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Saturday,April05,2014

saadmonga
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BankingNotesbyMuhammadAshrafAli,MemberSeniorVisitingFaculty,GCUniversity,

"Autographyourworkwithquality.
OriginandEvolutionofBanking
ExplanationofWhatisaBank?
Ifwethinkofthepeopleinaneconomyfromthepointofviewofwhethertheyhaveordonothave
spare,extramoneyorwhethertheypossessordonotpossesspotentiallylucrativeideasoftheirownto
gainfullyemploytheextramoney,wefindthattheeconomyiscomposedofthefollowingfourtypesof
people.
1.Peoplewithnoextramoneyandnoideas.
2.Peoplewithextramoneybutnoideas(ornotimetoimplementanyideas).
3.Peoplewithideasbutnotenoughmoney.
4.Peoplewithbothideasandextramoney.
Thefirsttypedoesnotplayamajorrole,theyhavejustenoughmoneytocovertheirneeds,andhaveno
ideas.
Peopleofthefourthtypewhohaveextramoney,andhaveideasaswell.Theyaretheselfsufficient
entrepreneurswhousetheirownmoneyintheirownbusinessventures.
Wewillfocusourattentionontype2andtype3.
Type2withextramoneybutnoideasareusuallyhouseholdsorinvestorsorretiredpeople.Theyarethe
surplusentities.
Type3aremostlycompanieswhohavenomoneybuttheyhaveideasandtimetoutilizemoneyin
productiveenterprisesthatcangenerateincomesandcashflows.Thesearedeficitentities.
Banksareactuallytheintermediarieswhocollectandgathersmallindividualamountsofmoneyfroma
largenumberofhouseholds(Type2),poolthismoneyandlendthesameinlargechunkstocompanies
(Type3)whousethemoneyincashflowgeneratingproductionorinfrastructureprojects.
Companiespaypartofthecashflowstobanksasinterestorprofit.Bankskeepsometocovertheir

expensesandremunerationfortheirownservicesandthebalanceispaidtohouseholdsas
return/interestascompensationforpartingwiththemoney.

Banksthusassistinthesettingupoflargeprojectsinindustryandinfrastructureforeconomic
developmentofthecountriesandreductionofpovertybypoolingthesmall,idlesavingsofhouseholds
foruseinindustrialenterprises.
Theaboveisbywayofunderstandingtheimportantroleofthebanksincreatingandsupporting
employmentgeneratingproductiveenterprises.TheformaldefinitionsofBANKwillfollowlaterinthis
treatise.
Letsnowlookatthefinancialmarketswhichassistinthechannelizationofidleresourcesintoproductive
avenues.

BANKINGANDFINANCIALSERVICES
DIRECTANDINDIRECTINVESTMENTSINFINANCIALMARKETS

FirstofallwestudythefunctionoftheBROKERSintheMARKETmechanism
DIRECTINVESTMENTINFINANCIALMARKETSTHROUGHBROKERS

DIRECTINVESTMENTINFINANCIALMARKETS
FUNDSFLOWS
HOUSEHOLDS
BUSINESSESCASH(FINANCIALCASHBUSINESSES

CORPORATIONSMARKETS)CORPORATIONS

GOVERNMENT
BROKERSGOVERNMENT
(NetSavers)SecuritiesSecurities(NetBorrowers)

SurplusUnitsStocks/SharesStocks/SharesDeficitUnits
BondsBonds

1)BrokersearnBROKERAGECOMMISSIONforfacilitatingdirectinvestmentbyNetSavers/SurplusUnits.

BrokersreceivecashfromNetSaversandONPAYtonetborrowers/DeficitUnits.Theyreceiveshare
scrips/bondsandONPASStosavers/investors/surplusunits.
2)Investorsi.e.Savers/SurplusUnitsbeartheinvestment/defaultriskbutalsobenefitfrompossiblehigh
profits/gains.
3)Brokersdonotassume/bearanyinvestment/defaultrisksnorarebenefittedfromprofits/gainson
investments.

DisadvantagesofDirectInvestmenttoSavers

RiskoffinancialLoss
RiskofLiquidityLoss

NextwelookatthefunctionofBANKSintheMARKETsystem
INDIRECTINVESTMENTINFINANCIALMARKETSTHROUGH

FINANCIALINTERMEDIARIESBANKSANDOTHERFINANCIALINSTITUTIONS

INDIRECTINVESTMENTINFINANCIALMARKETS

THROUGHFINANCIALINTERMEDIATION

FUNDSFLOWS
HOUSEHOLDSHOUSEHOLDS
BUSINESSES

BUSINESSESCASH(FINANCIALCASHLOANCORPORATIONS

CORPORATIONSINTERMEDIATION)GOVERNMENT

GOVERNMENT
(NetSavers)(NetBorrowers)

CurrentAccountsBANKS&
SURPLUSSavingsAccountsFINANCIALLOANDEFICIT
UNITSFixedDepositsINSTITUTIONSDOCUMENTATION

SECURITIESUNITS

AdvantagesofIntermediation
1)Banks(FinancialIntermediaries)acceptcashfromsavers/surplusunits&givebank

accountsallowingsaversliquidityasperdeposittermsirrespectiveofpossibility

ofdefault.
2)FinancialIntermediariespooltheaccounts&depositsandgiveloanstodeficitentitiesandreceive
SecurityDocumentationsandCollateral.
3)Riskofdefaultininvestmentindeficitentitiesisassumedbythefinancialintermediary.

4)Banksgainfromfundbasedinterestincomeandnonfundbasedbusiness
likeimports/exportsfromtheborrowers/deficitunits.

5)Thesaversarebenefittedastheydonotfaceinvestment/defaultriskorliquidityrisk.
DisadvantagesofIntermediation

Inintermediationthesaversgetlesserreturnascomparedwithdirectinvestmentsincetheintermediary
organizationdoesnotpassonthefullgaintothesaver.

AlsotheDeficitunits,theborrowers,havetopayahigherpricefortheuseoffundsbecausetheyhaveto
payforboththecostsoftheintermediarybankandthesaverforpartingwiththemoney.

INTRODUCTIONtoBanking
Banking,initsmostprimevalpractice,canbetracedbackto2000BCinBabyloniaamoreevolvedand
relativelymodernformofbankingdatesbacktoearly14thcenturyinItaly.

ThetermbankisderivedfromtheItalianword"banca".TheJewsofLombardy(aprovinceinItaly)
usedtotransactmoneysittingonbenchesplacedinmarketplaces.Thosebencheswerecalled'banca
meaningthemoneychangersplace.Bancalaterconvenedintotheword"bank".Thefirstmodem
bank,BankofSt.George,wasfoundedinItalyin1406.Inthebeginningbankingoperationswere
restrictedtothegivingandtakingofmoney,whereastodaytheyareengagedinperformingmanyother
financialactivitieslikemanagementofinvestmentfunds,creditoperationsandinsuranceactivities.

AbankisdefinedasaninstitutionwhichhasbeenlicensedbytheCentralBankofitscountrytoaccept
depositsrepayableondemandorotherwise,andwithdrawalbycheques,draft,orderorotherwise.This
definitionalsoincludesspecializedbankssuchasagriculturalbanks,investmentbanks,SMEbanks,
microfinancebanksandPostOfficeSavingBanks,etc.Abankcanalsobedefinedasaninstitution
whoseprimaryactivityistoactasapaymentagentforcustomerstoborrowandlend".

AccordingtotheBankingCompaniesOrdinance1962SubSection(c):"BankingCompanymeansany
companythattransactsthebusinessofbankinginPakistanandincludestheirbranchesandsubsidiaries
functioningoutsidePakistanofbankingcompaniesincorporatedinPakistaninsertedbyFinanceAct
2007)".Section13oftheBankingCompaniesOrdinancedealswiththeminimumpaidupcapitaland
reserverequirementforthecommencementofbankingbusinessinPakistan.Theauthoritytoalterthis
requirementlieswiththeStateBankofPakistan.
Legal/StatutorydefinitionsofBankinginIndiaandPakistan:

IndiaTheBankingRegulationsAct1949(Section5b)definesbankingas:

Bankingmeanstheacceptingforthepurposeoflendingorinvestments,ofdepositsofmoneyfromthe
public,repayableondemandorotherwiseandwithdrawablebycheque,draft,orderorotherwise.

PakistanSection5(b)oftheBankingCompaniesOrdinance1962definesbankingas:

Accepting,forthepurposeoflendingorinvestmentofdepositsofmoneyfromthepublic,repayableon
demandorotherwiseandwithdrawablebycheque,draft,orderorotherwise.

Primarilytherearetwomainfunctionsofabankacceptingmoneyfromthedepositorsandofferingthat
moneyintheformofloanstothecreditors.Depositorslendmoneytothebankandarepaidforit
similarlythebanklendsmoneytothecreditorsandispaidforit.Theearningsofabankandits
shareholdersarethusthedifferencebetweenthesetwocoststhecostofdepositsandthecostof
credits.Abanksprimaryaimistokeepitsdepositorsandlenderssatisfiedbygivingbothpartiesthe
maximumbenefitsintermsofattractiveprofitsandqualityservices.

Atthetimeofpartitiontherewereonlyalimitednumberofcommercialbankbranchespresentin
Pakistanandbankingfacilitieswereavailableonlyinbigcities.Withthepassageoftime,thenumberof
banksandtheirbrancheshasincreasedsubstantially.Atpresenttherearemorethan10,500branchesof
commercialbanksprovidingbankingservicestomorethan30millioncustomers.Bankshaveplayeda
vitalroleinthedevelopmentofPakistansagriculturalandindustrialsector.

Everycountryhasitsownsetoflawsandregulationsforprotectionofpublicinterestandtoensure
smoothandlawfulrunningofitsbanks.Similarly,inordertocommencebankingoperationsinPakistan,
eitherdomesticallyorinternationally,abankhastoobtainabankinglicensefromtheregulator.This

licenseisissueduponensuringsuccessfuladherenceandfulfilmentofrelevantlawsandregulationsas
prescribedbytheStateBankofPakistan.TheStateBankofPakistanistheofficialregulatorofbanksin
PakistanaspertheBankingOrdinance1962.

Afterobtainingalicensetooperate,aseparatelicenseisrequiredtoopeneverynewbranchunder
Section28ofBankingCompaniesOrdinance1962.MicrofinancebanksarelicensedunderMicroFinance
InstitutionsOrdinance2001.
TheStateBankofPakistanprovidesguidanceandsupporttothebankingsectorfordevelopingand
maintaininggoodbusinesspractices.Inordertoensureavailabilityofbankingfacilitiestoallcornersof
thecountry,SBPhasinstructedbankstoopenatleast20%branchesinrural/underservedareas.New
optionsforopeningsubbranches,salesandservicecentersandmobilebankingunitshavealsobeen
introduced.Banksarebeingencouragedtoenhancetheirscopetowardsbranchlessbankingand
collaboratebysigningServiceLevelAgreements(SLA)withlargecompaniestoextendbankingservices
tothepublicatnonbankinglocations.Thenumberofbranchlessbankingaccountshasalreadyreached
2.4millionplusandSBPiskeentoincreasethenumberofpeoplewhohaveabankaccount.

EvolutionOfBankingIndustryInPakistan.

Beforepartition,intheundividedIndia,thecentralbankunderwhichbanksoperatedwastheReserve
BankofIndiaandtheReserveBankofIndiacontinuedtofunctionastheCentralBankofthebanks
operatinginthenewlyformedPakistan.

ThethengovernmentofthenewlyestablishedstateofPakistanrealizedtheneedtohaveacentral
regulatoryauthorityoftheirowntoensuresmoothoperationsofalltheexistingandfuturebanks.
Despitetheshortageofexperiencedstaffandotherresources,QuaideAzamMuhammadAliJinnah
inauguratedTheStateBankofPakistan(SBP)on1stofJuly1948.

InOctober1948PakistaninoteswereissuedtoreplaceReserveBankofIndianotes.HabibBankLtdwas
alreadyfunctioningfromprepartitiondays.TheNationalBankofPakistancameintobeingin1949asa
scheduledbankandtoserveasanagentofSBP.Later,IndustrialDevelopmentBankofPakistanand
AgricultureDevelopmentBankofPakistanwereformedtosupporttheindustrialandagriculturalsector.
Withthedevelopmentofagriculture,tradeandindustry,thefunctionsofthestatebankbecamewider.To
progressthissituation,theStateBankofPakistanAct1956waspromulgated.Duringthisperiodtwonew
banks,MuslimCommercialBank(MCB)andPakistanIndustrialCreditandInvestmentCorporation
(PICIC),wereformed.Thiswastheperiodofexpansioninthebankingarena.Inlate1959UnitedBank
Limited(UBL)wasestablished,whileCommerceBanklimitedandStandardBankLimitedfollowedsoon
after.

Nationalization
On1stofJanuary1974banksinPakistanwerenationalizedandtheBanksNationalizationAct1974was
promulgated.Afternationalization,theformationofnewbanksintheprivatesectorstoppedcompletely.
Duetoincreasingpoliticalinterferenceintheaffairsofthebanks,businessdecisionsandappointmentof
staffwerenottakenonmerit.Officedisciplinedeterioratedtoapointofnonexistenceandsome
nationalizedbankswereonthevergeofcollapse.

Denationalization
After16yearsofexperiencingnationalizationitwasrealizedthat,ratherthanbeingproductive,
nationalizationactuallyprovedtobequitedisastrousforthebankingindustry.In1991thegovernment
changeditsstanceandannouncedapolicyofdenationalizationofnationalizedbankssoastoencourage
theformationofnewbanksintheprivatesector.

Today,thefivelargenetworkbanksTheNationalBankofPakistan,HabibBankLimited,UnitedBank
Limited,MuslimCommercialBankLimitedandAlliedBankLimitedpossessmorethan50%ofthe
countrysdepositbase.Theremaining50%isdividedbetweenotherforeignandprivatesectorbanks.
BothMuslimCommercialBankandAlliedbankwereprivatizedin2000andshowedsignificant
improvementsinprofitanddepositgrowth.TheprivatizationofHabibBankandUnitedBankLimitedsoon
followed.TheNationalBankofPakistan,however,isstillgovernmentownedandiscurrentlythelargest
bankindepositbaseandisalmostthesolebeneficiaryoflucrativegovernmentdeposits.

Beforeprivatizationthefivelargenetworkbanksusedtosupportcertainnonlucrativeprojectson
governmentdemand,whichincluded:

Lendingtosupportprojectspatronizedbyinfluentialauthoritiesundergovernmentsponsorships.

Extendingloanswithoutrequisitecollateral.

Extendingloansbelowmarketratereturns.

Utilitybillcollectionbelowbankscostofmanagementofthebillcollectionprocess.

OvercollectionoftaxesfromtheseinstitutionstocoverGovernmentrevenueshortfall.

Overstaffingoftheseinstitutionswithunderskilledpreferredpeople.

Forcedbranchinginunbankedareas.

Theabovementionedpracticeshavebeenreducedsubstantiallyasaresultofprivatizationaswellas
parallelreformswithinthesector.Otherthanthebankingindustry,Pakistansfinancialsectorcomprises
ofthedevelopmentfinanceinstitutions(DFIs),insurancecompanies,mutualfunds,thestockexchange
andleasingcompanies.
Thefuturegrowthofthebankingindustrydependsonoveralleconomicactivitybut,morespecifically,on
theexpansionoftheindustrialsector.Theongoingprivatizationprocessisprovidingmomentumtothe
industrialsectorwhichinturnisfuellingthegrowthofthebankingindustry.

StepstowardTurnaround

Afterprivatizationofthefourbigbanks,thefollowingactionsweretakentoenhanceprofitabilityand
reducecosts:
Headcountreductiontoeliminateredundancybyalmost50%.

Closingdownoflossmakingbusinessareas.
Mergingofclosevicinitybranchesintosingleunits.
Automationatbothheadofficeandbranchlevel.

Introductionofnewproducts.
Inductionofcompetitivestaffbasedonmeritandemergingrequirements.

Streamliningoftheinternalauditandcompliancefunctions.
Increasedfocusondevelopingbothcorporateandconsumerportfoliostoenhanceprofitability.

Streamlininginternationaloperationstoensureenhancedprofitability.
Theabovestepshaveresultedinimprovementsinthebankingarenabothintermsofprofitabilityand
servicestandards.Thesechangeshavebeenrecognizedbothlocallyandinternationally,theimpactof
whichcanbeseenintheformofimprovedcreditratingsbyMoody'sInvestorServices.

FuturetrendsinthePakistanibankingindustry
TrendsinthePakistanibankingindustryinthenextfewyearsarelikelytobeextraordinarilycompetitive.
Afteradecadeofaggressiveprogress,theindustrywilltakesometimeforconsolidation.Duetotherise
ininflation,interestrateswillincreasefartherandthenetincomespreadofthebankswillbereduced.
Duetotheeconomicuncertainty,thenumberofnonperformingportfolioswillalsoincrease.Thefuture
approachofthebankswillbetofocusonInformationTechnology(IT).

Thefuturesuccessofthebankingindustryliesintheeffectiveuseofinformationtechnology,becauseit
benefitsthebanksandtheircustomersintermsofcost,speedandconvenience.AtpresentITisplaying
akeyroleinmanagingalltypesofbankingoperations,productdevelopmentandimprovementof
services.Ithasalsohelpedindefiningnewcustomerservicestandardswiththeincreaseinusageof
phonebanking,InteractiveVoiceResponse(IVR)systems,internetbanking,PointofSale(POS),credit
anddebitcards.Withtheincreaseddependencyontheuseofinformationtechnology,itisimperative
thatmaximumsecuritystandardsbeadoptedtoensurethesafety,security,andmaintenanceofe
bankingtransactions.ThenumberofAutomatedTellerMachines(ATM)inthecountryisnowwellover
5,000.Outof10,500branchesinthecountry,morethan8,100branchesareofferingrealtimeonline
bankingservices.Banksmustdesigninfallibledatasecurityprocessestostrengthencontrols.Information
technologyandcompliancerequirementswill,overthenextfewyears,continuetobethemost
significantdeterminantsofproductivity.Skillsareamidrankingfactoramongthedriversofproductivity,
althoughinthewholesalesectorsandininvestmentandfundmanagement,technicalskillswillbethe
mostimportantcontributors.
UseofCoreBankingSystem(CBS)

ThemajorityofbanksareusingtheCoreBankingSystem(CBS)asacomprehensivebankingsolution.It
worksonarealtimebasisandtheentirebankingnetworkresidesononehostwhichleadstoefficient
reconciliationofheadofficeaccountentrIesandmaintenanceofcustomersaccountdetailsunderoneCIF
(customerinformationfile)
withinformationonborrowingofallkinds.Thissystemallowsaninsightofalltherelationshipsa
customermaintainswiththebankonthebasisofauniqueID,generallytheCNICofthecustomer.Inthe
absenceofacorebankingsystem,differentdepartmentswithinbanksusedifferentprogramsfortheir
bankingneeds.PostimplementationofCBS,allfunctionsarecentralizedatonepointofcontrol.Allbanks
infuturewillmoveontoimplementationoftheCoreBankingSystem.

Rulesforcustomers'protection

Since2008,theStateBankofPakistanhaswitnessedanunprecedentedgrowthinconsumerbanking,
whichhasledtoanincreaseinthegrievancesofconsumersabouttheproductsandservicesof
banks/DFIs.Inordertodealeffectivelywiththeseincreasingconsumergrievancesandtoputinplacean
appropriatepolicyandregulatorymechanismfortheirredress,SBPhascreatedaConsumerProtection
Department.Inadditiontodealingwithanddecidingonconsumerspublicgrievances/complaints
regardingconsumerproductsandservices,thenewlycreateddepartmentalsohandlescomplaintsrelated
toalltypesofbankproducts.Itservesadualpurpose,i.e.itprotectsthecustomersofthebankandon
theotherhanditalsosupportsthebankingindustrybysuggestingimprovementsinbankspolicies.In
future,principlesbasedregulationswillbemodifiedforbanksaswellasforcustomersprotection.
Centralizationofprocesses

Maximumcentralizationofprocesseswillbeakeyfactorinfuture.Accountopening,clearingprocessing
inwardandoutward,collection,CreditAdministrationdepartment(CAD)affairs,etcwillallbe
centralized.Afewmajorbankshavealreadycentralizedthesefunctions.

Outsourcingservices
Duetounproductiveunionactivities,somebankshavestartedoutsourcingvarioustasks,including
securityservicesandhiringofthirdpartystaff.Insomepartsoftheworld,forexampleinIndia,apublic
sectorbankhasoutsourcedworkfortheinstallationandmaintenanceof1,000ATMsaspartofitsplanto
scaleupalternativechannelsforbusinessoperations.InPakistanalso,insteadofsettingupafully
fledgeddepartmentandhiringahugeworkforce,thetrendforallocatingspecializedjobstothirdparties
isbecomingmorepopular.

BranchlessBanking

ItissaidthatbranchlessbankingisthefutureofPakistansfinancialsector,asitopensupgreat

opportunitiesforbankstobringtheunbankedsegmentofsocietyintothefinancialsystem.TheState
BankofPakistan,beingthecentralbankofthecountry,istakingstepstomakethebranchlessbanking
regulatoryframeworkmoreflexibletobroadenthescopeoffinancialservicesinlinewiththeother,more
traditionalbankingchannels.Branchlessbankinghashugepotentialtoreachthisunbankedanduntapped
segmentofsociety.Thisisnotonlycosteffectiveforthebanksbutrepresentsanaffordablesolutionfor
thefinanciallyexcluded,underprivilegedclassofsociety.ThatiswhyPakistansfinancialsectoris
witnessingadynamictransition,ledbythisbranchlessbankingsolution.Thistransitioncanbewitnessed
byacomparisonofthenumberofbranchesversusbranchlessbankingoutlets.Atpresent,numbersof
branchlessbankingoutletshavereachedaround14,000inaroundtwoyears,againstatotalbranch
networkofaround10,500in63years.

Accordingtooneestimate,thecostofsettingupaconventionalbranchis76timeshigherthanusinga
thirdpartyagenttobringtheunbankedareasintothefinancialsystem.Atpresentthemostpopular
branchlessbankingproductsinthemarketareOmniofUBL,EasypaisaofTameerBank,MCBMobile,
KASBMobileandHBLUphone.AccordingtotheSBPdisclosure,morethan400,000branchless/mobile
bankingaccountswereopenedcollectivelybyallbanksinthelast18months.Inbranchlessbanking
billionsofrupeeshavebeentransferredfromonepersontoanother,fromoneaccounttoanother,and
fromgovernmenttothepublicsector.Thetotalbranchlessbankingcustomeraccountsisnowabove2.4
million.
Prioritytotheagriculturesector

Thesedaysanincreasingnumberofresourcefulpeoplearesettingupagribasedbusinessesbecausereal
farmersarenotgettingbenefitsofagriculturalreforms.ThemajorlandholdingiswiththeZameendars/
Waderas.

Since2008thegovernmenthasincreasedthepurchasepriceofwheat,thecostofcottonisincreasing
worldwide,riceproductionisincreasingalthoughitspriceisstable,fruitproductionandexportsarealso
increasingandallthesefactorshaveledtoanincreasinginterestintheagriculturalsector.

FunctionsofStateBankofPakistan

TraditionalandNonTraditionalFunctionsoftheStateBankofPakistan

TheStateBankofPakistanistheCentralBankofthecountry.InordertoachieveitsobjectivestheState
Bankperformsallthetraditionalandnontraditionalfunctions.Traditionalfunctionsarethosewhichare
performedbythecentralbanksofallcountries.Nontraditionalfunctionsarethosewhicharenot
traditionalorconventionalbutwhichSBPhasassumedthesefunctionstakingintoaccountthespecific
requirementsofthecountry.IntheStatuteoftheBankforInternationalSettlements,Basle,Switzerland,
acentralbankisdefinedas

'thebankinanycountrytowhichhasbeenentrustedthedutyofregulatingthevolumeofcurrencyand
creditinthatcountry'(Article56a).
Traditionalfunctions

TraditionalfunctionsperformedbyCentralBankseverywherearedividedintotwogroups,i.e.primary
functionsandsecondaryfunctions.
Primaryfunctionsareissuanceofnotes,regulationofthefinancialsystem,lenderoflastresort,and
conductofmonetarypolicy.

Secondaryfunctionsaremanagementofpublicdebt,managementofforeignexchange,advising
governmentonpolicymatters,securingthepaymentsystemandmaintainingrelationshipswith
internationalinstitutions.
1.SoleauthoritytoissueNotes:

Undersection24oftheSBPAct1956,thisistheprimaryfunctionofthebanktoissuenotesin
accordancewiththerequirementsofbusinessandthepublicasawhole.Accordingtosection30ofthe
SBPAct,assetsoftheIssueDepartment(gold/silverreserve,approvedforeignexchange,special
drawingrightsheldwithIMFandotherapprovedassets.)atnotimeshouldfallbelowitsliabilities,i.e.
totalofnotesissued.OutoftotalassetsaminimumRs.1.2billionmustbekeptintheformofgoldcoins,
goldbullion,andsilverbullionorapprovedforeignexchange.

2.ConductofMonetaryandCreditpolicy:
Accordingtosection9AoftheSBPAct,theStateBankofPakistanisresponsibleforregulationofthe
monetaryandcreditpolicyofthecountryinsuchamannerthatitshouldbringeconomicstabilitytothe
country.TheBankusesdirectandindirectinstrumentsforcreditcontrol,suchasdiscountrateforthree
daysrepo,Tbillauctionrate,andopenmarketoperations.TheBankalsocontrolscreditbyprescribing
creditceilings,settingthecredit/debitratio,andfixingmarginrequirements.Since1995,SBPhasbeen
controllingliquiditythroughopenmarketoperations.
3.RegulationandsupervisionofFinancialSystem:

Asthecentralbank,SBPisresponsibleforsafeguardingthesoundnessofthefinancialsystemofthe
country.Undersection40AoftheBankingCompaniesOrdinance1962,itistheresponsibilityoftheSBP
tomonitortheperformanceofeverybankingcompanyandDFIs,aswellasMicroFinancebanks.

Nonbankfinancialcompanies(NBFCs),suchasinvestmentbanks,leasingcompanies,mutualfunds,
Modarbacompanies,thestockexchangeandinsurancecompanies,etc,allfallundertheambitofthe
SecurityandExchangeCommissionofPakistan(SECP)whichisresponsibleformonitoringtheaffairsof
thesecompanies.
4.Offsiteandonsitemonitoring

TheBankmonitorsbankingactivitiesthroughacombinationofoffsitemonitoringandonsiteinspection.

OffsitesurveillanceisconductedbytheStateBankthroughvariousperiodicalreturnsreceivedfrom
banksandDFIs,whileonsiteinspectionisundertakenonthepremisesofthebanksconcerned.The
purposeofinspectionistochecktheassetsandliabilitiesastheyappearonthebooks,toevaluatethe
qualityoftheassets,todeterminecompliancewithlaws,regulations,directivesandpolicyguidelines
providedbytheStateBank,tojudgethesoundnessofoperationsandtheprudenceoflendingand
investmentpolicies,toappraisethequalityofthemanagementandtoattemptanestimateoftheoverall
positionofthebank.
5.PrudentialRegulations

Inordertosafeguardtheinterestofdepositorsandtoensurethesafetyandsoundnessofthe
banks/DFIs,theStateBankhasissuedPrudentialRegulations.TheStateBankhasdevisedseparate
PrudentialRegulationsfordifferentareas,viz.CorporateandCommercialBanking,SmallEnterpriseand
MediumEnterpriseFinancing,ConsumerBusiness,MicroFinancingandAgricultureFinancing.
ThePrudentialRegulationsforCorporateandCommercialBankinggovernoperationsofthefinancial
institutionsinrespectoftheirdealingwithcorporateentities.TheRegulationsfocusonCreditRisk
Management,CorporateGovernance,AntiMoneyLaunderingandOperations.RegulationsforConsumer
Financinghavebeendevisedtoencouragethebankstoexpandtheirloanportfoliothroughcreationof
newproductsandtoensurethatbanksundertakeconsumerfinancinginasensiblemanner.Consumer
financingcoversanyfinancingallowedtoindividualsformeetingtheirpersonal,familyorhousehold
needsandincludescreditcards,autoloans,housingfinanceandothermethodsofconsumerfinancing.
ThePrudentialRegulationsforSmallEnterprisesandMediumEnterprises(SMEs)facilitateandencourage
theflowofbankcredittotheSMEsectorwiththepurposeofmovingawayfromcollateralbasedlending
tocashflowbasedlending.Themaximumlimitofcleanfinancingagainstpersonalguaranteeshas
increasedtoRs.5millionforSMEs.Thisisgreaterthanthatforconsumerfinancingaswellasfor
corporatecleanfinancing.Therequirementforbanks/DFIstoobtainacopyofaccountshasbeenrelaxed
forexposuresofuptoRs.10million.
TheStateBankhasalsoissuedPrudentialRegulationsforMicrofinanceBanksandinstitutions.
MicrofinanceBanks/Institutions(MFBs/MFIs)shallnotcommencebusinessunlessthereisaminimum
paidupcapitalasprescribedinMFIsOrdinance2001.AMFB/MFIshallalsomaintainequityequivalentto
atleast15%ofitsriskweightedassetsshallmaintainacashreserveequivalenttonotlessthan5%of
itstimeanddemandliabilitiesinacurrentaccountopenedwiththeStateBankoritsagent.Inadditionto
acashreserveitshallalsomaintainliquidityequivalenttoatleast10%ofitstimeanddemandliabilities
intheformofliquidassets,i.e.cash,goldandunencumberedapprovedsecurities.Inparticular:

TheMFB/MFIshallnotextendloansexceedingRs.100,000/toasingleborrower.

Theoutstandingprincipaloftheloansandadvances,paymentsagainstwhichareoverduefor30days
ormore,shallbeclassifiedasNonPerformingLoans(NPLs).

6.TheBankers'Bank

TheSBPalsofunctionsasthebankers'bank.Banksareclassifiedasscheduledandnonscheduled.A
scheduledbankisthatwhichfulfilstherequirementsofascheduledbankaccordingtosection37(2)of
theSBPAct1956,suchascapitalandreservesarenotlessthantherequirementprescribedbySBP.

TheStateBankmaintainsanupdatedlistofallscheduledbanksatitsvariousoffices.Thesebanksare
entitledtocertainfacilitiesfromtheStateBankandinreturntheyhavesomeobligationstoit.TheState
Bankprovidesthefollowingthreeimportantservicestothescheduledbanks:

I.SBPkeepsthedepositsofcommercialbanks,whichconstitutethestatutoryreservesofscheduled
banks.ScheduledbanksarerequiredtokeepwiththeStateBankacertainpercentageoftheirdemand
andtimeliabilitiesunderSection36ofSBPAct,1956.
II.TheStateBankalsoprovideswiderangingremittancefacilitiestobanksataconcessionalrate.The
Bankprovidesthisfacilitythroughthemediaofitsownoffices,thebranchesofNationalBankofPakistan
actingasitsagents,andtreasuriesandsubtreasuriesholdingpermanentcurrencychestsatplaces
wheretheStateBankhasnooffice.
III.Inordertostreamlinepaymentsthroughthefinancialsystem,theBankalsomanagestheoperations
ofclearinghouses.Inthemajorcities,thefunctionsoftheSBPclearinghousehasbeenhandedovertoa
privateagency,namelyNationalInstitutionalFacilitationTechnologiesPrivateLimited(NIFT),tothe
extentofsortingofpaymentsinstrumentsandpreparingclearingschedules.

7.LenderofLastResort

OneofthemostimportantfunctionsoftheStateBankisthatitactsasthelenderoflastresort.Under
section17oftheSBPAct1956,theStateBankprovidesloanandrediscountfacilitiestoscheduledbanks
intimesofdireneedwhentheycanfindnoothersourceoffunds.Thesefacilitiesareordinarilyprovided
bytheBankagainstgovernmentsecurities,tradebills,agriculturebills,etc.A3DayRepofacilitywas
introducedbytheStateBankofPakistanwitheffectfrom1stFebruary,1992,withthepurposeof
accommodatingtheshorttermliquidityrequirementsoffinancialinstitutions.

8.BankertotheGovernment
TheStateBankprovidesbusinessbankingfacilitiestoFederalandProvincialGovernmentandsome
governmentagencies.ThesefunctionsperformedbytheBankaresimilartothoseordinarilyperformed
bycommercialbanksfortheircustomers.TheBankprovidesthefollowingservicestogovernment:
1.Acceptsdepositsofcash,chequesanddraftsbytheGovernmentandundertakesthecollectionof
chequesanddraftsdrawnonotherbanks.TheBanktransfersgovernmentfundsfromoneaccountto
anotherorfromonecentretoanotherasadvisedbythem.

2.FederalandProvincialgovernmentkeeptheirdepositswiththeStateBankfreeofinterest.Inturn,the

StateBankdoesnotchargeanycommissionforthebankingservicesrenderedtothem.

3.FederalandProvincialgovernmentcanobtainadvancesfromtheSBPsubjecttomutualagreementin
respectofthetermsandconditionsforsuchadvances.

4.Accordingtosection17,subsection(13)oftheSBPAct,SBP,onbehalfofFederal,ProvincialorLocal
government,undertakessale/purchaseofgold,silver,approvedforeignexchange,securitiesorsharesin
anycompany,andcollectionofreturnsontheseshares/securities,transactionofSpecialDrawingRights
(SDR),etc.
{Sometimescalled'papergold'theSDRsareaccountingunitinthebooksofIMF}
TypesofBanks

Primarilyallbanksgathertemporarilyidlemoneyforthepurposeoflendingtoothersandfor
investmentswhichbringgainintheformofreturn,profitanddividendsetc.

However,duetothevarietyofresourcesofmoneyandthediversityinlendingandinvestment
operations,bankshavebeenplacedinvariouscategories,suchascommercialbanks,savingsbanks,
merchantbanks,mortgagebanks,consumerbanks,investmentbanks,developmentbanks,cooperative
banks,eximpbanksandcentralbanksetc.

ItisimportanttonotethatthelargebankslikeHabib,United,MCBetcperformallormanyofthe
functionsdescribedunderseparatecategoriesbelowandatthesametimetherearebankswhichperform
onlyoneormorespecializedfunctions.Sothesetypesareattimesoverlappingandnotalwaysmutually
exclusive.

CommercialBanks
Thecommercialbanksreceivedepositsfromthegeneralpublicwhicharerepayableondemandupon
writtenordersofthedepositors.Astheirmostdistinctivefeaturethecommercialbanksmaintain
chequeingaccountsfortheconstituents.
Thecommercialbanksarealsodistinguishedforprovidingshorttermfinancetotrade,commerceand
industryfortheirworkingcapitalrequirementsandshortterminvestment.

MerchantBanks
Merchantbanksarethosewhichhavebeenmainlyfinancingthedomesticandinternationaltradein
UnitedKingdom.Duringthelateeighteenthandearlynineteenthcenturiesthetradebetweencountries
wasfinancedbybillsofexchangebywellreputedmerchanthousesforwhichtheywouldchargea
commissionfortheirservice.Thusthebusinessofacceptingbillsofexchangetofinancethetrade
developedandgraduallythesebusinesshousesenteredintootherbankingactivitiesandbecameknown
as"merchantbanks".
Sinceallthecommercialbanks,inadditiontootherbankingfunctions,alsodealintradefinancing,the
term'merchantbanks'havegraduallyfadedaway.
SavingsBanks

Thebasicpurposeofthesebanksistoinculcatethehabitofsavingsinthepeople.Thesavingsbank
depositsarenotrepayableupononlythewrittenordersofthedepositorbutthedepositororhisagent
hastoappearpersonallyatthesavingbanktomakewithdrawal,andforthispurposehemustpresenta
passbook,acertificateofdepositorsomesimilardocumentstoprovehisrighttoreceivepayment.Post
OfficeSavingsBanksandSavingsAccountatNationalSavingsOrganizationarewellknownoperational
SavingsBanksinPakistan.

MortgageBanks
Thesebanksmainlydealinloansfortheacquisitionorconstructionofrealestateagainstthesecurityof
mortgages.Quiteafewsuchbanksareoperatingindevelopedpartoftheworld.SavingsandLoans
associationsandfarmloanassociationsaresomeofthewellknownformsofthemortgagebanks.
HouseBuildingFinanceCorporationinPakistanisaMortgageBank.

ConsumerBanks
Thesebanksprovidefinanceforpurchasingconsumergoodsforthepersonaluseoftheborrowers.For
exampleCarLoans,Consumerdurablegoodslikeairconditioners,refrigerators,furnitureandHouse
LoansforResidentialpurposes.ConsumerFinanceCompanies,salesfinancecompaniesandcreditunions
aresomeofthepopularformsofconsumerbanks.Consumerbanksdonotgiveloansfor
productive/businesspurposes.

InvestmentBanks

Theinvestmentbanksassistindustrial/businesshousesandthegovernmentbodiestoraisemoney
throughthesaleofstocksandbondsforusuallylongtermpurposes.Mainobjectiveofinvestmentbanks
istoachievedisintermediationwheretheyassistbusinessestoraisefinancesforprojectsdirectlyfrom
thesaversthroughissuanceofbondsandissuanceofshares.Investmentbanksservetheinvestors
throughfloatationofmutualfunds.Thesebanksalsoperformtheusualintermediationfunctionsofraising
depositsofidlemoneyfromthepublicandfinancethebusinesshousesandotherbodies.
Otherfunctions:

AssistingCompaniesinmergers,takeovers.

Consultingservicesforprivatisation.

ServicesforPublicIssuesincludingUnderwritingofshareissues.
AssistingCompaniesintheissuanceofTermFinanceCertificatesbothPublicissuesandPrivate
Placements.
ShareBrokerage

ManagingMutualFunds.
DevelopmentBanks

Thesebankshavebeenestablishedtoprovidelongtermdevelopmentfinancetothetrade,commerce,
andindustry.InPakistantheyaregenerallygovernmentowned

banks,establishedunderspeciallypromulgatedlaws.ZaraiTaraqiatiBankofPakistan,andIndustrial
DevelopmentBankofPakistanareverywellknowndevelopmentbanks.Theprivatecommercialbanks
areusuallyshyoffinancingtolongtermandgreenfieldprojects.ThisgapisfilledbyDevelopment
Banks.
CooperativeBanks

Thesewerethebanksestablishedandregisteredascooperativeventurestoprovidebankingfacilitiesto
themembersofthecooperatives.InPakistan,theFederalBankofCooperativeswassuchabank,but
nowithasbeenmergedwithZaraiTaraqiatiBank.

AtonestageofhistoryofbankinginPakistantheCooperativeSocietiesinthecountrystarteddoingbank
typebusiness.Theywerenotproperlyregulatedandtheydefraudedthegeneralpublicinaverybigway.
SubsequentlyCooperativeSocietiesweretotallybannedfromconductingbanklikebusiness.

EximBanks
Theseareusuallythegovernmentorsemigovernmentbankswhichprovidefinanceandinsurancefor
promotionofimportsandexportstotrade,commerceandindustry.Everycountrywantstoincreaseits
exportstoearnvaluableforeignexchangebuttherearemanyrisksfortheexportersbecausethebuyers
areindistantlands.EximBanksprovidefinancefortheexportersandprovideinsurancetotheexporters
againstdefaultofthebuyersorcountryrisks.Thesebanksarecontributinggreatlytowardsthe
expansionofinternationaltradeofcountries,wheretheyfunction.

SmallandMediumEnterpriseBanks.(SMEBanks)
SMEshaveassumedgreatimportanceinthedevelopingcountriesinrecentyears.Thoughtheymakea
hugecontributiontotrade,commerceandindustryyettheyhavedifficultiesinraisingcapitalforthem.
KeepingalltheseissueinviewSMEBankshavebeenestablishedinPakistantocatertothefinancial
needsoftheseenterprises.TheSMEBanksareprovidingbasicallyshorttermworkingcapitaltothe
smallandmediumenterprisesinPakistan.

DICTIONARIESYOUMUSTHAVEONYOURWORKTABLE

1)OxfordAdvancedLearnersEnglishDictionary

Latest8thEdition
OxfordUniversityPress

NearChottiMarketGulberg

PleasebuythedictionarywhichhasaCDTHATYOUCAN

SAVEelectronicdictionaryONYOURCOMPUTERSHARDDISK.

2)OxfordDictionaryofFinanceandBanking,publishedbyOxfordUniversityPress.

3)OxfordDictionaryofLaw,publishedbyOxfordUniversityPress.

______________________________________________________________________
__________________
Wheneveryoufindyourselfonthesideofthemajority,itistimetopauseandreflect.MarkTwain

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BankingLawsAndRegulations

"Successisnotsomethingtowaitfor,itissomethingtoworkfor.
BankingLawsandRegulations
Lawconstitutestheprinciplesandregulationsestablishedinacountrybysomeauthority,applicabletoits
people,whetherintheformoflegislationorofcustomsandpracticesrecognizedandenforcedbyjudicial
decision.Itistheimplementationofsocialorderandjusticecreatedbyadherencetosuchasystem.The
systemofjudicialadministrationputsthelawsofacommunityintoeffect,e.g.allcitizensareequal
beforethelaw.
Thebankingbusinessflourishesonthesupportandconfidenceofpublicbecausetheycontributetothe
capitalanddepositsofmoneyinthebanks.Thisconfidenceisstrengthenedasandwhenthepeoplefind
thattheirinterestsarebeinglookedafterproperlybythegovernmentanditsauthorizedregulatory
agencies.
BanksandbankaccountsareregulatedbyFederalstatutorylaw.BanksareestablishedinPakistanunder
theBankingCompaniesOrdinance1962,regulatedbySBPthroughPrudentialRegulations,andExchange
ControlManual.Bankaccountsmaybeestablishedbyprivateandstateownedbanks(NationalBankof
Pakistan)andNationalSavingscentres.AllareregulatedbytheFederallaws.Chequesandrelated
matters(bearer,order,crossing,protectiontothebankers,etc)aregovernedundertheNegotiable
InstrumentsAct1881.
ThereisanelaboratelegalframeworkforregulationandsupervisionofbankingbusinessinPakistan.
ThisregulatoryprocessisbasicallymaintainedbytheStateBankofPakistanasthecentralbankofthe
country,whichderivesitsauthorityandsupportfromthelawswhichhavebeenenactedandenforcedfor
bankingbusiness.
Forsmoothrunningofthebankingsystemitisvitalthatthepublicshouldhaveconfidenceinitandbe
assuredthattheirinterestisprotectedbythegovernmentthroughregulators.Oneofthemostimportant
functionsoftheStateBankofPakistanisprotectionofcustomers'rights.Mostbankcustomersare
laymen,theyhaveverylittleknowledgeoffinancetojudgethestabilityandsoundnessofabank.
Throughappropriatelawsthestateensuresthatthemoneyentrustedtoabankbythepublicisnot
placedatrisk.Thefailureofabankisaseriouseventspeciallyduetothepossibilityofcontagion
onebanksfailurecanleadtolackofconfidenceinthefinancialsystemresultinginthecollapseofthe
entiresystem.Hencetheneedtoensuresafetyandsecurityofallbanks.
BankinginPakistanisgovernedbylawsenactedbytheGovernmentandregulationsframedbyother
statefunctionariesnamelyStateBankofPakistanandtheSecuritiesandExchangeCommissionof
Pakistan.ThefarreachinginfluenceonbankingoperationsincludesrulesincorporatedintheForeign
ExchangeRegulations,PrudentialRegulationsandcircularsissuedbyStateBankofPakistanfromtotime.
AllbanksinPakistan(exceptSBPandNBP)arecompaniesincorporatedundertheCompaniesOrdinance
1913and1984asamendedfromtimetotimeandtothatextentfallwithinthepurviewofSecuritiesand
ExchangeCommissionofPakistan(SECP)butalltheNonBankingFinancialInstitutionsaretotally
governedbySECP.AssuchbankshaveoverlappingsupervisionofSBPandSECPinmanyrespects.The
majorlawsapplicabletobankinginstitutionsare:
1.BankingCompaniesOrdinance(BCO)1962
2.StateBankofPakistanAct1956
3.NegotiableInstrumentAct1881
4.BankersBookEvidenceAct1882
5.ElectronicTransactionsOrdinance2002
6.ForeignExchangeRegulationAct1947
7.FinancialInstitutions(RecoveryofFinanceOrdinance)2001*
8.SBPBankingServiceCorporationOrdinance2001
9.PaymentSystemsandElectronicFundsTransferAct2007
10.BankingTribunalsOrdinance1984
11.BankingCompaniesTribunals(ValidationofOrders)Act1994
12.MicrofinanceInstitutionsOrdinance2001
TheabovelistedActs/lawsarebrieflydiscussedbelowwhereverapplicable.
StateBankofPakistanAct1956:
ThepreambleofthisActhasentrustedtheStateBankofPakistanwiththeresponsibilitytoregulatethe
monetaryandcreditsystemofPakistanandtofosteritsgrowthinthebestnationalinterestswithaview

tosecuringmonetarystabilityandfullerutilizationofcountrysproductiveresources.ThusStateBank
ofPakistanisthecentralbankofthecountry.Gradually,StateBankofPakistanexpandedand
consolidatedovertheyears.

StateBankofPakistanwasestablishedin1948withapaidupcapitalofRs.10Croreswithamix
ownershipbasis(partGovt.ownedandpartprivateowned),wherein51%ofthepaidupcapitalwasheld
bytheFederalGovernmentandthebalancebytheprivatesector.FollowingitsnationalizationinJanuary
1974,theFederalGovernmentassumedownershipofallprivatelyheldsharesonpaymentof
compensation.TheCentralBoard,comprisingofaGovernor,oneormoreDeputyGovernorsand7
directorsnominatedbytheFederalGovernment,managestheSBP.UndertherulestheBoardisrequired
toholdmeetingsatleast6timesineachcalendaryearandatleastonceineachquarter.Any3directors
mayrequisitiontotheGovernortoconveneameetingand5directorsaremandatorytoformaquorum.

AppointmentofGovernorUnderSection10theGovernoroftheBankistobeappointedbythePresident
ofPakistanforatermofthreeyears.Hewillbeeligibleforanothertermofthreeyearsprovidedhehas
notattainedtheageofsixtyfiveyears.

CriteriaforDirectorsAppointmentUnderSection13
NopersonshallbeorshallcontinuetobeadirectorofSBP,ifheisaMNAorMPA,

isasalariedGovernmentofficial,

isorhasbeenadjudicatedaninsolvent,or

hassuspendedpaymentsorhascompounded

{(meaningofCompounded=Tosettle(adebt,forexample)byagreeingonanamountlessthanthe
claimadjust.}
withhiscreditors,
islunaticor
ofunsoundmindor
isadirectorofanothercommercialbank.
Theelecteddirectorsshallholdofficeforatermofthreeyears.Adirectorloseshisofficeif
heabstainsfromthreeconsecutivemeetingsoftheCentralBoardwithoutobtainingleave.

SBPsFunctionsUnderSection17,theSBPsbusinessandfunctionsextendtoaverywidearea
including
1.extensionofloansandadvancestotheFederalandProvincialGovernments,

2.providingfinancetofinancialinstitutionsincludingbanks,

3.saleandpurchaseofgovernmentsecuritiesincludingforeignexchange,

4.dealingingoldandbullion,{Bullion=goldorsilverinlargeamountsorintheformofbars}

5.purchaseandsaleofdebentures,(CorporateBondsarecalleddebentures)

6.custodyofmoniesandsecurities,
7.actingasbankertotheGovernmentandas

8.bankersbankand

9.lastbutnottheleasttheNoteIssuingAuthority

ProhibitionsonSBPfunctionsUndersection20,the
SBPisnotallowedtoengageintradeordirectinterestinanycommercial,industrialorotherundertaking
exceptthatitmayacquireinthecourseofsatisfactionofanyofitsclaims,whichshallbedisposedofat
theearliest.
TheSBPisnotallowedtopurchaseitsownsharesorsharesofanyotherbankorextendloansor
advancesagainstthesecurityofsuchsharesoradvancemoneyonmortgageorsecurityofan
immoveableproperty(excepttoitsownstaff)ormakeunsecuredloans.

CustodianofForeignExchangeUnderSection23,theSBPiscustodianofforeignexchangeandmaybuy
orsellforeignexchangefromortoanauthorizeddealer.

CashReservemandatoryforBanksUnderSection36,allthescheduledbanksarerequiredtomaintain
aCashreservewiththeStateBankattherateasmaybedeterminedbytheBank.{WhatisCash
Reserve?Apercentageusuallyabout5%ofthetotalCustomerdepositsinabankmustbedepositedwith
SBPasCashReserveonwhichSBPdoesnotpayanyprofit.}Thisruleisintendedtobolstertheliquidity
andfinancialstrengthofthecommercialbank.
ScheduledBankUnderSection37theStateBankmaydeclareanybanktobethescheduledbanka
bankwhichiscarryingbusinessofbankinginPakistan,hasapaidupcapitalofnotlessthantheamount
stipulatedandthattheStateBankissatisfiedthattheaffairsofsuchabankarenotconductedina
mannerdetrimentaltotheinterestofdepositors.
DutytosecrecySection52imposesadutytomaintainsecrecyoneveryofficeroftheSBPastothe
affairsoftheBankortheaffairsofanyotherfinancialinstitutionthatcometohisknowledgein
performanceofhisduties.

TheBankingCompaniesOrdinance1962:
Thislawisveryimportantandcomprehensive.Itgivesdetailedlegalrequirementsofhowbankswillbe
formed,andhowtheywillfunctionunderthesupervisionofSBP.Thislawlistsdownallthepowersthat
aregrantedtotheStateBankofPakistanforsupervisingandcontrollingthebanksinPakistan.Ifabank
indulgesinactivitiesagainstthedirectionsofSBP,thislawgivesauthorizationtoSBPtopunishthebank
anditsemployeesbyimposingpenalties,dismissalandreplacementofofficersincludingchiefexecutive
ordirectors,cancellationofbankinglicenseandevenliquidationofthebank.

TheobjectoftheaboveordinanceistoprovidegeneraldetailsandguidelinesofhowBankingCompanies
wouldoperatetheirbusiness.

DistinctiveFeaturesofaBankingCompany

i.Section8prescribesthatonlyacompanywhichisallowedbySBPandcarriesoutthebusinessof
bankingshallusethewordbankoranyofitsderivativesaspartofitsname.Othercompaniescannot
doso.

ii.AcompanyregisteredasabankingcompanyinPakistanwillbeapubliclimitedcompany,asdefinedin
theCompaniesOrdinance,1984.AbankingcompanywillalsohavethewordlimitedorLtd.inits
name.
iii.Section87conferstheexclusiverighttothebanksfortheuseofchequesforwithdrawalortransferof
depositsofmoney.

BankingBusiness
a.Section7oftheOrdinancehasdefinedtheformsofbusinessinwhichbankingcompaniesmayengage.
Theseincludeacceptingdeposits,lendingorinvestingfunds,makingremittances,openinglettersof
credit,issuingguarantees,underwritingshareorbondissue,foreignexchangedealings,etc.

I.Section9oftheOrdinancedefinesthoseformsofbusinesswhichbankingcompaniesarenotallowed
toengagein.Theprohibitedactivitieslistincludes,buying/sellingorbarteringofgoodsorengageinany
trade.
II.Section10prohibitsabankingcompanyfromholdingofanonbankingasset(immoveableproperty)
foraperiodexceedingsevenyearsfromthedateofacquisitionexceptasmaybepermittedbytheState
Bankorasisrequiredforitsownuse.
ProhibitiononemploymentofcertainpersonsSection11prohibitsemploymentbyabankingcompany
ofapersonwhois,oratanytimehasbeen,adjudicatedinsolvent,orhassuspendedpayment,orhas
compoundedwithhiscreditors,orwhoisorhasbeenconvictedbyacriminalcourtofanoffence
involvingmoralturpitude.{turpitude=veryimmoralbehaviourSYNwickedness}

CapitalofaBankingCompany

a.Section13oftheBCO,1962hasauthorizedtheStateBankofPakistantodetermineandprescribe
theminimumpaidupcapitalforabankingcompanyfromtimetotime.(2013Rs10Billion)

b.MinimumGeneralReserveSection13stipulatesmaintainingbybanksofGeneralReservesasmaybe
determinedandnotifiedbytheStateBankfromtimetotime.

{GeneralReserveisanamountdeductedfrombanksProfitsandretainedinReservesAccount,whichis
partofEquitytomeetanyBadDebtsorotherLosssituationsfortheBank.}
BoardofDirectors
ElectionandtenureofdirectorsIftheGovernorSBPfindsthatthemanagementofacommercialbank
isdoingactswhichareseriouslyharmfulforthesoundoperationofthebank,undersection15theState
BankmayorderanyBankingCompanytocallageneralmeetingoftheshareholderstoelectfresh
directorsofthatbank.
Adirectorofabankingcompany(otherthantheChiefExecutive)shallnotholdofficeformorethansix
years.

UnderSection15(b)adirectorshallnotholdofficeformorethan6consecutiveyearsandunderSection
15(c)adirectorofabankingcompanyshallvacatehisofficeifhehasfailedtopayanyadvanceor
interestthereonandnotmorethan25%ofthetotaldirectorscouldbethepaidexecutivedirectors.

StatutoryCashRequirement.(SCR)

Section22oftheOrdinanceprescribesthateverybankingcompanymustmaintainacertainpercentof
itstotaldemandandtimeliabilitiesasonthelastworkingdayoftheweek,withtheStateBankof
Pakistan.ThepercentagewillbenotifiedbytheSBPfromtimetotime.(20135%)(Thisrequirement
ensuresliquidityofthebank)

LendingagainstsecurityofownsharesSection24prohibitsanybankingcompanytogiveloansand
advancesagainstthesecurityofits(banks)ownsharesorgrantunsecuredloansoradvancestoormake
loansandadvancesagainstguaranteeofanyofitsdirectororanyofthefamilymembersofanyofits
directors,nortoafirmorcompanyinwhichanyofitsdirectorisinterestedaspartner,directoror
guarantor.

