Banking Notes by Muhammad Ashraf Ali, Member Senior Visiting Faculty, GC University,

" Autograph your work with quality.

Origin and Evolution of Banking
Explanation of What is a Bank?
If we think of the people in an economy from the point of view of whether they have or do
not have spare, extra money or whether they possess or do not possess potentially
lucrative ideas of their own to gainfully employ the extra money, we find that the economy
is composed of the following four types of people.
1.
2.
3.
4.

People
People
People
People

with
with
with
with

no extra money and no ideas.

extra money but no ideas (or no time to implement any ideas).
ideas but not enough money.
both ideas and extra money.

The first type does not play a major role, they have just enough money to cover their
needs, and have no ideas.
People of the fourth type who have extra money, and have ideas as well. They are the self
sufficient entrepreneurs who use their own money in their own business ventures.
We will focus our attention on type 2 and type 3.
Type 2 with extra money but no ideas are usually households or investors or retired
people. They are the surplus entities.
Type 3 are mostly companies who have no money but they have ideas and time to utilize
money in productive enterprises that can generate incomes and cash flows. These are
deficit entities.
Banks are actually the intermediaries who collect and gather small individual amounts of
money from a large number of households (Type 2) , pool this money and lend the same
in large chunks to companies (Type 3) who use the money in cash flow generating
production or infrastructure projects.
Companies pay part of the cash flows to banks as interest or profit. Banks keep some to
cover their expenses and remuneration for their own services and the balance is paid to
households as return/interest as compensation for parting with the money.
Banks thus assist in the setting up of large projects in industry and infrastructure for
economic development of the countries and reduction of poverty by pooling the small, idle
savings of households for use in industrial enterprises.
The above is by way of understanding the important role of the banks in creating and
supporting employment generating productive enterprises. The formal definitions of BANK
will follow later in this treatise.
Lets now look at the financial markets which assist in the channelization of idle resources
into productive avenues.
BANKING AND FINANCIAL SERVICES

DIRECT AND INDIRECT INVESTMENTS IN FINANCIAL MARKETS

First of all we study the function of the BROKERS in the MARKET mechanism
DIRECT INVESTMENT IN FINANCIAL MARKETS THROUGH BROKERS
DIRECT INVESTMENT IN FINANCIAL MARKETS
FUNDS FLOWS
HOUSE HOLDS
BUSINESSES CASH (FINANCIAL CASH BUSINESSES
CORPORATIONS MARKETS) CORPORATIONS
GOVERNMENT
BROKERS GOVERNMENT
(Net Savers) Securities Securities (Net Borrowers)
Surplus Units Stocks/Shares Stocks/Shares Deficit Units
Bonds Bonds

1) Brokers earn BROKERAGE COMMISSION for facilitating direct investment by Net
Savers/Surplus Units.
Brokers receive cash from Net Savers and ON-PAY to net borrowers/Deficit Units. They
receive share scrips/bonds and ON-PASS to savers/investors/surplus units.
2) Investors i.e. Savers/Surplus Units bear the investment/default risk but also benefit
from possible high profits/gains.
3) Brokers do not assume/bear any investment/default risks nor are benefitted from
profits/gains on investments.
Disadvantages of Direct Investment to Savers
Risk of financial Loss
Risk of Liquidity Loss
Next we look at the function of BANKS in the MARKET system
INDIRECT INVESTMENT IN FINANCIAL MARKETS THROUGH
FINANCIAL INTERMEDIARIESBANKS AND OTHER FINANCIAL INSTITUTIONS
INDIRECT INVESTMENT IN FINANCIAL MARKETS
THROUGH FINANCIAL INTERMEDIATION

FUNDS FLOWS

HOUSE HOLDS HOUSE HOLDS

BUSINESSES
BUSINESSES CASH (FINANCIAL CASH LOAN CORPORATIONS
CORPORATIONS INTERMEDIATION) GOVERNMENT
GOVERNMENT
(Net Savers) (Net Borrowers)
Current Accounts BANKS &
SURPLUS Savings Accounts FINANCIAL LOAN DEFICIT
UNITS Fixed Deposits INSTITUTIONS DOCUMENTATION
SECURITIES UNITS

Advantages of Intermediation
1) Banks (Financial Intermediaries) accept cash from savers/surplus units & give bank
accounts allowing savers liquidity as per deposit terms irrespective of possibility
of default.
2) Financial Intermediaries pool the accounts & deposits and give loans to deficit entities
and receive Security Documentations and Collateral.
3) Risk of default in investment in deficit entities is assumed by the financial intermediary.
4) Banks gain from fund based interest income and non fund based business
like imports/exports from the borrowers /deficit units.
5) The savers are benefitted as they do not face investment/default risk or liquidity risk.
Disadvantages of Intermediation
In intermediation the savers get lesser return as compared with direct investment since
the intermediary organization does not pass on the full gain to the saver.
Also the Deficit units, the borrowers, have to pay a higher price for the use of funds
because they have to pay for both the costs of the intermediary bank and the saver for
parting with the money.
INTRODUCTION to Banking
Banking, in its most primeval practice, can be traced back to 2000 BC in Babylonia; a
more evolved and relatively modern form of banking dates back to early 14th century in
Italy.
The term bank is derived from the Italian word "banca". The Jews of Lombardy (a
province in Italy) used to transact money sitting on benches placed in market places.
Those benches were called 'banca meaning the money changers place. Banca later
convened into the word "bank". The first modem bank, Bank of St. George, was founded
in Italy in 1406. In the beginning banking operations were restricted to the giving and
taking of money, whereas today they are engaged in performing many other financial
activities like management of investment funds, credit operations and insurance activities.
A bank is defined as an institution which has been licensed by the Central Bank of its
country to accept deposits repayable on demand or otherwise, and withdrawal by cheques,
draft, order or otherwise. This definition also includes specialized banks such as
agricultural banks, investment banks, SME banks, microfinance banks and Post Office
Saving Banks, etc. A bank can also be defined as an institution whose primary activity is
to act as a payment agent for customers to borrow and lend".
According to the Banking Companies Ordinance 1962 Sub Section (c): "Banking Company
means any company that transacts the business of banking in Pakistan and includes their
branches and subsidiaries functioning outside Pakistan of banking companies incorporated

in Pakistan inserted by Finance Act 2007)". Section 13 of the Banking Companies

Ordinance deals with the minimum paid-up capital and reserve requirement for the
commencement of banking business in Pakistan. The authority to alter this requirement
lies with the State Bank of Pakistan.
Legal/Statutory definitions of Banking in India and Pakistan:India - The Banking Regulations Act 1949 (Section 5 b) defines banking as:
Banking means the accepting for the purpose of lending or investments, of deposits of
money from the public, repayable on demand or otherwise and withdraw-able by cheque,
draft, order or otherwise.
Pakistan - Section 5(b) of the Banking Companies Ordinance 1962 defines banking as:
Accepting, for the purpose of lending or investment of deposits of money from the public,
repayable on demand or otherwise and withdrawable by cheque, draft, order or
otherwise.
Primarily there are two main functions of a bank - accepting money from the depositors
and offering that money in the form of loans to the creditors. Depositors lend money to
the bank and are paid for it; similarly the bank lends money to the creditors and is paid
for it. The earnings of a bank and its shareholders are thus the difference between these
two costs - the cost of deposits and the cost of credits. A banks primary aim is to keep its
depositors and lenders satisfied by giving both parties the maximum benefits in terms of
attractive profits and quality services.
At the time of partition there were only a limited number of commercial bank branches
present in Pakistan and banking facilities were available only in big cities. With the
passage of time, the number of banks and their branches has increased substantially. At
present there are more than 10,500 branches of commercial banks providing banking
services to more than 30 million customers. Banks have played a vital role in the
development of Pakistans agricultural and industrial sector.
Every country has its own set of laws and regulations for protection of public interest and
to ensure smooth and lawful running of its banks. Similarly, in order to commence banking
operations in Pakistan, either domestically or internationally, a bank has to obtain a
banking license from the regulator. This license is issued upon ensuring successful
adherence and fulfilment of relevant laws and regulations as prescribed by the State Bank
of Pakistan. The State Bank of Pakistan is the official regulator of banks in Pakistan as per
the Banking Ordinance 1962.
After obtaining a license to operate, a separate license is required to open every new
branch under Section 28 of Banking Companies Ordinance 1962. Microfinance banks are
licensed under Micro Finance Institutions Ordinance 2001.
The State Bank of Pakistan provides guidance and support to the banking sector for
developing and maintaining good business practices. In order to ensure availability of
banking facilities to all corners of the country, SBP has instructed banks to open at least
20% branches in rural/underserved areas. New options for opening sub-branches, sales
and service centers and mobile banking units have also been introduced. Banks are being
encouraged to enhance their scope towards branchless banking and collaborate by signing
Service Level Agreements (SLA) with large companies to extend banking services to the
public at non-banking locations. The number of branchless banking accounts has already
reached 2.4 million plus and SBP is keen to increase the number of people who have a
bank account.
Evolution Of Banking Industry In Pakistan.
Before partition, in the undivided India, the central bank under which banks operated was
the Reserve Bank of India and the Reserve Bank of India continued to function as the
Central Bank of the banks operating in the newly formed Pakistan.

The then government of the newly established state of Pakistan realized the need to have
a central regulatory authority of their own to ensure smooth operations of all the existing
and future banks. Despite the shortage of experienced staff and other resources, Quaid-eAzam Muhammad Ali Jinnah inaugurated The State Bank of Pakistan (SBP) on 1st of July
1948.
In October 1948 Pakistani notes were issued to replace Reserve Bank of India notes.
Habib Bank Ltd was already functioning from pre partition days. The National Bank of
Pakistan came into being in 1949 as a scheduled bank and to serve as an agent of SBP.
Later, Industrial Development Bank of Pakistan and Agriculture Development Bank of
Pakistan were formed to support the industrial and agricultural sector. With the
development of agriculture, trade and industry, the functions of the state bank became
wider. To progress this situation, the State Bank of Pakistan Act 1956 was promulgated.
During this period two new banks, Muslim Commercial Bank (MCB) and Pakistan Industrial
Credit and Investment Corporation (PICIC), were formed. This was the period of
expansion in the banking arena. In late 1959 United Bank Limited (UBL) was established,
while Commerce Bank limited and Standard Bank Limited followed soon after.
Nationalization
On 1st of January 1974 banks in Pakistan were nationalized and the Banks Nationalization
Act 1974 was promulgated. After nationalization, the formation of new banks in the
private sector stopped completely. Due to increasing political interference in the affairs of
the banks, business decisions and appointment of staff were not taken on merit. Office
discipline deteriorated to a point of non-existence and some nationalized banks were on
the verge of collapse.
Denationalization
After 16 years of experiencing nationalization it was realized that, rather than being
productive, nationalization actually proved to be quite disastrous for the banking industry.
In 1991 the government changed its stance and announced a policy of denationalization of
nationalized banks so as to encourage the formation of new banks in the private sector.
Today, the five large network banks - The National Bank of Pakistan, Habib Bank Limited,
United Bank Limited, Muslim Commercial Bank Limited and Allied Bank Limited - possess
more than 50 % of the countrys deposit base. The remaining 50% is divided between
other foreign and private sector banks. Both Muslim Commercial Bank and Allied bank
were privatized in 2000 and showed significant improvements in profit and deposit growth.
The privatization of Habib Bank and United Bank Limited soon followed. The National Bank
of Pakistan, however, is still government owned and is currently the largest bank in
deposit base and is almost the sole beneficiary of lucrative government deposits.
Before privatization the five large network banks used to support certain non-lucrative
projects on government demand, which included:
Lending to support projects patronized by influential authorities under government
sponsorships.
Extending loans without requisite collateral.
Extending loans below market rate returns.
Utility bill collection below banks cost of management of the bill collection process.
Over-collection of taxes from these institutions to cover Government revenue shortfall.
Over-staffing of these institutions with under-skilled preferred people.
Forced branching in unbanked areas.
The above mentioned practices have been reduced substantially as a result of privatization
as well as parallel reforms within the sector. Other than the banking industry, Pakistans
financial sector comprises of the development finance institutions (DFIs), insurance

companies, mutual funds, the stock exchange and leasing companies.

The future growth of the banking industry depends on overall economic activity but, more
specifically, on the expansion of the industrial sector. The on-going privatization process is
providing momentum to the industrial sector which in turn is fuelling the growth of the
banking industry.
Steps toward Turnaround
After privatization of the four big banks, the following actions were taken to enhance
profitability and reduce costs:
Headcount reduction to eliminate redundancy by almost 50%.
Closing down of loss making business areas.
Merging of close vicinity branches into single units.
Automation at both head office and branch level.
Introduction of new products.
Induction of competitive staff based on merit and emerging requirements.
Streamlining of the internal audit and compliance functions.
Increased focus on developing both corporate and consumer portfolios to enhance
profitability.
Streamlining international operations to ensure enhanced profitability.
The above steps have resulted in improvements in the banking arena both in terms of
profitability and service standards. These changes have been recognized both locally and
internationally, the impact of which can be seen in the form of improved credit ratings by
Moody's Investor Services.
Future trends in the Pakistani banking industry
Trends in the Pakistani banking industry in the next few years are likely to be
extraordinarily competitive. After a decade of aggressive progress, the industry will take
some time for consolidation. Due to the rise in inflation, interest rates will increase farther
and the net income spread of the banks will be reduced. Due to the economic uncertainty,
the number of non-performing portfolios will also increase. The future approach of the
banks will be to focus on Information Technology (IT).
The future success of the banking industry lies in the effective use of information
technology, because it benefits the banks and their customers in terms of cost, speed and
convenience. At present IT is playing a key role in managing all types of banking
operations, product development and improvement of services. It has also helped in
defining new customer service standards with the increase in usage of phone banking,
Interactive Voice Response (IVR) systems, internet banking, Point of Sale (POS), credit
and debit cards. With the increased dependency on the use of information technology, it is
imperative that maximum security standards be adopted to ensure the safety, security,
and maintenance of e-banking transactions. The number of Automated Teller Machines
(ATM) in the country is now well over 5,000. Out of 10,500 branches in the country, more
than 8,100 branches are offering real time online banking services. Banks must design
infallible data security processes to strengthen controls. Information technology and
compliance requirements will, over the next few years, continue to be the most significant
determinants of productivity. Skills are a mid-ranking factor among the drivers of
productivity, although in the wholesale sectors and in investment and fund management,
technical skills will be the most important contributors.
Use of Core Banking System (CBS)
The majority of banks are using the Core Banking System (CBS) as a comprehensive
banking solution. It works on a real time basis and the entire banking network resides on
one host which leads to efficient reconciliation of head office account entrIes and
maintenance of customers account details under one CIF (customer information file)

with information on borrowing of all kinds. This system allows an insight of all the
relationships a customer maintains with the bank on the basis of a unique ID, generally
the CNIC of the customer. In the absence of a core banking system, different departments
within banks use different programs for their banking needs. Post implementation of CBS,
all functions are centralized at one point of control. All banks in future will move on to
implementation of the Core Banking System.
Rules for customers' protection
Since 2008, the State Bank of Pakistan has witnessed an unprecedented growth in
consumer banking, which has led to an increase in the grievances of consumers about the
products and services of banks/DFIs. In order to deal effectively with these increasing
consumer grievances and to put in place an appropriate policy and regulatory mechanism
for their redress, SBP has created a Consumer Protection Department. In addition to
dealing with and deciding on consumers public grievances / complaints regarding
consumer products and services, the newly created department also handles complaints
related to all types of bank products. It serves a dual purpose, i.e. it protects the
customers of the bank and on the other hand it also supports the banking industry by
suggesting improvements in banks policies. In future, principles-based regulations will be
modified for banks as well as for customers protection.
Centralization of processes
Maximum centralization of processes will be a key factor in future. Account opening,
clearing processing inward and outward, collection, Credit Administration department
(CAD) affairs, etc will all be centralized. A few major banks have already centralized these
functions.
Outsourcing services
Due to unproductive union activities, some banks have started outsourcing various tasks,
including security services and hiring of third party staff. In some parts of the world, for
example in India, a public sector bank has outsourced work for the installation and
maintenance of 1,000 ATMs as part of its plan to scale up alternative channels for business
operations. In Pakistan also, instead of setting up a fully fledged department and hiring a
huge work force, the trend for allocating specialized jobs to third parties is becoming more
popular.
Branchless Banking
It is said that branchless banking is the future of Pakistans financial sector, as it opens
up great opportunities for banks to bring the unbanked segment of society into the
financial system. The State Bank of Pakistan, being the central bank of the country, is
taking steps to make the branchless banking regulatory framework more flexible to
broaden the scope of financial services in line with the other, more traditional banking
channels. Branchless banking has huge potential to reach this unbanked and untapped
segment of society. This is not only cost effective for the banks but represents an
affordable solution for the financially excluded, underprivileged class of society. That is
why Pakistans financial sector is witnessing a dynamic transition, led by this branchless
banking solution. This transition can be witnessed by a comparison of the number of
branches versus branchless banking outlets. At present, numbers of branchless banking
outlets have reached around 14,000 in around two years, against a total branch network
of around 10,500 in 63 years.
According to one estimate, the cost of setting up a conventional branch is 76 times higher
than using a third party agent to bring the unbanked areas into the financial system. At
present the most popular branchless banking products in the market are Omni of UBL,
Easy paisa of Tameer Bank, MCB Mobile, KASB Mobile and HBL Uphone. According to the
SBP disclosure, more than 400,000 branchless/ mobile banking accounts were opened
collectively by all banks in the last 18 months. In branchless banking billions of rupees
have been transferred from one person to another, from one account to another, and from

government to the public sector. The total branchless banking customer accounts is now
above 2.4 million.
Priority to the agriculture sector
These days an increasing number of resourceful people are setting up agri-based
businesses because real farmers are not getting benefits of agricultural reforms. The
major land holding is with the Zameendars/ Waderas.
Since 2008 the government has increased the purchase price of wheat, the cost of cotton
is increasing worldwide, rice production is increasing although its price is stable, fruit
production and exports are also increasing and all these factors have led to an increasing
interest in the agricultural sector.
Functions of State Bank of Pakistan
Traditional and Non-Traditional Functions of the State Bank of Pakistan
The State Bank of Pakistan is the Central Bank of the country. In order to achieve its
objectives the State Bank performs all the traditional and non-traditional functions.
Traditional functions are those which are performed by the central banks of all countries.
Non-traditional functions are those which are not traditional or conventional but which SBP
has assumed these functions taking into account the specific requirements of the country.
In the Statute of the Bank for International Settlements, Basle, Switzerland, a central
bank is defined as
'the bank in any country to which has been entrusted the duty of regulating the volume of
currency and credit in that country' (Article 56 a).
Traditional functions
Traditional functions performed by Central Banks everywhere are divided into two groups,
i.e. primary functions and secondary functions.
Primary functions are issuance of notes, regulation of the financial system, lender of last
resort, and conduct of monetary policy.
Secondary functions are management of public debt, management of foreign exchange,
advising government on policy matters, securing the payment system and maintaining
relationships with international institutions.
1. Sole authority to issue Notes:
Under section 24 of the SBP Act 1956, this is the primary function of the bank - to issue
notes in accordance with the requirements of business and the public as a whole.
According to section 30 of the SBP Act, assets of the Issue Department (gold / silver
reserve, approved foreign exchange, special drawing rights held with IMF and other
approved assets.) at no time should fall below its liabilities, i.e. total of notes issued. Out
of total assets a minimum Rs.1.2 billion must be kept in the form of gold coins, gold
bullion, and silver bullion or approved foreign exchange.
2. Conduct of Monetary and Credit policy:
According to section 9A of the SBP Act, the State Bank of Pakistan is responsible for
regulation of the monetary and credit policy of the country in such a manner that it should
bring economic stability to the country. The Bank uses direct and indirect instruments for
credit control, such as discount rate for three days repo, T-bill auction rate, and open
market operations. The Bank also controls credit by prescribing credit ceilings, setting the
credit/ debit ratio, and fixing margin requirements. Since 1995, SBP has been controlling
liquidity through open market operations.
3. Regulation and supervision of Financial System:
As the central bank, SBP is responsible for safeguarding the soundness of the financial
system of the country. Under section 40 A of the Banking Companies Ordinance 1962, it is
the responsibility of the SBP to monitor the performance of every banking company and

DFIs, as well as Micro Finance banks.

Non-bank financial companies (NBFCs), such as investment banks, leasing companies,
mutual funds, Modarba companies, the stock exchange and insurance companies, etc, all
fall under the ambit of the Security and Exchange Commission of Pakistan (SECP) which is
responsible for monitoring the affairs of these companies.
4. Off-site and on-site monitoring
The Bank monitors banking activities through a combination of off-site monitoring and onsite inspection. Off-site surveillance is conducted by the State Bank through various
periodical returns received from banks and DFIs, while on-site inspection is undertaken on
the premises of the banks concerned. The purpose of inspection is to check the assets and
liabilities as they appear on the books, to evaluate the quality of the assets, to determine
compliance with laws, regulations, directives and policy guidelines provided by the State
Bank, to judge the soundness of operations and the prudence of lending and investment
policies, to appraise the quality of the management and to attempt an estimate of the
overall position of the bank.
5. Prudential Regulations
In order to safeguard the interest of depositors and to ensure the safety and soundness of
the banks/DFIs, the State Bank has issued Prudential Regulations. The State Bank has
devised separate Prudential Regulations for different areas, viz. Corporate and Commercial
Banking, Small Enterprise and Medium Enterprise Financing, Consumer Business, Micro
Financing and Agriculture Financing.
The Prudential Regulations for Corporate and Commercial Banking govern operations of
the financial institutions in respect of their dealing with corporate entities. The Regulations
focus on Credit Risk Management, Corporate Governance, Anti Money Laundering and
Operations. Regulations for Consumer Financing have been devised to encourage the
banks to expand their loan portfolio through creation of new products and to ensure that
banks undertake consumer financing in a sensible manner. Consumer financing covers any
financing allowed to individuals for meeting their personal, family or household needs and
includes credit cards, auto loans, housing finance and other methods of consumer
financing.
The Prudential Regulations for Small Enterprises and Medium Enterprises (SMEs) facilitate
and encourage the flow of bank credit to the SME sector with the purpose of moving away
from collateral-based lending to cash- flow- based lending. The maximum limit of clean
financing against personal guarantees has increased to Rs. 5 million for SMEs. This is
greater than that for consumer financing as well as for corporate clean financing. The
requirement for banks/DFIs to obtain a copy of accounts has been relaxed for exposures
of up to Rs. 10 million.
The State Bank has also issued Prudential Regulations for Microfinance Banks and
institutions. Microfinance Banks/Institutions (MFBs/MFIs) shall not commence business
unless there is a minimum paid-up capital as prescribed in MFIs Ordinance 2001. A
MFB/MFI shall also maintain equity equivalent to at least 15% of its risk-weighted assets
shall maintain a cash reserve equivalent to not less than 5% of its time and demand
liabilities in a current account opened with the State Bank or its agent. In addition to a
cash reserve it shall also maintain liquidity equivalent to at least 10% of its time and
demand liabilities in the form of liquid assets, i.e. cash, gold and unencumbered approved
securities. In particular:
The MFB/MFI shall not extend loans exceeding Rs. 100,000/- to a single borrower.
The outstanding principal of the loans and advances, payments against which are
overdue for 30 days or more, shall be classified as Non-Performing Loans (NPLs).
6. The Bankers' Bank
The SBP also functions as the bankers' bank. Banks are classified as scheduled and non-

scheduled. A scheduled bank is that which fulfils the requirements of a scheduled bank
according to section 37(2) of the SBP Act 1956, such as capital and reserves are not less
than the requirement prescribed by SBP.
The State Bank maintains an updated list of all scheduled banks at its various offices.
These banks are entitled to certain facilities from the State Bank and in return they have
some obligations to it. The State Bank provides the following three important services to
the scheduled banks:
I. SBP keeps the deposits of commercial banks, which constitute the statutory reserves of
scheduled banks. Scheduled banks are required to keep with the State Bank a certain
percentage of their demand and time liabilities under Section 36 of SBP Act, 1956.
II. The State Bank also provides wide-ranging remittance facilities to banks at a
concessional rate. The Bank provides this facility through the media of its own offices, the
branches of National Bank of Pakistan acting as its agents, and treasuries and subtreasuries holding permanent currency chests at places where the State Bank has no
office.
III. In order to streamline payments through the financial system, the Bank also manages
the operations of clearing houses. In the major cities, the functions of the SBP clearing
house has been handed over to a private agency, namely National Institutional Facilitation
Technologies Private Limited (NIFT), to the extent of sorting of payments instruments and
preparing clearing schedules.
7. Lender of Last Resort
One of the most important functions of the State Bank is that it acts as the lender of last
resort. Under section 17 of the SBP Act 1956, the State Bank provides loan and rediscount facilities to scheduled banks in times of dire need when they can find no other
source of funds. These facilities are ordinarily provided by the Bank against government
securities, trade bills, agriculture bills, etc. A 3-Day Repo facility was introduced by the
State Bank of Pakistan with effect from 1st February, 1992, with the purpose of
accommodating the short-term liquidity requirements of financial institutions.
8. Banker to the Government
The State Bank provides business banking facilities to Federal and Provincial Government
and some government agencies. These functions performed by the Bank are similar to
those ordinarily performed by commercial banks for their customers. The Bank provides
the following services to government:
1. Accepts deposits of cash, cheques and drafts by the Government and undertakes the
collection of cheques and drafts drawn on other banks. The Bank transfers government
funds from one account to another or from one centre to another as advised by them.
2. Federal and Provincial government keep their deposits with the State Bank free of
interest. In turn, the State Bank does not charge any commission for the banking services
rendered to them.
3. Federal and Provincial government can obtain advances from the SBP subject to mutual
agreement in respect of the terms and conditions for such advances.
4. According to section 17, sub section (13) of the SBP Act, SBP, on behalf of Federal,
Provincial or Local government, undertakes sale/purchase of gold, silver, approved foreign
exchange, securities or shares in any company, and collection of returns on these
shares/securities, transaction of Special Drawing Rights (SDR), etc.
{Sometimes called 'paper gold' the SDRs are accounting unit in the books of IMF}
Types of Banks
Primarily all banks gather temporarily idle money for the purpose of lending to others and
for investments which bring gain in the form of return, profit and dividends etc.

However, due to the variety of resources of money and the diversity in lending and
investment operations, banks have been placed in various categories, such as commercial
banks, savings banks, merchant banks, mortgage banks, consumer banks, investment
banks, development banks, cooperative banks, eximp banks and central banks etc.
It is important to note that the large banks like Habib, United, MCB etc perform all or
many of the functions described under separate categories below and at the same time
there are banks which perform only one or more specialized functions. So these types are
at times overlapping and not always mutually exclusive.
Commercial Banks
The commercial banks receive deposits from the general public which are repayable on
demand upon written orders of the depositors. As their most distinctive feature the
commercial banks maintain chequeing accounts for the constituents.
The commercial banks are also distinguished for providing short term finance to trade,
commerce and industry for their working capital requirements and short term investment.
Merchant Banks
Merchant banks are those which have been mainly financing the domestic and
international trade in United Kingdom. During the late eighteenth and early nineteenth
centuries the trade between countries was financed by bills of exchange by well
reputed merchant houses for which they would charge a commission for their service.
Thus the business of accepting bills of exchange to finance the trade developed and
gradually these business houses entered into other banking activities and became known
as "merchant banks".
Since all the commercial banks, in addition to other banking functions, also deal in trade
financing, the term 'merchant banks' have gradually faded away.
Savings Banks
The basic purpose of these banks is to inculcate the habit of savings in the people. The
savings bank deposits are not repayable upon only the written orders of the depositor but
the depositor or his agent has to appear personally at the saving bank to make
withdrawal, and for this purpose he must present a pass book, a certificate of deposit or
some similar documents to prove his right to receive payment. Post Office Savings Banks
and Savings Account at National Savings Organization are well known operational Savings
Banks in Pakistan.
Mortgage Banks
These banks mainly deal in loans for the acquisition or construction of real estate against
the security of mortgages. Quite a few such banks are operating in developed part of the
world. Savings and Loans associations and farm-loan associations are some of the well
known forms of the mortgage banks. House Building Finance Corporation in Pakistan is a
Mortgage Bank.
Consumer Banks
These banks provide finance for purchasing consumer goods for the personal use of the
borrowers. For example Car Loans, Consumer durable goods like air conditioners,
refrigerators, furniture and House Loans for Residential purposes. Consumer Finance
Companies, sales finance companies and credit unions are some of the popular forms of
consumer banks. Consumer banks do not give loans for productive/business purposes.

Investment Banks
The investment banks assist industrial / business houses and the government bodies to
raise money through the sale of stocks and bonds for usually long term purposes. Main
objective of investment banks is to achieve disintermediation where they assist businesses
to raise finances for projects directly from the savers through issuance of bonds and
issuance of shares. Investment banks serve the investors through floatation of mutual
funds. These banks also perform the usual intermediation functions of raising deposits of
idle money from the public and finance the business houses and other bodies.
Other functions:Assisting Companies in mergers, take-overs.
Consulting services for privatisation.
Services for Public Issues including Underwriting of share issues.
Assisting Companies in the issuance of Term Finance Certificates both Public issues and
Private Placements.
Share Brokerage
Managing Mutual Funds.
Development Banks
These banks have been established to provide long term development finance to the
trade, commerce, and industry. In Pakistan they are generally government owned
banks, established under specially promulgated laws. Zarai Taraqiati Bank of Pakistan,
and Industrial Development Bank of Pakistan are very well-known development banks.
The private commercial banks are usually shy of financing to long term and greenfield
projects. This gap is filled by Development Banks.
Cooperative Banks
These were the banks established and registered as cooperative ventures to provide
banking facilities to the members of the cooperatives. In Pakistan, the Federal Bank of
Cooperatives was such a bank, but now it has been merged with Zarai Taraqiati Bank.
At one stage of history of banking in Pakistan the Cooperative Societies in the country
started doing bank type business. They were not properly regulated and they defrauded
the general public in a very big way. Subsequently Cooperative Societies were totally
banned from conducting bank like business.
Exim Banks
These are usually the government or semi government banks which provide finance and
insurance for promotion of imports and exports to trade, commerce and industry. Every
country wants to increase its exports to earn valuable foreign exchange but there are
many risks for the exporters because the buyers are in distant lands. Exim Banks provide
finance for the exporters and provide insurance to the exporters against default of the
buyers or country risks. These banks are contributing greatly towards the expansion of
international trade of countries, where they function.
Small and Medium Enterprise Banks. (SME Banks)
SMEs have assumed great importance in the developing countries in recent years. Though
they make a huge contribution to trade, commerce and industry yet they have difficulties
in raising capital for them. Keeping all these issue in view SME Banks have been
established in Pakistan to cater to the financial needs of these enterprises. The SME
Banks are pro-viding basically short term working capital to the small and medium
enterprises in Pakistan.

DICTIONARIES YOU MUST HAVE ON YOUR WORK TABLE

1) Oxford Advanced Learners English Dictionary
Latest 8th Edition
Oxford University Press
Near Chotti Market Gulberg
Please buy the dictionary which has a CD THAT YOU CAN
SAVE electronic dictionary ON YOUR COMPUTERS HARD DISK.
2) Oxford Dictionary of Finance and Banking, published by Oxford University Press.
3) Oxford Dictionary of Law, published by Oxford University Press.
__________________________________________________ ____________________
__________________
Whenever you find yourself on the side of the majority, it is time to pause and reflect.
-Mark Twain
The Following 2 Users Say Thank You to saad monga For This Useful Post:
mudasr (Saturday, April 26, 2014), Warraich (Sunday, April 06, 2014)
#2
Saturday, April 05, 2014

saad monga
Member

Join Date: May 2012

Location: Lahore
Posts: 34
Thanks: 8
Thanked 7 Times in 6 Posts

Banking Laws And Regulations

" Success is not something to wait for, it is something to work for.

Banking Laws and Regulations
Law constitutes the principles and regulations established in a country by some authority,
applicable to its people, whether in the form of legislation or of customs and practices
recognized and enforced by judicial decision. It is the implementation of social order and
justice created by adherence to such a system. The system of judicial administration puts
the laws of a community into effect, e.g. all citizens are equal before the law.
The banking business flourishes on the support and confidence of public because they
contribute to the capital and deposits of money in the banks. This confidence is
strengthened as and when the people find that their interests are being looked after
properly by the government and its authorized regulatory agencies.
Banks and bank accounts are regulated by Federal statutory law. Banks are established in
Pakistan under the Banking Companies Ordinance 1962, regulated by SBP through
Prudential Regulations, and Exchange Control Manual. Bank accounts may be established
by private and state-owned banks (National Bank of Pakistan) and National Savings

centres. All are regulated by the Federal laws. Cheques and related matters (bearer, order,
crossing, protection to the bankers, etc) are governed under the Negotiable Instruments
Act 1881.
There is an elaborate legal framework for regulation and supervision of banking business
in Pakistan. This regulatory process is basically maintained by the State Bank of Pakistan
as the central bank of the country, which derives its authority and support from the laws
which have been enacted and enforced for banking business.
For smooth running of the banking system it is vital that the public should have confidence
in it and be assured that their interest is protected by the government through regulators.
One of the most important functions of the State Bank of Pakistan is protection of
customers' rights. Most bank customers are laymen, they have very little knowledge of
finance to judge the stability and soundness of a bank. Through appropriate laws the state
ensures that the money entrusted to a bank by the public is not placed at risk. The failure
of a bank is a serious event specially due to the possibility of contagion-----one banks
failure can lead to lack of confidence in the financial system resulting in the collapse of the
entire system. Hence the need to ensure safety and security of all banks.
Banking in Pakistan is governed by laws enacted by the Government and regulations
framed by other state functionaries namely State Bank of Pakistan and the Securities and
Exchange Commission of Pakistan. The far reaching influence on banking operations
includes rules incorporated in the Foreign Exchange Regulations, Prudential Regulations
and circulars issued by State Bank of Pakistan from to time. All banks in Pakistan (except
SBP and NBP) are companies incorporated under the Companies Ordinance 1913 and
1984 as amended from time to time and to that extent fall within the purview of Securities
and Exchange Commission of Pakistan (SECP) but all the Non-Banking Financial
Institutions are totally governed by SECP. As such banks have overlapping supervision of
SBP and SECP in many respects. The major laws applicable to banking institutions are:
1. Banking Companies Ordinance (BCO) 1962
2. State Bank of Pakistan Act 1956
3. Negotiable Instrument Act 1881
4. Bankers Book Evidence Act 1882
5. Electronic Transactions Ordinance 2002
6. Foreign Exchange Regulation Act 1947
7. Financial Institutions (Recovery of Finance Ordinance) 2001*
8. SBP Banking Service Corporation Ordinance 2001
9. Payment Systems and Electronic Funds Transfer Act 2007
10. Banking Tribunals Ordinance 1984
11. Banking Companies Tribunals (Validation of Orders) Act 1994
12. Microfinance Institutions Ordinance 2001
The above listed Acts/laws are briefly discussed below wherever applicable.
State Bank of Pakistan Act 1956:
The preamble of this Act has entrusted the State Bank of Pakistan with the responsibility
to regulate the monetary and credit system of Pakistan and to foster its growth in the
best national interests with a view to securing monetary stability and fuller utilization of
countrys productive resources. Thus State Bank of Pakistan is the central bank of the
country. Gradually, State Bank of Pakistan expanded and consolidated over the years.
State Bank of Pakistan was established in 1948 with a paid up capital of Rs. 10 Crores

with a mix ownership basis (part Govt. owned and part private owned), wherein 51% of
the paid up capital was held by the Federal Government and the balance by the private
sector. Following its nationalization in January 1974, the Federal Government assumed
ownership of all privately held shares on payment of compensation. The Central Board,
comprising of a Governor, one or more Deputy Governors and 7 directors nominated by
the Federal Government, manages the SBP. Under the rules the Board is required to hold
meetings at least 6 times in each calendar year and at least once in each quarter. Any 3
directors may requisition to the Governor to convene a meeting and 5 directors are
mandatory to form a quorum.
Appointment of Governor - Under Section 10 the Governor of the Bank is to be appointed
by the President of Pakistan for a term of three years. He will be eligible for another term
of three years provided he has not attained the age of sixty-five years.
Criteria for Directors Appointment - Under Section 13
No person shall be or shall continue to be a director of SBP, if he is a MNA or MPA,
is a salaried Government official,
is or has been adjudicated an insolvent, or
has suspended payments or has compounded
{(meaning of Compounded = To settle (a debt, for example) by agreeing on an amount
less than the claim; adjust.}
with his creditors,
is lunatic or
of unsound mind or
is a director of another commercial bank.
The elected directors shall hold office for a term of three years. A director loses his office if
he abstains from three consecutive meetings of the Central Board without obtaining leave.
SBPs Functions - Under Section 17, the SBPs business and functions extend to a very
wide area including;1. extension of loans and advances to the Federal and Provincial Governments,
2. providing finance to financial institutions including banks,
3. sale and purchase of government securities including foreign exchange,
4. dealing in gold and bullion, {Bullion = gold or silver in large amounts or in the form of
bars}
5. purchase and sale of debentures, (Corporate Bonds are called debentures)
6. custody of monies and securities,
7. acting as banker to the Government and as
8. bankers bank and
9. last but not the least the Note-Issuing Authority
Prohibitions on SBP functions - Under section 20, the
SBP is not allowed to engage in trade or direct interest in any commercial, industrial or
other undertaking except that it may acquire in the course of satisfaction of any of its
claims, which shall be disposed of at the earliest.
The SBP is not allowed to purchase its own shares or shares of any other bank or extend
loans or advances against the security of such shares or advance money on mortgage or
security of an immoveable property (except to its own staff) or make unsecured loans.
Custodian of Foreign Exchange - Under Section 23, the SBP is custodian of foreign
exchange and may buy or sell foreign exchange from or to an authorized dealer.

Cash Reserve mandatory for Banks - Under Section 36, all the scheduled banks are
required to maintain a Cash reserve with the State Bank at the rate as may be determined
by the Bank. {What is Cash Reserve? A percentage usually about 5% of the total
Customer deposits in a bank must be deposited with SBP as Cash Reserve on which SBP
does not pay any profit.} This rule is intended to bolster the liquidity and financial
strength of the commercial bank.
Scheduled Bank Under Section 37 the State Bank may declare any bank to be the
scheduled bank; a bank which is carrying business of banking in Pakistan, has a paid up
capital of not less than the amount stipulated and that the State Bank is satisfied that the
affairs of such a bank are not conducted in a manner detrimental to the interest of
depositors.
Duty to secrecy - Section 52 imposes a duty to maintain secrecy on every officer of the
SBP as to the affairs of the Bank or the affairs of any other financial institution that come
to his knowledge in performance of his duties.
The Banking Companies Ordinance 1962:
This law is very important and comprehensive. It gives detailed legal requirements of how
banks will be formed, and how they will function under the supervision of SBP. This law
lists down all the powers that are granted to the State Bank of Pakistan for supervising
and controlling the banks in Pakistan. If a bank indulges in activities against the directions
of SBP, this law gives authorization to SBP to punish the bank and its employees by
imposing penalties, dismissal and replacement of officers including chief executive or
directors, cancellation of banking license and even liquidation of the bank.
The object of the above ordinance is to provide general details and guidelines of how
Banking Companies would operate their business.
Distinctive Features of a Banking Company
i. Section 8 prescribes that only a company which is allowed by SBP and carries out the
business of banking shall use the word bank or any of its derivatives as part of its name.
Other companies cannot do so.
ii. A company registered as a banking company in Pakistan will be a public limited
company, as defined in the Companies Ordinance, 1984. A banking company will also have
the word limited or Ltd. in its name.
iii. Section 87 confers the exclusive right to the banks for the use of cheques for
withdrawal or transfer of deposits of money.
Banking Business
a. Section 7 of the Ordinance has defined the forms of business in which banking
companies may engage. These include accepting deposits, lending or investing funds,
making remittances, opening letters of credit, issuing guarantees, underwriting share or
bond issue, foreign exchange dealings, etc.
I. Section 9 of the Ordinance defines those forms of business which banking companies
are not allowed to engage in. The prohibited activities list includes, buying/selling or
bartering of goods or engage in any trade.
II. Section 10 prohibits a banking company from holding of a non-banking asset
(immoveable property) for a period exceeding seven years from the date of acquisition
except as may be permitted by the State Bank or as is required for its own use.

