JAIIB · PPB · Unit 12Chapter Notes6–8 Marks Expected

Payment & Collection of Cheques and Negotiable Instruments

Principles & Practices of Banking | Unit 12 Chapter Notes

NI Act 1881 — three instrument types, payment in due course, paying and collecting bank protections, all endorsement and crossing types, dishonour offence and the 3-30-15 rule. One of the highest-scoring chapters in PPB.

✓ By Bankopedia.co.in✓ Updated 2026✓ Module A · General Banking Operations

📌 Why This Chapter Matters in JAIIB

This is one of the most frequently tested chapters in PPB — expect 6–8 questions every attempt. The NI Act provisions (Sec 10, 31, 85, 89, 128, 131, 138) are direct MCQ fodder. The 3-30-15 rule for dishonour, the 5 endorsement types, and the 4 crossing types each generate multiple questions. Nail the section numbers and you are almost guaranteed these marks.

Section 1

The Negotiable Instruments Act, 1881

The NI Act governs three types of financial instruments used in everyday banking. Understanding the differences — and what makes each one valid — is the foundation of this entire chapter.

🧠 Mnemonic — 3 NI Instruments: PBC

Promissory Note

Sec 4

Bill of Exchange

Sec 5

Cheque

Sec 6

Remember: “Pay By Cheque” — P, B, C.

Sec 4

Promissory Note

A written, unconditional promise by one person (the maker) to pay a certain sum of money to another person or to the bearer of the instrument.

💡 Valid examples

"I promise to pay B or order ₹500." ✓
"I acknowledge myself to be indebted to B in ₹1,000, to be paid on demand." ✓

⚠️ Not valid as promissory notes

“I promise to pay ₹500 after deducting what B owes me” — conditional, not unconditional.
“I promise to pay ₹500 and deliver my black horse” — not money alone.

Sec 5

Bill of Exchange

A written, unconditional order by one person (the drawer) directing another person (the drawee) to pay a certain sum to a third person (the payee) or to the bearer.

Party	Role	In a cheque
Drawer	Signs and issues the instrument	Account holder
Drawee	Directed to make payment	The bank
Payee	Receives the payment	Named on the cheque

Sec 6

Cheque — including electronic forms

A bill of exchange drawn on a specified banker, payable on demand only. Can be drawn on a current or savings account — not on a term deposit.

Cheque in electronic form

Drawn using a computer resource and signed with a digital/electronic signature.

Truncated cheque

Physical cheque stopped during clearing; an electronic image is transmitted instead. Used in CTS (Cheque Truncation System).

⚠️ Key legal duty

A bank is legally obligated to pay a properly drawn cheque if: (a) cheque is properly drawn, (b) sufficient balance exists, (c) no legal restraint exists.

Concept	What it means
Holder	Any person entitled in their own name to possess and receive payment of a negotiable instrument.
Holder in Due Course (HDC)	A holder who acquired the instrument for consideration, before maturity, in good faith, and without knowledge of any defect in the title of the transferor.
Negotiation	Transfer of a negotiable instrument to a person so as to make them the new holder.

Section 2

What the Bank Checks Before Paying a Cheque

Before debiting the customer’s account, the paying bank must run through a checklist. Missing any one of these can expose the bank to liability.

🧠 Mnemonic — Pre-Payment Checklist: DATES-B

D — Date (not stale / post-dated)

A — Amount (words = figures)

T — Title / Payee

E — Endorsements regular

S — Signature of drawer

— Stop-payment check

B — Balance & legal orders

Date

Cheque must not be stale (older than 3 months) or post-dated. A post-dated cheque cannot be paid on presentation — there is a risk that stop-payment, death, or insolvency of the drawer may occur before the ostensible date.

Amount — words vs figures

Words and figures must match. Sec 18 says if they differ, the amount in words prevails. In practice, the cheque is returned with the reason 'amount in words and figures differs'.