PowersofStateBankofPakistan

BankingCompaniesOrdinance1962hasconferredthefollowingpowersonSBP:

a.Section25hasauthorizedSBPtocontroladvancesbybanks.SBPlaysdownconditionstobefulfilled
whicharegiveninRiskPrudentialRegulations.

b.Section25AauthorizedtheSBPtocollectcreditinformationfrombankingcompaniesandfurnishthem
tootherbankingcompanieswithoutdisclosingthesourceofinformation.
c.Section25AAhasauthorizedSBPtoprepareandsubmittotheFederalGovernmenteveryyeara
specialreportoncasesofwriteoffofloans,markupandotherduesorfinancialreliefthrough
reschedulingandrestructuringofloans,etc.,wherebankingcompanieshavedeviatedfromthe
establishedbankingpractices.

d.Section26authorisestheStateBankofPakistantoprohibitbankingcompaniesincorporatedin
PakistanorincorporatedoutsidePakistanbutoperatinginPakistanfromacceptingdeposits.

e.Noindividual,associationoracompanyisauthorisedtocarryonbankingbusinessinPakistan
withoutobtainingalicencefromtheStateBankofPakistanunderSection27.

f.Whenbankingcompaniesortheirbranchesdonotperformtheirfunctionsproperly,Section27(4)has
authorizedtheStateBankofPakistantocancelthelicensegrantedtothem.^

Preparation/displayofBalanceSheet.Section34prescribesthateverybankingcompanyoperatingin
Pakistanwhetherlocalofforeign,shallpreparebalancesheetandprofitandlossaccountsasonthe
lastworkingdayeachyear,intheformatgiveninSecondScheduleoftheBCO.

g.Section38makesitobligatorytodisplaythecopyofthisbalancesheet&profitandlossaccountat
appropriateplacesinbranchesandprincipalofficesinPakistan.

Unclaimeddepositsandvaluables

TheSection31requiresthatbanksmaintainrecordofallunclaimeditemsandiftheseremainunpaidor
unclaimedforaperiodoftenyears,transferthemtoStateBank.Thisincludesalldepositsandunpaid
instrumentssuchasdividend,drafts,billsofexchange,sharesorvaluablearticlesheldinsafecustody,
forwhichtherehasbeennotransactionornoclaimexceptthoseofaminororacourtoflawora
government.TheSBPhascreatedawebsitewhereinformationregardingsuchunclaimeddepositsis
available.

TradeUnionsAttheinitiativeoftheGovernor,StateBankingSectionBwasinsertedbytheBanking
Companies(Amendment)Act1997whichbarredanyofficerormemberofatradeunioninabanking
companyfromusinganybankcarortelephonetopromoteunionactivitiesortocarryweaponsintothe
bankpremisesetc.Anypersonviolatinganyprovisionsofthissectionshallbeguiltyofanoffense
punishablewithimprisonmentthatmayextendtothreeyearsorwithfineorwithboth.
SecrecySection33AoftheActhasmadeitobligatoryforeachbanktomaintaincompletesecrecyand
fidelityrelatingtotheaffairsofitscustomersexceptwhenlawandpracticessopermit.Inorderto
enforcethisprovisionthissectionprescribesthateveryPresident,Chairman,MemberBoard,Auditor,
OfficerorEmployeeisrequiredtomakeadeclarationoffidelityandsecrecyatthetimeofjoining
institutionswhicharecoveredunderBankingCompaniesOrdinance,1962.

DisclosureofWriteOffsMoreover,thissectionhasmadeitobligatoryforeverybankingcompanyto
publishinitsannualaccountsallsuchloansaswrittenofforfinancialreliefprovidedtoanycustomer
amountofwhichisRs.500,000/ormore.
PoweroftheStateBankofPakistantotakethe
correctivemeasuresagainstBankingCompanies

a.Sections41,41Aand41BoftheBankingCompaniesOrdinance,1962haveconferredthepowersto
StateBankofPakistannotonlytogivedirectionstothebankingcompaniesinPakistantomanage
themselvesproperlybuttoimposecorrectivemeasures.ThesepowersincludetheremovalofChairman
andmembersoftheBoardofDirectorsand/orChiefExecutiveandappointitsnomineestomanagethe
bankingcompanies.Thisperiodcanbeuptothreeyears.

b.Section41CoftheBankingCompaniesOrdinance,1962allowsthatifanypersonsorbanking
companyisaggrievedwiththeordersmadeundersection41A,41BofStateBankofPakistanmay
makeanappealtotheCentralBoardofDirectorsoftheStateBankofPakistan.Theirdecisionshallbe
final.
InspectionbyStateBankofPakistan

a.Section40oftheBankingCompaniesOrdinance.1962,hasmadeitobligatoryfortheStateBankof
Pakistantoinspectbankingcompaniesfromtotimeinordertoevaluatetheirmanagementand
performance.SubSection(4)makesitobligatoryforbankingcompaniestoproduceallsuchbooksand
documentstotheinspectingofficerasdesiredbyhim.

b.BasedontheinspectionreportStateBankofPakistanisauthorizedtoimposefinesandpenalties
includingthewindingupofthebankingcompanyunderSection49oftheBCO.1962.

XI.AmalgamationandWindingupofaBankingCompany

a.Section48oftheBankingCompaniesOrdinance.1962,allowstheamalgamationofbanksaccording
toadefinedprocedure.Itincludespreparationofawelldesignedschemeofamalgamationcontaining
termsandconditions.Thisschemehastobeplacedindraftformtotheshareholdersofeachofthe
bankingcompaniesconcernedseparately.Whenitisapprovedbyaresolutionpassedbyatwothird
majorityofshareholdersofeachoftheconcernedbankingcompanies,itshouldbesubmittedtotheState
BankofPakistanfortheirapprovalandthemergerwilltakeplaceonlyaftertheirformalapproval.

b.Section59oftheBankingCompaniesOrdinance,1962,clearlylaysdownthatnobankingcompany
whichholdsalicenceundersection27oftheActcanvoluntarilywindupwithoutfirstobtaininga
certificatefromStateBankofPakistanaboutitsinabilitytorepaythecreditors.

Sections60to82oftheOrdinancedescribethelegalandproceduralframeworkforthewindingup
proceeding.Accordingtotheseprovisions,onlytheHighCourtsinPakistancanallowwindingupandin
suchcasesStateBankofPakistanwillbetheofficialliquidator.

2.3.1.Specificmethods/areasofregulationsUnderBCO1962theSBPhavethefollowingspecificareas
forregulatingbankinginstitutions:
i.Authorizationforbankinglicense

ii.Rulesregardingownershipoffinancialinstitutions
iii.Criterionregardingadequacyofcapitalinbanks.
iv.Reservesandliquidityratioscompliancebycommercialbanks

v.Rulesregardingforeigncurrencyandotherexposures

vi.Depositinsurance

vii.Professionalmanagement
viii.Classificationofadvances(Specialmeaningofclassification)

ix.Perpartylimitsonbankslending

x.Controlondepositandlendingrates

xi.Policyofscheduledbanksborrowings

xii.Bankchargesandpenal(penalty)rates

xiii.Loanwriteoffprocedure
TheBankingCompaniesOrdinance,1962,(BCO)consolidatedbasiclegalframeworkandstrengthenedthe
RegulatorypowersofStateBank.

Itempowers:
a)SBPforclosesupervisionovertheaffairsofbankingcompanies

b)prescribesmaintenanceofrequiredadvances/depositsratio

c)givedirectionstobankingcompaniesgenerally

d)makeadvancestobankingcompanies

BankingMohtasib
2.4.12.BankingMohtasibSection82AwasaddedtoBCOwhichrelatestoappointmentofBanking
Mohtasibwithpowersandresponsibilityof:

BankingMohtasib/Ombudsman
OmbudsmanmeansacommissionerappointedbytheGovernmenttoinvestigateanycomplaintsagainst
thebodyconcerned.InPakistan,ombudsmaniscalledMohtasib.Forthebankingsector,governmenthas
appointedaseparateMohtasibwhoisappointedforaperiodofthreeyearsandisnotbeeligibleforany
extension.
TheofficeoftheBankingMohtasib(BM)wasestablishedunderbankingcompaniesordinance1962by
insertingsevensectionsfrom82Ato82Gon2ndJune,1997throughthebankingcompanies
amendmentAct1997.ThepurposeoftheestablishmentofBankingMohtasibistoresolveanycomplaints
fromcustomersagainsttheirbanksandthoseofscheduledbanksagainstanotherbank.Thisisafree
serviceforthepublicwhichcoversallbankingservices.

PowersofBankingMohtasib(BM)

a)BMcanentertaincomplaintsfrom,customers,borrower,utilitybilldepositors,banksorfromanybody
ororganization.
b)BankingMohtasibcanawardcompensationforactuallosssufferedandgrantofreasonableexpenses
canbeconsideredbythebankingMohtasib.

c)BankingMohtasibcannotawarddamagesagainstthebank.Facilitateamicablesettlementofthe
complaints.
d)BankingMohtasibshallnotentertainanycomplaintalreadydisposedofbySBPoranycourtoflaw.

e)BankingMohtasibcannotissueastayordertoentertainanycomplaint,ifthematterispendingbefore
anycourtoflaw.

AuthoritiesofBankingMohtasib

BankingMohtasibisauthorizedtoentertaincomplaintsofthefollowingnature:

A)Banksfailuretoactaccordingtothebankinglawsandregulation.Delaysorfraudsinrelationtothe
payments,collectionofinstrumentsorfundtransfer.

B)Fraudulentorunauthorizeddebitentriesintheaccount.

C)Complaintsfromexportersorimportersrelatingtothebankingservices.
D)Complaintsfromholdersofforeigncurrencyaccountswhetherresidentornonresident.
E)Unauthorizedoperationoflockers.

F)Complaintsrelatedtoforeignremittances.
G)ComplaintinrelationtothemarkupbasedonthegroundofviolationofanagreementorSBP
directives.

H)Complaintsrelatingtotheutilitybills.

BankingMohtasibshallnotpassanyorderagainstbankwithoutgivingnoticeandopportunityofhearing.

BeforefilingacomplaintwiththeMohtasib,thecomplainantshouldintimatebankinwritingaboutthe
intentionofdoingso.Incaseofnoreplyorunsatisfactoryreply,thecomplainantcansendcomplaintto
bankingMohtasibwithin45day.

Thecomplaintshouldbemadeinwritingundersolemnaffirmationoroath,narratingfulldetailsofthe
case/transactionsdisputed,andalsonameandaddressofthecomplainant.

TheMohtasibcanadoptanyprocedure,heconsidersappropriateforinvestigatingthecomplaint.

BankingMohtasibhasthepowerforthepurposeofdisposingacase,torequireanyinformation
documentsfrombankswhicharerelevantforthepurposeofdecidingacomplaint,subjecttothe
followingconditions:
a)Maintainconfidentialityasperbankinglawsandprocedure.

b)Thedocumentsshallnotbeprovidedwhichmaycompromisebankspositioninrelationtotheother
customersaccount.
c)Ifbanksdonotprovideinformation/documents,thebankMohtasibcanaddadversecommentsinhis
findingregardingnonprovisionofinformation/documents.

Mohtasibwilltryforanamicablesettlementifsatisfiedwiththegenuinenessofthecomplaint.Incaseof
failureitmaydirectconcernedbankto:

a)Reconsiderthematter.

b)Modifyearlierdecision

c)TopaycompensationfixedbyMohtasib.

d)Totakestepstoimproveefficiencyofthebank.

e)RecommendSBPtoinitiateinquiryagainstthebankforviolationoflaw,regulations,etc.

InnocaseMohtasibwilldirectbanktoprovidefinance/loantoanycomplainant.

IfanybankoritsofficialorcomplainantisnotsatisfiedwiththedecisionofMohtasib,hemayfilean
appealwiththeGovernoroftheStateBankofPakistanwithin30daysofpassingtheorderbythe
Mohtasib.Thegovernorshalldecideappealwithin30days.

FindingoftheMohtasibshouldbeimplementedwithin40daysofthedecisionorfinalizationofappeal
fromtheGovernorSBPasthecasemaybe.

Ifnoappealisfiled,thedecisionofMohtasibshallbetreatedasfinal.IfdecisionoftheMohtasibisnot
implementedbytheconcernedbank,SBPmaypenalizeitormayaskfordisciplinaryactionagainstits
officials.
BankingMohtasibcanaskthebanktodiscloseanyinformationrequiredfordisposingthecase,ensuring
confidentialityasperrequirementoflaw.

2.5.BankersBooksEvidenceAct,1891:

PriortopassingofBankersBookEvidenceAct1891bankerswererequiredtoproduceinthecourtoflaw
oneormoreoftheiroriginalledgersorotherbooksofaccountasanevidence,therebycausing
inconvenienceanddisruptiontotheirnormalbusinessoperations.Toremovetheseformalities,Bankers
BookEvidenceAct1876waspassedwhichwasreplacedbyBankersBookEvidenceAct1879with
extendedprovisions.

2.5.1.BankersConvenienceSection5ofthesaidActreadsasunder:

Abankerorofficerofabankshallnotinanylegalproceedingtowhichthebankisnotaparty,be
compellabletoproduceanybankersbooks,thecontentsofwhichcanbeprovedunderthisActorto
appearasawitnesstoprovethematters,transactionsandaccountsthereinrecorded,unlessbyorderof
aJudgemadeforspecialcause.
TheActthusabsolvesbanksfrom:
Productionoforiginalbooksand
Appearanceinpersonofbankspersonnel.

2.5.3.Certifiedcopy.

Undersection4,acertifiedcopyofanyentryinabankersbookshallinalllegalproceedingsbereceived
asprimafacieevidenceoftheexistenceofsuchanentryandshallbeadmittedasevidenceofthe
matters,transactionsandaccountsthereinrecordedineverycasewhere,andtothesameextent,asthe
originalentryitselfisnowbylawadmissible,butnotfurtherorotherwise.

AcertifiedcopymeansacopyofanyentryinthebooksofabankasdefinedbySection2(2)bearingat
thefootoftheentry,acertificatedatedandsubscribedbytheAccountant/Managerofthebankwithhis
nameandofficialdesignationtotheeffect:
i.thattheentryiscontainedinoneoftheordinarybooksofthebank.
ii.thattheentrywasmadeintheusualandordinarycourseofbusiness.
iii.thatthebookcontainingtheentryisstillinthecustodyofthebank.
CopiesofbankrecordthatarenotcertifiedwithinthemeaningofSection2(8)cannotbereceivedas
primafacieevidenceofexistenceofentriesofwhichtheyarecopiesnorcansuchcopiesbeadmittedas
evidenceofmatters,transactionsandaccountthereinrecorded.

ElectronicTransactionsOrdinance2002

2.5.4.ElectronicTransactions.Tocopewiththerequirementsofpresentdaychangesinvolving
electronictransactions,theGovernmentpromulgatedtheElectronicTransactionsOrdinance2002.Thislaw
ismeanttorecognizeandfacilitatedocuments,records,information,communicationsandtransactionsin
electronicformandtoprovidefortheaccreditationofcertificationserviceprovider.Varioustermsused
intheOrdinancehavebeendefinedasunder:

Authenticitymeansinrelationtoanelectronicdocumentorelectronicsignature,theidentificationof
anattributiontoaparticularpersonoraninformationsystem.
Legalrecognitionnodocument,record,information,communicationortransactionshallbedeniedlegal
recognition,admissibility,effect,validity,prooforenforceabilityonthegroundsthatitisinelectronic
formandhasnotbeenattestedbyanywitness.

Attestation/Notarizationnoelectronicdocumentshallrequireattestationandnotarizationforaperiod
of2yearsfromthedateoftheOrdinance.

ToincludetheimpactoftheElectronicOrdinancetheQanuneShahadatOrder1984hasbeenamended
accordingly.

___________________________________________________________________________
Successisnotsomethingtowaitforitissomethingtoworkfor.
__________________
Wheneveryoufindyourselfonthesideofthemajority,itistimetopauseandreflect.MarkTwain

Saturday,April05,2014

saadmonga
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BankerCustomerRelationship

Youareneverfullydresseduntilyouwearasmile.
BankerCustomerRelationship
WhatIsaBanker:
AccordingtoSection3(b)NegotiableInstrumentsAct(Amendment)1962a"Bankermeansaperson
transactingthebusinessofaccepting,forthepurposeoflendingorinvestment,ofdepositsofmoney
frompublic,repayableondemandorotherwiseandwithdrawablebycheque,draft,orderorotherwise
andincludesanyPostOfficeSavingBank".
Bankerhasbeendefinedinalmostthesametermsinsection5(b)ofBankingCompaniesOrdinance1962.
Insimplewordswecansaybankerisonewho
(1)Takesdepositsofmoneyfromthepeople,
(2)Repaysthesedepositstothepeopleaccordingtoagreedtermsandconditionsincludingondemand,
and
(3)Lendsand/orinveststhesedepositsinprofitableventures.
WhoIsaCustomer.Thetermcustomerhasnotsofarbeendefinedinanybankinglaw,however,some

eminentwritersonbankingandjuristshavetriedtodefineit.SirJohnPagetsays:"Toconstitutea
personbeingcalledacustomertheremustbesomerecognisablecourseorhabitofdealinginthe
natureofregularbankingbusiness".Themostimportantpoint,accordingtoSirJohnPaget,wasthe
sufficientlylong"duration"ofrelationshipbetweenthebankerandacustomer,butitwasruledoffbythe
judgementofMr.JusticeBailhacheinthecaseofLadbrokev/sTodd(1914)whoobserved"the
relationshipofbankerandcustomerbeginsassoonasthefirstcashdepositisacceptedorachequeis
paidinandacceptedforcollectionandnotmerelywhenitispaid".ThiswasconfirmedbyPrivyCouncil
inthecaseofCommissionerofTaxationv/sEnglish,Scottish,andAustralianBank(1920)."Theword
'Customer'signifiesarelationshipinwhichdurationisnotoftheessence.Apersonwhosemoneyhas
beenacceptedonthefootingthatthebankundertakestohonourchequesuptotheamounttohiscredit
is,intheviewoftheirLordship,acustomerofthebankinthesenseofstatuteirrespectiveofwhathis
connectionis,oflongorshortstanding".(Whatisastatute?)
Torestatetheconcepttheword'Customer'generallydenotesarelationshipresultingfromhabitor
continueddealings.Weknowthatapersoncannotberegardedasacustomerofashopunlesshemakes
apracticeorhabitofpurchasingarticlesfromthatshop.Anisolatedtransactionisnotsufficientto
suggestthatthepurchaserisacustomer.Howeverforabankcustomerthishabitofdealingsisnot
essential.Apersonbecomescustomerassoonasheopensanaccountwiththebank.
Ontheotherhandifapersoncomestobankforencashmentofchequesdaily,whichmeansheisa
regularvisitorofbank,butthesefrequentvisits,willnotentitlehimtobecomeacustomerofbank.Only
theopeningofanaccountestablishestherelationshipofbankerandcustomer.

Inthelightofwhathasbeensaidaboveandbankingpracticewecansaythatanypersonhavingan
accountinabankisacustomer,whateverthenatureofhisaccount.Whetherornotheoperateshis
accountregularlyandwhetherhis,accountisoflongorshortduration,theaccountholderisacustomer.

WhoCanBeACustomer:Therelationshipofbankerandcustomerisacontractualone,therefore,any
personwhohasthecapacitytoenterintoacontract,canbeacustomer.

He/Shemust,therefore,beapersonwho:
(i)hasattainedtheageofmajority,

(ii)isofsoundmind(whenheopensanaccountheshouldbecapableofunderstandingitandmakinga
rationaljudgmentastoitseffectonhisinterests)

(iii)isnotdisqualifiedfromcontractingbyanylawtowhichheissubject.(shouldnotbeaproclaimed
offender,shouldnotbeundischargedbankruptandshouldnotbealienenemy)(Whoisanundischarged
bankrupt?)
However,thereisoneexceptiontothislawandthataminorcanbeacustomeraccordingtothebanking
practice.Suchaccountsareopenedonlytobroadenthebankingfacilities.Theseaccountsareoperated
bytheirguardiansortobenefittheminorunderCourtsWardsAct.Aminor,however,cannotoperatean
account.
(Bylawthepropertyofaminorcanbeusedforthebenefitoftheminoronly.Aloanagainsttheproperty
ofaminorshouldonlybegivenaftergreatcare.)

WhatIsTheNatureOfBankerCustomerRelationship:Asstatedearlier,bankrelationshipisacontractual
oneandforeveryvalidcontracttheremustbeanofferanditsacceptance.Similarly,thereisanoffer
anditsacceptanceinsuchcases.Thedepositoroffershis/hermoneyandbankeracceptsorthebanker
offerstoacceptdepositsandcustomerinacceptanceofthisoffer,depositshismoney.

TypesofRelationships

GeneralRelationship:Thegeneralrelationshipofbankercustomeristhatofdebtorandcreditorwhichof
thesetwo,entirelydependsonthecurrentstateofaccount.Whenthecustomerborrowsfromthebank
heisdebtorandwhenbuildsupbalanceintheaccounthe/sheisacreditorofthebank.
Thisrelationshipofdebtorandcreditorwasforthefirsttimerecognisedin1848inthecaseofFoleyv/s
Hillbythecourtoflaw.Acustomerbroughtanactionagainstabankertoaccountformoneyreceived,
claimingthattherelationshipwasequitable,akintothatofPrincipalandAgentandthathewasentitled
onthatbasistoknow,whathadhappenedtohismoneyandwhatprofithadbeenderivedfromit.The
courtdecidedthattherelationshipisthatofdebtorandcreditorandnotthatofPrincipalandAgent.The
decisionenabledthebankertousethemoneyaccordingtotheirowndiscretion.Whencustomerdeposits
moneyinhisaccount,hehasarighttowithdrawit,buthecannotenquireaboutitsutilization.

OtherRelationships:

i)BailerandBailee.Whenthebanksprovidesafecustody/lockerfacilitiestocustomersfortheir
valuables,therelationshipbecomesthatofbailerandbaileeunderContractAct,1872.Itisanold
relationshipofbankerandcustomerwhichstartedfromthedaysofearlierbankers,i.e.,goldsmiths.The
goldsmithsusedtokeepthebelongingsandvaluablesofpublicforsafecustodywiththemselves.Later
ontheystartedlendingapartofthatdepositwhichwasnothingbutabreachofcontractofbailment.

Section148oftheContractAct,1872,definesbailmentas

Abailmentisdeliveryofgoodsbyonepersontoanotherforsomepurpose,uponacontract.

Adistinctionshouldbemadebetweenagratuitousbaileeandbaileeforreward.Agratuitous(meaning:
donewithoutanycompensationorreward)baileeisrequiredtotakethesamecareasareasonably
prudentandcarefulmanmayfairlybeexpectedtotakeofhisownpropertyofthelikedescription.A
baileeforrewardmusttakegreatercareandmakeuseofthemosteffectiveappliancesavailableforthe
safekeepingofthevaluablesappropriateforthenatureofgoodsentrustedtohiscare.

Theextentandcharacterofbanksobligationsasabaileewillvarywiththedifferentformsofdeposits.
Whensharesandsecuritiesarelodgedwithinstructionstohandlethem,thebankermusthavenoticeof
theparticularsofthearticlesbailed,butwhenarticlesareputinasealedboxorpacketorkeptinasafe
depositlockerthebankerisnotsupposedtohaveanynoticeofthecontents.Inthelattercase,the
bankersobligationistoreturntheboxorpacketwithsealsintactorallowthecustomertooperatehis
lockerwhichshouldbeunhamperedandinaccessibletothebankerindependently.

Thereceiptgrantedbythebankerforsafecustodyofarticlesisnotanegotiableinstrumentor
transferabledocument.Incasethebailerofadepositedarticleisunabletocallatthebanktotakeback
thearticleswhenrequiredtobewithdrawn,thebankershouldtakecaretoensurethattheperson
deputedforthepurposeisdulyauthorizedbythebailer,otherwisethebankerwillbeliablefor
conversion.

(ii)PrincipalandAgent:Whenbankperformagencyservicetheybecomeagentoftheirclientsand
customers,suchascollectionofchequesetcandpaymentofpremiumofinsurancecompanyor
membershipfeetoclubsonbehalfoftheircustomersundertheirstandinginstructions.
(iii)PawnerandPawnee/PledgerandPledgee/MortgagorandMortgagee:Whenwemakeadvancetoour
customeragainstsecurityitistherelationshipofpawnerandpawnee.Besidesthese,bankersalsoacta
Trustee,Executor,AttorneyandGuarantoretc.

Whenacustomerpledgeshismovablepropertylikegoodsanddocumentsandpassesonphysical
possessionthereoftothebankerassecurityforanadvance,hebecomesthepledgerandthebanker
becomesthepledgee.Similarlywhenadvancetothecustomerismadeagainstsecurityofimmovable
property,therelationshipbecomesthatofmortgagorandmortgagee,thecustomerbeingthemortgagor
andthebankermortgagee.

Intermsofthedeedofpledgeanddeedofmortgageexecutedbytheborroweratthetimeoftaking
advance,thebankerhasexpressauthoritytodisposeofthemovableorimmovablepropertyofthe
borrowerincaseofhisfailuretoliquidatethedebtwhenitbecomesduewithoutreferencetoacourtof
law.

HowBankingRelationshipIsEstablished:Theopeningofanaccountestablishestherelationship.An
accountmaybeopenedeitherbycashdepositorbytenderofnegotiableinstrumentforcredittothe
account.AccordingtothebankingpracticeinPakistan,accountsaregenerallyopenedwithcashdeposits.
Ifpartyiswellknownachequeoranyothernegotiableinstrumentmayalsobeacceptedinlieuofcash.

HowDoesTheRelationshipSubsist:Thisrelationshipstartswiththeknowledgeaboutthecustomerand
graduallybuildsupoveraperiodoftime.Thisrelationshipcontinuessolongasitiscarriedoutaccording
tothetermsofcontractembodiedintherulesofthebank.

{Subsist=toexisttobevalid}

HowAndByWhomTheRelationshipCanbeTerminated:Thisrelationshipcanbeterminatedbyanyof
thecontractingparties,ifthepartyagreestodosooronthehappeningofaneventthatwouldgiveto
oneofthepartyoptiontoavoidwhenthereisavoidablecontract.Therelationshipcanbeterminatedby
the:
1)ByCustomer:Accordingtotermsofthedeposits,ifitispayableoni)demandbywithdrawingwhole
balanceandclosingtheaccount,ii)Fixedmaturitythepaymentofthebalanceatsuchmaturity.

2)ByBank:Thebankmayclosetheaccountwhenitbecomesunremunerativeortediousortiresomeor
foranyotherreasonriskytomaintain(ObstinacyofCustomer)orwhenbankexercisestherightofset
off.Bankshouldclosetheaccountafterpropernoticetothecustomer,otherwiseitmaydragthebank
intolitigation.
3)ByOperationOfLaw:

Whenthecustomer
i)diesor
ii)becomesinsaneor
iii)becomesbankruptor
iv)thebankitselfbecomesbankruptor
v)anyothercontractualincapacitationoftheparties.
RightsAndDutiesOfBankers:

Bankerhasthefollowingrights/dutiestowardsitscustomers

RightsofBankers:

1)Paymentsandreceiptsmustbeinbusinesshours:

2)Righttorefusepaymentof:

i)Stalecheque(datedmorethan6monthsbeforepresentation)
ii)Postdatedcheque(datewhichhasnotyetarrivedonthedateofpresentation)

iii)Undatedcheques,or
iv)Anyotherirregularityinthechequesuchasdifferenceinamountwritteninwordsandfiguresor
signaturediffers.
3)Righttodebittheaccountwhichwaspreviouslycreditedbyclearingitemwhichisreturnedunpaid.

4)Righttohavereasonabletimeforposting.

5)Righttoutilizethecustomer'sfundsaccordingtoitsownwill.

6)Righttochargeforservicesrendered.
7)RightOfLien:LienisarightofaBanktoretainthepropertybelongingtoacustomeruntilthedebt
duefromthecustomerispaid.Supposeacustomerhasnotrepaidaloanontimeorhasnotpaidbanks
charges,etc.Thebankreceivesadividendwarrantfromacompanyforcredittothiscustomersaccount.
Thebankwillhavealienontheproceedsofthedividendwarranttillsuchtimethecustomerclearsthe
banksdues.Itemsunderliencanbesold/appropriatedbythebankonlyafterthebankgivesduenotice
tothecustomer.

8)RightOfSetOff:Itconsistsoftherightofthebanktofullyorpartiallymergethecreditbalanceofa
customeraccountwithaclaimthatthebankhasagainstthecustomer.Thebankerhasthisrightofsetoff
when:
iAccountisinthesamenameandright,
iiThereisnocontracttothecontrary.

Thebankcanexecutethesetoffonlyaftergivingduenoticetothecustomer.

DutiesOfBanker:

1)Obligationtopay/honourthecheques:

i.whenthereiscreditbalanceor
ii.whenthereareotherarrangementslikeoverdraftfacilities.

iii.Topaychequesdrawnbythecustomeronthebranchofthebankwheretheaccountiskept,orunder
specialarrangementatagreedplaces.

2)Toprovideastatementcontainingacopyofhisaccountwiththebankeratregularintervals

3)Topayprofit/returntothecustomersontheirbalancesasperagreedrates.

4)Tocollecttheproceedsofchequesandotherordersinstrumentsdepositedforcredittotheaccount
CollectionofchequesandothernegotiableinstrumentsBankercollectschequesandothernegotiable
instrumentsonhiscustomersbehalffrombanksandfinancialinstitutionsonwhichthesearedrawn.He
thusactsasagentofthecustomer.Bankerasagenthascertainresponsibilitieswhichhemustdischarge
meticulously.Bankerisexpectedtokeephiscustomeradvisedofthefateoftheinstrumentsunder
collection.Thecustomersaccountcanbedebitedwiththeusualcommissionorcollectionchargesasper
banksrulesandpractice.Asthisserviceisnotrenderedfreeofchargethebankerisliableforany
inordinateandavoidabledelaysinthecollectionorinadvisingfateoftheinstrumenttothecustomer.

5)Togivereasonablenoticetothecustomerbeforeclosingtheaccountordeterminingtherelationship.
(Inlawtheworddeterminingmeansending,closing)

6)ToMaintainSecrecyOfCustomer'sAccount:Itismostimportantlegaldutyofbankernottodisclose
thestateofcustomer'saccounttoanyunauthorisedperson.Thebankercannotdisclosethestateof
accounteventothewifeorhusbandofaccountholderwhoareotherwiseoneandthesamething.This
dutydoesnotendwiththeclosingofaccountbutitcontinuesevenafterthat.Aprudentbankermust,
therefore,exercisegreatestcaretoobservethisdutyofsecrecy.Anyinadvertentdisclosuremadeduring
thebusytimemayhaveseriousconsequences.

Howeverbankercandisclosethestateofaccountonproperandreasonableoccasionswhichare:

1.UnderCompulsionOfLaw,

2.InTheNationalInterest,
3.CommonCourtesyToOtherBanks,

4.InBanksInterest,
5.ExpressedOrImpliedConsentOfCustomer.

RightsandDutiesofaCustomerTowardstheBanker

RIGHTS:

Thecustomerhasthefollowinguniversallyacceptedrights:

(1)todrawchequesagainsthiscreditbalanceorintheabsenceofcreditbalancetherearearrangements
foraccommodationmadewiththebankerbeforehand,tothiseffect.

(2)toreceiveaPassBookorastatementcontainingacopyofhisaccountwiththebanker.Incasehe
findsanyovercreditingoroverdebitinginhisaccounthehasarighttogetitcorrected

(3)tosuethebankforthecosts,lossanddamageswhenhischequeiswrongfullydishonoured
(4)tosuewhenthebankerhasnotmaintainedthesecrecyofhisaccount.

(5)toclaimforandreceivetheprofit/returnonhisdepositsaspromisedbythebank.

DUTIES:
Thecustomerhasthefollowingdutiestowardshisbanker:

(1)NegotiableInstrumentsActlaysdownthatthecustomermustpresentthecheques

forpaymentandcollectionwithinthebusinesshoursofhisbanker.

(2)NegotiableInstrumentsActlaysdownthatthecustomershouldseethatthe

chequeandotherinstrumentsarepresentedforpaymentwithinareasonabletimefromthedateoftheir
Issue.
(3)Heshouldkeephischequebookunderlockandkeysothatnounauthorisedpersongetsaccesstoit.
Ifacustomerfailsinthisdutyheistobeheldresponsibletorhisnegligenceinleavinghischeques
unprotected.
(4)Heshoulddrawthechequesverycarefullyandinsuchawaythatthereisnoroomleftforany
fraudulentalterationsandadditions.

Inthecase,LondonJointStockBankvs.MacmillanandArthur(l918A.C77)LordFindlaysaid:"A
chequedrawnbyacustomer,isinpointoflawamandatetothebankertopaytheamountaccordingto
thetenorofthecheque.Itisbeyonddisputethatthecustomerisboundtoexercisereasonablecarein
drawingthechequetopreventthebankfrombeingmisled.Ifhedrawsachequeinamannerwhich
facilitatesfraud,heisguiltyofabreachofdutytohimselfandthebankerandhewillberesponsibleto
thebankerforanylosssustainedbythebankerasanaturalanddirectconsequenceofthisbreachof
duty."

GeneralTermsandConditionsApplicabletoAccountOpening

Followingarethetermsandconditionscommonlyusedbybanksintheiraccountopeningform.

Anyperson(s)openingoroperatinganaccountwiththeBankwillbedeemedtohaveread,understood
andacceptedtheTermsofAccountandtheapplicableScheduleofBankChargesissuedandamended
fromtimetotimebytheBank.

Notmorethanoneaccountofeachcategory,i.e.foreigncurrency,currentandsaving,PLSsaving,or
similaraccountscanbeopenedinanybranchoftheBank.

ProperidentificationintheformofComputerizedNationalIdentityCard/Passport/AlienRegistration
CardwillberequiredbeforetheBankopensanyaccount,atitssolediscretion,whichwillbe
independentlyverifiedbytheBankthroughNADRA.Incaseofnonvalidationormismatch/incorrect
information,theBankhastherighttostopthetransactiontillclearanceofambiguityorclosureofthe
account.Eachaccountshallpossessadistinctivenumber,whichshallbequotedinallcorrespondence
withtheBankinrelationtotheaccount.
Anychangeintheaddressorconstitutionoftheaccountholder/depositorshouldbeimmediately
communicatedinwritingtotheBank.Thepostofficeandotheragentsfordeliveryshallbeconsidered
agentsoftheaccountholder(s)/depositor(s)fordeliveryofletters,remittanceetc.,andnoresponsibility
shallbeacceptedbytheBankfordelay,nondelivery,etc.

TosafeguardtheBanksinterest,theBankmay,atitsdiscretion,andforanyotherpurposeasperthe
lawofthelandinforce,shareanyinformation,detailsorthedatarelatingtothecustomerstransactions
withanycompetentauthorityoragency.TheBank,incomplyingwithlawsandregulations,mayintercept
andinvestigateanypaymentmessageandotherinformationorcommunicationssenttoorbytheaccount
holderorontheaccountholdersbehalfviaanotherBank.Thisprocessmayinvolvemakingfurther
futureenquiries.
Themethodofcalculatingreturn/profitundertheprofit/losssharingschemeisgovernedbytheBank
RulesunderprevailingRegulations/DirectivesoftheStateBankofPakistanandissubjecttochange
withoutpriornotice.
Noprofitorinterestispaidoncurrentaccounts,whetherinrespectoflocalorforeigncurrency.
Anysumtobedepositedintheaccountshouldbeaccompaniedbyadulycompleteddepositslip
showingthenameandnumberoftheaccounttobecreditedandthedepositorssignature.Suchdeposits
mustbeenteredatcashcounteronly.

Thebankmayacceptforcollectionchequesandotherinstrumentspromptlybutbytheaccount
holder/depositorhim/herselfathis/hersolerisk.Allchequesandotherinstrumentsshouldbecrossed

beforetheyaredepositedforcreditingintheaccount.
Intheeventofanyinstrumentdepositedbeingreturnedforanyreasonwhatsoeverorbeingreturnedat
anytime,althoughpreviouslyadvisedaspaid,theaccountholderwillrefundtheproceedsofthesaid
instrumentandindemnifytheBankagainstalllossesandcostsarisingtherefromandauthorizetheBank
todebitsuchamountandexpensestoanyaccountwhichtheaccountholdermayhavewiththebank.
Thebankwilltakeduecaretoensurethatthecreditanddebitentriesarecorrectlyrecordedinthe
accountsoftheaccountholder/depositor,butincaseofanyerror,theBankshallbewithinitsrightatall
timestomakethecorrectadjustingentrieswithoutpriornoticeandrecoveranyamountduefromthe
accountholder/depositorwithoutpriornotice.
Inthecaseofadepositmaturingonapublicorbankholiday,thentheBankshallpaythedeposit
and/ortheinterest/return/profitonthenextworkingdaywhentheBankisopenforbankingbusiness.
ChequesmayonlybedrawnonprintedchequessuppliedbytheBank.TheBankreservesatalltimesthe
righttorefusepaymentofchequesdrawnotherwise.

Chequesshouldbesignedbytheaccountholder/depositorasperspecimensignaturesuppliedtothe
Bankandanyalteration(s)thereonmustbeauthenticatedbythedrawersfullsignature.Inorderto
complywithanyinstructionsgivenbytheaccountholder/depositor,theBankshallonlyrelyonthe
signatureasprovided/inscribedbytheaccountholder/depositoronthespecimensignaturecardatthe
timeofopeningofthebankaccount.
InthecaseoftheBankreceivingnoticeofthedemiseofanindividualcustomer,theBankwillnotbe
obligedtoallowanyoperationorwithdrawalexceptonproductionofthesuccessioncertificateorother
courtordersfromacourtofcompetitivejurisdiction.

Inthecaseofanoperatinginstructioneitherorsurvivor,intheeventofthedeathofeitherthe
accountholder(s)/depositor,thecreditbalanceintheaccountwillbepayabletothesurvivingaccount
holder(s)/depositor.

Current/savingaccountsthatremaininoperativeforoneyearwillbeclassifiedasdormant.Anychange
ofaddress/signature(s)canberequestedduringtheperiodofdormancyoftheaccount,buttheaccount
willnotbechargedforanychangeinthestatusofthedormantaccount.Forreactivationofanydormant
account,theaccountholdermustinpersonrequestachangeofstatusandwillproduceoriginalCNICor
PassportorPakistanOriginCard(POC)orNationalIdentityCardforOverseasPakistani(NICOP)witha
photocopyforBranch/Bankattestation.

Ifadepositaccount/instrumentremainsinoperativeforaperiodoftenyears,thenitwillbecomean
unclaimeddepositandwillbesurrenderedtoSBPaspertheprovisionsoftheBankingCompanies
Ordinance1962.
PeriodicstatementsofaccountshallbeissuedbytheBanktotheaccountholder/depositorconcerned.
AnydiscrepancyinthestatementofaccountshouldbepromptlybroughttothenoticeoftheBankin
writingwithinfourteendaysofdispatch,failingwhichthestatementofaccountshallbedeemedtobe
finalandconclusive,forallpurposeswhatsoever,

Ifastatementofaccountislostorspoiled,aduplicatestatementofaccountmaybeprovidedbythe
Bank,subjecttochargeasisapplicableunderitsScheduleofBankCharges,uponreceiptofwritten
requestbythecustomer/accountholderonly.

RupeeandforeigncurrencyaccountsnotmeetingtheBanksminimumbalancerequirementmaybe
subject,atthediscretionoftheBank,toservicechargesaspertheScheduleofBankCharges.However,
thefollowingaccountswillbeexemptedfromlevyofservicecharges:I)Students,II)Mustahiqueenof
Zakat,III)EmployeesofGovernment/SemiGovernmentinstitutionsforsalaryandpensionpurposes,
IV)BasicBankingAccount.Detailsofminimumbalancerequirementservicechargeswithexemptionsare
listedintheBanksScheduleofChargesandarealsodisplayedinallthebranches.

TheBank,atitssolediscretion,shallbeconstrainedtoclosethoseaccountswhichshownilbalanceat
thetimeofhalfyearlyclosings.Besidesthis,theBankreservestherighttoclosewithoutpriornotice,
anyaccountwhichinitsopinionisnotsatisfactorilyoperated,orforanyotherreasonswhatsoever.It
shallnotbeincumbentontheBanktodisclosetotheaccountholder/depositorthereason(s)fordoing
so.

Theaccountholder/depositorwishingtoclosetheaccountmustsurrenderunusedcheques,ifany.
TheBankshallhavedischargeditsliabilitywithrespecttoanyaccountsoclosedbymailingtothe
accountholder/depositorathis/herlastknownaddressaspertheBanksrecord,aBankdraftinthe
currencyofsuchaccount,payabletotheaccountholder/depositoroftheamountofthecreditbalanceof
suchaccountlessdeduction(s)inrespectoftheamountofanyclaimthattheBankmayhaveonsuch
funds.
TheBankshalldeterminefromtimetotimetherateofinterest/return/profitpayableonthe
account/depositinaccordancewiththeprevailingrulesandregulationsoftheStateBankofPakistanand
thepoliciesoftheBankwhicharesubjecttochangefromtimetotimeandtheaccountholder/depositor
agreestoacceptsuchrateofinterest/return/profit.

ForeigncurrencycurrentorsavingsaccountsandtimedepositsmaybeestablishedintheU.S.Dollar,
PoundSterling,Euro,JapYenandsuchothercurrenciesastheBankshalldetermine/allowandin
accordancewiththelocalregulationsinforcefromtimetotime.
Profitonforeigncurrencysavingandtermdepositsispaidatperiodicintervalsasdeterminedbythe
Bankand/oruponrespectivematuritydatesofsuchdepositsatsuchrateasmaybedeterminedbythe
Bankfromtimetotime.
.Foreigncurrencyaccounts/depositsareopenedandmaintainedsubject

toForeignExchangeRegulationsandDirectivesoftheGovernmentof

Pakistan,oranyoftheorganizations/agenciesandStateBankofPakistanfromtimetotime.

Zakat,whereverapplicable,shallbedeductedonvaluationdatafrom

applicableaccountshavingbalanceinexcessoftheexemptedlimitasdeclaredforthatparticularZakat
year.
.DeclarationonprescribedPerformaforexemptionofdeductionofZakatwillberegisteredwiththeBank
atleastonemonthpriortovaluationdateorasperZakatrulesapplicablefromtimetotime.Zakatwill
bedeductedasperZakatandUsherOrdinance1980.

.ALLapplicabletaxesshallberecoveredaspertaxlawsinforce.TheBankshallwithinitsrightmake
investmentofcreditbalancedepositsinanymanneratitssolediscretionandmakeuseoffundstothe
bestofitsjudgmentinthebankingbusinessunderthePLSsystem.
Theaccountholder/depositorundertakestoreimbursetheBankwithanyclaiminrespectof
losses/chargesonthebasisofhalfyearly/yearlyclosingoftheBanksbooksofaccount.TheBankwould
bewithinitsauthorizedrightstodebittheiraccountsfortheamount(s)ofsuchclaims/chargesin
settlementofbusinessaccountsoftheBank.
TheBankissubjecttoallapplicablecirculars,orders,directives,rules,regulations,laws,decreesand
restrictionsissuedbycompetentGovernmentandotherregulatoryauthoritiesinPakistanandtheliability
oftheBankforpaymentisgovernedbyapplicablelawsandregulationinforceinPakistanattherelevant
time.Repaymentofanydepositaccount,balances,orinterest/profitthereonissubjecttoanyactsofthe
Govt,ofPakistanortheStateBankofPakistanoranycompetentgovernmentalandotherregulatory
authorityinPakistan.

OnarequestforHoldMailservice,theBankwillholdallmailaddressedtotheaccount
holder/depositor.Theaccountholderwillcollectanymailsoheldpersonally,orthroughanauthorized
person,unlesshe/sheadvisesthebanktothecontraryinwriting.Itisacknowledgedthattherequestfor
HoldMailserviceisbeingmadeentirelyfortheaccountholdersconvenienceandathis/herriskand
responsibilityandwithoutanyobligationonthepartoftheBank.Alltransactionswillbechargedasper
ScheduleofCharges.
ForaBBAaccount,amaximumoftwodepositsandtwowithdrawalspermonthareallowedfreeof
chargeasperpolicyinforce.However,anytransactioninacalendarmonthoverthosementionedabove
willbechargedaflatfeeaspertheprevailingScheduleofBankCharges.
Anyexistingcustomerwantingtoconverthis/heraccountintoBBAcandosobygivingawritten
applicationtotheBranchManager,afterwhichanewBBAaccountwillbeopened.Anewaccountnumber
willbeprovidedtothecustomerafterdueaccountopeningprocedures,includingsubmissionofCNIC,if
notprovidedearlier.Thestatementofaccountwillbeissuedonceayear.Theaccountisexemptfrom
levyofservicechargesinthecaseofnotmeetingminimumbalancerequirements.Onlyoneaccountper
CNICshallbeallowedtobeopenedregardlessofthebranch.Noduplicationshallbeallowed,evenasa
jointaccountorsoleproprietorshipaccount.
__________________________________________________________________________________
__________________
Wheneveryoufindyourselfonthesideofthemajority,itistimetopauseandreflect.MarkTwain

Saturday,April05,2014

saadmonga
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PrudentialRegulationsforBanks

Everyjobisaselfportraitofthosewhodidit.
PrudentialRegulationsforBanks
IfthebanksinPakistanviolatethesePrudentialRegulationstheyareliabletofaceheavyfinancial
penaltiesandthebankofficerscanfacedisciplinaryactionbytheStateBankofPakistanandthebank
canlosetheirbankinglicencebesidesheavyfinancialpenalties.)
5.1.NatureofPrudentialRegulations:
PrudentialRegulationsarebothpreventiveandprotectivetechniques.Preventiveregulationsforestall

crisesbyreducingtherisksfacingbankssuchascontrollingandmonitoringthemanagementofbanks
capital,solvency(CHECKTHEMEANINGSOFSOLVENCYINTHECOMPUTER)andliquiditystandardsand
largeexposurelimits.Protectivetechniquesprovidesupporttobanksonceacrisisthreatenslenderof
thelastresortfacilitiesareofimmediatebenefits.

IncaseofPakistanibanksbranchesfunctioningoverseasthePrudentialRegulationsorlegalrequirements
ofhostcountryshallprevail.ThePrudentialRegulationsdonotsupersedeotherdirectivesissuedbySBP
fromtimetotime.
5.2.Definitionsofimportantterms:
1.AccountHoldermeansapersonwhohasopenedanyaccountwithabankorisaholderofdeposit/
depositcertificateoranyinstrumentrepresentingdeposit/placingofmoneywithabankorhas
borrowedmoneyfromthebank/DFI.ADFImeansaDevelopmentFinanceInstitution.

2.Borrowermeansapersononwhomabankhastakenanyexposureduringthecourseofbusiness.

3.Contingentliabilitymeans:(a)apossibleobligationthatarisesfrompasteventsandwhoseexistence
willbeconfirmedonlybytheoccurrenceornonoccurrenceofoneormoreuncertainfutureeventsnot
whollywithinthecontroloftheenterpriseor
(b)apresentobligationthatarisesfrompasteventsbutisnotrecognizedbecause:

(i)itisnotprobablethatanoutflowofresourcesembodyingeconomicbenefitswillberequiredtosettle
theobligationor
(ii)theamountoftheobligationcannotbemeasuredwithsufficientreliabilityandincludeslettersof
credit,lettersofguarantee,bidbonds/performancebonds,advancepaymentguaranteesand
underwritingcommitments.(BidBond=Aguaranteethatthefirmwillenterintoacontractifitis
awardedtothefirm)

4.Documentsincludevouchers,cheques,bills,payorders,andpromissorynotes,securitiesforleases/
advancesandclaimsbyoragainstthebank/DFIorotherpaperssupportingentriesinthebooksofa
bank/DFI.
5.Equityoftheborrowerincludespaidupcapital,generalreserves,balanceinsharepremiumaccount,
reserveforissueofbonussharesandretainedearnings/accumulatedlosses,revaluationreserveson
accountoffixedassetsandsubordinatedloans.

6.Exposuremeansfinancingfacilitieswhetherfundbasedand/ornonfundbasedandincludeanyform
offinancingfacilityextendedorbillspurchased/discountedexceptonesdrawnagainsttheL/Csofbanks
ratedatleastAbycreditratingagencyontheapprovedpanelofStateBankofPakistan.

7.ForcedSaleValue(FSV)meansthevaluewhichfullyreflectsthepossibilityofpricefluctuationsand
cancurrentlybeobtainedbysellingthemortgaged/pledgedassetsinforced/distressedsale
conditions.
8.GovernmentSecuritiesshallincludesuchtypesofPak.RupeeobligationsoftheFederalGovernmentor
aProvincialGovernmentorofaCorporationwhollyownedorcontrolled,directlyorindirectly,bythe
FederalGovernmentoraProvincialGovernmentandguaranteedbytheFederalGovernment.

9.Groupmeanspersons,whethernaturalorjuridical,ifoneofthemorhisdependentfamilymembersor
itssubsidiary,havecontrolorholdsubstantialownershipinterestovertheother.

10.LiquidAssetsaretheassetswhicharereadilyconvertibleintocashwithoutrecoursetoacourtoflaw
andmeanencashment/realizablevalueofgovernmentsecurities,bankdeposits,certificatesof
deposit,sharesoflistedcompanieswhichareactivelytradedonthestockexchange,NationalInvestment
Trust(NIT)Units,certificatesofmutualfunds,CertificatesofInvestmentissuedbyentitiesratedatleast
AbyacreditratingagencyontheapprovedpanelofStateBankofPakistan.Theseassetswith
appropriatemarginsshouldbeinpossessionofthebankwithperfectedlien.
11.Guaranteesissuedbydomesticbankswhenreceivedascollateralbybankswillbetreatedatparwith
liquidassetswhereas,forguaranteesissuedbyforeignbanks,withratingofAandabove.

12.MediumandLongTermFacilitiesmeanfacilitieswithmaturitiesofmorethanoneyearandShort
TermFacilitiesmeanthosefacilitieswithmaturitiesuptooneyear

13.NBFCmeansNonBankingFinanceCompanyandincludesaModaraba,LeasingCompany,Housing
FinanceCompany,InvestmentBank,DiscountHouse,AssetManagementCompanyandaVentureCapital
Company.

14.OtherFormofSecuritymeanshypothecationofstock(inventory),assignmentofreceivables,lease
rentals,contractreceivables,etc.

15.ReadilyRealizableAssetsmeanandincludeliquidassetsandstockspledgedtothebanksin
possession,withperfectedliendulysupportedwithcompletedocumentation.
16.Securedmeansexposurebackedbytangiblesecurityandanyotherformofsecuritywithappropriate
margins.Exposurewithoutanysecurityorcollateralisdefinedasclean.

17.EquityoftheBank/DFImeansTierICapitalorCoreCapitalandincludespaidupcapital,general
reserves,balanceinsharepremiumaccount,reserveforissueofbonussharesandretained
earnings/accumulatedlossesasdisclosedinlatestannualauditedfinancialstatements.Incaseof
branchesofforeignbanksoperatinginPakistan,equitywillmeancapitalmaintained,freeoflossesand
provisions,underSection13oftheBankingCompaniesOrdinance,1962.

18.NomineeDirectormeansapersonnominatedontheboardofabank/DFIbysponsor(s),persons,
company,institutionetc.byvirtueofhis/theirshareholdinginabank/DFI.

19.PBAmeansPakistanBanksAssociation.

20.SubordinatedLoanmeansanunsecuredloan,extendedtotheborrowerforaminimumoriginal
maturityperiodof5years,subordinatetotheclaimofthebank/DFItakingexposureontheborrower,
anddocumentedbyaformalsubordinationagreementbetweenprovideroftheloanandthebank/DFI.
Theloanshallbedisclosedintheannualauditedfinancialstatementsoftheborrowerassubordinated
loan.
21.TangibleSecuritymeansreadilyrealizableassets(asdefinedinthesePrudentialRegulations),
mortgageofland,plant,building,machineryandanyotherfixedassets.

22.UnderwritingCommitmentsmeancommitmentsgivenbycommercialbanks/DFIstothelimited
companiesatthetimeofnewissueofequity/debtinstrument,thatincasetheproposedissueof
equity/debtinstrumentisnotfullysubscribed,theunsubscribedportionistakenup(purchased)bythe
underwritingentity.

5.3.TheNeedforPrudentialRegulations

TheBaselAccordof1988anddesirabilitytoavailthebenefitsoflaissezfairepromptedtheintroduction
ofPrudentialRegulationsbyStateBankofPakistanwitheffectfrom1January,1992,tocounterany
adverseimpactofaderegulatedbankingsectorinPakistan.Thekeyobjectivesoftheseregulationsare
outlinedbelow:
a)ToprotectthesafetyofpublicssavingsdepositedinBanks.

b)Tocontrolthesupplyofmoneyandcreditinordertoachieveanationsbroadeconomicgoals(suchas
highemploymentandlowinflation).

c)Toensureequalopportunityandfairnessinthepublicsaccesstocreditandothervitalfinancial
services.
d)Topromotepublicconfidenceinthefinancialsystem,sothatsavingsflowsmoothlyintoproductive
investment.

e)Toavoidconcentrationsoffinancialpowerinthehandsofafewindividualsandinstitutions.

f)Toprovidethegovernmentwithcredit,taxrevenuesandotherservices.

g)Tohelpthosesectorsoftheeconomythathavespecialcreditneeds(suchashousing,smallbusiness,
andagriculture).
5.4.CategoriesofPrudentialRegulations:

ThePrudentialRegulationsaredividedinfourcategories:

1.RiskManagement(R),(PrefixR)
(TherearedifferentsetsofRiskRegulationsforCorporateandCommercialBanking,SME,Consumer,
AgricultureandMicroFinanceLoans.)
2.CorporateGovernance(G),

3.KYCandAntiMoneyLaundering(M),and
4.Operations(0).