Prohibition on employment of certain persons - Section 11 prohibits employment by a

banking company of a person who is, or at any time has been, adjudicated insolvent, or
has suspended payment, or has compounded with his creditors, or who is or has been
convicted by a criminal court of an offence involving moral turpitude. { turpitude = very
immoral behaviour SYN wickedness}
Capital of a Banking Company
a. Section 13 of the BCO, 1962 has authorized the State Bank of Pakistan to determine
and prescribe the minimum paid up capital for a banking company from time to time.
(2013 Rs 10 Billion)
b. Minimum General Reserve - Section 13 stipulates maintaining by banks of General
Reserves as may be determined and notified by the State Bank from time to time.
{General Reserve is an amount deducted from banks Profits and retained in Reserves
Account, which is part of Equity to meet any Bad Debts or other Loss situations for the
Bank.}
Board of Directors
Election and tenure of directors If the Governor SBP finds that the management of a
commercial bank is doing acts which are seriously harmful for the sound operation of the
bank, under section 15 the State Bank may order any Banking Company to call a general
meeting of the shareholders to elect fresh directors of that bank.
A director of a banking company (other than the Chief Executive) shall not hold office for
more than six years.
Under Section 15(b) a director shall not hold office for more than 6 consecutive years and
under Section 15(c) a director of a banking company shall vacate his office if he has failed
to pay any advance or interest thereon and not more than 25% of the total directors could
be the paid executive directors.
Statutory Cash Requirement. (SCR)
Section 22 of the Ordinance prescribes that every banking company must maintain a
certain per cent of its total demand and time liabilities as on the last working day of the
week, with the State Bank of Pakistan. The percentage will be notified by the SBP from
time to time. (2013 --5%) (This requirement ensures liquidity of the bank)
Lending against security of own shares - Section 24 prohibits any banking company to
give loans and advances against the security of its (banks) own shares or grant unsecured
loans or advances to or make loans and advances against guarantee of any of its director
or any of the family members of any of its directors, nor to a firm or company in which
any of its director is interested as partner, director or guarantor.
Powers of State Bank of Pakistan
Banking Companies Ordinance 1962 has conferred the following powers on SBP:
a. Section 25 has authorized SBP to control advances by banks. SBP lays down
conditions to be fulfilled which are given in Risk Prudential Regulations.
b. Section 25-A authorized the SBP to collect credit information from banking companies
and furnish them to other banking companies without disclosing the source of
information.
c. Section 25AA has authorized SBP to prepare and submit to the Federal Government
every year a special report on cases of write off of loans, mark up and other dues or

financial relief through rescheduling and restructuring of loans, etc., where banking
companies have deviated from the established banking practices.
d. Section 26 authorises the State Bank of Pakistan to prohibit banking companies
incorporated in Pakistan or incorporated outside Pakistan but operating in Pakistan from
accepting deposits.
e. No individual, association or a company is authorised to carry on banking business in
Pakistan without obtaining a licence from the State Bank of Pakistan under Section 27.
f. When banking companies or their branches do not perform their functions properly,
Section 27 (4) has authorized the State Bank of Pakistan to cancel the license granted to
them. ^
Preparation/display of Balance Sheet. Section 34 prescribes that every banking com-pany
operating in Pakistan whether local of foreign, shall prepare balance sheet and profit and
loss accounts as on the last working day each year, in the format given in Second
Schedule of the BCO.
g. Section 38 makes it obligatory to display the copy of this balance sheet & profit and loss
account at appropriate places in branches and principal offices in Pakistan.
Unclaimed deposits and valuables
The Section 31 requires that banks maintain record of all unclaimed items and if these
remain unpaid or unclaimed for a period of ten years, transfer them to State Bank. This
includes all deposits and unpaid instruments such as dividend, drafts, bills of exchange,
shares or valuable articles held in safe custody, for which there has been no transaction or
no claim except those of a minor or a court of law or a government. The SBP has created
a website where information regarding such unclaimed deposits is available.
Trade Unions At the initiative of the Governor, State Banking Section B was inserted by
the Banking Companies (Amendment) Act 1997 which barred any officer or member of a
trade union in a banking company from using any bank car or telephone to promote union
activities or to carry weapons into the bank premises etc. Any person violating any
provisions of this section shall be guilty of an offense punishable with imprisonment that
may extend to three years or with fine or with both.
Secrecy Section 33-A of the Act has made it obligatory for each bank to maintain complete
secrecy and fidelity relating to the affairs of its customers except when law and practices
so permit. In order to enforce this provision this section prescribes that every
President, Chairman, Member Board, Auditor, Officer or Employee is required to make a
declaration of fidelity and secrecy at the time of joining institutions which are covered
under Banking Companies Ordinance, 1962.
Disclosure of Write Offs Moreover, this section has made it obligatory for every banking
company to publish in its annual accounts all such loans as written off or financial relief
provided to any customer amount of which is Rs.500,000/- or more.
Power of the State Bank of Pakistan to take the
corrective measures against Banking Companies
a. Sections 41, 41-A and 41-B of the Banking Companies Ordinance, 1962 have conferred
the powers to State Bank of Pakistan not only to give directions to the banking companies
in Pakistan to manage themselves properly but to impose corrective measures. These

powers include the removal of Chairman and members of the Board of Directors and/or
Chief Executive; and appoint its nominees to manage the banking companies. This period
can be upto three years.
b. Section 41-C of the Banking Companies Ordinance, 1962 allows that if any persons or
banking company is aggrieved with the orders made under section 41-A, 41-B of State
Bank of Pakistan may make an appeal to the Central Board of Directors of the State
Bank of Pakistan. Their decision shall be final.
Inspection by State Bank of Pakistan
a. Section 40 of the Banking Companies Ordinance. 1962, has made it obligatory for the
State Bank of Pakistan to inspect banking companies from to time in order to evaluate
their management and performance. Sub Section (4) makes it obligatory for banking
companies to produce all such books and documents to the inspecting officer as desired
by him.
b. Based on the inspection report State Bank of Pakistan is authorized to impose fines and
penalties including the winding up of the banking company under Section 49 of the
BCO.1962.
XI. Amalgamation and Winding up of a Banking Company
a. Section 48 of the Banking Companies Ordinance. 1962, allows the amalgamation of
banks according to a defined procedure. It includes preparation of a well designed scheme
of amalgamation containing terms and conditions. This scheme has to be placed in draft
form to the shareholders of each of the banking companies concerned separately. When it
is approved by a resolution passed by a two-third majority of shareholders of each of the
concerned banking companies, it should be submitted to the State Bank of Pakistan for
their approval and the merger will take place only after their formal approval.
b. Section 59 of the Banking Companies Ordinance, 1962, clearly lays down that no
banking company which holds a licence under section 27 of the Act can voluntarily wind up
without first obtaining a certificate from State Bank of Pakistan about its inability to
repay the creditors.
Sections 60 to 82 of the Ordinance describe the legal and procedural framework for the
winding up proceeding. According to these provisions, only the High Courts in Pakistan can
allow winding up and in such cases State Bank of Pakistan will be the official liquidator.
2.3.1. Specific methods/areas of regulations Under BCO 1962 the SBP have the
following specific areas for regulating banking institutions:
i. Authorization for banking license
ii. Rules regarding ownership of financial institutions
iii. Criterion regarding adequacy of capital in banks.
iv. Reserves and liquidity ratios compliance by commercial banks
v. Rules regarding foreign currency and other exposures
vi. Deposit insurance
vii. Professional management
viii. Classification of advances (Special meaning of classification)
ix. Per party limits on banks lending
x. Control on deposit and lending rates
xi. Policy of scheduled banks borrowings
xii. Bank charges and penal (penalty) rates
xiii. Loan write-off procedure
The Banking Companies Ordinance, 1962, (BCO) consolidated basic legal framework and

strengthened the Regulatory powers of State Bank.

It empowers:a) SBP for close supervision over the affairs of banking companies;
b) prescribes maintenance of required advances/ deposits ratio;
c) give directions to banking companies generally;
d) make advances to banking companies
Banking Mohtasib
2.4.12. Banking Mohtasib - Section 82A was added to BCO which relates to appointment
of Banking Mohtasib with powers and responsibility of:
Banking Mohtasib / Ombudsman
Ombudsman means a commissioner appointed by the Government to investigate any
complaints against the body concerned. In Pakistan, ombudsman is called Mohtasib. For
the banking sector, government has appointed a separate Mohtasib who is appointed for a
period of three years and is not be eligible for any extension.
The office of the Banking Mohtasib (BM) was established under banking companies
ordinance 1962 by inserting seven sections from 82-A to 82- G on 2nd June, 1997 through
the banking companies amendment Act 1997. The purpose of the establishment of
Banking Mohtasib is to resolve any complaints from customers against their banks and
those of scheduled banks against another bank. This is a free service for the public which
covers all banking services.
Powers of Banking Mohtasib (BM)
a) BM can entertain complaints from, customers, borrower, utility bill depositors, banks or
from anybody or organization.
b) Banking Mohtasib can award compensation for actual loss suffered and grant of
reasonable expenses can be considered by the banking Mohtasib.
c) Banking Mohtasib cannot award damages against the bank. Facilitate amicable
settlement of the complaints.
d) Banking Mohtasib shall not entertain any complaint already disposed of by SBP or any
court of law.
e) Banking Mohtasib cannot issue a stay order to entertain any complaint, if the matter is
pending before any court of law.
Authorities of Banking Mohtasib
Banking Mohtasib is authorized to entertain complaints of the following nature:
A) Banks failure to act according to the banking laws and regulation. Delays or frauds in
relation to the payments, collection of instruments or fund transfer.
B) Fraudulent or unauthorized debit entries in the account.
C) Complaints from exporters or importers relating to the banking services.
D) Complaints from holders of foreign currency accounts whether resident or nonresident.
E) Unauthorized operation of lockers.
F) Complaints related to foreign remittances.
G) Complaint in relation to the mark-up based on the ground of violation of an agreement
or SBP directives.
H) Complaints relating to the utility bills.
Banking Mohtasib shall not pass any order against bank without giving notice and
opportunity of hearing.

Before filing a complaint with the Mohtasib, the complainant should intimate bank in
writing about the intention of doing so. In case of no reply or unsatisfactory reply, the
complainant can send complaint to banking Mohtasib within 45 day.
The complaint should be made in writing under solemn affirmation or oath, narrating full
details of the case / transactions disputed, and also name and address of the complainant.
The Mohtasib can adopt any procedure, he considers appropriate for investigating the
complaint.
Banking Mohtasib has the power for the purpose of disposing a case, to require any
information documents from banks which are relevant for the purpose of deciding a
complaint, subject to the following conditions:
a) Maintain confidentiality as per banking laws and procedure.
b) The documents shall not be provided which may compromise banks position in relation
to the other customers account.
c) If banks do not provide information / documents, the bank Mohtasib can add adverse
comments in his finding regarding non provision of information/ documents.
Mohtasib will try for an amicable settlement if satisfied with the genuineness of the
complaint. In case of failure it may direct concerned bank to:
a) Reconsider the matter.
b) Modify earlier decision
c) To pay compensation fixed by Mohtasib.
d) To take steps to improve efficiency of the bank.
e) Recommend SBP to initiate inquiry against the bank for violation of law, regulations,
etc.
In no case Mohtasib will direct bank to provide finance/ loan to any complainant.
If any bank or its official or complainant is not satisfied with the decision of Mohtasib, he
may file an appeal with the Governor of the State Bank of Pakistan within 30 days of
passing the order by the Mohtasib. The governor shall decide appeal within 30 days.
Finding of the Mohtasib should be implemented within 40 days of the decision or
finalization of appeal from the Governor SBP as the case may be.
If no appeal is filed, the decision of Mohtasib shall be treated as final. If decision of the
Mohtasib is not implemented by the concerned bank, SBP may penalize it or may ask for
disciplinary action against its officials.
Banking Mohtasib can ask the bank to disclose any information required for disposing the
case, ensuring confidentiality as per requirement of law.
2.5. Bankers Books Evidence Act, 1891:
Prior to passing of Bankers Book Evidence Act 1891 bankers were required to produce in
the court of law one or more of their original ledgers or other books of account as an
evidence, thereby causing inconvenience and disruption to their normal business
operations. To remove these formalities, Bankers Book Evidence Act 1876 was passed
which was replaced by Bankers Book Evidence Act 1879 with extended provisions.
2.5.1. Bankers Convenience - Section 5 of the said Act reads as under:
A banker or officer of a bank shall not in any legal proceeding to which the bank is not a
party, be compellable to produce any bankers books, the contents of which can be proved
under this Act or to appear as a witness to prove the matters, transactions and accounts
therein recorded, unless by order of a Judge made for special cause.

The Act thus absolves banks from:

Production of original books and
Appearance in person of banks personnel.
2.5.3. Certified copy.
Under section 4, a certified copy of any entry in a bankers book shall in all legal
proceedings be received as prima facie evidence of the existence of such an entry and
shall be admitted as evidence of the matters, transactions and accounts therein recorded
in every case where, and to the same extent, as the original entry itself is now by law
admissible, but not further or otherwise.
A certified copy means a copy of any entry in the books of a bank as defined by Section
2(2) bearing at the foot of the entry, a certificate dated and subscribed by the
Accountant/Manager of the bank with his name and official designation to the effect:
i. that the entry is contained in one of the ordinary books of the bank.
ii. that the entry was made in the usual and ordinary course of business.
iii. that the book containing the entry is still in the custody of the bank.
Copies of bank record that are not certified within the meaning of Section 2(8) cannot be
received as prima facie evidence of existence of entries of which they are copies nor can
such copies be admitted as evidence of matters, transactions and account therein
recorded.
Electronic Transactions Ordinance 2002
2.5.4. Electronic Transactions. - To cope with the requirements of present day changes
involving electronic transactions, the Government promulgated the Electronic Transactions
Ordinance 2002. This law is meant to recognize and facilitate documents, records,
information, communications and transactions in electronic form and to provide for the
accreditation of certification service provider. Various terms used in the Ordinance have
been defined as under:
Authenticity means in relation to an electronic document or electronic signature, the
identification of an attribution to a particular person or an information system.
Legal recognition; no document, record, information, communication or transaction shall
be denied legal recognition, admissibility, effect, validity, proof or enforceability on the
grounds that it is in electronic form and has not been attested by any witness.
Attestation/Notarization; no electronic document shall require attestation and
notarization for a period of 2 years from the date of the Ordinance.
To include the impact of the Electronic Ordinance the Qanun-e-Shahadat Order 1984 has
been amended accordingly.
__________________________________________________
_________________________
Success is not something to wait for; it is something to work for.
__________________
Whenever you find yourself on the side of the majority, it is time to pause and reflect.
-Mark Twain

#3
Saturday, April 05, 2014

saad monga
Member

Join Date: May 2012

Location: Lahore
Posts: 34
Thanks: 8
Thanked 7 Times in 6 Posts

Banker Customer Relationship

You are never fully dressed until you wear a smile.

Banker Customer Relationship
What Is a Banker:
According to Section 3(b) Negotiable Instruments Act (Amendment) 1962 a "Banker means
a person transacting the business of accepting, for the purpose of lending or investment, of
deposits of money from public, repayable on demand or otherwise and withdrawable by
cheque, draft, order or otherwise and includes any Post Office Saving Bank".
Banker has been defined in almost the same terms in section 5(b) of Banking Companies
Ordinance 1962.
In simple words we can say banker is one who
(1) Takes deposits of money from the people,
(2) Repays these deposits to the people according to agreed terms and conditions including
on demand, and
(3) Lends and/or invests these deposits in profitable ventures.
Who Is a Customer. The term customer has not so far been defined in any banking law,
however, some eminent writers on banking and jurists have tried to define it. Sir John Paget
says: "To constitute a person being called a customer there must be some recognisable
course or habit of dealing in the nature of regular banking business". The most important
point, according to Sir John Paget, was the sufficiently long "duration" of relationship
between the banker and a customer, but it was ruled off by the judgement of Mr. Justice
Bailhache in the case of Ladbroke v/s Todd (1914) who observed "the relationship of banker
and customer begins as soon as the first cash deposit is accepted or a cheque is paid in and
accepted for collection and not merely when it is paid". This was confirmed by Privy Council
in the case of Commissioner of Taxation v/s English, Scottish, and Australian Bank (1920).
"The word 'Customer' signifies a relationship in which duration is not of the essence. A
person whose money has been accepted on the footing that the bank undertakes to honour
cheques up to the amount to his credit is, in the view of their Lordship, a customer of the
bank in the sense of statute irrespective of what his connection is, of long or short
standing". (What is a statute?)
To restate the concept; the word 'Customer' generally denotes a relationship resulting from
habit or continued dealings. We know that a person cannot be regarded as a customer of a
shop unless he makes a practice or habit of purchasing articles from that shop. An isolated
transaction is not sufficient to suggest that the purchaser is a customer. However for a bank
customer this habit of dealings is not essential. A person becomes customer as soon as he

opens an account with the bank.

On the other hand if a person comes to bank for encashment of cheques daily, which means
he is a regular visitor of bank, but these frequent visits, will not entitle him to become a
customer of bank. Only the opening of an account establishes the relationship of banker and
customer.
In the light of what has been said above and banking practice we can say that any person
having an account in a bank is a customer, whatever the nature of his account. Whether or
not he operates his account regularly and whether his, account is of long or short duration,
the account holder is a customer.
Who Can Be A Customer: The relationship of banker and customer is a contractual one,
therefore, any person who has the capacity to enter into a contract, can be a customer.
He / She must, therefore, be a person who:
(i) has attained the age of majority,
(ii) is of sound mind; (when he opens an account he should be capable of understanding it
and making a rational judgment as to its effect on his interests)
(iii) is not disqualified from contracting by any law to which he is subject. (should not be a
proclaimed offender, should not be undischarged bankrupt and should not be alien enemy)
(Who is an undischarged bankrupt?)
However, there is one exception to this law and that a minor can be a customer according to
the banking practice. Such accounts are opened only to broaden the banking facilities.
These accounts are operated by their guardians or to benefit the minor under Courts Wards
Act. A minor,however, cannot operate an account.
(By law the property of a minor can be used for the benefit of the minor only. A loan against
the property of a minor should only be given after great care.)
What Is The Nature Of Banker Customer Relationship: As stated earlier, bank relationship is
a contractual one and for every valid contract there must be an offer and its acceptance.
Similarly, there is an offer and its acceptance in such cases. The depositor offers his/her
money and banker accepts or the banker offers to accept deposits and customer in
acceptance of this offer, deposits his money.
Types of Relationships
General Relationship: The general relationship of banker customer is that of debtor and
creditor; which of these two, entirely depends on the current state of account. When the
customer borrows from the bank he is debtor and when builds up balance in the account
he / she is a creditor of the bank.
This relationship of debtor and creditor was for the first time recognised in 1848 in the case
of Foley v/s Hill by the court of law. A customer brought an action against a banker to
account for money received, claiming that the relationship was equitable, akin to that of
Principal and Agent and that he was entitled on that basis to know, what had happened to
his money and what profit had been derived from it. The court decided that the relationship
is that of debtor and creditor and not that of Principal and Agent. The decision enabled the
banker to use the money according to their own discretion. When customer deposits money
in his account, he has a right to withdraw it, but he cannot enquire about its utilization.
Other Relationships:
i) Bailer and Bailee. When the banks provide safe custody / locker facilities to customers for
their valuables, the relationship becomes that of bailer and bailee under Contract Act, 1872.
It is an old relationship of banker and customer which started from the days of earlier

bankers, i.e., goldsmiths. The goldsmiths used to keep the belongings and valuables of
public for safe custody with themselves. Later on they started lending a part of that deposit
which was nothing but a breach of contract of bailment.
Section 148 of the Contract Act, 1872, defines bailment as
A bailment is delivery of goods by one person to another for some purpose, upon a
contract.
A distinction should be made between a gratuitous bailee and bailee for reward. A
gratuitous (meaning: done without any compensation or reward) bailee is required to take
the same care as a reasonably prudent and careful man may fairly be expected to take of
his own property of the like description. A bailee for reward must take greater care and
make use of the most effective appliances available for the safekeeping of the valuables
appropriate for the nature of goods entrusted to his care.
The extent and character of banks obligations as a bailee will vary with the different forms
of deposits. When shares and securities are lodged with instructions to handle them, the
banker must have notice of the particulars of the articles bailed, but when articles are put in
a sealed box or packet or kept in a safe deposit locker the banker is not supposed to have
any notice of the contents. In the latter case, the bankers obligation is to return the box or
packet with seals intact or allow the customer to operate his locker which should be
unhampered and inaccessible to the banker independently.
The receipt granted by the banker for safe custody of articles is not a negotiable instrument
or transferable document. In case the bailer of a deposited article is unable to call at the
bank to take back the articles when required to be withdrawn, the banker should take care
to ensure that the person deputed for the purpose is duly authorized by the bailer, otherwise
the banker will be liable for conversion.
(ii) Principal and Agent: When bank perform agency service they become agent of their
clients and customers, such as collection of cheques etc and payment of premium of
insurance company or membership fee to clubs on behalf of their customers under their
standing instructions.
(iii)Pawner and Pawnee / Pledger and Pledgee /Mortgagor and Mortgagee: When we make
advance to our customer against security it is the relationship of pawner and pawnee.
Besides these, bankers also act a Trustee, Executor, Attorney and Guarantor etc.
When a customer pledges his movable property like goods and documents and passes on
physical possession thereof to the banker as security for an advance, he becomes the
pledger and the banker becomes the pledgee. Similarly when advance to the customer is
made against security of immovable property, the relationship becomes that of mortgagor
and mortgagee, the customer being the mortgagor and the banker mortgagee.
In terms of the deed of pledge and deed of mortgage executed by the borrower at the time
of taking advance, the banker has express authority to dispose of the movable or
immovable property of the borrower in case of his failure to liquidate the debt when it
becomes due without reference to a court of law.
How Banking Relationship Is Established: The opening of an account establishes the
relationship. An account may be opened either by cash deposit or by tender of negotiable
instrument for credit to the account. According to the banking practice in Pakistan, accounts
are generally opened with cash deposits. If party is well-known a cheque or any other
negotiable instrument may also be accepted in lieu of cash.

How Does The Relationship Subsist: This relationship starts with the knowledge about the
customer and gradually builds up over a period of time. This relationship continues so long
as it is carried out according to the terms of contract embodied in the rules of the bank.
{Subsist = to exist; to be valid}
How And By Whom The Relationship Can be Terminated: This relationship can be terminated
by any of the contracting parties, if the party agrees to do so or on the happening of an
event that would give to one of the party option to avoid when there is avoidable contract.
The relationship can be terminated by the:
1) By Customer: According to terms of the deposits, if it is payable on i) demand by
withdrawing whole balance and closing the account, ii) Fixed maturity - the payment of the
balance at such maturity.
2) By Bank: The bank may close the account when it becomes unremunerative or tedious or
tiresome or for any other reason risky to maintain (Obstinacy of Customer) or when bank
exercises the right of set-off. Bank should close the account after proper notice to the
customer, otherwise it may drag the bank into litigation.
3) By Operation Of Law:
When the customer
i) dies or
ii) becomes insane or
iii) becomes bankrupt or
iv) the bank itself becomes bankrupt or
v) any other contractual incapacitation of the parties.
Rights And Duties Of Bankers:
Banker has the following rights /duties towards its customers
Rights of Bankers:
1) Payments and receipts must be in business hours:
2) Right to refuse payment of:
i) Stale cheque (dated more than 6 months before presentation)
ii) Post-dated cheque (date which has not yet arrived on the date of presentation)
iii) Undated cheques, or
iv) Any other irregularity in the cheque such as difference in amount written in words and
figures or signature differs.
3)Right to debit the account which was previously credited by clearing item which is
returned unpaid.
4)Right to have reasonable time for posting.
5)Right to utilize the customer's funds according to its own will.
6) Right to charge for services rendered.
7) Right Of Lien: Lien is a right of a Bank to retain the property belonging to a customer
until the debt due from the customer is paid. Suppose a customer has not repaid a loan on
time or has not paid banks charges, etc. The bank receives a dividend warrant from a
company for credit to this customers account. The bank will have a lien on the proceeds of
the dividend warrant till such time the customer clears the banks dues. Items under lien can
be sold/appropriated by the bank only after the bank gives due notice to the customer.
8) Right Of Set Off: It consists of the right of the bank to fully or partially merge the credit

balance of a customer account with a claim that the bank has against the customer. The
banker has this right of set off when:
i Account is in the same name and right,
ii There is no contract to the contrary.
The bank can execute the set off only after giving due notice to the customer.
Duties Of Banker:
1) Obligation to pay/honour the cheques:
i. when there is credit balance or
ii. when there are other arrangements like overdraft facilities.
iii. To pay cheques drawn by the customer on the branch of the bank where the account is
kept, or under special arrangement at agreed places.
2) To provide a statement containing a copy of his account with the banker at regular
intervals;
3) To pay profit/return to the customers on their balances as per agreed rates.
4) To collect the proceeds of cheques and other orders instruments deposited for credit to
the account; Collection of cheques and other negotiable instruments - Banker collects
cheques and other negotiable instruments on his customers behalf from banks and financial
institutions on which these are drawn. He thus acts as agent of the customer. Banker as
agent has certain responsibilities which he must discharge meticulously. Banker is expected
to keep his customer advised of the fate of the instruments under collection. The customers
account can be debited with the usual commission or collection charges as per banks rules
and practice. As this service is not rendered free of charge the banker is liable for any
inordinate and avoidable delays in the collection or in advising fate of the instrument to the
customer.
5) To give reasonable notice to the customer before closing the account or determining the
relationship. (In law the word determining means ending, closing)
6) To Maintain Secrecy Of Customer's Account: It is most important legal duty of banker not
to disclose the state of customer's account to any unauthorised person. The banker cannot
disclose the state of account even to the wife or husband of account holder who are
otherwise one and the same thing. This duty does not end with the closing of account but it
continues even after that. A prudent banker must, therefore, exercise greatest care to
observe this duty of secrecy. Any inadvertent disclosure made during the busy time may
have serious consequences.
However banker can disclose the state of account on proper and reasonable occasions which
are: 1. Under Compulsion Of Law,
2. In The National Interest,
3. Common Courtesy To Other Banks,
4. In Banks Interest,
5. Expressed Or Implied Consent Of Customer.
Rights and Duties of a Customer Towards the Banker
RIGHTS:
The customer has the following universally accepted rights:
(1) to draw cheques against his credit balance or in the absence of credit balance there are

arrangements for accommodation made with the banker beforehand, to this effect.
(2) to receive a Pass Book or a statement containing a copy of his account with the banker.
In case he finds any over-crediting or over-debiting in his account he has a right to get it
corrected;
(3) to sue the bank for the costs, loss and damages when his cheque is wrongfully
dishonoured;
(4) to sue when the banker has not maintained the secrecy of his account.
(5) to claim for and receive the profit / return on his deposits as promised by the bank.
DUTIES:
The customer has the following duties towards his banker:
(1) Negotiable Instruments Act lays down that the customer must present the cheques
for payment and collection within the business hours of his banker.
(2) Negotiable Instruments Act lays down that the customer should see that the
cheque and other instruments are presented for payment within a reasonable time from the
date of their Issue.
(3) He should keep his cheque book under lock and key so that no unauthorised person gets
access to it. If a customer fails in this duty he is to be held responsible tor his negligence in
leaving his cheques unprotected.
(4) He should draw the cheques very carefully and in such a way that there is no room left
for any fraudulent alterations and additions.
In the case, London Joint Stock Bank vs. Macmillan and Arthur -(l918-A.C 77) Lord Findlay
said: "A cheque drawn by a customer, is in point of law a mandate to the banker to pay the
amount according to the tenor of the cheque. It is beyond dispute that the customer is
bound to exercise reasonable care in drawing the cheque to prevent the bank from being
misled. If he draws a cheque in a manner which facilitates fraud, he is guilty of a breach of
duty to himself and the banker and he will be responsible to the banker for any loss
sustained by the banker as a natural and direct consequence of this breach of duty."
General Terms and Conditions Applicable to Account Opening
Following are the terms and conditions commonly used by banks in their account opening
form.
Any person(s) opening or operating an account with the Bank will be deemed to have
read, understood and accepted the Terms of Account and the applicable Schedule of Bank
Charges issued and amended from time to time by the Bank.
Not more than one account of each category, i.e. foreign currency, current and saving, PLS
saving, or similar accounts can be opened in any branch of the Bank.
Proper identification in the form of Computerized National Identity Card/Passport/Alien
Registration Card will be required before the Bank opens any account, at its sole discretion,
which will be independently verified by the Bank through NADRA. In case of non-validation
or mismatch/ incorrect information, the Bank has the right to stop the transaction till
clearance of ambiguity or closure of the account. Each account shall possess a distinctive
number, which shall be quoted in all correspondence with the Bank in relation to the

account.
Any change in the address or constitution of the account holder/depositor should be
immediately communicated in writing to the Bank. The post office and other agents for
delivery shall be considered agents of the account holder(s)/depositor(s) for delivery of
letters, remittance etc., and no responsibility shall be accepted by the Bank for delay, non
delivery, etc.
To safeguard the Banks interest, the Bank may, at its discretion, and for any other
purpose as per the law of the land in force, share any information, details or the data
relating to the customers transactions with any competent authority or agency. The Bank,
in complying with laws and regulations, may intercept and investigate any payment
message and other information or communications sent to or by the account holder or on
the account holders behalf via another Bank. This process may involve making further
future enquiries.
The method of calculating return/profit under the profit/loss sharing scheme is governed
by the Bank Rules under prevailing Regulations/Directives of the State Bank of Pakistan and
is subject to change without prior notice.
No profit or interest is paid on current accounts, whether in respect of local or foreign
currency.
Any sum to be deposited in the account should be accompanied by a duly completed
deposit slip showing the name and number of the account to be credited and the depositors
signature. Such deposits must be entered at cash counter only.
The bank may accept for collection cheques and other instruments promptly but by the
account holder/depositor him/herself at his/her sole risk. All cheques and other instruments
should be crossed before they are deposited for crediting in the account.
In the event of any instrument deposited being returned for any reason whatsoever or
being returned at any time, although previously advised as paid, the account holder will
refund the proceeds of the said instrument and indemnify the Bank against all losses and
costs arising there from and authorize the Bank to debit such amount and expenses to any
account which the account holder may have with the bank.
The bank will take due care to ensure that the credit and debit entries are correctly
recorded in the accounts of the account holder/depositor, but in case of any error, the Bank
shall be within its right at all times to make the correct adjusting entries without prior notice
and recover any amount due from the account holder/depositor without prior notice.
In the case of a deposit maturing on a public or bank holiday, then the Bank shall pay the
deposit and/or the interest/return/profit on the next working day when the Bank is open for
banking business. Cheques may only be drawn on printed cheques supplied by the Bank.
The Bank reserves at all times the right to refuse payment of cheques drawn otherwise.
Cheques should be signed by the account holder/depositor as per specimen signature
supplied to the Bank and any alteration(s) thereon must be authenticated by the drawers
full signature. In order to comply with any instructions given by the account
holder/depositor, the Bank shall only rely on the signature as provided/inscribed by the
account holder/depositor on the specimen signature card at the time of opening of the bank
account.
In the case of the Bank receiving notice of the demise of an individual customer, the Bank
will not be obliged to allow any operation or withdrawal except on production of the
succession certificate or other court orders from a court of competitive jurisdiction.
In the case of an operating instruction either or survivor, in the event of the death of
either the account holder(s)/depositor, the credit balance in the account will be payable to
the surviving account holder(s)/depositor.
Current/saving accounts that remain inoperative for one year will be classified as dormant.
Any change of address/signature(s) can be requested during the period of dormancy of the
account, but the account will not be charged for any change in the status of the dormant
account. For reactivation of any dormant account, the account holder must in person

request a change of status and will produce original CNIC or Passport or Pakistan Origin
Card (POC) or National Identity Card for Overseas Pakistani (NICOP) with a photocopy for
Branch / Bank attestation.
If a deposit account / instrument remains inoperative for a period of ten years, then it will
become an unclaimed deposit and will be surrendered to SBP as per the provisions of the
Banking Companies Ordinance 1962.
Periodic statements of account shall be issued by the Bank to the account holder /
depositor concerned. Any discrepancy in the statement of account should be promptly
brought to the notice of the Bank in writing within fourteen days of dispatch, failing which
the statement of account shall be deemed to be final and conclusive, for all purposes
whatsoever,
If a statement of account is lost or spoiled, a duplicate statement of account may be
provided by the Bank, subject to charge as is applicable under its Schedule of Bank
Charges, upon receipt of written request by the customer / account holder only.
Rupee and foreign currency accounts not meeting the Banks minimum balance
requirement may be subject, at the discretion of the Bank, to service charges as per the
Schedule of Bank Charges. However, the following accounts will be exempted from levy of
service charges: I) Students, II) Mustahiqueen of Zakat, III) Employees of Government /
Semi-Government institutions for salary and pension purposes, IV) Basic Banking Account.
Details of minimum balance requirement service charges with exemptions are listed in the
Banks Schedule of Charges and are also displayed in all the branches.
The Bank, at its sole discretion, shall be constrained to close those accounts which show
nil balance at the time of half yearly closings. Besides this, the Bank reserves the right to
close without prior notice, any account which in its opinion is not satisfactorily operated, or
for any other reasons whatsoever. It shall not be incumbent on the Bank to disclose to the
account holder / depositor the reason(s) for doing so.
The account holder / depositor wishing to close the account must surrender unused
cheques, if any.
The Bank shall have discharged its liability with respect to any account so closed by
mailing to the account holder / depositor at his/her last known address as per the Banks
record, a Bank draft in the currency of such account, payable to the account holder /
depositor of the amount of the credit balance of such account less deduction(s) in respect of
the amount of any claim that the Bank may have on such funds.
The Bank shall determine from time to time the rate of interest/return/profit payable on
the account/deposit in accordance with the prevailing rules and regulations of the State
Bank of Pakistan and the policies of the Bank which are subject to change from time to time
and the account holder / depositor agrees to accept such rate of interest/return/profit.
Foreign currency current or savings accounts and time deposits may be established in the
U.S. Dollar, Pound Sterling, Euro, Jap Yen and such other currencies as the Bank shall
determine/allow and in accordance with the local regulations in force from time to time.
Profit on foreign currency saving and term deposits is paid at periodic intervals as
determined by the Bank and/or upon respective maturity dates of such deposits at such rate
as may be determined by the Bank from time to time.
. Foreign currency accounts/deposits are opened and maintained subject
to Foreign Exchange Regulations and Directives of the Government of
Pakistan, or any of the organizations/agencies and State Bank of Pakistan from time to
time.
Zakat, wherever applicable, shall be deducted on valuation data from
applicable accounts having balance in excess of the exempted limit as declared for that
particular Zakat year.

. Declaration on prescribed Performa for exemption of deduction of Zakat will be registered

with the Bank at least one month prior to valuation date or as per Zakat rules applicable
from time to time. Zakat will be deducted as per Zakat and Usher Ordinance 1980.
. ALL applicable taxes shall be recovered as per tax laws in force. The Bank shall within its
right make investment of credit balance deposits in any manner at its sole discretion and
make use of funds to the best of its judgment in the banking business under the PLS
system.
The account holder/depositor undertakes to reimburse the Bank with any claim in respect
of losses/charges on the basis of half yearly/yearly closing of the Banks books of account.
The Bank would be within its authorized rights to debit their accounts for the amount(s) of
such claims/charges in settlement of business accounts of the Bank.
The Bank is subject to all applicable circulars, orders, directives, rules, regulations, laws,
decrees and restrictions issued by competent Government and other regulatory authorities
in Pakistan and the liability of the Bank for payment is governed by applicable laws and
regulation in force in Pakistan at the relevant time. Repayment of any deposit account,
balances, or interest/profit thereon is subject to any acts of the Govt, of Pakistan or the
State Bank of Pakistan or any competent governmental and other regulatory authority in
Pakistan.
On a request for Hold Mail service, the Bank will hold all mail addressed to the account
holder/depositor. The account holder will collect any mail so held personally, or through an
authorized person, unless he/she advises the bank to the contrary in writing. It is
acknowledged that the request for Hold Mail service is being made entirely for the account
holders convenience and at his/her risk and responsibility and without any obligation on the
part of the Bank. All transactions will be charged as per Schedule of Charges.
For a BBA account, a maximum of two deposits and two withdrawals per month are
allowed free of charge as per policy in force. However, any transaction in a calendar month
over those mentioned above will be charged a flat fee as per the prevailing Schedule of
Bank Charges.
Any existing customer wanting to convert his/her account into BBA can do so by giving a
written application to the Branch Manager, after which a new BBA account will be opened. A
new account number will be provided to the customer after due account opening
procedures, including submission of CNIC, if not provided earlier. The statement of account
will be issued once a year. The account is exempt from levy of service charges in the case of
not meeting minimum balance requirements. Only one account per CNIC shall be allowed to
be opened regardless of the branch. No duplication shall be allowed, even as a joint account
or sole proprietorship account.
__________________________________________________
________________________________
__________________
Whenever you find yourself on the side of the majority, it is time to pause and reflect.
-Mark Twain
#4
Saturday, April 05, 2014

saad monga

Join Date: May 2012

Location: Lahore
Posts: 34
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Prudential Regulations for Banks

Every job is a self portrait of those who did it.

Prudential Regulations for Banks
If the banks in Pakistan violate these Prudential Regulations they are liable to face heavy
financial penalties and the bank officers can face disciplinary action by the State Bank of
Pakistan and the bank can lose their banking licence besides heavy financial penalties.)
5.1. Nature of Prudential Regulations:
Prudential Regulations are both preventive and protective techniques. Preventive regulations
forestall crises by reducing the risks facing banks such as controlling and monitoring the
management of banks capital, solvency (CHECK THE MEANINGS OF SOLVENCY IN THE
COMPUTER) and liquidity standards and large exposure limits. Protective techniques provide
support to banks once a crisis threatens; lender-of-the-last-resort facilities are of immediate
benefits.
In case of Pakistani banks branches functioning overseas the Prudential Regulations or legal
requirements of host country shall prevail. The Prudential Regulations do not supersede
other directives issued by SBP from time to time.
5.2. Definitions of important terms:
1. Account Holder means a person who has opened any account with a bank or is a holder
of deposit / deposit certificate or any instrument representing deposit / placing of money
with a bank or has borrowed money from the bank/DFI. A DFI means a Development
Finance Institution.
2. Borrower means a person on whom a bank has taken any exposure during the course of
business.
3. Contingent liability means: (a) a possible obligation that arises from past events and
whose existence will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the enterprise; or
(b) a present obligation that arises from past events but is not recognized because:
(i) it is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient reliability; and includes
letters of credit, letters of guarantee, bid bonds / performance bonds, advance payment
guarantees and underwriting commitments. (Bid Bond= A guarantee that the firm will enter
into a contract if it is awarded to the firm)
4. Documents include vouchers, cheques, bills, pay-orders, and promissory notes, securities
for leases / advances and claims by or against the bank/DFI or other papers supporting
entries in the books of a bank/DFI.
5. Equity of the borrower includes paid-up capital, general reserves, balance in share
premium account, reserve for issue of bonus shares and retained earnings / accumulated
losses, revaluation reserves on account of fixed assets and subordinated loans.
6. Exposure means financing facilities whether fund based and / or non-fund based and
include any form of financing facility extended or bills purchased / discounted except ones
drawn against the L/Cs of banks rated at least A by credit rating agency on the approved

panel of State Bank of Pakistan.

7. Forced Sale Value (FSV) means the value which fully reflects the possibility of price
fluctuations and can currently be obtained by selling the mortgaged / pledged assets in
forced / distressed-sale conditions.
8. Government Securities shall include such types of Pak. Rupee obligations of the Federal
Government or a Provincial Government or of a Corporation wholly owned or controlled,
directly or indirectly, by the Federal Government or a Provincial Government and guaranteed
by the Federal Government.
9. Group means persons, whether natural or juridical, if one of them or his dependent family
members or its subsidiary, have control or hold substantial ownership interest over the
other.
10. Liquid Assets are the assets which are readily convertible into cash without recourse to a
court of law and mean--- encashment / realizable value of government securities, bank
deposits, certificates of deposit, shares of listed companies which are actively traded on the
stock exchange, National Investment Trust (NIT) Units, certificates of mutual funds,
Certificates of Investment issued by entities rated at least A by a credit rating agency on
the approved panel of State Bank of Pakistan. These assets with appropriate margins should
be in possession of the bank with perfected lien.
11. Guarantees issued by domestic banks when received as collateral by banks will be
treated at par with liquid assets whereas, for guarantees issued by foreign banks, with
rating of A and above.
12. Medium and Long Term Facilities mean facilities with maturities of more than one year
and Short Term Facilities mean those facilities with maturities up to one year
13. NBFC means Non-Banking Finance Company and includes a Modaraba, Leasing
Company, Housing Finance Company, Investment Bank, Discount House, Asset Management
Company and a Venture Capital Company.
14. Other Form of Security means hypothecation of stock (inventory), assignment of
receivables, lease rentals, contract receivables, etc.
15. Readily Realizable Assets mean and include liquid assets and stocks pledged to the
banks in possession, with perfected lien duly supported with complete documentation.
16. Secured means exposure backed by tangible security and any other form of security
with appropriate margins. Exposure without any security or collateral is defined as clean.
17. Equity of the Bank/DFI means Tier-I Capital or Core Capital and includes paid-up capital,
general reserves, balance in share premium account, reserve for issue of bonus shares and
retained earnings/accumulated losses as disclosed in latest annual audited financial
statements. In case of branches of foreign banks operating in Pakistan, equity will mean
capital maintained, free of losses and provisions, under Section 13 of the Banking
Companies Ordinance, 1962.
18. Nominee Director means a person nominated on the board of a bank/DFI by sponsor(s),
persons, company, institution etc. by virtue of his/their shareholding in a bank/DFI.

