Important Points About Negotiable Instruments – Banking Awareness

History of Negotiable Instruments:

A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, with the payer usually named on the document. Common prototypes of bills of exchanges and promissory notes originated in China.

Bank notes are frequently referred to as promissory notes, a promissory note made by a bank and payable to bearer on demand. According to section 4 of India’s Negotiable Instruments Act, 1881, a Promissory Note is an writing (not being a bank note or currency note), containing an unconditional undertaking, signed by the maker to pay a certain sum of money only to or to the order of a certain person or the bearer of the instrument.

Features of Negotiable Instruments:

• It is a written document.
• A Negotiable Instrument payable to bearer is transferable merely by delivery, whereas a Negotiable Instrument payable to order is transferable by endorsement and delivery.
• The holder of a Negotiable Instrument can sue upon it in his own name.
• The consideration is not mentioned on the Negotiable Instrument. It is presumed that the Negotiable Instrument has been drawn for a valuable consideration.
• Negotiable Instruments works in the same manner as money and like money, it may also be transferred from one person to another.
• The transferor does not need to give notice to any person at the time of transferring the instrument.
• It is the simplest and most convenient mode of assignment of a debt.
• The title to the instrument received by a bonafide transferee is not affected by any defected in the title of the transferor.

Types of Negotiable Instruments:

Promissory Note:

It is a legal document between a lender and a borrower, whereby the later agrees to certain conditions for the repayment of the sum of money borrowed. When one borrows from a commercial bank, he/she signs a promissory note.

Particular forms of promissory notes, known as commercial paper, can be bought and sold. They are usually issued by large corporations, but in some countries. Promissory notes are a common form of small business finance.

Commercial Bill:

It is the market that deals in commercial bills. Commercial bills of exchange are negotiable instruments drawn by the seller or drawer of the goods of the buyer or drawee of the goods for the value of the goods delivered. These bills are called trade bills. These trade bills are called commercial bills when they are accepted by commercial banks. Duration of commercial bill is 1 to 14 days only.

Cheque:

It is a bill of exchange document that orders a bank to pay a specific amount of money from a person’s account to the person in whose name the cheque has been issued. They are in different types:

1. Order cheque
2. Bearer cheque
3. Blank cheque
4. Stale cheque
5. Multilated cheque
6. Post-dated cheque
7. Open cheque
8. Crossed cheque
9. Account payee cheque
10. Gift cheque
11. Travelers’ cheque

Treasury Bills(T-Bills):

It is instrument for short term borrowing by the government. The bills are issued by tender to the money market and to government departments through tap issues. Tenders are invited every week from banker, discount houses and brokers. On the other hand, T-bills provide the government with a highly flexible and relatively cheap means of borrowing money to meet its fluctuating needs for cash and on the other, the bills provide a sound security for dealings in the money market. The RBI, being the banker to the government, issues treasury bills at a discount. There are four types of T-bills:

1. 14 days T-bill
2. 91 days T-bill
3. 182 days T-bill
4. 364 days T-bill

Commercial Paper (CP):

Commercial Paper is issued in the form of promissory note, sold directly by the issuer to investors or else placed by the borrowers through agents such as merchant banks and security houses. CP can be issued in the denominations of Rs. 5 lakh or multiples thereof.

These papers have a maturity of minimum 7 days and maximum of upto one year from the date of issue. These are negotiable and transferable by endorsement.

Certificate of Deposits (CDs):

It is a negotiable claim issued by a bank in return for a term deposit. CDs are securities that are purchased for less than their face value, which is the bank’s promise to repay the deposit and thus, offer a yield to maturity. Certificate of Deposits were first issued in New York in 1960s and denominated in dollars.

Bank Note:

A banknote (often known as a bill, paper money, or simply a note) is a type of negotiable instrument known as a promissory note, made by a bank, payable to the bearer on demand. Banknotes were originally issued by commercial banks, who were legally required to redeem the notes for legal tender (usually gold or silver coin) when presented to the chief cashier of the originating bank. Commercial banknotes have primarily been replaced by national banknotes issued by central banks.

Bank Draft:

It is a bill of exchange in which a bank orders its branch or another bank specified therein, as the case may be to repay a specified sum of money to a specified person or to his order. Usually, banks charge a standard rate of service charges on these drafts.