5.4.1.RiskManagement
1)Corporate/CommercialBanking

REGULATIONR1

LIMITONEXPOSURETOASINGLEPERSON/GROUP

1.Thetotaloutstandingexposure(fundbasedandnonfundbased)byabank/DFItoanysingleperson

shallnotatanypointintimeexceed30%ofthebank's/DFI'sequityasdisclosedinthelatestaudited
financialstatements,subjecttotheconditionthatthemaximumoutstandingagainstfundbasedexposure
doesnotexceed20%ofthebank's/DFI'sequity.

2.Thetotaloutstandingexposure(fundbasedandnonfundbased)byabank/DFItoanygroupshallnot
exceed50%ofthebank's/DFI'sequityasdisclosedinthelatestauditedfinancialstatements,subjectto
theconditionthatthemaximumoutstandingagainstfundbasedexposuredoesnotexceed35%ofthe
bank's/DFI'sequity.

Therationaleofthisregulationistodiversifythebanksexposuretoalargenumberofclients.Ifabank
givesloansonlytoasmallnumberofclientsgivinglargechunkstoeachcustomerthebankscreditrisk
willbehigh.Ifloansaregiventoalargenumberofclientsandeachcustomerisgivenasmalleramount
theoverallRISKwillbelower.

3.Limitonexposuretoasingleperson/Groupeffectivefrom31122009andonwardwouldbeasunder:
EffectivedateExposurelimitasa%ofbanks/DFIsequity(asdisclosedinthelatestauditedfinancial
statements)
ForsinglepersonForgroup

Totaloutstanding(fundandnonfundbased)exposurelimitFundbasedoutstandinglimitTotaloutstanding
(fundandnonfundbased)exposurelimitFundbasedoutstandinglimit
3112200930204535
3112201030204035
3112201130203530
3112201230203025
3112201325252525
REGULATIONR2

LIMITONEXPOSUREAGAINSTCONTINGENTLIABILITIES
1.Contingentliabilitiesofabank/DFIshallnotexceedatanypointintime10timesofitsequity.

ContingentLiabilitiesarethetotalofthefollowingcommitmentsundertakenbyabank:

A.LettersofGuaranteeissuedbyabank.

B.LettersofCreditissuedbyabank.

C.LettersUnderwritingtheissueofsharesorTFCstothePublic.

Followingshallnotconstitutecontingentliabilitiesforthepurposeofthisregulation:

a)Billsforcollection.
b)ObligationsunderLettersofCreditandLettersofGuaranteetotheextentofcashmarginretainedby
thebank/DFI.
c)Lettersofcredit/guaranteewherethepaymentisguaranteedbytheStateBankofPakistan/Federal
Governmentorbanks/DFIsratedatleast'A'byacreditratingagencyontheapprovedpanelofState
BankofPakistanorStandard&Poors,Moody's,FitchIbcaorJapanCreditRatingAgency(JCRA).

d)Nonfundbasedexposuretotheextentcoveredbyliquidassets.

e)Claimsotherthanthoserelatedtoprovisionoffacilities(fundbasedornonfundbased)tothe
banks'/DFIsconstituents,wheretheprobabilityofconversionoftheseclaimsintoliabilitiesareremote.

REGULATIONR3

MINIMUMCONDITIONSFORTAKINGEXPOSURE

1.Whileconsideringproposalsforanyexposure(includingrenewal,enhancementand
rescheduling/restructuring)exceedingsuchlimitasmaybeprescribedbyStateBankofPakistanfrom
timetotime(presentlyatRs500,000),banks/DFIsshouldgivedueweightagetothecreditreport
relatingtotheborrowerandhisgroupobtainedfromCreditInformationBureau(CIB)ofStateBankof
Pakistan.However,banks/DFIsmaytakeexposureondefaulterskeepinginviewtheirriskmanagement
policiesandcriteria,providedtheyproperlyrecordreasonsandjustificationsintheapprovalform.The
conditionofobtainingCIBreportwillapplytoexposureexceedingRs500,000/afternettingofftheliquid
assetsheldassecurity.

2.Banks/DFIsshall,asamatterofrule,obtainacopyoffinancialstatementsdulyauditedbya
practicingCharteredAccountant,relatingtothebusinessofeveryborrowerwhoisalimitedcompanyor
wheretheexposureofabank/DFIexceedsRs10million,foranalysisandrecord.Thebanks/DFIsmay
alsoacceptacopyoffinancialstatementsdulyauditedbyapracticingCostandManagementAccountant
incaseofaborrowerotherthanapubliccompanyoraprivatecompanywhichisasubsidiaryofapublic
company.HowevereffectivefromDecember31,2009,iftheborrowerisapubliclimitedcompanyand
exposureexceedsRs.500million,banks/DFIsshouldobtainthefinancialstatementsdulyauditedbya
firmofCharteredAccountantswhichhasreceivedsatisfactoryratingundertheQualityControlReview
(QCR)ProgramoftheInstituteofCharteredAccountantsofPakistan.Subsequently,ifthefirm'sratingis

downgradedinQCRprogram,thenthefinancialstatementsofsuchborrowersareauditedinthe
subsequentyearbyafirmhavingsatisfactoryratingunderQCR.lBanks/DFIsmaywaivetherequirement
ofobtainingcopyoffinancialstatementswhentheexposurenetofliquidassetsdoesnotexceedthelimit
ofRs10million.Further,financialstatementssignedbytheborrowerwillsufficewheretheexposureis
fullysecuredbyliquidassets.

3.Banks/DFIsshallnotapproveand/orprovideanyexposure(includingrenewal,enhancementand
rescheduling/restructuring)untilandunlesstheLoanApplicationForm(LAF)prescribedbythe
banks/DFIsisaccompaniedbya'Borrower'sBasicFactSheet'underthesealandsignatureofthe
borrowerasperapprovedformatoftheStateBankofPakistan(AnnexureIIAforcorporateborrowers
andAnnexureIIBforindividualborrowers).

REGULATIONR4

LIMITONEXPOSUREAGAINSTUNSECUREDFINANCINGFACILITIES

1.Banks/DFIsshallnotprovideunsecured/cleanfinancingfacilityinanyformofasumexceedingRs
500,000/(Rupeesfivehundredthousandonly)toanyoneperson.Financingfacilitiesgrantedwithout
securitiesincludingthosegrantedagainstpersonalguaranteesshallbedeemedas'clean'forthepurpose
ofthisregulation.Further,atthetimeofgrantingacleanfacility,banks/DFIsshallobtainawritten
declarationtotheeffectthattheborrowerinhisownnameorinthenameofhisfamilymembers,has
notavailedofsuchfacilitiesfromotherbanks/DFIssoastoexceedtheprescribedlimitofRs500,000/
inaggregate.
2.Forthepurposeofthisregulation,followingshallbeexcluded/exemptedfromtheperpartylimitofRs
500,000/onthecleanfacilities:
a)FacilitiesprovidedtofinancetheexportofcommoditieseligibleunderExportFinanceScheme.

b)FinancingcoveredbytheguaranteeofPakistanExportFinanceGuaranteeAgency.

c)Loans/advancesgiventotheemployeesofthebanks/DFIsinaccordancewiththeirentitlement/staff
loanpolicy.

d)InvestmentinCOIs/interbankplacementswithNBFCs,providedtheinvesteeNBFCisrated'A+','A'or
'A'forlongtermratingandatleast'A2'forshorttermratingorequivalentbyacreditratingagencyon
theapprovedpaneloftheStateBankofPakistanorStandard&Poors,Moody's,FitchIbcaorJapan
CreditRatingAgency(JCRA).ninstructions,willbeexemptedfromtheaggregateexposurelimit.

3.Banks/DFIsshallensurethattheaggregateexposureagainstalltheircleanfacilitiesshallnot,atany
pointintime,exceedtheamountoftheirequity.However,investmentofbanks/DFIsinsubordinatedand
unsecuredTFCs,issuedbyotherbanks/DFIstoraiseTierIICapitalasperStateBankofPakistan's
instructions,willbeexemptedfromtheaggregateexposurelimit.

REGULATIONR5

LINKAGEBETWEENFINANCIALINDICATORSOFTHEBORROWERANDTOTALEXPOSUREFROMFINANCIAL
INSTITUTIONS
1.Whiletakinganyexposure,banks/DFIsshallensurethatthetotalexposure(fundbasedand/ornon
fundbased)availedbyanyborrowerfromfinancialinstitutionsdoesnotexceed10timesofborrower's
equityasdisclosedinitsfinancialstatements(obtainedinaccordancewithPara2ofRegulationR3),
subjecttotheconditionthatthefundbasedexposuredoesnotexceed4timesofitsequityasdisclosedin
itsfinancialstatements.However,wheretheequityofaborrowerisnegativeandtheborrowerhas
injectedfreshequityduringitscurrentaccountingyear,itwillbeeligibletoobtainfinanceupto4times
ofthefreshinjectedequity(insteadoftheexisting3times)providedtheborrowershallploughbackat
least80%ofthenetprofiteachyearuntilsuchtimethatitisabletoborrowwithoutthisrelaxation.After
30thJune2009,theborrowerwillbeeligibleonlyupto3timesofhisfreshinjectedequity.

Inexceptionalcases,banks/DFIsmayallowseasonalfinancingtoborrowers,foramaximumperiodof
sixmonths,notmeetingthecriteriaof4timesoffundbasedexposureand10timestotalexposure,
subjecttotheconditionthatfundbasedexposuredoesnotexceed8timesandtotalexposuredoesnot
exceed12timesofborrower'sequity.

2.Atthetimeofallowingfreshexposure/enhancement/renewal,thebanks/DFIsshouldensurethatthe
currentassetstocurrentliabilitiesratiooftheborrowerisnotlowerthansuchratioasmayberequired
undertheCreditPolicyofthebank/DFI.Banks/DFIsshallprescribetheminimumcurrentratiounder
theirCreditPolicykeepinginviewthequalityofthecurrentassets,natureofthecurrentliabilities,
natureofindustrytowhichborrowerbelongsto,averagesizeofcurrentratioofthatindustry,
appropriatenessofriskmitigantsavailabletothebank/DFIetc.Itisexpectedthatbank/DFI'sCredit
Policy,dulyapprovedbytheBoardofDirectors,shallemphasizehighercreditstandardsandprovidefull
guidancetothemanagementaboutthecurrentratiorequirementforvariouscategoriesofclientsand
correspondingriskmitigantsetc.acceptabletothebank/DFI.
3.Forthepurposeofthisregulation,subordinatedloansshallbecountedasequityoftheborrower.
Banks/DFIsshouldspecificallyincludetheconditionofsubordinatedloanintheirOfferLetter.The
subordinationagreementtobesignedbytheproviderofthesubordinatedloan,shouldconfirmthatthe
subordinatedloanwillberepaidafterthatbank's/DFI'spriorapproval.

4.Thisregulationshallnotapplyincaseofexposurefullysecuredagainstliquidassetsheldascollateral,
aswellasincaseswheretheexposureistakenonUnits/Projectsrevivedasaconsequenceofsettlement
underCommitteeforRevivalofSickIndustrialUnits(CRSIU),Corporate&IndustrialRestructuring
Corporation(CIRC)andtheStateBankofPakistanBPDCircularNo.29datedOctober15,2002,fora

periodoffiveyearsfromthedateofsuchsettlement.Exportfinanceandfinanceprovidedtoginningand
ricehuskingfactoriesshallalsobeexcludedfromtheborrowings(exposure)forthepurposeofthis
regulation.
5.Wherethebanks/DFIshavetakenexposureonexceptionalbasisasprovidedinpara1above,they
shallrecordinwritingthereasonsandjustificationsfordoingsointheapprovalformandmaintainafile
intheircentralcreditofficecontainingallsuchapprovals.TheExceptionsApprovalfileshallbemade
availabletotheinspectionteamofStateBankduringtheinspection.

REGULATIONR6

EXPOSUREAGAINSTSHARES/TFCsANDACQUISITIONOFSHARES
1.A)EXPOSUREAGAINSTSHARES/TFCs:
Banks/DFIsshallnot:
a)Takeexposureagainstthesecurityofshares/TFCsissuedbythem.XYZbankcannotgrantloans
againstsharesissuedbyXYZbank.

b)ProvideunsecuredcredittofinancesubscriptiontowardsfloatationofsharecapitalandissueofTFCs.

c)TakeexposureagainstthenonlistedTFCsorthesharesofcompaniesnotlistedontheStock
Exchange(s).However,banks/DFIsmaymakedirectinvestmentinnonlistedTFCs.

d)Takeexposureonanypersonagainsttheshares/TFCsissuedbythatpersonoritssubsidiary
companies.ItmeansPackagesLtdcannotobtainloanagainstsharesissuedbyPackagesLtd.

e)Takeexposureagainst'sponsordirector'sshares'(issuedintheirownnameorinthenameoftheir
familymembers)ofbanks/DFIs.
f)Takeexposureonanyoneperson(whethersinglyortogetherwithotherfamilymembersorcompanies
ownedandcontrolledbyhimorhisfamilymembers)againstsharesofanycommercialbank/DFIin
excessof5%ofpaidupcapitaloftheshareissuingbank/DFI.

g)Takeexposureagainsttheshares/TFCsoflistedcompaniesthatarenotmembersoftheCentral
DepositorySystem.CheckoninternetthepurposeofCentralDepositoryCompany.

h)TakeexposureagainstunsecuredTFCsornonratedTFCsorTFCsratedbelow'BBB'orequivalent.
Exposuremay,however,betakenagainstunsecured/subordinatedTFCs,whichareissuedbythe
banks/DFIsformeetingtheirminimumcapitalrequirements,aspertermsandconditionsstipulatedin
BSDCircularNo.12ofAugust25,2004.

i)Takeexposureagainstsharesunlessthebeneficiaryofthefacilityisabsoluteownerofthesharesso
pledgedorhasthenecessarymandatetopledgethesharesofthirdpartyassecurityforavailing
financingfacilityfromthebank/DFI.

B)ACQUISITIONOFSHARES:
a)Banks/DFIsshallnotownsharesofanycompany/scripsinexcessof5%oftheirownequity.Further,
thetotalinvestmentsofbanksinsharesshouldnotexceed20%oftheirownequity.

Thesharesacquiredinexcessof5%limitduetotheunderwritingcommitmentswillbesoldoff/off
loadedwithinaperiodofthreemonths.
b)Banks/DFIsmayalsotakeexposureinfuturecontractstotheextentof10%oftheirequityon
aggregatebasis.Inthisconnection,the10%exposurelimitforfuturecontractswillincludebothpositions
takeninfuturesbuyingandselling.

c)Banks/DFIsmaycombinethelimitsforreadymarketandfuturecontractsandhavetheaggregate
exposureinsharestotheextentof30%oftheirequityprovidedthatinvestmentinfuturecontractsshall
notexceed10%oftheirequity.

d)Banks/DFIswillobtainpriorapprovalfromtheStateBankwhilepurchasingsharesofacompanyin
excessof5%oftheirpaidupcapitalor10%ofthecapitalofinvesteecompany,whicheverislower.
Theselimitswillbecalculatedasunder:
e)Regardingstrategicinvestment,thebanks/DFIswillexerciseproperdiligence,astheirdecisionto
makestrategicinvestmentcarriesgreatsignificance,keepinginviewtheimplicationsofsuchinvestment
intermsofliquiditymanagementandlongtermoutlookoftheinvesteecompanies.Inthisregard,the
banks/DFIsshouldtakeintoaccountallrelevantfactors.Accordingly,thefollowingshouldbeensured:

xAcommittee,clearlydesignated/empoweredbythebank,shouldtakethedecisionforstrategic
investment.

xAllRecordoftransactions/decisions,takenbythecommittee,regardingstrategicinvestmentshouldbe
properlymaintainedandkeptinaseparatefile,forprovisionofthesametotheSBPInspectionTeam
duringtheirvisittothebank.
xThebanks/DFIswillreporttheirinvestmentinstrategicportfoliototheBankingPolicyDepartment,
within2workingdaysfromthedateofsuchinvestment.

2.Banks/DFIsshallnotholdsharesinanycompanywhetheraspledge,mortgagee,orabsoluteowner,of
anamountexceeding30%ofthepaidupsharecapitalofthatcompanyor30%oftheirownpaidup
sharecapitalandreserves,whicheverisless.

3.
4.SECURITYMARGIN:Exposureagainstthesharesoflistedcompaniesshallbesubjecttominimum
marginof30%oftheircurrentmarketvalue,thoughthebanks/DFIsmay,iftheywish,sethighermargin
requirementskeepinginviewotherfactors.However,banks/DFIsshouldnotgiveamargincalluntilthe
marginreachestothelevelof25%.Banks/DFIswillmonitorthemarginonatleastweeklybasisandwill
takeappropriateactionfortopupandselloutonthebasisoftheirBoardofDirectors'approvedcredit

policyandprefactwrittenauthorizationfromtheborrowerenablingthebank/DFItodothis.
4.SECURITYMARGIN:ExposureagainstTFCsrated'A'(orequivalent)andabovebyacreditrating
agencyontheapprovedpanelofStateBankofPakistanshallbesubjecttoaminimummarginof10%
whiletheexposureagainstTFCsrated'A'and'BBB'shallbesubjecttoaminimummarginof20%.

REGULATIONR7GUARANTEES

1.Allguaranteesissuedbythebanks/DFIsshallbefullysecured.Furtherthebanks/DFIstoholdatleast
20%oftheguaranteedamountintheformofliquidassetsassecurity.

2.Therequirementofsecuritycanalsobewaivedbythebanks/DFIsincasesofguaranteesissuedto
PakistanifirmsandcompaniesfunctioninginPakistanagainstthebacktoback/counterguaranteesof
branchesofguaranteeissuingbank/DFIorbanks/DFIsratedatleast'A'orequivalentbyacreditrating
agencyontheapprovedpanelofStateBankofPakistanorStandard&Poors,Moody's,FitchIbcaor
JapanCreditRatingAgency(JCRA).Besides,incaseswherethecounterguaranteeissuingbankis
situatedinaforeigncountry,theratingofatleast'A'orequivalentbyalocalcreditratingagencyofthe
respectivecountryshallalsobeacceptable,providedtheguaranteeissuingbankinPakistanis
comfortablewithandacceptsthecounterguaranteeofsuchforeignbank.

However,theprescribedratingrequirementforbankssituatedinforeigncountriesmayberelaxedfor
transactionamountsuptoUS$250,000,subjecttointernalcreditcontrolsandapprovaloftherelevant
bank/DFIinPakistan.FortransactionamountsgreaterthanUS$250,000,banks/DFIsmayapproachthe
StateBankofPakistanforspecificapprovals/exemption,onacasebycasebasis,wheretheprescribed
minimumratingrequirementcannotbecompliedwith.Banks/DFIsareencouragedtosetlimitsfor
acceptanceofguaranteesissuedbyotherbanks/DFIs.

3.Incaseofbacktobacklettersofcreditissuedbythebanks/DFIsforexportorientedgoodsand
services,banks/DFIsarefreetodecidethesecurityarrangementsattheirowndiscretionsubjecttothe
conditionthattheoriginalL/Chasbeenestablishedbybranchesoftheguaranteeissuingbankorabank
ratedatleast'A'byStandard&Poors,Moody's,FitchIbcaorJapanCreditRatingAgency(JCRA).

4.Theguaranteesshallbeforaspecificamountandexpirydateandshallcontainaclaimlodgement
date.However,banks/DFIsareallowedtoissueopenendedguaranteeswithoutclearancefromState
BankofPakistanprovidedbanks/DFIshavesecuredtheirinterestbyadequatecollateralorother
arrangementsacceptabletothebank/DFIforissuanceofsuchguaranteesinfavourofGovernment
departments,corporations/autonomousbodiesowned/controlledbytheGovernmentandguarantees
requiredbythecourts.

REGULATIONR8

CLASSIFICATIONANDPROVISIONINGFORASSETSLOANS/ADVANCES:

CLASSIFICATIONANDPROVISIONING
Classificationheremeansclassifyingthelendingportfolioofabankintodifferentcategoriesbasedonthe
factwhethertheloanand/orinterestisbeingrepaidtothebankinaccordancewiththeloancontract
andwhethertheothertermsandconditionsarebeingmetornot.Forexamplewhethersecurityas
requiredispresent,whetherbusinessisrunningandwhethertheturnoverinthebusinessaccountwith
thebankissatisfactoryornot.Wecanclassifythestudentsofacollegebygender,ageorqualifications.

Provisioningisthenamegiventotheprocesswherebythebankdeductsanamountfromtheprofitithas
madeandplacestheamountinaseparateaccountcalledProvisionforbadanddoubtfuldebtswhenthe
bankhascometotheconclusionthatthereareevidenceswhichindicatethateithertheborroweris
willinglyavoidingtorepayasrequiredorthereisanerosionintheabilityoftheborrowertorepayand
thereisareductionintheavailablesecurityandthereisastrongapprehensionthatthecustomerwillfail
torepayandthebankwillhavetosufferafinancialloss.Theamountthatistransferredtoprovision
accountdoesnotavailabletodistributetotheshareholdersasdividendandcanonlybeusedtocoverthe
possiblelossinthefinancingandisusedtowriteofftheloan.

REGULATIONR11PAYMENTOFDIVIDEND

Banks/DFIsshallnotpayanydividendontheirsharesunlessanduntil:

a)theymeettheminimumcapitalrequirementsaslaiddownbytheStateBankofPakistanfromtimeto
time
b)alltheirclassifiedassetshavebeenfullyanddulyprovidedforinaccordancewiththePrudential
RegulationsandtothesatisfactionoftheStateBankofPakistanand

c)alltherequirementslaiddowninBankingCompaniesOrdinance,1962relatingtopaymentofdividend
arefullycomplied.
REGULATIONR12MONITORING

Whileextendingfundbasedfacilitiestoborrowersagainsthypothecationofstockand/orreceivableson
paripassubasis,banks/DFIsshallobtainmonthlystatementsfromborrowersthatcontainabankwise
breakupofoutstandingamountswiththetotalvalueofstocksandreceivablesthereagainst.

SMALLANDMEDIUMENTERPRIES
GeneralRISKPrudentialRegulationsChecklistforSMEs
GeneralRegulationscoveringboth1)SMALLand2)MEDIUMEnterprises
Criteria
SMESpecificCreditPolicytobeformulatedbyBankmanagement

Proceduresonloanadministration,disbursement,andmonitoringandrecoverymechanismareclearly
documented.
Specificationsofmainfunctions,role&responsibilitiesofkeypositions,aswellasdelegationmatrixfor
approvals/sanctioningoffinancinglimits.
BorrowersBasicFactSheetandeCIBReport

Dulysigned/stamped'BorrowersBasicFactSheet'(BBFS)obtained.
Dulysigned/stamped'LoanApplicationForm'(LAF)obtained.
eCIBreportonborrowerandonhisgroupisobtainedandincaseofdefaultproperjustificationand
reasonsofdefaultarerecorded.
PersonalGuarantees

Allfacilities,exceptforthosesecuredagainstliquidassetsarebackedbyPGoftheownersofSME's.
PGsofalldirectorsotherthannomineedirectorsshallbeobtained,incaseoflimitedcompanies
LimitonCleanfacilities
CleanExposure(facilitiessecuredagainstpersonalguaranteesonlyotherthanconsumerfinancinglimits
i.ecreditcard,personalloans)doesnotexceedRs5Minaggregatefromallbanks.
Writtendeclarationthatcleanfacilitiesdoesnotexceedprescribedlimit(s)isavailable
ProperUtilizationofLoan
Appropriatesystemformonitoringutilizationofloanisinplace.
IncaseofFixedAssets/ProjectFinancing:Appropriatesystemformonitoringutilizationofloanisin
place.
IncaseofWorkingCapital/revolvingcredits:Declarationforutilizationofloanforthepurposeindended
obtained.
RestrictiononFacilitiestoRelatedParties

Anyoffinancingbanksdirector,itschiefexecutiveormajorshareholding5%ormoreofsharecapitalof
theBankoranemployeeoranydependentfamilymemberofthesepersonsisnotinterestedinSME.
AnundertakingfromSEstatingthatthereisnoexistenceofanyinterestbetweentheborrowerandthe
abovementionedrelatedpartiesisobtained.
TranslationofLoanDocumentsintoUrduLanguage

ArrangementsareinplaceforprovisionofLAF,BBFSandotherrelateddocuments(exceptcharge
documents)onspecificrequestofthecustomer.
SecuritiesandmarginRequirements

Allfacilitiesexcepttheonesextendedundercleanfinancingaresecuredappropriately.
GeneralMeasures

Pricingpolicy,processing&documentationfee,prepayement/latepaymentpenalitiesetcexplicitly
mentionedinloanagreement
Atransparent,customerfocusedcomplaintsresolutionsystemisavailable
AnefficientManagementInformationSystem(MIS)forSMEFinancetoeffectivelycatertoneedsofthe
borrowerisimplemented

SmallEnterprises(SE)SpecificPrudentialRegulationsChecklist
NameoftheCustomer
Criteria
DefinitionofSmallEnterprise
ASmallEnterprise(SE)isabusinessentitywhichmeetsboththefollowingparameters
No:ofemployees(inclusiveofcontractemployees):upto20
AnnualSalesTurnover:UptoRs75M
PerPartyExposureLimit

ThemaximumexposureonacounterpartydoesnotexceedRs15MfromaSingleBank/AllBanks
RequirementofAuditedAccounts

Financialsdulysignedbytheborrowerobtained
RepaymentCapacityoftheBorrowerandCashFlowBasedLending

Cashflowsoftheborrowerproperlyassessedbyapplyingappropriatetechniques
CollateralValuation

ValuationconductedbyPakistanBanksAssociatin(PBA)approvedevaluatororBank's/DFIown
evaluatingstaff(forexposuresuptoRs5.0M)
RecoveryofOutstandingDues

Incase,cashcollection/recoveryisdoneataplaceotherthanauthorisedplaceofthebusiness,
appropriatesecuirtyandriskmanagementmeasuresareadopted(includingnecessarystepssuchas

intimationtotheborrower)
GeneralReserveagainstSmallEnterpriseFinance

Generalreserveatleastequivalentupto1%ofthesecuredSEportfolioand2%oftheunsecuredSE
portfolio,ismaintained
ClassificationandProvisioningforLoan/Advances

ClassificationandProvisionguidelinesaremeticulouslyobservedasrequired.
Restructuring/ReschedulingofLoan

GuidelinesforRestructuring/ReschedulingofLoanaremet
MinimumTurnaroundTime

TATforapprovalprocess(fromthedateofreceiptofcompleteinformation)iswithin30days
MediumEnterprises(ME)SpecificPrudentialRegulationsChecklist
NameoftheCustomer
Criteria
DefinitionofMediumEnterprise
AMediumEnterprise(ME)isabusinessentity(IdeallynotapubliclimitedCompany),whichmeetsboth
thefollowingparameters:
No:ofemployees(inclusiveofcontractstaff):21250(Manufacturer&Services)OR2150(Traders)
AnnualSalesTurnover:AboveRs75ManduptoRs400M
RepaymentCapacityandCashflowBasedLending

Repaymentcapacityoftheborroweronthebasisofassetconversioncycle&expectedfuturecashflowis
assessed
Keydrivers&risksofborrowersbusinessandriskmitigantsareidentified
Rationale&parametersusedtoprojectthefuturecashflowsaredocumentedandannexedwithcashflow
analysisundertaken
PerPartyExpsoureLimit

ThemaximumexposureonacounterpartydoesnotexceedRs100MfromaSingleBank.
Totalexposure(includingleasedassets)onacounterpartydoesnotexceedRs200MfromAllBank.
RequirementofAuditedAccounts

Copyoffinancialstatementsdulyauditedbyapracticingcharteredaccountanttobeobtainedwherethe
borrowerisalimitedcompanyand/ortheexposurenetofliquidassetsexceedsRs10M.
ClassificationandProvisioningforAssets

ClassificationandProvisionguidelinesaremeticulouslyobservedasrequired.
WearenotdiscussingtheremainingcategoriesofRiskPrudentialRegulations.

TheseriousstudentsmayvisitsbpwebsitefortheRegulations.

TheregulationsappearinginthebookbyDrIsrarmayormaynotbeuptodate.

5.4.2.CORPORATEGOVERNANCE:

Inordertoensurethatthemanagementofbankshouldnotfallinthehandsthatmightdamageboththe
institutionandthebankingindustryasawhole,theappointmentofproposedPresident/ChiefExecutive
andDirectorsontheBoardrequirepriorclearancefromStateBankofPakistan.Asimilartypeof
approachwillbeobservedbytheBankswhileappointingthekeyexecutivesoftheBankwhichwillserve
asintimationtoStateBankofPakistan.

A.FitAndProperTest

1.The"FitandProperTest"(FPT)isapplicabletothesponsors(bothindividualandcompanies)who
applyforacommercialbankinglicense,theinvestorsacquiringstrategic/controllingstakeinthe
banks/DFIs,majorshareholdersofthebankingcompaniesandtotheappointmentofDirectors,CEO,and
KeyExecutivesofthebanks/DFIs.Thefitnessandproprietywillbeassessedonthefollowingbroad
elements(AnnexureVIIB):

a)Integrity,HonestyandReputation

b)TrackRecord

c)SolvencyandIntegrity

d)QualificationsandExperience
e)ConflictofInterest
f)Others

InordertoimprovethequalityofdirectivesoriginatedfromtheBoard,ithasbeenparticularly
highlightedthattheirrolewillbeonlypolicymakingandgeneraldirections,oversightandsupervisionof
theaffairsandbusinessofthebankandshallnotindulgeindaytodayoperationsofthebusinessofthe
bank.
B.HeadofCompliane/ComplianceOfficer:

Banks/DFIsshallputinplaceaComplianceProgramtoensurethatallrelevantlawsarecompliedwith,in
letterandspirit,and,thus,minimizelegalandregulatoryrisks.Forthispurpose,theBoardofDirectors,
orCountryManagerincaseofforeignbanks,shallappoint/designateasuitablyqualifiedandexperienced
personasComplianceOfficeronacountrywidebasis,whomaybeassistedbyotherComplianceOfficers
downtheline.TheHeadofCompliancewillreportdirectlytothePresident/ChiefExecutiveOfficerofthe
bank/DFI.TheComplianceOfficerswillprimarilyberesponsibleforbank's/DFI'seffectivecompliance
relatingto:
(a)SBPPrudentialRegulations.

(b)Relevantprovisionsofexistinglawsandregulations.

(c)GuidelinesforKYC.
(d)Antimoneylaunderinglawsandregulations.

(e)Timelysubmissionofaccuratedata/returnstoregulatorandotheragencies.

(f)MonitorandreportsuspicioustransactionstoPresident/ChiefExecutiveOfficerofthebank/DFIand

TheBoardofDirectorsofaBankshallalsoensurethatitreceivesManagementLetterfromtheexternal
auditorswithoutdelayandappropriateactionistakenthereoninconsultationwiththeAuditCommitteeto
dealwithcontrolorotherweaknessesidentifiedtherein.AcopyofManagementLettershouldalsobe
submittedtotheStateBankofPakistanforfurtherfollowupattheirlevel

Withaviewtosafeguardtheinterestofprospectiveinvestors,depositorsandcreditors,itshallbe
mandatoryforallbankstohavethemselvescreditratedbyaCreditRatingAgencyontheapprovedpanel
oftheStateBankofPakistan.Further,thebankswilldisclosetheircreditratingprominentlyintheir
publishedannualandquarterlyfinancialstatements
5.4.3.KNOWYOURCUSTOMER(KYC)ANDMONEYLAUNDERING:

ThePrudentialRegulationimpressesuponthebankstoremainfullyconversantabouttheircustomersto
preventthepossibleuseofthebankingsectorformoneylaundering,terroristfinancing,andtransferof
illegal/illgottenmonies.Further,itisnotaonetimeexercisebutanongoingprocessandwill
commencewiththestartofbankercustomerrelationshipandwillremaininoperationduringthe
currencyofeachaccount.
RegulationM1CustomerDueDiligence(Cdd)1

1.Withaviewtopreservingtheintegrityandsafetyofthefinancialsystem,itisexpedienttoprevent
thepossibleuseofthebankingsectorformoneylaunderingandterroristfinancing.Tothisend,Customer
DueDiligence/KnowYourCustomer(CDD/KYC)proceduresrequirespecialattentionandconcrete
implementation.Accordingly,thefollowingminimumguidelinesarerequiredtobefollowedby
banks/DFIstoaverttherisksposedbymoneylaunderingandterroristfinancingactivities.However,
banks/DFIsarefreetotakeadditionalmeasuresinlinewithFinancialActionTaskForce
Recommendations.

ThePrudentialRegulationshavelisteddifferentdocumentsthatmustbeobtainedfromdifferenttypesof
customerswhileopeningeachaccountfortheeaseandguidanceofthebanks.Duringthecourseof
inspectionofthebanks,theefficacyofKYCsystemwillbecheckedtoensureeffectiveobservanceofSBP
directives

Thebanksarerequiredtopreservetheirrecordforaminimumperiodoffiveyears.Therecordsrelating
tothesuspicioustransactionsreportedbythebankshallberetainedevenafterthelapseofthisperiod,
tillsuchtimetheStateBankofPakistanpermitstodestroythesame.

RegulationM4CorrespondentBanking

1.Banks/DFIsshallgathersufficientinformationabouttheircorrespondentbankstounderstandfullythe
natureoftheirbusiness.Factorstoconsiderinclude:

xKnowyourcustomerpolicy(KYC)

xInformationaboutthecorrespondentbank'smanagementandownership
xMajorbusinessactivitiesxTheirlocation
xMoneylaunderingpreventionanddetectionmeasuresxThepurposeoftheaccount

xTheidentityofanythirdpartythatwillusethecorrespondentbankingservices(i.e.incaseofpayable
throughaccounts)xConditionofthebankregulationandsupervisioninthecorrespondent'scountry
SuspiciousTransactions

TheBanksarealsorequiredtoreportallsuspicioustransactionsthroughComplianceOfficerofthebank
toBankingPolicyDepartmentofStateBankofPakistan.Theemployeesofthebanksarestrictly
prohibitedtodisclosethefacttothecustomeroranyirrelevantquarterthatasuspicioustransactionor
relatedinformationisbeingreportedforinvestigation

5.4.4.OPERATIONS:

Bankshavebeenrestrainedfromwindowdressingi.e.artificiallyortemporarilyshowinganostensibly

differentpositionofbanksaccountsasreflectedintheirfinancialstatements.Particularcareshallbe
takeninshowingthepositionofdeposits,nonperformingloans/assets,provision,profit,interbranchand
interbankaccountsetc.

AllentriesoutstandingintheInterBranchAccountsand/orSuspenseaccountmustbereconciled/cleared
andtakentotheproperheadofaccountwithinamaximumperiodof30daysfromthedateofentry
madeinthesaidaccount
EveryBankshallmaintaininPakistannotlessthan80%oftheassetscreatedbyitagainsttimeand
demandliabilities.Accordinglyassetsheldabroadshallnot,atanypointintime,exceed20%ofitstime
anddemandliabilities.Allotherassetsfinancedfromsourcesotherthantimeanddemandliabilitiesshall
beheldwithinPakistan

IncaseofFE25deposits,theseshallnotbeinvestedinfundmanagementschemesofotherbanks,
whetherinPakistanorabroad.Atthesametimeamountinvestedinasingleinstitutionshouldnotexceed
25%oftotalinvestablefunds,availablewiththeinvestingbank

TheprescribedratioofCashReserve/SpecialCashReserveagainstFE25depositshallbemaintainedin
USDDollars.
_______________________________________________________________________________________
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Wheneveryoufindyourselfonthesideofthemajority,itistimetopauseandreflect.MarkTwain

Saturday,April05,2014

saadmonga
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KnowyourCustomerandAntiMoneyLaundering(AML)

Theonlywayyourknowledgeandvocabularycangrowisbylookingupthemeaningsofallunfamiliar
wordsinagoodNewEditionDictionary.SpecializedDictionariesliketheoneson(1)Lawand(2)banking
andfinancecanincreaseyourunderstandingoftechnicaltermsandconcepts.
Makearesolutionthatyouwilllookupthewords,whosemeaningsarenotcleartoyou.
KnowyourCustomerandAntiMoneyLaundering(AML)
(StoryBCCIconvictedofmoneylaunderingandliquidatedworldwide.)
WhatisMoneyLaundering?
Moneylaunderingcanbedefinedastheprocesswherebythetrueidentityofillegallyobtainedmoneyis
changedorconcealedsothatitappearstohaveoriginatedfromalegitimatesource.
Themainpurposesofmoneylaunderingaretodisguisetheoriginoffunds,integratethefundsinto
economyandspreadanddiversifytheriskofseizureorconfiscationofillegitimatefunds,andtofurther
financecriminaloperations.
Moneylaunderingservesasaformofsecurityforindividualsinvolvedincriminalactivities.
Cashbeingabearerinstrumentandcompletelyfungible,lendsanonymitytoavarietyofcriminal
activitiesandisthepreferredmediumofexchangeinthecriminalworld.Thatgivesrisetoaneedfor
criminalsto:
1.concealthetrueownershipandoriginofthemoney
2.maintaincontroloverthemoneyand
3.altertheformofmoneytomaskitsorigins.
{fungibleesp.ofgoods)beingofsuchnatureorkindastobefreelyexchangeableorreplaceable,in
wholeorinpart,foranotheroflikenatureorkind.}
ThreeimportantphasesinMoneyLaundering.
1.Placement
Placementisthefirststageofmoneylaunderingprocess.Thecriminalsbringtheirillgottenmoneyinto
theformalsector.CriminalactivitiesalmostalwaysgenerateproceedsinCASH.Examplesareproceeds
ofnarcoticssales,takingbribes,sellingsmuggledgoods.Thecashreceivedisintroducedtothefinancial

systemorretaileconomyeitherinbulkorthroughstructuringoftransactionstoavoidattention.This
canbedoneinanincreasinglyvariednumberofways.Forexample:

1.depositofcashinbanksorotherfinancialinstitutions
2.purchaseoftravelerschequesorforeigncurrency

3.purchaseofinsurance,gold,paintingsorotherhighvalueitems

4.usingservicesoftraderswhomaybankillegalmoneyalongwiththeirownfunds,forexampleill
gottenproceedscanbedepositedinbankstogetherwithlegalpetrolpumpreceiptsincash.
Theplacementstageismostimportantasfarasdetectionofillegallyobtainedmoneyisconcerned.
2.Layering

Thisistheusualprocessofseparatingthefundsfromtheirsourceand/orconsolidatingfundsand
transferringthefundsthroughmultipleaccountsandfinancialinstruments.Seriesoftransactionsare
conductedfromoneaccounttoanotherandfromoneinstitutiontoanotherincludingoverseastransfers
withtheintentofmakingthemoneytrailasmuddyandmurky(notclear,darkanddirtywithmudetc.)as
possible,becauseifthefundscannotbeconnectedtocriminalact,theycannotbeseized.
Atthisstage,themoneylaundererssoleobjectiveistobreakthelinkbetweentheillegallyobtained
moneyanditssource.Ifabankercomesacrossabankingtransactionwhichhasnoapparenteconomic,
commercialorvisiblelawfulpurpose,onecouldsuspectthatitinvolveslayering.

3.Integration.

Thefinalstageofmoneylaundering,integrationisturningtheillegallyobtainedfundsintotangible
assets,suchasrealestate,carshowroomorreinvestingthefundsintoabusiness.Insituationswhere
thelayeringprocesssucceeds,integrationprocesseffectivelyreturnsthelaunderedproceedsbackinto
thegeneralfinancialsystemandtheproceedsappeartobetheresultoforconnectedtolegitimate
businessactivities.
Atthisstage,itisalmostimpossibletotracethefundsbacktotheiroriginalcriminalsource.

Banksandfinancialinstitutionsfacetheriskofinadvertentlybecominginvolvedintheprocessofmoney
laundering.Itwouldseemthattheplacementstagerepresentsthemostrisktofinancialinstitutions,but
itcanbeseenthatfinancialinstitutionscanunknowinglybecomeinvolvedinmoneylaunderingatany
stageoftheprocess.
Thebanksnormallydonothaveeffectivemeansofknowingwhetheratransactionstemsfromorforms
partofawrongfulactivity.Similarly,ininternationalcontext,itmaybedifficulttoensurethatcross
bordertransactionsonbehalfofcustomersareincompliancewiththeregulationsofanothercountry.
Nevertheless,thestaffshouldnotsetouttoofferservicesorprovideactiveassistanceintransactions,
whichintheiropinion,areassociatedwithmoneyderivedfromillegalactivities.

Bankssuccessonthisfrontisdependentupontheprudenceandvigilanceofeverymanagerand
employee.AllconcernedmustadheretoKYCpoliciesandproceduresforascertainingcustomersstatus
andhissourceofearning,formonitoringofaccountsonregularbasis,forcheckingidentitiesandbona
fidesofremittersandbeneficiaries,forretaininginternalrecordoftransactionsforfuturereference.

(checkbonafides=checktoensurethatsbiswhotheysaythattheyarechecktoensurethatsb/sthis
honest)
Thetransactions,whichareoutofcharacter/inconsistentwiththehistory,pattern,ornormaloperationof
theaccountinvolvingheavydeposits/withdrawals/transfersshouldbeviewedwithsuspicionandproperly
investigated.

Thecircumstancesgenerallyandaftertheeventof9/11(Whatis9/11?)haveinvitedattentionofall
concernedtoheightenedglobaleffortstopreventthepossibleuseofthebankingsectorformoney
laundering,terroristfinancing,transferofillegal/illgottenmonies,andasconduitforwhitecollar
crimes,etc.Inordertobringbankingoperationsatthedesiredlevel,StateBankofPakistanhasissueda
setofPrudentialRegulationsNo.M1toM5forthepurpose.

4.1.DefinitionofMoneyLaundering:
Thereisalackofconsensusamongsteventhedevelopedcountriesaboutwhatcriminalactivitiesfall
withinthesphereofMoneyLaundering.ThetermMoneyLaunderingwasfirstusedinearly1980s.
Broadlyitrefersto:
Itisaprocessbywhichlargeamountsofillegallyobtainedmoneyaregiventheappearanceofhaving
originatedfromalegitimatesource.

or
Theconversionofprofitsderivedfromillegalactivitiesintofinancialassetswhichconsequentlyappear
tohavelegitimateorigin.

or
MoneyLaunderingisamagictrickforwealthcreation,ahavenfordrugtraffickers,armsdealers,tax
evadersetc.

{haven=aplacethatissafeandpeacefulwherepeopleoranimalsareprotected:Thehotelisahaven
ofpeaceandtranquillity.Theriverbanksareahavenforwildlife.safehaven,taxhaven}

4.2.KnowYourCustomer(KYC)

Moneylaunderingisincreasinglyseentobewithinthesphereofresponsibilityofcentralbanksand
regulatoryauthorities.Moneylaunderinglegislationencouragesbankstoputinplaceeffectiveprocedures
toensurethatallpersonsconductingbusinesswiththemareproperlyidentifiedandthattransactions
whichdonotappeartobelegitimatedarereported.Intheyear2000representativesofinternational
bankingindustrylaunchedtheGlobalAntiMoneyLaunderingGuidelinesforBanks&DFIs.Theseunderline
legalobligationsonbankstoknowtheircustomersincludingbeneficialownersandtheirsourceof
wealth.Whatisabeneficialowner?

4.3.AntiMoneyLaunderingMeasures
TheSBPhastakenthefollowingsteps:

a.UnderPrudentialRegulations,Banksarerequiredtotakenecessarysafeguardattheirrespective
levelsagainstsuchtransactionsanduseofbankingchannelsforsuchactivities.

b.SpecificemphasisonthepolicyKnowYourCustomer.

c.AntiMoneyLaunderingUnitestablishedatStateBank.
d.PrudentialRegulationsprovidealistofsuspicious/suspectedtransactionsforguidancetoBankers.

e.AppointmentofComplianceOfficerbyallbanksmadecompulsorytooverseemoneylaundering
measuresintheirrespectiveinstitutions.

f.RestrictionsonissuanceofRupeeTravellersChequesofdenominationaboveRs.l0,000.

g.DiscontinuationofissuanceofbearerinstrumentssuchasFEBCs,DBCs,FCBCsandUS$SpecialBearer
Bonds.
h.ReplacementofMoneyChangersbyExchangeCompaniesandsettingupsystemsfortheirmonitoring.

i.AntiMoneyLaunderingActhasbeenpassedanditisbeingimprovedinthewakeofincreasing
terrorism.
j.PakistanacquiredmembershipofAsiaPacificGrouponMoneyLaundering(APGML),aregional
organizationforcombatingmoneylaundering.
k.CoordinationwithSECPandNABtochalkoutstrategiesforfuturecourseofaction.

l.WithdrawalofimmunityonForeignCurrencyAccounts.

(ImmunitymeantthatapersoncouldkeepasmuchmoneyashelikedinaForeignCurrencyandno
Govt.entitycouldaskanyquestions.Thishasbeenwithdrawn.)
StateBankAntiMoneyLaunderingRegulationsconsistoftwoimportantPillarsofProtectingthebanks
fromMoneyLaundering:
FirstPillarComprehensiveenquiries/careatthetimeofopeningtheaccountofaprospective
customerwhichinvolvesfillingoutaCustomerProfileForm,takingallthe

1)pertinentdetailsofthecustomer,

2)hissourceofincome,
3)thepurposeofopeningtheaccount,
4)thedetailsofthebeneficialowner,
5)theexpectedvolumeoftransactions,

6)theexpectedapproximateamountsofthetransactionsthatwillbemade,

7)theprofessionoftheaccountholder,

8)thenatureofbusinessand
9)verifiedaddressofthecustomer.

TheBranchmanagerhastomakeajudgementastothelevelofriskinessoftheaccountandifthe
accountisthatofapoliticalfigure(politicallyexposedperson),thebusinessentailscashtransactions,or
theuseofthebankingfacilitiesiscomplexthebranchmanagerwillassignandmarkahigherlevelof
risktotheaccount.Higherriskaccountswillbesubjecttoenhancedduediligencewhichmeansthe
accountwillbesubjecttocloserscrutiny.Ifthemanagerisnotsatisfiedhewillnotopentheaccount.

SecondPillarContinuedandconstantmonitoring/checkingofthetransactionsbeingpassedoverthe
Accounts.Thebanksdutydoesnotendwithduecareatthetimeofopeningtheaccount.Bankhasa
continuingdutyundertheAntiMoneyLaunderingActtokeepaconstantwatchonthetransactionsbeing
passedovertheaccountsinthebanksbooks.Ifthebankdetectsthatthevolumeorfrequencyof

transactionsisoutoflinewiththeindicationsgivenbythecustomeratthetimeofopeningtheaccount
thebankmustmakeenquiries.

ThereisaHeadofComplianceintheHeadOfficeandthereareComplianceOfficersinBranches.The
complianceteamkeepsaneyeonthebankingtransactionsbeingpassedovertheaccounts.

Iftheydetectdiscrepancybetweenthenature,size,frequencyoftransactionsindicatedatthetimeof
accountopeningandactualtransactionsthecomplianceteamconsidersthediscrepanciescarefully.In
lessseriousmattersthebankmaydecidetotakeclarification/explanationfromthecustomer.

If,however,thebankdetectsanysuspiciousentrieswhichindicatethatthecustomerisinvolvedin
moneylaunderingorotherillegalfinancialactivitiesitistheincumbentdutyofthebankertoinformthe
HeadofCompliancewhoshouldinformtheSpecialAntiMoneyLaunderingCellcreatedinStateBankof
Pakistan.Thebankmustnotinformthecustomerinquestionthatthebankhasreportedtheaccountto
StateBankofPakistan.

PracticalStepsin:

Complianceof
KnowYourCustomer,

CustomerDueDiligenceand
EnhancedDueDiligence
WalkinCustomers

Walkincustomersarethosewhojustwalkintobranchpremisestoopenanaccountormakeuseofother
bankingservices.Theprioritiesofwalkincustomersmaybethat:

Thebranchlocationisconvenientforthem

Thecustomerserviceofthebranchisbetterthanotherbranchesorotherbanks

Thebranchpremisesarebetterthanotherbranchesorotherbanksandareequippedwithmodern
facilities
Thesizeandreputationofthebankisgood

Thechargesarelessthanotherbanks.
SolicitedCustomers
Solicitedcustomersarethosewhoarecontactedbythebankstaffwiththepurposeofestablishinga
businessrelationship.Generallythesearecustomerswhosecredentialsarewellestablishedandwho
enjoyagoodreputationinthemarket.

Anaccountisopenedbycompletinganaccountopeningform.Thisdocumentisthemeansbywhichthe
bankercustomerrelationshipisestablished.Alltherequirementsofaccountopeningapplytoboththe
customerandthedocumentationdependingonthetypeofaccountbeingopenedinthebank.

AccountopeningbasicsforPeople/Naturalpersons:

Fornaturalpersonsthefollowinginformationshouldbeobtained,whereapplicable:

1.Legalnameandanyothernamesused(suchasmaidenname)(maidennameisthepreviousname
usedbyawomanbeforechanginghernameuponmarriage)

2.Correctpermanentaddress(thefulladdressshouldbeobtainedaPostOfficeboxnumberisnot
sufficient)
3.Telephonenumber,faxnumber,andemailaddress

4.Dateandplaceofbirth
5.Nationality

6.Occupation,publicpositionheldand/ornameofemployer

7.Anofficialpersonalidentificationnumberorotheruniqueidentifiercontainedinanunexpiredofficial
document{e.g.passport,identificationcardCNIC,POC(PakistanOriginCard),NICOP(NationalIdentity
CardforOverseasPakistanis}thatbearsaphotographofthecustomer

8.Typeofaccountandnatureofthebankingrelationship

9.Signature.
10.Letterofthanksmustbepreparedandmailedtothecustomeronthegivenaddress.Chequebook
mustnotbedelivereduntilthecustomerbringsthethankyouletterreceivedbyhimthrough
courier/mail.
11.Iftheletterofthanksisreturnedundelivered,itcouldbeanindicationthattheprospectiveaccount
holderisafraudster,branchmanagershouldbeinformedwhoshouldmakecareful,investigation.The
accountshouldbemarkedcautionuntilthematterissortedout.Thebranchmanagertodecidetheaction
tobetaken.

(StoryAMExportsthankyouletterreturned.Majorfraudofcustomsdeptt.revealed.)

12.Thebankshouldverifytheinformationontheaccountopeningformbythefollowingmethods:

a.Confirmingthedateofbirthfromanofficialdocument(e.g.birthcertificate,passport,IdentityCard,
socialsecurityrecords)

b.Confirmingthepermanentaddress(e.g.utilitybill,taxassessment,bankstatement,aletterfroma
publicauthority)

c.Contactingthecustomerbytelephone,byletterorbyemailtoconfirmtheinformationsuppliedafter
anaccounthasbeenopened(e.g.adisconnectedphone,returnedmail,orincorrectemailaddress
shouldwarrantfurtherinvestigation)

d.ConfirmingthegenuinenessoftheCNICproducedbythecustomerthroughonlineverificationfrom
NADRAisessential.

AccountopeningbasicsforCompanies
Forcompaniesthefollowinginformationshouldbeobtained:

1.Nameofinstitution
2.Principalplaceofinstitution'sbusinessoperations

3.Mailingaddressofinstitution
4.Contacttelephoneandfaxnumbers
5.Partnershipdeed

6.Letterheadofproprietorship
7.Someformofofficialidentificationnumber,ifavailable(e.g.taxidentificationnumber)

8.TheoriginalorcertifiedcopyoftheCertificateofIncorporationandMemorandumandArticlesof
Association
9.TheresolutionoftheBoardofDirectorstoopenanaccountandidentification(CNIC)ofthosewho
haveauthoritytooperatetheaccount

10.Natureandpurposeofbusinessanditslegitimacy.

11.Letterofthanksdrillandcareifreturnedundeliveredshouldbeexercisedforbusinessaccountsas
well.
CustomersDueDiligence(CDD)/KnowYourCustomer(KYC)

CustomersDueDiligence(CDD)/KnowYourCustomer(KYC)areprimarilyproceduresthatarerequired
tobeimplementedbythebanktoidentifytheirclients/customersinordertoascertainrelevant
informationpertinenttodoingbusinesswiththem.Financialmanagersareincreasinglyrecognizingthe
importanceofensuringthattheirbankshaveadequatecontrolsandproceduresinplacesothatthey
knowthecustomerswithwhomtheyaredealing.
Adequateduediligenceonnewandexistingcustomersisakeypartofthesecontrols.Withoutthis,banks
maybecomesubjecttoreputational,operational,legalandconcentrationrisks,whichcanresultin
significantfinancialcost.InPakistan,CDD/KYCisaregulatorypolicyrequirementtobeimplementedto
checkthecustomer,theirsourcesoffundsandnatureofbusiness,etc.KYCimplementationshave
becomeincreasinglyimportantgloballytopreventtheft,fraud,andmoneylaunderingactivities.KYC
shouldnotbetreatedasjustaformalityofformfillinginfactitisaprocesstobeundertakenwithcare.
Theobjectivebeingthataccountisopenedforgenuinecustomersandregularmonitoringensuresthatit
isnotusedforcriminalormoneylaunderingpurposes.
ThesecondaspectofCDD/KYCcheckingistoverifythatthecustomer

isnotonanylistofknownpersonssuspectedorconvictedoffinancialcrimeordefault.SBPissuesa
negativelistwhichisupdatedfromtimetotime,highlightingsuchnegativepersons,companiesand
associations.PersonsorEntitiesappearingonthenegativelistarenoteligibletoopenaccounts.
Computercheckingofthenegativelistisessentialwhenstartinganynewfinancialrelationship.