19. PBA means Pakistan Banks Association.

20. Subordinated Loan means an unsecured loan, extended to the borrower for a minimum
original maturity period of 5 years, subordinate to the claim of the bank/DFI taking
exposure on the borrower, and documented by a formal sub-ordination agreement between
provider of the loan and the bank/DFI. The loan shall be disclosed in the annual audited
financial statements of the borrower as subordinated loan.
21. Tangible Security means readily realizable assets (as defined in these Prudential
Regulations), mortgage of land, plant, building, machinery and any other fixed assets.
22. Underwriting Commitments mean commitments given by commercial banks/DFIs to the
limited companies at the time of new issue of equity/debt instrument, that in case the
proposed issue of equity/debt instrument is not fully subscribed, the un-subscribed portion
is taken up (purchased) by the underwriting entity.
5.3. The Need for Prudential Regulations
The Basel Accord of 1988 and desirability to avail the benefits of laissez- faire prompted the
introduction of Prudential Regulations by State Bank of Pakistan with effect from 1 January,
1992, to counter any adverse impact of a deregulated banking sector in Pakistan. The key
objectives of these regulations are outlined below:
a) To protect the safety of publics savings deposited in Banks.
b) To control the supply of money and credit in order to achieve a nations broad economic
goals (such as high employment and low inflation).
c) To ensure equal opportunity and fairness in the publics access to credit and other vital
financial services.
d) To promote public confidence in the financial system, so that savings flow smoothly into
productive investment.
e) To avoid concentrations of financial power in the hands of a few individuals and
institutions.
f) To provide the government with credit, tax revenues and other services.
g) To help those sectors of the economy that have special credit needs (such as housing,
small business, and agriculture).
5.4. Categories of Prudential Regulations:
The Prudential Regulations are divided in four categories:
1. Risk Management (R), (Prefix R)
(There are different sets of Risk Regulations for Corporate and Commercial Banking, SME,
Consumer, Agriculture and Micro Finance Loans.)
2. Corporate Governance (G),
3. KYC and Anti Money Laundering (M), and
4. Operations (0).
5.4.1. Risk Management
1) Corporate/Commercial Banking
REGULATION R-1

LIMIT ON EXPOSURE TO A SINGLE PERSON/GROUP

1. The total outstanding exposure (fund based and non-fund based) by a bank/DFI to any
single person shall not at any point in time exceed 30% of the bank's/DFI's equity as
disclosed in the latest audited financial statements, subject to the condition that the
maximum outstanding against fund based exposure does not exceed 20% of the
bank's/DFI's equity.
2. The total outstanding exposure (fund based and non-fund based) by a bank/DFI to any
group shall not exceed 50% of the bank's/DFI's equity as disclosed in the latest audited
financial statements, subject to the condition that the maximum outstanding against fund
based exposure does not exceed 35% of the bank's/DFI's equity.
The rationale of this regulation is to diversify the banks exposure to a large number of
clients. If a bank gives loans only to a small number of clients giving large chunks to each
customer the banks credit risk will be high. If loans are given to a large number of clients
and each customer is given a smaller amount the overall RISK will be lower.

3. Limit on exposure to a single person/Group effective from 31-12-2009 and onward would
be as under:
Effective date Exposure limit as a % of banks/DFIs equity (as disclosed in the latest
audited financial statements)
For single person For group
Total outstanding(fund and non-fund based) exposure limit Fund based outstanding limit
Total outstanding (fund and non-fund based) exposure limit Fund based outstanding limit
31-12-2009 30 20 45 35
31-12-2010 30 20 40 35
31-12-2011 30 20 35 30
31-12-2012 30 20 30 25
31-12-2013 25 25 25 25
REGULATION R-2
LIMIT ON EXPOSURE AGAINST CONTINGENT LIABILITIES
1. Contingent liabilities of a bank/DFI shall not exceed at any point in time 10 times of its
equity.
Contingent Liabilities are the total of the following commitments undertaken by a bank:A. Letters of Guarantee issued by a bank.
B. Letters of Credit issued by a bank.
C. Letters Underwriting the issue of shares or TFCs to the Public.
Following shall not constitute contingent liabilities for the purpose of this regulation:
a) Bills for collection.
b) Obligations under Letters of Credit and Letters of Guarantee to the extent of cash margin
retained by the bank/DFI.
c) Letters of credit/guarantee where the payment is guaranteed by the State Bank of
Pakistan/Federal Government or banks/DFIs rated at least 'A' by a credit rating agency on
the approved panel of State Bank of Pakistan or Standard & Poors, Moody's, Fitch- Ibca or
Japan Credit Rating Agency (JCRA).

d) Non-fund based exposure to the extent covered by liquid assets.

e) Claims other than those related to provision of facilities (fund based or non-fund based)
to the banks'/DFIs constituents, where the probability of conversion of these claims into
liabilities are remote.
REGULATION R-3
MINIMUM CONDITIONS FOR TAKING EXPOSURE
1. While considering proposals for any exposure (including renewal, enhancement and
rescheduling/restructuring) exceeding such limit as may be prescribed by State Bank of
Pakistan from time to time (presently at Rs 500,000), banks/DFIs should give due
weightage to the credit report relating to the borrower and his group obtained from Credit
Information Bureau (CIB) of State Bank of Pakistan. However, banks/DFIs may take
exposure on defaulters keeping in view their risk management policies and criteria, provided
they properly record reasons and justifications in the approval form. The condition of
obtaining CIB report will apply to exposure exceeding Rs 500,000/- after netting-off the
liquid assets held as security.
2. Banks/DFIs shall, as a matter of rule, obtain a copy of financial statements duly audited
by a practicing Chartered Accountant, relating to the business of every borrower who is a
limited company or where the exposure of a bank/DFI exceeds Rs 10 million, for analysis
and record. The banks/DFIs may also accept a copy of financial statements duly audited by
a practicing Cost and Management Accountant in case of a borrower other than a public
company or a private company which is a subsidiary of a public company. However effective
from December 31, 2009, if the borrower is a public limited company and exposure exceeds
Rs. 500 million, banks/DFIs should obtain the financial statements duly audited by a firm of
Chartered Accountants which has received satisfactory rating under the Quality Control
Review (QCR) Program of the Institute of Chartered Accountants of Pakistan. Subsequently,
if the firm's rating is downgraded in QCR program, then the financial statements of such
borrowers are audited in the subsequent year by a firm having satisfactory rating under
QCR.l Banks/DFIs may waive the requirement of obtaining copy of financial statements
when the exposure net of liquid assets does not exceed the limit of Rs 10 million. Further,
financial statements signed by the borrower will suffice where the exposure is fully secured
by liquid assets.
3. Banks/DFIs shall not approve and/or provide any exposure (including renewal,
enhancement and rescheduling/restructuring) until and unless the Loan Application Form
(LAF) prescribed by the banks/DFIs is accompanied by a 'Borrower's Basic Fact Sheet' under
the seal and signature of the borrower as per approved format of the State Bank of Pakistan
(Annexure II-A for corporate borrowers and Annexure II-B for individual borrowers).
REGULATION R-4
LIMIT ON EXPOSURE AGAINST UNSECURED FINANCING FACILITIES
1. Banks/DFIs shall not provide unsecured/clean financing facility in any form of a sum
exceeding Rs 500,000/- (Rupees five hundred thousand only) to any one person. Financing
facilities granted without securities including those granted against personal guarantees
shall be deemed as 'clean' for the purpose of this regulation. Further, at the time of granting
a clean facility, banks/DFIs shall obtain a written declaration to the effect that the borrower
in his own name or in the name of his family members, has not availed of such facilities
from other banks/DFIs so as to exceed the prescribed limit of Rs 500,000/- in aggregate.
2. For the purpose of this regulation, following shall be excluded/exempted from the per
party limit of Rs 500,000/- on the clean facilities:
a) Facilities provided to finance the export of commodities eligible under Export Finance
Scheme.
b) Financing covered by the guarantee of Pakistan Export Finance Guarantee Agency.
c) Loans/advances given to the employees of the banks/DFIs in accordance with their

entitlement/staff loan policy.

d) Investment in COIs/inter bank placements with NBFCs, provided the investee NBFC is
rated 'A+', 'A' or 'A-' for long-term rating and at least 'A2' for short-term rating or equivalent
by a credit rating agency on the approved panel of the State Bank of Pakistan or Standard &
Poors, Moody's, Fitch-Ibca or Japan Credit Rating Agency (JCRA).n instructions, will be
exempted from the aggregate exposure limit.
3. Banks/DFIs shall ensure that the aggregate exposure against all their clean facilities shall
not, at any point in time, exceed the amount of their equity. However, investment of
banks/DFIs in subordinated and unsecured TFCs, issued by other banks/DFIs to raise Tier-II
Capital as per State Bank of Pakistan's instructions, will be exempted from the aggregate
exposure limit.
REGULATION R-5
LINKAGE BETWEEN FINANCIAL INDICATORS OF THE BORROWER AND TOTAL EXPOSURE
FROM FINANCIAL INSTITUTIONS
1. While taking any exposure, banks/DFIs shall ensure that the total exposure (fund-based
and/or non-fund based) availed by any borrower from financial institutions does not exceed
10 times of borrower's equity as disclosed in its financial statements (obtained in
accordance with Para 2 of Regulation R-3), subject to the condition that the fund based
exposure does not exceed 4 times of its equity as disclosed in its financial statements.
However, where the equity of a borrower is negative and the borrower has injected fresh
equity during its current accounting year, it will be eligible to obtain finance up to 4 times of
the fresh injected equity (instead of the existing 3 times) provided the borrower shall plough
back at least 80% of the net profit each year until such time that it is able to borrow without
this relaxation. After 30th June 2009, the borrower will be eligible only up to 3 times of his
fresh injected equity.
In exceptional cases, banks/DFIs may allow seasonal financing to borrowers, for a
maximum period of six months, not meeting the criteria of 4 times of fund based exposure
and 10 times total exposure, subject to the condition that fund based exposure does not
exceed 8 times and total exposure does not exceed 12 times of borrower's equity.
2. At the time of allowing fresh exposure/enhancement/renewal, the banks/DFIs should
ensure that the current assets to current liabilities ratio of the borrower is not lower than
such ratio as may be required under the Credit Policy of the bank/DFI. Banks/DFIs shall
prescribe the minimum current ratio under their Credit Policy keeping in view the quality of
the current assets, nature of the current liabilities, nature of industry to which borrower
belongs to, average size of current ratio of that industry, appropriateness of risk mitigants
available to the bank/DFI etc. It is expected that bank/DFI's Credit Policy, duly approved by
the Board of Directors, shall emphasize higher credit standards and provide full guidance to
the management about the current ratio requirement for various categories of clients and
corresponding risk mitigants etc. acceptable to the bank/DFI.
3. For the purpose of this regulation, subordinated loans shall be counted as equity of the
borrower. Banks/DFIs should specifically include the condition of subordinated loan in their
Offer Letter. The subordination agreement to be signed by the provider of the subordinated
loan, should confirm that the subordinated loan will be repaid after that bank's/DFI's prior
approval.
4. This regulation shall not apply in case of exposure fully secured against liquid assets held
as collateral, as well as in cases where the exposure is taken on Units/Projects revived as a
consequence of settlement under Committee for Revival of Sick Industrial Units (CRSIU),
Corporate & Industrial Restructuring Corporation (CIRC) and the State Bank of Pakistan BPD
Circular No. 29 dated October 15,2002, for a period of five years from the date of such
settlement. Export finance and finance provided to ginning and rice husking factories shall

also be excluded from the borrowings (exposure) for the purpose of this regulation.
5. Where the banks/DFIs have taken exposure on exceptional basis as provided in para 1
above, they shall record in writing the reasons and justifications for doing so in the approval
form and maintain a file in their central credit office containing all such approvals. The
Exceptions Approval file shall be made available to the inspection team of State Bank during
the inspection.
REGULATION R-6
EXPOSURE AGAINST SHARES/TFCs AND ACQUISITION OF SHARES
1. A) EXPOSURE AGAINST SHARES/TFCs:
Banks/DFIs shall not:
a) Take exposure against the security of shares/TFCs issued by them. XYZ bank cannot
grant loans against shares issued by XYZ bank.
b) Provide unsecured credit to finance subscription towards floatation of share capital and
issue of TFCs.
c) Take exposure against the non-listed TFCs or the shares of companies not listed on the
Stock Exchange(s). However, banks/DFIs may make direct investment in non-listed TFCs.
d) Take exposure on any person against the shares/TFCs issued by that person or its
subsidiary companies. It means Packages Ltd cannot obtain loan against shares issued by
Packages Ltd.
e) Take exposure against 'sponsor director's shares' (issued in their own name or in the
name of their family members) of banks/DFIs.
f) Take exposure on any one person (whether singly or together with other family members
or companies owned and controlled by him or his family members) against shares of any
commercial bank/DFI in excess of 5% of paid-up capital of the share issuing bank/DFI.
g) Take exposure against the shares/TFCs of listed companies that are not members of the
Central Depository System. Check on internet the purpose of Central Depository Company.
h) Take exposure against unsecured TFCs or non-rated TFCs or TFCs rated below 'BBB' or
equivalent. Exposure may, however, be taken against unsecured/subordinated TFCs, which
are issued by the banks/DFIs for meeting their minimum capital requirements, as per terms
and conditions stipulated in BSD Circular No. 12 of August 25, 2004.
i) Take exposure against shares unless the beneficiary of the facility is absolute owner of the
shares so pledged or has the necessary mandate to pledge the shares of third party as
security for availing financing facility from the bank/ DFI.
B) ACQUISITION OF SHARES:
a) Banks/DFIs shall not own shares of any company/scrips in excess of 5% of their own
equity. Further, the total investments of banks in shares should not exceed 20% of their own
equity.
The shares acquired in excess of 5% limit due to the underwriting commitments will be sold
off/off loaded within a period of three months.
b)Banks/DFIs may also take exposure in future contracts to the extent of 10% of their
equity on aggregate basis. In this connection, the 10% exposure limit for future contracts
will include both positions taken in futures buying and selling.
c) Banks/DFIs may combine the limits for ready market and future contracts and have the
aggregate exposure in shares to the extent of 30% of their equity provided that investment
in future contracts shall not exceed 10% of their equity.
d) Banks/DFIs will obtain prior approval from the State Bank while purchasing shares of a
company in excess of 5% of their paid-up capital or 10% of the capital of investee company,
whichever is lower. These limits will be calculated as under:
e) Regarding strategic investment, the banks/DFIs will exercise proper diligence, as their

decision to make strategic investment carries great significance, keeping in view the
implications of such investment in terms of liquidity management and long term outlook of
the investee companies. In this regard, the banks/DFIs should take into account all relevant
factors. Accordingly, the following should be ensured:
x A committee, clearly designated/empowered by the bank, should take the decision for
strategic investment.
x All Record of transactions/decisions, taken by the committee, regarding strategic
investment should be properly maintained and kept in a separate file, for provision of the
same to the SBP Inspection Team during their visit to the bank.
x The banks/DFIs will report their investment in strategic portfolio to the Banking Policy
Department, within 2 working days from the date of such investment.
2. Banks/DFIs shall not hold shares in any company whether as pledge, mortgagee, or
absolute owner, of an amount exceeding 30% of the paid-up share capital of that company
or 30% of their own paid-up share capital and reserves, whichever is less.
3.
4. SECURITY MARGIN : Exposure against the shares of listed companies shall be subject to
minimum margin of 30% of their current market value, though the banks/DFIs may, if they
wish, set higher margin requirements keeping in view other factors. However, banks/DFIs
should not give a margin call until the margin reaches to the level of 25%. Banks/DFIs will
monitor the margin on at least weekly basis and will take appropriate action for top-up and
sell-out on the basis of their Board of Directors' approved credit policy and pre-fact written
authorization from the borrower enabling the bank/DFI to do this.
4. SECURITY MARGIN : Exposure against TFCs rated 'A' (or equivalent) and above by a
credit rating agency on the approved panel of State Bank of Pakistan shall be subject to a
minimum margin of 10% while the exposure against TFCs rated 'A-' and 'BBB' shall be
subject to a minimum margin of 20%.
REGULATION R-7 GUARANTEES
1. All guarantees issued by the banks/DFIs shall be fully secured. Further the banks/DFIs to
hold at least 20% of the guaranteed amount in the form of liquid assets as security.
2. The requirement of security can also be waived by the banks/DFIs in cases of guarantees
issued to Pakistani firms and companies functioning in Pakistan against the back to
back/counter guarantees of branches of guarantee issuing bank/DFI or banks/DFIs rated at
least 'A' or equivalent by a credit rating agency on the approved panel of State Bank of
Pakistan or Standard & Poors, Moody's, Fitch-Ibca or Japan Credit Rating Agency (JCRA).
Besides, in cases where the counter-guarantee issuing bank is situated in a foreign country,
the rating of at least 'A' or equivalent by a local credit rating agency of the respective
country shall also be acceptable, provided the guarantee issuing bank in Pakistan is
comfortable with and accepts the counter-guarantee of such foreign bank.
However, the prescribed rating requirement for banks situated in foreign countries may be
relaxed for transaction amounts up to US$250,000, subject to internal credit controls and
approval of the relevant bank/DFI in Pakistan. For transaction amounts greater than
US$250,000, banks/ DFIs may approach the State Bank of Pakistan for specific
approvals/exemption, on a case-by-case basis, where the prescribed minimum rating
requirement cannot be complied with. Banks/DFIs are encouraged to set limits for
acceptance of guarantees issued by other banks/DFIs.
3. In case of back-to-back letters of credit issued by the banks/DFIs for export-oriented
goods and services, banks/DFIs are free to decide the security arrangements at their own
discretion subject to the condition that the original L/C has been established by branches of
the guarantee issuing bank or a bank rated at least 'A' by Standard & Poors, Moody's, FitchIbca or Japan Credit Rating Agency (JCRA).
4. The guarantees shall be for a specific amount and expiry date and shall contain a claim

lodgement date. However, banks/DFIs are allowed to issue open-ended guarantees without
clearance from State Bank of Pakistan provided banks/DFIs have secured their interest by
adequate collateral or other arrangements acceptable to the bank/DFI for issuance of such
guarantees in favour of Government departments, corporations/autonomous bodies
owned/controlled by the Government and guarantees required by the courts.
REGULATION R-8
CLASSIFICATION AND PROVISIONING FOR ASSETS LOANS/ADVANCES:
CLASSIFICATION AND PROVISIONING
Classification here means classifying the lending portfolio of a bank into different categories
based on the fact whether the loan and / or interest is being repaid to the bank in
accordance with the loan contract and whether the other terms and conditions are being
met or not. For example whether security as required is present, whether business is
running and whether the turnover in the business account with the bank is satisfactory or
not. We can classify the students of a college by gender, age or qualifications.
Provisioning is the name given to the process whereby the bank deducts an amount from
the profit it has made and places the amount in a separate account called Provision for bad
and doubtful debts when the bank has come to the conclusion that there are evidences
which indicate that either the borrower is willingly avoiding to repay as required or there is
an erosion in the ability of the borrower to repay and there is a reduction in the available
security and there is a strong apprehension that the customer will fail to repay and the bank
will have to suffer a financial loss. The amount that is transferred to provision account does
not available to distribute to the shareholders as dividend and can only be used to cover the
possible loss in the financing and is used to write off the loan.

REGULATION R-11 PAYMENT OF DIVIDEND

Banks/DFIs shall not pay any dividend on their shares unless and until:
a) they meet the minimum capital requirements as laid down by the State Bank of Pakistan
from time to time;
b) all their classified assets have been fully and duly provided for in accordance with the
Prudential Regulations and to the satisfaction of the State Bank of Pakistan; and
c) all the requirements laid down in Banking Companies Ordinance, 1962 relating to
payment of dividend are fully complied.
REGULATION R-12 MONITORING
While extending fund-based facilities to borrowers against hypothecation of stock and/or
receivables on pari-passu basis, banks/DFIs shall obtain monthly statements from borrowers
that contain a bank-wise break-up of outstanding amounts with the total value of stocks and
receivables there-against.
SMALL AND MEDIUM ENTERPRIES
General RISK Prudential Regulations Check-list for SME s
General Regulations covering both 1) SMALL and 2) MEDIUM Enterprises
Criteria
SME Specific Credit Policy to be formulated by Bank management

Procedures on loan administration, disbursement, and monitoring and recovery mechanism

are clearly documented.
Specifications of main functions, role & responsibilities of key positions, as well as
delegation matrix for approvals/sanctioning of financing limits.
Borrowers Basic Fact Sheet and e-CIB Report
Duly signed/stamped 'Borrowers Basic Fact Sheet' (BBFS) obtained.
Duly signed/stamped 'Loan Application Form' (LAF) obtained.
e-CIB report on borrower and on his group is obtained and in case of default proper
justification and reasons of default are recorded.
Personal Guarantees
All facilities, except for those secured against liquid assets are backed by PG of the owners
of SME's.
PGs of all directors other than nominee directors shall be obtained, in case of limited
companies
Limit on Clean facilities
Clean Exposure (facilities secured against personal guarantees only other than consumer
financing limits i.e credit card, personal loans) does not exceed Rs 5 M in aggregate from all
banks.
Written declaration that clean facilities does not exceed prescribed limit (s) is available
Proper Utilization of Loan
Appropriate system for monitoring utilization of loan is in-place.
In case of Fixed Assets/Project Financing: Appropriate system for monitoring utilization of
loan is in-place.
In case of Working Capital/revolving credits: Declaration for utilization of loan for the
purpose indended obtained.
Restriction on Facilities to Related Parties
Any of financing banks director, its chief executive or major share holding 5% or more of
share capital of the Bank or an employee or any dependent family member of these persons
is not interested in SME.
An undertaking from SE stating that there is no existence of any interest between the
borrower and the above-mentioned related parties is obtained.
Translation of Loan Documents into Urdu Language
Arrangements are in-place for provision of LAF, BBFS and other related documents (except
charge documents) on specific request of the customer.
Securities and margin Requirements
All facilities except the ones extended under clean financing are secured appropriately.
General Measures
Pricing policy, processing & documentation fee, prepayement/late-payment penalities etc
explicitly mentioned in loan agreement
A transparent, customer focused complaints resolution system is available
An efficient Management Information System (MIS) for SME Finance to effectively cater to
needs of the borrower is implemented

Small Enterprises (SE) Specific Prudential Regulations Check- list

Name of the Customer
Criteria
Definition of Small Enterprise
A Small Enterprise (SE) is a business entity which meets both the following parameters
No: of employees (inclusive of contract employees): upto 20

Annual Sales Turnover : Upto Rs 75 M

Per Party Exposure Limit
The maximum exposure on a counterparty does not exceed Rs 15 M from a Single Bank/ All
Banks
Requirement of Audited Accounts
Financials duly signed by the borrower obtained
Repayment Capacity of the Borrower and Cash Flow Based Lending
Cashflows of the borrower properly assessed by applying appropriate techniques
Collateral Valuation
Valuation conducted by Pakistan Banks Associatin (PBA) approved evaluator or Bank's/ DFI
own evaluating staff (for exposures upto Rs 5.0M)
Recovery of Outstanding Dues
Incase, cash collection/recovery is done at a place other than authorised place of the
business, appropriate secuirty and risk management measures are adopted (including
necessary steps such as intimation to the borrower)
General Reserve against Small Enterprise Finance
General reserve atleast equivalent upto 1% of the secured SE portfolio and 2% of the
unsecured SE portfolio, is maintained
Classification and Provisioning for Loan /Advances
Classification and Provision guidelines are meticulously observed as required.
Restructuring/Rescheduling of Loan
Guidelines for Restructuring/Rescheduling of Loan are met
Minimum Turnaround Time
TAT for approval process (from the date of receipt of complete information) is within 30 days

Medium Enterprises (ME) Specific Prudential Regulations Check- list

Name of the Customer
Criteria
Definition of Medium Enterprise
A Medium Enterprise (ME) is a business entity (Ideally not a public limited Company), which
meets both the following parameters:
No: of employees (inclusive of contract staff): 21-250 (Manufacturer & Services) OR 21-50
(Traders)
Annual Sales Turnover : Above Rs 75 M and upto Rs 400 M
Repayment Capacity and Cashflow Based Lending
Repayment capacity of the borrower on the basis of asset conversion cycle & expected
future cash flow is assessed
Key drivers & risks of borrowers business and risk mitigants are identified
Rationale & parameters used to project the future cash flows are documented and annexed
with cash flow analysis undertaken
Per Party Expsoure Limit
The maximum exposure on a counterparty does not exceed Rs 100 M from a Single Bank.
Total exposure (including leased assets) on a counterparty does not exceed Rs 200 M from
All Bank.
Requirement of Audited Accounts
Copy of financial statements duly audited by a practicing chartered accountant to be
obtained where the borrower is a limited company and/or the exposure net of liquid assets
exceeds Rs 10M.
Classification and Provisioning for Assets

Classification and Provision guidelines are meticulously observed as required.

We are not discussing the remaining categories of Risk Prudential Regulations.
The serious students may visit sbp website for the Regulations.
The regulations appearing in the book by Dr Israr may or may not be uptodate.
5.4.2. CORPORATE GOVERNANCE:
In order to ensure that the management of bank should not fall in the hands that might
damage both the institution and the banking industry as a whole, the appointment of
proposed President/Chief Executive and Directors on the Board require prior clearance from
State Bank of Pakistan. A similar type of approach will be observed by the Banks while
appointing the key executives of the Bank which will serve as intimation to State Bank of
Pakistan.
A. Fit And Proper Test
1. The "Fit and Proper Test" (FPT) is applicable to the sponsors (both individual and
companies) who apply for a commercial banking license, the investors acquiring
strategic/controlling stake in the banks/DFIs, major shareholders of the banking companies
and to the appointment of Directors, CEO, and Key Executives of the banks/DFIs. The
fitness and propriety will be assessed on the following broad elements (Annexure VII-B):
a) Integrity, Honesty and Reputation
b) Track Record
c) Solvency and Integrity
d) Qualifications and Experience
e) Conflict of Interest
f) Others
In order to improve the quality of directives originated from the Board, it has been
particularly highlighted that their role will be only policy making and general directions,
oversight and supervision of the affairs and business of the bank and shall not indulge in
day-to-day operations of the business of the bank.
B. Head of Compliane / Compliance Officer:
Banks/DFIs shall put in place a Compliance Program to ensure that all relevant laws are
complied with, in letter and spirit, and, thus, minimize legal and regulatory risks. For this
purpose, the Board of Directors, or Country Manager in case of foreign banks, shall
appoint/designate a suitably qualified and experienced person as Compliance Officer on a
countrywide basis, who may be assisted by other Compliance Officers down the line. The
Head of Compliance will report directly to the President/Chief Executive Officer of the
bank/DFI. The Compliance Officers will primarily be responsible for bank's/DFI's effective
compliance relating to:
(a) SBP Prudential Regulations.
(b) Relevant provisions of existing laws and regulations.
(c) Guidelines for KYC.
(d) Anti money laundering laws and regulations.
(e) Timely submission of accurate data/returns to regulator and other agencies.
(f) Monitor and report suspicious transactions to President/Chief Executive Officer of the
bank/DFI and

The Board of Directors of a Bank shall also ensure that it receives Management Letter from
the external auditors without delay and appropriate action is taken thereon in consultation
with the Audit Committee to deal with control or other weaknesses identified therein. A copy
of Management Letter should also be submitted to the State Bank of Pakistan for further
follow up at their level
With a view to safeguard the interest of prospective investors, depositors and creditors, it
shall be mandatory for all banks to have themselves credit rated by a Credit Rating Agency
on the approved panel of the State Bank of Pakistan. Further, the banks will disclose their
credit rating prominently in their published annual and quarterly financial statements
5.4.3. KNOW YOUR CUSTOMER (KYC) AND MONEY LAUNDERING:
The Prudential Regulation impresses upon the banks to remain fully conversant about their
customers to prevent the possible use of the banking sector for money laundering, terrorist
financing, and transfer of illegal / ill-gotten monies. Further, it is not a one time exercise but
an on going process and will commence with the start of banker customer relationship and
will remain in operation during the currency of each account.
Regulation M-1 Customer Due Diligence (Cdd)1
1. With a view to preserving the integrity and safety of the financial system, it is expedient
to prevent the possible use of the banking sector for money laundering and terrorist
financing. To this end, Customer Due Diligence/Know Your Customer (CDD/KYC) procedures
require special attention and concrete implementation. Accordingly, the following minimum
guidelines are required to be followed by banks/DFIs to avert the risks posed by money
laundering and terrorist financing activities. However, banks/DFIs are free to take additional
measures in line with Financial Action Task Force Recommendations.
The Prudential Regulations have listed different documents that must be obtained from
different types of customers while opening each account for the ease and guidance of the
banks. During the course of inspection of the banks, the efficacy of KYC system will be
checked to ensure effective observance of SBP directives
The banks are required to preserve their record for a minimum period of five years. The
records relating to the suspicious transactions reported by the bank shall be retained even
after the lapse of this period, till such time the State Bank of Pakistan permits to destroy the
same.
Regulation M-4 Correspondent Banking
1. Banks/DFIs shall gather sufficient information about their correspondent banks to
understand fully the nature of their business. Factors to consider include:
x Know your customer policy (KYC)
x Information about the correspondent bank's management and ownership
x Major business activities x Their location
x Money laundering prevention and detection measures x The purpose of the account
x The identity of any third party that will use the correspondent banking services (i.e. in
case of payable through accounts) x Condition of the bank regulation and supervision in the
correspondent's country
Suspicious Transactions
The Banks are also required to report all suspicious transactions through Compliance Officer
of the bank to Banking Policy Department of State Bank of Pakistan. The employees of the
banks are strictly prohibited to disclose the fact to the customer or any irrelevant quarter

that a suspicious transaction or related information is being reported for investigation

5.4.4. OPERATIONS:
Banks have been restrained from window dressing i.e. artificially or temporarily showing an
ostensibly different position of banks accounts as reflected in their financial statements.
Particular care shall be taken in showing the position of deposits, non-performing
loans/assets, provision, profit, inter-branch and inter-bank accounts etc.
All entries outstanding in the Inter-Branch Accounts and/or Suspense account must be
reconciled /cleared and taken to the proper head of account within a maximum period of 30
days from the date of entry made in the said account
Every Bank shall maintain in Pakistan not less than 80% of the assets created by it against
time and demand liabilities. Accordingly assets held abroad shall not, at any point in time,
exceed 20% of its time and demand liabilities. All other assets financed from sources other
than time and demand liabilities shall be held within Pakistan
In case of FE 25 deposits, these shall not be invested in fund management schemes of other
banks, whether in Pakistan or abroad. At the same time amount invested in a single
institution should not exceed 25% of total investable funds, available with the investing
bank
The prescribed ratio of Cash Reserve /Special Cash Reserve against FE-25 deposit shall be
maintained in USD Dollars.
__________________________________________________
_____________________________________
__________________
Whenever you find yourself on the side of the majority, it is time to pause and reflect.
-Mark Twain

Know your Customer and Anti Money Laundering (AML)

The only way your knowledge and vocabulary can grow is by looking up the meanings of
all unfamiliar words in a good New Edition Dictionary. Specialized Dictionaries like the ones
on (1) Law and (2) banking and finance can increase your understanding of technical
terms and concepts.
Make a resolution that you will look up the words, whose meanings are not clear to you.
Know your Customer and Anti Money Laundering (AML)
(Story BCCI convicted of money laundering and liquidated world wide.)
What is Money Laundering?
Money laundering can be defined as the process whereby the true identity of illegally
obtained money is changed or concealed so that it appears to have originated from a
legitimate source.

The main purposes of money laundering are to disguise the origin of funds, integrate the
funds into economy and spread and diversify the risk of seizure or confiscation of
illegitimate funds, and to further finance criminal operations.
Money laundering serves as a form of security for individuals involved in criminal
activities.
Cash being a bearer instrument and completely fungible, lends anonymity to a variety of
criminal activities and is the preferred medium of exchange in the criminal world. That
gives rise to a need for criminals to:
1. conceal the true ownership and origin of the money;
2. maintain control over the money; and
3. alter the form of money to mask its origins.
{ fungible esp. of goods) being of such nature or kind as to be freely exchangeable or
replaceable, in whole or in part, for another of like nature or kind.}
Three important phases in Money Laundering.
1. Placement
Placement is the first stage of money laundering process. The criminals bring their illgotten money into the formal sector. Criminal activities almost always generate proceeds
in CASH. Examples are proceeds of narcotics sales, taking bribes, selling smuggled goods.
The cash received is introduced to the financial system or retail economy either in bulk or
through structuring of transactions to avoid attention. This can be done in an
increasingly varied number of ways. For example:
1. deposit of cash in banks or other financial institutions;
2. purchase of travelers cheques or foreign currency;
3. purchase of insurance, gold, paintings or other high value items;
4. using services of traders who may bank illegal money along with their own funds, for
example ill gotten proceeds can be deposited in banks together with legal petrol pump
receipts in cash.
The placement stage is most important as far as detection of illegally obtained money is
concerned.
2. Layering
This is the usual process of separating the funds from their source and/or consolidating
funds and transferring the funds through multiple accounts and financial instruments.
Series of transactions are conducted from one account to another and from one institution
to another including overseas transfers with the intent of making the money trail as
muddy and murky(not clear, dark and dirty with mud etc.) as possible, because if the
funds cannot be connected to criminal act, they cannot be seized.
At this stage, the money launderers sole objective is to break the link between the
illegally obtained money and its source. If a banker comes across a banking transaction
which has no apparent economic, commercial or visible lawful purpose, one could suspect
that it involves layering.
3. Integration.
The final stage of money laundering, integration is turning the illegally obtained funds into
tangible assets, such as real estate, car show room or reinvesting the funds into a
business. In situations where the layering process succeeds, integration process effectively
returns the laundered proceeds back into the general financial system and the proceeds
appear to be the result of or connected to legitimate business activities.

At this stage, it is almost impossible to trace the funds back to their original criminal
source.
Banks and financial institutions face the risk of inadvertently becoming involved in the
process of money laundering. It would seem that the placement stage represents the
most risk to financial institutions, but it can be seen that financial institutions can
unknowingly become involved in money laundering at any stage of the process.
The banks normally do not have effective means of knowing whether a transaction stems
from or forms part of a wrongful activity. Similarly, in international context, it may be
difficult to ensure that cross border transactions on behalf of customers are in compliance
with the regulations of another country.
Nevertheless, the staff should not set out to offer services or provide active assistance in
transactions, which in their opinion, are associated with money derived from illegal
activities.
Banks success on this front is dependent upon the prudence and vigilance of every
manager and employee. All concerned must adhere to KYC policies and procedures for
ascertaining customers status and his source of earning, for monitoring of accounts on
regular basis, for checking identities and bona fides of remitters and beneficiaries, for
retaining internal record of transactions for future reference.
(check bona fides = check to ensure that sb is who they say that they are; check to
ensure that sb/sth is honest )
The transactions, which are out of character/inconsistent with the history, pattern, or
normal operation of the account involving heavy deposits/withdrawals/transfers should be
viewed with suspicion and properly investigated.
The circumstances generally and after the event of 9/11 (What is 9/11?) have invited
attention of all concerned to heightened global efforts to prevent the possible use of the
banking sector for money laundering, terrorist financing, transfer of illegal / ill-gotten
monies, and as conduit for white collar crimes, etc. In order to bring banking operations at
the desired level, State Bank of Pakistan has issued a set of Prudential Regulations No. M
1 to M 5 for the purpose.
4.1. Definition of Money Laundering:
There is a lack of consensus amongst even the developed countries about what criminal
activities fall within the sphere of Money Laundering. The term Money Laundering was first
used in early 1980s. Broadly it refers to:
It is a process by which large amounts of illegally obtained money are given the
appearance of having originated from a legitimate source.
or
The conversion of profits derived from illegal activities into financial assets which
consequently appear to have legitimate origin.
or
Money Laundering is a magic trick for wealth creation, a haven for drug traffickers, arms
dealers, tax evaders etc.
{ haven = a place that is safe and peaceful where people or animals are protected: The
hotel is a haven of peace and tranquillity. The river banks are a haven for wildlife. safe
haven, tax haven}
4.2. Know Your Customer (KYC)

Money laundering is increasingly seen to be within the sphere of responsibility of central

banks and regulatory authorities. Money laundering legislation encourages banks to put in
place effective procedures to ensure that all persons conducting business with them are
properly identified and that transactions which do not appear to be legitimated are
reported. In the year 2000 representatives of international banking industry launched the
Global Anti Money Laundering Guidelines for Banks & DFIs. These underline legal
obligations on banks to know their customers including beneficial owners and their
source of wealth. What is a beneficial owner?
4.3. Anti Money Laundering Measures
The SBP has taken the following steps:
a. Under Prudential Regulations, Banks are required to take necessary safeguard at their
respective levels against such transactions and use of banking channels for such activities.
b. Specific emphasis on the policy Know Your Customer.
c. Anti Money Laundering Unit established at State Bank.
d. Prudential Regulations provide a list of suspicious/suspected transactions for guidance
to Bankers.
e. Appointment of Compliance Officer by all banks made compulsory to oversee money
laundering measures in their respective institutions.
f. Restrictions on issuance of Rupee Travellers Cheques of denomination above Rs.l0,000.
g. Discontinuation of issuance of bearer instruments such as FEBCs, DBCs, FCBCs and US$
Special Bearer Bonds.
h. Replacement of Money Changers by Exchange Companies and setting up systems for
their monitoring.
i. Anti Money Laundering Act has been passed and it is being improved in the wake of
increasing terrorism.
j. Pakistan acquired membership of Asia Pacific Group on Money Laundering (APGML), a
regional organization for combating money laundering.
k. Coordination with SECP and NAB to chalk out strategies for future course of action.
l. Withdrawal of immunity on Foreign Currency Accounts.
(Immunity meant that a person could keep as much money as he liked in a Foreign
Currency and no Govt. entity could ask any questions. This has been withdrawn.)
State Bank Anti Money Laundering Regulations consist of two important Pillars of
Protecting the banks from Money Laundering:First Pillar------ Comprehensive enquiries/care at the time of opening the account of a
prospective customer which involves filling out a Customer Profile Form, taking all the

1)
2)
3)
4)
5)
6)
7)
8)
9)

pertinent details of the customer,

his source of income,
the purpose of opening the account,
the details of the beneficial owner,
the expected volume of transactions,
the expected approximate amounts of the transactions that will be made,
the profession of the account holder,
the nature of business and
verified address of the customer.

The Branch manager has to make a judgement as to the level of riskiness of the account
and if the account is that of a political figure (politically exposed person), the business
entails cash transactions, or the use of the banking facilities is complex the branch
manager will assign and mark a higher level of risk to the account. Higher risk accounts
will be subject to enhanced due diligence which means the account will be subject to
closer scrutiny. If the manager is not satisfied he will not open the account.
Second Pillar----- Continued and constant monitoring / checking of the transactions being
passed over the Accounts. The banks duty does not end with due care at the time of
opening the account. Bank has a continuing duty under the Anti Money Laundering Act to
keep a constant watch on the transactions being passed over the accounts in the banks
books. If the bank detects that the volume or frequency of transactions is out of line with
the indications given by the customer at the time of opening the account the bank must
make enquiries.
There is a Head of Compliance in the Head Office and there are Compliance Officers in
Branches. The compliance team keeps an eye on the banking transactions being passed
over the accounts.
If they detect discrepancy between the nature, size, frequency of transactions indicated at
the time of account opening and actual transactions the compliance team considers the
discrepancies carefully. In less serious matters the bank may decide to take
clarification/explanation from the customer.
If, however, the bank detects any suspicious entries which indicate that the customer is
involved in money laundering or other illegal financial activities it is the incumbent duty of
the banker to inform the Head of Compliance who should inform the Special Anti Money
Laundering Cell created in State Bank of Pakistan. The bank must not inform the customer
in question that the bank has reported the account to State Bank of Pakistan.
Practical Steps in :Compliance of
Know Your Customer,
Customer Due Diligence and
Enhanced Due Diligence
Walk-in Customers
Walk-in customers are those who just walk into branch premises to open an account or
make use of other banking services. The priorities of walk-in customers may be that:
The branch location is convenient for them
The customer service of the branch is better than other branches or other banks
The branch premises are better than other branches or other banks and are equipped
with modern facilities
The size and reputation of the bank is good
The charges are less than other banks.
Solicited Customers

Solicited customers are those who are contacted by the bank staff with the purpose of
establishing a business relationship. Generally these are customers whose credentials are
well established and who enjoy a good reputation in the market.
An account is opened by completing an account opening form. This document is the
means by which the banker-customer relationship is established. All the requirements of
account opening apply to both the customer and the documentation depending on the
type of account being opened in the bank.
Account opening basics for People/Natural persons:
For natural persons the following information should be obtained, where applicable:
1. Legal name and any other names used (such as maiden name); (maiden name is the
previous name used by a woman before changing her name upon marriage)
2. Correct permanent address (the full address should be obtained; a Post Office box
number is not sufficient);
3. Telephone number, fax number, and e-mail address;
4. Date and place of birth;
5. Nationality;
6. Occupation, public position held and/or name of employer;
7. An official personal identification number or other unique identifier contained in an
unexpired official document {e.g. passport, identification card CNIC, POC(Pakistan Origin
Card), NICOP(National Identity Card for Overseas Pakistanis} that bears a photograph of
the customer;
8. Type of account and nature of the banking relationship;
9. Signature.
10. Letter of thanks must be prepared and mailed to the customer on the given address.
Cheque book must not be delivered until the customer brings the thank you letter received
by him through courier/mail.
11. If the letter of thanks is returned undelivered, it could be an indication that the
prospective account holder is a fraudster, branch manager should be informed who should
make careful, investigation. The account should be marked caution until the matter is
sorted out. The branch manager to decide the action to be taken.
(Story AMExports thank you letter returned. Major fraud of customs deptt. revealed.)
12. The bank should verify the information on the account opening form by the following
methods:
a. Confirming the date of birth from an official document (e.g. birth certificate, passport,
Identity Card, social security records);
b. Confirming the permanent address (e.g. utility bill, tax assessment, bank statement, a
letter from a public authority);
c. Contacting the customer by telephone, by letter or by e-mail to confirm the information
supplied after an account has been opened (e.g. a disconnected phone, returned mail, or
incorrect e-mail address should warrant further investigation);
d. Confirming the genuineness of the CNIC produced by the customer through online
verification from NADRA is essential.
Account opening basics for Companies
For companies the following information should be obtained:
1. Name of institution
2. Principal place of institution's business operations
3. Mailing address of institution
4. Contact telephone and fax numbers
5. Partnership deed

6. Letterhead of proprietorship
7. Some form of official identification number, if available (e.g. tax identification number)
8. The original or certified copy of the Certificate of Incorporation and Memorandum and
Articles of Association
9. The resolution of the Board of Directors to open an account and identification (CNIC) of
those who have authority to operate the account
10. Nature and purpose of business and its legitimacy.
11. Letter of thanks drill and care if returned undelivered should be exercised for business
accounts as well.
Customers Due Diligence (CDD)/ Know Your Customer (KYC)
Customers Due Diligence (CDD)/ Know Your Customer (KYC) are primarily procedures that
are required to be implemented by the bank to identify their clients / customers in order
to ascertain relevant information pertinent to doing business with them. Financial
managers are increasingly recognizing the importance of ensuring that their banks have
adequate controls and procedures in place so that they know the customers with whom
they are dealing.
Adequate due diligence on new and existing customers is a key part of these controls.
Without this, banks may become subject to reputational, operational, legal and
concentration risks, which can result in significant financial cost. In Pakistan, CDD/KYC is a
regulatory policy requirement to be implemented to check the customer, their sources of
funds and nature of business, etc. KYC implementations have become increasingly
important globally to prevent theft, fraud, and money laundering activities. KYC should not
be treated as just a formality of form filling; in fact it is a process to be undertaken with
care. The objective being that account is opened for genuine customers and regular
monitoring ensures that it is not used for criminal or money laundering purposes.
The second aspect of CDD/KYC checking is to verify that the customer
is not on any list of known persons suspected or convicted of financial crime or default.
SBP issues a negative list which is updated from time to time, highlighting such negative
persons, companies and associations. Persons or Entities appearing on the negative list
are not eligible to open accounts. Computer checking of the negative list is essential when
starting any new financial relationship.
Another key aspect of CDD/KYC control is to monitor transactions of customers against
their recorded profile, including their historical data.
Banks exercising CDD/KYC monitoring for Anti-Money Laundering and Countering the
Financing of Terrorism (AML/CFT) purposes should use specialized Transaction Monitoring
Software, as well as Names Analysis Software and Trend Monitoring Software. Such
software should automatically highlight accounts appearing on a negative list and should
also generate alerts to identify unusual activities.
Know Your Customer (KYC) policy
According to the SBP Prudential Regulation M-l, banks and DFIs should formulate in
writing a comprehensive Know Your Customer (KYC) policy, duly approved by the banks
Board of Directors and in line with international best practices. This policy should be
applicable when starting a new relationship (new account) with the customer and a
continuing relationship with existing customers. This has become more important in view
of the recent rise in terrorist activities, where terrorists have used banking channels to
transfer illegal funds.
Customer Due Diligence (CDD)
The following Due Diligence measures should be taken:
No account of an anonymous or fictitious person shall be opened or maintained.
All reasonable measures should be taken to identify beneficial ownership of an account.

