The term Paying Banker refers to a bank that pays out the amount of a cheque or negotiable instrument on behalf of its customer. It is a key function in banking operations governed primarily by the Negotiable Instruments Act, 1881, and relevant banking regulations.
Who is a Paying Banker?
A Paying Banker is a bank that holds the account of the drawer (payer) and is responsible for honouring cheques drawn by its customer, provided they meet all legal and procedural conditions.
Simply put, the Paying Banker is the drawee bank that pays the cheque or draft issued by its customer.
Legal Provisions Related to Paying Banker
The duties and protections of a paying banker are defined under:
- Negotiable Instruments Act, 1881
- Section 10: “Payment in due course”
- Section 85: Cheques payable to order
- Section 85A: Demand drafts
- Section 89: Cheques with material alterations
- Reserve Bank of India (RBI) Guidelines
- Banking Regulations Act, 1949
Essential Conditions for Payment by the Paying Banker
For a paying banker to legally honour a cheque:
- Cheque must be properly drawn and signed.
- Funds must be available in the account.
- Cheque must be within validity period (generally 3 months).
- No stop payment instructions from customer.
- No court order (like garnishee order) restraining payment.
- No material alteration on the face of the cheque.
Duties of a Paying Banker
✔ Verify Authenticity
- Ensure the signature of the drawer matches records.
- Confirm no alterations or overwriting exist.
✔ Sufficient Funds
- Check that the drawer’s account has adequate balance.
✔ Observe Mandates
- Adhere to any mandates, stop payments, court orders or instructions issued.
✔ Timely Payment
- Must make payment within reasonable time if the cheque is valid.
✔ Maintain Secrecy
- Should not disclose transaction details without proper legal authority.
When Can a Paying Banker Refuse Payment?
- Insufficient balance in the drawer’s account.
- Post-dated or stale cheque.
- Signature mismatch or unauthorized alteration.
- Garnishee order or court injunction.
- Stop payment instruction from the account holder.
- Dormant/inactive account status.
- Account closed or under legal freeze.
Protection Available to Paying Banker
Under Section 85, Negotiable Instruments Act:
- If the cheque is payable to order and is paid in due course, the banker is discharged from liability, even if the endorsement is forged.
Under Section 85A:
- Similar protection is provided for demand drafts if the payment is made in due course.
Under Section 10:
- “Payment in due course” protects bankers if they make payment:
- In good faith
- Without negligence
- To the person entitled to receive the payment
Liabilities of a Paying Banker
- Wrongful Dishonour: If the bank dishonours a valid cheque, it may face liability for damages, especially if the customer’s credit is hurt.
- Payment on Forged Cheque: If payment is made on a forged cheque, the bank cannot debit the customer’s account unless protected by law.
- Negligence: If the banker fails to follow standard precautions, they may be liable for negligence.
Difference Between Paying Banker and Collecting Banker
| Criteria | Paying Banker | Collecting Banker |
|---|---|---|
| Role | Pays cheque drawn by its customer | Collects cheque on behalf of its customer |
| Account Holder | Drawer | Payee |
| Risk | Dishonour or wrongful payment | Forged endorsements or conversion |
| Legal Provisions | Sec. 10, 85, 85A, 89 of NI Act | Sec. 131 of NI Act |