AnotherkeyaspectofCDD/KYCcontrolistomonitortransactionsofcustomersagainsttheirrecorded
profile,includingtheirhistoricaldata.
BanksexercisingCDD/KYCmonitoringforAntiMoneyLaunderingandCounteringtheFinancingof
Terrorism(AML/CFT)purposesshouldusespecializedTransactionMonitoringSoftware,aswellasNames
AnalysisSoftwareandTrendMonitoringSoftware.Suchsoftwareshouldautomaticallyhighlightaccounts
appearingonanegativelistandshouldalsogeneratealertstoidentifyunusualactivities.

KnowYourCustomer(KYC)policy

AccordingtotheSBPPrudentialRegulationMl,banksandDFIsshouldformulateinwritinga
comprehensiveKnowYourCustomer(KYC)policy,dulyapprovedbythebanksBoardofDirectorsandin
linewithinternationalbestpractices.Thispolicyshouldbeapplicablewhenstartinganewrelationship
(newaccount)withthecustomerandacontinuingrelationshipwithexistingcustomers.Thishasbecome
moreimportantinviewoftherecentriseinterroristactivities,whereterroristshaveusedbanking
channelstotransferillegalfunds.
CustomerDueDiligence(CDD)
ThefollowingDueDiligencemeasuresshouldbetaken:

Noaccountofananonymousorfictitiouspersonshallbeopenedormaintained.

Allreasonablemeasuresshouldbetakentoidentifybeneficialownershipofanaccount.

Ifacustomerisactingonbehalfofanyotherperson(s),measuresshouldbetakentoverifythe
identityoftheotherperson(s).

WhendealingwithanyLegalPerson(companies,trusts,societies,NGOs,NonprofitOrganizations,etc)
informationmustbeobtainedandverifiedabouttheownershipandcontrolstructureoftheaccountand
abouttheperson(s)whoultimatelyown(s)orcontrol(s)theaccount/customer.

EnhancedDueDiligence(EDD)
EnhancedduediligenceshouldbeexercisedwhendealingwithHighRiskcustomerssuchas:

a)Nonresidencecustomers
b)Privatebankingcompanies

c)Legalpersons
d)CustomersbelongingtocountrieswhereKYC,CDD,AMLregulationsarenonexistent/notapplied

e)Customersincashbasedbusiness
f)Customerswhosesourceofincomeisnotclearlydefined

g)Customersdealinginhighvalueitems.

EDDshouldalsobeusedinthefollowingsituations:

Customerwhohasbeenrefusedbankingfacilitiesbyanyotherbank/DFI

Openingcorrespondencebankingaccount
Dealingwithnofacetoface/onlinecustomers
Dealingwithpoliticallyexposedpersons(PEP).'Politicallyexposedpersons'(PEPs)arepersonsholding
orwhohaveheldapositionofpublictrust.

Thefollowingmustbecarriedoutatthetimeofestablishingarelationship
withacustomer:
1.Allprospectivecustomersmustbeseenfacetoface(exceptonlinecustomers,forwhomaseparate
identificationprocessisdefined).
2.PropercompletionofAccountOpeningandKYCformsandauthorizations.
3.Documentsproducedbythecustomermustbeoriginal.Inthecaseofphotocopies,eachcopymustbe
markedOriginalseen"afterverifyingtheoriginaldocuments.

4.Alldocumentaryevidence,informationprovidedandsignaturesmustbeconsistent.

5.Purposeandreasonforopeningtheaccountorestablishingtherelationship.

6.Expectedoriginanduseoffundsthatareroutedthroughthebank.
7.Prepareanddocumentcustomersbusinessandtransactionprofileincludingdetailsof
occupation/employment/businessactivitiesandsourcesofwealthandincome.

8.Evidenceofidentityandaddressofallaccountholders(includingthirdpartymandate)mustbe
obtainedandshouldbeindependentlyverifiedforauthenticity.

9.PhotocopyofCNICalongwithoriginalmustbeobtainedatthetimeofopeningtheaccount.Original
maybereturnedaftermarkingcopyOriginalseen.

10.DocumentsrequiredunderSBPPrudentialRegulationNo.Mlmustbeobtained.

11.Wheretherearedoubtsaboutthequalityoradequacyofpreviouslyobtainedcustomeridentification
materialforexistingcustomers,then,onthebasisofmaterialityandriskidentification,verification
shouldbecarriedoutatappropriatetimes.
PurposeofCDD/KYCandAML
ThepurposeofCDD/KYCandAntiMoneyLaundering(AML)proceduresistochecktheauthenticityofthe
customerandtheirbusinessaccount.
Forthispurpose,thefollowingstepsshouldbetaken.

Obtainallnecessaryidentificationdocuments.Thecustomercanprovideanyofthefollowingverification
documents,alongwithaphotocopy,forattestation/verificationtothedesignatedofficer.Theoriginal
documentsshouldbereturnedtothecustomerafterverification/attestation.

1.CNIC
2.Passport

3.PakistanOriginCard(POC)

4.NationalIdentityCardforOverseasPakistani(NICOP)foraccountsotherthanindividualorjoint.
Variousadditionaldocumentsarerequired,thedetailsofwhichareprovidedintheAccountOpening
portionofthisbook.NADRAverificationshouldbecompletedimmediatelybutnolaterthan5working
days.InnocircumstanceshouldtheverificationcostofCNICverificationbepassedontotheaccount
holder.

Generally,branchstaffknowstheircustomerswelltheCDD/KYCexercisehelpstodocumenttheir
knowledgeofthecustomer.Ifinformationisnotdocumented,verbalinformationwillnotbeacceptableto
theregulator.

CDD/KYCshouldnotbemerelyaformfillingexercisebutshouldbeinstrumentalinbuildingfuture
relationships.
CDD/KYCisanongoingprocessanddoesnotendattheaccountopeningstage.Anyfreshinformation
regardingtheaccountholder,his/hernewbusiness,newsourcesoffunds,orconversionofstatusfrom
studenttobusiness/service,etcshouldbeimmediatelyupdatedintheAOFandinthecomputersystem.
NocustomerisexemptfromCDD/KYC.Theyallhavetobetakenthroughthisrouteinavery
professionalmanner,withoutannoyingthem.Thebankershouldnotbehavelikeaninvestigatorora
policeofficer,butinsteadbeverycourteousandtactfulintheirapproach.

CDD/KYCisaveryconfidentialpartofthecustomerAOFandinnocircumstancesshoulditbesharedwith
him/her.Donotwritegeneralizedstatements/wordssuchasprivateservice,business,etc.rather
bemorespecificinrecordinginformationsuchasservinginKESC,KauserMedicalStore,etc.

Itisnotnecessarythatallinformationisbackedbydocumentaryevidence,butmustbedonewherever
possible.EnsurethatGovernmentaccountsarenotopenedinthepersonalnameofgovernmentofficials.

Foropeninganygovernmentaccount(Federal,Provincial,andLocalGovt.)inanofficialcapacity,the
relevantgovernmentofficialsshouldproduceanauthorityletterfromthedepartmentconcerned,duly
endorsedbytheMinistryofFinanceorFinanceDepartmentoftherelevantprovincial/localgovernment.
Additionaldiligenceshouldbeappliedtohighriskcustomerswhoareengagedincashbasedbusinesses
andwhoseactualsourceoffundsisnotclearlyidentifiable.
AsperSBPinstruction,anyaccountthathasnotsubmittedaCNICwithinaspecifiedperiodcanbe
discontinued.
BankandDFIsshouldundertakeduediligenceandidentificationofwalkincustomerswhoundertake
transactionsabovethelimitprescribedinthebanks/DFIsinternalpolicies.

Publicfiguresandpoliticallyexposedpersons
Theterm"publicfigure"appliestoapersonwhoperformsanimportantpublicfunctionandisknownby
thepublicatlarge.Individualsbelongingtopoliticalandsocialenvironments,showbiz,etc.shouldalso
beconsideredaspublicfigures.Thesepeoplewilltakeadvantageoftheirpublicfigurestatusinorderto
achievepersonalbenefits.Followingareafewexamplesofpublicfigures:

HeadofState(presentorpast)
CabinetMinisters
ChiefExecutivesofnationalizedindustriesandseniorofficialsofgovernmentadministration

ChiefJusticeofHighCourtsandjudgesofSupremeCourtsseniorleadersofpoliticalparties
Seniorjournalistsofelectronicandprintmediaetc
Diplomats,AmbassadorsandCounselGeneralsservingabroadandForeignAmbassadorsandCounsel
GeneralsofIncreasedRiskCountries

HeadsofArmedForces(Army,Navy,AirForce,JointChiefsofStaff)

Personsresponsibleforlookingafterthepublicinterestatlarge.Thislistisonlyindicativeandnot
exhaustiveandisalsobasedonsubjectivecriteria,justtogiveanideaofPEPs/publicfigures.Youmay
beabletothinkofotherexamplesfromyourownexperienceofdealingwithsuchcustomers.

______________________________________________________________________
__________________
Wheneveryoufindyourselfonthesideofthemajority,itistimetopauseandreflect.MarkTwain

Saturday,April05,2014

saadmonga
Member

#6

JoinDate:May2012
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Openingaccountsforvarioustypesofcustomers

Theonlywayyourvocabularyandknowledgewillgrowisbyreadingnewwords
Lookinguptheirmeaningsinagooddictionarywhichalsogivesexamplesofsentencesinwhichthose
wordsareused.
OxfordAdvancedLearnersEnglishDictionaryisonesuchDictionary.
Openingaccountsforvarioustypesofcustomers
6.5.OpeningofAccountEveryadultandsaneindividualcanopenabankaccount,providedheisnot
insolventoranundischargedbankrupt.Jointaccountcanalsobeopenedbytwoormoreindividuals.
Similarlyagroupofpersonshavingformedthemselvesintoapartnershipfirmcanalsoopena
partnershipaccount,providedthemaximumnumberofpartnersistwenty.Wheneverthemaximum
numberexceedsthislimit,lawrequiresthatitshouldgetitselfincorporatedasajointstockcompany
undertheCompaniesOrdinance1984.
Abankaccountisopenedwithaninitialdepositofmoneygenerallyintheformofcash.Tothisendan
accountopeningformisused.Theaccountopeningformisrequiredtobecompletedandsignedbythe
prospectiveaccountholderandacceptedbythebranchManageroranofficialdulyauthorizedinthis
behalf.Thecompletionandsigningoftheaccountopeningformbytheprospectivecustomerandits
subsequentacceptancebythebankanddepositofinitialamountconstitutesacontractualrelationship
betweentheaccountholderandthebank.
Itis,therefore,necessarythatthebankbeforeenteringintothiscontractualarrangementwiththe
prospectiveaccountholdershould,amongother,besatisfiedwithregardtohisidentity,integrityand
reliability.
Thebankshouldsatisfyitselfthatitisnotopeningaccountofaperson,whoisnonexistentorisa
personofquestionableintegrityandreliability.Thisunderlinestheneed
andimportanceofdetailedcustomerduediligencebythebankmanager.Thisentailssatisfyinghimself
thatthecustomerisgenuine,heisnotanimposter,hisaddressisverified,hiscomputerizedIDcardis
genuine,hissourcesoffundsareknownandheisareliablepersonsuitableformaintainingabank
accountandisnotlikelytoindulgeinmoneylaundering.Onsatisfactionabouttheintegrityofthenew
accountholders,usualapprovalforopeningtheaccountshallbeextendedbytheManagerhimself.
Thereafterotherformalitieslikeallotmentofdistinctiveaccountnumberandrecordingofcustomersdata
intheledger/computersystemshallbeundertaken.
CUSTOMERDUEDILIGENCE(CDD)

Intheyear2008StateBankofPakistanissuedinstructionsthatthereisnocompulsoryrequirementof
INTRODUCTION.Insteadthebankopeningtheaccountisrequiredtododetailedduediligencetoensure
thattheaccountisopenedforapersonwhoisproperlyidentified,thebankshouldmakeenquiriesthat
heisagenuinepersonandhisaddressandotherdetailsareverifiedaspertherequirementsof
PrudentialRegulationsandKNOWYOURCUSTOMERandtheBankManagerinterviewstheprospective
customer.Themanagerconfirmsinwritingthatheisfullysatisfiedaboutthegenuinenessandsuitablility
ofthecustomer.Thebankmanagercancallforanydocumentsthatheconsidersappropriateormake
anyenquirieshedeemsnecessarybeforeapprovingtheopeningoftheaccount.

Banksusuallyopenaccountwithafirstcashdepositandacceptchequesfordepositonlythereafterso
astobecertainthatthechequeisbeingcollectedforacustomertobewithintheprotectionofSection
131oftheNegotiableInstrumentAct.
Theessentialprecautionsare:
i.Theprospectiveaccountholder,preferably,callsatthebankandsignstheaccountopeningforminthe
presenceofanauthorisedbankofficial.
ii.Anewaccountholderisinterviewedbythebankofficerinordertoreassurehimselfaboutthe
genuinenessofthepersonapplying.
iii.Tosecureidentityoftheprospectiveaccountholderbanksofficersmayvisittheplaceofresidence
and/orbusinessattheaddressgivenintheaccountopeningform,tactfullyverifyingtheantecedentsof
thenewcustomer.

iv.AsamatterofroutinetheBankManagersendsaletterofthankstothenewcustomerforhaving
openedhisaccountwiththebankassuringhimofthebankscourteousandefficientservices.Thereal
purposeofthisexerciseistoeliminatethepossibilityoftheaccountopenerbeingafakepersonoran
impersonatorortheaddressbeingwrong.Ifathankyouletterisreturnedundelivered,bankmust
makedetailedenquiriesasitmaybeduetothecustomerbeingfakeornongenuine.

v.Ifthenewcustomerhasorhadanaccountinsomeotherbank,thatbankmayberequestedtoprovide
aconfidentialreportonthestatusofthecustomer,inaccordancewiththeestablishedpracticeamongst
banksforexchangeofinformationoneachotherscustomers.

vi.StateBankofPakistanhasgivendetailedinstructionsforKnowYourCustomer(KYC)/AntiMoney
Laundering(AML)duediligenceandalsoalistofminimumdocumentsthatarerequiredforopeningofan
account.
TypesofCustomers

Therelationshipofbankerandcustomerisprimarilythatofdebtorandcreditor.Theamountdepositedby
thecustomerbecomesbanksownmoneyonceitentersBankskitty.Thecustomerhasachoiceofaction
i.e.arighttoreclaimthedebtfromthebankbydrawingachequeorbyissuingwritteninstructions.The
depositsareobtainedfromvarioustypesofcustomerswithvaryingfeaturesandimplicationswhichare
discussedbelow:
7.1.IndividualsAccount(SingleorJoint,NaturalPerson/s)

Anypersonhavingcapacitytomakeavalidcontractcanopenanaccountbysigningtheprescribed
accountopeningformandspecimensignaturecard.Theaccounthasattributesofacceptanceofdeposits
andwithdrawalthroughchequestotheextentofcreditbalanceavailableinthesaidaccount.The
customercanalsogivespecialinstructionsorstandingorderstothebankregardingperiodicalpayments
likeinsurancepremium,subscriptionorforanyotherservicestothedebitofhisaccount,whichthebank
willcomplywithinthenormalcourseofbusiness.
7.2.JointAccount
7.2.1.Natureoftheaccountanaccountopenedinthenameoftwoormorenaturalpersonsisknown
asajointaccount.Inajointaccountexpressinstructionsmustbeobtainedwithreferencetoitsmodeof
operationi.e.,whetheroneormoreofthemshalloperatesinglyorjointly.However,ifitissilentthe
operationwillbeallowedonlyunderthejointsignaturesofallthejointaccountholders.Itisrelevantto
signifythatthejointaccountholdersarenotpartnershiportrustaccount.Anyoneofthejointaccount
holdershavearighttoaskforstoppayment,butsubsequentwithdrawalofstoppaymentinstructionsand
requesttoclosetheaccountmustbesignedbyallthejointaccountholders.

JointOperation

IfajointaccountissubjecttoOperationbyJointsignatures,withdrawalswillbeallowedonlyifallthe
jointholderssignthewithdrawal.Incaseofdeathofajointholderinajointoperationaccount,the
survivorcannotdrawthebalanceamountandCourtInstructionswillhavetobeobtainedastowhocan
drawthefunds.

7.2.3.EitherorSurvivorLetter:Thisisaspecialmandateobtainedfromallthejointaccountholders
authorizingoperationbyEitherorSurvivor.Inthiscaseanyoneaccountholderorsurvivorcanoperate
theaccount.Thisisaconvenientarrangementinasmuchasthesurvivorscanautomaticallycontinue

operationupontheaccountorcanevenwithdrawtheentirebalanceleftafterthedeathofoneofthe
jointaccountholder.Statebankhasalsogivendirectionstoaddacolumnonthebackoftheformto
provideinformationaboutnextofkinenablingbankstocorrespondincaseofdeath.Thenextofkin
hasnoauthoritytodrawfunds.Heisonlyauthorizedtoreceiveinformationabouttheaccountinthecase
ofdeathofaccountholders.
Duetotheabovereasons,whenajointaccountisopenedclearcutwritteninstructionsshouldbetakenin
regardtotheoperationofaccount.

7.2.4.ListofDocumentstobeobtainedfrom
IndividualsAccount(SingleorJoint)(NaturalPerson/s):

1.PhotocopyofComputerizedNationalIdentityCard(CNIC)orpassportoftheindividualattestedbya
gazettedofficeroraNotaryPublic.ThisattestedcopymustbetalliedwiththeCNIC/Passport.Before
returningtheoriginalCNlC/Passporttotheapplicant,thebankofficershouldwriteontheattestedcopy
originalseenandreturned.

VerificationofCNIC.ThegenuinenessofCNICmustbeconfirmedFROMNADRAthroughtheonline
computerizedsystem.

2.IncasetheCNICdoesnotcontainthephotograph,thebank/DFIshouldalsoobtain,inadditionto
CNIC,anyotherdocumentsuchasdrivinglicenseetc.thatcontainsthephotograph.However,ifthe
individualdoesnothaveanyothervaliddocumentwhichbearsphotograph,followingdocumentsshould
beobtained:
(i)Acopyofthephotographdulyattestedbyagazettedofficer/Nazim.

(ii)AcopyofCNICwithoutphotographdulyattestedbythesamepersonwhohasattestedthecopyof
photographasperSr.No.(i)above.

(iii)Aconfirmationinwritingfromtheapplicanttotheeffectthattheindividualhasnootherdocument
bearingphotograph.TheBanks/DFIs(DevelopmentFinanceInstitutions)shallensurethattheCNICand
thephotographareofthesamepersonwhoseaccountisbeingopenedwiththem.Theparticulars/CNIC
ofsuchpersonsmustbeverifiedfromNADRAinwritingorthroughitsVeriSyssystembythebank/
DFI.
3)AccountOperationInstructionsmustbeselectedormentionedinthejointaccountopeningform.

Options
A)Anyonemayoperate.AlsomentionEitherorSurvivorandtakeeitherorsurvivorletterifprescribed.
Incaseofdeathofjointholderthesurvivorcanoperate.

B)JointOperation.(Itmeansalljointholderstosigntheoperatinginstructions.Incaseofdeathofjoint
holdertheamountwillbereleasedonlyonsuccessioncertificate.)
4.Incaseofasalariedperson,attestedcopyoftheservicecard,oranyotheracceptableevidenceof
service,including,butnotlimitedtoacertificatefromtheemployer.

5.Incaseofotherprofessionstakesomeappropriatedocumentwhichevidencestheprofessionofthe
accountholder.

SoleProprietorshipAccountDocumentsRequired

1)Alltheformalities/documentsdiscussedaboveunderindividualaccountwillbefulfilledforthesole
proprietor.

2)Additionallythesoleproprietorofatradingconcernmustsignadeclarationthatheistheproprietorof
thefirm.
3)MandateportionoftheAOFshouldbecompletediftheproprietordelegatestheaccountoperation
authoritytoanyotherpersononhisbehalf.

Theofficerofthebankauthorizingtheopeningofasoleproprietoraccountmustundertakeextradue
diligenceandindependentenquirywhileauthorizingsuchaccountassoleproprietorshipconcernsarenot
registeredentitiesandtheonlyevidencethebankhastotheeffectthattheproprietorownsthe
concernedbusinessistheundertakingofthecustomerhimself.

DocumentslikeNTNcertificatecanalsobedemanded.

7.3.Partnershipaccount:

Partnershiphasbeendefinedinsection4ofthepartnershipAct,1932as

..therelationbetweenpersonswhohaveagreedtosharetheprofitsofthebusinesscarriedon
byalloranyofthemactingforall..

Partnershipcanbecreatedbyagreementwhetheroralorwritten.Personswhohaveenteredinto
partnershipareindividuallycalledpartnersandtheircollectivegroupiscalledafirm.Maximumnumber
allowableaspartnersinanybusinessis20.Minorpartnersarenotconsideredforcomputingmaximum
numberofpartners.Allactsanddeedsdonebyanypartnerinthecourseoftheordinarypartnership
businesswillbindtheotherpartnersalso.Thereforeeachpartneristheprincipal/agentoftheother
partners.However,accordingtosection192(b)ofthePartnershipAct,apartnerhasnoimpliedauthority
toopenabankaccountonbehalfofthefirminhisownname.
Therefore,abankershouldalwaysopenafirmsaccountinfirmsnameandobtainallthenecessary
detailslikethenatureofbusiness,thenamesandaddressesofallthepartnersandthenamesofthose

whoareauthorizedtooperatetheaccountinthenameofthefirm.

Section58ofthePartnershipAct,1932enablesanyfirmtoberegisteredwiththeregistraroffirms,as
unregisteredfirmscannotbringsuittoenforcearightarisingoutofacontractagainstoutsiders.
Moreover,asuitfiledbyanunregisteredfirmisnotmaintainable.Apartnerofafirmcannotsuehis
unregisteredfirmfordamagesforwrongfuldismissalorforshareofprofits.
Awrittenagreementmadebythepartnersatthetimeofformingthepartnershipiscalledpartnership
deed.Itspellsoutallthetermsandconditionsunderwhichthebusinessofthefirmwillbeconductedand
profits/lossestobeshared.Neverthelesstheliabilityofpartnersisunlimited,jointandseveral,which
meansthatintheeventoflossorliquidationofthefirmeachpartnerwillbeliabletomeettheliabilities
ofthefirmeithersinglyorcollectivelywithotherpartners.

Anymandategivenbythepartnersforoperatingtheaccountceasestobeeffectiveonthedeath,lunacy
orbankruptcyofanypartnerunlessotherwisementionedinthePartnershipDeed.Thebankshouldobtain
afreshmandatefromthesurvivingpartnersforfutureoperationoftheaccount.Legalheirsofa
deceasedpartnerdonotautomaticallybecomepartnersinthefirmbutareonlyentitledtotheshareheld
bythedeceasedinthefirmatthetimeofhisdeath.Intheeventofadmissionofanewpartneror
retirementofanyoftheexistingpartners,thebankshouldrecordthechangesandobtainafresh
mandatefromallthepartnersforfutureoperationoftheaccount.Intheabsenceofanyagreementin
thePartnershipDeedfortheconsequencestofollowonthedeath,lunacyorbankruptcyofapartner,the
bankshouldnormallyfreezetheaccountofthefirmandnotallowanyfurtherdebitsintheaccountuntil
properorderofacourtisproduced.
7.3.1.Openingandoperatingapartnershipaccountapartnershipaccountresemblesajointaccountin
thatitisopenedinthenameofmorethanoneperson.Apartnership,unlikeacorporation,doesnothave
alegalpersonalityseparatefromthatofthepartners,theaccountconstitutesineffectajointaccountof
thepartners.Theaccountopeningformandanymandateonbehalfofthepartnershipshouldbesigned
byallthepartners.

7.3.2.Dissolutionofpartnershipbydeaththedoctrineofsurvivorshipisinapplicabletopartnership
accounts.Unlessthepartnershipagreementprovidestothecontrary,thefirmisdissolveduponthedeath
ofoneofthepartners.Undersection38ofthepartnershipAct1890thesurvivingpartnershavethe
powertocontinuetoactforthefirmforthepurposeofwindingupitsaffairs.
7.3.3.Problemsofinsolvencyundersection33and38ofthePartnershipAct1890apartnershipis
dissolvedbytheinsolvencyofthefirmorofoneofitspartners.Afterhisadjudication,theinsolvent
partnerisunabletobindthepartnership.Ifpriortothecommencementofthebankruptcy,hehas
incurredanydebtsinthepartnershipsnametheotherpartnersareliable.

7.3.4.Documentstobeobtained
(i)Photocopyofidentitycardsofallpartners,dulyattestedandverifiedfromNadraasmentionedinpara
7.2.4.
(ii)AttestedcopyofPartnershipDeeddulysignedbyallpartnersofthefirm.

(iii)AttestedcopyofRegistrationCertificatewithRegistrarofFirms.Incasethepartnershipis
unregistered,thisfactshouldbeclearlymentionedontheAccountOpeningForm.

(iv)Authorityletter,inoriginal,infavorofthepersonauthorizedtooperateontheaccountofthefirm
dulysignedbyallthepartners.

7.4.JointStockCompanies
AsdefinedintheCompaniesOrdinance1984ajointstockcompanyisanassociationofindividualsfor
transactinganybusinessforacquisitionofgains,possessingacommoncapitalcontributedbymembers
constitutingitsuchcapitalbeingcommonlydividedintoshares,ofwhicheachpossessesoneormore
andwhicharetransferablebytheowner.Whensuchanassociationisincorporatedaccordingtolaw,it
becomesanartificialpersoncreatedbylawwithacommonsealandperpetualsuccessionanditis
regardedasalegalperson,separateanddistinctfromitsmembers.Thereisawellknowncaseof
SolomonvsSolomonwheretheHouseofLordsheldthatsinceSolomonheld20000sharesoutof20006
sharesandthecompanywasthereforeaonemancompany,nonethelesshewasdifferentfromthe
companywhichhehadformed.

7.4.1.Companiesaccounts
(1)Generalprinciplesacompanyhasalegalpersonalityofitsown,regardlessofwhetheritisapublic
corporationoraprivatecompany.Thismeansthatthecompaniescanenterintocontractsintheirgiven
nameandcansueandbesued.
(ii)UnincorporatedassociationsaccountsUnincorporatedassociationsaremainlybodiessuchasclubs,
literarysocietiesandcharitableinstitutions.Theobjectsofsuchbodiesareprimarilynoncommercial.
Frequentlytheydecidenottoincorporateinordertoavoidtheexpensesinvolved.Anunincorporated
associationwouldneedabankaccounttobeutilizedforthepaymentandcollectionofcheques,oreven
toborrowmoneytocarryoutitsobjectives.Thusaclubmaywishtoraisecreditinordertoarrangefor
theacquisitionofitspremises.
(iii)Anunincorporatedassociationdoesnothaveanindependentlegalpersonality.Itfollowsthatsuchan

associationcanneithersuenorbesuedinitsownname.Actionshavetobebroughtagainstthe
committeethatactsonbehalfofthebody.Usuallytheliabilityofmembersisexpresslyrestrictedtothe
amountofthesubscriptionormembershipfeeduefromthem.
Indealingwithanunincorporatedassociationthebankhastofollowrulesdictatedbothbyprudenceand
bylegalconsiderations.Wherethebankacceptsanunincorporatedbodyasacustomer,thebankshould
askforclearinstructionsastowhoisentitledtooperatetheassociationsaccount.Ideallythebank
shouldobtainacopyoftheconstitutionorfailingthat,acopyofaresolutionconcerningtheopeningof
anddrawingupontheassociationsaccount.Thebankhastobemorecautiouswhentheassociation
requiresanoverdraftoraloan.

7.4.2.StatutoryCompaniesThesearecompanieswhichareincorporatedunderaspecialActof
ParliamentorAssembly.StateBankofPakistanisanexampleofthistype.

7.4.3.LimitedCompaniesAcompanymaybe

(a)acompanylimitedbyshares,or

(b)acompanylimitedbyguarantee(suchasKarachiStockExchange)or

Furthermoreaprivatelimitedcompanymaybe:

(i)asinglemembercompany(smc),wherethenameisrequiredtodenoteas

(SMCPvt)Limited
(ii)atwoormorebutnotmorethanfiftyperson(thenameisrequiredtodenote(Pvt)Limited

(iii)Apubliclimitedcompanywhichmayeitherbelisted(7members)orunlisted(3members)

(iv)Ifthecompanyislimitedbyguarantee,thenameisrequiredtodenote(Guarantee)Limited

Openingofaccountofacompanynotyetincorporatedisriskyasithasnotyetbecomealegalentity.In
suchcasesusuallythePromoterswouldopenaccountintheirindividualnames.
DocumentstobeobtainedforopeningCompanyAccount:

Certifiedcopiesof:
(i)ResolutionpassedbyBoardofDirectorsofCompanyforopeningofaccountspecifyingtheperson(s)
authorizedtooperatetheaccount.(ThisResolutionisthemostimportantdocumenttobetakenfor
openingalimitedcompanyaccount.)

(ii)MemorandumandArticlesofAssociation.

(iii)CertificateofIncorporation.

(iv)CertificateofCommencementofBusiness.(OnlyifitisaPublicLtdCompany)

(v)Attestedphotocopiesofidentitycardsofallthedirectors.

(vi)FreshListofDirectorsonForm29issuedbytheRegistrarJointStockCompany.

(vii)LatestBalanceSheet,ifitisanongoingcompany.

Foropeninganaccountofaprivatelimitedcompany,CertificateofCommencementofBusinessisnot
required.
7.4.4.Memorandum&ArticlesofAssociation

7.4.4.1.MemorandumItsetsouttheobjectivesforwhichajointstockcompanyisformedandalso
definesthescopeofitsactivities.Italsoembodiestheaddressoftheregisteredofficeofthecompany,
theamountofitscapitalanditsdistributionintosharesoffixedamountdeclaringthefactthatthe
liabilityofthemembersislimited.

7.4.4.2.ArticlesThearticlesofassociationcontaintherulesandregulationsfortheinternal
managementofthecompany.Generallytheycontain:

Powervestedinthedirectors.

Electionandretirementofdirectors.
Procedureforcallingofmeetingofshareholdersanddirectorsandpassingofresolutions.
Auditofaccountofthecompanyandappointmentofauditors.

Companysealandprocedureforitsuse.

7.4.5.CertificateofIncorporationFromthebankerspointofviewthisdocumentisveryimportant.Itis
issuedbytheRegistrarofJointStockCompanies(nowSECP)andisconclusiveevidencetotheeffectthat
alltherequirementsofthelawinregardtoformationandregistrationofthecompanyhavebeenduly
compliedwith,andthecompanyhaslegallycomeintoexistence.

7.4.6.CertificateofCommencementofBusinessWhentheregistrarofJointStockCompanyissatisfied
thatapubliclimitedcompanyhasfulfilledalltherequirementswithregardtothesubscriptionofshares,
submissionofthestatutorydeclarationandotherrequirementsofthelaw,theRegistrarofCompanies
issuesthecertificateofcommencementofbusiness.

7.4.7.BalanceSheetItisastatementofthefinancialaffairsofthecompanyandthebankercandraw
itsownconclusionsaboutthecompanyfromthestudyofthefinancialaffairs,particularlywithreference
topastperformance.However,balancesheetwillnotbeexpectedfromanewlyformedcompanywhen
openingitsaccount.
7.5.OpeningaccountsofAssociations,ClubsandSocieties
Asnontradingorganizationstheseareformedforsocial,cultural,educational,recreational,charitable
andcommunitydevelopmentpurposesetc.SomeoftheseinstitutionsareregisteredundertheSocieties
RegistrationAct,1866.Acertificateofregistrationisissuedafteritsbyelawsareapprovedandfoundfit
forregistration.Accordingtothebyelaws,theaffairsoftheorganizationareadministeredbyan
ExecutiveCommittee,orManagingCommittee,bywhatevernameitmaybecalled.

7.5.1.Documentstobeobtained:
Certifiedcopiesof
(a)CertificateofRegistration.

(b)Bylaws/Rules&Regulations

(c)ResolutionoftheGoverningBody/ExecutiveCommitteeforopeningofaccountauthorizingthe
person(s)tooperatetheaccountanddulyattestedcopyoftheidentitycard(s)oftheauthorized
person(s).
(d)Anundertakingsignedbyalltheauthorizedpersonsonbehalfoftheinstitutionmentioningthat
wheneveranychangestakeplaceinthepersonsauthorizedtooperateupontheaccount,thebankerwill
beinformedimmediately.

Theunregisteredinstitutionshaveneitherlegalentitynorpowerstomakecontracts.Anyloanraised
fromthebankwillbeextendedtothemembersofthecommitteeintheirpersonalcapacityandnotin
representativecapacityastheinstitutioncannotbesued.

7.6.AccountopenedbyAgents

Byvirtueofapowerofattorneyexecutedbytheprincipal(donor),anagentappointedmayopenand
operateabankaccountontheprincipalsbehalf.PowerofattorneyshouldbearstampsundertheStamp
ActandnotarizedbyaNotaryPublic.Ifexecutedinaforeigncountryitshouldalsobeconsularizedby
thePakistanEmbassythere.Whenanagentisallowedtoopenhisprincipalsaccount,thebankershould
carefullyscrutinizethepowerofattorneyexecutedinhisfavour,inrespectoftheclausesrelatingto
openingandoperationoftheaccountandtheborrowingpowers,ifany.Powerofattorneyshouldbe
registeredinthebanksrecord.Apowerofattorneyisrenderedinvaliduponthedeath,insanityor
insolvencyoftheprincipal.Therefore,onhappeningofanyofsucheventsthebankermuststopall
operationsontheaccount.Chequespresentedaftertheprincipalsdeathshouldbereturnedandmarked
Drawerreporteddead.However,ontheagentsdeathaccountwillnotbestoppedandtheprincipalcan
eitheroperatetheaccounthimselforappointanewagent.

7.6.1.Documentstobeobtained:
i)CertifiedcopyofPowerofAttorney.

ii)Dulyattestedphotocopyofidentitycardofthecustomerandagent.

7.7.OpeningofTrustAccounts:

7.7.1.GeneralprinciplesTrustaccountsareopenedmainlybyexecutorsappointedastrusteesundera
willandbypersonssuchassolicitorstrustcompanieswhoadministerfamilyorcharitabletrusts.Atrust
doesnotconstitutealegalentityseparatefromthatofthetrustees.Thebroadprincipalisthatthe
trusteeshavethelegaltitleinthetrustpropertyandthebeneficiaryofthetrustacquirestheequitable
interest.Thetrusteesfunctionistoadministerthetrustinaccordancewiththedeedunderwhichthey
holdtheirappointments.Inaddition,certainpowersanddutiesareconferredonthembytheTrusteesAct
1925.
Usuallyatrustdeedrequiresappointmentoftwoormoretrustees.Theobjectofthisarrangementisto
ensurethatthetrustpropertyremainunderthecontrolofmorethanonedesignatedperson.Trusteesare
notusuallypermittedtodelegatetheirauthority.Forthisreasonandunlessthetrustdeedmakesa
stipulationtothecontrary,achequedrawnonthetrustaccountrequiresthesignaturesofallthe
trustees.
Asthetrusteeshaveonlythelegalasdistinctfromtheequitabletitletotheproperty,theproblemof
survivorshipdoesnotarise.Whenatrusteedies,anotherpersonisappointedeitherundertheprovisions
ofthewillorbythecourt.UntilsuchanappointmentismadeSection18oftheTrusteesAct1925
authorizesthesurvivingtrusteeortrusteestocarryonthebusinessofthetrustforthetimebeing.

7.7.2.Dutyofthebankthebankdoesnotincuranyliabilitytothebeneficiariesunlessitknowsthatthe
accountinvolvedisatrustaccount(caselawThomsonvClydesdaleBankLtd1893).Inthiscasethe
ownersofcertainsharesorderedtheirstockbrokertosellthem.Naturallythebankhasknowledgeifthe
accountisexpresslyopenedassuch.Thesecondgeneralprinciplewithregardtobanksliabilityisin
caseofbreachoftrust.Thebanksconcernistoensurethatthetrusteesactwithinthescopeoftheir

apparentpowers.Thusthebankhastoensurethatachequedrawnonthetrustaccountcarriesallthe
requiredsignatures.Intheabsenceofexpressknowledgebythebankofanimproperorafraudulent
designperpetratedbythetrustees,thebankisnotusuallyliablefortheirmisconduct.

WhenopeninganaccountinthenameofaTrust,bankshouldensurethatalltrusteessigntheaccount
openingformorallthetrusteeswhoareauthorisedtooperateontheaccountbyaresolutionpassedby
theTrustees.AcopyoftheResolutioncertifiedbyatleasttwotrusteesshouldbeobtainedandkepton
Banksrecord.Iftheaccountisopenedinthenameoftrustees,itshouldnotbetreatedasajoint
account.Ontheledgersheetaswellasonthespecimensignaturecarditshouldbeprominently
mentionedinboldlettersthatitisaTrustAccount.TheTrustDeedorInstrumentofTrustshouldbe
carefullyexaminedandcopythereofmaybekeptinbanksrecord.Specialattentionshouldbepaidto
thetrusteespowersandtheprovisionfortheappointmentofnewtrustees.UndertheTrustAct,1882,a
trusteecannotdelegatehispowerstocotrusteeortoanythirdparty.However,atrusteecanappointan
attorneyorproxyforanactofroutinenatureinvolvingnoindependentdirection.Contraventionof
provisionsofsection47ofTrustAct,1882byabankerwhichforbidsthedelegationofauthoritybya
trustee,maycausebreachoftrustandthemembersmaybyaskedtoredressthesame.

TrustaccountsshouldbehandledwithutmostcareandthetransferoffundsfromTrustaccounttothe
personalaccountsoftrusteesshouldnotbeallowed,otherwisethebankerwillberesponsibleforthe
consequences.WhendealingwithTrustaccounts,abankerisexpectedtobeawareoflegalpositionofa
Trust.Section3ofTrustAct1882,definesTrust:

ATrustisanobligationannexedtotheownershipofpropertyandarisingoutofaconfidencereposedin
andacceptedbyhimforthebenefitofanotherorofanotherandtheowner.

Section4ofthesameActdeclaresthat:ATrustmaybecreatedforanylawfulpurpose.Thepurposeof
aTrustislawfulunlessitis

(a)forbiddenbylawor

(b)isofsuchanaturethat,ifpermitted,itwoulddefeattheprovisionsofanylawor

(c)isfraudulentor

(d)involvesorimpliesinjurythepersonorpropertyofanotheror

(e)theCourtregardsitasimmoraloropposedtopublicpolicy.

Everytrustofwhichthepurposeisunlawfulisvoid.AndwhereaTrustiscreatedfortwopurposes,of
whichoneislawfulandtheotherunlawfulandthetwopurposescannotbeseparated,thewholeTrustis
void.Section6oftheTrustActauthorisesthecreationofTrustbywordofmouthorbyanyactwhich
reflectstheintentionoftheauthoroftheTrust.Anypersonwhoiscompetenttocontractiscapableof
creatingaTrustwhichmustbeforapropertytransferabletothebeneficiary.Intheeventofthedeathof
atrusteeoutofseveraltrusteestheauthoritymaybeexercisedbythecontinuingtrusteesunless
otherwiseprovidedforintheInstrumentofTrust.
7.7.4.Documentstobeobtained:
(i)AttestedcopyofCertificateofRegistrationofTrust.

(ii)Dulyattestedphotocopyofidentitycardsofallthetrustees.

(iii)CertifiedcopyofInstrumentofTrust.

7.8.OpeningExecutors/AdministratoraccountsAnExecutorisapersontowhomtheexecutionofa
Willisentrustedbythetestator.(Whoisatestator?)Theexecutorderiveshisauthorityfromthewill.As
suchhehastocarryoutallthedirectionscontainedinthetestatorslastWill.

AnAdministratorisapersonappointedbyacourtoflawtolookaftertheestateofapersonwhodied
withoutleavingaWillorthepersonsheappointedareincapableofactingasexecutors.Whenhedies
intestate(i.e.withoutleavingaWill)theadministrationisgenerallygrantedtohiswidoworwidoweror
thechildrenofthedeceased,asthecasemaybe,oranyoneelseonwhomalltheheirsagreeorthe
courtconsidersfitforthepurpose.Abankershouldhavefullknowledgeaboutthelegalsignificanceof
theWillsothathemayallowoperationontheExecutors!Administratorsaccountaccordingly.Section
74oftheLawofWillslaysdownthatawillmaybedrawninanysuchlanguagethatexpresstheintention
ofthetestatorclearly.AWillmaybeoralorinwritingandneednotbewitnessed.Thetestatorunder
MuslimLawispermittedtogiveonlyonethirdofhisestatetoastrangerbyWill.Theremainingtwo
third,willonlybeinheritedinaccordancewiththeMuslimLaw.

ProbateisacertifiedcopyoftheWill,issuedunderthesealofthecourt.Apersonwhohasbeennamed
asanExecutorintheWilliseligibletoapplyforaprobate.WhenoneormoreoftheExecutorsor
Administratorsdie(s),theauthorityisvestedinthesurvivor/s.IfthedeceasedwasthesoleExecutoror
Administrator,afreshLetterofAdministrationmustbeobtained.Iftheaccountshowsacreditbalance,
operationontheaccountshouldbestoppedonthedeathoftheAdministratororExecutoruntilanewone
isappointed.
AnaccountopenedbyExecutorsorbyAdministratorsconstitutesanaccountoftheestate.TheExecutors
aretherepresentativesoftheestateandunlikepartners,havenopersonalinterestintheaccountorin

theestatesproperty.AseachExecutorhasthestatusofanagent,heisentitledtoopenanaccountin
thenameoftheestateandequallyisentitledtocountermandchequesdrawnonit,betheydrawnby
himselforbyanotherExecutor.Toavoidconflictsbanksusuallyaskforclearinstructionsconcerningthe
drawingofchequesonanaccountofanestate.Thebanksmandateisspeltoutinindisputableterms
usuallyeachchequeistobesignedbytwoExecutors.

7.8.1.Documentstobeobtained:
(i)DulyattestedphotocopyofidentitycardsoftheExecutor/Administrator.

(ii)CertifiedcopyofLetterofAdministrationorProbate.

7.9.OpeningAccountsofLocalBodiesLocalbodiesareconstitutedundertheLocalBodiesAct,suchas
MunicipalCorporations,MunicipalCommitteesetc.Theyaregovernedbytheirownexecutivecommittees
consistinggenerallyofelectedmembers.Theyareadministeredthroughnotificationsissuedunderthe
Actfromtimetotime.Thechairmanoftheselocalbodiesmaybeelectedbythemembersornominated
bytheGovernment.

AsthesebodiesderivetheirauthorityfromtherelevantAct,thebankeropeningtheiraccountmustsee
thattherequestcomesfromthepersonauthorisedtodoso.Properinstructionsandspecimensignatures
manybeobtainedfromtheperson/sauthorisedtooperatetheaccount.Generallynoadvanceisgivento
alocalbodyunlesssomestatutoryprovisionsauthorisesthemtoobtainaloanandprovidesecurityforit.
7.10.OpeningSharesSubscriptionAccountwheneverapubliccompanyissuessharesforpublic
subscriptionithastoopenabankaccounttowhichallthereceiptswouldbecredited.Abankopening
suchanaccountwillbeknownasBankertotheissue.Thisisacollectionaccountandwillhaveonly
creditswithreceiptofeachapplication.Oncesubscriptionisclosed,thesponsormaytransferthefunds
totheirregularaccountandpaymentsforunsuccessfulsubscribersmadeaftertheballoting,ifany.No
chequebookisissued.
7.11.OpeningDividendAccountCompaniesdeclaringdividend(shareofprofit)tobepaidto
shareholdersdesiretoopenanaccountwithabanktowhichthetotalamounttobedisbursedasdividend
iscreditedandonpresentationofdividendwarrant,itisdebited.Ifthebankreceivesanintimationthata
dividendwarranthasbeenlost,allprecautionsshouldbetakenasareapplicabletoalostcheque.Ifa
companydeclaresdividendeveryyear,itispreferabletoopenseparatedividendaccountsforeachyear.
Thisfacilitatesbalancing/reconciliationoftheaccounts.
7.12.OpeningCollectionAccountquiteoftenabankmaybeaskedtoopenaCollectionAccount.As
thenameindicatesitisusedforcollectionoffundse.g.ateacompanymayhavesalesalloverPakistan.
ItmayopenthemainaccountwiththebanksKarachibranchandcollectionaccountswithotherbranches
fromwherethefundsaretransferredtothemainaccountperiodicallyasperarrangements.Another
examplemaybethePresidentsCollectionFundfordisasterreliefetc.

7.13.DormantAccount
Whendoesanormal,activeaccountbecomeaDORMANTACCOUNT?anaccountinwhichtherehave
beennotransactionsforasufficientlylongperiodoftime,sixmonthsforcurrentaccountandoneyear
forsavingaccount,isusuallymarkedasDormantandanywithdrawaltherefromisfirstreferredtothe
BranchManager/inchargedepositsdepartment.IfanaccountremainsDORMANTFOR10YEARS,the
amountoftheaccountmustbesurrenderedtoStateBankofPakistanasUnclaimedBalance.Thebank
continuestokeepfullrecordandifthetrueclaimantapproachesthebanksubsequentlytheamountcan
berecalledfromStateBankofPakistan.

7.14.WhatisaDeceasedAccount?onthedeathofanindividualhisaccountisimmediatelymarked
deceasedaccountandnofurtherwithdrawal/paymentisallowed.Dependingonthebalanceinthe
account,thebankmayasktheheirstoproduceheirshiporaSuccessionCertificate.Incasetheamount
issmall,thebankmay,ifsatisfied,paytheamountoncertificationbyareaNazim/NaibNazimor
Counselorafterobtaininganindemnityfrombeneficiaries.

7.14.ClosingofAccountsEveryaccountholderhasarighttoclosehisaccountatanytime.Instructions
todosomustbegivenbytheaccountholderinwritingandhemustsurrenderanyunusedcheques
beforetheaccountcanbeclosed.Incaseofjointaccounts,itcanonlybeclosedbyallthejointaccount
holderscollectiveinstructions.Evenifajointaccountisoperateduponsingly,instructionstocloseitmust
begivenbyallthejointaccountholders.Bankmayalsoclosetheaccountofacustomerafternotifying
thebanksintentionandgivinghimreasonabletimetomakearrangementtohavehischequesin
circulationpresentedforpaymentbeforethenoticeperiodexpires.Itisusuallydonewhenthecustomer
hasbecomeundesirablelike:

a.Byfrequentlydrawingchequesmuchinexcessofthebalanceinhisaccount,whichhavetobe
returnedunpaid
b.ByfrequentlycontraveningtheRulesforoperationoftheaccount

c.Bymakinghimselfanuisanceduringhisvisitstothebanksbranchandpickingupquarrelswiththe

staffunnecessarily.

7.15.StatementsoftheaccountBanksgenerallyprovidethebalanceofanaccountonrequest.Full
statementsofanaccountarealsoavailableeitheronrequestorbypredeterminedarrangements.In
somecountriesbanksreturncustomerschequeswithstatementofaccounttoenablethecustomerto
discoveranyunauthorizedsignaturesoralterationandtoreportanydiscrepancypromptly.Failureto
complyprecludesthecustomerfromassertingforgeriesagainstthebankunlessthebankitselfhasbeen
negligentinpayingthecheques.

TheStateBankofPakistan,videcircular18of2004hasgivenstrictinstructionsthatallbanksare
requiredtoinvariablysendthestatementofaccountsperiodicallytoalltheiraccountholdersirrespective
ofthebalancesintheiraccounts.
__________________
Wheneveryoufindyourselfonthesideofthemajority,itistimetopauseandreflect.MarkTwain

Saturday,April05,2014

saadmonga
Member

#7

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HandlingofCustomersincertaincircumstances.

AnImportantSkilltoAcquireistheVerbalCommunicationSkill
LearnPronunciation,LearntheLanguage,andLearntheUseofWords.
Duringgroupdiscussionsmanypeopleneverspeakupbecausetheyareafraidthatpeoplewilljudge
themforsayingsomethingstupid.Thisfearisnotreallyjustified.Generally,peoplearemuchmore
acceptingthanweimagine.Infactmostpeoplearedealingwithexactlythesamefears.Bymakingan
efforttospeakupatleastonceineverygroupdiscussionyouwillbecomeabetterpublicspeaker.You
willinstillmoreconfidenceinyourthoughtsandwillberecognizedasaleaderbyyourpeers.
1.HandlingofCustomersincertaincircumstances.
2.Powersofattorney/Mandate
3.Safecustodyofcustomersvaluablesandlockers.
HandlingofCustomerAccountsinthefollowingCircumstances.
1.Countermandofpayment(StopPaymentofCheque)
2.NoticeofCustomersdeath
3.Noticeofadjudicationofcustomerasaninsolvent
4)Noticeofcustomersinsanity
5)LegalordersattachingcustomersaccountAgarnisheeorder
{insolvent=apersonwhoisunabletopayhisdebtsastheyarise.}
9.1.CountermandofPaymentcountermandreferstostoppingpaymentofthechequebythedrawer
himself.Itusuallyariseswhereachequeislostorstolenorsomedisputebeginsbetweenthedrawerand
thepayee.Itmeansthatthedutyandauthorityofabanktopayachequedrawnuponitare
determined/terminatedthroughcountermandofcheque.Thebankmustcomplywithitsprincipals
instructionsandstoptheprocessifitispracticable.Countermandinstructionsmustbereceivedbeforeit
ispresentedandpaidandachequepresentedinclearingcanbecountermandeduntilthetimefixedas
perClearingHouserulesforreturninganunpaidcheque.
Achequebackedbyaguaranteecardcannotbecountermandedasthecustomerhasundertakennotto
countermandasamatterofguaranteecardcontract.Moreoveracustomermaybesuedbyaholderin
duecoursedespitecountermandofacheque.(Wewillstudyinalaterhandoutastowhoisaholderin
duecourse.)Therecannotbeacountermandifachequeiscertifiedbythebankgoodforpaymentif
suchcertificationispermittedaccordingtolocalpractice.
Thecountermandwillberegardedaseffectiveonlyifthebankhasactualnoticeofthecountermand.In
Curticevs.LondonCityandMidlandBank(1908)thePlaintiffcountermandedthechequebytelegram
whichwasdeliveredafterthebankhadclosed.Itwasputintotheletterboxofthebankbythetelegram
messenger.Thestaffclearedtheboxbutsomehowignoredthetelegram.Thechequewaspresentedand
paidduringthedate.ThecourtofAppealheldthatthenotificationofcountermandhadtoactuallycome

tothebanksnotice.TheCourtheldinfavourofthebank.

Thebankmustensurethatthestoppaymentinstructionsaregenuinei.e.properlysignedbearing
referencetothechequebeingstopped.Ifsuchinstructionsaregivenovertelephone,acautionmaybe
recordedbutthecustomershouldbeaskedtoconfirmbywritteninstructions.Thesignaturesshouldbe
verifiedanditshouldbecheckedfromtheledgerifpaymenthasalreadynotbeenmadeorthatsucha
chequeisnotpresentedoncounterforcashpaymentorhasnotbeenreceivedininwardclearingi.e.
everypossibleeffortshouldbemadetoensurethatthechequeisnotintheprocessofbeingpaid.

Confirmationofacknowledgementshouldbepreparedandsenttothecustomer.Whenachequemarked
forstoppaymentispresentedforpaymenteitheratthecounterorthroughclearingthesamemustbe
returnedonlyafterclearlywritingonthefaceofthechequeitselfPaymentcountermandedbythe
Drawer.
Inthepast,banks,whileacknowledginginstructionsforstoppaymentofchequesfromtheircustomers
usedtoissuedisclaimersforindemnifyingthemselvesagainstbreachoftheseinstructionsbydeclaring
thatthebankwillnotberesponsibleiftheconcernedchequewaspaidduetorushofworkoranyother
reason.

TheStateBankofPakistanhastakenexceptiontosuchdisclaimerswhichnegatetheverypurposeof
stoppaymentinstructionsandhasstrictlydirectedthebankstodiscontinueissuanceofsuchdisclaimers.

{Disclaimer=astatementinwhichsb.,saysthattheyarenotresponsibleforsth.}

9.2.NoticeofCustomersdeath

Onnoticeofacustomersdeaththedutyandauthorityofabankertopayachequedrawnonhimbyhis
deadcustomerceases.Noticemeansreliablenotice.Itisnotthecustomersdeathbutthenoticeofthe
deaththatrevokestheauthority.Henceachequepaidafterthedeathofthecustomerbutbeforethe
bankhadnoticethereofisavalidpayment.

Thedeathofacustomercancelsthemandatetothebanker.Itisofnorelevanceifthechequeisdated
wellbeforethedateofthedeath.Onreceiptofsuchinformationandconfirmation,thebankershould
immediatelystopallwithdrawalsincludingmakingpaymentsfromthedeceasedsaccount.
Thepaymentofachequeevenafterthedeathoftheaccountholderintheabsenceofanynoticeor
knowledgeofsuchdeathwillnotcreateanyliabilitytothebank.Thebankmustensurethatthe
informationregardingdeathisreliableotherwisereturningachequeonthegroundofdeathofthe
accountholderwhereasheisactuallyalivewillcreateanembarrassingsituationforthebankandmay
leadtoclaimsfordamages.Writteninformationbyarelativeofthedeceased,newspaperreportor
obituarypublishedinthepapercanbereliedupontomarktheaccountdeceased.
Creditsareallowedtoadeceasedaccountbutnowithdrawalsareallowedunlessanduntilthelegalheirs
produceaSuccessionCertificate,Probate*1oraLetterofAdministration.