Title / Payee

Order cheque: paid to payee or valid endorsee. Bearer cheque: paid to any presenter — no endorsement check needed. Joint payees ('X and Y'): must be paid jointly. 'X or Y': either may be paid.

Endorsements

For order cheques, all endorsements must be regular. For bearer cheques, endorsements are irrelevant — paying bank need not verify them at all.

Signature of the drawer

The drawer's signature is the mandate to debit the account. If forged, no mandate exists — the bank cannot debit the account. Sec 89 protects the bank for forged endorsements, but NOT for a forged drawer signature.

—

Stop-payment instructions

Bank must check for any countermand instruction. Joint account: all account holders must give the stop-payment. Partnership: all partners must sign. Company: all authorised signatories must cancel the stop-payment.

Balance & legal orders

Sufficient clear balance must exist. No garnishee order, income tax attachment, or any other legal restraint should be in force. No notice of drawer's death, insolvency, or insanity should have been received.

Section 3

Payment in Due Course — Section 10

The paying bank only gets statutory protection if the payment qualifies as “payment in due course.” This is the golden test — get this wrong and the bank loses all protection.

“Payment in due course means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitledto receive payment.”
— Section 10, NI Act 1881

🧠 Mnemonic — 4 Elements of Sec 10: AGPE

A — Apparent tenor

G — Good faith (no negligence)

P — Person in possession (HDC)

E — Entitled to receive

“A Good Person is Entitled” = Apparent tenor, Good faith, Person in possession, Entitled.

→ Apparent tenor

The instructions visible on the face of the cheque — date, payee name, bearer/order, amount in words and figures, crossing. The bank pays based on what it can see, not what is hidden.

→ Good faith and without negligence

Good faith alone is NOT enough — the bank must also not be negligent. If the depositor gives the wrong account number but the correct name, crediting without cross-checking the name is negligence. No protection available in that case.

→ Person in possession (HDC)

Payment must be made to the holder in due course — a person who obtained the cheque for value, in good faith, before maturity.

→ Entitled to receive

No circumstances should exist that cast doubt on the presenter's right to the cheque. If there is a visible red flag and the bank pays anyway, it loses protection.

Section 4

Paying Bank — Liability & Protections

Section 31 — The Core Duty

The bank is legally required to honour a properly drawn cheque if sufficient funds are available. If it wrongly refuses, it must compensate the drawer for all losses caused. Funds are not properly applicable when payment is stopped, drawer is dead, a garnishee or attachment order is served, funds are earmarked, set off, or the balance is unclear.

🧠 Mnemonic — 5 Paying Bank Protections: OBADs + C

O — Order cheque (Sec 85-1)

B — Bearer cheque (Sec 85-2)

A — drAft (Sec 85-A)

D — material alteration (Sec 89)

C — Crossed cheque (Sec 128)

Sec 85(1)

Forged endorsement on an ORDER cheque

If an order cheque is endorsed on behalf of the payee, the bank is discharged by payment to the endorsee — even if the endorsement was forged — PROVIDED: (a) all endorsements look regular, and (b) payment is made in due course (Sec 10). Banks cannot be expected to know the signatures of non-customers.

⚠️ Exam trap

This protection does NOT cover a forged drawer signature. If the drawer's own signature is forged, the bank has no mandate to pay and gets no protection.

Sec 85(2)

Forged endorsement on a BEARER cheque

A bearer cheque is discharged by payment to the bearer regardless of any endorsement — genuine, forged, or restrictive. Bearer cheques are negotiated by delivery alone, so endorsements are irrelevant.

Sec 85A

Forged endorsement on a DRAFT

Same protection as Sec 85(1) — the bank is discharged by payment in due course if the draft appears to be endorsed by/on behalf of the payee and endorsements look regular.

Sec 89

Material alteration of a cheque

If a cheque was materially altered but the alteration is not apparent at the time of payment, the bank is discharged by paying according to the apparent tenor at the time of payment. Under CTS, NO alterations or corrections are allowed on cheques — not even date changes. For any correction, a fresh cheque must be issued.