 If a customer is acting on behalf of any other person(s), measures should be taken to

verify the identity of the other person(s).
When dealing with any Legal Person (companies, trusts, societies, NGOs, Non-profit
Organizations, etc) information must be obtained and verified about the ownership and
control structure of the account and about the person(s) who ultimately own(s) or
control(s) the account/ customer.
Enhanced Due Diligence (EDD)
Enhanced due diligence should be exercised when dealing with High Risk customers such
as:
a) Non-residence customers
b) Private banking companies
c) Legal persons
d) Customers belonging to countries where KYC, CDD, AML regulations are nonexistent/not applied
e) Customers in cash-based business
f) Customers whose source of income is not clearly defined
g) Customers dealing in high value items.
EDD should also be used in the following situations:
Customer who has been refused banking facilities by any other bank/ DFI
Opening correspondence banking account
Dealing with no face-to-face / online customers
Dealing with politically exposed persons (PEP).'Politically exposed persons' (PEPs) are
persons holding or who have held a position of public trust.
The following must be carried out at the time of establishing a relationship
with a customer:
1. All prospective customers must be seen face-to-face (except online customers, for
whom a separate identification process is defined).
2. Proper completion of Account Opening and KYC forms and authorizations.
3. Documents produced by the customer must be original. In the case of photocopies,
each copy must be marked Original seen" after verifying the original documents.
4. All documentary evidence, information provided and signatures must be consistent.
5. Purpose and reason for opening the account or establishing the relationship.
6. Expected origin and use of funds that are routed through the bank.
7. Prepare and document customers business and transaction profile including details of
occupation/employment/business activities and sources of wealth and income.
8. Evidence of identity and address of all account holders (including third party mandate)
must be obtained and should be independently verified for authenticity.
9. Photocopy of CNIC along with original must be obtained at the time of opening the
account. Original may be returned after marking copy Original seen.
10. Documents required under SBP Prudential Regulation No. M-l must be obtained.
11. Where there are doubts about the quality or adequacy of previously obtained
customer identification material for existing customers, then, on the basis of materiality
and risk identification, verification should be carried out at appropriate times.
Purpose of CDD/KYC and AML
The purpose of CDD/KYC and Anti-Money Laundering (AML) procedures is to check the
authenticity of the customer and their business account.
For this purpose, the following steps should be taken.

Obtain all necessary identification documents. The customer can provide any of the
following verification documents, along with a photocopy, for attestation / verification to
the designated officer. The original documents should be returned to the customer after
verification / attestation.
1. CNIC
2. Passport
3. Pakistan Origin Card (POC)
4. National Identity Card for Overseas Pakistani (NICOP) for accounts other than individual
or joint. Various additional documents are required, the details of which are provided in
the Account Opening portion of this book. NADRA verification should be completed
immediately but no later than 5 working days. In no circumstance should the verification
cost of CNIC verification be passed on to the account holder.
Generally, branch staff knows their customers well; the CDD/KYC exercise helps to
document their knowledge of the customer. If information is not documented, verbal
information will not be acceptable to the regulator.
CDD/KYC should not be merely a form-filling exercise but should be instrumental in
building future relationships.
CDD/KYC is an ongoing process and does not end at the account opening stage. Any fresh
information regarding the account holder, his/her new business, new sources of funds, or
conversion of status from student to business / service, etc should be immediately
updated in the AOF and in the computer system.
No customer is exempt from CDD/KYC. They all have to be taken through this route in a
very professional manner, without annoying them. The banker should not behave like an
investigator or a police officer, but instead be very courteous and tactful in their approach.
CDD/KYC is a very confidential part of the customer AOF and in no circumstances should it
be shared with him/her. Do not write generalized statements / words such as private
service, business, etc.; rather be more specific in recording information such as serving
in KESC, Kauser Medical Store, etc.
It is not necessary that all information is backed by documentary evidence, but must be
done wherever possible. Ensure that Government accounts are not opened in the personal
name of government officials.
For opening any government account (Federal, Provincial, and Local Govt.) in an official
capacity, the relevant government officials should produce an authority letter from the
department concerned, duly endorsed by the Ministry of Finance or Finance Department of
the relevant provincial/ local government.
Additional diligence should be applied to high risk customers who are engaged in cashbased businesses and whose actual source of funds is not clearly identifiable.
As per SBP instruction, any account that has not submitted a CNIC within a specified
period can be discontinued.
Bank and DFIs should undertake due diligence and identification of walk- in customers
who undertake transactions above the limit prescribed in the banks/DFIs internal policies.
Public figures and politically exposed persons
The term "public figure" applies to a person who performs an important public function
and is known by the public at large. Individuals belonging to political and social
environments, showbiz, etc. should also be considered as public figures. These people will
take advantage of their public figure status in order to achieve personal benefits. Following
are a few examples of public figures:
Head of State (present or past)
Cabinet Ministers
Chief Executives of nationalized industries and senior officials of government
administration

 Chief Justice of High Courts and judges of Supreme Courts; senior leaders of political
parties
Senior journalists of electronic and print media etc
Diplomats, Ambassadors and Counsel Generals serving abroad and Foreign Ambassadors
and Counsel Generals of Increased Risk Countries
Heads of Armed Forces (Army, Navy, Air Force, Joint Chiefs of Staff)
Persons responsible for looking after the public interest at large. This list is only
indicative and not exhaustive and is also based on subjective criteria, just to give an idea
of PEPs/ public figures. You may be able to think of other examples from your own
experience of dealing with such customers.
__________________________________________________ ____________________
__________________
Whenever you find yourself on the side of the majority, it is time to pause and reflect.
-Mark Twain
#6
Saturday, April 05, 2014

saad monga
Member

Join Date: May 2012

Location: Lahore
Posts: 34
Thanks: 8
Thanked 7 Times in 6 Posts

Opening accounts for various types of customers

The only way your vocabulary and knowledge will grow is by reading new words
Looking up their meanings in a good dictionary which also gives examples of sentences in
which those words are used.
Oxford Advanced Learners English Dictionary is one such Dictionary.
Opening accounts for various types of customers
6.5. Opening of Account - Every adult and sane individual can open a bank account,
provided he is not insolvent or an un-discharged bankrupt. Joint account can also be
opened by two or more individuals. Similarly a group of persons having formed
themselves into a partnership firm can also open a partnership account, provided the
maximum number of partners is twenty. Whenever the maximum number exceeds this
limit, law requires that it should get itself incorporated as a joint stock company under the
Companies Ordinance 1984.
A bank account is opened with an initial deposit of money generally in the form of cash. To
this end an account opening form is used. The account opening form is required to be
completed and signed by the prospective account holder and accepted by the branch
Manager or an official duly authorized in this behalf. The completion and signing of the
account opening form by the prospective customer and its subsequent acceptance by the
bank and deposit of initial amount constitutes a contractual relationship between the
account holder and the bank.
It is, therefore, necessary that the bank before entering into this contractual arrangement

with the prospective account holder should, among other, be satisfied with regard to his
identity, integrity and reliability.
The bank should satisfy itself that it is not opening account of a person, who is nonexistent or is a person of questionable integrity and reliability. This underlines the need
and importance of detailed customer due diligence by the bank manager. This entails
satisfying himself that the customer is genuine, he is not an imposter, his address is
verified, his computerized ID card is genuine, his sources of funds are known and he is a
reliable person suitable for maintaining a bank account and is not likely to indulge in
money laundering. On satisfaction about the integrity of the new account holders, usual
approval for opening the account shall be extended by the Manager himself. Thereafter
other formalities like allotment of distinctive account number and recording of customers
data in the ledger/computer system shall be undertaken.
CUSTOMER DUE DILIGENCE (CDD)
In the year 2008 State Bank of Pakistan issued instructions that there is no compulsory
requirement of INTRODUCTION. Instead the bank opening the account is required to do
detailed due diligence to ensure that the account is opened for a person who is properly
identified, the bank should make enquiries that he is a genuine person and his address
and other details are verified as per the requirements of Prudential Regulations and KNOW
YOUR CUSTOMER and the Bank Manager interviews the prospective customer. The
manager confirms in writing that he is fully satisfied about the genuineness and suitablility
of the customer. The bank manager can call for any documents that he considers
appropriate or make any enquiries he deems necessary before approving the opening of
the account.
Banks usually open account with a first cash deposit and accept cheques for deposit only
thereafter so as to be certain that the cheque is being collected for a customer to be
within the protection of Section 131 of the Negotiable Instrument Act.
The essential precautions are:
i. The prospective account holder, preferably, calls at the bank and signs the account
opening form in the presence of an authorised bank official.
ii. A new account holder is interviewed by the bank officer in order to reassure himself
about the genuineness of the person applying.
iii. To secure identity of the prospective account holder banks officers may visit the place
of residence and/or business at the address given in the account opening form, tactfully
verifying the antecedents of the new customer.
iv. As a matter of routine the Bank Manager sends a letter of thanks to the new customer
for having opened his account with the bank assuring him of the banks courteous and
efficient services. The real purpose of this exercise is to eliminate the possibility of the
account opener being a fake person or an impersonator or the address being wrong. If
a thank you letter is returned undelivered, bank must make detailed enquiries as it may
be due to the customer being fake or non-genuine.
v. If the new customer has or had an account in some other bank, that bank may be
requested to provide a confidential report on the status of the customer, in accordance
with the established practice amongst banks for exchange of information on each others
customers.
vi. State Bank of Pakistan has given detailed instructions for Know Your Customer

(KYC)/Anti Money Laundering(AML) due diligence and also a list of minimum documents
that are required for opening of an account.
Types of Customers
The relationship of banker and customer is primarily that of debtor and creditor. The
amount deposited by the customer becomes banks own money once it enters Banks kitty.
The customer has a choice of action i.e. a right to reclaim the debt from the bank by
drawing a cheque or by issuing written instructions. The deposits are obtained from
various types of customers with varying features and implications which are discussed
below:
7.1. Individuals Account (Single or Joint,Natural Person/s)
Any person having capacity to make a valid contract can open an account by signing the
prescribed account opening form and specimen signature card. The account has attributes
of acceptance of deposits and withdrawal through cheques to the extent of credit balance
available in the said account. The customer can also give special instructions or standing
orders to the bank regarding periodical payments like insurance premium, subscription or
for any other services to the debit of his account, which the bank will comply with in the
normal course of business.
7.2. Joint Account
7.2.1. Nature of the account an account opened in the name of two or more natural
persons is known as a joint account. In a joint account express instructions must be
obtained with reference to its mode of operation i.e., whether one or more of them shall
operate singly or jointly. However, if it is silent the operation will be allowed only under the
joint signatures of all the joint account holders. It is relevant to signify that the joint
account holders are not partnership or trust account. Any one of the joint account holders
have a right to ask for stop payment, but subsequent withdrawal of stop payment
instructions and request to close the account must be signed by all the joint account
holders.
Joint Operation
If a joint account is subject to Operation by Joint signatures, withdrawals will be allowed
only if all the joint holders sign the withdrawal. In case of death of a joint holder in a joint
operation account, the survivor cannot draw the balance amount and Court Instructions
will have to be obtained as to who can draw the funds.
7.2.3. Either or Survivor Letter : This is a special mandate obtained from all the joint
account holders authorizing operation by Either or Survivor. In this case any one account
holder or survivor can operate the account. This is a convenient arrangement inasmuch as
the survivors can automatically continue operation upon the account or can even withdraw
the entire balance left after the death of one of the joint account holder. State bank has
also given directions to add a column on the back of the form to provide information about
next of kin enabling banks to correspond in case of death. The next of kin has no
authority to draw funds. He is only authorized to receive information about the account in
the case of death of account holders.
Due to the above reasons, when a joint account is opened clear cut written instructions
should be taken in regard to the operation of account.
7.2.4. List of Documents to be obtained from
Individuals Account (Single or Joint)(Natural Person/s):

1. Photocopy of Computerized National Identity Card (CNIC) or passport of the individual

attested by a gazetted officer or a Notary Public. This attested copy must be tallied with
the CNIC / Passport. Before returning the original CNlC/Passport to the applicant, the bank
officer should write on the attested copy original seen and returned.
Verification of CNIC. The genuineness of CNIC must be confirmed FROM NADRA through
the on-line computerized system.
2. In case the CNIC does not contain the photograph, the bank / DFI should also obtain, in
addition to CNIC, any other document such as driving license etc. that contains the
photograph. However, if the individual does not have any other valid document which
bears photograph, following documents should be obtained:
(i) A copy of the photograph duly attested by a gazetted officer / Nazim.
(ii) A copy of CNIC without photograph duly attested by the same person who has attested
the copy of photograph as per Sr. No. (i) above.
(iii) A confirmation in writing from the applicant to the effect that the individual has no
other document bearing photograph. The Banks / DFIs (Development Finance Institutions)
shall ensure that the CNIC and the photograph are of the same person whose account is
being opened with them. The particulars / CNIC of such persons must be verified from
NADRA in writing or through its VeriSys system by the bank/ DFI.
3) Account Operation Instructions must be selected or mentioned in the joint account
opening form.
Options
A) Any one may operate. Also mention Either or Survivor and take either or survivor
letter if prescribed. In case of death of joint holder the survivor can operate.
B) Joint Operation. (It means all joint holders to sign the operating instructions. In case of
death of joint holder the amount will be released only on succession certificate.)
4. In case of a salaried person, attested copy of the service card, or any other acceptable
evidence of service, including, but not limited to a certificate from the employer.
5. In case of other professions take some appropriate document which evidences the
profession of the account holder.
Sole Proprietorship Account----Documents Required
1) All the formalities/documents discussed above under individual account will be fulfilled
for the sole proprietor.
2) Additionally the sole proprietor of a trading concern must sign a declaration that he is
the proprietor of the firm.
3) Mandate portion of the AOF should be completed if the proprietor delegates the account
operation authority to any other person on his behalf.
The officer of the bank authorizing the opening of a sole proprietor account must
undertake extra due diligence and independent enquiry while authorizing such account as
sole proprietorship concerns are not registered entities and the only evidence the bank
has to the effect that the proprietor owns the concerned business is the undertaking of the
customer himself.
Documents like NTN certificate can also be demanded.
7.3. Partnership account:
Partnership has been defined in section 4 of the partnership Act, 1932 as;
..the relation between persons who have agreed to share the profits of the
business carried on by all or any of them acting for all..

Partnership can be created by agreement whether oral or written. Persons who have
entered into partnership are individually called partners; and their collective group is
called a firm. Maximum number allowable as partners in any business is 20. Minor
partners are not considered for computing maximum number of partners. All acts and
deeds done by any partner in the course of the ordinary partnership business will bind the
other partners also. Therefore each partner is the principal/agent of the other partners.
However, according to section 19 2(b) of the Partnership Act, a partner has no implied
authority to open a bank account on behalf of the firm in his own name.
Therefore, a banker should always open a firms account in firms name and obtain all the
necessary details like the nature of business, the names and addresses of all the partners
and the names of those who are authorized to operate the account in the name of the
firm.
Section 58 of the Partnership Act, 1932 enables any firm to be registered with the
registrar of firms, as un-registered firms cannot bring suit to enforce a right arising out of
a contract against outsiders. Moreover, a suit filed by an unregistered firm is not
maintainable. A partner of a firm can not sue his unregistered firm for damages for
wrongful dismissal or for share of profits.
A written agreement made by the partners at the time of forming the partnership is called
partnership deed. It spells out all the terms and conditions under which the business of
the firm will be conducted and profits/losses to be shared. Nevertheless the liability of
partners is unlimited, joint and several, which means that in the event of loss or
liquidation of the firm each partner will be liable to meet the liabilities of the firm either
singly or collectively with other partners.
Any mandate given by the partners for operating the account ceases to be effective on the
death, lunacy or bankruptcy of any partner unless otherwise mentioned in the Partnership
Deed. The bank should obtain a fresh mandate from the surviving partners for future
operation of the account. Legal heirs of a deceased partner do not automatically become
partners in the firm but are only entitled to the share held by the deceased in the firm at
the time of his death. In the event of admission of a new partner or retirement of any of
the existing partners, the bank should record the changes and obtain a fresh mandate
from all the partners for future operation of the account. In the absence of any agreement
in the Partnership Deed for the consequences to follow on the death, lunacy or bankruptcy
of a partner, the bank should normally freeze the account of the firm and not allow any
further debits in the account until proper order of a court is produced.
7.3.1. Opening and operating a partnership account a partnership account resembles a
joint account in that it is opened in the name of more than one person. A partnership,
unlike a corporation, does not have a legal personality separate from that of the partners,
the account constitutes in effect a joint account of the partners. The account opening form
and any mandate on behalf of the partnership should be signed by all the partners.
7.3.2. Dissolution of partnership by death the doctrine of survivorship is inapplicable to
partnership accounts. Unless the partnership agreement provides to the contrary, the firm
is dissolved upon the death of one of the partners. Under section 38 of the partnership Act
1890 the surviving partners have the power to continue to act for the firm for the purpose
of winding-up its affairs.
7.3.3. Problems of insolvency under section 33 and 38 of the Partnership Act 1890 a
partnership is dissolved by the insolvency of the firm or of one of its partners. After his
adjudication, the insolvent partner is unable to bind the partnership. If prior to the
commencement of the bankruptcy, he has incurred any debts in the partnerships name

the other partners are liable.

7.3.4. Documents to be obtained;
(i) Photocopy of identity cards of all partners, duly attested and verified from Nadra as
mentioned in para 7.2.4.
(ii) Attested copy of Partnership Deed duly signed by all partners of the firm.
(iii) Attested copy of Registration Certificate with Registrar of Firms. In case the
partnership is unregistered, this fact should be clearly mentioned on the Account Opening
Form.
(iv) Authority letter, in original, in favor of the person authorized to operate on the account
of the firm duly signed by all the partners.
7.4. Joint Stock Companies
As defined in the Companies Ordinance 1984 a joint stock company is an association of
individuals for transacting any business for acquisition of gains, possessing a common
capital contributed by members constituting it; such capital being commonly divided in to
shares, of which each possesses one or more and which are transferable by the owner.
When such an association is incorporated according to law, it becomes an artificial person
created by law with a common seal and perpetual succession and it is regarded as a legal
person, separate and distinct from its members. There is a well known case of Solomon
vs Solomon where the House of Lords held that since Solomon held 20000 shares out of
20006 shares and the company was therefore a one man company, nonetheless he was
different from the company which he had formed.
7.4.1. Companies accounts
(1) General principles a company has a legal personality of its own, regardless of
whether it is a public corporation or a private company. This means that the companies
can enter into contracts in their given name and can sue and be sued.
(ii) Unincorporated associations accounts- Unincorporated associations are mainly bodies
such as clubs, literary societies and charitable institutions. The objects of such bodies are
primarily non-commercial. Frequently they decide not to incorporate in order to avoid the
expenses involved. An unincorporated association would need a bank account to be
utilized for the payment and collection of cheques, or even to borrow money to carry out
its objectives. Thus a club may wish to raise credit in order to arrange for the acquisition
of its premises.
(iii) An unincorporated association does not have an independent legal personality. It
follows that such an association can neither sue nor be sued in its own name. Actions have
to be brought against the committee that acts on behalf of the body. Usually the liability of
members is expressly restricted to the amount of the subscription or membership fee due
from them.
In dealing with an unincorporated association the bank has to follow rules dictated both by
prudence and by legal considerations. Where the bank accepts an unincorporated body as
a customer, the bank should ask for clear instructions as to who is entitled to operate the
associations account. Ideally the bank should obtain a copy of the constitution or failing
that, a copy of a resolution concerning the opening of and drawing upon the associations
account. The bank has to be more cautious when the association requires an overdraft or
a loan.
7.4.2. Statutory Companies - These are companies which are incorporated under a special
Act of Parliament or Assembly. State Bank of Pakistan is an example of this type.

7.4.3. Limited Companies A company may be

(a) a company limited by shares, or
(b) a company limited by guarantee (such as Karachi Stock Exchange) or
Furthermore a private limited company may be:
(i) a single member company(smc), where the name is required to denote as
(SMC Pvt) Limited
(ii) a two or more but not more than fifty person (the name is required to denote (Pvt)
Limited;
(iii) A public limited company which may either be listed (7 members) or unlisted (3
members);
(iv) If the company is limited by guarantee, the name is required to denote (Guarantee)
Limited;
Opening of account of a company not yet incorporated is risky as it has not yet become a
legal entity. In such cases usually the Promoters would open account in their individual
names.
Documents to be obtained for opening Company Account:
Certified copies of:
(i) Resolution passed by Board of Directors of Company for opening of account specifying
the person(s) authorized to operate the account. (This Resolution is the most important
document to be taken for opening a limited company account.)
(ii) Memorandum and Articles of Association.
(iii) Certificate of Incorporation.
(iv) Certificate of Commencement of Business.(Only if it is a Public Ltd Company)
(v) Attested photocopies of identity cards of all the directors.
(vi) Fresh List of Directors on Form 29 issued by the Registrar Joint Stock Company.
(vii) Latest Balance Sheet, if it is an on-going company.
For opening an account of a private limited company, Certificate of Commencement of
Business is not required.
7.4.4. Memorandum & Articles of Association
7.4.4.1. Memorandum - It sets out the objectives for which a joint stock company is
formed and also defines the scope of its activities. It also embodies the address of the
registered office of the company, the amount of its capital and its distribution into shares
of fixed amount declaring the fact that the liability of the members is limited.
7.4.4.2. Articles - The articles of association contain the rules and regulations for the
internal management of the company. Generally they contain:
Power vested in the directors.
Election and retirement of directors.
Procedure for calling of meeting of share holders and directors and passing of
resolutions.
Audit of account of the company and appointment of auditors.

 Company seal and procedure for its use.

7.4.5. Certificate of Incorporation - From the bankers point of view this document is very
important. It is issued by the Registrar of Joint Stock Companies (now SECP) and is
conclusive evidence to the effect that all the requirements of the law in regard to
formation and registration of the company have been duly complied with, and the
company has legally come into existence.
7.4.6. Certificate of Commencement of Business - When the registrar of Joint Stock
Company is satisfied that a public limited company has fulfilled all the requirements with
regard to the subscription of shares, submission of the statutory declaration and other
requirements of the law, the Registrar of Companies issues the certificate of
commencement of business.
7.4.7. Balance Sheet - It is a statement of the financial affairs of the company; and the
banker can draw its own conclusions about the company from the study of the financial
affairs, particularly with reference to past performance. However, balance sheet will not be
expected from a newly formed company when opening its account.
7.5. Opening accounts of Associations, Clubs and Societies
As non-trading organizations these are formed for social, cultural, educational,
recreational, charitable and community development purposes etc. Some of these
institutions are registered under the Societies Registration Act, 1866. A certificate of
registration is issued after its bye-laws are approved and found fit for registration.
According to the bye-laws, the affairs of the organization are administered by an Executive
Committee, or Managing Committee, by whatever name it may be called.
7.5.1. Documents to be obtained:
Certified copies of
(a) Certificate of Registration.
(b) By-laws/Rules & Regulations
(c) Resolution of the Governing Body/Executive Committee for opening of account
authorizing the person(s) to operate the account and duly attested copy of the identity
card(s) of the authorized person(s).
(d) An undertaking signed by all the authorized persons on behalf of the institution
mentioning that whenever any changes take place in the persons authorized to operate
upon the account, the banker will be informed immediately.
The unregistered institutions have neither legal entity nor powers to make contracts. Any
loan raised from the bank will be extended to the members of the committee in their
personal capacity and not in representative capacity as the institution cannot be sued.
7.6. Account opened by Agents
By virtue of a power of attorney executed by the principal (donor), an agent appointed
may open and operate a bank account on the principals behalf. Power of attorney should
bear stamps under the Stamp Act and notarized by a Notary Public. If executed in a
foreign country it should also be consularized by the Pakistan Embassy there. When an
agent is allowed to open his principals account, the banker should carefully scrutinize the
power of attorney executed in his favour, in respect of the clauses relating to opening and
operation of the account and the borrowing powers, if any. Power of attorney should be
registered in the banks record. A power of attorney is rendered invalid upon the death,

insanity or insolvency of the principal. Therefore, on happening of any of such events the
banker must stop all operations on the account. Cheques presented after the principals
death should be returned and marked Drawer reported dead. However, on the agents
death account will not be stopped and the principal can either operate the account himself
or appoint a new agent.
7.6.1. Documents to be obtained:
i) Certified copy of Power of Attorney.
ii) Duly attested photocopy of identity card of the customer and agent.
7.7. Opening of Trust Accounts:
7.7.1. General principles Trust accounts are opened mainly by executors appointed as
trustees under a will and by persons such as solicitors trust companies who administer
family or charitable trusts. A trust does not constitute a legal entity separate from that of
the trustees. The broad principal is that the trustees have the legal title in the trust
property and the beneficiary of the trust acquires the equitable interest. The trustees
function is to administer the trust in accordance with the deed under which they hold their
appointments. In addition, certain powers and duties are conferred on them by the
Trustees Act 1925.
Usually a trust deed requires appointment of two or more trustees. The object of this
arrangement is to ensure that the trust property remain under the control of more than
one designated person. Trustees are not usually permitted to delegate their authority. For
this reason and unless the trust deed makes a stipulation to the contrary, a cheque drawn
on the trust account requires the signatures of all the trustees.
As the trustees have only the legal as distinct from the equitable title to the property, the
problem of survivorship does not arise. When a trustee dies, another person is appointed
either under the provisions of the will or by the court. Until such an appointment is made
Section 18 of the Trustees Act 1925 authorizes the surviving trustee or trustees to carry
on the business of the trust for the time being.
7.7.2. Duty of the bank - the bank does not incur any liability to the beneficiaries unless it
knows that the account involved is a trust account (case law Thomson v Clydesdale Bank
Ltd 1893). In this case the owners of certain shares ordered their stockbroker to sell
them. Naturally the bank has knowledge if the account is expressly opened as such. The
second general principle with regard to banks liability is in case of breach of trust. The
banks concern is to ensure that the trustees act within the scope of their apparent
powers. Thus the bank has to ensure that a cheque drawn on the trust account carries all
the required signatures. In the absence of express knowledge by the bank of an improper
or a fraudulent design perpetrated by the trustees, the bank is not usually liable for their
misconduct.
When opening an account in the name of a Trust, bank should ensure that all trustees sign
the account opening form or all the trustees who are authorised to operate on the account
by a resolution passed by the Trustees. A copy of the Resolution certified by at least two
trustees should be obtained and kept on Banks record. If the account is opened in the
name of trustees, it should not be treated as a joint account. On the ledger sheet as well
as on the specimen signature card it should be prominently mentioned in bold letters that
it is a Trust Account. The Trust Deed or Instrument of Trust should be carefully examined
and copy thereof may be kept in banks record. Special attention should be paid to the
trustees powers and the provision for the appointment of new trustees. Under the Trust
Act, 1882, a trustee cannot delegate his powers to co-trustee or to any third party.

However, a trustee can appoint an attorney or proxy for an act of routine nature involving
no independent direction. Contravention of provisions of section 47 of Trust Act, 1882 by a
banker which forbids the delegation of authority by a trustee, may cause breach of trust
and the members may by asked to redress the same.
Trust accounts should be handled with utmost care and the transfer of funds from Trust
account to the personal accounts of trustees should not be allowed, otherwise the banker
will be responsible for the consequences. When dealing with Trust accounts, a banker is
expected to be aware of legal position of a Trust. Section 3 of Trust Act 1882, defines
Trust:
A Trust is an obligation annexed to the ownership of property and arising out of a
confidence reposed in and accepted by him for the benefit of another or of another and
the owner.
Section 4 of the same Act declares that: A Trust may be created for any lawful purpose.
The purpose of a Trust is lawful unless it is
(a) forbidden by law; or
(b) is of such a nature that, if permitted, it would defeat the provisions of any law; or
(c) is fraudulent; or
(d) involves or implies injury the person or property of another; or
(e) the Court regards it as immoral or opposed to public policy.
Every trust of which the purpose is unlawful is void. And where a Trust is created for two
purposes, of which one is lawful and the other unlawful and the two purposes cannot be
separated, the whole Trust is void. Section 6 of the Trust Act authorises the creation of
Trust by word of mouth or by any act which reflects the intention of the author of the
Trust. Any person who is competent to contract is capable of creating a Trust which must
be for a property transferable to the beneficiary. In the event of the death of a trustee out
of several trustees the authority may be exercised by the continuing trustees unless
otherwise provided for in the Instrument of Trust.
7.7.4. Documents to be obtained:
(i) Attested copy of Certificate of Registration of Trust.
(ii) Duly attested photocopy of identity cards of all the trustees.
(iii) Certified copy of Instrument of Trust.
7.8. Opening Executors / Administrator accounts An Executor is a person to whom
the execution of a Will is entrusted by the testator. (Who is a testator?) The executor
derives his authority from the will. As such he has to carry out all the directions contained
in the testators last Will.
An Administrator is a person appointed by a court of law to look after the estate of a
person who died without leaving a Will or the persons he appointed are incapable of acting
as executors. When he dies intestate (i.e. without leaving a Will) the administration is
generally granted to his widow or widower or the children of the deceased, as the case
may be, or any one else on whom all the heirs agree or the court considers fit for the
purpose. A banker should have full knowledge about the legal significance of the Will so
that he may allow operation on the Executors! Administrators account accordingly.
Section 74 of the Law of Wills lays down that a will may be drawn in any such language
that express the intention of the testator clearly. A Will may be oral or in writing and need
not be witnessed. The testator under Muslim Law is permitted to give only one-third of his

estate to a stranger by Will. The remaining two-third, will only be inherited in accordance
with the Muslim Law.
Probate is a certified copy of the Will, issued under the seal of the court. A person who has
been named as an Executor in the Will is eligible to apply for a probate. When one or more
of the Executors or Administrators die(s), the authority is vested in the survivor/s. If the
deceased was the sole Executor or Administrator, a fresh Letter of Administration must be
obtained. If the account shows a credit balance, operation on the account should be
stopped on the death of the Administrator or Executor until a new one is appointed.
An account opened by Executors or by Administrators constitutes an account of the estate.
The Executors are the representatives of the estate and unlike partners, have no personal
interest in the account or in the estates property. As each Executor has the status of an
agent, he is entitled to open an account in the name of the estate and equally is entitled
to countermand cheques drawn on it, be they drawn by himself or by another Executor. To
avoid conflicts banks usually ask for clear instructions concerning the drawing of cheques
on an account of an estate. The banks mandate is spelt out in indisputable terms usually
each cheque is to be signed by two Executors.
7.8.1. Documents to be obtained:
(i) Duly attested photocopy of identity cards of the Executor/Administrator.
(ii) Certified copy of Letter of Administration or Probate.
7.9. Opening Accounts of Local Bodies - Local bodies are constituted under the Local
Bodies Act, such as Municipal Corporations, Municipal Committees etc. They are governed
by their own executive committees consisting generally of elected members. They are
administered through notifications issued under the Act from time to time. The chairman
of these local bodies may be elected by the members or nominated by the Government.
As these bodies derive their authority from the relevant Act, the banker opening their
account must see that the request comes from the person authorised to do so. Proper
instructions and specimen signatures many be obtained from the person/s authorised to
operate the account. Generally no advance is given to a local body unless some statutory
provisions authorises them to obtain a loan and provide security for it.
7.10. Opening Shares Subscription Account - whenever a public company issues shares for
public subscription it has to open a bank account to which all the receipts would be
credited. A bank opening such an account will be known as Banker to the issue. This is a
collection account and will have only credits with receipt of each application. Once
subscription is closed, the sponsor may transfer the funds to their regular account and
payments for unsuccessful subscribers made after the balloting, if any. No cheque book is
issued.
7.11. Opening Dividend Account - Companies declaring dividend (share of profit) to be
paid to shareholders desire to open an account with a bank to which the total amount to
be disbursed as dividend is credited and on presentation of dividend warrant, it is debited.
If the bank receives an intimation that a dividend warrant has been lost, all precautions
should be taken as are applicable to a lost cheque. If a company declares dividend every
year, it is preferable to open separate dividend accounts for each year. This facilitates
balancing / reconciliation of the accounts.
7.12. Opening Collection Account quite often a bank may be asked to open a Collection

Account. As the name indicates it is used for collection of funds e.g. a tea company may
have sales all over Pakistan. It may open the main account with the banks Karachi branch
and collection accounts with other branches from where the funds are transferred to the
main account periodically as per arrangements. Another example may be the Presidents
Collection Fund for disaster relief etc.
7.13. Dormant Account
When does a normal, active account become a DORMANT ACCOUNT?- an account in which
there have been no transactions for a sufficiently long period of time, six months for
current account and one year for saving account, is usually marked as Dormant and any
withdrawal there from is first referred to the Branch Manager / in charge deposits
department. If an account remains DORMANT FOR 10 YEARS, the amount of the account
must be surrendered to State Bank of Pakistan as Unclaimed Balance. The bank continues
to keep full record and if the true claimant approaches the bank subsequently the amount
can be recalled from State Bank of Pakistan.
7.14. What is a Deceased Account ?- on the death of an individual his account is
immediately marked deceased account and no further withdrawal / payment is allowed.
Depending on the balance in the account, the bank may ask the heirs to produce heirship
or a Succession Certificate. In case the amount is small, the bank may, if satisfied, pay the
amount on certification by area Nazim / Naib Nazim or Counselor after obtaining an
indemnity from beneficiaries.
7.14. Closing of Accounts - Every account holder has a right to close his account at any
time. Instructions to do so must be given by the account holder in writing and he must
surrender any unused cheques before the account can be closed. In case of joint accounts,
it can only be closed by all the joint account holders collective instructions. Even if a joint
account is operated upon singly, instructions to close it must be given by all the joint
account holders. Bank may also close the account of a customer after notifying the banks
intention and giving him reasonable time to make arrangement to have his cheques in
circulation presented for payment before the notice period expires. It is usually done when
the customer has become undesirable like:
a. By frequently drawing cheques much in excess of the balance in his account, which
have to be returned unpaid;
b. By frequently contravening the Rules for operation of the account;
c. By making himself a nuisance during his visits to the banks branch and picking up
quarrels with the staff unnecessarily.
7.15. Statements of the account Banks generally provide the balance of an account on
request. Full statements of an account are also available either on request or by predetermined arrangements. In some countries banks return customers cheques with
statement of account to enable the customer to discover any unauthorized signatures or
alteration and to report any discrepancy promptly. Failure to comply precludes the
customer from asserting forgeries against the bank unless the bank itself has been
negligent in paying the cheques.
The State Bank of Pakistan, vide circular 18 of 2004 has given strict instructions that all
banks are required to invariably send the statement of accounts periodically to all their
account holders irrespective of the balances in their accounts.
__________________

Whenever you find yourself on the side of the majority, it is time to pause and reflect.
-Mark Twain
#7
Saturday, April 05, 2014

saad monga
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Handling of Customers in certain circumstances.

An Important Skill to Acquire is the Verbal Communication Skill

Learn Pronunciation, Learn the Language, and Learn the Use of Words.
During group discussions many people never speak up because they are afraid that people
will judge them for saying something stupid. This fear is not really justified. Generally,
people are much more accepting than we imagine. In fact most people are dealing with
exactly the same fears. By making an effort to speak up at least once in every group
discussion you will become a better public speaker. You will instill more confidence in your
thoughts and will be recognized as a leader by your peers.
1. Handling of Customers in certain circumstances.
2. Powers of attorney / Mandate
3. Safe custody of customers valuables and lockers.
Handling of Customer Accounts in the following Circumstances.
1. Countermand of payment (Stop Payment of Cheque)
2. Notice of Customers death
3. Notice of adjudication of customer as an insolvent
4) Notice of customers insanity
5) Legal orders attaching customers account A garnishee order
{insolvent = a person who is unable to pay his debts as they arise.}
9.1. Countermand of Payment countermand refers to stopping payment of the cheque by
the drawer himself. It usually arises where a cheque is lost or stolen or some dispute begins
between the drawer and the payee. It means that the duty and authority of a bank to pay a
cheque drawn upon it are determined/terminated through countermand of cheque. The
bank must comply with its principals instructions and stop the process if it is practicable.
Countermand instructions must be received before it is presented and paid and a cheque
presented in clearing can be countermanded until the time fixed as per Clearing House rules
for returning an unpaid cheque.
A cheque backed by a guarantee card cannot be countermanded as the customer has
undertaken not to countermand as a matter of guarantee card contract. Moreover a
customer may be sued by a holder in due course despite countermand of a cheque. (We will
study in a later handout as to who is a holder in due course.) There cannot be a
countermand if a cheque is certified by the bank good for payment if such certification is

permitted according to local practice.

The countermand will be regarded as effective only if the bank has actual notice of the
countermand. In Curtice vs. London City and Midland Bank (1908) the Plaintiff
countermanded the cheque by telegram which was delivered after the bank had closed. It
was put into the letter box of the bank by the telegram messenger. The staff cleared the box
but somehow ignored the telegram. The cheque was presented and paid during the date.
The court of Appeal held that the notification of countermand had to actually come to the
banks notice. The Court held in favour of the bank.
The bank must ensure that the stop payment instructions are genuine i.e. properly signed
bearing reference to the cheque being stopped. If such instructions are given over
telephone, a caution may be recorded but the customer should be asked to confirm by
written instructions. The signatures should be verified and it should be checked from the
ledger if payment has already not been made or that such a cheque is not presented on
counter for cash payment or has not been received in inward clearing i.e. every possible
effort should be made to ensure that the cheque is not in the process of being paid.
Confirmation of acknowledgement should be prepared and sent to the customer. When a
cheque marked for stop payment is presented for payment either at the counter or through
clearing the same must be returned only after clearly writing on the face of the cheque itself
Payment countermanded by the Drawer.
In the past, banks, while acknowledging instructions for stop payment of cheques from
their customers used to issue disclaimers for indemnifying themselves against breach of
these instructions by declaring that the bank will not be responsible if the concerned
cheque was paid due to rush of work or any other reason.
The State Bank of Pakistan has taken exception to such disclaimers which negate the very
purpose of stop payment instructions and has strictly directed the banks to discontinue
issuance of such disclaimers.
{Disclaimer = a statement in which sb., says that they are not responsible for sth.}
9.2. Notice of Customers deathOn notice of a customers death the duty and authority of a banker to pay a cheque drawn
on him by his dead customer ceases. Notice means reliable notice. It is not the customers
death but the notice of the death that revokes the authority. Hence a cheque paid after the
death of the customer but before the bank had notice thereof is a valid payment.
The death of a customer cancels the mandate to the banker. It is of no relevance if the
cheque is dated well before the date of the death. On receipt of such information and
confirmation, the banker should immediately stop all withdrawals including making
payments from the deceaseds account.
The payment of a cheque even after the death of the account holder in the absence of any
notice or knowledge of such death will not create any liability to the bank. The bank must
ensure that the information regarding death is reliable otherwise returning a cheque on the
ground of death of the accountholder whereas he is actually alive will create an
embarrassing situation for the bank and may lead to claims for damages. Written
information by a relative of the deceased, newspaper report or obituary published in the
paper can be relied upon to mark the account deceased.
Credits are allowed to a deceased account but no withdrawals are allowed unless and until

the legal heirs produce a Succession Certificate, Probate*1 or a Letter of Administration.