AsuccessioncertificateissuedbyacourtofLawisaninstructiontoabanktopaythestatedamountsto
thenamedheirs.
AProbateisawillmadebythedeceasedthathasbeencertifiedbyacourtoflawforexecutionbyan
executornamedbythedeceased.

ALetterofAdministrationisanappointmentbythecourtofanadministratorwhoisorderedtotake
chargeoftheestateanddistributeitamongstthenamedheirsasapprovedbythecourt.Thishappensif
thedeceasedhasnotleftanyWill.(Whatisintestate?)

KindlynotethatunderIslamicLawapersoncanwilli.e.leaveinstructionsthathispropertymaybe
giventopersonsotherthanlegalheirsonlyuptotheextentofonethirdofhisproperty.Theremaining
twothirdscannotbewilledandshallbedistributedonlytothelegalheirsasperSharia.
9.3.NoticeofcustomersinsolvencyInsolvencymeansinabilitytopayorsettlejustdebts.(theword
justheremeansjustifiable)Onceanadjudicationorderispasseddecidingthatapersonisinsolvent,
thepropertyofthecustomervestsintheOfficialAssigneeorOfficialReceiver.Hencethebalanceinthe
accountisnomoreatthedisposaloftheaccountholder.Thebankershouldthereforenothonourany
chequesissuedbythecustomerevenifthesearedatedbeforethedateofsuchadjudicationorder.

Acreditor(i.e.alender)canlaunch(i.e.move)anapplicationinacourtoflawrequestingthecourtto
declareapersoninsolventandappointareceiverifthedebtorhascommittedanactofinsolvency.Very
brieflytheactsofinsolvencyare:

Adebtor:
1.Transfersallorasubstantialpartofhispropertytoathirdpersonwiththeintenttoprejudicehis
creditorsorpreferoneabovetheother.

2.Transfershispropertyorapartofitwithanintentiontodefeatordelayhiscreditors

3.Transfershispropertyorapartofitwhichwouldbevoidbecauseoffraudulentpreference,ifhewere
adjudgedaninsolvent.

4.Ifwithintenttodefeatordelayhiscreditors:
i.Hedepartsfromorremainsoutofthecountry
ii.Hedepartsfromhisresidenceorusualplaceofbusinessorabsentshimself
iii.Hesecludeshimselfwithintenttodeprivehiscreditorsofthemeansofcommunicatingwithhim.

5.Anyofhispropertyissoldinexecutionofthedecreeofacourtforthepaymentofmoney

6.Hepetitionstobeadjudgedaninsolvent

7.Givesnoticetoanyofhiscreditorsthathehasorisabouttosuspendpaymentofhisdebts

8.Heisimprisonedinexecutionofthedecreeofanycourtforthepaymentofmoney.

Actionbybankorreceiptofinsolvencyorder.

Onreceiptofinformationregardingadjudication(meanings:tomakeanofficialdecisionaboutwhois
rightinadisagreementbetweentwogroupsororganizations:inotherwordspassingofalegalorder.)
thatthecustomerofbankisinsolventandanofficialreceiverhasbeenappointed,thebankermust
informtheOfficialReceiverorAssigneeastothebankspositionwiththeinsolvent.Oninstructionsfrom
theOfficialReceiver,thecreditbalanceintheaccount,ifany,andnotunderlientothebank,wouldbe
transferredtotheOfficialReceiverorAssignee.Howeverifthecustomerowesdebttothebanker,the
bankerhastherighttorealizeanysecuritiesforpaymentofitsduesandifanyexcessisleft,thenit
maybetransferredtotheOfficialReceiverortheAssignee.Incasethereisashortfallinrecoveryofthe
banksdues,thebankmaytheninformtheofficialreceiveraccordingly.

9.4.NoticeofcustomersinsanityAssoonasabankerreceivesinformationofthecustomerdeveloping
unsoundmindoractuallybecomesinsane,itshouldimmediatelystopfurtheroperationintheaccount
andanychequeevenifitisdatedwithapriordate,shouldnotbepaidandifaLunacyOrderhasbeen
issued,itscontentsshouldbecarefullynoted.
9.5.Legalordersattachingcustomersaccount

AlsocalledAGarnisheeOrder*
{GarnishmentmeansAlegalprocedurebywhichacreditorcancollectwhatadebtorowesbyreaching
thedebtor'spropertywhenitisinthehandsofsomeoneotherthanthedebtor}

*isanorderofthecourtinfavourofacreditorwhohasobtainedjudgmentagainsthisdebtor,attaching
forthedischargeofhisdebt,thefundsinthehandsofathirdparty,thegarnishee.ThusifAobtains
judgmentinrespectofadebtowedtohimbyB,Amayapplytothecourtforagarnisheeorder
attachingfundsonBsbankaccounts.

Garnisheeproceedingscomprisetwodistinctsteps.ThefirstistheissuebythecourtofaGarnishee
ordernisi,whichattachesthefundsinthehandsofthegarnishee,butgiveshimanopportunityof
appearingbeforethecourttoshowcausewhyfundsshouldnotbehandedovertothejudgmentcreditor.
Thesecondstepistakenwhentheorderismadeabsolute,andthegarnisheeisorderedtopaytothe
judgmentcreditoreitherthewholeofthefundsinhishandsorenoughtosatisfythejudgmentdebt.

Whenagarnisheeorderservedonabankerattachesalldebtsowingoraccruingdue,thewholeofa
customersbalanceonaccountisattached,althoughtheamountofthejudgmentdebtmaybe
considerablylessthanthebalancestandingtothecustomerscredit.Theresultisthat,asfromthedate
ofthereceiptoftheorder,thebalanceontheaccountmustnotbeinterferedwithinanywaybythe
bankerorthecustomer.Butgenerallygarnisheeordersissuedbycourtsmentiontheamountforwhich
theorderisissuedandthebankwillhavetoonlyearmarkthatamountintheaccountandtheaccount
holderwillcontinuetohavefreeaccesstotheamountinexcessthereof.

Ifthebankhasanyclaimagainstcreditbalance,thebankwillinstructitssolicitortoappearatthe
hearingoftheorderforexample,arighttosetoffagainstthecreditbalanceonanadvancemadetothe
samecustomer.Butthebankerisnotentitledtosetoffacontingentliability,e.g.inrespectofabill
discountedforthecustomer,orL/Copenedforthecustomerbutnotyetnegotiated.

InshortaGarnisheeOrdermustrelatetoadebtwhichisdueoraccruingdueatadefinitedateandnota
claimthatmaybecomedueatafuturedate.Itmustbe:

i.adepositpayableondemand

ii.adepositrepayableonthefixedexpiryofafixednotice

iii.adepositrepayableatafixedfuturedateorafterthelapseofaspecified

time.

AcreditbalanceinajointaccountcannotbeattachedbyaGarnisheeOrderunlessitisissuedinthejoint
names.ThefuturedebtsarealsonotaffectedbytheOrder.Thereforethesafemethodwouldbeforthe
bankertoopenafreshaccountforallsubsequenttransactions.Thefollowingstepsarerequiredtobe
taken:

i.markthedateandtimeofreceiptoftheOrder
ii.traceoutthedepositsinthenameofthepersonnamedintheOrder

iii.iftheentireamountofthebalanceisattachedthebalanceintheaccountisencircledandanotebe
madetotheeffectthatithasbeenattached.
iv.Exercisetherightofsetoffifthereisanyclaimofthebankonthecustomer

v.IntimatethecustomerabouttheattachmentOrderandheisadvisednottoissueanycheque.

10.9.PowerofAttorney

Apowerofattorneyisadocumentwherebyonepersontermedthedonororgrantorgivesanother
persontermedthedonee,granteeorattorneyauthorityorpowertoactasagentonhisbehalf
eitherforaspecificpurposeorforgeneralpurposes.IntheformercaseitiscalledaSpecialPowerof
Attorneyandinthelattercase,theinstrumentiscalledaGeneralPowerOfAttorney.Anypersonhaving
contractualcapacitycanappointanattorneytoactonhisbehalf.ThecompaniesOrdinance,1984permits
acompanytoappointanattorneyforthepurposeofexecutingdeedsonitsbehalf.Suchapowermustbe
givenunderthecompanycommonsealofthecompany.(Acompanycommonsealisanembossedmark
usuallybearingthenameandlogoofthecompany.TheArticlesofassociationlaysdownwhichtypeof
documentsissuedbytheCompanymustbearthecompanycommonsealtobelegallyvalid.)

Apowerofattorneyiscommonlyusedwhenthegrantorisleavingthecountryforacertainperiodoris
otherwiseunabletoattendtohisbusinessandwishestoauthorizesomeoneelsetotransactbusinesson
hisbehalf.

Abankerwhoisaskedtoacceptauthorityofanattorneyshouldrequireacertifiedcopyofthepowerof
attorneytobeplacedinhishands,andshouldrecorddetailsthereofonthecustomersledgeraccount,in
theregisterofSecurities,andinanyotherplacewheretheinformationshouldbeavailable.

Thebankershouldverifythattheoriginalpowerisdulysigned,stampedandnotarized.

Thebankershouldascertainexactlywhatpowersthedocumentconveys,andensurethattheauthorityis
stillinforceandthatithasnotbeenrevoked.Usuallythebankerobtainsfromtheattorneyadeclaration
thatthepowerofattorneyhasnotbeenrevokedandthedonorisstillalive.Apowerofattorneybecomes
invalidonthedeathofthedonor.

10.9.1.PurposecoveredbyPowersofAttorney.

Whetherapowerofattorneyisforaspecificpurposeonlyorisgeneralthetermsofthedocumentmust
bestrictlyconstrued.ItmeansthatthePowerofAttorneyshouldbeverycarefullystudiedtoascertain
thepowersthathavebeengrantedtotheattorney.

(Construe=tounderstandthemeaningofaword,asentence)
Inthisrespectthereisanimportantdistinctionbetweenanagentappointedbypowerofattorneyandan
agentappointedinsomeotherway.Althoughitisageneralruleoflawthattheactsofanagentare
bindingontheprincipalifthoseactsarewithintheagentsapparentauthority,thisruledoesnotapplyto
anattorney.Thescopeoftheauthorityofapersonactingunderapowerofattorneyiscontainedwithin
thedocument,andnothingcanbereadintothedocumentthatisnotspecificallyincludedtherein.
Forthesereasons,abankerwhoproposestoacceptapowerofattorneyshouldensurethatanyproposed
transactionbytheattorneyisdefinitelycoveredbyoneoftheclausesotherwise,ifthestrictletterof
authorityisnotcompliedwith,thebankermayrenderhimselfliabletothegrantorforanylossthatmay
ensue.Thus,powertooperateonanybankingaccount,todraw,signandindorsechequesanddividend
warrantsdoesnotimplypowertoopenanewaccountoracceptbillsortomakeorindorsepromissory
notes.Again,powertoindorsebillsofexchangeisnotauthoritytodiscountsuchbillsonbehalfofthe
principal.
Powertooperatebankingaccountdoesnotimplypowertooverdrawfromtheaccount.Powertoborrow
mustbeclearlygivenbytheinstrument,andborrowingmustbecarriedoutinthemannerandagainst
thesecuritiesthereindesignated,otherwisethebankerwillhavenorecourseagainstthegrantor.

Thesocalledgeneralclauseoromnibusclauseinageneralpowerofattorneycommonlyauthorises
theattorneytodoallsuchotheractsandthingsastheprincipalhimselfcoulddo.Butthebanker
cannotregardthisasanauthorityforanyactnotspecificallycovered,e.g.borrowingmoney.

Thebankershouldratherconsiderthisclauseinconjunctionwiththeprecedingclausesandtakeitas
authorityforanyactsnecessarilyincidentaltothepowersthatarespecificallymentioned.Evenwhere
powerofattorneycontainsanundertakingbytheprincipaltoratifyallactsdonebyhisattorneysuchan

undertakingcannotbeappliedagainsttheprincipalinrespectofanytransactionoutsidethelimitsofthe
powersexpresslyconferredintheinstrument.
WhereaPowerofAttorney(PA)ispresentedtoabank,itmustexaminethesameanddetermine:

1.ThatthePAhasbeenvalidlyexecuted.

2.Ithasbeenwitnessed
3.ifitoriginatedinaforeigncountry,itmustbeattestedbyCounseloroftheEmbassyinthatcountry

4.DeterminethatthepersonclaimingtobetheAttorneyisactuallythatperson

5.OriginaloracourtcertifiedtruecopyofPAmustberetainedforrecord.

6.Banktoensurethatthepowerofattorneyisregisterediflegallyitrequiresregistration.

MandateAcustomermayforhisownconvenienceliketoauthorizeanotherpersonorpersonsto
operatetheaccount.SuchanauthoritymaybeintheformofaMandateLetteroraPowerofAttorney.
AmandatecontainsanauthorityandadeclarationthatuntiltheBankreceivesawrittennoticetothe
contrary,anamedpersonwhosespecimensignaturesareprovidedonthemandateitself,isauthorizedto
drawchequesnotwithstandingthatdebitingofanysuchchequemaycausetheaccounttobeoverdrawn.
Withoutthisclearauthorityinthemandateabankshouldnotallowpaymentofachequewhichcreatesa
debitbalanceintheaccount.
Aletterofmandateusuallyhasspecificclausesconferringupontheconcernedpersonauthoritytodraw,
accept,indorsebillsofexchange(endorsement=signatureofaholderonabillofexchange)andto
receivestatementofaccounts.Mostbankshaveprintedmandateformscoveringalltheexigencies
(exigency=anurgentneedordemandthatyoumustdealwithSYNdemand.)Wheneveramandateis
receiveditmustbethoroughlystudiedtoseewhatpowershavebeenvestedintheperson.

Assoonasanoticeofrevocationofmandateisreceivedthebankmusttakeimmediatemeasuresto
ensurethatfurthernoactionsareallowedunderthemandate.
DifferencebetweenaPowerofAttorneyandaMandate:

1)AMandateisusuallyinaformsuppliedbythebankandsignedbythecustomernamingacertain
persontoactashisagentwhereasaPowerofAttorneyismoreformaldocumentandisspecifically
typed

2)AMandateisrestrictedinformwhereasaPowerofAttorneymaybegeneral

3)AMandateisaddressedtotheBankonlywhereasaPowerofAttorneyisaddressedtotheworldat
large
4)RevocationofMandateiseasyjustinformthebankwhereasrevocationofaPowerofAttorneyis
difficult
5)AMandateecannotexecutemortgageswhereasanAttorneycan

6)Amandatebecomesinvalidwiththedeathofthepersonexecutingthemandatewhereastheposition
withregardtoaPowerofAttorney(irrevocable)isdifferent.

{NotebyAshrafAliApowerofattorneynormallydieswiththedeathofthepersongrantingapowerof
Attorney.Powerofattorneygiventoabankforoperationofaccountwilldiewiththedeathoftheaccount
holder.

Howeverifapersonhasgivenpowerofattorneytodealwithlandedpropertyownedbyapersonafter
takingfinancialconsiderationfromthepersontowhomthepowerofattorneyisgranted,thecourtmay
allowtheoperationofthepowerofattorneyevenafterthedeathofthegiverofthepowerofattorney
duetothereasonthattheattorneygiverhadreceivedthevalueofthepropertyinrespectofwhichthe
attorneywasgiven}

SafeCustodyofCustomersValuablesandSafeDepositLockerFacility

(ThisreferstoBankerCustomerrelationshipofBailerandBailee.)

Oneofmuchappreciatedfacilitiesofferedbyabankertohiscustomersisthatofkeepinginsafecustody
valuablesofvariouskinds,includingsecurities,Jewelryboxes,anddocumentsoftitleproperty.
Frequentlysuchitemsaredepositedinalockedboxorsealedenvelope,inwhichcasethebankertakes
nocognizance
(Cognizance=tounderstandorconsidersthtotakenoticeofsth)

ofthecontents.Sometimes,however,sharecertificates,insurancepoliciesandtitledeedsarelodged
withoutcover,asalsonegotiablesecurities,suchasbearerbondsparticularlywherethebankeris
requiredfromtimetotimetodetachandpresentthecouponsforcollectingperiodicalreturn.

Somebanksissueaspecificformofreceiptforallarticleslodgedforsafecustody,andrequirethe
receipttobereturneddulydischargedbythecustomerbeforethearticlescanbewithdrawn.Moreover,it
isnormallyprovidedthatthedepositorshallattendinpersontowithdrawthearticles.Ifheisunableto
doso,heisrequiredtosignanorderonthebackofthereceiptinstructingthebankertodeliverthe
articlestothebearerofthedocument.Receiptgivenforlockedboxesorsealedenvelopesshouldspecify
contentsunknown.Whenarticlesaredepositedinthenamesoftwoormorepersons,thereceipts
shouldbemadeoutinthenameoftheallpartiesandthearticlesshouldbereturnedonlyagainst
signaturesofallthedepositors,unlessthecustomerhasgivenamandatethatitcanbereturnedto
eitherorsomeofthem.
Onthedeathofthepersoninwhosenamethearticlesareleftforsafecustody,thebankershouldnot
permitdealingswiththepropertyexceptbythedeceasedspersonalrepresentativeafterproductionand
recordofthesuccessioncertificateor,lettersofadministration,althoughheshouldnotobjecttothe
examinationofthearticlesinhispresencebypersonsproperlyinterested,e.g.thedeceasedspersonal
representativesornearrelativesorthefamilysolicitor.AWillcontainedinaboxmaybehandedover
againstthesignatureofallexecutorsmentionedtherein,butnootherdocumentshouldbegivenexcept
afterproductionofprobate{probate=orderbyacourtauthorizingactiononaWill}(orsuccession
certificateorlettersofadministration)andontheauthorityofallthepersonalrepresentatives.Where,
forexample,severalexecutorsarenamedinawill,thesignatureofoneshouldnotbeacceptedon
behalfofallinacknowledgementofthedeliveryofarticleslodgedforsafecustodyinthenameofthe
deceased.
10.11.SafeDepositLockerFacility.

Apartfromprovidingfacilityforacceptingvaluablesforsafecustody,safedepositlockersarealsomade
availabletocustomersonrent.Bankholdsthemasterkeyandakeyforanindividuallockerissupplied
tothecustomer.Thelockercanbeopenedonlywhenboththekeysareapplied.

Asregardsarticleslodgedinalocker,thebankerisnotconcernedwiththelodgmentandwithdrawalof
articlesinthelocker,evenifthelockerbeoperatedunderadoublekeysystem,onekeybeingheldby
thebanker(thebailee)andtheotherbythecustomer.Thebankisonlyresponsiblefortakingadequate
measurestopreventtamperingwiththestructureandsafetymechanismofthelockerandensurethat
thelockerisoperatedbythelockerrenter.

Customershavetodeclarethattheywillnotdepositanyarms,ammunitionorothercontrabandsinthe
lockers.(Whatisacontrabandcheckinadictionary)

Whenapersondepositsmoneyinhisaccountthebankisresponsibletoreturntheamountevenifthe
amountisstolenorburnt.Howeverthebankisnotresponsibleforthelossifthearticlesplacedinthe
lockersaredestroyedbycircumstancesbeyondthecontrolofthebanklikeexplosionorfireorotherwise
stolenbyrobbersorthieves.Bankisonlyresponsibletomakebesteffortstoensureagoodsecurityand
propermaintenanceofthelockerssystem.Thebankencouragesthatcustomersshouldtakeout
insuranceswithinsurancecompaniesfortheirvaluablearticlesinthelockers.

InPakistanduetotheincreaseinincidentsoflockersbeinglootedbyrobbers,attheinstructionsofState
Bank,theCommercialbankshavearrangedinsuranceoflockersagainstlossoffire,burglaryetc,for
amountsrangingfromRs500,000toRs15lacsperlockertheinsuranceamountdependinguponsizeof
locker.Incasethecustomeriskeepinggoodsworthmorethanthebankarrangedinsuranceamount,he
shouldmakeseparatearrangementofinsurance.
__________________
Wheneveryoufindyourselfonthesideofthemajority,itistimetopauseandreflect.MarkTwain

Saturday,April05,2014

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ClearingandSettlement

TheonlythingthatispermanentinlifeisCHANGE.Therateofchangeinthelasttwodecadeshasbeen
morethanthechangethattook
placeinthepreviousfiftyyears.Ifyouwishtosucceed
theRATEofLEARNINGmustalwaysbe
greaterthantherateofCHANGE.
Donotresistchange,

IMROVEyourlearningandADAPTtoCHANGE.

ClearingandSettlement
11.1.TheMechanism
Clearingsystemisamechanismforcalculatinganddeterminingeachbankspayments/receipts
positionwithintheCommercialbanksformingpartofthesystem.Aclearingsystemisgovernedbyits
ruleswhich,amongotherthings,includetimingforpresentationandreturnofpaymentinstruments.

Settlementisthetransferofvaluetodischargeapaymentobligation.Settlementmaybewithinthe
branchorwithinthebankoramongotherbanks.Thefirsttwobeingfairlyeasy,itisthelastpartof
settlementthatinvolvesmorebanksandsettlementiseffectedthroughtheStateBankofPakistan.
LogisticalhelpsincethelastfewyearsisobtainedfromNationalInstitutionalFacilitationTechnologies
(NIFT).

11.2.Paymentinstruments:

a.Firstwestudythesettlementprocedureforchequesdepositedforcredittoanaccountinthebranch
drawnonthecollectingbankbranchitself,wherethepersonwhoisreceivingthepaymentandtheperson
whoismakingthepayment,bothmaintaintheiraccountsatthesamebankbranchThesearealso
calledTRANSFERitemssincetheyinvolvetransferoffundsfromoneaccountinabranchtoanother
accountinthesamebranch.Thesechequesaresortedaccountwise,particularssuchasdateamount
andbalanceintheaccountcheckedandsignaturesverifiedandthenpassedontothecounterforposting
intherelevantaccount.Ifthechequeispassed,creditisaffordedtothepayeebutifthefundsinthe
accountarenotenoughorthereissomeotherreasonthechequewillbereturnedasperpractice.

b.Collectionofchequesdrawnonotherbranchesofthesamebankinthetownassoonasthecheques
arereceivedthesearecrossedwiththebankscrossingstamp,sortedoutbranchwiseandthensentto
theconcernedbranch/branches.Inthemoderntimesmostbanksbranchesareconnectedonlinewith
eachotherthroughtelephoneorsatellitelinks.Theaccountandspecimensignaturescanbeaccessedon
thesystem.ThechequesdrawnonotherbranchesarepostedONLINEandcreditaffordedtothe
customerdepositingthecheque.
c.Chequesdrawnonotherbanksinthesamecity/townthechequesarecrossedwithbankscrossing
stampandaresortedanddealtwiththroughtheusualclearingprocedureswhichweshallstudyindetail.
11.3.Itemsdealtwithoutsidetheclearingsystem:
i.StandingOrders.
ii.Cheques/draftspayableinUSDollars.

(USDinstrumentsdrawnonbanksinPakistanareclearedthroughNIFTsysteminKarachiwhichwillbe
explained)
iii.Chequeswithattachments
iv.BillsofExchangeotherthancheques.

Theprocedure/processoftheClassicalClearingHouse
Traditionallyinallcitiesitwasandevennowinremotetownstheclearingofchequesstillis
undertakenmanuallyinthelocalStateBankofPakistanorNationalBankofPakistan.(Inthosecities
whereStateBankofPakistandoesnotexist,theNationalBankofPakistanperformssomefunctionsof
StateBankofPakistanincludingtheClearingHousefunctions)

Cashiersfromallbankswhoaremembersoftheclearinghousegathertogetherintheclearinghouse
situatedinSBPorNBPandexchangethechequesdrawnoneachotherwhicharelistedonclearing
schedules.
TheclearingisbalancedwiththehelpoftheStateBankrepresentatives.

Forthesakeofillustrationweassumethatthereareonlythreecommercialbanksinatown.BankA,
BankB,andBankC.

Onworkingday1,customersofallbanksdepositchequesintheirownbanks,drawnonotherbanks,for
credittotheiraccounts.ThebankAcustomerswilldepositchequesdrawnonbankBandBankC,for
credittotheiraccountintheirownbankA.WhenthebankinghourscometoanendthecashierofBankA
willmakeClearingSchedules.

HewillprepareoneaddlistofallchequesdrawnonBankBandoneaddlistofallchequesdrawnon
BankCandwilladdupthetotalsofthetwolists.ThisgrandtotalistheamountBankAhastoreceive
fromBankBandBankC.ItiscalledOutwardClearingtotal.

OnthemorningofDay2thecashierofBankAwillcarrythechequesandliststotheclearinghouse
wherehewilldelivertheclearingscheduleswithchequestothetwootherbanksconsistingofcheques
drawnonthem.ThetotalofthetwoschedulesistheClearingDeliveredamount.Allthethreebankswill

similarlyexchangetheschedulesincludingcheques.BankAwillreceivescheduleswithchequesdrawnon
itselffromBankBandBankC.ThecashierwilltotalthetwoscheduleswhichistheTotalClearing
ReceivedorInwardClearing.TheStateBankOfficerwillalsobeintheroom.Allthecashierswillgive
theirDeliveredandReceivedfigurestotheStateBankwhowillmakeachartofthedeliveredand
receivedamountsofeachbank.Thetotalsofreceivedanddeliveredamountsshouldobviouslybeequal.
TheSBPclearingofficerwillgivethefiguresofeachbanksdeliveredandreceivedchequestotheDeposit
AccountsDepartment(DAD).ThisisthedepartmentinSBPwherethecurrentaccountsofcommercial
banksaremaintained.StateBankwilldebiteachbankwiththeclearingreceivedbythebankandcredit
eachbankbytheamountofclearingdeliveredbyit.

Allthecashierswillreturntotheirbanks.
BankAcashierwillbringtheschedulesandchequesdrawnonitbyBankBandC.Theclearingcheques
receivedwillbeposted/debitedtotherespectivecustomeraccounts.ThetotalofClearingReceived
(inwardclearing)willbecreditedtoStateBankaccountintheaccountingbooksofthebank.

Fortheclearingdelivered/outwardclearingthecustomersaccountsofthosewhodepositedchequeswill
beprovisionallycreditedandthetotalofclearingdeliveredwillbedebitedtoStateBankofPakistan
account.Wordofcaution:thecustomerswillnotbeallowedtodrawamountsagainstthesecreditstillthe
nextworkingdaybecausethechequesdepositedbythemhavenotyetbeenclearedandareasyet
subjecttoreturn.
ClearingamountsaresettledamongstthebanksthroughtheaccountsmaintainedatSBP.

AsyouknowthatallbanksmaintaintheiraccountsatStateBankofPakistanwheretheamountofthe
StatutoryCashReserve(thesedays5%ofCustomerDeposits)isheld.

StateBankofficerwhopresidestheclearinghousefunctionandhasallthefiguresofclearingwillpass
thefollowingentriesinSBPbooks:
Debit:BankATotalofInwardClearingChequesreceivedbyBankA

Credit:BankATotalofOutwardClearingChequesdeliveredbyBankA

SimilarentriesarepassedovertheaccountsofBankBandC.

Theinwardclearingchequeswillbepostedonthecustomeraccounts.Thechequesthatarenotpassed
duetoshortageoffundsintheaccountsorothertechnicalreasonslikesignatures,crossings,
endorsements,varianceinwordsandfigures,postdatedorstalecheques,etc.,arereturned(tothose
banks,whichhaddeliveredthechequesduringthemorningsession)intheafternoonsessionofthe
clearinghousewhichiscalledReturnClearingSession.Theprocessforreturnedchequesisexactly
oppositeofthemainclearingsession.Theentriespassedareopposite.Thecashiersbringbacktotheir
officesthereturnedcheques.Theaccountsofthosecustomerswhohadbeenprovisionallycreditedbut
thechequesdepositedarereturned,aredebitedwiththeamountsofthereturnedchequesandthe
chequesaresentbacktothecustomerswhodepositedthechequesundercoverofsuitablechequereturn
memos.
OnDay3thecustomers(whodepositedcheques)areallowedtodrawfundsfromclearingitemscredited
onDay2butnotreturned.

Theabovedescribeshoweachbankmakespaymentforthechequesdrawnonitandpresentedbyother
bankstoitinclearing.Alsohoweachbankreceivespaymentforthechequesdrawnonotherbanks.The
ReturnClearingsessionisheldtoclearthechequesthatcouldnotbepassed.

Thisisthemanualmethodthroughthebankcashiersvisitingclearinghouse.Thismethodhasbeen
usedsinceearlytimesofbankingandisstillusedinsmallertowns.
NewSystemofClearing.

Thenumberofchequesandotherinstrumentsreceivedbybankerseverydayforclearingiscurrentlyso
hugeinlargecitiesandthenumberofbanksandtheirbrancheshasswelledsomuchthatmanualsorting
andmanualexchangeattheSBPclearinghouseisdifficultifnotimpossible.Henceaclearingsystemhas
beendevisedwhichenablesthebankstooutsourcethesortingandexchangeofthepaymentinstruments
andsettlementtoathirdpartyinstitutionwhichhaslatesttechnologytoundertakethetask.

Basicallytheconceptisthesame.ThebanksaccountsinStateBankarecreditedanddebitedwiththe
amountsofchequesdeliveredorreceived.Onlylogisticsaredifferent.

11.4.ClearingSystemNationalInstitutionalFacilitationTechnologies(NIFT)

Untilafewyearsagothechequessentinclearingusedtobecollectedatthemainbranchesofeach
bank,sortedoutbankwiseandthensenttotheclearinghouseinSBPforexchangeofchequesand
ultimatedebit/credittotheaccountsoftheconcernedbanksasdescribedindetailabove.Thebalancing
wasmanualanddelayswereacommonfeature.

In1996aprivatecompanywasincorporatedbythenameofNationalInstitutionalFacilitation
Technologies(Pvt)Limited(NIFT)tohandlethismostimportantsegmentofbanksbusiness.The
automatedclearingsystemcameintooperationinKarachiasthefirstcentrein1996.Nowithasspread
toLahore,Islamabad,Rawalpindi,Faisalabad,Hyderabad,Peshawar,MultanandQuettaandalmostall
importantcities.
Theintroductionoftheautomatedclearinginvolvedcreatinglocalstandardsforencodingchequesand

otherinstruments,assistingbanksinpreparingstandardcodeline.Thesystemoperationhasprovento
beaverysuccessfularrangement.Themachinessortthechequesforthepreparationofscheduleswith
thehelpofelectroniccodelinewhichisprintedatthebottomofeachchequeinmachinereadable
magneticink.
NIFThavetheirownofficeineachcitywithmoderncomputers,sortingmachinesandtrainedstaff.Each
bankbranchonlymakealistingofthechequestobedeliveredtotheotherbanksthroughNIFT.

NIFTstaffvisitthebankbranchesonDay1andcollectthechequesfromthebranchesandbringthe
chequesandlistingpreparedbythebranchtotheNIFToffice.Thisisdoneforallthebankbranchesina
city.Duringthenighttheysortthechequesandmake(inwardclearing)listingsforeachbankbranchon
whichthechequesaredrawn.ThegrandtotalofthelistingspreparedbytheNIFTwillagreewiththe
grandtotalofthelistingspreparedbythebankbranchesinrespectofthechequesdeliveredbythem.
ThisbalancingmeansthattheNIFTpreparedlistingsarecorrectsofarastheamountsareconcerned.
NextmorningonDay2theNIFTstaffdeliversthechequestothebankbranchesonwhichthecheques
aredrawn.Duringthemorningtimethebankstaffexaminesthechequesandpostthechequestothe
accountsonwhichtheyaredrawn.Byafternoonthereturnchequesaredecidedandreturnmemos
prepared.IntheafternoontheNIFTstaffcollectsthereturnchequesandtakethemtotheNIFToffice
wheretherecordispreparedandreturnchequessenttothebrancheswhichhaddeliveredthecheques.
Thebranchesthendebittheaccountswhichhadinthemorningbeencreditedwiththeamounts.

NIFTofficeadvisestheStateBankastotheentriestobepassedbythemontheaccountsofthebanksin
StateBankinrespectofclearing.NIFTalsoadvisesthebanksoftheclearingamounts.Pleaseremember
thatwhenabankhasmorethanonebranchesinonecityonlythemainofficeinthecitymaintains
accountintheStateBank.Thenumberofbranchesinacitysettleclearingamountswiththeirmainoffice
andmainofficeforthenetamountsettleswithstatebank.
NotethatunderNIFTsystemthebankcashiersdonotcarrychequestoStateBankortoNIFToffice.

11.5.Clearingservicesoffered:
I.Overnightclearingincludingreturnchequeprocessing(24hourclearingcycle)

ii.SameDay/HighValueclearingincludingreturnchequeprocessing(3hourclearingcycle)

iii.InterCityclearingincludingreturnchequeprocessing(48hourclearingcycle)

iv.CountrywideLocalUSDollarclearing(Oneweekclearingcycle)

11.6.BasicServicesandFacilitiesofferedbyNIFT:

Interbankclearingandsettlement(Interbankmeansbetweenonebankandotherbanks,i.e.between
XYZBankandotherbanks.)
Intrabankclearingandsettlement(Intrabankmeansbetweendifferentbranchesofthesamebank.)

CollectionandDelivery

Advices/vouchersforintrabankandinterbankaccounting

Directpostingsupportonmediaforreturns
Querysystemssoftwareanddataenablinglargememberbanks

Callcentres
Reportsandstatisticstomemberbanksonaregularbasis

NETforcentralbanksettlement(NIFTsendsinformationtoStateBankofPakistantopassdebitcredit
entriesovertheaccountsofbanksforsettlementoftheclearing)

11.7.Clearingmaybedividedinto:

Outwardclearing
Inwardclearing

Samedayclearing(forlargeamounts)

11.8.Outwardclearing:

Outwardclearingcontainscheques/instrumentsdrawnonbankswithinthecity.Theseinstrumentsmay
be:
oCheques
oPayOrders
oPaySlips

oDemandDrafts

oDividendWarrants

oTelegraphicTransferReceipts

oRupeeTravellerCheques

Allchequessentinclearingmusthaveaclearingstampi.e.acombinationoftwodifferentstamps
oneSpecialCrossingStampwhichbearsthenameofthebankandthebranchnameandtheotherwith
thewordsClearingalongwithbanksbranchnameanddate.

11.9.USDollarsInstrumentsCollectionandSettlementSystem

PreviouslyUSDchequesdepositedinaccountsweretoberoutedthroughNewYork,therebycostingtime
andexpense.TheStateBankhasintroducedLocalSystem.Itssalientfeaturesareasunder:

11.9.1.Instruments
Allfinancialinstruments(cheques,draftsetc.)denominatedinUS$drawnonbankbranchesincities
Karachi,Lahore,Islamabad,Rawalpindi,Faisalabad,Multan,Sialkot,Peshawar,Quetta,Mirpur(Azad
Kashmir)andHyderabadandseveralothercitiesareacceptableforthissettlementsystem.Collection
fromallothercitiesisarranged/managedbyeachbank,bymakinginternalarrangements,throughany
oneoftheabovecities.

11.9.2.Collection&SettlementSchedule
Initiallythereweretwocollectionandsettlementdaysperweek,i.e.MondayandThursday.Ifa
collection/settlementdayhappenstobeabankholiday,thenitwillbeskippedtillthenextcollection/
settlementday.

Eachbankdesignatesabranch/Regional/HeadofficeinKarachiforpresentingoutwardandreceiving
inwardinstrumentsforcollectionandsettlementthroughNationalInstitutionalFacilitationTechnologies
(Pvt.)Ltd.(NIFT).

NIFTdealswithonlyonedesignatedofficeofeachbankinKarachiforsettlementofKarachiand
upcountrybranches.

Eachbankmayalsodesignateonebranchineachcity(i.e.fromthecoveragelist)withwhomNIFTand
thedesignatedbranchofthatbankinKarachi,ifrequired,wouldliaiseforissuesregardingcollection&
settlementrelatingtootherbranchesinthatcity.

11.9.3.MandatorySettlement
ItismandatoryforthebanksoperatinginPakistan,whoseHeadOfficesorbranchofficesarelocatedin
Karachi,tobeamemberofthissystem.,toopenUS$settlementaccountwithaminimumbalanceof
US$10,000/forsettlementwithSBPBSC(Bank)Karachi(i.e.StateBankofPakistanBankingServices
CorporationBank,Karachi.)andthereaftertomaintainsufficientbalancetocatertotherequirements
keepinginviewtheirbusinessvolume.Thesaidaccountwillberemuneratedonthesameinterestrateas
forStatutoryCashReserveRequirement(SCRR)forFE25andtosettlepaymentofUS$instruments
drawnonthemthroughthissystemortoreturnunpaidinstrumentsonsettlementdate.Incasethe
payingbankdoesnotreturntheoriginalinstrumentonthesettlementdatetothepresentingbank,itwill
beassumedthattheinstrumenthasbeenacceptedforpaymentandwillbesettledthroughthissystem
accordingly.

11.9.4.ProcessingCycle

Thecollection/settlementiscentralizedatKarachi.NIFTinterfaceswithonedesignatedbranchofeach
bankinKarachionly.

Banksrouteallinward/outwardinstrumentsfromtheirbranchesinPakistanthroughtheirdesignated
branchinKarachi.

NIFTcollects/deliversallinstrumentsforinward/outwardsettlementfromthedesignatedbranchesof
BanksinKarachi,processthecollection/settlementanddeliveraconsolidatedstatementtotherespective
designatedbranchofthebank.

EachdesignatedbranchinKarachiforwardstheinstrumentsreceivedininwardcollectiontothepayee
branchoftheirbankdirectlyforAcceptanceorReturnunpaid.

Thepayeebranchsettlesorreturnstheoriginalinstrument,ifany,tothedesignatedbranchinKarachi.
NIFTcollectsallreturninstrumentsfromthedesignatedbranchesinKarachi,processthemalongwith
inwardcollectionandthenroutethemtotherelateddesignatedpresentingBankbranchinKarachi.

TheSettlementproceedsoftheinstrumentswouldbecommunicatedtotheconcernedbranch
immediatelybyelectronicoranyothermeansonthesamedayforcreditingtotheconcerneddepositors
account.
11.9.5.DateStamp
TheCollectingBankwillaffixthestampofthedateonwhichoutwardinstrumentswouldbesenttoN1FT
forcollection.
11.9.6.Settlement

ThenetsettlementwilltakeplacebydebitingorcreditingtherespectivebanksUSDollarclearing
accountsonsettlementdate.
11.9.7.SettlementStatements
NIFTwillprovideastatementofcollection/settlementstatisticsonmonthlybasistoascertainthe
expensespayablebythelodgingbanktopayingbankattherateofRs.100/perinstrument(forcheques
drawnoncitiesotherthanKarachi)irrespectiveofwhethertheinstrumentsarepaidorreturnunpaid.

Allotherreportsandinformationwillbeproducedandprovidedontheexistingpatternasforrupee
clearing.NIFTwillprovidestationeryandusualcollection/settlementpreparationmaterialtothe
branchesasisbeingdoneforPKRclearingsystems.

11.9.8.ForcedRetention

Ifforsomeunavoidablereasonstherelevantbankisunabletoprovideareturnedchequeonthespecific
collection/settlementdateduetoanyreasonbeyondcontrol,thedesignatedbankofficeinKarachiwill
providetotheconcernedbankalongwithinwardclearinginstruments,withacopytoNIFT,adocument
onprescribedformat(agreedbetweenthebanksandNIFT)givingdetailsoftheinstrument,undertaking
thatthesaidinstrumentwillbeprovidedtothelodgingbankdirectlyonavailabilitybutnotlaterthanthe
subsequentcollection/settlementdate,thatinstrumentwillbeconsideredasreturnedunpaid.
Thisprocessmayfunctioninsuchamannerthatthedesignatedbankwillfurnishtheprescribed
documentinduplicatetoNIFTinplaceofthereturneddocumentandNIFTwillsendthefirstcopytothe
lodgingbankalongwithotherreturns,ifany,asareturninstrument.

11.9.9.SettlementInCaseOfInsufficientBalances
Atanypointintimewhenthenetdebit(inward&outward)cannotbepaidoutofabanksUSDollar
clearingaccount(duetoinsufficientbalance)heldwithSBPBSC(Bank),Karachi,theStateBankreserves
therighttoadoptasuitablealternate..Thiswillprimarilytaketheshapeofpaymentthroughan
appropriateovernightSWAPfromthePakRupeesclearingaccountbalanceofthebankwithSBPtothe
extentofsuchshortfallinUSDollaraccount.(ItmeansthatifthereisashortageoffundsintheDollar
account,StateBankwilldebittherelevantbanksPakRupeeAccountinwhichtheBankkeepsthe
statutorycashreserveamountandprovideDollarsintheDollarAccounttomeettherequirement.)

11.9.10.SettlementCharges
NIFTwillchargethepresentingbankRs.100/perinstrumentforitsservicesandRs.100/forprocessing
areturninstrument.
__________________
Wheneveryoufindyourselfonthesideofthemajority,itistimetopauseandreflect.MarkTwain

Saturday,April05,2014

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NegotiableInstruments

DoyouwantsuccessinLife?BeginwithaList.
Thebasictooloftimemanagementisalist,organizedbypriority,andusedasaconstanttoolfor
personalmanagement.Thefactisthatyoucan'tmanagetimeyoucanonlymanageyourself.Thatis
whytimemanagementrequiresselfdiscipline,selfcontrol,andselfmastery.Timemanagementrequires
thatyoumakethebestchoicesanddecisionsnecessarytoenhancethequalityofyourlifeandwork.
Thenyoufollowthroughonyourdecisions.
Weneedtobeawareoftheopportunitycostoftimenotutilizedinaproductivemanner.Alwayscarry
abookoranewspaperwithyou,sothatanytimethatyougetfreecanbeutilizedinenhancingyour
knowledgeratherthanspendingthatsparetimeinjustlookingaround.RememberTimeisMoney.
NegotiableInstruments
13.1.Background
Beforeenactmentofthe(Indian)NegotiableInstrumentsAct,1881,theEnglishLawofNegotiable
InstrumentsgovernedallquestionsrelatingtothenegotiableinstrumentsarisingbetweenEuropeans.If,
however,thepartieswereIndians,thelawandusagesprevailingamongthemerchantsoftherespective
communitiesgoverningsuchtransactionswereappliedbythecourts.Thereisnodoubtthatbythetime
theIndianNegotiableInstrumentsAct,1881,waspassed,theredevelopedinIndiaasetofrulesbased
oncustomsandusagerelatingtoHundis.

Theserulescouldnothavebeenignoredevenbythelegislaturewithoutconsequenthardshiptonative
bankersandtradesmen.ItwasforthisreasonthattheActexpresslyexcludedfromitsoperationany
localusagerelatingtoinstrumentsinanorientallanguage.
TheIndiannegotiableInstrumentsAct,1881anditsBritishcounterpart,theBillsofExchangeAct,1882
codifytheEnglishCommonLawofnegotiableinstruments.ThereismuchincommonbetweentheIndian
ActandthecorrespondingEnglishAct.Itfollowstherefore,thatthereportedcasesofthesuperiorcourts
ofEnglandarestillreferredtowithadvantageforillustratingandexplaininganalogouspropositions
arisingunderIndianandPakistaniLawaswell.

13.2.Definition.
Anegotiableinstrumentisonethepropertyinwhichisacquiredbyanyonewhotakesitbonafideand
forvalue,notwithstandinganydefectoftitleinthepersonfromwhomhetookit

Itfollowsthataninstrumentcannotbenegotiableinstrumentunlessitisinsuchastatethatthetrue
ownercouldtransferthecontractorengagementcontainedthereinbydeliveryifbearerandby
endorsementanddeliveryiforderinstrument.

Itmaybelaiddownasasaferulethatwhereaninstrumentisbythecustomoftradetransferable,like
cash,bydeliveryandisalsocapableofbeingsueduponbythepersonwhoisAHOLDERINDUE
COURSEthenitisentitledtothenameofanegotiableinstrumentandthepropertyinitpassestoa
bonafidetransfereeforthevalueeventhoughthetransferormaynothaveanytitle.

13.3.NegotiableInstrumentAct,1881.
ThisActincludesthreeinstrumentswithinitsmeaningviz.PromissoryNote,BillofExchangeandCheque.
ThesehavebeendefinedinrelevantSectionsoftheActasfollows:

13.3.1.PromissoryNote.
Section4oftheActdefinesaPromissoryNote.
aninstrumentinwritingcontaininganunconditionalundertaking,signedbythemaker,topayondemand
oratafixedordeterminablefuturetimeacertainsumofmoneyonlyto,ortotheorderof,acertain
person,ortothebeareroftheinstrument.

Itscomponentsthereforeare:
1.Unconditionalundertakingtopay

2.Thesumshouldbeasumofmoneyandshouldbecertain
3.Thepaymentshouldbetoortotheorderofapersonwhoiscertainortothebeareroftheinstrument
and
4.Themakershouldsignit.

Theessentialfeatureofapromissorynoteisthatitisaclearlyexpressed,unconditionalwrittenpromise
topayanditisnotenoughthatthesubstantialeffectoftheinstrumentshouldbetomaketheexecutants
liabletopayasumofmoney.Aninstrumentcontainingwords,Iamliabletopaywithoutany
undertaking,isnotapromissorynote.Aninstrumentonlyundertakingtopayinterest,therebeingno
unconditionalundertakingtopaytheprincipalamount,isnotapromissorynote.

Sometimestheabbreviationpronoteisusedinplaceofpromissorynote.
Thebasictestsofapromissorynotearethatthesumofmoneyshouldbecertainasalsothepayeeor
promisee.Iftherateofinterestisspecifiedinthedocumentthecertaintytothesumpayableisinno
wayaffectedasitmaybemerelyamatterofcalculationtoarriveatthesumpayable.Similarly,the
payeeorbearermustbecertain.Wherethenameofthepayeeisnotgiveninthebodyofthedocument
buthehasbeendescribedasyou,itcannotbeheldthatthepersonwhoadvancedthemoneyisa
personcertain.Therefore,itcannotbeheldthatthedocumentisapromissorynote.
Ifapronotedoesnotspecifyanyplacewherepaymentistobemade,thepresumptionisthatpayment
shouldbemadeattheplaceofresidenceorbusinessofthecreditor.AsforthePromissoryNotebeing
payableotherwiseondemand,itshouldbepresentedforpaymentonduedatecalculatedonthebasisof
thestipulatedperiodorthespecifieddateforpayment.

Illustrations

Thepromissorynotehastobeinwriting,withoutanyconditionattached,bearingthesignatureofthe
promisor(i.e.thepersonwhomakesit)promisingtopayadefiniteamountofmoney,totheperson
namedthereinortohisorderortothebearerofthenote,eitherondemandoratafuturefixeddateor
adatethatcanbedetermined.
ThusthefollowingdonotfallwithinthescopeofthisdefinitioneventhoughsignedbyA.

i)Mr.B.I.O.U.Rs.1,000/

ii)IpromisetopayBRs.500,000/ortodelivertohimmyToyotaCorollaCaron1stJanuarynext.
iii)IpromisetopayBRs.500/sevendaysaftermymarriagewithC.

However,theundernotedexamplescanbetermedasPromissoryNotes:

i)IacknowledgemyselftobeindebtedtoBinthesumofRs.1,000/tobepaidondemand.

ii)IundertaketopayBortohisorderasumofRs.5000/30daysafterdate.

iii)Ipromisetopaythebearer90daysaftersight,asumofRs.5000/

IMPORTANT:

1.Wheneverabankgrantsaloanoroverdraft,itobtainsaPromissoryNotefromtheborrower,whichis
usedasevidenceofborrowinginapossiblerecoverysuitinacourtoflaw.

SpecimenofPromissoryNote
24thDecember13
OndemandIpromisetopayPakistanBankLtd.

asumofRs.8,000/(RupeesEightThousandonly).

RevenueStamp

SdMohammadAli
20,MartinRoad,Karachi

13.3.2.BillofExchange

Section5definesaBillofExchange

Aninstrumentinwritingcontaininganunconditionalordersignedbythemaker,directingacertain
persontopayondemandoratafixedordeterminablefuturetimeacertainsumofmoneyonlyto,orto
theorderofacertainpersonortothebeareroftheinstrument.

Theessentialingredientsofthisdefinitionarethatitisanordertopay,withoutanycondition,toa
specifiedpersonortohisorderortothebearer,adefiniteamountofmoneyeitherondemandorata
futuredatewhichcouldbedeterminedoratafixeddateinfuture.Theinstrumentinordertobeavalid
billofexchangehastobesignedbythemaker(i.e.drawer)directingacertainperson(i.e.drawee)to
paytothepersonnamedtherein(i.e.payee)ortohisorderortobearerofthebill.

Billofexchangeisaninstrumentoftradewhichservesasabridgebetweenbuyerandsellerofthe
goods.Whereasthesellerwouldliketopartwithhisgoodsonlywhenheisassuredthatthesale
proceedsareinhishandsorinthehandsofareliableintermediary,fromwhomhecanreceivethe
samethebuyer,ontheotherhandisanxioustopayforthegoodsonlywhentheseareinhispossession
orinthehandsofacertainreliableagency(orthroughdocumentsoftitletogoods)fromwherehecan
obtaindeliverythereof.

Thesellerofthegoodswill,therefore,drawabillofexchangeuponthebuyerfortheproceedsdirecting
himtopaythesametohisbankertowhomhesendsthedocumentsoftitletogoodssold.Thebankis
instructedtodeliverthedocumentsoftitletothebuyeronlywhenthebuyermakespaymentasperthe
billofexchange.Thisishowthegapoftrustbetweenthetwoparties(i.e.,importerandexporter)is
bridgedbyabillofexchange.

1.SpecimenofBillofExchange

From(DRAWER)

A.B.Corporation.20thDecember2013

2,ApexCourt,
KarachiRs.50,000/

ThirtydaysaftersightpayM/sExcellentTraders(PAYEE)ororderasumofRupeesFifty

Thousandonlyforthevaluereceived.

To(DRAWEE)ForA.B.Corporation.
M/sFairdealTraders,SdA.Rahim

37JailRoadProprietor

Lahore(DRAWERSIGNATURE)

(TheaboveisanexampleofUsanceBill.Incasetheabovebillofexchangeisdrawnbyanexporterthe
exporterdeliversthisBillofExchangetoitsbankers.TheexportersbankerssendthisBofEtothe
importersbanktogetherwithabillofladingevidencingshipmentofrelatedgood.Theimporteraccepts
theBillofExchangeindicatingadateonwhichtheywillmakepayment.Incasethatthebankconsiders
thecustomersufficientlycreditworthythebankcandeliverthebillofladingagainstacceptanceofbill.

Onmaturityofbillthebankpresentsthebilltotheimporter,collectstheamountandremitstheamount
totheexportersbank.)
13.3.3.DifferencesbetweenaBillofExchangeandaPromissoryNote:

1)Apromissorynotehastwopartiesabillofexchangehasthreeparties

2)Apromissorynoteisanunconditionalpromiseorundertakingtopaywhereasabillofexchangeisan
unconditionalorderordirectiontopay

3)Apromissorynoteiswrittenbytheborrowerwhereasabillofexchangeispreparedandissuedbythe
lender
4)Apromissorynoteismainlyusedindomesticbusinesswhereasabillofexchangeismainlyusedin
internationaltrade

5)Wheneverabankgrantsaloanoroverdraft,itobtainsapromissorynotefromtheborroweroffunds.
Thepromissorynoteisusedasanevidenceincaseofarecoverysuitinacourtoflaw.

13.4.BankersDraft

Ademanddraftisalsoabillofexchange.Itisanordertopaymoneydrawnbyoneofficeofabankupon
anotherofficeofthesamebankoruponanofficeofadifferentbank.ItiscoveredunderSec.85(a)of
theNegotiableInstrumentsAct.
SpecimenofBankDraft

No.BD00XXXPakistanBankLtd.20thDec.2013.

51,MartinRoad,Karachi

(Protectographed)NotoverRs.25,000/

Rs.25,000/
OndemandpaytoMohammad&Bros.ororderasumofRupeestwentyfive

thousandonly,forvaluereceived.

PakistanBankLtd.ForPakistanBankLtd.

5,SiteRamRoad,KarachiSdOfficer

LahoreSd)Manager
Adraftisabilldrawnbyonebankonanotherbankoronitsownbranch.Itisabillofexchangeanda
negotiableinstrument(AIR1962KAR210).TherelationshipbetweentheholderofDDandthebank
issuingademanddraftisthatofcreditoranddebtor(PLD1952Dacca)

13.5.Acheque
ThechequehasbeendefinedinSec6oftheNegotiableInstrumentsAct,1881.Achequeisalsoabillof
exchangewhichisdrawnonabankerandexpressedtobenotpayableotherthanondemand.The
differencesbetweenachequeandabillofexchangeare:

1.Achequeisalwaysdrawnonabankerwhileabillofexchangemaybedrawnonanyperson

2.Achequeisalwayspayableondemandwhileabillofexchangemaybeusancealsoi.e.itcanbe
payableatagivenfuturedateoradeterminablefuturedate

3.Achequedoesnotneedacceptancewhileabillofexchangedrawnpayableafteraperiodwould
requireacceptancebythedrawee

4.Achequeispresentedforpaymentonlywhileabillofexchangemaybepresentedforacceptanceifit
isausancebill
5.Graceperiod:

Thereisnograceperiodinacheque.

Threegracedaysareallowedincalculatingthematuritydateofthebillofexchange.