⚠️ Exam trap

A material alteration that IS apparent gives the bank no protection — it should catch it and return the cheque.

Sec 128

Payment of a CROSSED cheque

A bank that pays a crossed cheque in due course is placed in the same position as if the true owner had received the payment. For a generally crossed cheque: must pay only to a banker. For a specially crossed cheque: must pay only to the specified banker or their agent.

⚠️ Exam trap

If the bank pays a crossed cheque to someone other than a banker (or not the specified banker), it loses this protection and is liable to the true owner (Sec 129).

Section 5

Collecting Bank — Duties & Protection (Sec 131)

The collecting bank collects cheques on behalf of its customers. If it collects for someone with no title or defective title, it is liable for conversion— wrongful interference with the true owner’s property.

3 Conditions for Protection under Sec 131

1
Collected for a customer
KYC guidelines must have been followed. The account holder must be a known, properly onboarded customer — not a stranger.
2
Cheque is already crossed
The crossing must exist before the cheque reaches the bank — either generally or specially. The bank gets no protection if it adds the crossing itself after receiving an uncrossed cheque.
3
Good faith and without negligence
Both conditions must be met simultaneously. Good faith without due diligence is not enough — the bank must also take reasonable care in the collection process.

⚠️ Critical distinction — Sec 131 vs Sec 128/85

→Sec 131 protects the collecting bank.
→Secs 85 and 128 protect the paying bank.
→MCQ tip: “Section 131 extends protection to ___” → Answer: collecting bank.

Section 6

Endorsement of Cheques — 5 Types

An endorsement is when the holder signs the back of a cheque to transfer it to someone else. Made on the reverse of the cheque — or on a separate slip called an allonge — it is the primary mechanism for negotiating an order instrument. (Sec 15)

🧠 Mnemonic — 5 Endorsement Types: BFCRF

B — Blank

F — Full (Special)

C — Conditional (Sans Recourse)

R — Restrictive

F — Facultative

“Big Fat Cats Rarely Fly” — Blank, Full, Conditional, Restrictive, Facultative.

Sec 16

1. Blank Endorsement

How it’s made

Endorser signs the back of the cheque — no payee name written.

Effect

Converts the cheque into a bearer instrument. Can be negotiated by mere delivery.

💡 Example

Ramesh signs the back of a cheque without writing anyone's name. Anyone holding it can now cash it.

Sec 16

2. Full (Special) Endorsement

How it’s made

Endorser signs AND writes the name of the person to whom it is transferred.

Effect

Only that named person can further negotiate or encash the cheque.

💡 Example

Ramesh writes 'Pay to Sunita or order' and signs. Now only Sunita (or her endorsee) can use it.

Sec 52

3. Conditional (Sans Recourse) Endorsement

How it’s made

Endorser excludes their own liability, OR payment depends on a future event.

Effect

If the cheque is dishonoured, the endorsee cannot recover from this endorser.

💡 Example

'Pay to Priya sans recourse' — if Priya doesn't get paid, she cannot come back to the endorser.

Sec 50

4. Restrictive Endorsement

How it’s made

Endorsement restricts further negotiation, e.g. 'Pay to Nalini only'.

Effect

The cheque cannot be further transferred. Nalini can collect but cannot endorse it onwards.

💡 Example

'Pay to Nalini Mumbaikar only' — Nalini collects the funds but cannot hand the cheque to anyone else.

Sec 52

5. Facultative Endorsement

How it’s made

Endorser waives the requirement for notice of dishonour in writing.

Effect

Even if dishonoured, no formal notice needs to be given — the endorser remains liable.

💡 Example

'Pay to Manorama or order, notice of dishonour waived' — the endorser stays liable without requiring a dishonour notice.