A succession certificate issued by a court of Law is an instruction to a bank to pay the stated
amounts to the named heirs.
A Probate is a will made by the deceased that has been certified by a court of law for
execution by an executor named by the deceased.
A Letter of Administration is an appointment by the court of an administrator who is ordered
to take charge of the estate and distribute it amongst the named heirs as approved by the
court. This happens if the deceased has not left any Will. (What is intestate?)
Kindly note that under Islamic Law a person can will i.e. leave instructions that his property
may be given to persons other than legal heirs only upto the extent of one third of his
property. The remaining two thirds cannot be willed and shall be distributed only to the legal
heirs as per Sharia.
9.3. Notice of customers insolvency Insolvency means inability to pay or settle just
debts. (the word just here means justifiable) Once an adjudication order is passed deciding
that a person is insolvent, the property of the customer vests in the Official Assignee or
Official Receiver. Hence the balance in the account is no more at the disposal of the account
holder. The banker should therefore not honour any cheques issued by the customer even if
these are dated before the date of such adjudication order.
A creditor (i.e. a lender) can launch (i.e. move) an application in a court of law requesting
the court to declare a person insolvent and appoint a receiver if the debtor has committed
an act of insolvency. Very briefly the acts of insolvency are:A debtor:1. Transfers all or a substantial part of his property to a third person with the intent to
prejudice his creditors or prefer one above the other.
2. Transfers his property or a part of it with an intention to defeat or delay his creditors;
3. Transfers his property or a part of it which would be void because of fraudulent
preference, if he were adjudged an insolvent.
4. If with intent to defeat or delay his creditors:
i. He departs from or remains out of the country
ii. He departs from his residence or usual place of business or absents himself;
iii. He secludes himself with intent to deprive his creditors of the means of communicating
with him.
5. Any of his property is sold in execution of the decree of a court for the payment of
money;
6. He petitions to be adjudged an insolvent
7. Gives notice to any of his creditors that he has or is about to suspend payment of his
debts
8. He is imprisoned in execution of the decree of any court for the payment of money.
Action by bank or receipt of insolvency order.
On receipt of information regarding adjudication (meanings : to make an official decision
about who is right in a disagreement between two groups or organizations: in other words

passing of a legal order.) that the customer of bank is insolvent and an official receiver has
been appointed, the banker must inform the Official Receiver or Assignee as to the banks
position with the insolvent. On instructions from the Official Receiver, the credit balance in
the account, if any, and not under lien to the bank, would be transferred to the Official
Receiver or Assignee. However if the customer owes debt to the banker, the banker has the
right to realize any securities for payment of its dues and if any excess is left, then it may
be transferred to the Official Receiver or the Assignee. In case there is a shortfall in
recovery of the banks dues, the bank may then inform the official receiver accordingly.
9.4. Notice of customers insanity As soon as a banker receives information of the customer
developing unsound mind or actually becomes insane, it should immediately stop further
operation in the account and any cheque even if it is dated with a prior date, should not be
paid and if a Lunacy Order has been issued, its contents should be carefully noted.
9.5. Legal orders attaching customers account
Also called A Garnishee Order*
{Garnishment means A legal procedure by which a creditor can collect what a debtor owes
by reaching the debtor's property when it is in the hands of someone other than the debtor}
*is an order of the court in favour of a creditor who has obtained judgment against his
debtor, attaching for the discharge of his debt, the funds in the hands of a third party, the
garnishee. Thus if A obtains judgment in respect of a debt owed to him by B, A may
apply to the court for a garnishee order attaching funds on Bs bank accounts.
Garnishee proceedings comprise two distinct steps. The first is the issue by the court of a
Garnishee order nisi, which attaches the funds in the hands of the garnishee, but gives him
an opportunity of appearing before the court to show cause why funds should not be handed
over to the judgment creditor. The second step is taken when the order is made absolute,
and the garnishee is ordered to pay to the judgment creditor either the whole of the funds
in his hands or enough to satisfy the judgment debt.
When a garnishee order served on a banker attaches all debts owing or accruing due, the
whole of a customers balance on account is attached, although the amount of the judgment
debt may be considerably less than the balance standing to the customers credit. The result
is that, as from the date of the receipt of the order, the balance on the account must not be
interfered with in any way by the banker or the customer. But generally garnishee orders
issued by courts mention the amount for which the order is issued and the bank will have to
only earmark that amount in the account and the account holder will continue to have free
access to the amount in excess thereof.
If the bank has any claim against credit balance, the bank will instruct its solicitor to appear
at the hearing of the order; for example, a right to set-off against the credit balance on an
advance made to the same customer. But the banker is not entitled to set-off a contingent
liability, e.g. in respect of a bill discounted for the customer, or L/C opened for the customer
but not yet negotiated.
In short a Garnishee Order must relate to a debt which is due or accruing due at a definite
date and not a claim that may become due at a future date. It must be:
i. a deposit payable on demand;
ii. a deposit repayable on the fixed expiry of a fixed notice
iii. a deposit repayable at a fixed future date or after the lapse of a specified

time.
A credit balance in a joint account cannot be attached by a Garnishee Order unless it is
issued in the joint names. The future debts are also not affected by the Order. Therefore the
safe method would be for the banker to open a fresh account for all subsequent
transactions. The following steps are required to be taken:
i. mark the date and time of receipt of the Order
ii. trace out the deposits in the name of the person named in the Order
iii. if the entire amount of the balance is attached the balance in the account is encircled and
a note be made to the effect that it has been attached.
iv. Exercise the right of set-off if there is any claim of the bank on the customer
v. Intimate the customer about the attachment Order and he is advised not to issue any
cheque.
10.9. Power of Attorney
A power of attorney is a document whereby one person termed the donor or grantorgives another person termed the donee, grantee or attorney--- authority or power to
act as agent on his behalf either for a specific purpose or for general purposes. In the
former case it is called a Special Power of Attorney and in the latter case, the instrument is
called a General Power Of Attorney. Any person having contractual capacity can appoint an
attorney to act on his behalf. The companies Ordinance, 1984 permits a company to appoint
an attorney for the purpose of executing deeds on its behalf. Such a power must be given
under the company common seal of the company. (A company common seal is an embossed
mark usually bearing the name and logo of the company. The Articles of association lays
down which type of documents issued by the Company must bear the company common
seal to be legally valid.)
A power of attorney is commonly used when the grantor is leaving the country for a certain
period or is otherwise unable to attend to his business and wishes to authorize someone
else to transact business on his behalf.
A banker who is asked to accept authority of an attorney should require a certified copy of
the power of attorney to be placed in his hands, and should record details thereof on the
customers ledger account, in the register of Securities, and in any other place where the
information should be available.
The banker should verify that the original power is duly signed, stamped and notarized.
The banker should ascertain exactly what powers the document conveys, and ensure that
the authority is still in force and that it has not been revoked. Usually the banker obtains
from the attorney a declaration that the power of attorney has not been revoked and the
donor is still alive. A power of attorney becomes invalid on the death of the donor.
10.9.1. Purpose covered by Powers of Attorney.
Whether a power of attorney is for a specific purpose only or is general the terms of the
document must be strictly construed. It means that the Power of Attorney should be very
carefully studied to ascertain the powers that have been granted to the attorney.
(Construe = to understand the meaning of a word, a sentence)
In this respect there is an important distinction between an agent appointed by power of
attorney and an agent appointed in some other way. Although it is a general rule of law that

the acts of an agent are binding on the principal if those acts are within the agents
apparent authority, this rule does not apply to an attorney. The scope of the authority of a
person acting under a power of attorney is contained within the document, and nothing can
be read into the document that is not specifically included therein.
For these reasons, a banker who proposes to accept a power of attorney should ensure that
any proposed transaction by the attorney is definitely covered by one of the clauses;
otherwise, if the strict letter of authority is not complied with, the banker may render
himself liable to the grantor for any loss that may ensue. Thus, power to operate on any
banking account, to draw, sign and indorse cheques and dividend warrants does not imply
power to open a new account or accept bills or to make or indorse promissory notes. Again,
power to indorse bills of exchange is not authority to discount such bills on behalf of the
principal.
Power to operate banking account does not imply power to overdraw from the account.
Power to borrow must be clearly given by the instrument, and borrowing must be carried
out in the manner and against the securities therein designated, otherwise the banker will
have no recourse against the grantor.
The so-called general clause or omnibus clause in a general power of attorney commonly
authorises the attorney to do all such other acts and things as the principal himself could
do. But the banker cannot regard this as an authority for any act not specifically covered,
e.g. borrowing money.
The banker should rather consider this clause in conjunction with the preceding clauses and
take it as authority for any acts necessarily incidental to the powers that are specifically
mentioned. Even where power of attorney contains an undertaking by the principal to ratify
all acts done by his attorney such an undertaking cannot be applied against the principal in
respect of any transaction outside the limits of the powers expressly conferred in the
instrument.
Where a Power of Attorney(PA) is presented to a bank, it must examine the same and
determine:
1. That the PA has been validly executed.
2. It has been witnessed
3. if it originated in a foreign country, it must be attested by Counselor of the Embassy in
that country
4. Determine that the person claiming to be the Attorney is actually that person;
5. Original or a court certified true copy of PA must be retained for record.
6. Bank to ensure that the power of attorney is registered if legally it requires registration.
Mandate A customer may for his own convenience like to authorize another person or
persons to operate the account. Such an authority may be in the form of a Mandate Letter
or a Power of Attorney. A mandate contains an authority and a declaration that until the
Bank receives a written notice to the contrary, a named person whose specimen signatures
are provided on the mandate itself, is authorized to draw cheques notwithstanding that
debiting of any such cheque may cause the account to be overdrawn. Without this clear

authority in the mandate a bank should not allow payment of a cheque which creates a
debit balance in the account.
A letter of mandate usually has specific clauses conferring upon the concerned person
authority to draw, accept, indorse bills of exchange (endorsement = signature of a holder on
a bill of exchange) and to receive statement of accounts. Most banks have printed mandate
forms covering all the exigencies (exigency=an urgent need or demand that you must deal
with SYN demand.) Whenever a mandate is received it must be thoroughly studied to see
what powers have been vested in the person.
As soon as a notice of revocation of mandate is received the bank must take immediate
measures to ensure that further no actions are allowed under the mandate.
Difference between a Power of Attorney and a Mandate:
1) A Mandate is usually in a form supplied by the bank and signed by the customer naming
a certain person to act as his agent whereas a Power of Attorney is more formal document
and is specifically typed;
2) A Mandate is restricted in form whereas a Power of Attorney may be general
3) A Mandate is addressed to the Bank only whereas a Power of Attorney is addressed to
the world at large
4) Revocation of Mandate is easy; just inform the bank whereas revocation of a Power of
Attorney is difficult;
5) A Mandatee cannot execute mortgages whereas an Attorney can;
6) A mandate becomes invalid with the death of the person executing the mandate whereas
the position with regard to a Power of Attorney(irrevocable) is different.
{Note by Ashraf Ali A power of attorney normally dies with the death of the person granting
a power of Attorney. Power of attorney given to a bank for operation of account will die with
the death of the account holder.
However if a person has given power of attorney to deal with landed property owned by a
person after taking financial consideration from the person to whom the power of attorney is
granted, the court may allow the operation of the power of attorney even after the death of
the giver of the power of attorney due to the reason that the attorney giver had received
the value of the property in respect of which the attorney was given}
Safe Custody of Customers Valuables and Safe Deposit Locker Facility
(This refers to Banker Customer relationship of Bailer and Bailee.)
One of much appreciated facilities offered by a banker to his customers is that of keeping in
safe custody valuables of various kinds, including securities, Jewelry boxes, and documents
of title property. Frequently such items are deposited in a locked box or sealed envelope, in
which case the banker takes no cognizance
(Cognizance =to understand or consider sth; to take notice of sth)
of the contents. Sometimes, however, share certificates, insurance policies and title deeds
are lodged without cover, as also negotiable securities, such as bearer bonds; particularly
where the banker is required from time to time to detach and present the coupons for
collecting periodical return.
Some banks issue a specific form of receipt for all articles lodged for safe custody, and
require the receipt to be returned duly discharged by the customer before the articles can

be withdrawn. Moreover, it is normally provided that the depositor shall attend in person to
withdraw the articles. If he is unable to do so, he is required to sign an order on the back of
the receipt instructing the banker to deliver the articles to the bearer of the document.
Receipt given for locked boxes or sealed envelopes should specify contents unknown.
When articles are deposited in the names of two or more persons, the receipts should be
made out in the name of the all parties and the articles should be returned only against
signatures of all the depositors, unless the customer has given a mandate that it can be
returned to either or some of them.
On the death of the person in whose name the articles are left for safe custody, the banker
should not permit dealings with the property except by the deceaseds personal
representative after production and record of the succession certificate or, letters of
administration, although he should not object to the examination of the articles in his
presence by persons properly interested, e.g. the deceaseds personal representatives or
near relatives or the family solicitor. A Will contained in a box may be handed over against
the signature of all executors mentioned therein, but no other document should be given
except after production of probate {probate = order by a court authorizing action on a Will}
(or succession certificate or letters of administration) and on the authority of all the
personal representatives. Where, for example, several executors are named in a will, the
signature of one should not be accepted on behalf of all in acknowledgement of the delivery
of articles lodged for safe custody in the name of the deceased.
10.11. Safe Deposit Locker Facility.
Apart from providing facility for accepting valuables for safe custody, safe deposit lockers
are also made available to customers on rent. Bank holds the master key and a key for an
individual locker is supplied to the customer. The locker can be opened only when both the
keys are applied.
As regards articles lodged in a locker, the banker is not concerned with the lodgment and
withdrawal of articles in the locker, even if the locker be operated under a double key
system, one key being held by the banker (the bailee) and the other by the customer. The
bank is only responsible for taking adequate measures to prevent tampering with the
structure and safety mechanism of the locker and ensure that the locker is operated by the
locker renter.
Customers have to declare that they will not deposit any arms, ammunition or other
contrabands in the lockers. (What is a contraband-----check in a dictionary)
When a person deposits money in his account the bank is responsible to return the amount
even if the amount is stolen or burnt. However the bank is not responsible for the loss if the
articles placed in the lockers are destroyed by circumstances beyond the control of the bank
like explosion or fire or otherwise stolen by robbers or thieves. Bank is only responsible to
make best efforts to ensure a good security and proper maintenance of the lockers system.
The bank encourages that customers should take out insurances with insurance companies
for their valuable articles in the lockers .
In Pakistan due to the increase in incidents of lockers being looted by robbers, at the
instructions of State Bank, the Commercial banks have arranged insurance of lockers
against loss of fire, burglary etc, for amounts ranging from Rs 500,000 to Rs 15 lacs per
locker the insurance amount depending upon size of locker. In case the customer is keeping
goods worth more than the bank arranged insurance amount, he should make separate
arrangement of insurance.
__________________
Whenever you find yourself on the side of the majority, it is time to pause and reflect.

-Mark Twain
#8
Saturday, April 05, 2014

saad monga
Member

Join Date: May 2012

Location: Lahore
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Clearing and Settlement

The only thing that is permanent in life is CHANGE. The rate of change in the last two
decades has been more than the change that took
place in the previous fifty years. If you wish to succeed
the RATE of LEARNING must always be
greater than the rate of CHANGE.
Do not resist change,
IMROVE your learning and ADAPT to CHANGE.
Clearing and Settlement
11.1. The Mechanism
Clearing system is a mechanism for calculating and determining each banks payments /
receipts position within the Commercial banks forming part of the system. A clearing
system is governed by its rules which, among other things, include timing for presentation
and return of payment instruments.
Settlement is the transfer of value to discharge a payment obligation. Settlement may be
within the branch or within the bank or among other banks. The first two being fairly easy, it
is the last part of settlement that involves more banks and settlement is effected through
the State Bank of Pakistan. Logistical help since the last few years is obtained from National
Institutional Facilitation Technologies (NIFT).
11.2. Payment instruments:
a. First we study the settlement procedure for cheques deposited for credit to an account in
the branch drawn on the collecting bank branch itself, where the person who is receiving the
payment and the person who is making the payment, both maintain their accounts at the
same bank branch These are also called TRANSFER items since they involve transfer of
funds from one account in a branch to another account in the same branch. These cheques
are sorted account-wise, particulars such as date; amount and balance in the account
checked and signatures verified and then passed on to the counter for posting in the
relevant account. If the cheque is passed, credit is afforded to the payee but if the funds in
the account are not enough or there is some other reason the cheque will be returned as
per practice.
b. Collection of cheques drawn on other branches of the same bank in the town as soon
as the cheques are received these are crossed with the banks crossing stamp, sorted out
branch wise and then sent to the concerned branch/branches. In the modern times most
banks branches are connected on line with each other through telephone or satellite links.
The account and specimen signatures can be accessed on the system. The cheques drawn
on other branches are posted ON LINE and credit afforded to the customer depositing the

cheque.
c. Cheques drawn on other banks in the same city/town the cheques are crossed with
banks crossing stamp and are sorted and dealt with through the usual clearing procedures
which we shall study in detail.
11.3. Items dealt with outside the clearing system:
i. Standing Orders.
ii. Cheques / drafts payable in US Dollars.
(USD instruments drawn on banks in Pakistan are cleared through NIFT system in Karachi
which will be explained)
iii. Cheques with attachments
iv. Bills of Exchange other than cheques.
The procedure/process of the Classical Clearing House
Traditionally in all cities it was; and even now in remote towns the clearing of cheques still
is; undertaken manually in the local State Bank of Pakistan or National Bank of Pakistan.(In
those cities where State Bank of Pakistan does not exist, the National Bank of Pakistan
performs some functions of State Bank of Pakistan including the Clearing House functions)
Cashiers from all banks who are members of the clearing house gather together in the
clearing house situated in SBP or NBP and exchange the cheques drawn on each other
which are listed on clearing schedules.
The clearing is balanced with the help of the State Bank representatives.
For the sake of illustration we assume that there are only three commercial banks in a town.
Bank A, Bank B, and Bank C.
On working day 1, customers of all banks deposit cheques in their own banks, drawn on
other banks, for credit to their accounts. The bank A customers will deposit cheques drawn
on bank B and Bank C, for credit to their account in their own bank A. When the banking
hours come to an end the cashier of Bank A will make Clearing Schedules.
He will prepare one add-list of all cheques drawn on Bank B and one add-list of all cheques
drawn on Bank C and will add up the totals of the two lists. This grand total is the amount
Bank A has to receive from Bank B and Bank C. It is called Outward Clearing total.
On the morning of Day 2 the cashier of Bank A will carry the cheques and lists to the
clearing house where he will deliver the clearing schedules with cheques to the two other
banks consisting of cheques drawn on them. The total of the two schedules is the Clearing
Delivered amount. All the three banks will similarly exchange the schedules including
cheques. Bank A will receive schedules with cheques drawn on itself from Bank B and Bank
C. The cashier will total the two schedules which is the Total Clearing Received or Inward
Clearing. The State Bank Officer will also be in the room. All the cashiers will give their
Delivered and Received figures to the State Bank who will make a chart of the delivered and
received amounts of each bank. The totals of received and delivered amounts should
obviously be equal. The SBP clearing officer will give the figures of each banks delivered and
received cheques to the Deposit Accounts Department (DAD).This is the department in SBP
where the current accounts of commercial banks are maintained. State Bank will debit each
bank with the clearing received by the bank and credit each bank by the amount of clearing
delivered by it.

All the cashiers will return to their banks.

Bank A cashier will bring the schedules and cheques drawn on it by Bank B and C. The
clearing cheques received will be posted/debited to the respective customer accounts. The
total of Clearing Received (inward clearing) will be credited to State Bank account in the
accounting books of the bank.
For the clearing delivered/outward clearing the customers accounts of those who deposited
cheques will be provisionally credited and the total of clearing delivered will be debited to
State Bank of Pakistan account. Word of caution: the customers will not be allowed to draw
amounts against these credits till the next working day because the cheques deposited by
them have not yet been cleared and are as yet subject to return.
Clearing amounts are settled amongst the banks through the accounts maintained at SBP.
As you know that all banks maintain their accounts at State Bank of Pakistan where the
amount of the Statutory Cash Reserve (these days 5% of Customer Deposits) is held.
State Bank officer who presides the clearing house function and has all the figures of
clearing will pass the following entries in SBP books:Debit: Bank A Total of Inward Clearing Cheques received by Bank A
Credit: Bank A Total of Outward Clearing Cheques delivered by Bank A
Similar entries are passed over the accounts of Bank B and C.
The inward clearing cheques will be posted on the customer accounts. The cheques that are
not passed due to shortage of funds in the accounts or other technical reasons like
signatures, crossings, endorsements, variance in words and figures, post dated or stale
cheques,etc., are returned (to those banks, which had delivered the cheques during the
morning session) in the afternoon session of the clearing house which is called Return
Clearing Session. The process for returned cheques is exactly opposite of the main clearing
session. The entries passed are opposite. The cashiers bring back to their offices the
returned cheques. The accounts of those customers who had been provisionally credited but
the cheques deposited are returned, are debited with the amounts of the returned cheques
and the cheques are sent back to the customers who deposited the cheques under cover of
suitable cheque return memos.
On Day 3 the customers(who deposited cheques) are allowed to draw funds from clearing
items credited on Day 2 but not returned.
The above describes how each bank makes payment for the cheques drawn on it and
presented by other banks to it in clearing. Also how each bank receives payment for the
cheques drawn on other banks. The Return Clearing session is held to clear the cheques that
could not be passed.
This is the manual method through the bank cashiers visiting clearing house. This method
has been used since early times of banking and is still used in smaller towns.
New System of Clearing.
The number of cheques and other instruments received by bankers every day for clearing is
currently so huge in large cities and the number of banks and their branches has swelled so
much that manual sorting and manual exchange at the SBP clearing house is difficult if not
impossible. Hence a clearing system has been devised which enables the banks to outsource
the sorting and exchange of the payment instruments and settlement to a third party
institution which has latest technology to undertake the task.
Basically the concept is the same. The banks accounts in State Bank are credited and
debited with the amounts of cheques delivered or received. Only logistics are different.
11.4. Clearing System National Institutional Facilitation Technologies (NIFT)

Until a few years ago the cheques sent in clearing used to be collected at the main branches
of each bank, sorted out bank-wise and then sent to the clearing house in SBP for exchange
of cheques and ultimate debit/credit to the accounts of the concerned banks as described in
detail above. The balancing was manual and delays were a common feature.
In 1996 a private company was incorporated by the name of National Institutional
Facilitation Technologies (Pvt) Limited (NIFT) to handle this most important segment of
banks business. The automated clearing system came into operation in Karachi as the first
centre in 1996. Now it has spread to Lahore, Islamabad, Rawalpindi, Faisalabad, Hyderabad,
Peshawar, Multan and Quetta and almost all important cities.
The introduction of the automated clearing involved creating local standards for encoding
cheques and other instruments, assisting banks in preparing standard code line. The system
operation has proven to be a very successful arrangement. The machines sort the cheques
for the preparation of schedules with the help of electronic code line which is printed at the
bottom of each cheque in machine readable magnetic ink.
NIFT have their own office in each city with modern computers, sorting machines and
trained staff. Each bank branch only make a listing of the cheques to be delivered to the
other banks through NIFT.
NIFT staff visit the bank branches on Day 1 and collect the cheques from the branches and
bring the cheques and listing prepared by the branch to the NIFT office. This is done for all
the bank branches in a city. During the night they sort the cheques and make (inward
clearing) listings for each bank branch on which the cheques are drawn. The grand total of
the listings prepared by the NIFT will agree with the grand total of the listings prepared by
the bank branches in respect of the cheques delivered by them. This balancing means that
the NIFT prepared listings are correct so far as the amounts are concerned.
Next morning on Day 2 the NIFT staff delivers the cheques to the bank branches on which
the cheques are drawn. During the morning time the bank staff examines the cheques and
post the cheques to the accounts on which they are drawn. By afternoon the return cheques
are decided and return memos prepared. In the afternoon the NIFT staff collects the return
cheques and take them to the NIFT office where the record is prepared and return cheques
sent to the branches which had delivered the cheques. The branches then debit the
accounts which had in the morning been credited with the amounts.
NIFT office advises the State Bank as to the entries to be passed by them on the accounts
of the banks in State Bank in respect of clearing. NIFT also advises the banks of the clearing
amounts. Please remember that when a bank has more than one branches in one city only
the main office in the city maintains account in the State Bank. The number of branches in a
city settle clearing amounts with their main office and main office for the net amount settles
with state bank.
Note that under NIFT system the bank cashiers do not carry cheques to State Bank or to
NIFT office.
11.5. Clearing services offered:
I. Overnight clearing including return cheque processing (24 hour clearing cycle)
ii. Same Day / High Value clearing including return cheque processing (3 hour clearing
cycle)
iii. Inter City clearing including return cheque processing (48 hour clearing cycle)
iv. Countrywide Local US Dollar clearing (One week clearing cycle)

11.6. Basic Services and Facilities offered by NIFT:

Inter-bank clearing and settlement (Inter-bank means between one bank and other
banks, i. e. between XYZ Bank and other banks.)
Intra-bank clearing and settlement (Intra- bank means between different branches of the
same bank.)
Collection and Delivery
Advices / vouchers for intra-bank and inter-bank accounting
Direct posting support on media for returns
Query systems software and data enabling large member banks;
Call centres
Reports and statistics to member banks on a regular basis
NET for central bank settlement; (NIFT sends information to State Bank of Pakistan to
pass debit credit entries over the accounts of banks for settlement of the clearing)
11.7. Clearing may be divided into:
Outward clearing
Inward clearing
Same day clearing (for large amounts)
11.8. Outward clearing:
Outward clearing contains cheques / instruments drawn on banks within the city. These
instruments may be:
o
o
o
o
o
o
o

Cheques
Pay Orders
Pay Slips
Demand Drafts
Dividend Warrants
Telegraphic Transfer Receipts
Rupee Traveller Cheques

All cheques sent in clearing must have a clearing stamp i.e. a combination of two different
stamps one Special Crossing Stamp which bears the name of the bank and the branch
name and the other with the words Clearing along with banks branch name and date.
11.9. US Dollars Instruments Collection and Settlement System
Previously USD cheques deposited in accounts were to be routed through New York, thereby
costing time and expense. The State Bank has introduced Local System. Its salient features
are as under:
11.9.1. Instruments
All financial instruments (cheques, drafts etc.) denominated in US$ drawn on bank branches
in cities Karachi, Lahore, Islamabad, Rawalpindi, Faisalabad, Multan, Sialkot, Peshawar,
Quetta, Mirpur (Azad Kashmir) and Hyderabad and several other cities are acceptable for
this settlement system. Collection from all other cities is arranged / managed by each bank,
by making internal arrangements, through any one of the above cities.
11.9.2. Collection & Settlement Schedule

Initially there were two collection and settlement days per week, i.e. Monday and Thursday.
If a collection / settlement day happens to be a bank holiday, then it will be skipped till the
next collection/ settlement day.
Each bank designates a branch/Regional/ Head office in Karachi for presenting outward and
receiving inward instruments for collection and settlement through National Institutional
Facilitation Technologies (Pvt.) Ltd. (NIFT).
NIFT deals with only one designated office of each bank in Karachi for settlement of Karachi
and upcountry branches.
Each bank may also designate one branch in each city (i.e. from the coverage list) with
whom NIFT and the designated branch of that bank in Karachi, if required, would liaise for
issues regarding collection & settlement relating to other branches in that city.
11.9.3. Mandatory Settlement
It is mandatory for the banks operating in Pakistan, whose Head Offices or branch offices
are located in Karachi, to be a member of this system., to open US$ settlement account with
a minimum balance of US$ 10,000/- for settlement with SBP BSC (Bank) Karachi (i.e. State
Bank of Pakistan Banking Services Corporation Bank, Karachi.) and thereafter to maintain
sufficient balance to cater to the requirements keeping in view their business volume. The
said account will be remunerated on the same interest rate as for Statutory Cash Reserve
Requirement (SCRR) for FE-25 and to settle payment of US$ instruments drawn on them
through this system or to return unpaid instruments on settlement date. In case the paying
bank does not return the original instrument on the settlement date to the presenting bank,
it will be assumed that the instrument has been accepted for payment and will be settled
through this system accordingly.
11.9.4. Processing Cycle
The collection/settlement is centralized at Karachi. NIFT interfaces with one designated
branch of each bank in Karachi only.
Banks route all inward/outward instruments from their branches in Pakistan through their
designated branch in Karachi.
NIFT collects / delivers all instruments for inward/outward settlement from the designated
branches of Banks in Karachi, process the collection/settlement and deliver a consolidated
statement to the respective designated branch of the bank.
Each designated branch in Karachi forwards the instruments received in inward collection to
the payee branch of their bank directly for Acceptance or Return unpaid.
The payee branch settles or returns the original instrument, if any, to the designated branch
in Karachi. NIFT collects all return instruments from the designated branches in Karachi,
process them along with inward collection and then route them to the related designated
presenting Bank branch in Karachi.
The Settlement proceeds of the instruments would be communicated to the concerned
branch immediately by electronic or any other means on the same day for crediting to the
concerned depositors account.
11.9.5. Date Stamp
The Collecting Bank will affix the stamp of the date on which outward instruments would be
sent to N1FT for collection.

11.9.6. Settlement
The net settlement will take place by debiting or crediting the respective banks US Dollar
clearing accounts on settlement date.
11.9.7. Settlement Statements
NIFT will provide a statement of collection / settlement statistics on monthly basis to
ascertain the expenses payable by the lodging bank to paying bank at the rate of Rs. 100/per instrument (for cheques drawn on cities other than Karachi) irrespective of whether the
instruments are paid or return unpaid.
All other reports and information will be produced and provided on the existing pattern as
for rupee clearing. NIFT will provide stationery and usual collection / settlement preparation
material to the branches as is being done for PKR clearing systems.
11.9.8. Forced Retention
If for some unavoidable reasons the relevant bank is unable to provide a returned cheque
on the specific collection / settlement date due to any reason beyond control, the
designated bank office in Karachi will provide to the concerned bank along with inward
clearing instruments, with a copy to NIFT, a document on prescribed format (agreed
between the banks and NIFT) giving details of the instrument, undertaking that the said
instrument will be provided to the lodging bank directly on availability but not later than the
subsequent collection / settlement date, that instrument will be considered as returned
unpaid.
This process may function in such a manner that the designated bank will furnish the
prescribed document in duplicate to NIFT in place of the returned document and NIFT will
send the first copy to the lodging bank along with other returns, if any, as a return
instrument.
11.9.9. Settlement In Case Of Insufficient Balances
At any point in time when the net debit (inward & outward) cannot be paid out of a banks
US Dollar clearing account (due to insufficient balance) held with SBP BSC(Bank), Karachi,
the State Bank reserves the right to adopt a suitable alternate.. This will primarily take the
shape of payment through an appropriate overnight SWAP from the Pak Rupees clearing
account balance of the bank with SBP to the extent of such shortfall in US Dollar account.
(It means that if there is a shortage of funds in the Dollar account, State Bank will debit the
relevant banks Pak Rupee Account in which the Bank keeps the statutory cash reserve
amount and provide Dollars in the Dollar Account to meet the requirement.)
11.9.10. Settlement Charges
NIFT will charge the presenting bank Rs.100/- per instrument for its services and Rs.100/for processing a return instrument.
__________________
Whenever you find yourself on the side of the majority, it is time to pause and reflect.
-Mark Twain
#9
Saturday, April 05, 2014

saad monga
Member

Join Date: May 2012

Location: Lahore
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Negotiable Instruments

Do you want success in Life? Begin with a List.

The basic tool of time management is a list, organized by priority, and used as a constant
tool for personal management. The fact is that you can't manage time; you can only
manage yourself. That is why time management requires self-discipline, self-control, and
self-mastery. Time management requires that you make the best choices and decisions
necessary to enhance the quality of your life and work. Then you follow through on your
decisions.
We need to be aware of the opportunity cost of time not utilized in a productive manner.
Always carry a book or a newspaper with you, so that any time that you get free can be
utilized in enhancing your knowledge rather than spending that spare time in just looking
around. Remember Time is Money.
Negotiable Instruments
13.1. Background
Before enactment of the (Indian) Negotiable Instruments Act, 1881, the English Law of
Negotiable Instruments governed all questions relating to the negotiable instruments arising
between Europeans. If, however, the parties were Indians, the law and usages prevailing
among the merchants of the respective communities governing such transactions were
applied by the courts. There is no doubt that by the time the Indian Negotiable Instruments
Act, 1881, was passed, there developed in India a set of rules based on customs and usage
relating to Hundis.
These rules could not have been ignored even by the legislature without consequent
hardship to native bankers and tradesmen. It was for this reason that the Act expressly
excluded from its operation any local usage relating to instruments in an oriental language.
The Indian negotiable Instruments Act, 1881 and its British counterpart, the Bills of
Exchange Act, 1882 codify the English Common Law of negotiable instruments. There is
much in common between the Indian Act and the corresponding English Act. It follows
therefore, that the reported cases of the superior courts of England are still referred to with
advantage for illustrating and explaining analogous propositions arising under Indian and
Pakistani Law as well.
13.2. Definition.
A negotiable instrument is one the property in which is acquired by anyone who takes it
bona fide and for value, notwithstanding any defect of title in the person from whom he took
it
It follows that an instrument cannot be negotiable instrument unless it is in such a state
that the true owner could transfer the contract or engagement contained therein by delivery
if bearer and by endorsement and delivery if order instrument.
It may be laid down as a safe rule that where an instrument is by the custom of trade
transferable, like cash, by delivery and is also capable of being sued upon by the person

who is A HOLDER IN DUE COURSE then it is entitled to the name of a negotiable

instrument and the property in it passes to a bona fide transferee for the value even
though the transferor may not have any title.
13.3. Negotiable Instrument Act, 1881.
This Act includes three instruments within its meaning viz. Promissory Note, Bill of Exchange
and Cheque. These have been defined in relevant Sections of the Act as follows:
13.3.1. Promissory Note.
Section 4 of the Act defines a 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.
Its components therefore are:
1. Unconditional undertaking to pay
2. The sum should be a sum of money and should be certain
3. The payment should be to or to the order of a person who is certain or to the bearer of
the instrument and
4. The maker should sign it.
The essential feature of a promissory note is that it is a clearly expressed, unconditional
written promise to pay and it is not enough that the substantial effect of the instrument
should be to make the executants liable to pay a sum of money. An instrument containing
words, I am liable to pay without any undertaking, is not a promissory note. An
instrument only undertaking to pay interest, there being no unconditional undertaking to
pay the principal amount, is not a promissory- note.
Sometimes the abbreviation pro-note is used in place of promissory note.
The basic tests of a promissory note are that the sum of money should be certain as also
the payee or promisee. If the rate of interest is specified in the document the certainty to
the sum payable is in no way affected as it may be merely a matter of calculation to arrive
at the sum payable. Similarly, the payee or bearer must be certain. Where the name of the
payee is not given in the body of the document but he has been described as you, it
cannot be held that the person who advanced the money is a person certain. Therefore, it
cannot be held that the document is a promissory note.
If a pro-note does not specify any place where payment is to be made, the presumption is
that payment should be made at the place of residence or business of the creditor. As for
the Promissory Note being payable otherwise on demand, it should be presented for
payment on due date calculated on the basis of the stipulated period or the specified date
for payment.
Illustrations
The promissory note has to be in writing, without any condition attached, bearing the
signature of the promisor (i.e. the person who makes it) promising to pay a definite amount
of money, to the person named therein or to his order or to the bearer of the note, either on
demand or at a future fixed date or a date that can be determined.
Thus the following do not fall within the scope of this definition even though signed by A.

i) Mr. B. I.O.U. Rs. 1,000/ii) I promise to pay B Rs. 500,000/-or to deliver to him my Toyota Corolla Car on 1st
January next.
iii) I promise to pay B Rs. 500/- seven days after my marriage with C.
However, the under noted examples can be termed as Promissory Notes:
i) I acknowledge myself to be indebted to B in the sum of Rs. 1,000/- to be paid on
demand.
ii) I undertake to pay B or to his order a sum of Rs. 5000/- 30 days after date.
iii) I promise to pay the bearer 90 days after sight, a sum of Rs. 5000/IMPORTANT :
1. Whenever a bank grants a loan or overdraft, it obtains a Promissory Note from the
borrower, which is used as evidence of borrowing in a possible recovery suit in a court of
law.
Specimen of Promissory Note
24th December 13
On demand I promise to pay Pakistan Bank Ltd.
a sum of Rs. 8,000/- (Rupees Eight Thousand only).
Revenue Stamp
Sd- Mohammad Ali
20, Martin Road, Karachi
13.3.2. Bill of Exchange
Section 5 defines a Bill of Exchange
An instrument in writing containing an unconditional order signed by the maker, directing a
certain person 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.
The essential ingredients of this definition are that it is an order to pay, without any
condition, to a specified person or to his order or to the bearer, a definite amount of money
either on demand or at a future date which could be determined or at a fixed date in future.
The instrument in order to be a valid bill of exchange has to be signed by the maker (i.e.
drawer) directing a certain person (i.e. drawee) to pay to the person named therein (i.e.
payee) or to his order or to bearer of the bill.
Bill of exchange is an instrument of trade which serves as a bridge between buyer and seller
of the goods. Whereas the seller would like to part with his goods only when he is assured
that the sale proceeds are in his hands or in the hands of a reliable intermediary, from
whom he can receive the same; the buyer, on the other hand is anxious to pay for the
goods only when these are in his possession or in the hands of a certain reliable agency (or
through documents of title to goods) from where he can obtain delivery thereof.
The seller of the goods will, therefore, draw a bill of exchange upon the buyer for the
proceeds directing him to pay the same to his banker to whom he sends the documents of
title to goods sold. The bank is instructed to deliver the documents of title to the buyer only
when the buyer makes payment as per the bill of exchange. This is how the gap of trust

between the two parties (i.e., importer and exporter) is bridged by a bill of exchange.
1. Specimen of Bill of Exchange
From (DRAWER)
A. B. Corporation. 20th December 2013
2, Apex Court,
Karachi Rs. 50,000/Thirty days after sight pay M/s Excellent Traders(PAYEE) or order a sum of Rupees Fifty
Thousand only for the value received.
To (DRAWEE) For A. B. Corporation.
M/s Fairdeal Traders, Sd- A. Rahim
37-Jail Road Proprietor
Lahore (DRAWER SIGNATURE)
(The above is an example of Usance Bill. In case the above bill of exchange is drawn by an
exporter the exporter delivers this Bill of Exchange to its bankers. The exporters bankers
send this B of E to the importers bank together with a bill of lading evidencing shipment of
related good. The importer accepts the Bill of Exchange indicating a date on which they will
make payment. In case that the bank considers the customer sufficiently credit worthy the
bank can deliver the bill of lading against acceptance of bill. On maturity of bill the bank
presents the bill to the importer, collects the amount and remits the amount to the
exporters bank.)
13.3. 3. Differences between a Bill of Exchange and a Promissory Note:
1) A promissory note has two parties; a bill of exchange has three parties;
2) A promissory note is an unconditional promise or undertaking to pay whereas a bill of
exchange is an unconditional order or direction to pay;
3) A promissory note is written by the borrower whereas a bill of exchange is prepared and
issued by the lender;
4) A promissory note is mainly used in domestic business whereas a bill of exchange is
mainly used in international trade;
5) Whenever a bank grants a loan or overdraft, it obtains a promissory note from the
borrower of funds. The promissory note is used as an evidence in case of a recovery suit in
a court of law.
13.4. Bankers Draft;
A demand draft is also a bill of exchange. It is an order to pay money drawn by one office of
a bank upon another office of the same bank or upon an office of a different bank. It is
covered under Sec. 85 (a) of the Negotiable Instruments Act.
Specimen of Bank Draft
No. BD-00XXX Pakistan Bank Ltd. 20th Dec. 2013.
51, Martin Road, Karachi
(Protectographed) Not over Rs. 25,000/Rs. 25,000/On demand pay to Mohammad & Bros. or order a sum of Rupees twenty five
thousand only, for value received.

Pakistan Bank Ltd. For Pakistan Bank Ltd.