(Thefollowingstipulationsregardingdishonor,noting,protestingofBillofExchangealsoapplytothe
PromissoryNotes)
13.6.DishonorofaBillofExchangeorPromissoryNote.

Oneoftheessentialfeaturesofabillofexchangeisthatthebillpayableonafixedordeterminable
futuredatemustbepresentedtothedraweeforacceptancefirstandthenpresentedforpaymenton
determinableduedate.Ifabillisacceptedbydrawee,itisanexpressionofhisintentiontopayby
signingthebillwithduedate.If,however,thedraweedeclinestoaccept,thebillwillbetreatedas
dishonoredbynonacceptance.Abillwillbeconsideredtohavebeendishonoredbynonpaymentifits
paymentisnotmadeonduedateafteracceptance.Inthesecases,thelegalrequirementisthatthe
unacceptedorunpaidbillshouldbehandedtoaNotaryPublicfornotingandprotesting,whichwillbe
thelegalproofofthedraweehavingrefusedtoacceptorpaythebillandthisnotingandprotestingwill
enablefuturelegalactionagainstthedrawee.

Bothincaseofdishonorbynonacceptanceanddishonorbynonpayment,theholderofthedishonored
instrumentmustgivenoticeofdishonortoallthepartieswhomtheholderseekstomakeseverallyliable
thereon.Iftheholderseekstomakeseveralpartiesjointlyliable,noticetosomeofthemwillbe

sufficient.Itwillalsosufficeifthenoticeisgivenbysomepartywhoremainsliableontheinstrument,
andnotbytheholder.

(Severally=separately:Tenantsarejointlyandseverallyliableforpaymentoftherent.)

13.8.NotaryPublic
ItincludesapersonappointedbytheCentralGovernmenttoperformthefunctionsofanotarypublic
underNegotiableInstrumentsAct,1881(Section2(g))andanotaryappointedunderNotariesOrdinance,
1961(XIXof1961).
13.9.Noting
Section99oftheNegotiableInstrumentsAct,1881provides:WhenaPromissoryNoteoraBillof
Exchangehasbeendishonoredbynonacceptanceornonpayment,theholdermaycausesuchdishonor
tobenotedbyanotarypublicupontheinstrument,oruponapaperattachedtheretoorpartlyupon
each.

Suchnotemustbemadewithinareasonabletimeafterdishonorandmustspecifythedateofdishonor,
thereason,ifany,assignedforsuchdishonororiftheinstrumenthasnotbeenexpresslydishonored,the
reasonwhytheholdertreatsitasdishonoredandthenotaryscharges.

13.10.Protest(Protestinghasaspecialmeaninginrespectofnegotiableinstruments.)
Section100dealswiththeProtest.Itsays,Whenapromissorynoteorabillofexchangehasbeen
dishonoredbynonacceptanceornonpayment,theholdermay,withinareasonabletime,causesuch
dishonortobenotedandcertifiedbyanotarypublic.Suchacertificateprovidingformalevidenceof
dishonorofabillofexchangeiscalledprotest.

Whentheacceptorofabillofexchangehasbecomeinsolvent,orhiscredithasbeenpubliclyimpeached,
beforethematurityofthebill,theholdermay,withinareasonabletime,causeanotarypublicto
demandbettersecurityoftheacceptor,andonitsbeingrefusedmay,withinareasonabletime,cause
suchfactstobenotedandcertifiedasaforesaid.Suchcertificateiscalledaprotestforbettersecurity.

13.11.Drawer,DraweeandaDraweeincaseofNeed.(Section7)

13.11.1.Drawer

ADraweristhemakerofthebill

13.11.2.Drawee

ADraweeisthepersononwhomthebillofexchangeisdrawnandisdirectedtopay.

13.11.3.DraweeincaseofNeed

Wheninthebillorinanyindorsementthereon,thenameofanypersonisgiveninadditiontothe
drawee,toberesortedtoincaseofneed,suchapersoniscalleddraweeincaseofneed.(incaseof
need=e.g.ifthebillisreturnedunacceptedorunpaid.)
13.12.Acceptor
Afterthedraweeofabillofexchangehassignedhisassentuponthebillanddeliveredthesameor
givennoticeofsuchsigningtotheholderortosomepersononhisbehalf,heiscalledAcceptor.

13.13.AcceptorforHonor
Whenabillhasbeennotedorprotestedfornonacceptanceorforbettersecurityandanystranger
personacceptsitsupraprotestforhonorofthedraweeorforanyoneoftheendorsersorforthedrawer,
suchapersoniscalledAcceptorforHonor.

(Supraprotest,anacceptanceofabillbyathirdpersonafterprotestfornonacceptancebythedrawee.)

Itmaybementionedthatadrawerisprimarilyliabletotheholderofbillofexchangeuntilitisaccepted.
OnceabillisacceptedtheAcceptorbecomesprimarilyliable.
13.14.Payee

ThepersonnamedintheinstrumenttowhomortowhoseorderthemoneyispayableiscalledPayee.

13.15.Holderinduecourse
IthasbeendefinedinSection9oftheNegotiableInstrumentsAct1881,thatHolderinduecoursemeans
anypersonwhoforconsiderationbecomesthepossessorofapromissorynote,billofexchangeora
cheque,ifpayabletobearerorendorseethereof,ifpayabletoorder,beforeitbecameoverdue,without
noticethatthetitleofthepersonfromwhomhederivedhistitlewasdefective.

{Whatisthemeaningofforconsideration=whensomethingisobtainedinreturnforsomethingorsome
benefitgiven}

InregardtothedefectivetitlethelawfurtherclarifiesinSection58oftheNegotiableInstrumentsAct
1881,whichsayswhenapromissorynote,billofexchangeorchequehasbeenlostorhasbeen
obtainedfromanymaker,drawer,acceptororholderthereofbymeansofanoffenceorfraud,orforan
unlawfulconsideration,neitherthepersonwhofindsorsoobtainstheinstrumentnoranypossessoror

endorseewhoclaimsthroughsuchpersonisentitledtoreceivetheamountduethereonfromsuchmaker,
draweroracceptorunlesssuchpossessororendorseeis,orsomepersonthroughwhomheclaims,was
aholderthereofinduecourse.

ThefollowingpointsemergefromthesetwosectionsoftheNegotiableInstrumentAct:
a)UnlessapersonprovesthatheisaholderinduecoursewithinthemeaningofSec.9hecannothave
abettertitlethanthatoftheintermediateholdersthemselves.

b)Itisonlyapersonwhocomesintopossessionofanegotiableinstrumenthavingobtainedfor
considerationandbeingabonafidetransfereethatcanbeaholderinduecoursewithinthemeaningof
section9.
13.16.Presentmentforacceptance
Promissorynotes,billsofexchangeandchequesmustbepresentedforpaymenttothemaker,acceptor
ordraweethereofrespectively,byoronbehalfoftheholder.Indefaultofsuchpresentment,theother
partiestheretoarenotliablethereontosuchholder.

Sec.77ofNegotiableInstrumentsAct,1881dealswithliabilityofbankerfornegligentlydealingwithbill
presentedforpayment.Accordingtothissectionwhenabillofexchangeacceptedpayableataspecified
bankhasbeendulypresentedthereforpaymentanddishonored,ifthebankersonegligentlyor
improperlykeeps,dealswithordeliversbacksuchbillastocauselosstotheholder,hemust
compensatetheholderforsuchloss.
13.17.Differenceinwordsandfigures
Section18statesthatiftheamountundertakenororderedtobepaidisstateddifferentlyinfiguresand
inwords,theamountstatedinwordsshallbetheamountundertakenororderedtobepaid,provided
thatifthewordsareambiguousoruncertaintheamountmaybeascertainedbyreferringtothefigures.

Howeverinpracticebasedonthepleaofgoodfaithandwithoutnegligence,thebanksusuallyreturn
suchaninstrumentwiththeremarksamountinwordsandfiguresdiffers
13.18.Inchoatestampedinstrument
(MeaningofInchoate:justbeginningtoformandthereforenotclearordeveloped:inchoateideas=
incompleteideas)
Section20statesthatwhereonepersonsignsanddeliverstoanotherapaperstampedinaccordance
withthelawrelatingtostampdutychargeableonnegotiableinstruments,eitherwhollyblankorhaving
writtenthereonanincompletenegotiableinstrument,inorderthatitmaybemade,orcompletedintoa
negotiableinstrumenthetherebygivesprimafacieauthoritytothepersonwhoreceivesthatpaperto
makeorcompleteitasthecasemaybeintoanegotiableinstrumentfortheamountifanyspecified
thereonorwherenoamountisspecifiedforanyamountnotexceedingineithercase,theamount
coveredbythestamp.

Thusanegotiableinstrumentthoughinchoatebutproperlystampeddoesnotloseitsvalidityand
enforceabilitymerelybecauseitwasnotwhollyorpartiallyfilledinattimeofexecutionanddelivery
thereof.

MostImportantfeatureofaNegotiableInstrumentRestated(FromInternet)

TheholderinDueCourseofaNegotiableInstrumentcangetabettertitlethanthetransferor.

ExplanationoftheConcept.
Themostremarkablefeatureofanegotiableinstrumentisthatifitisnegotiatedtoapersonwho
acquirestheinstrument
i)Ingoodfaith
ii)Forvalue

iii)Withoutnoticeofanydefectsinitstitle

then,thetransfereeisaholderinduecourseandcanenforcetheinstrumentwithoutbeingsubjectto
defenseswhichthemakeroftheinstrumentwouldbeabletoassertagainsttheoriginalpayee,except
forcertainrealdefenseswhicharerarelyapplicable.
Theholderinduecourseruleiswhatmakesthefreetransferofnegotiableinstrumentsfeasibleinthe
modernindustrialeconomy:apersonorcompanywhopurchasessuchaninstrumentintheordinary
courseofbusinesscanreasonablyexpectthatitwillbepaidwhenpresentedtothemaker,without
involvingitselfinadisputebetweenthemakerandthepersontowhomtheinstrumentwasfirstissued.

Theforegoingisthetheoryandtheletterofthelaw:ofcourse,inrealitytheissuerofaninstrumentwho
feelshehasbeendefraudedorotherwiserawlydealtwithbythepayeemaynonethelessrefusetopay
theholderinduecourse,requiringthelattertoresorttolitigationtorecoverontheinstrument.
__________________
Wheneveryoufindyourselfonthesideofthemajority,itistimetopauseandreflect.MarkTwain

Saturday,April05,2014

saadmonga
Member

#10

JoinDate:May2012
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CrossingsandEndorsements

"Onlythosewhoconstantlyretoolthemselves
standachanceofstayingemployedintheyearsahead."
LearnNewSkills.
Iwouldrecommendyoutolearntouchtyping
whichwillincreaseyoureffectivenessappreciably.
WhatisTouchTyping?
CrossingsandEndorsements
14.1.Background
ThecrossingofachequeisafeatureoflawinPakistanadoptedfromlawsapplicableinBritishIndia.In
UnitedKingdomtheuseofthetermcrossingsoriginatedintheeighteenthcentury.Whentheemployees
ofdifferentbanksbroughttheirchequestotheclearingcentre,forthesakeofidentificationandto
facilitateremittance,theywrotethenamesoftheirbanksonthefaceofcheques.InUKthecrossed
chequesweregovernedbytheCrossedChequesAct,1856.
PleasenoteaCommoncharacteristicofALLTYPESofcrossings.Ifaninstrument,cheque,draft,etcis
crossedwhateverthetypeofcrossingthepayingbankwillnotpaycashagainstacrossed
instrument,itcanonlybecreditedintoabankaccount.
14.2.Typesofcrossing
Thefirsttypeofcrossingisknownasgeneralcrossingandconsistsofplacingoftwoparalleltransverse
linesacrossthecheque.Theselinesmaybewithorwithoutthewordsandcompanyoranabbreviation
thereofsuchas&Co.Thesecondtypeisknownasspecialcrossingwhichcarriesnameofthebank
collectingthechequeonthefaceofthecheque.Theeffectofacrossingonthechequeisthatitcanonly
becollectedbyabankforacustomerandcannotbepaidoverthecountertothepayeeorholderincash.
14.3.Definition
Section123oftheNegotiableInstrumentsAct,1881says:
Whereachequebearsacrossitsfaceanadditionofthewordsandcompanyoranyabbreviation
thereofbetweentwoparalleltransverselinessimply,eitherwithorwithoutthewordsnotnegotiablethe
additionshallbedeemedtobeacrossingandthechequeshallbedeemedtobecrossedgenerally
14.4.Featuresofageneralcrossing
(a)Twoparalleltransverselinesdrawnacrossthefaceofthecheque
(b)Withorwithoutthewordsandcompany
Cashcannotbepaidagainstagenerallycrossedcheque.
Amountcanbepaidonlytoabank,toanybankwherethepayeehasanaccount.
14.5.SpecialCrossing
Section124oftheActdefinesitasunder:
Whereachequebearsacrossitsfaceanadditionofthenameofabanker,thatadditionshallbedeemed
tobeaspecialcrossingandthechequeshallbedeemedtobecrossedspecially.Aspeciallycrossed
chequecanbepaidto(i.e.itcanbecollectedby)onlythatbankwhosenameiswritteninthespecial
crossingandbynootherbank.
14.6.Differencebetweengeneralandspecialcrossings
i.Ingeneralcrossingtwoparalleltransverselinesarenecessarywhereasinspecialcrossingneednot
Justthenameofabankwrittenacrossachequeconstitutesspecialcrossing.
ii.Inspecialcrossingthenameofthecollectingbankappearingonthefaceofthechequeisnecessary
whereasingeneralcrossingitdoesnotappear.
iii.Achequecrossedgenerallycanbecollectedbyanybankwhereasachequecrossedspeciallymustbe
collectedbyonlythatbankwhosenameappearsacrossthefaceoftheCheque
Allothercrossingscanbecancelledbythedrawerofthechequebutaspecialcrossingcanbecancelled
onlybythebankinwhosefavouritisspeciallycrossed.

iv.Achequemaybearmorethanonebanksnamewheretheotherbankisactingascollectingagentfor
thebankwherethepayeeofthechequemaintainshisaccount.

14.7.Notnegotiable
AccordingtoSection130oftheAct,ifinacrossedcheque,thewordsNotNegotiableappear,theholder
takingthechequeshallnothaveandshallnotbecapableofgiving,abettertitletothechequethanthat
whichthepersonfromwhomhetookit,had.NotNegotiablecrossingdoesnotrestrictfurther
transferabilityofacheque.Itisfreelytransferablebydeliveryincaseofbearerandbyindorsementand
deliveryincaseitisanordercheque.Theeffectofthesewordsonachequeisthatitisawarningtothe
payeeorholderthatifthechequehadadefectivetitle,theindorseeorholderthereofwillnotacquirea
bettertitlethanthatofthetransferor.Bythesametokentheholderwillnotbecapableofpassinga
bettertitlethanthatofhisowntothesubsequentholder.

Toreiterateanegotiableinstrumentisonethepropertyinwhichistransferredbymeredeliveryorby
endorsementanddelivery.Moreoveraholderinduecoursewhoreceivestheinstrumentforvalueand
ingoodfaith,withoutnoticeofanydefectinitstitlecangetabettertitlethanthepreviousholder.

Ifaninstrumentismarkednotnegotiablethenthesubsequentholdersdonotgetabettertitlethanthe
previousholders.
AnexamplewillexplaintheimpactofNotNegotiablecrossing.PersonAstoleachequebearingNot
Negotiablecrossing,thenheindorsedittoBforvaluableconsideration.A,havingstolenchequehasno
titletoitandhecannotpassonanytitletoanysubsequentholderthereof.Thisissoonlyifthechequeis
crossedNotNegotiable.AlthoughBreceiveditforvalueandwithoutnoticethatthetitleofAwas
defectivebutitwasclearlymarkednotnegotiablewhichisadeclarationthatthisinstrumentisdevoid
oftheimportantqualityofnegotiabilityandheBcannotgetabettertitlethanA.SincethetitleofA
wasdefectivethetitleofBwillalsobedefective.

Anonnegotiablecrossingmeansthatthechequeisdevoidofitsqualityofnegotiabilityandanendorsee
willreceivethechequesubjecttoanydefectsinthetitleoftheendorser.

Intheaboveexampleifthechequewasnotmarkednonnegotiable,Bwhohadreceivedthecheque
forvaluableconsiderationwithoutknowledgeofanydefectinitstitlewouldgetabettertitlethanAand
thepersonBcouldenforcethechequeagainstthedrawerandtheendorserA.

14.8.AccountPayeeOnlyCrossing

InPakistanitisacrimetocreditAccountPayeeOnlychequetoanyaccountotherthanthepayee
namedinthecheque.
Section123AwasaddedtotheNegotiableInstrumentAct,1881byanamendmentOrdinanceof1962.It
statesthatwhereachequecrossedgenerallybearsacrossitsfaceanadditionofthewordsaccount
payeebetweenthetwoparalleltransverselinesconstitutingthegeneralcrossing,thechequebesides
beingcrossedgenerally,issaidtobecrossedaccountpayee.Whenachequeiscrossedaccount
payee,itshallceasetobenegotiableanditshallbethedutyofthebankercollectingpaymentofthe
chequetocredittheproceedsthereofonlytotheaccountofthepayeenamedinthecheque.

{Transverse=placedacrosssth}

Thepracticeofusingthistypeofcrossinghasbeeninvoguesincethe19thcentury.Suchachequeisnot
transferablebutvalidonlybetweentheparties.Itissaidthatthesafestcrossingwillbethecombination
oftwocrossingsi.e.AccountPayeeonlyalongwithNotNegotiable.

{Vogue=afashionforsomething}

AccountPayeeOnlycrossingmeansthatinadditiontotherestrictionthatthepaymentcannotbemade
incashandcanonlybecollectedbyabanktheproceedsofanAccountPayeeOnlychequeCANonlybe
creditedTOTHEACCOUNTOFTHEPAYEENAMEDINTHECHEQUE.Suchchequecannotbeendorsedor
transferredtoanyotherpersonorinstitution.

InPakistanitisacrimetocreditsuchchequetoanyaccountotherthanthepayeenamedinthecheque.

14.9.PurposeandbenefitsofCrossing
Acrossingthoughnotaffectingthenegotiabilityofthechequedoesrestrictitspresentationthrougha
banki.e.ithastobedepositedinanaccounttherebyminimizingtheriskoffraudwhichcouldbeeasierif
thechequewaspaidonthecountersofabank.Moreoverthecrossinggivesdirectionstothepaying
bankertopaytheproceedstothecollectingbank.

Whensendingachequetoabeneficiarybymailorcourierorthroughapersonwhomyoucannotrely
uponfully,itisbettertocrossachequepreferablyAccountPayeeOnlybecauseifitissocrosseditcan
onlygointothebankaccountofthenamedpayeeandthechanceofsomebodyelseobtainingthemoney
inquestionisminimizedappreciably.

14.10.Whocancrossacheque?
AccordingtoSection125oftheNegotiableInstrumentAct

a)Whereachequeisuncrossed,theholdermaycrossitgenerallyorspecially

b)Whereachequeiscrossedgenerally,theholdermaycrossitspecially

c)Whereachequeiscrossedgenerallyorspecially,theholdermayaddthewordsnotnegotiable

d)Whereachequeiscrossedspecially,thebankertowhomitiscrossedmayagaincrossitspeciallyto
anotherbanker,hisagent,forcollection

e)Whenanuncrossedchequeorachequecrossedgenerallycomestothehandsofabanker,hemay
crossitspeciallytohimself.

14.11.DutiesofaBankwithregardtocrossedcheques
AsexplainedearlierSection126oftheActstatesthatachequecrossedgenerallymustbepaidonlytoa
bankerandachequecrossedspeciallyshallonlybepaidtothebankernamedtherein.AsperSection127
oftheActachequemaybearsecondspecialcrossinginfavorofasecondbankwhichisactingasan
agentforcollectionforthefirstbanker.

14.12A.ProtectiontothePayingBankerwhenpayingacrossedchequeSec.128oftheNegotiable
InstrumentsActdealswithpaymentinduecourseofacrossedchequeandmakesitobligatorytoa
bankerthatpaymentofacrossedchequemustbemadeonlyinduecoursewhichimpliespaymentin
goodfaithandwithoutnegligencetoabanker.However,ifhemakespaymentincontraventionofthis
section,helosesthelegalprotectionandwillhavetocompensatethecustomerforanylosssufferedby
himbysuchpayment.Theprotectionisavailableifthebankermakespaymentingoodfaithandwithout
negligenceofachequecrossedgenerallytoabankerandifcrossedspecially,thebankertowhomitis
crossedorhisagentforcollection,beingabanker.

ProtectionregardingPaymentofInstrumentonwhichalterationisnotvisible.

WhereaChequehasbeenmateriallyalteredbutdoesnotappeartohavebeensoaltered.

Sec.89providesarelieftothebankerinthecaseofpaymentofaninstrumentonwhichalterationisnot
apparentandstatesthatifachequepresentedforpaymenthasbeenalteredbutdoesnotappeartobe
alteredorithasbeencrossedbutdoesnotappeartobecrossedorhashadacrossingwhichhasbeen
expungedatthetimeofpresentation.Insuchasituation,thebankermaymakethepaymentaccording
totheapparenttenoroftheinstrument.Ifthepaymentmadeisinduecourseandmadeingoodfaith
withoutnegligencethebankshallbedischargedfromallliabilities.
14.12B.ProtectiontotheCollectingBankerwhencollectingacrossedchequeSec.131ofthe
NegotiableInstrumentActprovidesthatwhereabankeringoodfaithandwithoutnegligencereceives
paymentforacustomerofachequecrossedgenerallyorspeciallytohimself,andthecustomerhasno
titleordefectivetitlethereto,thebankersshallnotincuranyliabilitytothetrueownerofthechequeby
reasononlyofhavingreceivedsuchpaymentprovidedthepaymenthasbeencollectedingoodfaithand
withoutnegligence.
(Notethedifferenttypesofprotectionsavailabletothecollectingbankerandthepayingbankerprovided
theyhaveactedingoodfaithandwithoutnegligence.)

14.13.Whocanopenacrossingonacheque?
Wehaveearliermentionedastowhocanaddcrossingonthecheque.Howeverastowhocanremove
thecrossingisatotallydifferentmatter.Acrossingbeingamaterialpartofthecheque,itscancellation
canonlybedonebythedrawerofthechequei.e.onlyapersonwhoissuedthechequecanopenthe
crossing.Thisisforgeneralcrossing.Howeverforcancellationofspecialcrossingsthesecanonlybe
removedbythebankerwhosenameappearsinthecrossing.

14.14.Indorsements
IndorsunisLatinwordandfromitIndorsementisderived,theliteralmeaningofwhichisonthe
backorreverse.ButitslegaldefinitionunderSection15ofNegotiableInstrumentsAct,makesthings
clearer:Whenthemakerorholderofanegotiableinstrumentsignsthesame,otherwisethanassuch
maker,forthepurposeofnegotiation,onthebackorfacethereoforonaslipofpaperannexedthereto
orsosignsforthesamepurposeastampedpaperintendedtobecompletedasanegotiableinstrument,
heissaidtoindorsethesameandiscalledtheindorser.

Thefollowingpointsemergefromthisdefinition:
Indorsementmeansthewritingofapersonsnameeitheronthebackorthefaceofa

negotiableinstrument.
Intheeventofinsufficientspaceontheinstrument,indorsementcanevenbemadeonapieceofpaper
annexedtotheinstrument,technicallycalledallonge.TheIndorsementshouldbesomadethatpartof
thenameappearsontheinstrumentandpartlyonthepieceofpaperattachedasallonge.

TheIndorsementshouldbemadeonlywhentheinstrumentisintendedfornegotiationasperdefinition
ofnegotiationgiveninSection14ofNegotiableInstrumentsActwhichreads:whenapromissorynote,
abillofexchangeorchequeistransferredtoanypersonbytheholderthereof,theinstrumentissaidto
havebeennegotiated.

Negotiationthusmeansthetransferofanegotiableinstrumenttoathirdpartyinsuchawaythatthe
thirdpartyisconstitutedastheholderoftheinstrumentwhoisentitledto

thepossessionofthesameinamannerthathecansueuponitinhisownname.
Thereisnoexactformofindorsementprescribedinbankinglaw,butthebankershavedevelopedtheir
ownprinciplesinconsonancewiththebasiclegalrequirementsinthis
regard.
BankersinPakistangenerallyobservethefollowingprinciples:

a)Theindorsersnamemustbeexactlyinthesamespellingaswrittenintheinstrumentaspayeeor
indorsee,i.e.itshouldbeverbatim.

b)Indorsementshouldbemadeinpayeesorindorseeshandwritingonly.Signatureintheformof
facsimileisnotacceptable.
c)Vernacularindorsementisnotacceptableunlessitisconfirmedandguaranteedbythecollecting
banker.

14.15.TypesofIndorsements
Indorsementsareofthefollowingtypes:

i)Inblankindorsement,
ii)Infullindorsement,
iii)Conditionalindorsement,
iv)Restrictiveindorsement,

v)Partialindorsement.

14.15.1.InblankIftheindorsersignshisnameonly,theindorsementissaidtobeinblankandif
headdsadirectiontopaytheamountmentionedintheinstrument,toortotheorderof,aspecified
persontheindorsementissaidtobeinfullandthepersonsospecifiediscalledtheindorseeofthe
instrument(Section16(1)).TheprovisionofthisActrelatingtoapayeeshallapplywithnecessary
modificationtoanindorsee.(Section16(2)).

Inablankindorsement,theindorsersignshisnameonly.Itisalsocalledgeneralindorsement.The
instrumentbearingablankindorsementbecomespayabletobearer.Itisthusnegotiatedtosubsequent
holdersbymeredeliveryasincaseofaninstrumentpayabletobearer.

14.15.2.Infull
AsmentionedearlierinSection16oftheNegotiableInstrumentsAct,ifanindorserspecifieswithhis
signaturethenameofthepersontowhomtheinstrumentismadepayable,thisindorsementiscalledan
indorsementinfullorspecialindorsement.

14.15.3.Conditional
AccordingtoSection52,conditionalindorsementisonewhereanindorsermakessuchliabilityorthe
rightoftheindorseetoreceivetheamountduethereondependentuponthehappeningofacertainevent
whichmayormaynottakeplaceorexcludeshisownliabilitythereonwhensigninghisname,e.g.Pay
XY&Co.athisriskandresponsibilityorPayXY&Co.ororderwithoutrecoursetome.

14.15.4.Restrictive

Whenanindorserattachesaconditionwithhissignaturewhichpreventsfurthernegotiationofthe
instrument,itiscalledrestrictiveindorsement.Forexample,ifabillofexchangeisendorsedasPay
XYonlyorPayXYfortheaccountofDEetc.itrestrictsfurthernegotiability.Theindorseehasno
powertotransferhisrightstoanyonethereafter.

14.15.5.Partial

UnderSection56(1),negotiationbyindorsementmustbeoftheentireinstrument.Under56(2)an
indorsementwhichpurportstotransfertotheindorseeonlyapartoftheamountpayableorwhich
purportstotransfertheinstrumenttotwoormoreindorseesseverally,isnotvalidasanegotiationofthe
instrumentbutwheresuchamounthasbeenpaidinpart,anotetothateffectmaybeindorsedonthe
instrument,whichmaythenbeindorsedforthebalance.

14.16.Whocanindorse?
(Bonafide=[usuallybeforenoun](fromLatin)genuine,realorlegalnotfalse:abonafidereasonis
itabonafide,reputableorganization)
Abonafidepayee,indorseeorholderofanorderinstrumentcanendorseasanindividual,ifendorsedto
himassuch,oraspartnerifmadepayabletoapartnershipfirmorasChairman,Director,Secretary,or
Managerifmadepayabletoajointstockcompany,asperfollowingexamples:

14.16.1.Indorsementsbyindividual

Thenameoftheindorsershouldcorrespondexactlytothenameofthepayeewrittenintheinstrument.
Titlesofcourtesy,rank,maritalstatusarenottobeprefixedwithIndorsements.

a)Payee:AhmedHussain
Regular:AhmedHussain

Irregular:AhmadHossain
b)Payee:MuftiSameeullahKhan

Regular:SameeullahKhan

Irregular:MuftiSamiullahKhan
14.16.2.Indorsementsbyagentsforindividuals.

Indorsementmustindicatethattheagentissigningonbehalfofthepayeeunderproperauthority.

a)Payee:AbdulMannan
Regular:AbdulMannan

ByShahzadKhan
(his)attorney
Irregular:AbdulMannan
ShahzadKhan
Attorney

b)Payee:RizwanRasheed

Regular:ForandonbehalfofRizwanRasheed

ShahzadKhan
14.16.3.Indorsementbyafirmastheagenttoanindividual.

Indorsementmustindicatethatfirmissigningasanagentoftheindividual.
a)Payee:ImtiazShafi

Regular:forandonbehalfofImtiazShafi

Shafi&Co.

Irregular:ImtiazShafi
Shafi&Co.

14.16.4.IndorsementbyJointPayees.

Incaseofjointpayees,allpayeesmustendorseindividuallyoroneofthemshouldsignunderan
authorityfromrestofthem.

a)Payee:MuhammadImran&SaleemButt

Regular:MuhammadImran(Bothsigningindividually)

SaleemButt
or
MuhammadImran

Forself&SaleemButt

Irregular:MuhammadImran(Bothnameswritteninthesamehandwriting)

SaleemButt
14.16.5.Indorsementbyfirmsasanagentofanotherfirm.Afirmcanindorseasanagentonbehalfof
anotherfirm.
a)Payee:MessrsKarmanShah&Co.

Regular:PerproKarmanShah&Co.

Shahjee&Co.

Irregular:Shahjee&Co.forKarmanShah&Co.

14.16.6.Indrosementforandonbehalfofafirm.
Apersonindorsinganinstrumentforandonbehalfofafirm,theindorsermustindicatehisdesignation.
a)Payee:MessrsKarmanShah&Co.
Regular:forandonbehalfof

KarmanShah&Co.

SyedAli

(Manager.)

Irregular:forandonbehalfofKarmanShah&Co.

SyedAli

14.16.7.IndorsementforJointStockCompany.

ApersonindorsinganinstrumentonbehalfofaJointStockCompanymustbeadulyauthorizedofficialor
agentwhomustindicatehisauthorityanddesignationthereon.

a)Payee:MessrsSalmanJamal&Co.Ltd.

Regular:PerproSalmanJamal&Co.Ltd.

MansoorAli
(Secretary)
Irregular:PerproSalmanJamal&Co.Ltd.

MansoorAli
b)Payee:MessrsABFashion&Co.Ltd.

Regular:ABFashion&Co.Ltd.

ShahidAhmed
(Director)
Irregular:PerproABFashion&Co.Ltd.

ShahidAhmed
14.16.8.IndorsementsbyClubs,Societies,Administrators,Trusteesetc

Indorsementsbypersonsonbehalfoftheinstitutionslikeclubs,societies,trustsetc.mustbemadeby
anauthorizedofficebearerwhomustindicatehisdesignation.

a)Payee:KarachiServicesClub

Regular:forandonbehalfof

KarachiServicesClub

SherazKhan

(Hony.Secretary)

Irregular:KarachiServicesClub

SherazKhan

b)Payee:LawyersForum

Regular:forLawyersForum

WaliKhan

(President)
Irregular:forandonbehalfofLawyersForum

WaliKhan

14.9.Liabilityofindorser

Sec35statesthatintheabsenceofacontracttothecontrary,theindorserofanegotiableinstrument,
byindorsingit,engagesthatonduepresentmentitshallbeacceptedandpaidaccordingtoitstenorand
thatifitbedishonoredhewillcompensatetheholderorsubsequentindorserwhoiscompelledtopayit
foranylossordamagecausedtohimbysuchdishonor.Everyindorserafterdishonorisliableasuponan
instrumentpayableondemand.

Itmaybenotedthatdishonorbydraweeisnecessary.Thereforeaholdercannotcomestraighttoan
indorseranddemandpayment.Theinstrumenthastobepresentedtothedraweeandifherefusesto
pay,onlythentheholdercanclaimfromtheindorser.
__________________
Wheneveryoufindyourselfonthesideofthemajority,itistimetopauseandreflect.MarkTwain

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#11

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BankersCore*1Business

Youareneverfullydresseduntilyouwearasmile.
BankersCore*1BusinessDeposits
Moneyistherawmaterialforabank.Thebiggerthestockofmoney,themorethebusinessthatabank
canconductandthehighertheprofitsitcanmake.Depositsarerightlysaidtobethelifebloodfora
bank.
TheBankasDepository
Wehavediscussedearlierthedefinitionsofbank/banking.Oneofthebasicservicesrenderedbythe
banktothepublicisthatofdepository,bothanessenceandanimportantcomponentofbanking
business.
(*1Themostimportantorcentralpartofsomething)
ImportanceofDepositsThekeytoallgrowthanddevelopmentofthebankingsystemliesinthe
mobilizationofresourcesandtheirjudiciousutilization.TheSection5(b)oftheBankingCompanies
Ordinance,1962definesbankingparticularlyhighlightingtheseaspects:
Bankingmeanstheaccepting,forthepurposeoflendingorinvestment,ofdepositsofmoneyfromthe
public,repayableondemandorotherwise,andwithdrawablebycheque,draft,orderorotherwise.
Assuchthefirstprerequisiteofbankingistheacceptanceofdepositsfromthepublicandthenits
utilizationbywayoflendingorinvestmentinsuchamannerthatthedepositorsmayalsowithdrawtheir
fundsondemandorotherwise.Impliedly,itfurtherenvisagesthattheinvestmentoffundsshouldbe
judiciouslymadesoastobeabletogenerateearningsforpayingareasonablereturntodepositorsof
money,besidesmeetingoperationalexpensesofthebankandprovidingforreservesandcontingencies
andpayingdividendtoshareholders.Itimpliesthatdepositsareeffectivelytheworkingcapitalofthe
bankingbusiness.Unlessthereareresources,neitherthesecanbeinvestedinprofitmakingavenuesand
venturesnorwoulditbepossibletopayreasonablereturntothedepositors.
MobilizationofDeposits
Somebanks/DFIswereinthepastpublicizingtheirdepositmobilizationschemeswithoutdisclosingthe
correct&completetermsandconditionswithregardtotherateofreturnonsuchdeposits.Theuseof
ambiguousterms,likeconditionsapplyetc.,inadvertisementswerethecauseofcomplaintstoSBP
fromaggrieveddepositors.Allthebanks/DFlshavebeendirectedtoensurethatalladvertisementsin

media(print,electronicorinanyotherform)solicitingdepositsfromthegeneralpublicshouldexplicitly
indicatetheannualizedrateofexpectedreturn.Thewordsconditionsapplyorothersimilarwordings
shouldnotbeused.Theschemesonwhichprofitispaidonmonthly/quarterly/halfyearlyoranyother
regularinterval,theexpectedrateofprofittobepaidonsuchintervalsshouldbeclearlyindicatedinthe
accountopeningformoradvertisingmaterialinboldletters.Whatistheannualizedrateofreturn?

CoreEarningofabankistheSpreadofInterestorProfit
Resourcemobilizationofdepositsneedstobedonecarefullysoastoensurethatintheultimateend,it
doesnotbecomecounterproductiveforthebank.Inmobilizingdeposits,therefore,twobasicpointsviz.,
averagecostofdepositsandaveragereturnontheinvestmentofdeposits,shouldbekeptinview.A
prudentbankerwouldalwaystrytomaintainadepositmixwhichwouldkeephisaveragecostofdeposits
withinsafelimitssoastomaintaintheprofitabilityandviabilityforthebank.Aquestionthatcouldarise
hereisastowhatshouldbetheaveragecostofdepositsuptowhichitmaybefeasibletogoinfor
mobilizationofdeposits.StateBankstatutoryrequirementlaysdownapercentageoftotaldemandand
timeliabilitiestobeheldincash(CashReserve)withtheStateBankofPakistanfreeofanyreturn,while
anothergivenpercentageisrequiredtobeheldinunencumberedsecurities,usuallythispartisheldin
approvedsecurities(approvedforinvestmentinstatutoryliquidityrequirement)e.g.treasurybills,etc.
Theaveragecostofdepositsuptowhichdepositmobilizationcouldbefeasiblewouldhave,therefore,to
beconsideredwithreferencetotheaveragereturnonthelendingorinvestmentofthesedepositsafter
meetingstatutory(legal)obligations.
{unencumberedsecurities=thosesharesandbondsetcwhichareNOTplacedunderlientosomebody.
Freeofanylienorcharge}

Intheaboveparagraphwhichtypeofaverageisenvisaged?Simpleaverageorweightedaverage.What
isweightedaverage?

Inmobilizingdeposits,therearetwofactorswhichareofprimeimportance.Oneistherateofreturnto
thedepositors.Thisshouldnecessarilybecompetitivewithaviewtoattractdepositsinacompetitive
market.Anotherimportantaspectindepositmobilizationisthequantumofeffortsthatareputinonthis
behalf.Tothisendthefollowingguidelinescouldbeofassistance.

i.Identifytargetmarketfordepositmobilization.Asafirstprioritypotentialsources/areasofdeposits
andthepersons,ifany,tobecontactedinthisbehalfshouldbeidentified.Thenextstepwouldbeto
developcontactsandsupport,asmaybeconsiderednecessary,formobilizingthesedeposits.

ii.Inthecaseofthebankextendingletterofcreditorguaranteefacilities,whicheitherasperSBPs
guidelinesorthebanksownpolicies,requireanamountofmargintobedepositedwiththebank,italso
helpstoincreasebanksdepositthoughinlesservolume.

iii.Branchesfallinginhomeremittanceareascoulddowelltocontactpersonsreceivinglargerforeign
inwardremittancesforopeningaccountswiththeirbankandarrangingremittancesthroughdirectdeposit
inaccountswhichwouldprovidequickercreditstotheiraccountsbyavoidingdelaysinvolvedinreceiptof
fundsthroughinstrumentsofremittancelikechequesordrafts.Theremittersabroadcouldalsobe
likewiseapproachedforarrangingremittancesthroughtheirbankforcredittothebeneficiarysaccount
onthesamelineswithassurancesofefficiencyofservice.

iv.Issuingdrafts,payordersandotherformsofremittancesarealsosourcesoffundsasthefloatlying
withthebankcanbelargeincaseofincreasedvolumesofsuchbusinesses.

v.Branchdepositsshouldbeperiodicallycomparedwiththoseofotherbanksoperatinginthesameareas
andtheavailabledepositpotential.Thiswouldenablethebranchofficialstomakeacomparative
assessmentoftheirperformancesandplantheirfuturestrategiesandlineofactioninrespectof
advertisingandhiring/trainingofdepositpromotionofficers.

CustomersBankAccountsThemostbasicaccountisthesavingsaccountwhichcannotbeoverdrawn.
Thentherearecurrentaccountswhicharepayableondemandeitherbywithdrawalorbythecustomer
instructingthebanktomakepaymenttoathirdparty.Theycanbeoverdrawnbywayofoverdraft.Then
thereareforeigncurrencyaccountsandanumberofotherdepositaccountswithdifferentfeaturesand
services.Accountholdersvaryaswell,fromindividualsthroughmultinationalenterprisesand
governmentagencies.Therearespecialrulesrelatingtoaccountholdingbyunincorporatedassociations,
partnerships,executors,minors,mentallyillandsoon.Banksthemselvesholdaccountswithotherbanks
asaresultofcorrespondentbankingrelationship.

Deposits
Depositsaresourcesoffundswhichareusedbybanksforlendingand/orinvestmentpurposes.Thebasic
functionofanybankisacceptingdeposits.Depositscanbedividedintotwomaincategories:Demand
andTime/Termdeposits/liabilities.Banksusedepositsforlendingandinvestingactivitiesinsuchaway
thatwithdrawalsarepossibleondemandbothfordemandandtimedeposits.Inotherwordsthebank
usesthedepositsinkeepingcashinthebanktills,cashinStateBankaccount,investmentsinTreasury
Bills,inlongtermloanstogovernment.Theskillofthebankerliesindecidingtheavenuesofinvestment
andlendingtheirvolumesinsuchamannerthatthewithdrawalneedsofthecustomersaremetinan

admirablemannerandthebankalsoearnsreasonableprofit.Pleaserememberthathighearningand
highliquidityareopposinggoalsandachallengeforthebanker.

Demanddeposits/liabilitiesareaccounts,withdrawalsfromwhichcanbemadeimmediatelyondemand
atanytimewhereasinthecaseofTime/Termdeposits/liabilities,fundsareavailableforwithdrawal
onlyafterafixedtermordeterminableperiod.AlldepositproductsareLiabilityproductsandall
lending/investmentproductsareAssetsproductsandreportedinthebalancesheetaccordingly.

Abanksprofitabilitydependsonitsabilitytomobilizedepositseffectively.Generatingexpensivedeposits
andlendingorinvestingatcheaper/lowerinterestratescancauseprofiterosion.Costofdepositisa
termusedfortheratethatthebankpaystoitsdepositors.Thisratemustbehighenoughtoattract
desirablelevelsofdepositsbutlowenoughtoensureprofitsustainability.Bankslendataparticular
interestratewhichisdeterminedbykeepinginviewthecostofthebanksdepositsandotherfactors.It
isthetreasurersjobtomaintainthepoolofthebanksmoneyinaprofitableandfeasiblemanner.

ThedepositratesareinfluencedbytheDiscountRateannouncedbyStateBankatthetimeofannouncing
monetarypolicewhichisdoneeveryquarter.

Furthermore,therateofreturnondepositsisalsolinkedwithTreasurybillrates(TBills)andratesof
PakistanInvestmentBonds(PIBs).TBillsarefloatedbytheStateBanktofinanceshorttermgaps
betweengovernmentreceiptsandexpenditure.PakistanInvestmentBonds(PIBs)areissuedbythe
governmenttoborrowinthelongterm.TheratesofPIBsandareusedfordetermininglongtermdeposit
rates.

SBPhasadvisedallbanksandDFlstoprominentlydisclosealltermsandconditionsforbothdepositors
anddebtors,alongwiththeprojectedrateofreturntothedepositorsandinterestormarkupratesfor
thedebtors.Thisinformationmustbeclearlycommunicatedanddisclosedinallformsofcommunications
includinginmediacampaigns.
Section26AofBankingCompaniesOrdinance1962pertainstoDeposits.Thesalientfeaturesofthis
sectionare:
Banksmayacceptdepositsonparticipationinprofitandloss(PLS).

Freeofinterestorreturninanyotherform.

Banksshallmakeacompleterecordoftheinvestmentmadeandfundsallocatedforliquidassets.

DepositswhicharereceivedonaPLSbasisshallbeinvestedbythebanksattheirabsolutediscretionin
businesseswherereturnisnotfixed(interest).DepositorswhohaveinvestedmoneyonaPLSbasisare
entitledtoreceiveperiodicalprofitsfromashareofprofitsofbanksasmaybedeterminedbythemand
incaseoflossshallbeliabletobeartheproportionateloss.
TypesofAccounts

Anaccountisarelationshipwiththecustomer,operatedonadaytodaybasis,intowhichdepositsare
receivedandoutofwhichchequesarepaid.Adepositaccountisusuallyincredit,butanoverdraft
facilitymaybetakenbyprearrangementwiththebank.Somedepositaccountsareopenedforalimited
timesuchas:
1)NoticeAccountrepayableafteranoticeperiodofsevendays,or29days,etc.Suchaccountis
repayableinthefuture.Theconditionisthatthecustomerhastogiveawrittennoticetothebankseven
daysor29daysbeforethedatethecustomerneedsthemoneydependinguponwhetherthedepositison
7daysnoticeor29daysnotice.

2)TermDepositAccountrepayableafterafixedtimerangingfromonemonthto10yearsoreven
longer.Profitonsuchdepositsispayableeitheratmaturityoryearly,halfyearly,quarterlyormonthlyas
percontract.

3.CurrentAccount
Acurrentaccountisanaccountfromwhichanypartofthebalancemaybewithdrawnondemand.
Withdrawalfromtheaccountcanbemadeviacheques,directdebit,standinginstructionsorATM.Funds
intheaccountcanbedebitedorcreditedintheformofcash,chequesandfinancialinstruments.No
interest/profitispaidonthecurrentaccount.
Theseaccountsaregenerallyforbusinesspurposesandcanbeoverdrawnonarrangementwiththebank.
Zakatisnotdeductedoncurrentaccounts.Theinitialdepositcanbeaspereachbanksownpolicy.

Beforeaccountopening,duediligenceshouldbeexercisedandallKnowYourCustomer(KYC)
requirementsaretobefulfilled(KYCisexplainedindetailinotherhandouts).
4.PLSSavingsAccount(PLSmeansProfitandLossSharingBasis)

Savingsaccountsaremeantsolelyforsavingpurposes.Savingmeanstosetasidemoneyforfutureuse
ortoretainmoneytomeetfuturespendingneeds.Savingaccountshaveallthefeaturesofacurrent
account,exceptthatprofitispaidonthebalancemaintainedasperthePLSrulesofthebank.Saving
accountsaregenerallyopenedinthenameofindividualsbutcanalsobeopenedinthenameof
charitableinstitutions,forprovidentfunds,benevolentfundsandpensionfunds.Initialdepositand
minimumbalancerequirementfeaturescanbedecidedbyeachbankaspertheirownpolicies.Zakatis
deductedonthebalancemaintainedonthevaluationdate(firstdayofRamadan).ExemptionfromZakat

canbeclaimedbysubmittingZakatdeclaration30dayspriortotheZakatvaluationdate.

Differentbankshaveintroduceddifferentvariationproductsofsavingaccountsforindividualsandeligible
institutionswhereprofitispaidbiannually.Zakatrulesfortheseaccountsaresimilartothatofthe
normalsavingaccounts.

InthepastBanksusedtopayaverysmallpercentageasprofit/interestonSavingsAccounts.Asper
BPRDcircularno7dated30thMay2008,SBPhasinstructedallbankstopayaminimumofmandatory
5%profittotheirsavingaccountholders.Pleasenotewhenrateisquotedwithoutmentioningtheperiod
forexamplepermonthorperquarter,itmeanstherateofprofitperyear.

AsperSBPBPRDCircularNo.07ofMay27,2011,StateBankofPakistanhasprohibitedallthebanks
fromlevyinganyservicechargesforopeningandmaintenanceofregularsavingsaccountswitheffect
fromJuly01,2011.Thismeansthattheservicesrenderedbybanksfortheopeningandmaintenanceof
regularsavingsaccountsshallbefreeofcharge.Thereshallbenoconditionofmaintainingaminimum
balancefortheseaccounts.Theseinstructionsareapplicableequallyonallexistingandnewaccounts.
Similarly,nochargeswouldberecoveredbybanksatthetimeofclosinganaccount.Banksshallnot
demandmorethanRs.100asaninitialamountforopeningofregularsavingsaccounts.However,no
initialdepositwouldberequiredforopeningofaccountsby(i)MustahkeenofZakat,(ii)Students(iii)
EmployeesofGovernmentorofSemiGovernmentinstitutionsforsalaryandpensionpurposes(including
widows/childrenofdeceasedemployeeseligibleforfamilypension/benevolentfundgrant,etc.)andother
similartypesofaccounts.

Thebanksmustalsoensurethatalltermsandconditionsfortheoperationofanaccount,especiallyin
caseofitsdormancy,closingand/orsubsequentreactivationarebroughtintotheknowledgeofthe
customeratthetimeofaccountopening.KeyfeaturesoftheAccountOpeningFormmustbetranslated
intoUrduandaprintedcopyofsuchtranslationshallbesharedwiththeaccountholdersatthetimeof
openingoftheaccount.
5)BasicBankingAccounts(BBA)
GovernmentofPakistanhasbeenkeenonthedocumentationoftheeconomysothattheeconomicdata
availablefromthefinancialinstitutionshelpsthestateinformulatingpoliciesandincreasingthetaxbase
ofthecountry.Thiscanbeachievedifallthepeoplehavebankaccountsandinsteadofcash
transactions,everybodyusesthebanksfortheirbuyingandsellingandothermonetarytransactions.

BBAswereintroducedbySBP,withspecialfeaturesvideBPDcircularNo.30dated29thNovember2005,
tofacilitatebankingforlowincomepeopleinPakistan.PriortotheintroductionofBBAsbanksusedto
collectservicechargesfromallthecustomerswhofailedtomaintainaminimumbalanceintheir
accountsaspereachbank'spolicy.Inordertoresolvethisissueandtofacilitatebankingforsmall
depositors,SBPhasformulatedtheBBAschemewiththefollowingfeatures:
InitialdeposittoopenaBBAisRs.1000/
Noprofitispaidonthebalanceinthisaccount.
Nominimumbalanceisrequiredandnoservicechargesaretobepaidbythecustomer.

IfanaccountremainsatNilforacontinuousperiodofsixmonths,thebankhastherighttocloseit.
Maximumtwodepositsandtwochequewithdrawalsareallowedfreeofchargesinamonth.

UnlimitedfreeofchargeATMwithdrawalsareallowedfrombanksownATMs.

IncaseofwithdrawalfromATMsofanyotherbank,chargeswillberecoveredfromtheotherbank.

AregularbankingaccountcanbeconvertedtoaBBAonthecustomer'srequest/consent.

ThereisNObaronopeningajointBBAaccount.
6)PLSTermDeposits

Termdepositsarethedepositsrepayableafterapredeterminedfuturedate.Suchdeposittransactions
maybeforaperiodrangingfromonemonthtotenyearsorevenlonger.

Profitispaidonthesimpleinterestbasis.
Rolloveroptioncanbemadeavailable.

Zakatisapplicableonthefacevalue,ifTDRwasoutstandingonZakatvaluationdateorpaymentof
profitwhicheverisearlier.

Tax/withholdingtaxshallberecoveredasperlawofthelandonprofitdisbursed.(Withholdingtaxis
applicableonalltypesofaccountswherethebankpaysprofitincludingsavingsaccounts.Taxrateis10%
onprofit.)
DifferentbankshaveissueddifferentliabilityproductsforRTA(RupeesTransactionalAccounts)andTerm
DepositAccounts.Theapplicablerulesarewithintheparametersexplainedabove.

7)CashManagementAccount
Therearethreetypes

A)SimpleCashManagementAccount.
ACashManagementAccountisabankingserviceprovidedtohighprofilebusinesscustomersthrough
whichtheycanspeedilyobtainfundsfromtheircollectionaccountsandtransfertotheirmainaccount
whichisusuallyinoverdraft.Theremittancesareeffectedthroughacomputermodule.Themodule

collectsandconsolidatesdatafromthecustomer'sbankaccountinanylocationinthecountry.Through
cashmanagement,customerscanspeedupcollectionoftheiraccountsreceivableandutilizetheirfunds
totheoptimumlevel.ExamplePSOcashmanagementaccountforPetrolpumpsproceeds.PSOhasan
overdraftfacilityinaKarachiThepetrolpumpsgetproceedsofPSOpetrolfromvehicleusers.Petrol
pumpsalloverPakistandepositproceedsinbranchesgeographicallyclosetothem.Thecomputermodule
remitsalltheamountstotheoverdraftfacilityaccountatKarachiwithadvicestoallconcerned.Inthis
wayPSOsavesoninterestcostsastheproceedsofcollectionsareefficientlypooledtoreducethe
overdraft.

B)NonDiscretionaryWealth/CashManagementAccount

Throughsuchaccountsbanksprovidethefollowingservices.

Thecustomeropensaccountandentersintoanagreementwiththebankwherethecustomerdeposits
fundsintheaccount.Customermakesdecisionandinstructsthebanktoinvestdesignatedsumsinbank
depositschemes,inequityshares,inmutualfunds,inbondsissuedbyprivateinstitutions,and/orin
securitiesissuedbythegovernmentlikeTreasuryBills,PakistanInvestmentBonds.Inreturnforafee
thebankdoesallthepaperwork,investsthefundsasdesiredonbehalfofthecustomer,collectsprofit,
sellstheinvestmentswhenrequested.Thebankdoesallthedonkeyworkintheprocess.Thebank
handlesalltheperiodicalprofitandcapitalgainstheCustomerearnsforthecustomersaccount.
C)DiscretionaryWealth/CashManagementAccount.
Thebankandcustomerenterintoanagreementwherebythecustomerdepositshisamountandgives
discretionaryauthoritytothebanktoinvesttheamountinsecurities/avenuesaschosenbythe
investmentexpertsofthebank.Thebankhirescapablesecurityanalystswhoinvesttheamountin
shares,bondsorotherinvestmentsintheirbestjudgement.Thebankperformsallthesales,purchases,
collectionsforthecustomer.Allprofitsandcapitalgains/lossesarepassedtothecustomer.

8)Collectionaccounts
Collectionaccountsareopenedforcollectionoffundsattherequestofbusinesscustomers,charitable
institutionsandontheinstructionsofthegovernmentinthecaseofanydisaster.

Forthescenarioslistedabove,amainaccountisopenedinanybranchofthebank.Inadditiontothis
mainaccount,collectionaccountsareopenedinotherbranchesfromwherefundsaretransferredtothe
mainaccountasperinstruction/arrangement.Forexampleinordertoassistthepublictodonateforthe
rehabilitationofpeopledisplacedbythepowerfulearthquakeinBaluchistan,PrimeMinistersReliefFund
hasbeeninstitutedandcollectionaccountshavebeenopenedinallthecommercialbankbranchesin
Pakistan.AmountscreditedtothesecollectionaccountsareremittedtotheCentralReliefFundAccountat
thedisposaloftheCentralGovernment.

