progress was generally slow until that year's major banking crisis caused mostly by credit default swaps, mortgage-backed security markets and similar derivatives. As Basel III was negotiated, this was top of mind, and accordingly much more stringent standards were contemplated, and quickly adopted in some key countries including the USA.

Objective

The final version aims at:

Ensuring that capital allocation is more risk sensitive;

Enhance disclosure requirements which will allow market participants to assess the capital adequacy of an institution;

Ensuring that credit risk, operational risk and market risk are quantified based on data and formal techniques;Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage.While the final accord has largely addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will diverge from the economic capital.

Basel II uses a "three pillars" concept – (1) minimum capital requirements (addressing risk), (2) supervisory review and (3) market discipline.

The Basel I accord dealt with only parts of each of these pillars. For example: with respect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while market risk was an afterthought; operational risk was not dealt with at all.

The first pillar

The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk, and market risk. Other risks are not considered fully quantifiable at this stage.

The second pillar

The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as systemic risk, pension risk, concentration risk, strategic risk, reputational risk, liquidity risk and legal risk, which the accord combines under the title of residual risk. It gives banks a power to review their risk management system.

The third pillar

This pillar aims to complement the minimum capital requirements and supervisory review process by developing a set of disclosure requirements which will allow the market participants to gauge the capital adequacy of an institution.

In general, the disclosures under Pillar 3 apply to the top consolidated level of the banking group to which the Basel II framework applies.

Off- Shore Banking:

An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages.

Mainly foreign exchange business, acceptance of foreign currency deposits and arrangement of foreign investment and other necessary services connected with foreign investment without undergoing the rigors of foreign exchange regulations. This is usually allowed in the Export Processing Zone of a developing country located at off shore.

These advantages typically include:

greater privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act)
low or no taxation (i.e. tax havens)
easy access to deposits (at least in terms of regulation)
protection against local, political, or financial instability

Banking servicesIt is possible to obtain the full spectrum of financial services from offshore banks, including:

Corporate administration

Credit

Deposit taking

Foreign exchange

Fund managementand

Investment management and investment custody

Letters of credit and trade finance

Trustee services

Wire- and electronic funds transfers

Disadvantages of offshore banking

Offshore bank accounts are less financially secure.

Offshore banking has been associated in the past with the underground economy and organized crime, through money laundering.FollowingSeptember 11, 2001, offshore banks and tax havens, along with clearing houses, have been accused of helping various organized crime gangs, terrorist groups, and other state or non-state actors. However, offshore banking is a legitimate financial exercise undertaken by many expatriate international workers.

Offshore jurisdictions are often remote, and therefore costly to visit, so physical access and access to information can be difficult. Yet in a world with global telecommunications this is rarely a problem for customers. Accounts can be set up online, by phone or by mail.

Offshore private banking is usually more accessible

Offshore bank accounts are sometimes touted as the solution to every legal, financial and asset protection strategy but this is often much more exaggeration.

Camel Rating

Camel stands for: C – Capital adequacy, A – Asset quality, M – Management quality, E – Earnings ability, L – Liquidity management, S- Sensitivity Marketing

Camel is a rating system of banks and financial institutions. This rating system is based upon evaluation of 5 critical elements - Capital adequacy, Asset quality, Management quality, Earnings ability, Liquidity management. Its purpose is to provide an accurate and consistent assessment of financial institution on its financial conditions and operations. In evaluating the quality of a financial Institution, most of the developed countries are now following the uniform financial rating system CAMEL along with other existing procedures and techniques of supervision

Merchant Banking:Merchant Banking is the application of expertise by a bank provided to entrepreneurs for flotation of new companies, preparation and implementation of new project, arranging various license, raising finance and acting as undertakers etc. To do this specialized job commercial banks may have a separate merchant banking division. However there may be a completely separate institution to do merchant banking.

The functions of merchant banking are listed as follows:

Raising Finance for Clients : Merchant Banking helps its clients to raise finance through issue of shares, debentures, bank loans, etc. It helps its clients to raise finance from the domestic and international market. This finance is used for starting a new business or project or for modernization or expansion of the business.

Broker in Stock Exchange : Merchant bankers act as brokers in the stock exchange. They buy and sell shares on behalf of their clients. They conduct research on equity shares. They also advise their clients about which shares to buy, when to buy, how much to buy and when to sell. Large brokers, Mutual Funds, Venture capital companies and Investment Banks offer merchant banking services.

Project Management : Merchant bankers help their clients in the many ways. For e.g. Advising about location of a project, preparing a project report, conducting feasibility studies, making a plan for financing the project, finding out sources of finance, advising about concessions and incentives from the government.