5, Site Ram Road, Karachi Sd- Officer
Lahore Sd)- Manager
A draft is a bill drawn by one bank on another bank or on its own branch. It is a bill of
exchange and a negotiable instrument (AIR 1962 KAR 210). The relationship between the
holder of DD and the bank issuing a demand draft is that of creditor and debtor (PLD 1952
Dacca)
13.5. A cheque;
The cheque has been defined in Sec 6 of the Negotiable Instruments Act, 1881. A cheque is
also a bill of exchange which is drawn on a banker and expressed to be not payable other
than on demand. The differences between a cheque and a bill of exchange are:
1. A cheque is always drawn on a banker while a bill of exchange may be drawn on any
person;
2. A cheque is always payable on demand while a bill of exchange may be usance also i.e. it
can be payable at a given future date or a determinable future date;
3. A cheque does not need acceptance while a bill of exchange drawn payable after a period
would require acceptance by the drawee;
4. A cheque is presented for payment only while a bill of exchange may be presented for
acceptance if it is a usance bill;
5. Grace period:
There is no grace period in a cheque.
Three grace days are allowed in calculating the maturity date of the bill of exchange.
(The following stipulations regarding dishonor, noting, protesting of Bill of Exchange also
apply to the Promissory Notes)
13.6. Dishonor of a Bill of Exchange or Promissory Note.
One of the essential features of a bill of exchange is that the bill payable on a fixed or
determinable future date must be presented to the drawee for acceptance first and then
presented for payment on determinable due date. If a bill is accepted by drawee, it is an
expression of his intention to pay by signing the bill with due date. If, however, the drawee
declines to accept, the bill will be treated as dishonored by non-acceptance. A bill will be
considered to have been dishonored by non-payment if its payment is not made on due date
after acceptance. In these cases, the legal requirement is that the unaccepted or unpaid bill
should be handed to a Notary Public for noting and protesting, which will be the legal proof
of the drawee having refused to accept or pay the bill and this noting and protesting will
enable future legal action against the drawee.
Both in case of dishonor by non-acceptance and dishonor by non-payment, the holder of the
dishonored instrument must give notice of dishonor to all the parties whom the holder seeks
to make severally liable thereon. If the holder seeks to make several parties jointly liable,
notice to some of them will be sufficient. It will also suffice if the notice is given by some
party who remains liable on the instrument, and not by the holder.
(Severally= separately: Tenants are jointly and severally liable for payment of the rent.)
13.8. Notary Public
It includes a person appointed by the Central Government to perform the functions of a
notary public under Negotiable Instruments Act, 1881 (Section 2(g)) and a notary appointed
under Notaries Ordinance, 1961 (XIX of 1961).
13.9. Noting;

Section 99 of the Negotiable Instruments Act, 1881 provides: When a Promissory Note or a
Bill of Exchange has been dishonored by non-acceptance or non-payment, the holder may
cause such dishonor to be noted by a notary public upon the instrument, or upon a paper
attached thereto or partly upon each.
Such note must be made within a reasonable time after dishonor and must specify the date
of dishonor, the reason, if any, assigned for such dishonor or if the instrument has not been
expressly dishonored, the reason why the holder treats it as dishonored and the notarys
charges.
13.10. Protest; (Protesting has a special meaning in respect of negotiable instruments.)
Section 100 deals with the Protest. It says, When a promissory note or a bill of exchange
has been dishonored by non-acceptance or non-payment, the holder may, within a
reasonable time, cause such dishonor to be noted and certified by a notary public. Such a
certificate providing formal evidence of dishonor of a bill of exchange is called protest.
When the acceptor of a bill of exchange has become insolvent, or his credit has been
publicly impeached, before the maturity of the bill, the holder may, within a reasonable
time, cause a notary public to demand better security of the acceptor, and on its being
refused may, within a reasonable time, cause such facts to be noted and certified as
aforesaid. Such certificate is called a protest for better security.
13.11. Drawer, Drawee and a Drawee-in-case of Need. (Section 7)
13.11.1. Drawer
A Drawer is the maker of the bill;
13.11.2. Drawee
A Drawee is the person on whom the bill of exchange is drawn and is directed to pay.
13.11.3. Drawee-in-case of Need
When in the bill or in any indorsement thereon, the name of any person is given in addition
to the drawee, to be resorted to in case of need, such a person is called drawee in case of
need. (in case of need = e.g. if the bill is returned unaccepted or unpaid.)
13.12. Acceptor;
After the drawee of a bill of exchange has signed his assent upon the bill and delivered the
same or given notice of such signing to the holder or to some person on his behalf, he is
called Acceptor.
13.13. Acceptor for Honor;
When a bill has been noted or protested for non-acceptance or for better security and any
stranger person accepts it supra protest for honor of the drawee or for any one of the
endorsers or for the drawer, such a person is called Acceptor for Honor.
(Supra protest, an acceptance of a bill by a third person after protest for nonacceptance by
the drawee.)
It may be mentioned that a drawer is primarily liable to the holder of bill of exchange until it
is accepted. Once a bill is accepted the Acceptor becomes primarily liable.
13.14. Payee;
The person named in the instrument to whom or to whose order the money is payable is
called Payee.

13.15. Holder in due course;

It has been defined in Section 9 of the Negotiable Instruments Act1881, that Holder in due
course means any person who for consideration becomes the possessor of a promissory
note, bill of exchange or a cheque, if payable to bearer or endorsee thereof, if payable to
order, before it became overdue, without notice that the title of the person from whom he
derived his title was defective.
{What is the meaning of for consideration=when something is obtained in return for
something or some benefit given}
In regard to the defective title the law further clarifies in Section 58 of the Negotiable
Instruments Act 1881, which says when a promissory note, bill of exchange or cheque has
been lost or has been obtained from any maker, drawer, acceptor or holder thereof by
means of an offence or fraud, or for an unlawful consideration, neither the person who finds
or so obtains the instrument nor any possessor or endorsee who claims through such person
is entitled to receive the amount due thereon from such maker, drawer or acceptor unless
such possessor or endorsee is, or some person through whom he claims, was a holder
thereof in due course.
The following points emerge from these two sections of the Negotiable Instrument Act:
a) Unless a person proves that he is a holder in due course within the meaning of Sec. 9 he
cannot have a better title than that of the intermediate holders themselves.
b) It is only a person who comes into possession of a negotiable instrument having obtained
for consideration and being a bona fide transferee that can be a holder in due course
within the meaning of section 9.
13.16. Presentment for acceptance;
Promissory notes, bills of exchange and cheques must be presented for payment to the
maker, acceptor or drawee thereof respectively, by or on behalf of the holder. In default of
such presentment, the other parties thereto are not liable thereon to such holder.
Sec. 77 of Negotiable Instruments Act, 1881 deals with liability of banker for negligently
dealing with bill presented for payment. According to this section when a bill of exchange
accepted payable at a specified bank has been duly presented there for payment and
dishonored, if the banker so negligently or improperly keeps, deals with or delivers back
such bill as to cause loss to the holder, he must compensate the holder for such loss.
13.17. Difference in words and figures;
Section 18 states that if the amount undertaken or ordered to be paid is stated differently in
figures and in words, the amount stated in words shall be the amount undertaken or
ordered to be paid, provided that if the words are ambiguous or uncertain the amount may
be ascertained by referring to the figures.
However in practice based on the plea of good faith and without negligence, the banks
usually return such an instrument with the remarks amount in words and figures differs;
13.18. Inchoate stamped instrument;
(Meaning of Inchoate: just beginning to form and therefore not clear or developed: inchoate
ideas = incomplete ideas)
Section 20 states that where one person signs and delivers to another a paper stamped in
accordance with the law relating to stamp duty chargeable on negotiable instruments, either

wholly blank or having written thereon an incomplete negotiable instrument, in order that it
may be made, or completed into a negotiable instrument he thereby gives prima facie
authority to the person who receives that paper to make or complete it as the case may be
into a negotiable instrument for the amount if any specified thereon or where no amount is
specified for any amount not exceeding in either case, the amount covered by the stamp.
Thus a negotiable instrument though inchoate but properly stamped does not lose its
validity and enforceability merely because it was not wholly or partially filled in at time of
execution and delivery thereof.
Most Important feature of a Negotiable Instrument Restated (From Internet)
The holder in Due Course of a Negotiable Instrument can get a better title than the
transferor.
Explanation of the Concept.
The most remarkable feature of a negotiable instrument is that if it is negotiated to a person
who acquires the instrument
i) In good faith
ii) For value
iii) Without notice of any defects in its title
then, the transferee is a holder in due course and can enforce the instrument without being
subject to defenses which the maker of the instrument would be able to assert against the
original payee, except for certain real defenses which are rarely applicable.
The holder in due course rule is what makes the free transfer of negotiable instruments
feasible in the modern industrial economy: a person or company who purchases such an
instrument in the ordinary course of business can reasonably expect that it will be paid
when presented to the maker, without involving itself in a dispute between the maker and
the person to whom the instrument was first issued.
The foregoing is the theory and the letter of the law: of course, in reality the issuer of an
instrument who feels he has been defrauded or otherwise rawly dealt with by the payee may
nonetheless refuse to pay the holder in due course, requiring the latter to resort to litigation
to recover on the instrument.
__________________
Whenever you find yourself on the side of the majority, it is time to pause and reflect.
-Mark Twain
#10
Saturday, April 05, 2014

saad monga
Member

Crossings and Endorsements

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Crossings and Endorsements

14.1. Background;
The crossing of a cheque is a feature of law in Pakistan adopted from laws applicable in
British India. In United Kingdom the use of the term crossings originated in the eighteenth
century. When the employees of different banks brought their cheques to the clearing
centre, for the sake of identification and to facilitate remittance, they wrote the names of
their banks on the face of cheques. In UK the crossed cheques were governed by the
Crossed Cheques Act, 1856.
Please note a Common characteristic of ALL TYPES of crossings. If an instrument, cheque,
draft, etc is crossed----whatever the type of crossing----the paying bank will not pay cash
against a crossed instrument, it can only be credited into a bank account.
14.2. Types of crossing;
The first type of crossing is known as general crossing and consists of placing of two
parallel transverse lines across the cheque. These lines may be with or without the words
and company or an abbreviation thereof such as & Co. The second type is known as
special crossing which carries name of the bank collecting the cheque on the face of the
cheque. The effect of a crossing on the cheque is that it can only be collected by a bank for
a customer and cannot be paid over the counter to the payee or holder in cash.
14.3. Definition;
Section 123 of the Negotiable Instruments Act, 1881 says:
Where a cheque bears across its face an addition of the words and company or any
abbreviation thereof between two parallel transverse lines simply, either with or without the
words not negotiable the addition shall be deemed to be a crossing and the cheque shall be
deemed to be crossed generally
14.4. Features of a general crossing;
(a) Two parallel transverse lines drawn across the face of the cheque;
(b) With or without the words and company;
Cash cannot be paid against a generally crossed cheque.
Amount can be paid only to a bank, to any bank where the payee has an account.
14.5. Special Crossing;
Section 124 of the Act defines it as under:
Where a cheque bears across its face an addition of the name of a banker, that addition
shall be deemed to be a special crossing and the cheque shall be deemed to be crossed
specially. A specially crossed cheque can be paid to (i.e. it can be collected by) only that
bank whose name is written in the special crossing and by no other bank.
14.6. Difference between general and special crossings
i. In general crossing two parallel transverse lines are necessary whereas in special crossing
need not; Just the name of a bank written across a cheque constitutes special crossing.
ii. In special crossing the name of the collecting bank appearing on the face of the cheque is
necessary whereas in general crossing it does not appear.
iii. A cheque crossed generally can be collected by any bank whereas a cheque crossed
specially must be collected by only that bank whose name appears across the face of the
Cheque;
All other crossings can be cancelled by the drawer of the cheque but a special crossing can

be cancelled only by the bank in whose favour it is specially crossed.

iv. A cheque may bear more than one banks name where the other bank is acting as
collecting agent for the bank where the payee of the cheque maintains his account.
14.7. Not negotiable;
According to Section 130 of the Act, if in a crossed cheque, the words Not Negotiable
appear, the holder taking the cheque shall not have and shall not be capable of giving, a
better title to the cheque than that which the person from whom he took it, had. Not
Negotiable crossing does not restrict further transferability of a cheque. It is freely
transferable by delivery in case of bearer and by indorsement and delivery in case it is an
order cheque. The effect of these words on a cheque is that it is a warning to the payee or
holder that if the cheque had a defective title, the indorsee or holder thereof will not acquire
a better title than that of the transferor. By the same token the holder will not be capable of
passing a better title than that of his own to the subsequent holder.
To reiterate a negotiable instrument is one the property in which is transferred by mere
delivery or by endorsement and delivery. Moreover a holder in due course who receives the
instrument for value and in good faith, without notice of any defect in its title can get a
better title than the previous holder.
If an instrument is marked not negotiable then the subsequent holders do not get a better
title than the previous holders.
An example will explain the impact of Not Negotiable crossing. Person A stole a cheque
bearing Not Negotiable crossing, then he indorsed it to B for valuable consideration. A,
having stolen cheque has no title to it and he cannot pass on any title to any subsequent
holder thereof. This is so only if the cheque is crossed Not Negotiable. Although B received
it for value and without notice that the title of A was defective but it was clearly marked
not negotiable which is a declaration that this instrument is devoid of the important quality
of negotiability and he B cannot get a better title than A. Since the title of A was
defective-----the title of B will also be defective.
A non negotiable crossing means that the cheque is devoid of its quality of negotiability and
an endorsee will receive the cheque subject to any defects in the title of the endorser.
In the above example if the cheque was not marked non-negotiable, B who had received
the cheque for valuable consideration without knowledge of any defect in its title would get
a better title than A and the person B could enforce the cheque against the drawer and the
endorser A.
14.8. Account Payee Only Crossing;
In Pakistan it is a crime to credit Account Payee Only cheque to any account other than
the payee named in the cheque.
Section 123A was added to the Negotiable Instrument Act, 1881 by an amendment
Ordinance of 1962. It states that where a cheque crossed generally bears across its face an
addition of the words account payee between the two parallel transverse lines constituting
the general crossing, the cheque besides being crossed generally, is said to be crossed
account payee. When a cheque is crossed account payee, it shall cease to be negotiable
and it shall be the duty of the banker collecting payment of the cheque to credit the
proceeds thereof only to the account of the payee named in the cheque.
{Transverse= placed across sth}
The practice of using this type of crossing has been in vogue since the 19th century. Such a

cheque is not transferable but valid only between the parties. It is said that the safest
crossing will be the combination of two crossings i.e. Account Payee only along with Not
Negotiable.
{Vogue= a fashion for something}
Account Payee Only crossing means that in addition to the restriction that the payment
cannot be made in cash and can only be collected by a bank the proceeds of an Account
Payee Only cheque CAN only be credited TO THE ACCOUNT OF THE PAYEE NAMED IN THE
CHEQUE. Such cheque cannot be endorsed or transferred to any other person or institution.
In Pakistan it is a crime to credit such cheque to any account other than the payee named in
the cheque.
14.9. Purpose and benefits of Crossing;
A crossing though not affecting the negotiability of the cheque does restrict its presentation
through a bank i.e. it has to be deposited in an account thereby minimizing the risk of fraud
which could be easier if the cheque was paid on the counters of a bank. Moreover the
crossing gives directions to the paying banker to pay the proceeds to the collecting bank.
When sending a cheque to a beneficiary by mail or courier or through a person whom you
cannot rely upon fully, it is better to cross a cheque preferably Account Payee Only
because if it is so crossed it can only go into the bank account of the named payee and the
chance of somebody else obtaining the money in question is minimized appreciably.
14.10. Who can cross a cheque?
According to Section 125 of the Negotiable Instrument Act
a) Where a cheque is uncrossed, the holder may cross it generally or specially;
b) Where a cheque is crossed generally, the holder may cross it specially;
c) Where a cheque is crossed generally or specially, the holder may add the words not
negotiable;
d) Where a cheque is crossed specially, the banker to whom it is crossed may again cross it
specially to another banker, his agent, for collection;
e) When an uncrossed cheque or a cheque crossed generally comes to the hands of a
banker, he may cross it specially to himself.
14.11. Duties of a Bank with regard to crossed cheques
As explained earlier Section 126 of the Act states that a cheque crossed generally must be
paid only to a banker and a cheque crossed specially shall only be paid to the banker named
therein. As per Section 127 of the Act a cheque may bear second special crossing in favor of
a second bank which is acting as an agent for collection for the first banker.
14.12 A. Protection to the Paying Banker when paying a crossed cheque - Sec. 128 of the
Negotiable Instruments Act deals with payment in due course of a crossed cheque and
makes it obligatory to a banker that payment of a crossed cheque must be made only in
due course which implies payment in good faith and without negligence to a banker.
However, if he makes payment in contravention of this section, he loses the legal protection
and will have to compensate the customer for any loss suffered by him by such payment.
The protection is available if the banker makes payment in good faith and without
negligence of a cheque crossed generally to a banker and if crossed specially, the banker to
whom it is crossed or his agent for collection, being a banker.
Protection regarding Payment of Instrument on which alteration is not visible.

Where a Cheque has been materially altered but does not appear to have been so altered.
Sec. 89 provides a relief to the banker in the case of payment of an instrument on which
alteration is not apparent and states that if a cheque presented for payment has been
altered but does not appear to be altered or it has been crossed but does not appear to be
crossed or has had a crossing which has been expunged at the time of presentation. In such
a situation, the banker may make the payment according to the apparent tenor of the
instrument. If the payment made is in due course and made in good faith without
negligence the bank shall be discharged from all liabilities.
14.12B. Protection to the Collecting Banker when collecting a crossed cheque Sec. 131 of
the Negotiable Instrument Act provides that where a banker in good faith and without
negligence receives payment for a customer of a cheque crossed generally or specially to
himself, and the customer has no title or defective title thereto, the bankers shall not incur
any liability to the true owner of the cheque by reason only of having received such
payment provided the payment has been collected in good faith and without negligence.
(Note the different types of protections available to the collecting banker and the paying
banker provided they have acted in good faith and without negligence.)
14.13. Who can open a crossing on a cheque?
We have earlier mentioned as to who can add crossing on the cheque. However as to who
can remove the crossing is a totally different matter. A crossing being a material part of the
cheque, its cancellation can only be done by the drawer of the cheque i.e. only a person
who issued the cheque can open the crossing. This is for general crossing. However for
cancellation of special crossings these can only be removed by the banker whose name
appears in the crossing.
14. 14. Indorsements
Indorsun is Latin word and from it Indorsement is derived, the literal meaning of which
is on the back or reverse. But its legal definition under Section 15 of Negotiable
Instruments Act, makes things clearer: When the maker or holder of a negotiable
instrument signs the same, otherwise than as such maker, for the purpose of negotiation,
on the back or face thereof or on a slip of paper annexed thereto or so signs for the same
purpose a stamped paper intended to be completed as a negotiable instrument, he is said to
indorse the same and is called the indorser.
The following points emerge from this definition:
Indorsement means the writing of a persons name either on the back or the face of a
negotiable instrument.
In the event of insufficient space on the instrument, indorsement can even be made on a
piece of paper annexed to the instrument, technically called allonge. The Indorsement
should be so made that part of the name appears on the instrument and partly on the piece
of paper attached as allonge.
The Indorsement should be made only when the instrument is intended for negotiation as
per definition of negotiation given in Section 14 of Negotiable Instruments Act which reads:
when a promissory note, a bill of exchange or cheque is transferred to any person by the
holder thereof, the instrument is said to have been negotiated.
Negotiation thus means the transfer of a negotiable instrument to a third party in such a
way that the third party is constituted as the holder of the instrument who is entitled to
the possession of the same in a manner that he can sue upon it in his own name.

 There is no exact form of indorsement prescribed in banking law, but the bankers have
developed their own principles in consonance with the basic legal requirements in this
regard.
Bankers in Pakistan generally observe the following principles:
a) The indorsers name must be exactly in the same spelling as written in the instrument as
payee or indorsee, i.e. it should be verbatim.
b) Indorsement should be made in payees or indorsees hand writing only. Signature in the
form of facsimile is not acceptable.
c) Vernacular indorsement is not acceptable unless it is confirmed and guaranteed by the
collecting banker.
14.15. Types of Indorsements
Indorsements are of the following types:
i) In blank indorsement,
ii) In full indorsement,
iii) Conditional indorsement,
iv) Restrictive indorsement,
v) Partial indorsement.
14.15.1. In blank If the indorser signs his name only, the indorsement is said to be in
blank- and if he adds a direction to pay the amount mentioned in the instrument, to or to
the order of, a specified person the indorsement is said to be in full and the person so
specified is called the indorsee of the instrument (Section 16(1)). The provision of this Act
relating to a payee shall apply with necessary modification to an indorsee. (Section 16(2)).
In a blank indorsement, the indorser signs his name only. It is also called general
indorsement. The instrument bearing a blank indorsement becomes payable to bearer. It is
thus negotiated to subsequent holders by mere delivery as in case of an instrument payable
to bearer.
14.15.2. In full
As mentioned earlier in Section 16 of the Negotiable Instruments Act, if an indorser specifies
with his signature the name of the person to whom the instrument is made payable, this
indorsement is called an indorsement in full or special indorsement.
14.15.3. Conditional
According to Section 52, conditional indorsement is one where an indorser makes such
liability or the right of the indorsee to receive the amount due thereon dependent upon the
happening of a certain event which may or may not take place or excludes his own liability
thereon when signing his name, e.g. Pay XY & Co. at his risk and responsibility or Pay XY
& Co. or order without recourse to me.
14.15.4. Restrictive
When an indorser attaches a condition with his signature which prevents further negotiation
of the instrument, it is called restrictive indorsement. For example, if a bill of exchange is
endorsed as Pay XY only or Pay XY for the account of DE etc. it restricts further
negotiability. The indorsee has no power to transfer his rights to any one thereafter.

14.15.5. Partial
Under Section 56(1), negotiation by indorsement must be of the entire instrument. Under
56 (2) an indorsement which purports to transfer to the indorsee only a part of the amount
payable or which purports to transfer the instrument to two or more indorsees severally, is
not valid as a negotiation of the instrument; but where such amount has been paid in part,
a note to that effect may be indorsed on the instrument, which may then be indorsed for
the balance.
14.16. Who can indorse?
(Bona fide = [usually before noun] (from Latin) genuine, real or legal; not false: a bona fide
reason is it a bona fide, reputable organization)
A bona fide payee, indorsee or holder of an order instrument can endorse as an individual, if
endorsed to him as such, or as partner if made payable to a partnership firm or as
Chairman, Director, Secretary, or Manager if made payable to a joint stock company, as per
following examples:
14.16.1. Indorsements by individual;
The name of the indorser should correspond exactly to the name of the payee written in the
instrument. Titles of courtesy, rank, marital status are not to be prefixed with Indorsements.
a) Payee: Ahmed Hussain
Regular: Ahmed Hussain
Irregular: Ahmad Hossain
b) Payee: Mufti Samee-ullah Khan
Regular: Samee-ullah Khan
Irregular: Mufti Samiullah Khan
14.16.2. Indorsements by agents for individuals.
Indorsement must indicate that the agent is signing on behalf of the payee under proper
authority.
a) Payee: Abdul Mannan
Regular: Abdul Mannan
By Shahzad Khan
(his) attorney
Irregular: Abdul Mannan
Shahzad Khan
Attorney
b) Payee: Rizwan Rasheed
Regular: For and on behalf of Rizwan Rasheed
Shahzad Khan
14.16.3. Indorsement by a firm as the agent to an individual.
Indorsement must indicate that firm is signing as an agent of the individual.
a) Payee: Imtiaz Shafi
Regular: for and on behalf of Imtiaz Shafi
Shafi &Co.

Irregular: Imtiaz Shafi

Shafi & Co.
14.16.4. Indorsement by Joint Payees.
In case of joint payees, all payees must endorse individually or one of them should sign
under an authority from rest of them.
a) Payee : Muhammad Imran & Saleem Butt
Regular: Muhammad Imran (Both signing individually)
Saleem Butt
or
Muhammad Imran
For self & Saleem Butt
Irregular: Muhammad Imran (Both names written in the same handwriting)
Saleem Butt
14.16.5. Indorsement by firms as an agent of another firm. A firm can indorse as an agent
on behalf of another firm.
a) Payee: Messrs Karman Shah & Co.
Regular: Per pro Karman Shah & Co.
Shahjee & Co.
Irregular: Shahjee & Co. for Karman Shah & Co.
14.16.6. Indrosement for and on behalf of a firm.
A person indorsing an instrument for and on behalf of a firm, the indorser must indicate his
designation.
a) Payee: Messrs Karman Shah & Co.
Regular: for and on behalf of
Karman Shah & Co.
Syed Ali
(Manager.)
Irregular: for and on behalf of Karman Shah & Co.
Syed Ali
14.16.7. Indorsement for Joint Stock Company.
A person indorsing an instrument on behalf of a Joint Stock Company must be a duly
authorized official or agent who must indicate his authority and designation thereon.
a) Payee: Messrs Salman Jamal & Co. Ltd.
Regular: Per pro Salman Jamal & Co. Ltd.
Mansoor Ali
(Secretary)
Irregular: Per pro Salman Jamal & Co. Ltd.

Mansoor Ali
b) Payee: Messrs A B Fashion & Co. Ltd.
Regular: A B Fashion & Co. Ltd.
Shahid Ahmed
(Director)
Irregular: Per pro A B Fashion & Co. Ltd.
Shahid Ahmed
14.16.8. Indorsements by Clubs, Societies, Administrators, Trustees etc
Indorsements by persons on behalf of the institutions like clubs, societies, trusts etc. must
be made by an authorized office bearer who must indicate his designation.
a) Payee: Karachi Services Club
Regular: for and on behalf of
Karachi Services Club
Sheraz Khan
(Hony. Secretary)
Irregular: Karachi Services Club
Sheraz Khan
b) Payee: Lawyers Forum
Regular: for Lawyers Forum
Wali Khan
(President)
Irregular: for and on behalf of Lawyers Forum
Wali Khan
14.9. Liability of indorser
Sec 35 states that in the absence of a contract to the contrary, the indorser of a negotiable
instrument, by indorsing it, engages that on due presentment it shall be accepted and paid
according to its tenor and that if it be dishonored he will compensate the holder or
subsequent indorser who is compelled to pay it for any loss or damage caused to him by
such dishonor. Every indorser after dishonor is liable as upon an instrument payable on
demand.
It may be noted that dishonor by drawee is necessary. Therefore a holder cannot come
straight to an indorser and demand payment. The instrument has to be presented to the
drawee and if he refuses to pay, only then the holder can claim from the indorser.
__________________
Whenever you find yourself on the side of the majority, it is time to pause and reflect.
-Mark Twain
The Following User Says Thank You to saad monga For This Useful Post:
mudasr (Saturday, April 26, 2014)

Bankers Core*1 Business

You are never fully dressed until you wear a smile.

Bankers Core*1 Business Deposits
Money is the raw material for a bank. The bigger the stock of money, the more the
business that a bank can conduct and the higher the profits it can make. Deposits are
rightly said to be the life blood for a bank.
The Bank as Depository
We have discussed earlier the definitions of bank / banking. One of the basic services
rendered by the bank to the public is that of depository, both an essence and an important
component of banking business.
(*1 The most important or central part of something)
Importance of Deposits - The key to all growth and development of the banking system
lies in the mobilization of resources and their judicious utilization. The Section 5(b) of the
Banking Companies Ordinance, 1962 defines banking particularly highlighting these
aspects:
Banking means the accepting, for the purpose of lending or investment, of deposits of
money from the public, repayable on demand or otherwise, and withdrawable by cheque,
draft, order or otherwise.
As such the first pre-requisite of banking is the acceptance of deposits from the public
and then its utilization by way of lending or investment in such a manner that the
depositors may also withdraw their funds on demand or otherwise. Impliedly, it further
envisages that the investment of funds should be judiciously made so as to be able to
generate earnings for paying a reasonable return to depositors of money, besides meeting
operational expenses of the bank and providing for reserves and contingencies and paying
dividend to shareholders. It implies that deposits are effectively the working capital of the
banking business. Unless there are resources, neither these can be invested in profit
making avenues and ventures nor would it be possible to pay reasonable return to the
depositors.
Mobilization of Deposits
Some banks / DFIs were in the past publicizing their deposit mobilization schemes without
disclosing the correct & complete terms and conditions with regard to the rate of return on
such deposits. The use of ambiguous terms, like conditions apply etc., in advertisements
were the cause of complaints to SBP from aggrieved depositors. All the banks/DFls have
been directed to ensure that all advertisements in media (print, electronic or in any other
form) soliciting deposits from the general public should explicitly indicate the annualized
rate of expected return. The words conditions apply or other similar wordings should not
be used. The schemes on which profit is paid on monthly/quarterly/half yearly or any
other regular interval, the expected rate of profit to be paid on such intervals should be
clearly indicated in the account opening form or advertising material in bold letters. What
is the annualized rate of return?

Core Earning of a bank is the Spread of Interest or Profit

Resource mobilization of deposits needs to be done carefully so as to ensure that in the
ultimate end, it does not become counter-productive for the bank. In mobilizing deposits,
therefore, two basic points viz., average cost of deposits and average return on the
investment of deposits, should be kept in view. A prudent banker would always try to
maintain a deposit mix which would keep his average cost of deposits within safe limits so
as to maintain the profitability and viability for the bank. A question that could arise here
is as to what should be the average cost of deposits up to which it may be feasible to go in
for mobilization of deposits. State Bank statutory requirement lays down a percentage of
total demand and time liabilities to be held in cash (Cash Reserve) with the State Bank of
Pakistan free of any return, while another given percentage is required to be held in
unencumbered securities, usually this part is held in approved securities(approved for
investment in statutory liquidity requirement) e.g. treasury bills, etc. The average cost of
deposits up to which deposit mobilization could be feasible would have, therefore, to be
considered with reference to the average return on the lending or investment of these
deposits after meeting statutory (legal) obligations.
{ unencumbered securities= those shares and bonds etc which are NOT placed under lien
to somebody. Free of any lien or charge}
In the above paragraph which type of average is envisaged? Simple average or weighted
average. What is weighted average?
In mobilizing deposits, there are two factors which are of prime importance. One is the
rate of return to the depositors. This should necessarily be competitive with a view to
attract deposits in a competitive market. Another important aspect in deposit mobilization
is the quantum of efforts that are put in on this behalf. To this end the following guidelines
could be of assistance.
i. Identify target market for deposit mobilization. As a first priority potential sources/areas
of deposits and the persons, if any, to be contacted in this behalf should be identified. The
next step would be to develop contacts and support, as may be considered necessary, for
mobilizing these deposits.
ii. In the case of the bank extending letter of credit or guarantee facilities, which either as
per SBPs guidelines or the banks own policies, require an amount of margin to be
deposited with the bank, it also helps to increase banks deposit though in lesser volume.
iii. Branches falling in home remittance areas could do well to contact persons receiving
larger foreign inward remittances for opening accounts with their bank and arranging
remittances through direct deposit in accounts which would provide quicker credits to their
accounts by avoiding delays involved in receipt of funds through instruments of remittance
like cheques or drafts. The remitters abroad could also be likewise approached for
arranging remittances through their bank for credit to the beneficiarys account on the
same lines with assurances of efficiency of service.
iv. Issuing drafts, pay orders and other forms of remittances are also sources of funds as
the float lying with the bank can be large in case of increased volumes of such businesses.
v. Branch deposits should be periodically compared with those of other banks operating in

the same areas and the available deposit potential. This would enable the branch officials
to make a comparative assessment of their performances and plan their future strategies
and line of action in respect of advertising and hiring/training of deposit promotion
officers.
Customers Bank Accounts - The most basic account is the savings account which cannot
be overdrawn. Then there are current accounts which are payable on demand either by
withdrawal or by the customer instructing the bank to make payment to a third party.
They can be overdrawn by way of overdraft. Then there are foreign currency accounts and
a number of other deposit accounts with different features and services. Account holders
vary as well, from individuals through multinational enterprises and government agencies.
There are special rules relating to account-holding by unincorporated associations,
partnerships, executors, minors, mentally ill and so on. Banks themselves hold accounts
with other banks as a result of correspondent banking relationship.
Deposits
Deposits are sources of funds which are used by banks for lending and/or investment
purposes. The basic function of any bank is accepting deposits. Deposits can be divided
into two main categories: Demand and Time/Term deposits/liabilities. Banks use deposits
for lending and investing activities in such a way that withdrawals are possible on demand
- both for demand and time deposits. In other words the bank uses the deposits in
keeping cash in the bank tills, cash in State Bank account, investments in Treasury Bills, in
long term loans to government. The skill of the banker lies in deciding the avenues of
investment and lending their volumes in such a manner that the withdrawal needs of the
customers are met in an admirable manner and the bank also earns reasonable profit.
Please remember that high earning and high liquidity are opposing goals and a challenge
for the banker.
Demand deposits/liabilities are accounts, withdrawals from which can be made
immediately on demand at any time; whereas in the case of Time/Term deposits/liabilities,
funds are available for withdrawal only after a fixed term or determinable period. All
deposit products are Liability products and all lending/investment products are Assets
products and reported in the balance sheet accordingly.
A banks profitability depends on its ability to mobilize deposits effectively. Generating
expensive deposits and lending or investing at cheaper/lower interest rates can cause
profit erosion. Cost of deposit is a term used for the rate that the bank pays to its
depositors. This rate must be high enough to attract desirable levels of deposits but low
enough to ensure profit sustainability. Banks lend at a particular interest rate which is
determined by keeping in view the cost of the banks deposits and other factors. It is the
treasurers job to maintain the pool of the banks money in a profitable and feasible
manner.
The deposit rates are influenced by the Discount Rate announced by State Bank at the
time of announcing monetary police which is done every quarter.
Furthermore, the rate of return on deposits is also linked with Treasury bill rates (T-Bills)
and rates of Pakistan Investment Bonds (PIBs). T- Bills are floated by the State Bank to
finance short-term gaps between government receipts and expenditure. Pakistan
Investment Bonds (PIBs) are issued by the government to borrow in the long-term. The

rates of PIBs and are used for determining long-term deposit rates.
SBP has advised all banks and DFls to prominently disclose all terms and conditions for
both depositors and debtors, along with the projected rate of return to the depositors and
interest or mark-up rates for the debtors. This information must be clearly communicated
and disclosed in all forms of communications including in media campaigns.
Section 26-A of Banking Companies Ordinance 1962 pertains to Deposits. The salient
features of this section are:
Banks may accept deposits on participation in profit and loss (PLS).
Free of interest or return in any other form.
Banks shall make a complete record of the investment made and funds allocated for
liquid assets.
Deposits which are received on a PLS basis shall be invested by the banks at their
absolute discretion in businesses where return is not fixed (interest). Depositors who have
invested money on a PLS basis are entitled to receive periodical profits from a share of
profits of banks as may be determined by them and in case of loss shall be liable to bear
the proportionate loss.
Types of Accounts
An account is a relationship with the customer, operated on a day-to-day basis, into which
deposits are received and out of which cheques are paid. A deposit account is usually in
credit, but an overdraft facility may be taken by pre-arrangement with the bank. Some
deposit accounts are opened for a limited time such as:
1)Notice Account - repayable after a notice period of seven days, or 29 days, etc. Such
account is repayable in the future. The condition is that the customer has to give a written
notice to the bank seven days or 29 days before the date the customer needs the money
depending upon whether the deposit is on 7 days notice or 29 days notice.
2)Term Deposit Account - repayable after a fixed time ranging from one month to 10 years
or even longer. Profit on such deposits is payable either at maturity or yearly, half yearly,
quarterly or monthly as per contract.
3.Current Account
A current account is an account from which any part of the balance may be withdrawn on
demand. Withdrawal from the account can be made via cheques, direct debit, standing
instructions or ATM. Funds in the account can be debited or credited in the form of cash,
cheques and financial instruments. No interest / profit is paid on the current account.
These accounts are generally for business purposes and can be overdrawn on
arrangement with the bank. Zakat is not deducted on current accounts. The initial deposit
can be as per each banks own policy.
Before account opening, due diligence should be exercised and all Know Your Customer
(KYC) requirements are to be fulfilled (KYC is explained in detail in other hand outs).
4.PLS Savings Account (PLS means Profit and Loss Sharing Basis)
Savings accounts are meant solely for saving purposes. Saving means to set aside money
for future use or to retain money to meet future spending needs. Saving accounts have all

the features of a current account, except that profit is paid on the balance maintained as
per the PLS rules of the bank. Saving accounts are generally opened in the name of
individuals but can also be opened in the name of charitable institutions, for provident
funds, benevolent funds and pension funds. Initial deposit and minimum balance
requirement features can be decided by each bank as per their own policies. Zakat is
deducted on the balance maintained on the valuation date (first day of Ramadan).
Exemption from Zakat can be claimed by submitting Zakat declaration 30 days prior to the
Zakat valuation date.
Different banks have introduced different variation products of saving accounts for
individuals and eligible institutions where profit is paid bi-annually. Zakat rules for these
accounts are similar to that of the normal saving accounts.
In the past Banks used to pay a very small percentage as profit/interest on Savings
Accounts. As per BPRD circular no 7 dated 30th May 2008, SBP has instructed all banks to
pay a minimum of mandatory 5% profit to their saving account holders. Please note when
rate is quoted without mentioning the period for example per month or per quarter, it
means the rate of profit per year.
As per SBP BPRD Circular No.07 of May 27, 2011, State Bank of Pakistan has prohibited all
the banks from levying any service charges for opening and maintenance of regular
savings accounts with effect from July 01, 2011. This means that the services rendered by
banks for the opening and maintenance of regular savings accounts shall be free of
charge. There shall be no condition of maintaining a minimum balance for these accounts.
These instructions are applicable equally on all existing and new accounts. Similarly, no
charges would be recovered by banks at the time of closing an account. Banks shall not
demand more than Rs. 100 as an initial amount for opening of regular savings accounts.
However, no initial deposit would be required for opening of accounts by (i) Mustahkeen of
Zakat, (ii) Students (iii) Employees of Government or of Semi Government institutions for
salary and pension purposes (including widows/children of deceased employees eligible for
family pension/benevolent fund grant, etc.) and other similar types of accounts.
The banks must also ensure that all terms and conditions for the operation of an account,
especially in case of its dormancy, closing and/or subsequent reactivation are brought into
the knowledge of the customer at the time of account opening. Key features of the
Account Opening Form must be translated into Urdu and a printed copy of such translation
shall be shared with the account holders at the time of opening of the account.
5)Basic Banking Accounts (BBA)
Government of Pakistan has been keen on the documentation of the economy so that the
economic data available from the financial institutions helps the state in formulating
policies and increasing the tax base of the country. This can be achieved if all the people
have bank accounts and instead of cash transactions, everybody uses the banks for their
buying and selling and other monetary transactions.
BBAs were introduced by SBP, with special features; vide BPD circular No. 30 dated 29th
November 2005, to facilitate banking for low income people in Pakistan. Prior to the
introduction of BBAs banks used to collect service charges from all the customers who
failed to maintain a minimum balance in their accounts as per each bank's policy. In order

to resolve this issue and to facilitate banking for small depositors, SBP has formulated the
BBA scheme with the following features: Initial deposit to open a BBA is Rs.1000/ No profit is paid on the balance in this account.
No minimum balance is required and no service charges are to be paid by the customer.
If an account remains at Nil for a continuous period of six months, the bank has the
right to close it.
Maximum two deposits and two cheque withdrawals are allowed free of charges in a
month.
Unlimited free of charge ATM withdrawals are allowed from banks own ATMs.
In case of withdrawal from ATMs of any other bank, charges will be recovered from the
other bank.
A regular banking account can be converted to a BBA on the customer's request /
consent.
There is NO bar on opening a joint BBA account.
6)PLS Term Deposits
Term deposits are the deposits repayable after a predetermined future date. Such deposit
transactions may be for a period ranging from one month to ten years or even longer.
Profit is paid on the simple interest basis.
Roll-over option can be made available.
Zakat is applicable on the face value, if TDR was outstanding on Zakat valuation date or
payment of profit whichever is earlier.
Tax / withholding tax shall be recovered as per law of the land on profit disbursed.
(Withholding tax is applicable on all types of accounts where the bank pays profit including
savings accounts. Tax rate is 10% on profit.)
Different banks have issued different liability products for RTA (Rupees Transactional
Accounts) and Term Deposit Accounts. The applicable rules are within the parameters
explained above.
7)Cash Management Account
There are three types
A) Simple Cash Management Account.
A Cash Management Account is a banking service provided to high profile business
customers through which they can speedily obtain funds from their collection accounts and
transfer to their main account which is usually in overdraft. The remittances are effected
through a computer module. The module collects and consolidates data from the
customer's bank account in any location in the country. Through cash management,
customers can speed up collection of their accounts receivable and utilize their funds to
the optimum level. Example PSO cash management account for Petrol pumps proceeds.
PSO has an overdraft facility in a Karachi The petrol pumps get proceeds of PSO petrol
from vehicle users. Petrol pumps all over Pakistan deposit proceeds in branches
geographically close to them. The computer module remits all the amounts to the
overdraft facility account at Karachi with advices to all concerned. In this way PSO saves
on interest costs as the proceeds of collections are efficiently pooled to reduce the
overdraft.