9)ShareSubscriptionaccount
Whenapubliclimitedcompanyfloatsitssharesforsubscription,ithastoopenaccountsinbankswhich
arenominatedas"bankerstotheissue".Thesebanksauthorizetheirbranchestocollectshare
applicationsfromthepublicagainstdepositsofsubscriptionmoneyinacollectionaccountthisis
ultimatelytransferredtoamainaccountofthebankontheclosingdateofthesubscription.Ifthe
numberofshareapplicationsismorethanthesharesoffered,ballotingtakesplaceandrefundsto
unsuccessfulapplicantsaremadethroughthebrancheswheretheapplicationswerereceived.The
subscriptionamountrelatingtothesuccessfulshareapplicationsremainsavailableatthedisposalofthe
shareissuingCompany.Oncethefundsaretransferredtothemaincompanyaccountthesubscription
accountisclosed.
ChequeBooksandLooseCheques
IssuanceofChequeBookOpeningofanaccountlikecurrentorsavingsaccountwouldnecessarily
requireissuanceofachequebooktoenabletheaccountholdertoissuepaymentinstructions.Thefirst
chequebookshouldonlybeissuedoncealltheformalitieshavebeencompletedforopeningofthe
accountandnotbeforethat.SubsequentchequebookshouldbeissuedonreceiptofproperRequisition
Slip(fromthechequebookissued)dulysignedandthesignaturesverified.Thereceiptofchequebook
shouldbeacknowledgedbytheaccountholder.

IssuanceofLoosechequesThoughmostbanksdiscourageissuanceofloosecheques,onsome
occasionsacustomerrequestsforissuanceofaloosechequeleaf.

Thefollowingprecautionsshouldbetaken:

i.Aloosechequeshouldonlybeissuedtoanaccountholder,whocallspersonallyandwhoisintimately
knowntotheManageroraSeniorOfficerofthebranchforthepurposeofdrawingmoneyincashonly.
Loosechequecannotbeusedforthirdpartypayments.

ii.Loosechequesshouldbeissuedtocustomersfromanewandfullchequebookandnotfromunused
chequeswhicharereturnedbyotheraccountholder.

iii.ArecordofloosechequesissuedshouldbemaintainedinthechequeBookIssuedRegisterby
allocatinglastfewpagesoftheregisterforthepurposeseparatelyforCurrentandSavingsDeposit

Accounts.
iv.Loosechequeshouldbeissuedaftercompletionofthefollowingformalities:

a)Thepartyrequiringaloosechequeshouldsigntheloosechequerequisitionslipwhichisattestedbyan
officer,whopreferablyknowshimpersonallyandthesignatureoftheaccountholderisverifiedbythe
OfficerIncharge,DepositsDepartmentortheManagerafterverycarefullyexaminingspecimen
signatureoftheaccountholderavailableonthebanksrecord.

b)AstampbearingthewordsLooseChequeisaffixedonthefaceofthechequeatthetop.Closetothe
LooseChequestamp,wordsNotmorethanRssoandsomaybewrittenasaprecautionarymeasure.
__________________
Wheneveryoufindyourselfonthesideofthemajority,itistimetopauseandreflect.MarkTwain

Sunday,April06,2014

saadmonga
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PaymentMethods

Aneasywaytodevelopselfconfidence
DressSharpDressSharpDressSharp
Adressaffectsthewayapersonfeelsabouthimself.Forexamplethemorningyouknowyoudontlook
goodthefeelingreflectsinthewayyoucarryyourselfaroundallday.Thisalsoaffectsyourinteraction
withotherpeople.Sobeconsciousaboutyourselfandtakecareofyourpersonalappearancetobuildup
agoodconfidencelevel.Significantimprovementscanbemadebyfollowingsomesimpleroutine:
Bathandshavefrequently
Wearcleanclothes
Becognizantoflateststyles
Agreatruletofollowinbuyingclothesisspendtwiceasmuch,buyhalfasmuch.Ratherthanbuying
abunchofcheapclothesbuyhalfasmany.Selecthighqualityitems.Thiswilldecreaseyourspending
becauseexpensiveclotheshavegoodqualitysotheytaketimetowearoutandstayinstylelonger.
PaymentMethods
Paymentmethodsaretheinstrumentswhichareusedbytheaccountholders,whetheranindividual,a
partnershipfirmorjointstockcompany,tooperateupontheaccounttomeettheirpaymentobligations.
Thesemayincludepaperbasedorelectronicbasedoracombinationofboth.
8.1.CHEQUE:
Themostpopularpaymentinstrumentusedtheworldoverischeque.Thefacilitytodrawchequesbya
customertooperateuponhisaccountmaintainedwithafinancialinstitutionisoneoftheprerequisitesto
qualifyitasabank.Infactachequeisanordergivenbyacustomertohisbankertopayasumof
moneyeithertohimselforthenamedpayeeortohisorder.Inlegalterms,thedefinitionderivedfrom
theNegotiableInstrumentsAct1881isgivenbelow:
Section6achequeisabillofexchangedrawnonaspecifiedbankerandnotexpressedtobepayable
otherwisethanondemand
Thusachequeisaspeciesofabillofexchangeitsdistinguishingcharacteristicsbeingthat:
i.itmustbedrawnonabankerand
ii.itmustbepayableondemand.
Letussee,whatisBillofExchange.
Abillofexchangeisdefinedas:
1.Unconditionalorder
2.Whichisinwriting
3.Addressedfromonepersontoanother
4.Signedbythepersongivingit
5.Requiringthepersontowhomitisaddressedtopay
6.Eitherondemandoratafixedordeterminablefuturetime
7.Asumcertaininmoney
8.toaspecifiedperson
ortotheorderofaspecifiedpersonor

tothebearer.

ThuswhereverthetermbillisusedintheNegotiableInstrumentAct,primafacieitcoversbothbillof
exchangeandcheques.

8.2.TypesofCheques:

8.2.1.OpenchequeItispayableincashatthecountersofabankerinaccordancewiththepracticeof
thebanks.
8.2.2.CrossedchequesItisnotpayableincashatthecountersofabankerbutcanbecollectedbya
bankerwhowouldcredittheproceedstohiscustomersaccountafterrealization.

8.2.3.Datingachequethereisnolegalrequirementthatachequeshouldbedated.TheNegotiable
InstrumentActSection20allowsaninchoate{meanings:justbeginningtoformandthereforenotclear
ordeveloped}instrumenttobecompleted.However,inpracticebanksdonotpayundatedcheques.

AnteDatedCheque.Antedatedchequeisonethatbearsadatebeforethedateonwhichitispresented
forpayment.Suchchequeispaidiftheperiodofantedateislessthansixmonths.

StaleCheque.Ifhowevertheperiodofantedateissixmonthsormorethansixmonths,suchcheque
willbecalledaStaleChequeandwillbedishonoured.
PostDatedCheque.Apostdatedchequeisonethatispresentedforpaymentonadatebeforethedate
ofissueappearingonthecheque.Inotherwordsachequeispresentedforpaymentbutthedatewritten
onthechequehasnotyetarrived.Suchchequewillbedishonoured.

ChequebearingaDateoccurringonaSunday.Thisreasondoesnotmakeachequeinvalid.Itisavalid
cheque.
8.3.PartiestoachequeSection7oftheNegotiableInstrumentsActmentionspartiesasDrawer,
Drawee,Draweeincaseofneed,Acceptor,AcceptorforHonourandPayee.Howeverwewillonly
discussthepartiesrelevanttoachequei.e.Drawer,Drawee&Payee.(WeshallstudyNegotiable
Instrumentsindetailinasubsequenthandout.)
8.3.1.TheDrawer:Themakerofthecheque,ortobemoreexacttheaccountholder,istechnicallycalled
thedrawer(Sec.7).Inordertoconstituteavalidauthority,thedrawermustsigntheinstrument,
accordingtotherecordedsignaturewithhisbanker.Theworddrawerisusedforbillsofexchange
includingchequeswhileforPromissoryNotesthewordmakerisused.Adrawermaybethe
accountholderhimselforapersonauthorizedbyhimi.e.anagentmaybedrawerfortheprincipal.

8.3.2.TheDrawee:Thedraweeisthepersononwhomtheinstrumentisdrawn.Achequeisalways
drawnonabankwherethecustomermaintainshisaccount.Unlikethedrawer,adraweecannotbea
substitutei.e.itmustbethenamedbank.
8.3.3.ThePayee:AccordingtoSec.7oftheAct,apayeeisthepersonnamedinthechequetowhomor
towhoseorderthepaymentistobemade.Ifmorethanonepersonarenamedaspayee,thenthe
chequewillbepayablejointlyoralternately.

8.4.ComponentsofaBillofExchange(includesacheque):

8.4.1.Unconditionalorderitmustbeanorderandthattoounconditional.Thewordspleasepayor
simplypayaresufficienttoconstituteanorder.Paymentfromaparticularaccountorastatementofthe
transactione.g.collegefeedoesnotmakeitconditionalInPalmervs.Pratt(1824)itwasheldthata
billofexchangepayable30daysafterthearrivaloftheshipParagonatCalcuttawasconditionalforthe
saidshipmayneverhavearrivedatCalcutta.TheprintedformatofchequebooksprovidedbyBanksto
theircustomerstodrawchequesdonotcarryanyprovisiontoaddanyconditiontoitspayment.Ifa
bankerisorderedtopayconditionallyonthepayeessigningareceipt,theinstrumentwillacquirethe
statusofanorder&notacheque.
8.4.2.Itmustbeinwriting.TheBillsofExchangeAct,1882providesthatwritingincludesprintingas
well.Accordingly,achequepreparedonatypewriterwouldbetreatedasavalidinstrument.

8.4.3.Addressedbyonepersontoanotherpersonapersonmaybenaturalpersonoralegalperson
andthelatterincludesacompanyaddressedrequiresthatthenameoftheaddresseepersonmust
appearontheinstrumentitself.Itisnotimportantwhetheritappearsinthetop(asoncheques)orat
thelowerpart(asonbillsofexchange).TheinstrumentdrawnbyaBankeruponitself,likebankersdraft
isnotabillofexchangeasitisnotaddressedbyonepersontoanother.
8.4.4.Itmustbesignedbythepersongivingit.Anunsignedchequeisanincompleteinstrumentandwill
berefusedbythedraweesbankforpayment.

8.4.5.Payondemandoratafixedordeterminablefuturetimeondemandreferstodemandorat
sightoronpresentationorinwhichnotimeisexpressed.Achequeisalwayspayableondemand.The
responsibilityofthedraweebankoriginatesthemomentachequeispresentedforpayment.Note:An
instrumentpayableatafixedordeterminablefuturetimeisabillofexchangebutitisnotacheque.

8.4.6.Amountcertaininmoneyanamountindicating(a)withinterest(b)bystatedinstalments(c)by
statedinstalmentswithaprovisionthatthedefaultinpaymentofanyinstalmentsthewholeamountshall
becomedueisdeemedtobecertaininmoney.Wheretheamountstatedinthechequediffersinwords
andfigure,itappearsastheinstrumentwouldnotbeanorderforpaymentofasumcertaininmoney.
However,thebillofexchangecontemplatesthepossibilityofdiscrepancyinwordsandfiguresandit
specificallyprovidesthatinsuchcases,thesumdenotedbywordsistheamountpayable.Inpractice,
thebankersusuallyreturnsuchchequeswithremarkswordsandfiguresdiffer.
8.4.7.Payabletospecifiedpersonorbearer.Sometimesacustomerfillsinthechequestatingpaycash
ororder.Suchinstrumentsarenotcheques,becausecashisnotaspecifiedperson.Theseare,
however,validordersforpaymentofmoneyandaccordinglypaidonpresentation.Howeveriftheword
bearerremainsontheinstrument,itwillfallwithinthedefinition.Inmostcasestherewillbeanamed
payeeanditwillbepayabletohisorderorbearer.

8.4.PaymentinduecourseThehonouringofcustomerschequeisacontractualobligationofabanker.
Avalidpayment,however,isonewhichfulfilstherequirementslaiddownunderthePaymentindue
course.Section10oftheNegotiableInstrumentAct,1881definesasunder:

Paymentinduecoursemeanspaymentinaccordancewiththeapparenttenoroftheinstrumentingood
faithandwithoutnegligencetoanypersoninpossessionthereofundercircumstanceswhichdonotafford
areasonablegroundofbelievingthatheisnotentitledtoreceivepaymentoftheamounttherein
mentioned.

Apaymentmadebyabankerwillconstituteaspaymentinduecourseifitfulfilsthefollowing:

1.ProperformThechequemustbedrawnbythedrawerinaccordancewiththeprovisionsmentioned
inSec.6oftheNegotiableInstrumentsAct,1881.TheBankermustensurebeforepaymentthatthe
chequehasbeenproperlyfilledandnochangeshavebeenmadetoitsformatlikethenameofdrawee
Branch,accountnumberetc.

2.NotcrossedAchequecanbeeitheropenorcrossed.Acrossedchequeisonewhichisnotpayableto
anypersonbutacollectingbanker.Apaymentofacrossedchequeoverthecounterwouldnotconstitute
paymentinduecourse.

3.DrawnontheparticularbranchThepaymentofchequeiscontingentonitspresentationatthebranch
wherethecustomerismaintaininghisaccount.However,withtheintroductionofonlinebankingfacility
thechequesarealsoencashedonanyotherbranchofthesamebank.Thecustomersaccountis
ultimatelydebitedatthesameBranchwheretheaccountismaintained.

4.PayabletobearerororderWhenabearerchequeispresentedforpayment,thedraweebankis
dischargedbypayingtothebearerwhoispresentingtheinstrumentbyobtaininganacknowledgementof
receiptofmoneyonthebackofthecheque.However,incaseofordercheque,itisthebankers
responsibilitytoconfirmtheidentityofthepayeebeforemakinganypayment.

5.NotbemutilatedWhentheappearanceofthechequerevealsthatithasbeentornorwornoutand
givessufficientreasontobelievethecustomersintentionistowithdrawhisauthority,itiscalled
mutilation.Thebankershouldensurethatthechequepresentedforpaymenthasnosignofmutilation.

6.NounauthorizedmaterialalterationsMaterialalterationsincludethedate,thesumpayable,the
nameofpayeeandalterationoftheordertobearerbutnotviceversa.Thesealterationsformpartof
Section3(f).Section87saysAnymaterialalterationofanegotiableinstrumentrendersthesamevoid
againstanyonewhoisapartytheretoatthetimeofmakingsuchalterationanddoesnotconsentthereto
unlessitwasmadeinordertocarryoutthecommonintentionoftheoriginalpartiesandanysuch
alteration,ifmadebyanendorsee,dischargeshisendorserfromallliabilitytohiminrespectofthe
considerationthereof.

7.SufficientfundsavailableTheaccountonwhichachequeisdrawnmustbeinfundstoenablethe
banktomakepayment.Section31oftheActstatesThedraweeofachequehavingsufficientfundsof
thedrawerinhishands,properlyapplicabletothepaymentofsuchchequemustpaythechequewhen
dulyrequiredtodosoandindefaultofsuchpayment,mustcompensatethedrawerforanylossor
damagecausedbysuchdefault.

8.NotbepostdatedorstaleTheresponsibilityofthepayingbankerasregardspaymentornon
paymentofchequesdrawnonhimisquiteheavy.Ifthepayingbankerhonoursachequewhichshould
havebeendishonoured,thepayingbankermayloosethemoneyandifhedishonoursitwhenitshould
havebeenpaid,heisliabletopaydamagesforwrongfuldishonour.Thebankerhasonlytwooptions(i)
honouror(ii)dishonour.

Thecustomerexpectsthatthemakerofthechequemayhavearrangedfundsforpaymentonthedate

mentionedandifthechequeispresentedbeforementioneddateofpayment,itmaybereturnedbeing
postdated.Theotherrisksinclude:

a.Thecustomermaycountermandthepaymentbeforetheduedateofthechequebyinformingthebank
inwriting.Apaymentbeforetheduedatewillnotbeinaccordancewiththemandateofthecustomer
andhencecannotbedebitedtotheaccount.
b.Beforetheduedatethecustomermaydieandthedeathcancelsthemandategiventothebank.Ifthe
bankhaspaidthechequeandthecustomerdiesbeforethatdate,thebankerwillhavenomandateto
debittheaccount.
c.Paymentofapostdatedchequewillnotbedeemedtobepaymentinduecourseandhencethe
payingbankerwillnotbeentitledtostatutoryprotection.

d.Thecustomermaybecomeinsolventorinsanebeforetheduedateandhereagainthebankerwill
loosethecustomersmandate

e.Ifapostdatedchequeispaid,itmayconsumebalancewhichthecustomeractuallyhadinmindfor
paymentofanotherchequeandwhichmayhavetobedishonouredforlackoffundsthusmakingthe
bankerliabletodamagesforwrongfuldishonourofthecheque.

Dr.RajanyaaminhisarticlethepostdatedchequeandHolderinduecoursewrites,Aninstrumentin
theformofachequewhichispostdatedisnotachequeinlaw.Thereforeabankerwhopayssuchan
instrumentbeforetheduedateisunabletodebitthecustomersaccountwiththeamount.Apostdated
chequeistechnicallynotachequeuntiltheostensibledate.Achequebydefinitionispayableondemand
andhenceachequewithadateinfutureisnotpayableondemand.AnIndianwriterParthasarethyinhis
bookChequesinLawandPractice,2ed.1972p.32writesApostdatedchequetillthedatethereon
arrives,couldbetreatedasabillpayableatafuturedate

Achequeistermedoutofdatewhenitiseitherpostdatedorstale.Ifabankerpaysapostdated
chequebeforeitsduedate,helosestheprotectioneligibleunderthelaw.Itisalsocustomaryamongst
bankersinPakistanthattheydonotpaychequeswhicharepresentedafteraperiodofsixmonthsfrom
thedateofissue.SuchchequesaretermedasstaleasdescribedunderSec.21oftheNegotiable
InstrumentAct,1881andwouldbereturnedbythebank.Abillisnotinvalidbyreasonofthatitisante
datedorpostdatedorthatitbearsadatewhenitwasaSunday.Anantedatedchequeisonewhich
bearsanearlierdatethantheactualdateofdrawing.Thereforeifon25thJanuary2006achequemaybe
writtenwithadateas25thDec2005itwillbeanantedatedcheque.
9.PresentedduringbankinghoursAbankerisliabletohonourchequesdrawnonhim,ifitispresented
forpaymentduringworkinghoursandonbankingdaysonly.Thebankinghoursarefixedbybanksand
nonworkingdaysareannouncedbyStateBankofPakistanincompliancewiththeNegotiable
InstrumentsAct.
10.NolegalbaronpaymentAbankerwouldnotmakepaymentifthepaymenthasbeenstoppedbythe
drawerthroughwrittennoticereceivedbythebanker,orthebankerhasknowledgeofanydefectivetitle
ofthepersonpresentingtheinstrumentforpaymentorhasreceivedanoticeofinsolvency,insanityor
deathofthecustomer,orincaseofacompany,noticeofwindinguporanoticeofassignmentofthe
availablecreditbalanceintheaccountbythecustomeretc.

ProtectiontothePayingBanker

Section89:Paymentofinstrumentonwhichalterationisnotapparent.

Whereapromissorynote,billofexchangeorchequehasbeenmateriallyalteredbutdoesnotappearto
havebeensoaltered,orwhereachequeispresentedforpaymentwhichdoesnotatthetimeof
presentationappeartobecrossedortohavehadacrossingwhichhasbeenobliterated,paymentthereof
byapersonorbankerliabletopayandpayingthesameaccordingtotheapparenttenorthereofatthe
timeofpaymentandotherwiseinduecourse,ingoodfaithandwithoutnegligence,shalldischargesuch
personorbankerliabletopayandpayingthesameaccordingtotheapparenttenorthereofatthetimeof
paymentandotherwiseinduecourse,shalldischargesuchapersonorbankerfromallliabilitythereon,
andsuchpaymentshallnotbequestionedbyreasonsoftheinstrumenthavingbeenaltered,orthe
chequecrossed.Theprotectionwillbeavailableonlyifpaymentisinduecourse,ingoodfaithand
withoutnegligence.
8.8.ProtectiontotheCollectingBankerSec.131oftheNegotiableInstrumentActprovidesthatwhere
abankeringoodfaithandwithoutnegligencereceivespaymentforacustomerofachequecrossed
generallyorspeciallytohimself,andthecustomerhasnotitleordefectivetitlethereto,thebankers
shallnotincuranyliabilitytothetrueownerofthechequebyreasononlyofhavingreceivedsuch
paymentprovidedthepaymenthasbeencollectedingoodfaithandwithoutnegligence.

Pleasenotethatthisprotectionisavailableonlyifthecollectionisingoodfaithandwithoutnegligence.
Thewordnegligencehereextendstotheprocessofopeningoftheaccountinwhichtheamountis

credited.Thebankmusthavefulfilledalltherequiredduediligenceatthetimeofopeningtheaccount
whichprocessshouldhavebeenexecutedwithoutnegligence.

8.9.NegotiationofChequesAchequeisnegotiatedwhentheownershipinitistransferredfromone
persontoanotherinsuchamannerastoconstitutethetransfereetheholderofthecheque.Acheque
payabletobearerisnegotiatedbysimpledelivery,whereasachequepayabletoorderisnegotiatedby
endorsementanddelivery.Anendorsementcanbemadeonthebackbytheholderoftheinstrument,to
anotherpersonwhotakesitasanewholder.
ContributoryNegligencebyaDrawer

.Acustomerdrawingachequeinacarelessmannerwhichfacilitatesthematerialalterationhastosuffer
theloss.TheHouseofLordsinLondonJointStockBankvs.Macmillan&Arthur(1918)heldthatthe
drawerofthecheque(notthebank)mustsufferthelosscausedbyanalterationinchequeifsuchan
alterationhasbeenfacilitatedbythecustomer.(E.g.ifthecustomerleavesspacesinbetweenthedigits
oftheamountandspacesbetweenthewordswhenwritingtheamountinwords.Ifhedoessothe
amountsonthechequecanbealteredwithoutbeingdetectedbythebankofficersexamination.
PaymentofaChequeunderForgedSignatures:

Themostimportantpartofachequeisthesignatureofthecustomer,theauthoritytoexecutehis
instructionsandtherestofthechequeisveryoftenpermittedtobefilledbythesubordinates.Acheque
bynatureisaninstructionfromthecustomertothebankdirectingittopayoutthemoneyfromhis
account.Ifthereforethesignatureofthecustomeronachequeisforgedthenitisnothismandateor
ordertopay.Therefore,anypaymentbythebankuponthebasisofsuchachequeisapaymentwithout
authorityandwouldnotbindthecustomer(PLD1961Kar.185)
2.Ifsignaturesonchequeoroneofthejointsignaturestocheque,arenotorisnotgenuine,thereisno
mandateonbanktopay.Alsothequestionofanynegligenceonthepartofcustomer,suchasleaving
chequebookcarelesslysothatathirdpartycouldeasilygetholdofit,wouldaffordnodefencetobank.
Itwasheldthatthebankerwasnegligentanddishonestyofemployeeofcustomerwasnotproximate
causeoflosstobank.(A.I.R1967SupremeCourt389)
3.Moneypaidbybanksservantunderforgedchequecannotbedebitedtocustomer,merelybecauseof
customersnegligenceinallowinghischequebooktoremainunlocked.Itisthedutyoftheemployeesof
thebanktobeabletoidentifythesignaturesoftheircustomersandiftheyfailtodischargetheirduty
andtherebysufferloss,thereisnoreasonwhythecustomershouldmakegoodthatloss.Hencethe
moneypaidbytheservantofbankunderaforgedchequecannotbedebitedtothecustomermerelyon
thegroundthatthecustomerwasnegligenttothisextentthatheallowedhischequebooktoremain
unlocked.(A.I.R.1938Allahabad374)

4.Aspersection10oftheNegotiableInstrumentActapaymentmadeinduecoursei.e.paymentin
accordancewiththeapparenttenoroftheinstrumentingoodfaithandwithoutnegligencetoanyperson
inpossessionthereofundercircumstanceswhichdonotaffordareasonablegroundforbelievingthathe
isnotentitledtoreceivepaymentoftheamountthereinmentioned,givesprotectiontothepaying
banker.However,whereapaymentismadeonaforgedcheque,itcannotberegardedaspaymentindue
course.Itmaybethatthebankisaninnocentvictimofthefraudbutsoisthecustomer.Iftherearetwo
innocentparties,theonewhosenegligenceledtotheultimatelossisprimarilyresponsible.(1990CLC
686).
5.InLondonJointStockBankLtd.vs.MacmillanandArthur(1918)theHouseofLordsheldthatthe
customerisunderdutytohisbankertoexercisereasonablecareindrawingchequessoasnottomislead
hisbankorfacilitateforgery.ThisprinciplewasadoptedbytheSupremeCourtofCeyloninKulatilleke
vs.MercantileBankofIndia(1958).
6.InGreenwoodvs.MartinsBankLtd.(1932)itwasheldthatifthecustomerdiscoversthatcheques
purportingtohavebeensignedbyhimhavebeenforged,hemustinformhisbankimmediately.

7.Moneypaidonaforgedchequeisnotmoneypaidtothecustomerandmoneycannotbedebitedto
customersaccountmerelybecauseofhisnegligenceinallowinghischequebooktoremainunlocked
(PLD1975Kar252).

8.AsperSection29oftheNegotiableInstrumentActaforgedchequeisanullityandconfersnotitleand
asperCaseLaw(PLD1987Kar.599)achequeonwhichacustomerssignatureasdrawerisforged,is
notachequeatallandabankerwhopaysmoneyonitcannotdebitthecustomersaccountwithany
paymentmadethereon.

Consideringtheabovejudgmentsapaymentunderaforgedsignatureisnotpaymentwithoutnegligence
andthereforecannotbedebitedtotheaccountofthecustomer.Howeverwhatisaforgeryisamatterof
factdependingondocumentaryevidence,viewsofhandwritingexperts,etc.

IssuingchequeswithoutarrangingfundsmadeaCriminaloffencein2001.

8.12.Dishonourofachequesomecustomersareinthehabitofissuingchequeswithoutanyregardto
thebalanceintheaccountoranyalternatearrangementstherefore.Section20oftheFinancial
Institutions(RecoveryofFinances)Ordinance2001laysdown:

Whoeverdishonestlyissuesachequetowardsrepaymentofafinanceorfulfilmentofanobligationwhich
isdishonouredonpresentation,shallbepunishablewithimprisonmentwhichmayextendtooneyearor
withfineorwithbothunlesshecanestablish,forwhichtheburdenofproofshallrestonhim,thathe
madearrangementswithhisbanktoensurethatthechequewouldbehonouredandthatthebankwasat
faultinnothonouringthecheque.
Practical&AccountingStepsinPaymentofaCheque

CashPayment.

Procedureforpaymentofchequesincash

Thecustomer/bearerpresentsthechequetotheTellerforpayment.

Thechequeshouldnotbecrossed.Ifachequebearsanytypeofcrossing,itcanonlybecreditedtoan
accountinabank,cashcannotbepaid.
TheTellerreceivesthesignedchequefromthecustomer/bearerandasksforonesignatureonthe
reverseofthecheque.

Abearerchequecanbepresentedbyanyperson.Ifthechequeispayabletoanamedpersonandthe
wordbeareriscrossedout,itistreatedasanorderchequeandthepresenterwillhavetoshowhisCNIC
toprovehisidentity.Theofficersatisfieshimselftoensurethatthecorrectpayeehaspresentedthe
cheque.AcopyoftheCNICisretainedwiththecheque.

TheTellerscrutinizestheinstrumentfor:

Validity,i.e.stale/postdated

Amountinwordsandfiguresmatch
Chequeisnotmutilated
Chequeisbearer
Alteration/addition/cutting,ifany,areauthenticated.

TheTellerverifiesdrawerssignaturefromthesystemandpoststhecheque.Whatisthemeaningof
postingthecheque?Signatureverificationisofprimeimportance,becausethisistheauthoritybywhich
thecustomersaccountisdebited.Otherfactorsdiscussedinthishandoutarealsochecked.

Bypostingwemeanthatthedetailsofthechequearenotedontheledgerorcomputeraccounting
systemofthebankandthebalanceofthecustomerisreducedbytheamountofthechequeinthebanks
record.SupposethepreviousbalancewasRs100,000/andthechequewasforRs50,000/thissumwill
bedeductedfromthepreviousbalanceRsoneLacandanewbalanceRs50,000/willbeshownonthe
account.
Bythepostingofthechequethefollowingentrieswillbepassedontheaccountingledgerofthebank
eithermanuallyorthroughthecomputersystem:
Debit:CustomeraccountRs50,000/narrationchequenoXYZpaid,and

Credit:CashinHandaccountRs50,000/
accordingtothedoubleentrybookkeepingsystem.

IncasethechequeamountisinexcessoftheTellerslimit,realtime(beforepayment)supervisionis
requiredwhenmeansamoreseniorofficersscrutinizesthechequeandauthorizespayment.

ThechequeisdefacedbycancellationeitherbyTellerorbyTellerandSupervisor/Operations
Manager,ifamountexceedstheTellerlimit.

TheTellerasksforthesignatureofthecustomer/beareragainonthereverseofthechequeto:
Confirmtheidentityofthepresenterandinacknowledgementforhavingreceivedthepayment.

TheTellerrecordsthedenominationonthebackofthechequeandcashisdeliveredtothecustomer/
bearer.

TheTelleraffixesbranchCashPaidstampwithbranchname,codeanddateonthefaceofthecheque
andwritesamountpaidandsigns.
Procedureforpaymentofchequeintransfer

Transferinvolvesthetransactiontobesettledbetweenthecustomersofthesamebranchorcustomer(s)
ofremotebranchinthecaseofauthorizedsystemuser(Online)branch.

Procedure:
TheTellerreceiveschequefromdepositoralongwiththedepositslip.TheTellerscrutinizeschequeand
depositslipforanydiscrepancyandconfirmsthat:

Chequeissignedanddrawninfavorofaccountholder.Alternativelythechequeispayabletobeareror
ifpayabletoathirdpersonitisendorsedbythefirstpayeeinfavouroftheaccountholder.

Ifcrossed,itisnotcrossedinfavourofsomeotherbank.

Chequeanddepositslipamountagrees.
Detailsandamountonbothpartsofdepositsliptally.

Chequeisnotstale/postdatedormutilated.
Alteration/cutting/additionsoncheque,ifany,areauthenticatedbythedrawerandondepositslipby
depositor.Allotherfactorsarealsochecked.

Chequeisdrawnonthesamebranchorremotebranch.Inthecaseofchequebeingdrawnonaremote

branch,confirmsthatdraweebranchisOnline.

Depositslipissignedbythedepositor.

TheTellerverifiessignature,titleofaccount(ifmentionedoncheque)andnumberandpoststhe
chequeagainstbalanceavailable.Signatureverificationisofprimeimportance,becausethisisthe
authoritybywhichthecustomersaccountisdebited.

Tellerconfirmsbeneficiaryaccountnameandnumberandpostscreditinthecustomersaccount.

TheentriesinexcessofTellerslimitwillrequiresupervision.

TheTelleraffixesTransferandbranchstamp,signsanddeliversreceipttothedepositor.

TheTelleraffixesbankcrossingstamponthefaceofthechequeandendorsementstampPayees
accountcreditedonthereverse.TheendorsementissignedbytheSupervisor.Ifthechequeisendorsed
bythefirstpayeetoasecondpayeetheendorsementoffirstpayeeshouldbeconfirmedbythesecond
payeeandthedischargegivenbythebankwillbefirstpayeesendorsementconfirmed,amountcredited
totheaccountofsecondpayee.(Firstpayeesendorsementisconfirmedinwritingbythesecondpayee
andthesecondpayeeisthecustomerofthebankwhoseaccountisbeingcredited.Thebanktherefore
confirmstheendorsementonthebasisofconfirmationbythecustomerwhosesignaturesareavailable
onrecord.)
Fordebit/credittocustomeraccountwithremoteOnlinebranch,systemcontrols/conditionswillapply
andsystemwillbeusedforconfirmingtitleofaccount,accountnumber,signatureverificationand
balanceconfirmation.
Whenthepostingisconfirmedthesystemwillpassthefollowingentriesonthebanksledger
Debit:Customeraccountofthedrawerofcheque

Credit:Customeraccountoftheultimatepayeeofcheque/accountontheaccountcreditslip.

Procedureforpaymentofchequeininwardclearing

Procedure:
WhenachequeisusedtomovefundsfromBankABCtoBankXYZ,branchesofbothbankslocatedinthe
samecitytheprocessiscalledlocalclearing.

SupposeyouworkinFaysalBankLahore.Yourcustomergivesachequetoashop.Theshopkeeperhas
hisaccountatStanchartLahore.TheshopkeeperwilldepositthechequedrawnonFaysalBankwith
StanchartforcollectionthroughClearingandcredittohisaccount.
StanchartwillpresentthechequetoFaysalBankforclearingthroughNIFT.

NIFTwillcollect/pickupthechequefromStanchart,makeclearinglistsandpresentthechequetoFaysal
Bank.
FaysalBankwilldebittheaccountofthedrawerofthechequeandmakepaymenttoStateBankof
Pakistan.

StatebankwillmakepaymenttoStanchart.Stanchartwillcredittheshopkeepersaccountwiththe
amount.BasedonlistsfromNIFTtheStateBankwilldebitFaysalBankaccountandcreditStanchart
accountintheirbooks.ThroughthisprocessmoneyhasmovedfromyourcustomersaccountinFBLtothe
shopkeepersaccountatStanchart.Herethechequeisaclearingitem.Forstanchartthistransactionis
outwardclearingandforFaysalBankthisisinwardclearing.

NowwestudythepracticalstepsinthedraweebankthatisFaysalBank.

ThechequesandotherinstrumentsdrawnonthesamebranchofFBLarereceivedfromNIFTalongwith
forwardingscheduleshowingnumberandamountofinstrumentsenclosed.

Chequesandotherinstrumentsarehandedovertotherespectivedepartmentstoscrutinizecheques
foranydiscrepancysuchas:

Validity(stale/postdated).

Amountinwordsandfiguresagree.
ChequeisproperlyendorsedbybeneficiaryandthecollectingbankStanchart..

Chequebearspresentingbanksclearingandcrossingstamps.

Addition/alteration/cutting,ifany,oncheque(s)andotherinstrument(s),isauthenticated.

Ifchequesarefoundtobeinorder,signature(s)areverifiedagainstthebankcomputersystemor
manualrecord.Signatureverificationisofprimeimportance,becausethisistheauthoritybywhichthe
customersaccountisdebited.Allotherfactorsarealsochecked.
Thechequesarepostedintherespectiveaccountsinthesystemagainstavailablebalancethroughthe
financialtransactionoptionoftheClearing.

Thebranchwillensurethattotalnumberandamountofcheques/instrumentsreceivedthroughNIFT/
ClearingCellagreeswiththeamountshownonNIFT/ClearingCellforwardingschedule.

Dishonouredcheques/instrumentsarereturnedalongwiththechequereturningmemo(showing
specificreasonforreturn)dulysignedandafterentryintheChequeReturnedRegister.

Thechequereturningchargesarerecoveredfromthebankcustomersasperscheduleofcharges.

Scrutinyofdischargebythebankbranchwhichhaspresentedthechequeisimportant.

Bydischargewemeanastatementmadebythechequecollectingbankonthebackofthechequeover
itsstampandsignatureinwhichitstatesastohowthemoneyreceivedbythebankhasbeenorwillbe
utilized/disbursed.Variousoptionsare:

PayeesAccountCredited

PayeesaccountwillbecreditedonRealization.

Receivedpayment

Firstpayeesendorsementconfirmed,placedtotheaccountofsecondpayee.

Collectingbanksdischargeconfirmed.

Thereturnedchequesarereturnedtothechequepresentingbanks/branchesalongwiththecheque
returningmemothroughNIFTrepresentative.

NIFTassistsintheclearinglogisticsandpaperwork.Howeverthefollowingentriesarepassedonthe
banksaccountingledgerinrespectofinwardclearing.

(Whatisthemeaningoflogistics?
InwardClearing

Debit:Customersaccountsonwhomtheinwardclearingchequesweredrawn.

Credit:StateBankofPakistanorNationalBankofPakistan

ReturnClearing

Debit:StateBankofPakistanorNationalBankofPakistan
Credit:Customersaccountswhosechequesarereturned.
Inthenextweeksweshallstudyindetailhowthelocalclearingsystemworks.
8.13.StandingInstructions.Bankerextendsthisservicetohiscustomeronanominalcommissionfee
andpostingcharges.Paymentsofperiodicalnaturelikemonthlysubscriptionstoclubs,paymentof
regularfees,remittancestodependentsonregularbasis,paymentofregularinsurancepremiumare
madeaccordingtothestandinginstructionsofthecustomer.Customermustkeephisaccountinsufficient
fundstoenablethebankertoexecutehisstandinginstructions.

Fortheabovepurposeclientsgivestandinginstructionstothebranchmaintainingtheiraccounttomake
theperiodicalpaymentsorremittancesbydebittotheiraccount.Tothisend,thefollowingprocedureis
tobefollowedbythebranchconcernedindealingwithsuchrequestswhenreceived.

a)Thefirststepwouldbetoverifythesignatureoftheaccountholderasappearingontheletter
receivedfromhimcontaininghisstandinginstructionsforeffectingcertainperiodicalpaymentsor
remittances.TheverificationofthesignatureshallbedonebytheManagerhimselfortheOfficerIn
chargeofDepositsDepartmentincaseofbiggerbranches.

b)Aftertheaccountholderssignaturehasbeenverified,hisstandinginstructionswouldbeproperly
recordedintheStandingInstructionsRegistermaintainedatthebranchandalsoonthetopofthe
relativeledgerfoliooftheaccountunderproperauthenticationoftheBranchManagerortheofficerin
chargeofDepositDepartmentasthecasemaybe.

c)Oncompletionoftheaboveaction,thesaidlettershallbefiledintheStandingInstructionsFile
maintainedatthebranchdulypagenumberedandindexedunderproperauthentication.

d)Aproperdate,month,yeardiaryshallbeusedforensuringtimelyexecutionofclientsstanding
instructionsonduedatesandtherelativecomplianceshallbeproperlymonitoredbytheBranchManager.

e)Where,however,anaccounthasbeenclassifiedasNonResidentAccountorBlockedAccount,
relativeinstructionsoftheExchangeControlManualshallbekeptinview,whilecomplyingwiththe
standinginstructionsoftheaccountholder.IftheinstructionviolatestheExchangeControlRegulations,
theaccountholdershallbesuitablyadvisedabouttherelativeexchangecontrolrulesandthebanks
inabilitytocomplywithhisstandinginstructions.

8.15.CreditCard(Herethecustomerbasicallygetsaloantopayforthepurchases)CreditCardsare
bothacreditserviceandatransactiondevice.Thecustomerathisdiscretioncanusetheaccountandthe
relatedcreditlinetofinancepurchasesormayusetheaccountasanalternativetocash.Thecreditcard
markethasbeensegmentedbyintroductionofSilverCard,GoldCard,PlatinumCard,etcwhichoffer
differentfeaturesanddifferentpaymentterms.Somebankshaveintroducedvariablepricing
arrangements.

Acreditcardtransactioninvolvesthreedistinctfinancialcontractsamongthreepartiesi.e.1)thecard
holder,2)thecardissuerand3)thedealerormerchant.

Firstisthecontractbetweenthecardissuerandthecardholderwherebytheissuerundertakestopay
forthepurchasesmadebythecardholderwithinaspecifiedcreditlimit.Thecardholderagreesto
reimbursetheissuerintheprescribedmanner(inotherwordsrepaytheloanasagreed)andundertakes
topaytheapplicablecredit(interest)chargeandannualfee.

Thesecondcontractisbetweentheissuerandthedealer/merchantwherebytheissueragreestopayto
thedealeramountsduefromcardholderprovidedthegoodsorservicesaresuppliedontheagreed
terms,whichmeansthedealercannotsupplygoodsorserviceswithoutmakingacreditenquiryand
approvalfromthecardissuer.
Thethirdagreementisbetweenthedealer/merchantandthecardholder.Thisagreementremainsa
contractofsaleoracontractfortheprovisionofaservice,althoughpaymentisexpectedfromthe
issuer.

8.16.ChargeCardItisavariantofthecreditcard.Howevertheholderisrequiredtosettlethebill
promptlyandinfullwhenhereceivesitfromtheissuer.

8.17.ChequeCardorthechequeguaranteecardInsuchacasetheissuerguaranteespaymentof
chequesdrawnbythecustomeruptoanamountspecifiedinthecard.Heretheissueragreestohonoura
negotiableinstrumentdrawnbythecustomerwhateverthestateofhisaccountmaybe.Suchacheque
cannotbecountermandedi.e.,itspaymentcannotbestoppedbythedrawer.

8.18.DebitCardTheholderuseshisdebitcardinspecifiedshopstopurchasegoodsorobtain
services.Suchacarddiffersfromtheothercardsinthatwhenthecardholderuseshisdebitcard,the
priceofthegoodsortheamounttobepaidforservicesisremittedtotheretailerbyanelectronicmoney
transferthroughadebitofthesumconcernedtothecardholdersbankaccount.

8.19.CashcardorATMcardItisusedbythecustomertoobtaincashfromanautomatictellermachine
(ATM)byusingthecardandpersonalidentificationnumber(PIN)fromthekeyboardoftheATMterminal.
Theamountsowithdrawnisdebitedtotheaccountofthecustomer.Somebanksprovideotherfacilities
suchasbalanceenquiry.Cashcarddiffersfromalltheaforesaidfourcardsinthatinthecreditcard,
chargecardandchequecardatransactionbetweenthecardholderandthethirdpartyisevidencedbya
receiptoravoucherandauthenticatedbycomparisonofholderssignaturesonthecardwithsignatures
givenatthetimeoftransactionwhereasincaseofcashorATMcardsthecustomerPIN(secretcode)is
theauthorityforthetransaction.

NowadaysCardsarebeingissuedwhichfunctionasbothATMCardandDebitCardandthesecardsare
verypopular.

_8.7.BankersObjectionsonunpaidcheques

Sometimeschequeshavetobereturnedunpaidforvariousreasons.Returningofachequeunpaidfor
insufficientfundsisaveryseriousmatter.Maybethatitisthroughoversightthatchequeisissuedbythe
drawerinexcessofthebalanceavailable.Whatevermaybethereason,itdoescreateaverybad
impressioninthemarketabouttheprestigeandreputationofthedrawer.Banksalsotakegreatcarein
ascertainingthefundsofthecustomerthatmaybeunderclearanceorexpectedfromsomesources,
beforeacustomerschequeisreturnedunpaidforwantoffunds.InthepasttheBanksusuallyhavebeen
givingindirect/vagueremarkswhilereturningachequesuchasRefertoDrawer.

TheStateBankofPakistanvideitscircular22of2005hasdirectedthebanks/DFIstogivespecificand
clearreasonfordishonouringacheque.Thereasonrefertodrawerisvagueanddoesnotindicatea
clearreasonanditisnotusednow.

Fromtheyear2001issuingchequeswithoutmakingarrangementsofappropriateoverdraftlimitor
sufficientbalanceintheaccounttomeetthechequehasbeenmadeacriminaloffencewhichcarriesa
punishmentofoneyearimprisonment.Thisisallthemorereasonthatbankshouldnotuseanyvague
reasonforreturningachequeunpaid.
Otherreasonsforwhichchequesarereturnedunpaid:
i.Chequeispostdatedoroutofdate

Whenachequeisdrawninadateinadvance,i.e.thedatewhichisyettoarrive,itiscalledpostdated
cheque.

Whenacheque,atthetimeofitspresentation,hasbeenincirculationformorethansixmonthsfromthe
dateitwasdrawnitiscalled,outofdate,orstalecheque.

ii.Chequeismutilated
If,atthetimeofpresentation,achequeappearstornormutilated,itwillbereturnedwiththereason
chequemutilated,requiresdrawersconfirmation.Therationaleforreturningsuchchequeisthatthe
drawermayhaveintendedtocancelthecheque.

Ifthemutilationoccursatthecollectingbankersend,itmustbeconfirmedbytheconcernedbank.

iii.Crossedcheque
Crossedchequeitmustbepresentedthroughabank.Whenacrossedchequeispresentedforcash
paymentoverthecounter,itisreturnedwiththisobjection.

Thepaymentofacrossedchequecanonlybemadetoabankerofthebeneficiary.

iv.Effectsnotcleared,presentagain

Theremaybesomeinstrumentswhichthecustomerhasdepositedforcollectionandwhicharestillinthe
courseofclearance.Insuchcasestheobjectionofeffectsnotclearedisused.

v.Exceedsarrangements

Exceedsarrangements.Chequesthatareissuedbythecustomerwithintheamountofthe
accommodation(overdraftlimit)agreedwiththebankarepaid.Howeverchequeswhichexceedthelimit
agreedwiththebankarereturnedwiththisreason.
vi.Drawerssignaturedifferswiththespecimenfiledwiththebank.

Thisreasonisobviousfromitswording.

vii.Alterationindate/figures/words/nameofpayeeetc.

Alterationrequiresauthenticationbydrawersfullsignatures.

Thistooneedsnoexplanation.
viii.Payeesendorsementrequired/irregular/illegible.

Thisisalsoselfexplanatory.

ix.Amountinwordsandfiguresdiffers.
Thisreasonisusedwhentheamountgiveninfiguresdoesnottallywiththeamountgiveninwords.

x.Clearingstamprequired.

Sometimes,clearingstampisnotaffixedbythecollectingbankwhensendingchequesthroughclearing.
Thisobjectionisusedinsuchcases.
XI)Clearingbanksdischargerequired/irregular/illegible.

Thepayingbankerismakingthepaymentofachequetotheclearingbankwhichhasplacedaclearing
stamponthefaceofthecheque.
Theclearingbankershouldgiveadischargeonthebackofthechequeandconfirmhowtheamount
receivedbytheclearingbankisutilized.

IfthechequeismarkedaccountpayeethedischargewillbePayeesaccountcredited.

Iftheamounthasbeencreditedtoasecondpayeeonendorsementbythefirstpayee,thedischargewill
befirstpayeesendorsementconfirmed,placedtotheaccountofsecondpayee.

Theobjectionsonunpaidchequesarenumerous.Eachobjectionshouldfitwithrespecttospecific
situations.Theobjectionshereabovearecommonlyusedinthedaytodaypracticalbankingoperations.
__________________
Wheneveryoufindyourselfonthesideofthemajority,itistimetopauseandreflect.MarkTwain

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GeneralBankingOperations

ThebadnewsisthatTimeislimited.
However,thegoodnewsisthatyouhavetotalcontrol
ontheuseofTimeavailable.
Askyourselfasoftenaspossible.
Is,whatIamdoingnowthebestuseofmyTime,atthisTime?
CarryabookwithyouandwhenyouhavespareTime
Readittoexpandyourlearning.
Timeisfinite!
Avoidwaste.
TimeManagementmakesthedifferencebetweenSUCCESSandFAILURE.
GeneralBankingOperations
ThefollowingtopicsarediscussedinthisHandout:
i.Appropriations.
ii.RuleinClaytonsCase,1816.
iii.Bankersdutyofsecrecy.
iv.Bankersrightofsetoff.
v.Bankersrightoflien.
1O.1.Appropriations.
(Appropriation=Allocationofasumofmoneyforsomeparticularpurpose.)
Whenacustomerpaysinmoneyorwhenmoneyisreceivedfromathirdpartyforcredit,thecustomer
hastherighttoappropriatethemoney,i.e.tostipulate(Stipulate=tostateclearlyandfirmlythatsth
mustbedone,orhowitmustbedone)thatthefundsaretobeplacedtoaspecifiedaccountorappliedin

paymentofaparticulardebt,orappliedspecificallytomeetcertainchequesorbills.

Suchappropriationcanbemadebythecustomeratthetimeofdepositorlaterbeforethebankerhas
appropriatedthefundstoanyotheruse.Moreover,thecustomercanwithdraworvaryhisappropriations
solongasthebankerhasnotirrevocablydisposedofthefunds,accordingtothecustomersoriginal
appropriation.Thebankerisboundtoactonthecustomersinstructionswhateverthestateofaccounts
betweenthem.Thushecannotapplyacreditpaidbyacustomerinreductionofthecustomersoverdraft
ifthecustomerdirectsthatthecreditistomeetchequesdrawnbyhim.

Intheabsenceofanyappropriationbythecustomer,thebankercanapplypaymentreceivedtolessenor
wipeoffanydebtowingtohimbythecustomer,includingevenadebtwhichisstatutebarred(i.e.time
barred).Theappropriationbythebankerneednotbemadeimmediately.Itmaybemadeatanytime
beforeitiscommunicatedtothecustomerbutoncemadeandcommunicatedtothecustomer,itcannot
bevariedorrevokedbythebanker,andisbindingbothonhimandthecustomer.(Whatistimebarred?
Whensomebodylendsmoneyandtheborrowerdoesnotreturnthedebtwithinareasonabletimethe
lenderhasarighttofilearecoverysuitinacourtoflaw.Lawhasdefinedafinitetimeperiodafterthe
amountbecomesdueforpaymentwithinwhichalegalsuitcanbefiled.Oncethisdatehaspassedthe
courtwillnotentertainthesuit.)
Thepersonpayinginthemoneyhastheprimaryrighttosayastowhataccountitshallbeappropriated.
Thecreditor,ifthedebtormakesnoappropriation,hastherighttoappropriate.Ifneitherexercisesthe
rightofappropriationandifthereisnothingmorethanacurrentaccountoraparticularaccountkeptby
thecreditor,andhecreditsmoneytoaparticularaccountthenthecourtconcludesthattheappropriation
hasbeenmade,andhavingbeensomadeitisfinalandneitherthecreditornorthedebtorcanseekto
varythatappropriation.

10.2.RuleinClaytonsCase1816

Whenthereisarunningorcurrentaccountbetweenthepartiesandprovidedthattherehasbeenno
appropriationbythedebtororthecreditor,thenthelawappropriatesthepaymentand,accordingtolaw,
itisthefirstitemonthedebitsidethatisdischargedorreducedbythefirstitemonthecreditside.The
appropriationofsuccessivepaymentsin,isdeemedtohavebeenmadeinaccordancewiththeRulein
ClaytonsCase(Deveynesv.Noble,1816)viz,themoneyfirstpaidinisdeemedtohavebeenthefirst
drawnout,i.e.thecreditsinorderofentryintheaccountaredeemedtohavedischargeddebitsinthe
orderinwhichtheyappear.

TheeffectoftheRulecanbeseenfromthefollowingexample.
Youknowthatifaguarantordies,theestateofthedeadpersonwillberesponsibleforthedebt
outstandingonthedateofdeath,buttheestatewillnotberesponsibleforthedebtsincurredafterthe
deathoftheguarantor.

Supposeaguarantorofanoverdraftfacilitydiesatthetimewhenthepersonwhoseaccounthehas
guaranteedowesthebankRs.10,000/.Iftheaccountiscontinuedunbrokenaftertheguarantorsdeath,
allfuturepaymentsinwillgotoreducethedebitbalanceofRs.10,000/existingatthetimeofthe
guarantorsdeathandallpaymentsoutwillconstituteanewdebtnotcoveredbytheguarantee.Thus,if
thecustomerpaysintotheunbrokenaccountRs.10,000/aftertheguarantorsdeathanddrawsoutRs.
5,000/,theeffectoftheRulewillbethatthedebtcoveredbytheguaranteewillbewipedout,andthe
customerwillowethebankRs.5,000/andthisRs,5000/debtwillnotbecoveredbythedeceaseds
guarantee.Ifabankerorhiscustomerwishedtomakeanappropriationotherwisethaninaccordance
withthisRule,heshouldindicatehisintentionclearlyandunmistakablytotheotherparty.

Thisprincipleisofimportanceinitseffectsontherightsofabankerinrespectofanoverdraftincurrent
accountincircumstancessuchas:
(a)Whenacustomerdies
(b)WhenapartnerofaPartnershipdies

(c)Theconstitutionofapartnershipischanged,or
(d)Whenaguaranteeisterminatedbydeathorbankruptcyoftheguarantor.

Topreventtheoperationoftherule(which,itshouldbenoted,appliesonlytoacurrentorrunning
account),thebankermuststop/breaktheaccounti.e.discontinuealloperationsthereon,andopenanew
account,ifpossible,gettingtheconsentofthepartiesconcernedtotheactiontaken.

ThusinRoyalBankofScotlandV.Christie,1840,whereabankeronthedeathofapartnerina
partnershipfirm,allowedthesurvivingpartnerstocontinueoperationsontheaccount,itwasheldthat
thedeceasedpartnersestatewasdischargedasfromthedatewhenthepaymentsmadeinafterthe
partnersdeaththedebtduefromthefirmatthetimeofhisdeathstandsadjusted.

10.3.BankersDutyofSecrecy.

Abankermustnotdisclosethestateofhiscustomersaccountoranyinformationconcerningthe
customerorhisaffairs,exceptuponreasonableandproperoccasion(HardyV.Veasey,1868)anda
customerwhocanshowthathiscreditorreputationhassufferedinconsequenceofanunjustifiable
disclosureofhisaffairsbyhisbankermaybeawardeddamagesforbreachofcontract.

Theobligationtoobservesecrecydoesnotendevenwiththeclosingofthecustomersaccount.

ThereisaleadingcaseonthedutyofsecrecyonbanksTourniervs.NationalProvincialandUnionBank
ofEngland(1924).Theplaintiffhadtakenaloanfromthedefendantbankandonnonpaymentofan
installment,thebranchmanagerduringconversationwiththeemployercompanyoftheplaintiffhad
disclosedthestatusoftheaccount(overdrawn),thatpromisesofrepaymentwerenotbeingcarriedout
andthattheplaintiffwasinvolvedinbetting.Basedonsuchinformationtheemployercompanyofthe
plaintiffdidnotrenewhisemploymentcontract.Tournierbroughtanactionagainstthebankfordamages
forslanderandforbreachofimpliedtermofthecontractbetweenhimandthebankthatthebank
wouldnotdisclosetothirdpartiesthestateofhisaccountoranytransactionrelatingtoit.Thecourtheld
thatthedutyofbankerastosecrecyisnotabsolutebutqualifiedandunderthefollowingcircumstances
thebankmaydivulgeinformationaboutthecustomer:
i.Wheredisclosureisundercompulsionoflaw

ii.Wherethereisadutytopublictodisclose

iii.Wheretheinterestofbankrequiresand
iv.Wherethedisclosureismadebytheexpressorimpliedconsentofthecustomer.