Advice on Expansion and Modernization : Merchant bankers give advice for expansion and modernization of the business units. They give expert advice on mergers and amalgamations, acquisition and takeovers, diversification of business, foreign collaborations and joint-ventures, technology upgradation, etc.

Managing Public Issue of Companies : Merchant bank advice and manage the public issue of companies. They provide following services:

Advise on the timing of the public issue.

Advise on the size and price of the issue.

Acting as manager to the issue, and helping in accepting applications and allotment of securities.

Help in appointing underwriters and brokers to the issue.

Listing of shares on the stock exchange, etc.

Handling Government Consent for Industrial Projects : A businessman has to get government permission for starting of the project. Similarly, a company requires permission for expansion or modernization activities. For this, many formalities have to be completed. Merchant banks do all this work for their clients.

Special Assitance to Small Companies and Entreprenuers : Merchant banks advise small companies about business opportunities, government policies, incentives and concessions available. It also helps them to take advantage of these opportunities, concessions, etc.

Services to Public Sector Units : Merchant banks offer many services to public sector units and public utilities. They help in raising long-term capital, marketing of securities, foreign collaborations and arranging long-term finance from term lending institutions.

Revival of Sick Industrial Units : Merchant banks help to revive (cure) sick industrial units. It negotiates with different agencies like banks, term lending institutions, and BIFR (Board for Industrial and Financial Reconstruction). It also plans and executes the full revival package.

Portfolio Management : A merchant bank manages the portfolios (investments) of its clients. This makes investments safe, liquid and profitable for the client. It offers expert guidance to its clients for taking investment decisions.

Corporate Restructuring : It includes mergers or acquisitions of existing business units, sale of existing unit or disinvestment. This requires proper negotiations, preparation of documents and completion of legal formalities. Merchant bankers offer all these services to their clients.

Money Market Operation : Merchant bankers deal with and underwrite short-term money market instruments, such as: Government Bonds.

Certificate of deposit issued by banks and financila institutions.

Commercial paper issued by large corporate firms.

Treasury bills issued by the Government (Here in India by RBI).

Leasing Services : Merchant bankers also help in leasing services. Lease is a contract between the lessor and lessee, whereby the lessor allows the use of his specific asset such as equipment by the lessee for a certain period. The lessor charges a fee called rentals.

Management of Interest and Dividend : Merchant bankers help their clients in the management of interest on debentures / loans, and dividend on shares. They also advise their client about the timing (interim / yearly) and rate of dividend.

Subordinate Debt:

Subordinated debtis any outstanding loan that, should the borrowing company fail, it will only repaid after all other debt and loans have been settled. It is the opposite of unsubordinated debt.
Also known as a "junior security" or "subordinated loan".

In finance, subordinated debt (also known as subordinated loan, subordinated bond, subordinated debenture or junior debt) is debt which ranks after other debts should a company fall into liquidation or bankruptcy.

Such debt is referred to as subordinate, because the debt providers (the lenders) have subordinate status in relationship to the normal debt.

How It Works/Example:

Should an individual or company file for bankruptcy, the court will prioritize the outstanding loans which the liquidated assets will repay. Any debt with lesser priority qualifies as subordinated debt.
Suppose a company issues two bonds: Bond A and Bond B. The company fails and is forced to liquidate its assets to pay off debt. The money owed to Bond A holders is considered the priority debt so Bond B debt holders will be paid off only after all Bond A holders are repaid. Because Bond B was ranked second in priority, it is considered subordinated debt. Bond A debt is considered unsubordinated debt.

Why It Matters:

The risk associated with subordinated debt increases as the priority of the debt becomes lower. For this reason, it is important for lenders to consider a loan applicant's solvency as well as other loan obligations in order to evaluate the risk should the entity be forced to liquidate.

Overdraft

An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In this situation the account is said to be "overdrawn". If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft limit, then interest is normally charged at the agreed rate. If the negative balance exceeds the agreed terms, then additional fees may be charged and higher interest rates may apply.

Reasons for overdrafts

Overdrafts occur for a variety of reasons. These may include:Intentional short-term loan - The account holder finds themselves short of money and knowingly makes an insufficient-funds debit. They accept the associated fees and cover the overdraft with their next deposit.

Failure to maintain an accurate account register - The account holder doesn't accurately account for activity on their account and overspends through negligence.

ATM overdraft - Banks or ATMs may allow cash withdrawals despite insufficient availability of funds. The account holder may or may not be aware of this fact at the time of the withdrawal. If the ATM is unable to communicate with the cardholder's bank, it may automatically authorize a withdrawal based on limits preset by the authorizing network.