B) Non Discretionary Wealth/Cash Management Account

Through such accounts banks provide the following services.
The customer opens account and enters into an agreement with the bank where the
customer deposits funds in the account. Customer makes decision and instructs the bank
to invest designated sums in bank deposit schemes, in equity shares, in mutual funds, in
bonds issued by private institutions, and/or in securities issued by the government like
Treasury Bills, Pakistan Investment Bonds. In return for a fee the bank does all the paper
work, invests the funds as desired on behalf of the customer, collects profit, sells the
investments when requested. The bank does all the donkey work in the process. The bank
handles all the periodical profit and capital gains the Customer earns for the customers
account.
C) Discretionary Wealth/Cash Management Account.
The bank and customer enter into an agreement whereby the customer deposits his
amount and gives discretionary authority to the bank to invest the amount in securities /
avenues as chosen by the investment experts of the bank. The bank hires capable security
analysts who invest the amount in shares, bonds or other investments in their best
judgement. The bank performs all the sales, purchases, collections for the customer. All
profits and capital gains/losses are passed to the customer.
8)Collection accounts
Collection accounts are opened for collection of funds at the request of business
customers, charitable institutions and on the instructions of the government in the case of
any disaster.
For the scenarios listed above, a main account is opened in any branch of the bank. In
addition to this main account, collection accounts are opened in other branches from
where funds are transferred to the main account as per instruction / arrangement. For
example in order to assist the public to donate for the rehabilitation of people displaced by
the powerful earthquake in Baluchistan, Prime Ministers Relief Fund has been instituted
and collection accounts have been opened in all the commercial bank branches in
Pakistan. Amounts credited to these collection accounts are remitted to the Central Relief
Fund Account at the disposal of the Central Government.
9)Share Subscription account
When a public limited company floats its shares for subscription, it has to open accounts in
banks which are nominated as "bankers to the issue". These banks authorize their
branches to collect share applications from the public against deposits of subscription
money in a collection account; this is ultimately transferred to a main account of the bank
on the closing date of the subscription. If the number of share applications is more than
the shares offered, balloting takes place and refunds to unsuccessful applicants are made
through the branches where the applications were received. The subscription amount
relating to the successful share applications remains available at the disposal of the share
issuing Company. Once the funds are transferred to the main company account the
subscription account is closed.
Cheque Books and Loose Cheques
Issuance of Cheque Book - Opening of an account like current or savings account would

necessarily require issuance of a cheque book to enable the account holder to issue
payment instructions. The first cheque book should only be issued once all the formalities
have been completed for opening of the account and not before that. Subsequent cheque
book should be issued on receipt of proper Requisition Slip (from the cheque book issued)
duly signed and the signatures verified. The receipt of cheque book should be
acknowledged by the account holder.
Issuance of Loose cheques Though most banks discourage issuance of loose cheques,
on some occasions a customer requests for issuance of a loose cheque leaf.
The following precautions should be taken:
i. A loose cheque should only be issued to an account holder, who calls personally and who
is intimately known to the Manager or a Senior Officer of the branch for the purpose of
drawing money in cash only. Loose cheque cannot be used for third party payments.
ii. Loose cheques should be issued to customers from a new and full cheque book and not
from unused cheques which are returned by other account holder.
iii. A record of loose cheques issued should be maintained in the cheque Book Issued
Register by allocating last few pages of the register for the purpose separately for Current
and Savings Deposit Accounts.
iv. Loose cheque should be issued after completion of the following formalities:
a) The party requiring a loose cheque should sign the loose cheque requisition slip which is
attested by an officer, who preferably knows him personally and the signature of the
account holder is verified by the Officer In-charge, Deposits Department or the Manager
after very carefully examining specimen signature of the account holder available on the
banks record.
b) A stamp bearing the words Loose Cheque is affixed on the face of the cheque at the
top. Close to the Loose Cheque stamp, words Not more than Rs so and so may be
written as a precautionary measure.

__________________
Whenever you find yourself on the side of the majority, it is time to pause and reflect.
-Mark Twain

#12
Sunday, April 06, 2014
Join Date: May 2012
Location: Lahore

saad monga

Posts: 34

Payment Methods

An easy way to develop self confidence

Dress Sharp Dress Sharp Dress Sharp
A dress affects the way a person feels about himself. For example the morning you know
you dont look good the feeling reflects in the way you carry yourself around all day. This
also affects your interaction with other people. So be conscious about yourself and take
care of your personal appearance to build up a good confidence level. Significant
improvements can be made by following some simple routine:
Bath and shave frequently
Wear clean clothes
Be cognizant of latest styles
A great rule to follow in buying clothes is spend twice as much, buy half as much.
Rather than buying a bunch of cheap clothes buy half as many. Select high quality items.
This will decrease your spending because expensive clothes have good quality so they take
time to wear out and stay in style longer.
Payment Methods
Payment methods are the instruments which are used by the account holders, whether an
individual, a partnership firm or joint stock company, to operate upon the account to meet
their payment obligations. These may include paper based or electronic based or a
combination of both.
8.1. CHEQUE:
The most popular payment instrument used the world over is cheque. The facility to draw
cheques by a customer to operate upon his account maintained with a financial institution
is one of the prerequisites to qualify it as a bank. In fact a cheque is an order given by a
customer to his banker to pay a sum of money either to himself or the named payee or to
his order. In legal terms, the definition derived from the Negotiable Instruments Act 1881
is given below:
Section 6 a cheque is a bill of exchange drawn on a specified banker and not expressed
to be payable otherwise than on demand
Thus a cheque is a species of a bill of exchange; its distinguishing characteristics being
that:
i. it must be drawn on a banker and
ii. it must be payable on demand.
Let us see, what is Bill of Exchange.
A bill of exchange is defined as:
1. Unconditional order
2. Which is in writing
3. Addressed from one person to another
4. Signed by the person giving it
5. Requiring the person to whom it is addressed to pay
6. Either on demand or at a fixed or determinable future time

7.
8.
or
to

A sum certain in money

to a specified person
to the order of a specified person or
the bearer.

Thus wherever the term bill is used in the Negotiable Instrument Act, prima facie it
covers both bill of exchange and cheques.
8.2. Types of Cheques:
8.2.1. Open cheque It is payable in cash at the counters of a banker in accordance with
the practice of the banks.
8.2.2. Crossed cheques It is not payable in cash at the counters of a banker but can be
collected by a banker who would credit the proceeds to his customers account after
realization.
8.2.3. Dating a cheque there is no legal requirement that a cheque should be dated.
The Negotiable Instrument Act Section 20 allows an inchoate {meanings: just beginning
to form and therefore not clear or developed } instrument to be completed. However, in
practice banks do not pay undated cheques.
Ante Dated Cheque. Ante dated cheque is one that bears a date before the date on which
it is presented for payment. Such cheque is paid if the period of ante date is less than six
months.
Stale Cheque. If however the period of ante- date is six months or more than six months,
such cheque will be called a Stale Cheque and will be dishonoured.
Post Dated Cheque. A post dated cheque is one that is presented for payment on a date
before the date of issue appearing on the cheque. In other words a cheque is presented
for payment but the date written on the cheque has not yet arrived. Such cheque will be
dishonoured.
Cheque bearing a Date occurring on a Sunday. This reason does not make a cheque
invalid. It is a valid cheque.
8.3. Parties to a cheque Section 7 of the Negotiable Instruments Act mentions parties
as Drawer, Drawee, Drawee-in- case of need, Acceptor, Acceptor for Honour and Payee.
However we will only discuss the parties relevant to a cheque i.e. Drawer, Drawee &
Payee. (We shall study Negotiable Instruments in detail in a subsequent hand out.)
8.3.1. The Drawer: The maker of the cheque, or to be more exact the account holder, is
technically called the drawer (Sec.7). In order to constitute a valid authority, the drawer
must sign the instrument, according to the recorded signature with his banker. The word
drawer is used for bills of exchange including cheques while for Promissory Notes the
word maker is used. A drawer may be the accountholder himself or a person authorized
by him i.e. an agent may be drawer for the principal.
8.3.2. The Drawee: The drawee is the person on whom the instrument is drawn. A cheque
is always drawn on a bank where the customer maintains his account. Unlike the drawer, a
drawee cannot be a substitute i.e. it must be the named bank.

8.3.3. The Payee: According to Sec.7 of the Act, a payee is the person named in the
cheque to whom or to whose order the payment is to be made. If more than one person
are named as payee, then the cheque will be payable jointly or alternately.
8.4. Components of a Bill of Exchange (includes a cheque):
8.4.1. Unconditional order it must be an order and that too unconditional. The words
please pay or simply pay are sufficient to constitute an order. Payment from a particular
account or a statement of the transaction e.g. college fee does not make it conditional;
In Palmer vs. Pratt (1824) it was held that a bill of exchange payable 30 days after the
arrival of the ship Paragon at Calcutta was conditional for the said ship may never have
arrived at Calcutta. The printed format of cheque books provided by Banks to their
customers to draw cheques do not carry any provision to add any condition to its
payment. If a banker is ordered to pay conditionally on the payees signing a receipt, the
instrument will acquire the status of an order & not a cheque.
8.4.2. It must be in writing. The Bills of Exchange Act, 1882 provides that writing includes
printing as well. Accordingly, a cheque prepared on a typewriter would be treated as a
valid instrument.
8.4.3. Addressed by one person to another person a person may be natural person or
a legal person and the latter includes a company; addressed requires that the name of
the addressee person must appear on the instrument itself. It is not important whether it
appears in the top (as on cheques) or at the lower part (as on bills of exchange). The
instrument drawn by a Banker upon itself, like bankers draft is not a bill of exchange as it
is not addressed by one person to another.
8.4.4. It must be signed by the person giving it. An unsigned cheque is an incomplete
instrument and will be refused by the drawees bank for payment.
8.4.5. Pay on demand or at a fixed or determinable future time; on demand refers to
demand or at sight or on presentation or in which no time is expressed. A cheque is
always payable on demand. The responsibility of the drawee bank originates the moment
a cheque is presented for payment. Note: An instrument payable at a fixed or
determinable future time is a bill of exchange but it is not a cheque.
8.4.6. Amount certain in money; an amount indicating (a) with interest (b) by stated
instalments (c) by stated instalments with a provision that the default in payment of any
instalments the whole amount shall become due; is deemed to be certain in money.
Where the amount stated in the cheque differs in words and figure, it appears as the
instrument would not be an order for payment of a sum certain in money. However, the
bill of exchange contemplates the possibility of discrepancy in words and figures and it
specifically provides that in such cases, the sum denoted by words is the amount payable.
In practice, the bankers usually return such cheques with remarks words and figures
differ.
8.4.7. Payable to specified person or bearer. Sometimes a customer fills in the cheque
stating pay cash or order. Such instruments are not cheques, because cash is not a
specified person. These are, however, valid orders for payment of money and accordingly

paid on presentation. However if the word bearer remains on the instrument, it will fall
within the definition. In most cases there will be a named payee and it will be payable to
his order or bearer.
8.4. Payment in due course - The honouring of customers cheque is a contractual
obligation of a banker. A valid payment, however, is one which fulfils the requirements laid
down under the Payment in due course. Section 10 of the Negotiable Instrument Act,
1881 defines as under:
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 of believing that he is not entitled
to receive payment of the amount therein mentioned.
A payment made by a banker will constitute as payment in due course if it fulfils the
following:
1. Proper form - The cheque must be drawn by the drawer in accordance with the
provisions mentioned in Sec. 6 of the Negotiable Instruments Act, 1881. The Banker must
ensure before payment that the cheque has been properly filled and no changes have
been made to its format like the name of drawee Branch, account number etc.
2. Not crossed - A cheque can be either open or crossed. A crossed cheque is one which is
not payable to any person but a collecting banker. A payment of a crossed cheque over the
counter would not constitute payment in due course.
3. Drawn on the particular branch - The payment of cheque is contingent on its
presentation at the branch where the customer is maintaining his account. However, with
the introduction of on-line banking facility the cheques are also encashed on any other
branch of the same bank. The customers account is ultimately debited at the same
Branch where the account is maintained.
4. Payable to bearer or order - When a bearer cheque is presented for payment, the
drawee bank is discharged by paying to the bearer who is presenting the instrument by
obtaining an acknowledgement of receipt of money on the back of the cheque. However, in
case of order cheque, it is the bankers responsibility to confirm the identity of the payee
before making any payment.
5. Not be mutilated - When the appearance of the cheque reveals that it has been torn or
worn out and gives sufficient reason to believe the customers intention is to withdraw his
authority, it is called mutilation. The banker should ensure that the cheque presented for
payment has no sign of mutilation.
6. No unauthorized material alterations Material alterations include the date, the sum
payable, the name of payee and alteration of the order to bearer but not vice versa.
These alterations form part of Section 3 (f). Section 87 says Any material alteration of a
negotiable instrument renders the same void against anyone who is a party thereto at the
time of making such alteration and does not consent thereto unless it was made in order

to carry out the common intention of the original parties and any such alteration, if made
by an endorsee, discharges his endorser from all liability to him in respect of the
consideration thereof.
7. Sufficient funds available - The account on which a cheque is drawn must be in funds to
enable the bank to make payment. Section 31 of the Act states The drawee of a cheque
having sufficient funds of the drawer in his hands, properly applicable to the payment of
such cheque must pay the cheque when duly required to do so and in default of such
payment, must compensate the drawer for any loss or damage caused by such default.
8. Not be post dated or stale The responsibility of the paying banker as regards
payment or non-payment of cheques drawn on him is quite heavy. If the paying banker
honours a cheque which should have been dishonoured, the paying banker may loose the
money and if he dishonours it when it should have been paid, he is liable to pay damages
for wrongful dishonour. The banker has only two options; (i) honour or (ii) dishonour.
The customer expects that the maker of the cheque may have arranged funds for
payment on the date mentioned and if the cheque is presented before mentioned date of
payment, it may be returned being post-dated. The other risks include:
a. The customer may countermand the payment before the due date of the cheque by
informing the bank in writing. A payment before the due date will not be in accordance
with the mandate of the customer and hence cannot be debited to the account.
b. Before the due date the customer may die and the death cancels the mandate given to
the bank. If the bank has paid the cheque and the customer dies before that date, the
banker will have no mandate to debit the account.
c. Payment of a post-dated cheque will not be deemed to be payment in due course and
hence the paying banker will not be entitled to statutory protection.
d. The customer may become insolvent or insane before the due date and here again the
banker will loose the customers mandate
e. If a post-dated cheque is paid, it may consume balance which the customer actually
had in mind for payment of another cheque and which may have to be dishonoured for
lack of funds thus making the banker liable to damages for wrongful dishonour of the
cheque.
Dr. Rajanyaam in his article the post-dated cheque and Holder in due course writes, An
instrument in the form of a cheque which is post-dated is not a cheque in law. Therefore
a banker who pays such an instrument before the due date is unable to debit the
customers account with the amount. A post-dated cheque is technically not a cheque until
the ostensible date. A cheque by definition is payable on demand and hence a cheque with
a date in future is not payable on demand. An Indian writer Parthasarethy in his book
Cheques in Law and Practice, 2 ed. 1972 p. 32 writes A post-dated cheque till the date
thereon arrives, could be treated as a bill payable at a future date
A cheque is termed out-of-date when it is either post dated or stale. If a banker pays a

post-dated cheque before its due date, he loses the protection eligible under the law. It is
also customary amongst bankers in Pakistan that they do not pay cheques which are
presented after a period of six months from the date of issue. Such cheques are termed as
stale as described under Sec. 21 of the Negotiable Instrument Act, 1881 and would be
returned by the bank. A bill is not invalid by reason of that it is ante-dated or post dated
or that it bears a date when it was a Sunday. An antedated cheque is one which bears an
earlier date than the actual date of drawing. Therefore if on 25th January 2006 a cheque
may be written with a date as 25th Dec 2005 it will be an ante-dated cheque.
9. Presented during banking hours - A banker is liable to honour cheques drawn on him, if
it is presented for payment during working hours and on banking days only. The banking
hours are fixed by banks and non-working days are announced by State Bank of Pakistan
in compliance with the Negotiable Instruments Act.
10. No legal bar on payment - A banker would not make payment if the payment has been
stopped by the drawer through written notice received by the banker, or the banker has
knowledge of any defective title of the person presenting the instrument for payment; or
has received a notice of insolvency, insanity or death of the customer, or in case of a
company, notice of winding up or a notice of assignment of the available credit balance in
the account by the customer etc.
Protection to the Paying Banker
Section 89 : Payment of instrument on which alteration is not apparent.
Where a promissory note, bill of exchange or cheque has been materially altered but does
not appear to have been so altered, or where a cheque is presented for payment which
does not at the time of presentation appear to be crossed or to have had a crossing which
has been obliterated, payment thereof by a person or banker liable to pay and paying the
same according to the apparent tenor thereof at the time of payment and otherwise in due
course, in good faith and without negligence, shall discharge such person or banker liable
to pay and paying the same according to the apparent tenor thereof at the time of
payment and otherwise in due course, shall discharge such a person or banker from all
liability thereon, and such payment shall not be questioned by reasons of the instrument
having been altered, or the cheque crossed. The protection will be available only if
payment is in due course, in good faith and without negligence.

8.8. Protection to the Collecting Banker Sec. 131 of the Negotiable Instrument Act
provides that where a banker in good faith and without negligence receives payment for a
customer of a cheque crossed generally or specially to himself, and the customer has no
title or defective title thereto, the bankers shall not incur any liability to the true owner of
the cheque by reason only of having received such payment provided the payment has
been collected in good faith and without negligence.
Please note that this protection is available only if the collection is in good faith and
without negligence. The word negligence here extends to the process of opening of the
account in which the amount is credited. The bank must have fulfilled all the required due
diligence at the time of opening the account which process should have been executed
without negligence.

8.9. Negotiation of Cheques - A cheque is negotiated when the ownership in it is

transferred from one person to another in such a manner as to constitute the transferee
the holder of the cheque. A cheque payable to bearer is negotiated by simple delivery,
whereas a cheque payable to order is negotiated by endorsement and delivery. An
endorsement can be made on the back by the holder of the instrument, to another person
who takes it as a new holder.
Contributory Negligence by a Drawer
. A customer drawing a cheque in a careless manner which facilitates the material
alteration has to suffer the loss. The House of Lords in London Joint Stock Bank vs.
Macmillan & Arthur (1918) held that the drawer of the cheque (not the bank) must suffer
the loss caused by an alteration in cheque if such an alteration has been facilitated by the
customer. (E.g. if the customer leaves spaces in between the digits of the amount and
spaces between the words when writing the amount in words. If he does so the amounts
on the cheque can be altered without being detected by the bank officers examination.
Payment of a Cheque under Forged Signatures:
The most important part of a cheque is the signature of the customer, the authority to
execute his instructions and the rest of the cheque is very often permitted to be filled by
the subordinates. A cheque by nature is an instruction from the customer to the bank
directing it to pay out the money from his account. If therefore the signature of the
customer on a cheque is forged then it is not his mandate or order to pay. Therefore, any
payment by the bank upon the basis of such a cheque is a payment without authority and
would not bind the customer (PLD 1961 Kar. 185)
2. If signatures on cheque or one of the joint signatures to cheque, are not or is not
genuine, there is no mandate on bank to pay. Also the question of any negligence on the
part of customer, such as leaving cheque book carelessly so that a third party could easily
get hold of it, would afford no defence to bank. It was held that the banker was negligent
and dishonesty of employee of customer was not proximate cause of loss to bank. (A. I. R
1967 Supreme Court 389)
3. Money paid by banks servant under forged cheque cannot be debited to customer,
merely because of customers negligence in allowing his cheque book to remain unlocked.
It is the duty of the employees of the bank to be able to identify the signatures of their
customers and if they fail to discharge their duty and thereby suffer loss, there is no
reason why the customer should make good that loss. Hence the money paid by the
servant of bank under a forged cheque cannot be debited to the customer merely on the
ground that the customer was negligent to this extent that he allowed his cheque book to
remain unlocked. (A.I. R. 1938 Allahabad 374)
4. As per section 10 of the Negotiable Instrument Act a payment made in due course i.e.
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 entitled to receive payment of the
amount therein mentioned, gives protection to the paying banker. However, where a
payment is made on a forged cheque, it cannot be regarded as payment in due course. It

may be that the bank is an innocent victim of the fraud but so is the customer. If there are
two innocent parties, the one whose negligence led to the ultimate loss is primarily
responsible. (1990 CLC 686).
5. In London Joint Stock Bank Ltd. vs. Macmillan and Arthur (1918) the House of Lords
held that the customer is under duty to his banker to exercise reasonable care in drawing
cheques so as not to mislead his bank or facilitate forgery. This principle was adopted by
the Supreme Court of Ceylon in Kulatilleke vs. Mercantile Bank of India (1958).
6. In Greenwood vs. Martins Bank Ltd. (1932) it was held that if the customer discovers
that cheques purporting to have been signed by him have been forged, he must inform his
bank immediately.
7. Money paid on a forged cheque is not money paid to the customer and money cannot
be debited to customers account merely because of his negligence in allowing his cheque
book to remain unlocked (PLD 1975 Kar 252).
8. As per Section 29 of the Negotiable Instrument Act a forged cheque is a nullity and
confers no title and as per Case Law (PLD 1987 Kar. 599) a cheque on which a customers
signature as drawer is forged, is not a cheque at all and a banker who pays money on it
cannot debit the customers account with any payment made thereon.
Considering the above judgments a payment under a forged signature is not payment
without negligence and therefore cannot be debited to the account of the customer.
However what is a forgery is a matter of fact depending on documentary evidence, views
of handwriting experts, etc.

Issuing cheques without arranging funds made a Criminal offence in 2001.

8.12. Dishonour of a cheque some customers are in the habit of issuing cheques
without any regard to the balance in the account or any alternate arrangements therefore.
Section 20 of the Financial Institutions (Recovery of Finances) Ordinance 2001 lays down:
Whoever dishonestly issues a cheque towards repayment of a finance or fulfilment of an
obligation which is dishonoured on presentation, shall be punishable with imprisonment
which may extend to one year or with fine or with both unless he can establish, for which
the burden of proof shall rest on him, that he made arrangements with his bank to ensure
that the cheque would be honoured and that the bank was at fault in not honouring the
cheque .
Practical & Accounting Steps in Payment of a Cheque
Cash Payment.
Procedure for payment of cheques in cash
The customer / bearer presents the cheque to the Teller for payment.
The cheque should not be crossed. If a cheque bears any type of crossing, it can only be
credited to an account in a bank, cash cannot be paid.

 The Teller receives the signed cheque from the customer / bearer and asks for one
signature on the reverse of the cheque.
A bearer cheque can be presented by any person. If the cheque is payable to a named
person and the word bearer is crossed out, it is treated as an order cheque and the
presenter will have to show his CNIC to prove his identity. The officer satisfies himself to
ensure that the correct payee has presented the cheque. A copy of the CNIC is retained
with the cheque.
The Teller scrutinizes the instrument for:
- Validity, i.e. stale / post dated
- Amount in words and figures match
- Cheque is not mutilated
- Cheque is bearer
- Alteration / addition / cutting, if any, are authenticated.
The Teller verifies drawers signature from the system and posts the cheque. What is
the meaning of posting the cheque? Signature verification is of prime importance, because
this is the authority by which the customers account is debited. Other factors discussed in
this hand out are also checked.
By posting we mean that the details of the cheque are noted on the ledger or computer
accounting system of the bank and the balance of the customer is reduced by the amount
of the cheque in the banks record. Suppose the previous balance was Rs 100,000/- and
the cheque was for Rs 50,000/- this sum will be deducted from the previous balance Rs
one Lac and a new balance Rs 50,000/- will be shown on the account.
By the posting of the cheque the following entries will be passed on the accounting
ledger of the bank either manually or through the computer system: Debit: Customer account Rs 50,000/- narration cheque no XYZ paid, and
Credit: Cash in Hand account Rs 50,000/ according to the double entry book keeping system.
In case the cheque amount is in excess of the Tellers limit, real time (before payment)
supervision is required when means a more senior officers scrutinizes the cheque and
authorizes payment.
The cheque is defaced by cancellation either by Teller or by Teller and Supervisor /
Operations Manager, if amount exceeds the Teller limit.
The Teller asks for the signature of the customer / bearer again on the reverse of the
cheque to:
Confirm the identity of the presenter and in acknowledgement for having received the
payment.
The Teller records the denomination on the back of the cheque and cash is delivered to
the customer / bearer.
The Teller affixes branch Cash Paid stamp with branch name, code and date on the face
of the cheque and writes amount paid and signs.
Procedure for payment of cheque in transfer
Transfer involves the transaction to be settled between the customers of the same branch
or customer(s) of remote branch in the case of authorized system user (Online) branch.
Procedure:
The Teller receives cheque from depositor along with the deposit slip. The Teller
scrutinizes cheque and deposit slip for any discrepancy and confirms that:

 Cheque is signed and drawn in favor of account holder. Alternatively the cheque is
payable to bearer or if payable to a third person it is endorsed by the first payee in favour
of the account holder.
If crossed, it is not crossed in favour of some other bank.
Cheque and deposit slip amount agrees.
Details and amount on both parts of deposit slip tally.
Cheque is not stale / post dated or mutilated.
Alteration / cutting / additions on cheque, if any, are authenticated by the drawer and on
deposit slip by depositor. All other factors are also checked.
Cheque is drawn on the same branch or remote branch. In the case of cheque being
drawn on a remote branch, confirms that drawee branch is Online.
Deposit slip is signed by the depositor.
The Teller verifies signature, title of account (if mentioned on cheque) and number and
posts the cheque against balance available. Signature verification is of prime importance,
because this is the authority by which the customers account is debited.
Teller confirms beneficiary account name and number and posts credit in the customers
account.
The entries in excess of Tellers limit will require supervision.
The Teller affixes Transfer and branch stamp, signs and delivers receipt to the depositor.
The Teller affixes bank crossing stamp on the face of the cheque and endorsement stamp
Payees account credited on the reverse. The endorsement is signed by the Supervisor. If
the cheque is endorsed by the first payee to a second payee the endorsement of first
payee should be confirmed by the second payee and the discharge given by the bank will
be first payees endorsement confirmed, amount credited to the account of second payee.
(First payees endorsement is confirmed in writing by the second payee and the second
payee is the customer of the bank whose account is being credited. The bank therefore
confirms the endorsement on the basis of confirmation by the customer whose signatures
are available on record.)
For debit/credit to customer account with remote Online branch, system controls /
conditions will apply and system will be used for confirming title of account, account
number, signature verification and balance confirmation.
When the posting is confirmed the system will pass the following entries on the banks
ledger
Debit :Customer account of the drawer of cheque
Credit : Customer account of the ultimate payee of cheque/account on the account credit
slip.
Procedure for payment of cheque in inward clearing
Procedure:
When a cheque is used to move funds from Bank ABC to Bank XYZ, branches of both
banks located in the same city the process is called local clearing.
Suppose you work in Faysal Bank Lahore. Your customer gives a cheque to a shop. The
shop keeper has his account at Stanchart Lahore. The shop keeper will deposit the cheque
drawn on Faysal Bank with Stanchart for collection through Clearing and credit to his
account.
Stanchart will present the cheque to Faysal Bank for clearing through NIFT.
NIFT will collect/pick up the cheque from Stanchart, make clearing lists and present the

cheque to Faysal Bank.

Faysal Bank will debit the account of the drawer of the cheque and make payment to State
Bank of Pakistan.
State bank will make payment to Stanchart. Stanchart will credit the shop keepers
account with the amount. Based on lists from NIFT the State Bank will debit Faysal Bank
account and credit Stanchart account in their books.Through this process money has
moved from your customers account in FBL to the shop keepers account at Stanchart.
Here the cheque is a clearing item. For stanchart this transaction is outward clearing and
for Faysal Bank this is inward clearing.
Now we study the practical steps in the drawee bank that is Faysal Bank.
The cheques and other instruments drawn on the same branch of FBL are received from
NIFT along with forwarding schedule showing number and amount of instruments
enclosed.
Cheques and other instruments are handed over to the respective departments to
scrutinize cheques for any discrepancy such as:
- Validity (stale / post dated).
- Amount in words and figures agree.
- Cheque is properly endorsed by beneficiary and the collecting bank Stanchart..
- Cheque bears presenting banks clearing and crossing stamps.
- Addition / alteration / cutting, if any, on cheque(s) and other instrument(s), is
authenticated.
If cheques are found to be in order, signature(s) are verified against the bank computer
system or manual record. Signature verification is of prime importance, because this is the
authority by which the customers account is debited. All other factors are also checked.
The cheques are posted in the respective accounts in the system against available
balance through the financial transaction option of the Clearing.
The branch will ensure that total number and amount of cheques / instruments received
through NIFT / Clearing Cell agrees with the amount shown on NIFT / Clearing Cell
forwarding schedule.
Dishonoured cheques / instruments are returned along with the cheque returning memo
(showing specific reason for return) duly signed and after entry in the Cheque Returned
Register.
The cheque returning charges are recovered from the bank customers as per schedule of
charges.
Scrutiny of discharge by the bank branch which has presented the cheque is important.
By discharge we mean a statement made by the cheque collecting bank on the back of
the cheque over its stamp and signature in which it states as to how the money received
by the bank has been or will be utilized/disbursed. Various options are:
Payees Account Credited
Payees account will be credited on Realization.
Received payment
First payees endorsement confirmed, placed to the account of second payee.
Collecting banks discharge confirmed.

The returned cheques are returned to the cheque presenting banks / branches along with
the cheque returning memo through NIFT representative.
NIFT assists in the clearing logistics and paperwork. However the following entries are

passed on the banks accounting ledger in respect of inward clearing.

(What is the meaning of logistics?
Inward Clearing
Debit : Customers accounts on whom the inward clearing cheques were drawn.
Credit : State Bank of Pakistan or National Bank of Pakistan

Return Clearing
Debit : State Bank of Pakistan or National Bank of Pakistan
Credit : Customers accounts whose cheques are returned.
In the next weeks we shall study in detail how the local clearing system works.
8.13. Standing Instructions.- Banker extends this service to his customer on a nominal
commission fee and posting charges. Payments of periodical nature like monthly
subscriptions to clubs, payment of regular fees, remittances to dependents on regular
basis, payment of regular insurance premium are made according to the standing
instructions of the customer. Customer must keep his account in sufficient funds to enable
the banker to execute his standing instructions.
For the above purpose clients give standing instructions to the branch maintaining their
account to make the periodical payments or remittances by debit to their account. To this
end, the following procedure is to be followed by the branch concerned in dealing with
such requests when received.
a) The first step would be to verify the signature of the account holder as appearing on
the letter received from him containing his standing instructions for effecting certain
periodical payments or remittances. The verification of the signature shall be done by the
Manager himself or the Officer In-charge of Deposits Department in case of bigger
branches.
b) After the account holders signature has been verified, his standing instructions would
be properly recorded in the Standing Instructions Register maintained at the branch and
also on the top of the relative ledger folio of the account under proper authentication of
the Branch Manager or the officer-in-charge of Deposit Department as the case may be.
c) On completion of the above action, the said letter shall be filed in the Standing
Instructions File maintained at the branch duly page-numbered and indexed under proper
authentication.
d) A proper date, month, year diary shall be used for ensuring timely execution of clients
standing instructions on due dates and the relative compliance shall be properly monitored
by the Branch Manager.
e) Where, however, an account has been classified as Non-Resident Account or Blocked
Account, relative instructions of the Exchange Control Manual shall be kept in view, while
complying with the standing instructions of the account holder. If the instruction violates
the Exchange Control Regulations, the account holder shall be suitably advised about the
relative exchange control rules and the banks inability to comply with his standing
instructions.

8.15. Credit Card (Here the customer basically gets a loan to pay for the purchases)
Credit Cards are both a credit service and a transaction device. The customer at his
discretion can use the account and the related credit line to finance purchases or may use
the account as an alternative to cash. The credit card market has been segmented by
introduction of Silver Card, Gold Card, Platinum Card, etc which offer different features
and different payment terms. Some banks have introduced variable pricing arrangements.
A credit card transaction involves three distinct financial contracts among three parties i.e.
1) the card-holder, 2) the card issuer and 3) the dealer or merchant.
First is the contract between the card issuer and the card holder whereby the issuer
undertakes to pay for the purchases made by the cardholder within a specified credit limit.
The cardholder agrees to reimburse the issuer in the prescribed manner (in other words
repay the loan as agreed) and undertakes to pay the applicable credit (interest) charge
and annual fee.
The second contract is between the issuer and the dealer/merchant whereby the issuer
agrees to pay to the dealer amounts due from cardholder provided the goods or services
are supplied on the agreed terms, which means the dealer cannot supply goods or
services without making a credit enquiry and approval from the card issuer.
The third agreement is between the dealer/merchant and the cardholder. This agreement
remains a contract of sale or a contract for the provision of a service, although payment is
expected from the issuer.
8.16. Charge Card- It is a variant of the credit card. However the holder is required to
settle the bill promptly and in full when he receives it from the issuer.
8.17. Cheque Card or the cheque guarantee card In such a case the issuer guarantees
payment of cheques drawn by the customer up to an amount specified in the card. Here
the issuer agrees to honour a negotiable instrument drawn by the customer whatever the
state of his account may be. Such a cheque cannot be countermanded i.e., its payment
cannot be stopped by the drawer.
8.18. Debit Card The holder uses his debit card in specified shops to purchase goods or
obtain services. Such a card differs from the other cards in that when the card holder uses
his debit card, the price of the goods or the amount to be paid for services is remitted to
the retailer by an electronic money transfer through a debit of the sum concerned to the
card holders bank account.
8.19. Cash card or ATM card - It is used by the customer to obtain cash from an automatic
teller machine (ATM) by using the card and personal identification number (PIN) from the
keyboard of the ATM terminal. The amount so withdrawn is debited to the account of the
customer. Some banks provide other facilities such as balance enquiry. Cash card differs
from all the aforesaid four cards in that in the credit card, charge card and cheque card a
transaction between the card holder and the third party is evidenced by a receipt or a
voucher and authenticated by comparison of holders signatures on the card with
signatures given at the time of transaction whereas in case of cash or ATM cards the
customer PIN (secret code) is the authority for the transaction.

Nowadays Cards are being issued which function as both ATM Card and Debit Card and
these cards are very popular.
_8.7. Bankers Objections on unpaid cheques
Sometimes cheques have to be returned unpaid for various reasons. Returning of a
cheque unpaid for insufficient funds is a very serious matter. May be that it is through
oversight that cheque is issued by the drawer in excess of the balance available. Whatever
may be the reason, it does create a very bad impression in the market about the prestige
and reputation of the drawer. Banks also take great care in ascertaining the funds of the
customer that may be under clearance or expected from some sources, before a
customers cheque is returned unpaid for want of funds. In the past the Banks usually
have been giving indirect/vague remarks while returning a cheque such as Refer to
Drawer.
The State Bank of Pakistan vide its circular 22 of 2005 has directed the banks/ DFIs to
give specific and clear reason for dishonouring a cheque. The reason refer to drawer is
vague and does not indicate a clear reason and it is not used now.
From the year 2001 issuing cheques without making arrangements of appropriate
overdraft limit or sufficient balance in the account to meet the cheque has been made a
criminal offence which carries a punishment of one year imprisonment. This is all the more
reason that bank should not use any vague reason for returning a cheque unpaid.
Other reasons for which cheques are returned unpaid:
i. Cheque is post-dated or out of date
When a cheque is drawn in a date in advance, i.e. the date which is yet to arrive, it is
called post-dated cheque.
When a cheque, at the time of its presentation, has been in circulation for more than six
months from the date it was drawn it is called, out of date, or stale cheque.
ii. Cheque is mutilated
If, at the time of presentation, a cheque appears torn or mutilated, it will be returned with
the reason cheque mutilated, requires drawers confirmation. The rationale for returning
such cheque is that the drawer may have intended to cancel the cheque.
If the mutilation occurs at the collecting bankers end, it must be confirmed by the
concerned bank.
iii. Crossed cheque
Crossed cheque it must be presented through a bank. When a crossed cheque is
presented for cash payment over the counter, it is returned with this objection.
The payment of a crossed cheque can only be made to a banker of the beneficiary.
iv. Effects not cleared, present again
There may be some instruments which the customer has deposited for collection and
which are still in the course of clearance. In such cases the objection of effects not
cleared is used.

v. Exceeds arrangements
Exceeds arrangements. Cheques that are issued by the customer within the amount of
the accommodation (overdraft limit) agreed with the bank are paid. However cheques
which exceed the limit agreed with the bank are returned with this reason.
vi. Drawers signature differs with the specimen filed with the bank.
This reason is obvious from its wording.
vii. Alteration in date/figures/words/name of payee etc.
Alteration requires authentication by drawers full signatures.
This too needs no explanation.
viii. Payees endorsement required/irregular/illegible.
This is also self-explanatory.
ix. Amount in words and figures differs.
This reason is used when the amount given in figures does not tally with the amount given
in words.
x. Clearing stamp required.
Sometimes, clearing stamp is not affixed by the collecting bank when sending cheques
through clearing. This objection is used in such cases.
XI) Clearing banks discharge required/ irregular/ illegible.
The paying banker is making the payment of a cheque to the clearing bank which has
placed a clearing stamp on the face of the cheque.
The clearing banker should give a discharge on the back of the cheque and confirm how
the amount received by the clearing bank is utilized.
If the cheque is marked account payee the discharge will be Payees account credited.
If the amount has been credited to a second payee on endorsement by the first payee, the
discharge will be first payees endorsement confirmed, placed to the account of second
payee.

The objections on unpaid cheques are numerous. Each objection should fit with respect to
specific situations. The objections here-above are commonly used in the day-to-day
practical banking operations.
__________________
Whenever you find yourself on the side of the majority, it is time to pause and reflect.
-Mark Twain

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General Banking Operations

The bad news is that Time is limited.

However, the good news is that you have total control
on the use of Time available.
Ask yourself as often as possible.
Is , what I am doing now the best use of my Time, at this Time?
Carry a book with you and when you have spare Time
Read it to expand your learning.
Time is finite!
Avoid waste.
Time Management makes the difference between SUCCESS and FAILURE.
General Banking Operations
The following topics are discussed in this Handout:
i. Appropriations.
ii. Rule in Claytons Case, 1816.
iii. Bankers duty of secrecy.
iv. Bankers right of set off.
v. Bankers right of lien.
1O.1.Appropriations.
(Appropriation= Allocation of a sum of money for some particular purpose.)
When a customer pays in money or when money is received from a third party for credit,
the customer has the right to appropriate the money, i.e. to stipulate (Stipulate= to state
clearly and firmly that sth must be done, or how it must be done) that the funds are to be
placed to a specified account or applied in payment of a particular debt, or applied
specifically to meet certain cheques or bills.
Such appropriation can be made by the customer at the time of deposit or later before the
banker has appropriated the funds to any other use. Moreover, the customer can withdraw
or vary his appropriations so long as the banker has not irrevocably disposed of the funds,
according to the customers original appropriation. The banker is bound to act on the
customers instructions whatever the state of accounts between them. Thus he cannot
apply a credit paid by a customer in reduction of the customers overdraft if the customer

directs that the credit is to meet cheques drawn by him.

In the absence of any appropriation by the customer, the banker can apply payment
received to lessen or wipe off any debt owing to him by the customer, including even a
debt which is statute-barred (i.e. time barred). The appropriation by the banker need not
be made immediately. It may be made at any time before it is communicated to the
customer; but once made and communicated to the customer, it cannot be varied or
revoked by the banker, and is binding both on him and the customer.( What is time
barred? When somebody lends money and the borrower does not return the debt within a
reasonable time the lender has a right to file a recovery suit in a court of law. Law has
defined a finite time period after the amount becomes due for payment within which a
legal suit can be filed. Once this date has passed the court will not entertain the suit.)
The person paying in the money has the primary right to say as to what account it shall be
appropriated. The creditor, if the debtor makes no appropriation, has the right to
appropriate. If neither exercises the right of appropriation and if there is nothing more
than a current account or a particular account kept by the creditor, and he credits money
to a particular account then the court concludes that the appropriation has been made,
and having been so made it is final and neither the creditor nor the debtor can seek to
vary that appropriation.
10.2. Rule in Claytons Case 1816
When there is a running or current account between the parties and provided that there
has been no appropriation by the debtor or the creditor, then the law appropriates the
payment and, according to law, it is the first item on the debit side that is discharged or
reduced by the first item on the credit side. The appropriation of successive payments in,
is deemed to have been made in accordance with the Rule in Claytons Case (Deveynes v.
Noble, 1816) viz, the money first paid in is deemed to have been the first drawn out, i.e.
the credits in order of entry in the account are deemed to have discharged debits in the
order in which they appear.
The effect of the Rule can be seen from the following example.
You know that if a guarantor dies, the estate of the dead person will be responsible for the
debt outstanding on the date of death, but the estate will not be responsible for the debts
incurred after the death of the guarantor.
Suppose a guarantor of an overdraft facility dies at the time when the person whose
account he has guaranteed owes the bank Rs. 10,000/-. If the account is continued
unbroken after the guarantors death, all future payments-in will go to reduce the debit
balance of Rs. 10,000/- existing at the time of the guarantors death and all payments out
will constitute a new debt not covered by the guarantee. Thus, if the customer pays into
the unbroken account Rs. 10,000/- after the guarantors death and draws out Rs. 5,000/-,
the effect of the Rule will be that the debt covered by the guarantee will be wiped out, and
the customer will owe the bank Rs. 5,000/- and this Rs, 5000/- debt will not be covered
by the deceaseds guarantee. If a banker or his customer wished to make an appropriation
otherwise than in accordance with this Rule, he should indicate his intention clearly and
unmistakably to the other party.
This principle is of importance in its effects on the rights of a banker in respect of an
overdraft in current account in circumstances such as:-

(a) When a customer dies

(b) When a partner of a Partnership dies
(c) The constitution of a partnership is changed, or
(d) When a guarantee is terminated by death or bankruptcy of the guarantor.
To prevent the operation of the rule (which, it should be noted, applies only to a current or
running account), the banker must stop/break the account i.e. discontinue all operations
thereon, and open a new account, if possible, getting the consent of the parties concerned
to the action taken.
Thus in Royal Bank of Scotland V. Christie, 1840, where a banker on the death of a partner
in a partnership firm, allowed the surviving partners to continue operations on the
account, it was held that the deceased partners estate was discharged as from the date
when the payments made in after the partners death the debt due from the firm at the
time of his death stands adjusted.
10.3. Bankers Duty of Secrecy.
A banker must not disclose the state of his customers account or any information
concerning the customer or his affairs, except upon reasonable and proper occasion
(Hardy V. Veasey, 1868) and a customer who can show that his credit or reputation has
suffered in consequence of an unjustifiable disclosure of his affairs by his banker may be
awarded damages for breach of contract.
The obligation to observe secrecy does not end even with the closing of the customers
account.
There is a leading case on the duty of secrecy on banks; Tournier vs. National Provincial
and Union Bank of England (1924). The plaintiff had taken a loan from the defendant bank
and on nonpayment of an installment, the branch manager during conversation with the
employer company of the plaintiff had disclosed the status of the account (overdrawn),
that promises of repayment were not being carried out and that the plaintiff was involved
in betting. Based on such information the employer company of the plaintiff did not renew
his employment contract. Tournier brought an action against the bank for damages for
slander and for breach of implied term of the contract between him and the bank that
the bank would not disclose to third parties the state of his account or any transaction
relating to it. The court held that the duty of banker as to secrecy is not absolute but
qualified and under the following circumstances the bank may divulge information about
the customer:
i. Where disclosure is under compulsion of law;
ii. Where there is a duty to public to disclose;
iii. Where the interest of bank requires and
iv. Where the disclosure is made by the express or implied consent of the customer.