Section 7

Crossing of Cheques — 4 Types

Crossing is a safety instruction from the drawer that forces the cheque to be routed through a bank account rather than paid in cash over the counter. It creates an audit trail. Governed by Secs 123–131 — also applicable to banker’s cheques, pay orders, and drafts.

🧠 Mnemonic — 4 Crossing Types: GSNA

G — General

S — Special

N — Not Negotiable

A — Account Payee

“Girls Stay Near Accounts” — General, Special, Not Negotiable, Account Payee.

Sec 123

General Crossing

How it’s done

Two parallel transverse lines drawn across the face of the cheque. May include '& Co' or 'Not Negotiable' between lines.

Effect

Cheque can only be paid through a bank account — not over the counter in cash.

📌 Exam point

A crossed cheque must be paid only to a banker (Sec 126). Not through cash payment at counter.

Sec 124

Special Crossing

How it’s done

Two parallel lines PLUS the name of a specific bank written across the face.

Effect

Payment can only be made to that specific named banker (or their agent for collection).

📌 Exam point

If crossed specially to more than one banker (not agent), the paying bank must refuse payment (Sec 127).

Sec 130

Not Negotiable Crossing

How it’s done

Words 'Not Negotiable' added within or alongside the crossing.

Effect

Removes the cheque's negotiable character. The transferee gets no better title than the transferor had.

📌 Exam point

If the transferor had a defective title, the transferee also gets a defective title — even if they paid value in good faith.

Not in NI Act — RBI directive

Account Payee Crossing

How it’s done

Words 'A/c Payee' or 'Payee's A/c Only' added to the crossing.

Effect

Collecting bank must credit the proceeds only to the named payee's account. Cannot be collected for a third party.

📌 Exam point

This is NOT in the NI Act but is RBI-mandated practice. It's a direction to the collecting bank, not the paying bank.

Crossing after issue (who can add crossing?)

→Uncrossed cheque → holder may cross it generally or specially.
→Generally crossed → holder may convert it to a special crossing.
→Any holder may add the words 'Not Negotiable' to an existing crossing.
→Once crossed specially, the holder CANNOT uncross it.

Section 8

Forged Instruments

A forged instrument — where the drawer’s or endorser’s signature, or the payee’s name, has been faked — gives no title at allto anyone in the chain. This is different from a defective title (where some title exists, but it’s flawed).

→The rule: forgery gives NO title. A holder in due course of a forged instrument has no title, not just a defective one.
→The true owner can sue to recover the amount — the holder is deemed to be holding it on the true owner's behalf.
→If payment was obtained through forgery, the payee is liable to return it to the drawee.
→Fraud is a good defence only against the party who committed it or a transferee who knew about it — not against a genuine HDC.

⚠️ Supreme Court — Canara Bank case

In Canara Bank vs Canara Sales Corporation (1987), the Supreme Court held that a cheque with a forged drawer signature is a mere nullity — not a cheque at all. The bank has no authority to debit the account. The bank can only succeed if it proves adoption (the customer accepted the debit) or estoppel (the customer misled the bank).

Section 9

Dishonour of Cheques — The Sec 138 Offence

Bouncing a cheque is not just a banking inconvenience — it is a criminal offence under the NI Act. Understanding the exact conditions, timelines, and penalties is critical for JAIIB.

Common reasons for dishonour

→Insufficient funds

→No arrangement

→Exceeds arrangement

→Payment stopped

→Refer to drawer

→Closure of account

→Present in proper zone (CTS)

→Paper not received (CTS)

→Alteration in instrument (CTS)

→Digital certification failure (CTS)

Sec 138

Dishonour for insufficient funds / exceeds arrangement

If a cheque issued for discharge of a debt or liability is returned unpaid due to insufficient funds or exceeding the arrangement, the drawer commits an offence punishable with:

Imprisonment

Up to 2 years

Fine

Up to 2× cheque amount

🧠 3 Conditions — Remember: 3-30-15

3 months

Cheque must be presented within validity period

30 days

Demand notice must be sent within 30 days of return

15 days

Drawer must pay within 15 days of receiving notice

If the drawer pays within 15 days of the notice, no offence is committed.