InPakistanwehavespecificlawsgoverningsecrecy.Thesearebrieflygivenbelow:

1.BCOSection82F.Powertocallforinformation.TheBankingMohtasibshallhavethepowerfor
purposesofdisposingacase,torequireabanktodisclosetohimanyinformationsubjecttocertain
conditionswhichincludethattheBankingMohtasibshallmakeeveryendeavourtoensurethatbanking
confidentialityismaintainedasrequiredbybankinglawandprocedureandshalltakenoactionwhichis
violativethereof.TheBankingMohtasibmaycallforanyorallsuchdocumentsthatarerelevantor
pertinentforpurposesofdecidingacomplaint:Providedthatheshallnotbeentitledtocallforunrelated
documentsordocumentswhichmaycompromisethebankspositioninrelationtoothercustomers,
providedfurtherthatincaseswheretheBankingMohtasibisinvestigatingcaseofcorruption,heshall
havegreaterlatitudeinrelationtotheinspectionofdocuments.Howeverintheeventofabankrefusing
tofurnishinformation,orcopiesofrelevantdocuments,theBankingMohtasibshallnotbeauthorizedto
compelthebanktocomplywithhisorderbuthemaydrawanadverseinferenceandcommentonthe
sameinhisfindings.
2.BCOSection93ExchangeofinformationBankingcompaniesmayexchangeonconfidentialbasis
amongstthemselves,eitherdirectlyorthroughthePakistanBankingCouncil,informationabouttheir
respectiveclients.

3.BankersBooksEvidenceAct1891..s.6InspectionofbooksbyorderofCourtorJudge.Onthe
applicationofanypartytoalegalproceeding,thecourtorajudgemayorderthatsuchpartybeat
libertytoinspectandtakecopiesofanyentriesinabankersbookforanyofthepurposesofsuch
proceedings,ormayorderthebanktoprepareandproduce,withinatimetobespecifiedintheorder,
certifiedcopiesofallsuchentries,accompaniedbyafurthercertificatethatnootherentriesaretobe
foundinthebooksofthebankrelevanttothemattersinissueinsuchproceedingandsuchfurther
certificateshallbedatedandsubscribedinthemannerhereinbeforedirectedinreferencetocertified
copies
.
4.SupplyofinformationtoIncomeTaxOffice.Section176ofIncomeTaxOrdinance2001the
CommissionerIncomeTaxmay,bynoticeinwriting,requireanypersontofurnishtotheCommissioner
oranauthorizedofficeranyinformationrelevanttoanytaxunderthisOrdinanceasspecifiedinthe
notice.TheCommissionermayimpound

{meanings(ofthepolice,courtsoflaw,etc.)totakesthawayfromsb,sothattheycannotuseit}
anyaccountsordocumentsproducedasaboveandretainthemforsolongasmaybenecessaryfor
examinationorforthepurposesofprosecution.
5.Section19oftheNationalAccountabilityBureauOrdinance,1999(NAB)Allbanksandfinancial
institutionsarelegallyboundtodiscloseinformationtoNABuponrequest,duringanongoing
investigation.TheChairmanNABoranyauthorizedofficermay,duringthecourseofaninquiryin
connectionwithcontraventionoftheprovisionofthisOrdinancerequireanybankorfinancialinstitution,
notwithstandinganythingcontainedinanyotherlawforthetimebeinginforce,toprovideany
informationrelatingtoanypersonwhosoever,includingcopiesofentriesmadeinabanksorfinancial
institutionsbookssuchasledgers,daybooks,cashbooksandallotherbooksincludingrecordof
informationandtransactionssavedinelectronicordigitalform,andthekeepersofsuchrecordsare
underanobligationtocertifythecopiesinaccordancewithlaw.

10.4.BankersOpinions.

ThepracticeofbankersgivingConfidentialopinionstooneanotherandtothesocalledtrade

protectionagenciesconcerningthecreditandstandingofcustomers,issowellestablishedthat,
providedtheinformationishonestandfairandhasbeengivenintheusualwayandintheordinary
courseofbusiness,itisunlikelythatacustomercouldsuccessfullyobjecttoit.Unlessacustomer
expresslyinstructshisbankernottogivesuchopinions,hemustberegardedashavinggivenhisimplied
consenttothisrecognizedpracticewhenheopenshisaccount.

InSzekv.LloydsBank1908,thegivingofaConfidentialOpinionbyabankertoarepresentativeofa
recognizedtradeprotectionsocietywasnotquestioned.

Aconfidentialopinionshouldbeessentiallyofageneralnature,embodyingthebankersconsideredand
truthfulopinionastothegeneralreputationandfinancialpositionofhiscustomer,butthebankshould
omitspecificdetailswhichmightinfringeuponthecustomersrighttosecrecyconcerninghisaccount.

Itisasoundruletoanswerasgenerallyaspossibleandtosayaslittleaspossible.Providedthebanker
givesatruthfulopinionthatiswarrantedbytheinformationathisdisposal,heisquitesafe,eventhough
hisopinionturnsouttobemisleading.
Innocircumstancesshouldthebankergiveactualfiguresrelatingtotheaccountordisclosethe
customersbalance.ButifheisaskedwhetherheconsidershiscustomerGoodfortradecreditofRs.
50,000/heisentitledtosayYesorNothough,ifhehastogiveanegativeopinion,heshouldmake
hisanswerasguardedaspossible.
Abankerwhomakesanunauthorizeddisclosureconcerninghiscustomersaffairsisliabletothe
customerfordamagesarisingoutofbreachofcontract,andthesedamagesarelikelytobeassessedon
aheavierscaleiftheopinioncontainsunwarrantedorunjustifiedremarksdetrimentaltothecreditofthe
customer.

Ifthebankermakesanunauthorizeddisclosure,e.g.toanotherbanker,andbymistakesayssomething
untrueabouthiscustomer,itisdoubtfulwhetherhewouldbeliabletohiscustomeronthegroundsof
libel,ashasbeensometimesuggested,because,suchacommunicationintheordinarycourseof
businesswouldprobablyberegardedasprivileged,solongasthebankerhadactedwithoutmalice.Buta
bankmanagerwhomaliciously(malice=afeelingofhatredforsbthatcausesadesiretoharmthem)
givesanunfavorableopinionaboutacustomermayrenderhimselfpersonallyliableforlibel(orslander
iftheopinionisgivenorally)anditisprobablethatthebankalsowouldbeliable.

SummaryofconditionsunderwhichthebankermaydivulgetheinformationofanAccount.

i)UNDERCOMPULSIONOFLAW:WhenabankeriscalleduponbycourtofLaworbyIncomeTax
Commissionerhecandisclosetheactualstateofaffairsi.e.actualbalance,butforthisanoticemustbe
receivedfromthecompetentauthority.BankersBooksEvidenceAct,1891permitsbankstoproduce
copiesofentriesinbanksbookstoacourtoflawinsteadofactualbooks.Thisprovisionavoids
attendanceincourtwithactualbooksofaccount.
ii)INTHENATIONALINTEREST:Bankisdulyboundtoinformtheappropriateauthoritieswhenits
customerdealingsarenotinthenationalinterestlikeusingtheaccountformoneylaunderingand
financingillegalactivities.
iii)COMMONCOURTESYTOOTHERBANKS:Itisagenerallyestablishedpracticeamongbankerstogive
confidentialopinionabouttheircustomerstofellowbankerswhenaskedtodoso.Itisnotbreachof
secrecy,andacustomercannotobjecttoit.Inotherwordswecansaythatitisanimpliedconditionof
theagreemententeredintoatthetimeofopeningaccount.TheBankergivingopinionmustnotdisclose
theactualfigurestandingintheaccountofhiscustomer,heshouldonlygiveopinionincodewordssuch
asgood,fair,satisfactoryandunsatisfactoryetc.whicharemeantforthispurpose.Theinformationmust
becarefullywordedanditmustbementionedintheconfidentialopinionthatneitherthebanknorits
officialsareresponsibleforthisinformation.Itshouldbesenttobankconcernedinsealedenvelope
alongwithcoveringletter,butthisconfidentialopinionshouldnotbesignedbybanker.Acoveringletter,
enclosingtheconfidentialopinionmaybesignedbyabankofficer.

iv)INBANKSINTEREST:Incaseofstuckupadvancesorotherdisputesbankshavetoresorttolegal
proceedings.Inallsuchsituationsbankshavetodiscloseallthedetailedinformationtothecourtsoflaw
togetthelegalremedy.

v)EXPRESSEDORIMPLIEDCONSENTOFCUSTOMERCustomersauthorisethebankstogivesome
informationabouttheiraccountstotheirlawyers,accountantsandincometaxadvisorsetc.fordoingthe
needful.Whensuchinformationissoughtbankersprovideittotheauthorisedpersons.

vi)TRADEPROTECTIONASSOCIATIONS:BankerssometimesgivegeneralinformationtoTradeProtection
AssociationssuchasChamberofCommerceandIndustryetc.whichareworkingforthepromotionof
commerceandindustryofthecountry.Suchinformationmustbegeneralandactualpositionofcustomer
mustnotbedisclosed.

10.5.BankersRightofsetOff.

Ifacustomerhastwoormoreaccountsatthesamebank,oneormoreincreditandtheotherorothers
indebit,thebanker,intheabsenceofanycontraryagreement,orearmarking,hastheright,ongiving
noticetothecustomer,tosetoffthecreditbalanceagainstthedebitbalance.Incertaincaseswhere
combinationoftwoaccountsisimmediatelynecessarytoascertainthetrue(net)stateofaccount
betweenthebankerandhiscustomer(e.g.onthedeathorbankruptcyofthecustomeroronserviceof
garnisheeorder),therightofsetoffmaybeexercisedwithoutnotice.

Incaseofordinarytradedebts,theruleisthatacreditormay,withoutnoticetohisdebtor,setoffa
creditbalanceduetothedebtoragainstthedebtduebyhim.Butthedebtowingbyabankertohis
customeroncurrentaccountisnotthesameasanordinarydebt.Itinvolvesanobligationonthe
bankersparttohonorchequesdrawnbythecustomeragainstthebalanceoutstanding,andbecausethe
bankerrendershimselfliableifthecustomersuffersdamagesthroughthewrongfuldishonorofany
chequessodrawn.Thisexerciseofrightofsetoffagainstbalanceincurrentaccountshould,therefore,
bedoneonlyafterduenoticetothecustomer.

Hence,iftheexerciseoftherightofsetoffwouldinvolvethereturnofacustomerschequesdrawn
againstacreditbalance,thebankermustnotexercisetherightwithoutgivingreasonablenoticetohis
customer.Moreover,thekeepingfortwoaccountsinthenameofthesamecustomerinvolvesanimplied
agreementonthepartofthebankertokeeptheaccountsdistinct,and,thatbeingso,reasonablenotice
ofhisintentiontocombinethemmustbegiventothecustomer.InthecaseofBuckinghamv.London&
MidlandBank,1895,thebankhad,withoutnoticetothecustomer,combinedaloanaccountandacurrent
accountinthesamename,andhaddishonoredchequesdrawnuponthelatter.Itwasheldthat,owingto
thebanksfailuretogivenotice,thecustomerwasentitledtodamages.

Againonthehappeningofanyeventthatdetermines(Inlawtheworddeterminemeanstoendto
terminate)thebankersdutytopayacustomerscheques,e.g.onthedeathorbankruptcyofthe
customer,oronserviceofagarnisheeorderattachingthecustomerscreditbalance,thebankeris
entitledwithoutnoticetosetoffthebalanceonseparateaccountsinordertoascertainthenetamount
owingtohim.
Moreover,ifthecustomerprejudices{toprejudice=toinjureorharm,asbysomejudgmentoraction}
thebankersrightinrespectofasecurity,e.g.bygivingasecondchargeovertheproperty,thebanker
canexercisehisrightofsetoffwithoutgivingnoticetothecustomer.

TheFollowingIsASummaryOfTheConditionsRelatingToTheApplicationOfTheRightOfSetOff.

:
THERIGHTOFSETOFFWILLAPPLY
(i)Whenaccountisrunning:Inthiscasenoticefrombankerisamust,otherwiseifachequewhichis
drawnproperlyisdishonouredthebankspositionmaybecomeveryembarrassing.

(ii)Whenoperationonaccountisstopped:Asinthecaseofdeath,bankruptcy,therightaccrues
automatically.Whenadeceasedcustomerhadtwoaccounts,oneisrunningindebitandotherincredit
balance,thebankercanadjustdebitbalancefromanaccounthavingcreditbalancebeforepayingthe
amounttolegalheirsofdeceased.
ACCOUNTSWHICHARESUBJECTTOSETOFF:

1.Debitbalanceoftrustaccountcanbesetoffagainstcreditbalanceoftrustee'sprivateaccountasthe
trusteeispersonallyliable.,
2.Ifacustomerhasmorethanoneaccountandgarnisheeorderisservedonthebankattachingcredit
balance.Insuchcasedebitbalanceofanaccountcanbetransferredtoanaccounthavingcreditbalance.

3.Adepositaccountagainstoverdraftaccounts.

4.AJointcreditAccountagainstindividualoverdraftaccountwhenallthejointaccountholders
individuallyguaranteetheoverdraft.

ACCOUNTSWHICHARENOTSUBJECTTOSETOFF:

1.Debitbalanceofatrusteeorexecutoragainstcreditbalanceofthetrust.
2.Creditbalanceoftheexecutoragainstthedebitbalanceofthedeceased.
3.Thedebitbalanceoftheexecutoragainstcreditbalanceofthedeceased.

4.Partner'sdebitbalanceagainstpartnershipcreditbalance.

5.IfO/DisgrantedtoLocalAuthorityinrespectofoneundertakingitcannotbeadjustedby
appropriationfromtheLocalAuthority'sothercreditbalance.

6.WherebankerhasknowledgeofTrustfund.

7.Wherethereisanagreementthatrightofsetoffwillnotbeexercised.

10.6.BankersRightofLien

Alienistherightofonepersontoretainpropertyinhishandsbelongingtoanother,untilcertainlegal
demandsagainsttheownerofthepropertybythepersoninpossessionaresatisfied.Thusacreditorwho
hasinhispossessiongoodsofhisdebtormayhavealienoverthegoodsinrespectofthemoneydueby
thedebtor.Liendoesnotasageneralrulegivethepersonexercisingthelienanypowertosellthegoods

orsecurityretainedbyhim.

Lienmaybeparticularorgeneral.Aparticularlienissocalledbecauseitconfersarighttoretainthe
goodsinconnectionwithwhichaparticulardebtarose,whereasagenerallienconfersarighttoretain
goods,notonlyinrespectofthedebtincurredwiththem,butalsoinrespectofthegeneralbalancedue
bytheownerofgoodstothepersonexercisingtherightoflien.Inotherwords,aparticularlienapplies
onlytoonetransaction,orcertaintransactions,whereasagenerallienextendstoalltransactions
betweentheparties.Certainpersonswhoactasagentsonbehalfofotherse.g.solicitors,bankers,stock
brokers,producebrokersandfactors{factor=apersonwhocarriesonbusinesstransactionsfor
anothercommissionmerchantagentforthesaleofgoodsentrustedtohispossessionanagent,asa
bankingorfinancecompany,engagedinfinancingtheoperationsofcertaincompanies,orinfinancing
wholesaleandretailsales,throughthepurchaseofaccountsreceivable}

havearightofgenerallienoverallgoodsandsecuritiesoftheirclientsorcustomersthatcomeintotheir
handsasagentsintheordinarywayofbusiness.

Nospecialarrangementoragreementisnecessarytocreatetherightoflienitarisesoutofthecourse
ofdealingsbetweentheparties.Neverthelesstherightoflienmaybeexpresslyconferredbyagreement,
oritmaybedefinitelyexcludedeitherbyarrangementbetweenpartiesorbytheexistenceofacontract
orofcircumstancesinconsistentwiththeexerciseoftherightoflien.

Bankerslienisagenerallien.However,itcannotberegardedasextendingtoeverytypeofsecurity
thatcomesintoabankershands.Thetermsecurityisintendedtomeansuchsecuritiesaspromissory
notes,billsofexchange,coupons,bondsofforeigngovernments,etc.Nevertheless,inanumberof
casesbankerslienhasbeenheldtocovernonnegotiablesecurities.

InReBowes1886,theassumptionseemstohavebeenthatbankerslienwouldattachtoapolicyof
insuranceinUnitedServicesCompany,1871,bankerslienwasheldtoattachtosharecertificate,andin
Jeffreyesv.AgraandMastermanssBank,1886,aformofdepositreceiptwasheldtobesubjectto
bankerslien.

Allsecuritiesthatcometothebankershandsintheordinarycourseofbusinessasabankerwillbe
subjecttohislien,providedthereisnoexpressorimpliedcontracttothecontrary.Butitisnotalways
easytodecidewhensecuritiesdocomeintothehandsofthebankerintheordinarycourseofbusiness
asabanker.Heunquestionablyhasalienonbillsofexchange,promissorynotes,cheques,couponsand
dividendwarrants,handedtohimforcollection,andprobablyalsooveracertificateforsharespurchased
byhimonbehalfofacustomer.Butwherearticlesarehandedtoabankersolelyforsafecustody,the
bankerisactingmerelyasabaileeandassuchhasnolienoverthearticles.

Ageneralliencannotariseinrespectofsecuritiesdepositedforaspecialpurposeonly,although
circumstancesmaybesuchastocreateaparticularlieninrespectofthesecurities.Thusabanker
cannothaveagenerallieninrespectofpropertyofcustomerpledgedassecurityforaparticulardebt.
Forexample,ifAhastwooverdraftsatabank,andhaspledgedsecuritiesforrepaymentofone
overdraftspecificallythebankcanonlyusethesecuritytoadjustthatoverdraftandonlythesurplus,if
any,canbeusedtopayofforreducetheotheroverdraft.

Nolienarisesinrespectofpropertywhichcomestothebankershandsbymistake,orwhichisplacedin
hishandstocoveranadvancethatisnotyetgranted.Bankersrightofsaleofsecuritiesplacedunder
lienshouldbedistinctlyunderstood.Bankerslienhascometoberegardedasanimpliedpledgeanda
pledgegivesthepledgeearightofsale.Butabankersrightofsaleisgenerallyconsideredasextending
onlytofullynegotiablesecuritiessuchas,bearerbonds,couponsandsharewarrantspayabletobearer.
Inrespectofsuchsecuritiestherightofsalemaybeexercisedbythebankerwithouttheconsentofthe
customerifthelattercannotpayorrefusestopaywhatheowes,althoughreasonablenoticeofthe
intentiontosellshouldbegiventothecustomer.

Itisnothoweverclearwhetherthebankersrightofsaleextendstosecuritieswhicharenotfully
negotiable.Mostcasesconcerninglienhaveappliedtonegotiableinstrumentsandintheabsenceoflegal
decisiononthematter,itseemsadvisabletoregardabankerslienonnonnegotiablesecuritiesas
conferringonlyarighttoretainthemuntilhisdemandshavebeensatisfied.Toreleasesuchproperty,the
bankerwouldprobablyhavetoapplytothecourt.

Thefollowingisasummaryoftheconditionsrelatingtoalienbybank.

SPECIALLIEN:
Aspecialorparticularlienisrighttoretaingoodsinrespectofwhichthedebtwasincurrede.g.Railways
Authoritieshavelienongoodswhichwereentrustedtothemfortransportpendingpaymentofcarriage.

GENERALLIEN:
Itisarighttoretainnotonlyforwhichadebtisincurredonparticulargoodsbutforthegeneralbalance
due.Thebankers,solicitorsandstockholdershavegenerallien.Abanker'slienisaspecialtypeof
generallien.Itincludesarightofsaleafterreasonablenotice.Abankerhasagenerallienonall
securitiesdepositedwithhimasbankerbyacustomer,unlessthereiscontracttothecontrary.

Thefollowingconditionsmustbepresentinordertoexercisethisright:

iThatthepropertyofcustomermustcomeintothehandsofbankerasabankerof

customer.

ii.Thereshouldnotbeanyentrustmentforspecialpurpose.

iii.Bankershouldobtainpossessionlawfully.

iv.Thereshouldbenoagreementinconsistentwiththelien.

WHICHARESUBJECTTOLIEN:

1.Bills,chequesanddocumentsforcollection.(Thisisbanksordinarybusiness).

2.Bearerbondsandcouponswhichareleftforcollection.
3.Coupononlywherethebondisinsafecustody.

4.PromissoryNote,BillofExchange,TreasuryBills,CouponBondsofforeigncountries,depositedwith
bank.
5.Securitiesleftafteradjustment.
6.Dividend,Interestwarrantorstocksanddebenturecertificatesissuedinthenameofbankforthe
accountofthecustomer.

7.Sharescertificatespurchasedbythebankforcustomer.

WHICHARENOTSUBJECTTOLIEN:

1.Whenitisnotthepropertyofthecustomer.Ifthebankerisunawaretheliennotaffected.

2.Securitiesdepositedforparticularpurpose.
3.Creditbalancesinrespectofcontingentliabilityofbillsnotyetdue(BillPurchased).

4.Bondswhencustomerhimselfcutsthecouponsthereonforcollection,presumptionbeingthatbonds
areleftforsafecustody.

5.Articlesleftforsafecustody.

6.Securitiesgivenforsale.

7.Documentsandvaluablesinadvertentlyleftwiththebank.

8.Balancesnotdue.
9.Trustaccounts.
__________________
Wheneveryoufindyourselfonthesideofthemajority,itistimetopauseandreflect.MarkTwain

Sunday,April06,2014

saadmonga
Member

#14

JoinDate:May2012
Location:Lahore
Posts:34
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Thanked8Timesin6Posts

Remittances

Dontwaitforyourshiptocomein,swimouttoit.
BeProactive,ratherthanReactive.
Remittances
Remittancescanbedefinedasanactoftransferringmoneytoadistantplace.Banksissueremittances
onbehalfofcustomersafterreceivingthevalueofremittanceandrelatedcharges/Govttaxes,ifany,are
takencareof.Paymentincashisnotonlyveryriskybutalsotimeconsuming.Remittancesassuchplay
avitalroleindaytodaybusiness.RemittancespayablewithinthecountryarecalledInLand
Remittances.Remittancespayableoutsidethecountryandreceivedfromforeigncountriesarecalled
ForeignRemittances.
InordertoprovideforanownershipstructureinPakistanforremittancefacilitation,StateBankof
Pakistan,MinistryofOverseasPakistanisandMinistryofFinancelaunchedajointinitiativecalled
PakistanRemittanceInitiative.Thisinitiativehasbeentakentoachievetheobjectiveoffacilitating,
supporting,faster,cheaper,convenientandefficientflowofremittances.Thisinitiativeshalltakeall
necessarystepsandactionstoenhancetheflowofremittances.
TypesofInlandRemittances
Payorder
Demanddraft
Telegraphictransfer
Cashierscheques/bankerscheques/Rupeetravelerscheques
Onlinetransfer
1.Payorder(PO)
Payorderisanordertopayacertainamountofmoneymentionedintheinstrumentondemandtothe
payee.Thebankisdischargedbypaymentinduecourse.Payorderisgenerallyusedformakinglocal
paymentsandthesameisdonebythebranchthatissuesit.Thisisanorderinstrumentandtransferred

throughnegotiation.ThisislikeaBanker'sChequebutissuedlocallyforlocalpayments.Thisisdifferent
fromademanddraftwhichispayableforoutstationsandisgenerallyusedforoutstationpayments.

Issuanceprocedure
Requestshallbereceivedonstandardapplicationformoroncustomerswrittenrequest.

Inthecaseofawalkincustomer,thenecessaryKYC(knowyourcustomer)proceduresshouldbe
completed,suchasaddressofthepurchaser,telephonenumber(s)andaphotocopyoftheCNICfordue
diligence.Checkthatallrequiredinformationontheapplicationiscompletedandthatitisdulysigned.
Ifthepayorderistobeissuedagainstcash,thenthesameneedstobecollectedalongwithcharges
andacashreceivedstampisaffixedontothepayorderapplication.

Ifthepayorderistobeissuedagainstacheque,thenitshouldbepostedintheaccount.Service
charges,ifnotcollectedincash,willhavetobepostedinthecustomersaccountthroughadebit
voucher.Atransferstampneedstobeaffixedontothevoucherandthepayorderbeforeissuingit,either
manuallyorthroughthesystem.
IssuanceofPayorder/Cashiercheque

CustomerapproachesthebankforissuanceofPO/CC
RequestwillbereceivedeitheronstandardapplicationformorcustomerwrittenrequestInthecaseof
walkincustomer,requiredKYCshouldbecompleted,suchas:

Addressandtelephonenumber(s)ofthepurchaser.

PhotocopyofCNICanditscomparisonwithoriginalforduediligence.Purposeofremittance.

Dealingofficermustcheckthatallrequiredinformationintheapplicationformiscompletedanditis
signed
IfPO/CCistobeissuedagainstcash,thensameshallbecollectedalongwithchargesandcashreceived
stampshallbeaffixedontoapplicationform

IfPO/CCistobeissuedagainstcheque,itshallbepostedintheaccount.Ifchargesarenotincludedin
thechequeseparately,debitvouchershallbepreparedandchargesshallberecovered

Chequeswillbecancelledandtransferstampmustbeaffixedontoallrelatedvouchers

DuplicatecopyshallbehandedPayorder/cashierchequeshallbepreparedasperdetailsinthe
application,eithermanuallyorthroughsystem
Itshallbesignedbythemakerandcountersignedbythechecker

overtothecustomer

PaymentofPayOrder

Whenapayorderispresentedforpayment,thebankershouldcheckthe

following:
Issuedbythesamebranchanddulysignedbyauthorizedofficers.

Thereisnoalterationontheinstrument.

Ifpresentedinclearing,specialcrossingandclearingstampisaffixedandendorsementisgivenon
backoftheinstrument.
Payorderdateshouldnotbemorethansixmonthsold,otherwiseitwillrequirerevalidation.

Aftercheckingalltheabovepointsthepayordershouldbepostedin

theregister/systemandshouldbemarkedaspaid.

Duplicateissuance
Thepurchaserofthepayordershouldsubmitanapplicationforlossofthepayorderandissuanceofa
duplicate.
Signatureofthepurchasershouldbeverifiedfromtheoriginalapplicationform.

Prescribedindemnityonrequiredvalueofstamppapershouldbeobtainedsignedbythepurchaserand
dulywitnessed.
Approvalfromcompetentauthoritiesofthebankforissuanceshouldbeobtained.

Duplicatepayordershouldbeissuedandnewnumbersoftheduplicatepayordershouldbewrittenon
POapplicationform.
Cancellation
Applicationfromthepurchaser,alongwithoriginalinstrument,requestingcancellationofpayorderis
required.
Thebankershouldverifythesignatureofthepurchaserfromthepayorderapplicationform.

Ifpayorderwasissuedotherthaninpersonalname,clearance/dischargefrombeneficiarymustbe
obtained.(NotebyAshraf.ThisprecautionhasresultedfromforgeriesandfraudsobservedinGovt
Departments.Apersonxhastoobtainalicensefromagovt.deptt.Thedepartmentdemandsthatx
submitsapayorderasfeeforRs100,000/payabletothegovtdeptt.xpaystheamounttoabank,
obtainsapayorderpayabletogovt.deptt.,deliversthepayordertothegovtdepartment.Thegovtclerk
showspayorderreceivedtotheofficerwhosignsthelicence.Theclerkdeliversthelicencetox.
Subsequentlytheclerkaftertakingabribefromxdeliversthepayordertox.xreturnsthepayorderto
thebankandtakesrefund.Inordertocontrolsuchfraudsthegovtdepartmentshaveaskedthebanks
thattheyshouldnotrefundthepayordersmadeoutinfavourofthegovtdepartmentsunlessa

responsiblegovtofficerdoesnotauthorizerefundofsuchapayorderinwriting.Surprisinglythe
governmentisunabletodisciplineitsemployeesandisthrowingtheburdenofpreventingfraudsbytheir
staffonthebanks.
Payordershouldbemarkedascancelledandthesignatureportionofthepayordershouldbetornout.

CancellationshouldbemarkedinthePOregister/system.

Proceedsofthepayordershouldbecreditedtothecustomersaccountafterrecoveringcancellation
charges.
Ifpayorderwasissuedforwalkincustomer,anotherpayorderinthenameofthepurchasershouldbe
issuedinsteadofrefundingtheamountincash.

2.DemandDraft(DD)

Ademanddraftisavaluereceivedinstrumentissuedbythebank.Itisissuedinordertopaymoney
drawnbyonebranchofabankuponanotherbranchofthesamebankoritscorrespondent.Sincethisis
anorderinstrument,thedraweebankisdischargedbypaymentinduecourseandtheinstrumentis
transferredthroughnegotiation.DDsaregenerallydrawnonothercitieswithanobjectiveofmaking
paymentsthere.

Issuance
Requestshouldbereceivedonstandardapplicationformoroncustomer'swrittenrequest/instruction.

Inthecaseofawalkincustomer,thenecessaryKYC(knowyourcustomer)proceduresshouldbe
completed,suchasaddressofthepurchaser,telephonenumber(s)andaphotocopyoftheCNICfordue
diligence.
Checkthatallrequiredinformationontheapplicationiscompletedandthatitisdulysigned.
IfDDistobeissuedagainstcash,thenthesameneedstobecollectedalongwithchargesandacash
receivedstampisaffixedontothepayorderapplication.

IfDDistobeissuedagainstacheque,thenitshouldbepostedintheaccount.Servicecharges,ifnot
collectedincash,willhavetobepostedinthecustomer'saccountthroughadebitvoucher.Atransfer
stampneedstobeaffixedontothevoucherandtheDDbeforeissuingit,eithermanuallyorthroughthe
system.
DDsshouldbepreparedaccordingtothedraftapplicationform,signedbytwoauthorizedofficersand
shouldbedeliveredtothepurchaser.

Relativecreditadviceshouldbepreparedanddispatchedtothedrawee'sbranch.

Amountonthedraftisprotectedfromriskofalterationbyuseofprotectographmachine{I.e.a
machinebywhichthefiguresshowingamountsareEMBOSSEDonthedraftormailtransfersothatit
cannotbealtered}
Payment

Whenadraftispresentedforpayment,thebankershouldcheckthefollowing:

Draftisdrawnonthebranchwhereitispresentedforpayment.

Signedbyauthorizedofficerswithattorneynumber.
Signatureshouldbeverifiedfrompowerofattorneybook.

Thereisnoalterationontheinstrumentanditisinorderinallrespects.Inthecaseofanyalteration,
thesameshouldbedulyauthenticatedunderjointsignatures.
Ifpresentedinclearing,aspecialcrossingandclearingstampisaffixedandendorsementisgivenon
thebackoftheinstrument.
DDdateshouldnotbemorethansixmonthsold,otherwiseitwillrequirerevalidation.

Aftercheckingalltheabovepoints,theDDshouldbepostedintheregister/systemandshouldbe
markedaspaid.

Duplicateissuance
Thepurchaserofthedraftshouldsubmitapplicationforlossofthedemanddraftandissuanceof
duplicate.
Signatureofthepurchasershouldbeverifiedfromtheoriginalapplicationform.

Draweebranchshouldbeinformedaboutthelossofthedraft,withrequesttomarkcautionforits
payment.

Onreceiptofconfirmationthatdraftisoutstanding,prescribedindemnityonrequiredvalueofstamp
papershouldbeobtained,signedbythepurchaseranddulywitnessed.

Duplicatedemanddraftshouldbeissuedwithanote"duplicatedraftisissuedinlieuoforiginaldraftno
dated".
Newnumberoftheduplicatedraftshouldbewrittenondraftapplicationform.

Ifpurchaserwantshismoneyback,draweebranchshouldbeaskedtoremitbackmoneybydebiting
theirDDpayableaccountandbyissuingacreditadvice.

Onreceiptoffunds,thesameshouldbecreditedtocustomer'saccount.
Cancellation
Applicationfrompurchaseralongwithoriginalinstrumentrequestingcancellationofthedemanddraft.

Thebankershouldverifysignatureofthepurchaserfromthedraftapplicationform.

Ifdemanddraftwasissuedinotherthanapersonalname,clearance/dischargefrombeneficiarymust
beobtained.
Draftshouldbemarkedascancelledandsignatureportionofdraftshouldbetornout.

CancellationshouldbemarkedintheDDissueregister/system.

Proceedsofthedraftshouldbepaidbydebitingsuspenseaccountandcreditingcustomersaccount(s)
respectively.

Onreceiptofcreditadvice,thesuspenseaccountcreatedinlieuofthecancelledDDshouldbereversed
withinamaximumof30days.

3.Telegraphictransfer(TT)

Telegraphictransferisatransferofmoneybycableorthroughtelegraphfromonebranchofabankto
anotherbranchofthesamebankoritscorrespondentofanamedbeneficiary.TTmessageisprepared
undertestnumber.TheauthenticityoftheTTmessageshouldbeconfirmedbythedraweebranchby
verifyingasecrettestnumber.Whenthetestisconfirmed,theproceedsoftheTTarecreditedinthe
accountofthebeneficiary.

Issuance
CustomershouldapplyforremittanceoffundsthroughTTonstandardapplicationformoron
instructionsletterdulysigned.
Ifremittanceisrequestedagainstdepositofcash,itshouldbecountedandareceivedcashstamp
shouldbeaffixed.

Ifchequesaretenderedalongwithremittanceapplicationtheyshouldbepostedinthecustomers
accountandvouchersforthechargesshouldalsobepreparedandposted.

ThedetailsoftheTTshouldbeenteredintheTTissueregister.

TTmessageshouldbepreparedandtestshouldbeapplied.

Themessageshouldbetransmittedbyacable/telegraph/telex.

Deliveryofmessageoverphoneshouldbeavoided.

Payment

OnreceiptofmessageattheDRAWEEbranch,testshouldbeverifiedonthemessage.
Iftestisnotagreed,messageshouldbesenttotheissuingbranchforrevisionoftest.

Iftestisagreed,TestAgreedStampshouldbeaffixedonthemessage.

Vouchersshallbepreparedbydebitingheadofficeaccountofissuingbranchandcreditingbillspayable
TTpayableaccount.

Ifbeneficiarysaccountisinthesamebranch,billspayableTTpayableshallbedebitedandcustomers
accountwillbecredited.
Ifbeneficiarysaccountisinanotherbranch,TTreceiptshouldbeissuedinthenameofthebeneficiary
andpaidinnormalclearing.

4.Cashiercheque/banker'scheque

AcashierchequeisakindofadraftdrawnbyabranchonitsHeadOfficeorMainOffice.Cashier
chequesareaguaranteedformofpayment.Thisisanorderinstrumentthatcanbepaidwhenpresented
atthecounter,butgenerallyissuedasacrossedcheque.Thisisaverycustomerfriendlyinstrumentasit
servesthepurposeofbothdemanddraftandpayorder.Apayorderisissuedandpaidbythesame
branchaDDispaidbythebranchonwhichitisdrawn,whereasacashierchequecanbepaidatany
branchofthebank.Anycustomer,includingwalkincustomers,canorderacashierschequefromany
banksimplybyhandingthemthemoneyoverthecounter,butifhe/shehasanaccountwiththebankitis
sometimescheaper.

InwesterncountriessuchastheUK,cashierchequesareissuedwithspecialcharacteristics,suchas:

Generallyissuedwithenhancedsecurityfeatures,includingspecialbondpaper.

Thesearedesignedtodecreasethevulnerabilitytoitemsbeingcounterfeited.

Thechequeisgenerallysignedbyoneortwobankemployeeshowever,somebanksissuecashiers
cheqesfeaturingasignatureofthebanksorotherseniorofficial.

Acashierchequeincludesthenameoftheissuingbranchanditscode,instrumentnumber,date,drawn
onmainofficeandamountinwordsandfigures.Itcanbeissuedforanyamountandrequiresthe
signaturesoftwoauthorizedofficers.

Issuance
Applicationforissuanceofcashierchequesshouldbesubmittedonastandardformorcanbeissued
againstacustomerswritteninstructions.

Customersname,addressandtelephonenumbershouldbeobtainedontheapplicationform.

Ifpurchaserisawalkincustomer,copyofCNICshouldbeobtainedalongwithoriginalforattestation.
ThisisSBPsminimumrequirementforwalkincustomers.

Ifacashierchequehastobeissuedagainstcash,thencashshouldbecountedandReceivedCash
Stampshouldbeaffixedontotheapplication.

Ifachequeistenderedalongwithanapplication,itshouldbepostedinthecustomer'saccountanda
transferstampshouldbeaffixedonboththechequeandtheapplicationform.

Acashierchequeoftherequiredamountshouldbeissuedunderfullsignatureandattorneynumber.

Postthedetailsofthecashierchequeinthesystemassuch,detailsoftheinstrumentareupdatedat
HeadOfficerecordonlineandonrealtimebasis.
Afterpostinginthesystem,theinstrumentmaybedeliveredtothecustomer.

Dispatchrelatedcreditadvicetothecashierchequecell.
Encashment
Cashierchequecanbepaidincash,transferorclearing.

Beforeencashment,dealingofficershouldverifysignaturesontheinstrument.

Itisadvisablethatbeforeencashment,alistoflostinstrumentsshouldbereferredto.

Forwalkincustomers,acopyofCNICshouldbeobtained.

Inthecaseofalostinstrumentbeingpresentedforpayment,itshouldbemarkedasReportedLostand
returnedtothepresenter.

Thedealingofficer,aftersatisfyinghimselfabouttheauthenticityoftheinstrument,shouldcancelitin

thesamemannerasotherinstrumentsarecancelledandpostthesameinthesystem.Theholdershould
bepaidinthemodeitwaspresentedforpayment(cash,transfer,clearing)andastampshallbeaffixed.
(Explaininwhatmeaningsthewordcancelisusedinpracticalbanking)

5.RupeeTraveler'sCheques(TC)

ChequesissuedinPakrupeesbythebankstotheircustomerswhowishtotravelwithinthecountryare
calledRupeeTraveler'sCheques.Eachchequehasaspaceforthecustomertosignimmediatelyon
receiptofthechequeandanotherspacetosigninthepresenceofthepayingbankeratthetimeof
encashment.
Issuance
Applicationofissuanceofrupeetraveler'schequeshouldbesubmittedonlyonthestandardform.

Customer'sname,addressandtelephonenumbershouldbeobtainedontheapplicationform.
Ifpurchaserisawalkincustomer,copyofCNICshouldbeobtainedalongwithoriginalforattestation.
IfTCshavetobeissuedagainstcash,thenthesameshouldbecountedanda"ReceivedCashStamp"
shouldbeaffixedontotheapplication.

Ifachequeistenderedalongwiththeapplication,itshouldbepostedinthecustomer'saccountanda
transferstampshouldbeaffixedonbothchequeandapplicationform.

TCsoftherequireddenominationshouldbeissuedunderfullsignatureandattorneynumber,inthe
nameofthebeneficiary,thedetailsofwhomshouldbewrittenontheapplicationform.TCsshouldbe
issuedafterobtainingfirstthesignatureoneachTCandonthepurchasereceipt.

RelatedcreditadviceshouldbedispatchedtotheTC'scell.

Encashment
TCscanbepresentedforpaymenteitherincash,transferorinclearing.

AuthenticityoftheTCshouldbecheckedbyverificationofthesignatureontheTCandsignatureofthe
purchaseronthepurchaserreceipt.
Customershouldbeaskedtoputhis/hersignatureinthesecondspace.

Forwalkincustomers,acopyofCNICshouldbeobtained.

AfterverificationofsignatureandCNIC,paymentcanbemade.

Ifpresentedinclearing,crossing,clearing,dischargeonthereverseshouldbeverifiedandif
everythingisinorder,chequeshouldbemarkedascancelled,andrelatedcreditadviceshouldbeissued.

6.OnlineTransfer

Onlinetransfermeanstransferoffundselectronicallythroughacomputersystem.Inacashfreeworld
alltransactionscanbedoneelectronically.Toreceivemoneythecustomershouldhaveabankaccountin
thecountry,buttotransfermoney,awalkincustomercanalsomakeuseoftheonlinefundtransfer
facility.Thisisahighlyeffectiveandsecurewaytotransfermoney.

Throughanonlinesystem,branchesarelinkedtocomputercentersandcustomer'saccountrecordsare
heldandprocessedcentrally.Detailsofcountertransactionsaretransmittedforactionfrombranch
terminalsonlineandonarealtimebasis.Thisonlineservicecanbeusedforinquirypurposesandfor
actualbankingtransactions.Thefundsaregenerallyavailabletothebeneficiarywithinminutesandthere
isnoreceiverfee.Theprocessingofonlinefundstransfershouldbeinlinewiththeprovisionsgivenin
thePaymentSystemandElectronicFundsTransferAct2007.

Procedureforonlinetransfer

Customerscanapplyforonlinetransfereitherthroughastandardapplicationformorbyusingdeposit
slips.Theseslipsaredesignedinamannersothatadepositorcanwritethenameofalocalbranch
wherethecashisdepositedandnameoftheremotebranchwherefundshavetobecredited.

Beforeacceptinganonlinetransferitshouldbecheckediftheremotebranchiscomputerizedand
online.
Ifcashisdeposited,a'receivedcash'stampshouldbeaffixedontotheapplicationformaftercounting
thecashandrecoveringcharges.

Thecustomer'schequeandwritteninstructionscanalsobeacceptedforonlinetransfer.

Inthecaseofwritteninstructions,vouchersfordebitofthecustomer'saccountshouldbepreparedfor
remittanceamountpluscharges.
Iftheremitterisawalkincustomer,acopyofCNICshouldbeobtainedalongwiththeoriginalfor
attestation.
Afterallchequesarecleared,accesstotheremotebranchshouldbemadeandvouchersshouldbe
posted.Afterpostingandsupervision,fundtransferthroughtheonlinesystemshouldbecompletedona
realtimebasis.
Precautions
Inrecenttimes,fraudulentactivitiesinprocessingofonlinecashpaymentofchequeshaveincreased.
Fraudstersusechemicalstochangethewordsandfiguresofthecheque,convertingsmallamountsinto
largeamounts.Withaviewtopreventingfraudandpaymentoftamperedcheques,thefollowing
additionalcontrolstepsmaybetakenforpaymentofonlinecashchequesoverthecounter:

CollectionofphotocopyofCNICofbearerofchequeanditsverificationfromoriginal.

Allchequespresentedforonlinecashpaymentsshouldbecheckedunderanultravioletlampwhichcan
detectwhetherchequeshavebeentamperedwith.Theselampsarenotcostlyandcanbepurchasedfrom
localmarkets.

Foronlinepaymentofchequesoflargeamounts,acallbackprocessmustbefollowedbythepayee
branch.Thiscanbedonebyreferringthedetailsofthechequetothedrawerbranchforacallback
verificationofthechequewiththeaccountholder.

ii.ForeignRemittances

(explainsimilarmodesusedforforeignremittancesasforinlandremittances.

Theinwardremittancesincreaseourforeignexchangereservesandthusencouraged.

Outwardremittancesuseupvaluableforeignexchangesorestrictionsplacedonoutwardremittances
againstPakrupees.)

Itisimportantforthegovernmenttoknowstatisticsaboutearningandspendingforeignexchangeso
detailedproceduresforreportingforeignremittanceshavebeenputinplace.

12.3.OutwardForeignremittances

Aremittanceabroadinvolvesforeignexchange,thegrantofwhichissubjecttotheapprovalofthe
ForeignExchangeDepartmentofStateBankofPakistan.Forcertainspecifiedpurposesandforrestricted
amounts,authorizeddealershavebeendelegatedauthoritytosanctionremittancesonbehalfofState
Bank.Exceptforcasesfallingunderthiscategory,inallothercasespriorapprovaloftheForeign
ExchangeDepartment,SBP,ontheappropriateform,mustbeobtainedbeforeeffectinganyremittance.

(Accordingtothecurrentexchangerules,ifapersonmaintainsaforeigncurrencyaccountinabankthe
amountdebitedtotheforeigncurrencyaccountcanfreelyberemittedinsideoroutsidePakistanin
foreigncurrencywithoutapprovalfromStateBankofPakistan)

TheusualtypeofremittancesandtherelevantchapteroftheExchangeManualpertainingtothe
regulationsregardingremittancesabroadagainstpaymentofPakistanRupeesareasfollows:

i.TravelAllocationChapterXVIII:Exampleremittanceorissueofcurrencynotesortravelerscheques
totravelersforholidayorbusinesstripabroad.

ii.PrivateRemittancesChapterXVII:Exampleremittancesforpurposeslikeappearinginforeign
examinations,education,etc.Someremittancesareapprovedbycommercialbanksthemselveswhenthe
applicantsmeetthecriterialaiddownbySBPintheExchangeManual.Forothersapplicationismadeto
SBP.

Tofacilitatepaymentsabroad,Pakistanibanksmaintainforeigncurrencyaccountswithbanksinthe
principalfinancialcentersoftheworldwhicharecalledNostroaccounts.Beforedecidingonwhich
correspondentadrawingistobemadeareferenceshouldbemadetothelistofcorrespondentbanks
andtheiragencyarrangements.Incaseabankdoesnotmaintainanaccountinthecountryonwhichthe
drawingisbeingmade,reimbursementtothedraweebankshouldbeprovidedaslaiddownintheagency
arrangements.(Explainagencyarrangements)

RemittancesincurrenciesnotquotedbythebanksinPakistan

Remittancesshouldnormallybeeffectedincurrenciestheratesforwhicharequotedbybanks.
Remittancesmayalsobemadeinothercurrenciesinspecialcasesprovidedaprovisionaldeposit
sufficienttocovertheexpectedcostisobtainedandheldinsundrycreditorsaccount.

WhenaremittanceisreceivedinForeignCurrencyforpaymentinPakRupeestheBankPurchases(buys)
foreigncurrencyandpaysoutPakRupees.

WhenaremittanceisSENTinforeigncurrencyagainstpaymentinRupeesthebankSELLSforeign
currencyandcharges(debits)thecustomerinPakRupees.

SWIFT
(SocietyforWorldwideInterbankFinancialTelecommunication)

ComparedtodispatchofdraftandMailTransfer,andevenTT,theSWIFTisaverysecuresystem.The
movementoffundsisinstantaneous.SWIFTwasestablishedin1973by239banksin15countriesasa
nonprofitbankownedcooperativesociety.TheSWIFTtransactionsrelatetoremittances,banktransfer
andevendocumentarycredits.Byusingstandardformatforeachtypeoftransactionthetransactionsare
easytoreconcile.Thesystemoffersefficiency,speed,accuracyandsecurityandthereforealmostall
foreignremittancesaremadebymeansofSWIFT,nowadays.

TheSWIFTisacomputerizedpaymentssystem.Inthesendingbankbranchthemessageisinputbyone
authorizedofficeranditisapprovedfordispatchbytwodifferentauthorizedofficers,allthreeusingtheir
ownpasswords.Thecomputersystemconvertsthemessageintocodessothatitcannotbestolenduring
transmission.Atthedestinationbankbranchauthorizedofficerscanretrievethemessagethroughtheir
passwordsandtakeactiononthepaymentinstructions.Itisahighlysecureandinstantaneouspayments
systemandisusedtheWorldover.

12.6.InwardForeignRemittances

TheterminwardremittancemeanspurchaseofforeigncurrenciesinwhateverformandincludingM.T.,
T.T.,draft,travelerscheques,draftsundertravelerslettersofcredit,billsofexchange,currencynotes
andcoinsanddebittoforeignbanksnonresidentRupeeaccountsinPakistaniBanks.ARupeeaccount
openedbyStandardCharteredLondoninthebooksofStandardCharteredLahoreiscalledVostro
account.
Thereisnorestrictiononreceiptofremittancesfromabroadeitherinforeigncurrencyorbydebitto

nonresidentRupeeaccountsofbanksoverseasbranchesorcorrespondents.Banksmayfreelypurchase
T.Ts,M.Ts,drafts,billsetc.,expressedandpayableinforeigncurrenciesordrawninRupeesonbanks
nonresidentRupeeaccounts.

(ASWEHAVESEENEARLIERTHEREARERESTRICTIONSONREMITTANCESTOBESENTABROADANDTHE
EXCHANGEMANUALISSUEDBYSTATEBANKOFPAKISTANLAYSDOWNTHEPARAMETERSINTHIS
REGARD.HOWEVERREMITTANCESFROMABROADINTOPAKISTANAREALLOWEDWITHOUT
RESTRICTIONSASTHECOUNTRYGETSFOREIGNEXCHANGETHROUGHINWARDREMITTANCES)

12.7.OutwardForeignRemittances

ThetermoutwardremittancemeanssaleofforeignexchangeinanyformandincludesT.Ts,M.Ts,
drafts,travelerscheques,travelerslettersofcredit,foreigncurrencynotesandcoinsetcandcreditto
nonresidentRupeeaccount.Foreignoutwardremittancesaresubjecttoforeignexchangeregulationsof
StateBankofPakistan.

12.8.ModeofRemittances

TheExchangeControlManuallaysdownthatwhereremittancescanbeeffectedbyMTorTTtheissuance
ofdraftshouldbeavoided.However,wherethiscourseofactionwillcauseinconvenienceorhardshipto
theremitter,demanddraftcrossedPayeesA/conlymaybeissued.Adviceofdraftissuedshouldbe
dispatchedpromptly.Delayinthisregardmayputthebeneficiarytoconsiderableinconvenience.
Generally,thecorrespondentsalsoholdinstructionsthatincaseofpaymentofadraftoflargeamount,a
cableshouldbesenttotheissuingbranchifthedraftadviceisstillunreceived.

12.9.CancellationofforeignRemittances

12.9.1.CancellationofOutwardRemittances

IntheeventofanyoutwardremittancewhichhasalreadybeenreportedtotheStateBankbeing
subsequentlycancelled,eitherinfullorinpart,AuthorisedDealersmustreportthecancellationofthe
outwardremittanceasaninwardremittance.Thereturninwhichthereversalofthetransactionis
reportedtoSBPshouldbesupportedbyalettergivingthefollowingparticulars:

(a)Thedateofthereturninwhichtheoutwardremittancewasreported.

(b)Thenameandaddressoftheapplicant.
(c)Theamountoftheremittanceaseffectedoriginally.

(d)Theamountcancelled.
(e)Reasonsforcancellation.

12.9.2.CancellationofInwardRemittances

IntheeventofanyinwardremittancewhichhasalreadybeenreportedtotheStateBank,being
subsequentlycancelledeitherinfullorinpart,becauseofnonavailabilityofthebeneficiary,Authorized
DealersmustreportthecancellationoftheinwardremittanceasanoutwardremittanceonformM.The
returninwhichthereversalofthetransactionisreportedtoSBPshouldbesupportedbyalettergiving
thefollowingparticulars:
(a)Thedateofthereturninwhichtheinwardremittancewasreported.

(b)Thenameandaddressofthebeneficiary.

(c)Theamountofthepurchaseaseffectedoriginally.

(d)Theamountcancelled.
(e)Reasonsforcancellation.

ReportingofIncomingandOutgoingForeignRemittances

toStateBankofPakistan

NowwediscussthePurposeandSystemofReportingofIncomingandOutgoingForeignCurrency
Remittancestoandfromthepeople,governmentandbusinessesinPakistantotheStatisticsDepartment
inStateBankofPakistan.

InordertodecidetheImportExportpolicy,determinebudgetallocationstovarioussectorsofthe
economy,makedecisionsregardingmonetarypolicy,fiscalpolicy,tradepolicy,customsduties,etc.,the
StateBankofPakistanandtheGovernmentofPakistanspeciallytheMinistryofFinanceandMinistryof
CommerceneedSTATISTICSofvaluesandvolumesofVisibleandInvisibleImportsandExportsof
Pakistan.

TogathersuchstatisticstheSBPhaslaiddownadetailedsystemforstrictcompliancebyvirtueofwhich,
wheneveranycommercialbankreceivesforeigncurrencyforanypurposeorsendsoutforeigncurrency
foranypurposethebankpreparesdetailsofeachtransactionspeciallygivingthePURPOSEOFINWARD
OROUTWARDREMITTANCE,VALUEANDNATUREOFGOODSIMPORTEDOREXPORTED.Dependingupon
theamountthebankalsogivesthenameandaddressofthecustomerinvolved.

FollowingFormsareusedforReportinginwardandoutwardforeigncurrencyremittances:

SupportingFormPurpose

EFormAllremittancescomingintoPakistanshowinginwardreceiptofproceedsofexportofgoodsfrom
PakistanarereportedonEform.

RFormAllincomingremittancesshowingamountsreceivedforinvisibleexports,Remittancesfrom
Pakistaniexpatriates,etc.

IFormAllremittancesgoingoutofPakistanbeingpaymentsforgoodsimportedintothecountry.
MFormAllremittancesgoingoutofPakistanforinvisibleimports,travel,education,holiday,etc.

SuchcomprehensivestatisticshastobesentbyeachbanktothestatebankofPakistanonthe3rddayof
eachmonthrelatingtothefullpreviousmonth.
Heavypenaltiesareleviedifthebankdelaysinconveyingthisinformation.

ThisstatisticsisimportantfortheFinancialManagersofthecountry.
__________________
Wheneveryoufindyourselfonthesideofthemajority,itistimetopauseandreflect.MarkTwain

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