Temporary Deposit Hold - A deposit made to the account can be placed on hold by the bank. This may be due to Regulation CC (which governs the placement of holds on deposited checks) or due to individual bank policies. The funds may not be immediately available and lead to overdraft fees.

Unexpected electronic withdrawals - At some point in the past the account holder may have authorized electronic withdrawals by a business. This could occur in good faith of both parties if the electronic withdrawal in question is made legally possible by terms of the contract, such as the initiation of a recurring service following a free trial period. The debit could also have been made as a result of a wage garnishment, an offset claim for a taxing agency or a credit account or overdraft with another account with the same bank, or a direct-deposit chargeback in order to recover an overpayment.

Merchant error - A merchant may improperly debit a customer's account due to human error. For example, a customer may authorize a $5.00 purchase which may post to the account for $500.00. The customer has the option to recover these funds through chargeback to the merchant.

Chargeback to merchant - A merchant account could receive a chargeback because of making an improper credit or debit card charge to a customer or a customer making an unauthorized credit or debit card charge to someone else's account in order to "pay" for goods or services from the merchant. It is possible for the chargeback and associated fee to cause an overdraft or leave insufficient funds to cover a subsequent withdrawal or debit from the merchant's account that received the chargeback.Authorization holds - When a customer makes a purchase using their debit card without using their PIN, the transaction is treated as a credit transaction. The funds are placed on hold in the customer's account reducing the customer's available balance. However the merchant doesn't receive the funds until they process the transaction batch for the period during which the customer's purchase was made. Banks do not hold these funds indefinitely, and so the bank may release the hold before the merchant collects the funds thus making these funds available again. If the customer spends these funds, then barring an interim deposit the account will overdraw when the merchant collects for the original purchase.
Bank fees - The bank charges a fee unexpected to the account holder, creating a negative balance or leaving insufficient funds for a subsequent debit from the same account.

Playing the float - The account holder makes a debit while insufficient funds are present in the account believing they will be able to deposit sufficient funds before the debit clears. While many cases of playing the float are done with honest intentions, the time involved in checks clearing and the difference in the processing of debits and credits are exploited by those committing check kiting.

Returned check deposit - The account holder deposits a check or money order and the deposited item is returned due to non-sufficient funds, a closed account, or being discovered to be counterfeit, stolen, altered, or forged. As a result of the check chargeback and associated fee, an overdraft results or a subsequent debit which was reliant on such funds causes one. This could be due to a deposited item that is known to be bad, or the customer could be a victim of a bad check or a counterfeit check scam. If the resulting overdraft is too large or cannot be covered in a short period of time, the bank could sue or even press criminal charges.

Intentional Fraud - An ATM deposit with misrepresented funds is made or a check or money order known to be bad is deposited (see above) by the account holder, and enough money is debited before the fraud is discovered to result in an overdraft once the chargeback is made. The fraud could be perpetrated against one's own account, another person's account, or an account set up in another person's name by an identity thief.

Bank Error - A check debit may post for an improper amount due to human or computer error, so an amount much larger than the maker intended may be removed from the account. Same bank errors can work to the account holder's detriment, but others could work to their benefit.

Victimization - The account may have been a target of identity theft. This could occur as the result of demand-draft, ATM-card, or debit-card fraud, skimming, check forgery, an "account takeover," or phishing. The criminal act could cause an overdraft or cause a subsequent debit to cause one. The money or checks from an ATM deposit could also have been stolen or the envelope lost or stolen, in which case the victim is often denied a remedy.

Intraday overdraft - A debit occurs in the customer’s account resulting in an overdraft which is then covered by a credit that posts to the account during the same business day. Whether this actually results in overdraft fees depends on the deposit-account holder agreement of the particular bank.

Advantages of Overdrafts

Flexible – An overdraft is there when you need it, and costs nothing (apart from possibly a small fee) when you do not. It allows you to make essential payments whilst chasing up your own payments, and helps to maintain cash flow. You only need to borrow what you need at the time.

Quick – Overdrafts are easy and quick to arrange, providing a good cashflow backup with the minimum of fuss.

Disadvantages of Overdrafts

Cost – Overdrafts carry interest and fees; often at much higher rates than loans. This makes them very expensive for long term borrowing. You also face large charges if you go over the agreed overdraft limit.

Recall – Unless specified in the terms and conditions, the bank can recall the entire overdraft at any time. This may happen if you fail to make other payments, or if you have broken terms and conditions; though sometimes the banks simply change their policies.

Security – Overdrafts may need to be secured against your business assets, which put them at risk if you cannot meet repayments.