In Pakistan we have specific laws governing secrecy. These are briefly given below:
1. BCO Section 82F. Power to call for information. The Banking Mohtasib shall have the
power for purposes of disposing a case, to require a bank to disclose to him any
information subject to certain conditions which include that the Banking Mohtasib shall
make every endeavour to ensure that banking confidentiality is maintained as required by
banking law and procedure and shall take no action which is violative thereof. The Banking
Mohtasib may call for any or all such documents that are relevant or pertinent for
purposes of deciding a complaint: Provided that he shall not be entitled to call for
unrelated documents or documents which may compromise the banks position in relation
to other customers, provided further that in cases where the Banking Mohtasib is
investigating case of corruption, he shall have greater latitude in relation to the inspection
of documents. However in the event of a bank refusing to furnish information, or copies of
relevant documents, the Banking Mohtasib shall not be authorized to compel the bank to
comply with his order but he may draw an adverse inference and comment on the same in
his findings.
2. BCO Section 93 - Exchange of information - Banking companies may exchange on
confidential basis amongst themselves, either directly or through the Pakistan Banking
Council, information about their respective clients.
3. Bankers Books Evidence Act 1891.. s. 6 Inspection of books by order of Court or Judge.
On the application of any party to a legal proceeding, the court or a judge may order that
such party be at liberty to inspect and take copies of any entries in a bankers book for any
of the purposes of such proceedings, or may order the bank to prepare and produce,
within a time to be specified in the order, certified copies of all such entries, accompanied
by a further certificate that no other entries are to be found in the books of the bank
relevant to the matters in issue in such proceeding and such further certificate shall be
dated and subscribed in the manner herein before directed in reference to certified copies
.
4. Supply of information to Income Tax Office. - Section 176 of Income Tax Ordinance
2001 the Commissioner Income Tax may, by notice in writing, require any person to
furnish to the Commissioner or an authorized officer any information relevant to any tax
under this Ordinance as specified in the notice. The Commissioner may impound
{meanings (of the police, courts of law, etc.) to take sth away from sb, so that they
cannot use it}
any accounts or documents produced as above and retain them for so long as may be
necessary for examination or for the purposes of prosecution.
5. Section 19 of the National Accountability Bureau Ordinance, 1999 (NAB) - All banks and
financial institutions are legally bound to disclose information to NAB upon request, during
an ongoing investigation. The Chairman NAB or any authorized officer may, during the
course of an inquiry in connection with contravention of the provision of this Ordinance
require any bank or financial institution, notwithstanding anything contained in any other
law for the time being in force, to provide any information relating to any person
whosoever, including copies of entries made in a banks or financial institutions books
such as ledgers, day books, cash books and all other books including record of information
and transactions saved in electronic or digital form, and the keepers of such records are

under an obligation to certify the copies in accordance with law.

10.4. Bankers Opinions.
The practice of bankers giving Confidential opinions to one another and to the so-called
trade protection agencies concerning the credit and standing of customers, is so well
established that, provided the information is honest and fair and has been given in the
usual way and in the ordinary course of business, it is unlikely that a customer could
successfully object to it. Unless a customer expressly instructs his banker not to give such
opinions, he must be regarded as having given his implied consent to this recognized
practice when he opens his account.
In Szek v. Lloyds Bank 1908, the giving of a Confidential Opinion by a banker to a
representative of a recognized trade protection society was not questioned.
A confidential opinion should be essentially of a general nature, embodying the bankers
considered and truthful opinion as to the general reputation and financial position of his
customer, but the bank should omit specific details which might infringe upon the
customers right to secrecy concerning his account.
It is a sound rule to answer as generally as possible and to say as little as possible.
Provided the banker gives a truthful opinion that is warranted by the information at his
disposal, he is quite safe, even though his opinion turns out to be misleading.
In no circumstances should the banker give actual figures relating to the account or
disclose the customers balance. But if he is asked whether he considers his customer
Good for trade credit of Rs. 50,000/- he is entitled to say Yes or No though, if he has
to give a negative opinion, he should make his answer as guarded as possible.
A banker who makes an unauthorized disclosure concerning his customers affairs is liable
to the customer for damages arising out of breach of contract, and these damages are
likely to be assessed on a heavier scale if the opinion contains unwarranted or unjustified
remarks detrimental to the credit of the customer.
If the banker makes an unauthorized disclosure, e.g. to another banker, and by mistake
says something untrue about his customer, it is doubtful whether he would be liable to his
customer on the grounds of libel, as has been sometime suggested, because, such a
communication in the ordinary course of business would probably be regarded as
privileged, so long as the banker had acted without malice. But a bank manager who
maliciously (malice= a feeling of hatred for sb that causes a desire to harm them) gives
an unfavorable opinion about a customer may render himself personally liable for libel (or
slander if the opinion is given orally) and it is probable that the bank also would be liable.
Summary of conditions under which the banker may divulge the information of an
Account.
i) UNDER COMPULSION OF LAW: When a banker is called upon by court of Law or by
Income Tax Commissioner he can disclose the actual state of affairs i.e. actual balance,
but for this a notice must be received from the competent authority. Bankers Books
Evidence Act, 1891 permits banks to produce copies of entries in banks books to a court

of law instead of actual books. This provision avoids attendance in court with actual books
of account.
ii) IN THE NATIONAL INTEREST: Bank is duly bound to inform the appropriate authorities
when its customer dealings are not in the national interest like using the account for
money laundering and financing illegal activities.
iii) COMMON COURTESY TO OTHER BANKS: It is a generally established practice among
bankers to give confidential opinion about their customers to fellow bankers when asked
to do so. It is not breach of secrecy, and a customer cannot object to it. In other words we
can say that it is an implied condition of the agreement entered into at the time of
opening account. The Banker giving opinion must not disclose the actual figure standing in
the account of his customer, he should only give opinion in code words such as good, fair,
satisfactory and unsatisfactory etc. which are meant for this purpose. The information
must be carefully worded and it must be mentioned in the confidential opinion that neither
the bank nor its officials are responsible for this information. It should be sent to bank
concerned in sealed envelope along with covering letter, but this confidential opinion
should not be signed by banker. A covering letter, enclosing the confidential opinion may
be signed by a bank officer.
iv) IN BANKS INTEREST: In case of stuck up advances or other disputes banks have to
resort to legal proceedings. In all such situations banks have to disclose all the detailed
information to the courts of law to get the legal remedy.
v) EXPRESSED OR IMPLIED CONSENT OF CUSTOMER; Customers authorise the banks to
give some information about their accounts to their lawyers, accountants and income tax
advisors etc. for doing the needful. When such information is sought bankers provide it to
the authorised persons.
vi) TRADE PROTECTION ASSOCIATIONS: Bankers some times give general information to
Trade Protection Associations such as Chamber of Commerce and Industry etc. which are
working for the promotion of commerce and industry of the country. Such information
must be general and actual position of customer must not be disclosed.
10.5. Bankers Right of set-Off.
If a customer has two or more accounts at the same bank, one or more in credit and the
other or others in debit, the banker, in the absence of any contrary agreement, or
earmarking, has the right, on giving notice to the customer, to set-off the credit balance
against the debit balance. In certain cases where combination of two accounts is
immediately necessary to ascertain the true (net) state of account between the banker
and his customer (e.g. on the death or bankruptcy of the customer; or on service of
garnishee order), the right of set-off may be exercised without notice.
In case of ordinary trade debts, the rule is that a creditor may, without notice to his
debtor, set off a credit balance due to the debtor against the debt due by him. But the
debt owing by a banker to his customer on current account is not the same as an ordinary
debt. It involves an obligation on the bankers part to honor cheques drawn by the
customer against the balance outstanding, and because the banker renders himself liable

if the customer suffers damages through the wrongful dishonor of any cheques so drawn.
This exercise of right of set off against balance in current account should, therefore, be
done only after due notice to the customer.
Hence, if the exercise of the right of set-off would involve the return of a customers
cheques drawn against a credit balance, the banker must not exercise the right without
giving reasonable notice to his customer. Moreover, the keeping for two accounts in the
name of the same customer involves an implied agreement on the part of the banker to
keep the accounts distinct, and, that being so, reasonable notice of his intention to
combine them must be given to the customer. In the case of Buckingham v. London &
Midland Bank, 1895, the bank had, without notice to the customer, combined a loan
account and a current account in the same name, and had dishonored cheques drawn
upon the latter. It was held that, owing to the banks failure to give notice, the customer
was entitled to damages.
Again on the happening of any event that determines (In law the word determine means
to end; to terminate) the bankers duty to pay a customers cheques, e.g. on the death
or bankruptcy of the customer, or on service of a garnishee order attaching the customers
credit balance, the banker is entitled without notice to set-off the balance on separate
accounts in order to ascertain the net amount owing to him.
Moreover, if the customer prejudices {to prejudice = to injure or harm, as by some
judgment or action} the bankers right in respect of a security, e.g. by giving a second
charge over the property, the banker can exercise his right of set-off without giving notice
to the customer.
The Following Is A Summary Of The Conditions Relating To The Application Of The Right Of
Set Off.
:
THE RIGHT OF SET OFF WILL APPLY;(i) When account is running: In this case notice from banker is a must, otherwise if a
cheque which is drawn properly is dishonoured; the banks position may become very
embarrassing.
(ii) When operation on account is stopped: As in the case of death, bankruptcy, the right
accrues automatically. When a deceased customer had two accounts, one is running in
debit and other in credit balance, the banker can adjust debit balance from an account
having credit balance before paying the amount to legal heirs of deceased.
ACCOUNTS WHICH ARE SUBJECT TO SET OFF:
1. Debit balance of trust account can be set off against credit balance of trustee's private
account as the trustee is personally liable. ,
2. If a customer has more than one account and garnishee order is served on the bank
attaching credit balance. In such case debit balance of an account can be transferred to an
account having credit balance.
3. A deposit account against overdraft accounts.
4. A Joint credit Account against individual overdraft account when all the joint account
holders individually guarantee the overdraft.

ACCOUNTS WHICH ARE NOT SUBJECT TO SET OFF:

1. Debit balance of a trustee or executor against credit balance of the trust.
2. Credit balance of the executor against the debit balance of the deceased.
3. The debit balance of the executor against credit balance of the deceased.
4. Partner's debit balance against partnership credit balance.
5. If O/D is granted to Local Authority in respect of one undertaking it cannot be adjusted
by appropriation from the Local Authority's other credit balance.
6. Where banker has knowledge of Trust fund.
7. Where there is an agreement that right of set off will not be exercised.

10.6. Bankers Right of Lien

A lien is the right of one person to retain property in his hands belonging to another, until
certain legal demands against the owner of the property by the person in possession are
satisfied. Thus a creditor who has in his possession goods of his debtor may have a lien
over the goods in respect of the money due by the debtor. Lien does not as a general rule
give the person exercising the lien any power to sell the goods or security retained by him.
Lien may be particular or general. A particular lien is so called because it confers a right to
retain the goods in connection with which a particular debt arose, whereas a general lien
confers a right to retain goods, not only in respect of the debt incurred with them, but also
in respect of the general balance due by the owner of goods to the person exercising the
right of lien. In other words, a particular lien applies only to one transaction, or certain
transactions, whereas a general lien extends to all transactions between the parties.
Certain persons who act as agents on behalf of others e.g. solicitors, bankers, stock
brokers, produce brokers and factors {factor = a person who carries on business
transactions for another; commission merchant; agent for the sale of goods entrusted to
his possession; an agent, as a banking or finance company, engaged in financing the
operations of certain companies, or in financing wholesale and retail sales, through the
purchase of accounts receivable}
have a right of general lien over all goods and securities of their clients or customers that
come into their hands as agents in the ordinary way of business.
No special arrangement or agreement is necessary to create the right of lien; it arises out
of the course of dealings between the parties. Nevertheless the right of lien may be
expressly conferred by agreement, or it may be definitely excluded either by arrangement
between parties or by the existence of a contract or of circumstances inconsistent with the
exercise of the right of lien.
Bankers lien is a general lien. However, it cannot be regarded as extending to every type
of security that comes into a bankers hands. The term security is intended to mean
such securities as promissory notes, bills of exchange, coupons, bonds of foreign
governments, etc. Nevertheless, in a number of cases bankers lien has been held to
cover non-negotiable securities.
In Re-Bowes 1886, the assumption seems to have been that bankers lien would attach to
a policy of insurance; in United Services Company, 1871, bankers lien was held to attach
to share certificate, and in Jeffreyes v. Agra and Mastermanss Bank, 1886, a form of

deposit receipt was held to be subject to bankers lien.

All securities that come to the bankers hands in the ordinary course of business as a
banker will be subject to his lien, provided there is no express or implied contract to the
contrary. But it is not always easy to decide when securities do come into the hands of the
banker in the ordinary course of business as a banker. He unquestionably has a lien on
bills of exchange, promissory notes, cheques, coupons and dividend warrants, handed to
him for collection, and probably also over a certificate for shares purchased by him on
behalf of a customer. But where articles are handed to a banker solely for safe custody,
the banker is acting merely as a bailee and as such has no lien over the articles.
A general lien cannot arise in respect of securities deposited for a special purpose only,
although circumstances may be such as to create a particular lien in respect of the
securities. Thus a banker cannot have a general lien in respect of property of customer
pledged as security for a particular debt. For example, if A has two overdrafts at a bank,
and has pledged securities for repayment of one overdraft specifically the bank can only
use the security to adjust that overdraft and only the surplus, if any, can be used to pay
off or reduce the other overdraft.
No lien arises in respect of property which comes to the bankers hands by mistake, or
which is placed in his hands to cover an advance that is not yet granted. Bankers right of
sale of securities placed under lien should be distinctly understood. Bankers lien has come
to be regarded as an implied pledge and a pledge gives the pledgee a right of sale. But a
bankers right of sale is generally considered as extending only to fully negotiable
securities such as, bearer bonds, coupons and share warrants payable to bearer. In
respect of such securities the right of sale may be exercised by the banker without the
consent of the customer if the latter cannot pay or refuses to pay what he owes, although
reasonable notice of the intention to sell should be given to the customer.
It is not however clear whether the bankers right of sale extends to securities which are
not fully negotiable. Most cases concerning lien have applied to negotiable instruments
and in the absence of legal decision on the matter, it seems advisable to regard a bankers
lien on non-negotiable securities as conferring only a right to retain them until his
demands have been satisfied. To release such property, the banker would probably have to
apply to the court.
The following is a summary of the conditions relating to a lien by bank.
SPECIAL LIEN:
A special or particular lien is right to retain goods in respect of which the debt was
incurred e.g. Railways Authorities have lien on goods which were entrusted to them for
transport pending payment of carriage.
GENERAL LIEN:
It is a right to retain not only for which a debt is incurred on particular goods but for the
general balance due. The bankers, solicitors and stock-holders have general lien. A
banker's lien is a special type of general lien. It includes a right of sale after reasonable
notice. A banker has a general lien on all securities deposited with him as banker by a
customer, unless there is contract to the contrary.

The following conditions must be present in order to exercise this right:

i That the property of customer must come into the hands of banker as a banker of
customer.
ii. There should not be any entrustment for special purpose.
iii. Banker should obtain possession lawfully.
iv. There should be no agreement inconsistent with the lien.
WHICH ARE SUBJECT TO LIEN:
1. Bills, cheques and documents for collection. (This is banks ordinary business).
2. Bearer bonds and coupons which are left for collection.
3. Coupon only where the bond is in safe-custody.
4. Promissory Note, Bill of Exchange, Treasury Bills, Coupon Bonds of foreign countries,
deposited with bank.
5. Securities left after adjustment.
6. Dividend, Interest warrant or stocks and debenture certificates issued in the name of
bank for the account of the customer.
7. Shares certificates purchased by the bank for customer.
WHICH ARE NOT SUBJECT TO LIEN:
1. When it is not the property of the customer. If the banker is unaware the lien not
affected.
2. Securities deposited for particular purpose.
3. Credit balances in respect of contingent liability of bills not yet due (Bill Purchased).
4. Bonds when customer himself cuts the coupons thereon for collection, presumption
being that bonds are left for safe custody.
5. Articles left for safe custody.
6. Securities given for sale.
7. Documents and valuables inadvertently left with the bank.
8. Balances not due.
9. Trust accounts.
__________________
Whenever you find yourself on the side of the majority, it is time to pause and reflect.
-Mark Twain

#14
Sunday, April 06, 2014

saad monga
Member

Join Date: May 2012

Location: Lahore
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Remittances

Dont wait for your ship to come in, swim out to it.
Be Proactive, rather than Reactive.
Remittances
Remittances can be defined as an act of transferring money to a distant place. Banks issue
remittances on behalf of customers after receiving the value of remittance and related
charges/Govt taxes, if any, are taken care of. Payment in cash is not only very risky but also
time consuming. Remittances as such play a vital role in day-to-day business. Remittances
payable within the country are called In Land Remittances. Remittances payable outside
the country and received from foreign countries are called Foreign Remittances.
In order to provide for an ownership structure in Pakistan for remittance facilitation, State
Bank of Pakistan, Ministry of Overseas Pakistanis and Ministry of Finance launched a joint
initiative called Pakistan Remittance Initiative. This initiative has been taken to achieve the
objective of facilitating, supporting, faster, cheaper, convenient and efficient flow of
remittances. This initiative shall take all necessary steps and actions to enhance the flow of
remittances.
Types of Inland Remittances
Pay order
Demand draft
Telegraphic transfer
Cashiers cheques / bankers cheques / Rupee travelers cheques
Online transfer
1. Pay order (PO)
Pay order is an order to pay a certain amount of money mentioned in the instrument on
demand to the payee. The bank is discharged by payment in due course. Pay order is
generally used for making local payments and the same is done by the branch that issues it.
This is an order instrument and transferred through negotiation. This is like a Banker's
Cheque but issued locally for local payments. This is different from a demand draft which is
payable for outstations and is generally used for outstation payments.
Issuance procedure
Request shall be received on standard application form or on customers written request.
In the case of a walk-in customer, the necessary KYC (know your customer) procedures
should be completed, such as address of the purchaser, telephone number(s) and a photo
copy of the CNIC for due diligence. Check that all required information on the application is
completed and that it is duly signed.
If the pay order is to be issued against cash, then the same needs to be collected along
with charges and a cash-received stamp is affixed onto the pay order application.
If the pay order is to be issued against a cheque, then it should be posted in the account.
Service charges, if not collected in cash, will have to be posted in the customers account
through a debit voucher. A transfer stamp needs to be affixed onto the voucher and the pay
order before issuing it, either manually or through the system.
Issuance of Pay order / Cashier cheque
Customer approaches the bank for issuance of PO/CC

Request will be received either on standard application form or customer written request In
the case of walk-in customer, required KYC should be completed, such as:
Address and telephone number(s) of the purchaser.
Photo copy of CNIC and its comparison with original for due diligence. Purpose of
remittance.
Dealing officer must check that all required information in the application form is completed
and it is signed
If PO/CC is to be issued against cash, then same shall be collected along with charges and
cash received stamp shall be affixed onto application form
If PO/CC is to be issued against cheque, it shall be posted in the account. If charges are not
included in the cheque separately, debit voucher shall be prepared and charges shall be
recovered
Cheques will be cancelled and transfer stamp must be affixed onto all related vouchers
Duplicate copy shall be handed Pay order/cashier cheque shall be prepared as per details in
the application, either manually or through system
It shall be signed by the maker and counter signed by the checker
over to the customer
Payment of Pay Order
When a pay order is presented for payment, the banker should check the
following:
Issued by the same branch and duly signed by authorized officers.
There is no alteration on the instrument.
If presented in clearing, special crossing and clearing stamp is affixed and endorsement is
given on back of the instrument.
Pay order date should not be more than six months old, otherwise it will require
revalidation.
After checking all the above points the pay order should be posted in
the register / system and should be marked as paid.
Duplicate issuance
The purchaser of the pay order should submit an application for loss of the pay order and
issuance of a duplicate.
Signature of the purchaser should be verified from the original application form.
Prescribed indemnity on required value of stamp paper should be obtained; signed by the
purchaser and duly witnessed.
Approval from competent authorities of the bank for issuance should be obtained.
Duplicate pay order should be issued and new numbers of the duplicate pay order should
be written on PO application form.
Cancellation
Application from the purchaser, along with original instrument, requesting cancellation of
pay order is required.
The banker should verify the signature of the purchaser from the pay order application
form.
If pay order was issued other than in personal name, clearance / discharge from

beneficiary must be obtained.(Note by Ashraf. This precaution has resulted from forgeries
and frauds observed in Govt Departments. A person x has to obtain a license from a govt.
deptt. The department demands that x submits a pay order as fee for Rs 100,000/- payable
to the govt deptt. x pays the amount to a bank, obtains a payorder payable to govt. deptt.,
delivers the payorder to the govt department. The govt clerk shows pay order received to
the officer who signs the licence. The clerk delivers the licence to x. Subsequently the clerk
after taking a bribe from x delivers the pay order to x. x returns the pay order to the bank
and takes refund. In order to control such frauds the govt departments have asked the
banks that they should not refund the pay orders made out in favour of the govt
departments unless a responsible govt officer does not authorize refund of such a pay order
in writing. Surprisingly the government is unable to discipline its employees and is throwing
the burden of preventing frauds by their staff on the banks.
Pay order should be marked as cancelled and the signature portion of the pay order should
be torn out.
Cancellation should be marked in the PO register / system.
Proceeds of the pay order should be credited to the customers account after recovering
cancellation charges.
If pay order was issued for walk-in customer, another pay order in the name of the
purchaser should be issued instead of refunding the amount in cash.

2. Demand Draft (DD)

A demand draft is a value received instrument issued by the bank. It is issued in order to
pay money drawn by one branch of a bank upon another branch of the same bank or its
correspondent. Since this is an order instrument, the drawee bank is discharged by payment
in due course and the instrument is transferred through negotiation. DDs are generally
drawn on other cities with an objective of making payments there.
Issuance
Request should be received on standard application form or on customer's written
request / instruction.
In the case of a walk-in customer, the necessary KYC (know your customer) procedures
should be completed, such as address of the purchaser, telephone number(s) and a photo
copy of the CNIC for due diligence.
Check that all required information on the application is completed and that it is duly
signed.
If DD is to be issued against cash, then the same needs to be collected along with charges
and a cash-received stamp is affixed onto the pay order application.
If DD is to be issued against a cheque, then it should be posted in the account. Service
charges, if not collected in cash, will have to be posted in the customer's account through a
debit voucher. A transfer stamp needs to be affixed onto the voucher and the DD before
issuing it, either manually or through the system.
DDs should be prepared according to the draft application form, signed by two authorized
officers and should be delivered to the purchaser.
Relative credit advice should be prepared and dispatched to the drawee's branch.
Amount on the draft is protected from risk of alteration by use of protectograph
machine{I.e. a machine by which the figures showing amounts are EMBOSSED on the draft
or mail transfer so that it cannot be altered}
Payment
When a draft is presented for payment, the banker should check the following: Draft is drawn on the branch where it is presented for payment.

 Signed by authorized officers with attorney number.

Signature should be verified from power of attorney book.
There is no alteration on the instrument and it is in order in all respects. In the case of any
alteration, the same should be duly authenticated under joint signatures.
If presented in clearing, a special crossing and clearing stamp is affixed and endorsement
is given on the back of the instrument.
DD date should not be more than six months old, otherwise it will require re-validation.
After checking all the above points, the DD should be posted in the register / system and
should be marked as paid.
Duplicate issuance
The purchaser of the draft should submit application for loss of the demand draft and
issuance of duplicate.
Signature of the purchaser should be verified from the original application form.
Drawee branch should be informed about the loss of the draft, with request to mark
caution for its payment.
On receipt of confirmation that draft is outstanding, prescribed indemnity on required
value of stamp paper should be obtained, signed by the purchaser and duly witnessed.
Duplicate demand draft should be issued with a note "duplicate draft is issued in lieu of
original draft no dated ".
New number of the duplicate draft should be written on draft application form.
If purchaser wants his money back, drawee branch should be asked to remit back money
by debiting their DD payable account and by issuing a credit advice.
On receipt of funds, the same should be credited to customer's account.
Cancellation
Application from purchaser along with original instrument requesting cancellation of the
demand draft.
The banker should verify signature of the purchaser from the draft application form.
If demand draft was issued in other than a personal name, clearance/discharge from
beneficiary must be obtained.
Draft should be marked as cancelled and signature portion of draft should be torn out.
Cancellation should be marked in the DD issue register / system.
Proceeds of the draft should be paid by debiting suspense account and crediting
customers account(s) respectively.
On receipt of credit advice, the suspense account created in lieu of the cancelled DD
should be reversed within a maximum of 30 days.
3. Telegraphic transfer (TT)
Telegraphic transfer is a transfer of money by cable or through telegraph from one branch of
a bank to another branch of the same bank or its correspondent of a named beneficiary. TT
message is prepared under test number. The authenticity of the TT message should be
confirmed by the drawee branch by verifying a secret test number. When the test is
confirmed, the proceeds of the TT are credited in the account of the beneficiary.
Issuance
Customer should apply for remittance of funds through TT on standard application form or
on instructions letter duly signed.
If remittance is requested against deposit of cash, it should be counted and a received
cash stamp should be affixed.
If cheques are tendered along with remittance application they should be posted in the
customers account and vouchers for the charges should also be prepared and posted.

 The details of the TT should be entered in the TT issue register.

TT message should be prepared and test should be applied.
The message should be transmitted by a cable/telegraph/telex.
Delivery of message over phone should be avoided.
Payment
On receipt of message at the DRAWEE branch, test should be verified on the message.
If test is not agreed, message should be sent to the issuing branch for revision of test.
If test is agreed, Test Agreed Stamp should be affixed on the message.
Vouchers shall be prepared by debiting head office account of issuing branch and crediting
bills payable TT payable account.
If beneficiarys account is in the same branch, bills payable TT payable shall be debited
and customers account will be credited.
If beneficiarys account is in another branch, TT receipt should be issued in the name of
the beneficiary and paid in normal clearing.

4. Cashier cheque / banker's cheque

A cashier cheque is a kind of a draft drawn by a branch on its Head Office or Main Office.
Cashier cheques are a guaranteed form of payment. This is an order instrument that can be
paid when presented at the counter, but generally issued as a crossed cheque. This is a very
customer-friendly instrument as it serves the purpose of both demand draft and pay order.
A pay order is issued and paid by the same branch; a DD is paid by the branch on which it is
drawn, whereas a cashier cheque can be paid at any branch of the bank. Any customer,
including walk-in customers, can order a cashiers cheque from any bank simply by handing
them the money over the counter, but if he/she has an account with the bank it is
sometimes cheaper.
In western countries such as the UK, cashier cheques are issued with special characteristics,
such as:
Generally issued with enhanced security features, including special bond paper.
These are designed to decrease the vulnerability to items being counterfeited.
The cheque is generally signed by one or two bank employees; however, some banks issue
cashiers cheqes featuring a signature of the banks or other senior official.
A cashier cheque includes the name of the issuing branch and its code, instrument number,
date, drawn on main office and amount in words and figures. It can be issued for any
amount and requires the signatures of two authorized officers.
Issuance
Application for issuance of cashier cheques should be submitted on a standard form or can
be issued against a customers written instructions.
Customers name, address and telephone number should be obtained on the application
form.
If purchaser is a walk-in customer, copy of CNIC should be obtained along with original for
attestation. This is SBPs minimum requirement for walk-in customers.
If a cashier cheque has to be issued against cash, then cash should be counted and
Received Cash Stamp should be affixed onto the application.
If a cheque is tendered along with an application, it should be posted in the customer's
account and a transfer stamp should be affixed on both the cheque and the application
form.
A cashier cheque of the required amount should be issued under full signature and
attorney number.
Post the details of the cashier cheque in the system; as such, details of the instrument are

updated at Head Office record online and on real time basis.

After posting in the system, the instrument may be delivered to the customer.
Dispatch related credit advice to the cashier cheque cell.
Encashment
Cashier cheque can be paid in cash, transfer or clearing.
Before encashment, dealing officer should verify signatures on the instrument.
It is advisable that before encashment, a list of lost instruments should be referred to.
For walk-in customers, a copy of CNIC should be obtained.
In the case of a lost instrument being presented for payment, it should be marked as
Reported Lost and returned to the presenter.
The dealing officer, after satisfying himself about the authenticity of the instrument,
should cancel it in the same manner as other instruments are cancelled and post the same
in the system. The holder should be paid in the mode it was presented for payment (cash,
transfer, clearing) and a stamp shall be affixed. (Explain in what meanings the word cancel
is used in practical banking)
5. Rupee Traveler's Cheques (TC)
Cheques issued in Pak rupees by the banks to their customers who wish to travel within the
country are called Rupee Traveler's Cheques. Each cheque has a space for the customer to
sign immediately on receipt of the cheque and another space to sign in the presence of the
paying banker at the time of encashment.
Issuance
Application of issuance of rupee traveler's cheque should be submitted only on the
standard form.
Customer's name, address and telephone number should be obtained on the application
form.
If purchaser is a walk-in customer, copy of CNIC should be obtained along with original for
attestation.
If TCs have to be issued against cash, then the same should be counted and a "Received
Cash Stamp" should be affixed onto the application.
If a cheque is tendered along with the application, it should be posted in the customer's
account and a transfer stamp should be affixed on both cheque and application form.
TCs of the required denomination should be issued under full signature and attorney
number, in the name of the beneficiary, the details of whom should be written on the
application form. TCs should be issued after obtaining first the signature on each TC and on
the purchase receipt.
Related credit advice should be dispatched to the TC's cell.
Encashment
TCs can be presented for payment either in cash, transfer or in clearing.
Authenticity of the TC should be checked by verification of the signature on the TC and
signature of the purchaser on the purchaser receipt.
Customer should be asked to put his/her signature in the second space.
For walk-in customers, a copy of CNIC should be obtained.
After verification of signature and CNIC, payment can be made.
If presented in clearing, crossing, clearing, discharge on the reverse should be verified and
if everything is in order, cheque should be marked as cancelled, and related credit advice
should be issued.
6. Online Transfer
Online transfer means transfer of funds electronically through a computer system. In a
cash-free world all transactions can be done electronically. To receive money the customer

should have a bank account in the country, but to transfer money, a walk-in customer can
also make use of the online fund transfer facility. This is a highly effective and secure way to
transfer money.
Through an online system, branches are linked to computer centers and customer's account
records are held and processed centrally. Details of counter transactions are transmitted for
action from branch terminals online and on a real time basis. This online service can be used
for inquiry purposes and for actual banking transactions. The funds are generally available
to the beneficiary within minutes and there is no receiver fee. The processing of online funds
transfer should be in line with the provisions given in the Payment System and Electronic
Funds Transfer Act 2007.
Procedure for online transfer
Customers can apply for online transfer either through a standard application form or by
using deposit slips. These slips are designed in a manner so that a depositor can write the
name of a local branch where the cash is deposited and name of the remote branch where
funds have to be credited.
Before accepting an online transfer it should be checked if the remote branch is
computerized and online.
If cash is deposited, a 'received cash' stamp should be affixed onto the application form
after counting the cash and recovering charges.
The customer's cheque and written instructions can also be accepted for online transfer.
In the case of written instructions, vouchers for debit of the customer's account should be
prepared for remittance amount plus charges.
If the remitter is a walk-in customer, a copy of CNIC should be obtained along with the
original for attestation.
After all cheques are cleared, access to the remote branch should be made and vouchers
should be posted. After posting and supervision, fund transfer through the online system
should be completed on a real time basis.
Precautions
In recent times, fraudulent activities in processing of online cash payment of cheques have
increased. Fraudsters use chemicals to change the words and figures of the cheque,
converting small amounts into large amounts. With a view to preventing fraud and payment
of tampered cheques, the following additional control steps may be taken for payment of
online cash cheques over the counter:
Collection of photo copy of CNIC of bearer of cheque and its verification from original.
All cheques presented for online cash payments should be checked under an ultra violet
lamp which can detect whether cheques have been tampered with. These lamps are not
costly and can be purchased from local markets.
For online payment of cheques of large amounts, a call back process must be followed by
the payee branch. This can be done by referring the details of the cheque to the drawer
branch for a call back verification of the cheque with the account holder.
ii. Foreign Remittances
(explain similar modes used for foreign remittances as for inland remittances.
The inward remittances increase our foreign exchange reserves and thus encouraged.
Outward remittances use up valuable foreign exchange so restrictions placed on outward
remittances against Pak rupees.)
It is important for the government to know statistics about earning and spending foreign
exchange so detailed procedures for reporting foreign remittances have been put in place.

12.3. Outward Foreign remittances;

A remittance abroad involves foreign exchange, the grant of which is subject to the approval
of the Foreign Exchange Department of State Bank of Pakistan. For certain specified
purposes and for restricted amounts, authorized dealers have been delegated authority to
sanction remittances on behalf of State Bank. Except for cases falling under this category, in
all other cases prior approval of the Foreign Exchange Department, SBP, on the appropriate
form, must be obtained before effecting any remittance.
(According to the current exchange rules, if a person maintains a foreign currency account
in a bank the amount debited to the foreign currency account can freely be remitted inside
or outside Pakistan in foreign currency without approval from State Bank of Pakistan)
The usual type of remittances and the relevant chapter of the Exchange Manual pertaining
to the regulations regarding remittances abroad against payment of Pakistan Rupees are as
follows:
i. Travel Allocation Chapter XVIII: - Example remittance or issue of currency notes or
travelers cheques to travelers for holiday or business trip abroad.
ii. Private Remittances Chapter XVII: - Example remittances for purposes like appearing in
foreign examinations, education, etc. Some remittances are approved by commercial banks
themselves when the applicants meet the criteria laid down by SBP in the Exchange Manual.
For others application is made to SBP.
To facilitate payments abroad, Pakistani banks maintain foreign currency accounts with
banks in the principal financial centers of the world which are called Nostro accounts. Before
deciding on which correspondent a drawing is to be made a reference should be made to the
list of correspondent banks and their agency arrangements. In case a bank does not
maintain an account in the country on which the drawing is being made, reimbursement to
the drawee bank should be provided as laid down in the agency arrangements. (Explain
agency arrangements)
Remittances in currencies not quoted by the banks in Pakistan;
Remittances should normally be effected in currencies the rates for which are quoted by
banks. Remittances may also be made in other currencies in special cases provided a
provisional deposit sufficient to cover the expected cost is obtained and held in sundry
creditors account.
When a remittance is received in Foreign Currency for payment in Pak Rupees the Bank
Purchases (buys) foreign currency and pays out Pak Rupees.
When a remittance is SENT in foreign currency against payment in Rupees the bank SELLS
foreign currency and charges (debits) the customer in Pak Rupees.
SWIFT
(Society for Worldwide Interbank Financial Telecommunication)
Compared to dispatch of draft and Mail Transfer, and even TT, the SWIFT is a very secure
system. The movement of funds is instantaneous. SWIFT was established in 1973 by 239
banks in 15 countries as a non-profit bank-owned cooperative society. The SWIFT
transactions relate to remittances, bank transfer and even documentary credits. By using

standard format for each type of transaction the transactions are easy to reconcile. The
system offers efficiency, speed, accuracy and security and therefore almost all foreign
remittances are made by means of SWIFT, now a days.
The SWIFT is a computerized payments system. In the sending bank branch the message is
input by one authorized officer and it is approved for dispatch by two different authorized
officers, all three using their own passwords. The computer system converts the message
into codes so that it cannot be stolen during transmission. At the destination bank branch
authorized officers can retrieve the message through their passwords and take action on the
payment instructions. It is a highly secure and instantaneous payments system and is used
the World over.
12.6. Inward Foreign Remittances
The term inward remittance means purchase of foreign currencies in whatever form and
including M.T., T.T., draft, travelers cheques, drafts under travelers letters of credit, bills of
exchange, currency notes and coins and debit to foreign banks non-resident Rupee
accounts in Pakistani Banks. A Rupee account opened by Standard Chartered London in the
books of Standard Chartered Lahore is called Vostro account.
There is no restriction on receipt of remittances from abroad either in foreign currency or by
debit to non-resident Rupee accounts of banks overseas branches or correspondents. Banks
may freely purchase T.Ts, M.Ts, drafts, bills etc., expressed and payable in foreign currencies
or drawn in Rupees on banks non-resident Rupee accounts.
(AS WE HAVE SEEN EARLIER THERE ARE RESTRICTIONS ON REMITTANCES TO BE SENT
ABROAD AND THE EXCHANGE MANUAL ISSUED BY STATE BANK OF PAKISTAN LAYS DOWN
THE PARAMETERS IN THIS REGARD. HOWEVER REMITTANCES FROM ABROAD INTO
PAKISTAN ARE ALLOWED WITHOUT RESTRICTIONS AS THE COUNTRY GETS FOREIGN
EXCHANGE THROUGH INWARD REMITTANCES)
12.7. Outward Foreign Remittances
The term outward remittance means sale of foreign exchange in any form and includes
T.Ts, M.Ts, drafts, travelers cheques, travelers letters of credit, foreign currency notes and
coins etc and credit to non-resident Rupee account. Foreign outward remittances are subject
to foreign exchange regulations of State Bank of Pakistan.
12.8. Mode of Remittances
The Exchange Control Manual lays down that where remittances can be effected by MT or TT
the issuance of draft should be avoided. However, where this course of action will cause
inconvenience or hardship to the remitter, demand draft crossed Payees A/c only may be
issued. Advice of draft issued should be dispatched promptly. Delay in this regard may put
the beneficiary to considerable inconvenience. Generally, the correspondents also hold
instructions that in case of payment of a draft of large amount, a cable should be sent to the
issuing branch if the draft advice is still unreceived.
12.9. Cancellation of foreign Remittances
12.9.1. Cancellation of Outward Remittances
In the event of any outward remittance which has already been reported to the State Bank

being subsequently cancelled, either in full or in part, Authorised Dealers must report the
cancellation of the outward remittance as an inward remittance. The return in which the
reversal of the transaction is reported to SBP should be supported by a letter giving the
following particulars:
(a) The date of the return in which the outward remittance was reported.
(b) The name and address of the applicant.
(c) The amount of the remittance as effected originally.
(d) The amount cancelled.
(e) Reasons for cancellation.
12.9.2. Cancellation of Inward Remittances
In the event of any inward remittance which has already been reported to the State Bank,
being subsequently cancelled either in full or in part, because of non-availability of the
beneficiary, Authorized Dealers must report the cancellation of the inward remittance as an
outward remittance on form M. The return in which the reversal of the transaction is
reported to SBP should be supported by a letter giving the following particulars:
(a) The date of the return in which the inward remittance was reported.
(b) The name and address of the beneficiary.
(c) The amount of the purchase as effected originally.
(d) The amount cancelled.
(e) Reasons for cancellation.
Reporting of Incoming and Outgoing Foreign Remittances
to State Bank of Pakistan
Now we discuss the Purpose and System of Reporting of Incoming and Outgoing Foreign
Currency Remittances to and from the people, government and businesses in Pakistan to
the Statistics Department in State Bank of Pakistan.
In order to decide the Import Export policy, determine budget allocations to various sectors
of the economy, make decisions regarding monetary policy, fiscal policy, trade policy,
customs duties, etc., the State Bank of Pakistan and the Government of Pakistan specially
the Ministry of Finance and Ministry of Commerce need STATISTICS of values and volumes
of Visible and Invisible Imports and Exports of Pakistan.
To gather such statistics the SBP has laid down a detailed system for strict compliance by
virtue of which, whenever any commercial bank receives foreign currency for any purpose
or sends out foreign currency for any purpose the bank prepares details of each transaction
specially giving the PURPOSE OF INWARD OR OUTWARD REMITTANCE, VALUE AND NATURE
OF GOODS IMPORTED OR EXPORTED. Depending upon the amount the bank also gives the
name and address of the customer involved.
Following Forms are used for Reporting inward and outward foreign currency remittances:Supporting Form Purpose
E Form All remittances coming into Pakistan showing inward receipt of proceeds of export of
goods from Pakistan are reported on E form.

R Form All incoming remittances showing amounts received for invisible exports,
Remittances from Pakistani expatriates, etc.
I Form All remittances going out of Pakistan being payments for goods imported into the
country.
M Form All remittances going out of Pakistan for invisible imports, travel, education, holiday,
etc.
Such comprehensive statistics has to be sent by each bank to the state bank of Pakistan on
the 3rd day of each month relating to the full previous month.
Heavy penalties are levied if the bank delays in conveying this information.
This statistics is important for the Financial Managers of the country.
__________________
Whenever you find yourself on the side of the majority, it is time to pause and reflect.
-Mark Twain

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