⚠️ Important case law

→ Criminal liability cannot be imposed on heirs/legal representatives. (Bhupindar Kaur case)
→ Cheque returned on account closure also constitutes an offence. (G. Venkataramanaiah case)
→ A cheque can be re-presented any number of times within its validity period. (S. Bhadram case)
→ A post-dated cheque: the 3-month period runs from the date written on the cheque, not presentation date.

Related Sections 141–148 — Quick Reference

Sec	Title	What it says
141	Offences by Companies	If a company commits the offence, every person responsible (director, officer) is also personally guilty. Nominated govt. directors are exempt.
143	Summary Trial	Tried by Judicial Magistrate / Metropolitan Magistrate (1st class). Conviction in summary trial: max 1 year imprisonment + fine up to ₹5,000.
144	Mode of Summons	Summons may be served by speed post or court-approved courier — no need for physical service.
145	Evidence on Affidavit	The complainant's evidence can be submitted on affidavit — they don't need to appear in person for initial proceedings.
146	Bank Slip as Evidence	Court shall presume dishonour of the cheque on production of the bank's return slip / memo bearing the official dishonour mark — unless disproved.
147	Compoundable Offence	Every offence under the NI Act is compoundable — the complainant and accused can settle/compromise the matter.
148	Appeal — Deposit Required	If the drawer appeals against conviction under Sec 138, the appellate court may order a deposit of minimum 20% of the fine/compensation awarded by the trial court.

🧠 Mnemonic for 141–148: “Companies Try Sending Affidavits — Slips Compound Appeals” — Companies, Trial, Summons, Affidavit, Slip/evidence, Compound, Appeal.

Summary

Chapter at a Glance

→

3 NI instruments: PBC — Promissory Note (Sec 4), Bill of Exchange (Sec 5), Cheque (Sec 6).

→

Pre-payment checklist: DATES-B — Date, Amount, Title, Endorsements, Signature, (Stop-payment), Balance.

→

Payment in due course (Sec 10): AGPE — Apparent tenor, Good faith, Person in possession, Entitled to receive.

→

Paying bank protections: OBADs+C — Order (85-1), Bearer (85-2), drAft (85A), alteration (89), Crossed (128).

→

Collecting bank (Sec 131): 3 conditions: KYC customer + cheque already crossed + good faith without negligence.

→

5 endorsement types: BFCRF — Blank, Full, Conditional, Restrictive, Facultative. ('Big Fat Cats Rarely Fly')

→

4 crossing types: GSNA — General, Special, Not Negotiable, Account Payee. ('Girls Stay Near Accounts')

→

Sec 138 dishonour: 3-30-15: 3 months validity → 30 days notice → 15 days to pay. Penalty: 2 years / 2× amount.

→

Sec 141–148: Companies, Trial, Summons, Affidavit, Slip, Compound, Appeal (20% deposit minimum).

✅ Exam Strategy

✓Section numbers are MCQ gold — Sec 10 (due course), Sec 31 (bank's duty), Sec 85 (protections), Sec 131 (collecting bank), Sec 138 (offence).
✓The 3-30-15 rule for Sec 138 is asked every attempt — memorise it cold.
✓Sec 131 protects the COLLECTING bank. Secs 85 and 128 protect the PAYING bank. MCQs exploit this confusion.
✓'Not Negotiable' crossing (Sec 130) removes negotiability — the transferee gets no better title than the transferor.
✓Account Payee crossing is NOT in the NI Act — it is an RBI directive. This is an exam trap.
✓Forged drawer signature = no protection for the bank at all. Forged endorsement = protection available under Sec 85.

Payment & Collection of Cheques and Negotiable Instruments

The Negotiable Instruments Act, 1881

Promissory Note

Bill of Exchange

Cheque — including electronic forms

What the Bank Checks Before Paying a Cheque

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