Endorsement

Endorsement has different meanings, but in the law of negotiable instruments such as checks and securities, it is the act of the owner or payee signing his/her name to the back of a check, bill of exchange or other negotiable instrument so as to make it payable to another or cashable by any person. It is also sometimes referred to as "indorsement". An accommodation endorsement is the guarantee given by one person (or legal entity) to induce a bank or other lender to grant a loan to a different person (or legal entity). It is also the banking practice whereby one bank endorses the acceptances of another bank, for a fee, making them appropriate for purchase in the acceptance market.

There are five kinds of endorsements recognized in the Uniform Commercial Code:

Endorsement in blank, also known as general endorsement. If the instrument is payable to John Smith, the endorsement in blank is his simple signature without additional words, i.e., John Smith. It specifies no particular endorsee, and thereafter is payable to bearer and may be negotiated by delivery alone. It is a common form of endorsement, but if the instrument is lost or stolen, it may be more easily negotiated by the finder or thief to a holder in due course, the latter as such then having superior rights as against the original owner. The holder may convert an endorsement in blank into a special endorsement.

An endorsement in blank is an unqualified endorsement, and thus the endorser thereof makes all the warranties to all subsequent holders in due course specified in Section 3-417, Uniform Commercial Code.Special endorsement, also known as direct endorsement and endorsement in full. This endorsement specifies the person to whom or to whose order the instrument is payable, and the endorsement of such endorsee is necessary to the further negotiation of the instrument.

A special endorsement is an unqualified endorsement, and the endorser thereof makes all the warranties to all subsequent holders in due course detailed in Section 3417 of the Uniform Commercial Code.

Conditional endorsement.:This is a form of endorsement in which the endorser imposes some condition upon the transferee, e.g., Pay Adam Smith upon the satisfactory performance of his contract, (signed) Jane White. Where an endorsement is conditional, a party required to pay the instrument may make payment to the endorsee or his transferee, whether the condition has been fulfilled or not; but any person to whom an instrument so endorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of the person endorsing conditionally.

The conditional endorsement is an unqualified endorsement dependent upon the condition's fulfillment, and the endorser thereof thus makes all the warranties, if the condition is fulfilled, specified in Section 3-417, Uniform Commercial Code. Qualified endorsements are of two types and constitute the endorser a mere assignor of title to the instrument:Qualified endorsement Without Recourse, or similar wording.

The qualified endorsement does not destroy the negotiability of the instrument. The without recourse endorser makes the limited warranties found in Section 3-417, Uniform Commercial Code. A qualified endorsement is one directing it to be paid to a specific person or to be otherwise restricted, such as an indication of "for deposit only". If no qualifying language accompnies the signature, it is called a blank endorsement and payable to the holder.

Restrictive endorsement. A restrictive endorsement is a blank or special endorsement accompanied by words which either (1) prohibit the further negotiation of the instrument; or (2) constitute the endorsee the agent of the endorser; or (3) vest the title in the endorsee in trust for or to the use of some other person.

A restrictive endorsement is an endorsement signed on the back of a check, note or bill of exchange which restricts to whom the paper may be transferred. In addition to holder's signature, it includes a restriction on how the paper may be used by transferee. Only the payee can write a restrictive endorsement. A restrictive endorsement confers upon the endorsee the rights to (1) receive payment of the instrument; (2) bring any action thereon that the endorser could bring; (3) transfer his rights as such endorsee, where the form of the endorsement authorizes him to do so. All subsequent endorsees acquire only the title of the first endorsee under the restrictive endorsement.

The restrictive endorser is a qualified endorser, and makes the limited warranties found in Section 3-417, Uniform Commercial Code.

For further details and incidents of endorsements, see Article 3, Part 2 of the Uniform Commercial Code.

The following is an example of a state statute dealing with endorsement:

"(a) An indorsement may be in blank or special. An indorsement in blank includes an indorsement to bearer. A special indorsement specifies to whom a security is to be transferred or who has power to transfer it. A holder may convert a blank indorsement to a special indorsement.

(b) An indorsement purporting to be only of part of a security certificate representing units intended by the issuer to be separately transferable is effective to the extent of the indorsement.

(c) An indorsement, whether special or in blank, does not constitute a transfer until delivery of the certificate on which it appears or, if the indorsement is on a separate document, until delivery of both the document and the certificate.

(d) If a security certificate in registered form has been delivered to a purchaser without a necessary indorsement, the purchaser may become a protected purchaser only when the indorsement is supplied. However, against a transferor, a transfer is complete upon delivery and the purchaser has a specifically enforceable right to have any necessary indorsement supplied.

(e) An indorsement of a security certificate in bearer form may give notice of an adverse claim to the certificate, but it does not otherwise affect a right to registration that the holder possesses.

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