Negotiable instrument Act – Recent Amendments

« Sections 138 to 142 were added to the act in 1988.
« 5 new sections (Section 142 to 147) have been added in 2002
« Section 138 applies to cheque and other instruments like DD / PO / BC which can
be treated as cheque by holder in due course.
« Definition of cheque widened to include electronic image of a truncated cheque
and cheque in electronic form.
« Right of Banker who received payment on electronic image of a truncated cheque
to retain the truncated cheques.
« Certification of text of print out of electronic image of truncated cheque by paying
banker as a proof of payment
« Doubling the imprisonment term from one year to two years
« Doubling penalty for the offence up to twice the amount of instrument
« Doubling the period of time to issue demand notice from 15 to 30 days
« Cognizance can now be taken even if the complaint is made after expiry of the
stipulated period of one month provided the complainant satisfies the court that he
had the sufficient cause for not making the complaint within such period.
« Immunity from prosecution for nominee directors who are nominated by virtue of
holding any office or employment in Central Government or State Government
« Compounding of offence under N I Act
« Empowering the Magistrate to condone delay in filing complaint
« Bank’s memo denoting that the cheque has been dishonoured shall be presumed to
be the fact of dishonour. Requirement of Branch witness as drawee bank can be
dispensed with.
« The summons can be served by speed post or by authorized courier service and if
not accepted will be treated as duly served.
« Offences shall be tried by Ist class Judicial Magistrate or Metropolitan Magistrate.
« Trial to be concluded as expeditiously as possible and effort to be made to
conclude it within 6 months
« Offences under Act made compoundable.
« In case of conviction in a summary trial, the magistrate has been empowered to
pass a sentence not exceeding one year imprisonment and fine not exceeding Rs.
5000/-

NEGOTIABLE INSTRUMENT

Banking business largely revolves around Negotiable instrument. Although there is no definite definition of negotiable instrument has been given in the above said act yet as per section 13 of the act says that promissory notes, Bill of exchange, and cheques payable either to bearer or to order is are negotiable instruments. Following are the main characteristics of Negotiable Instrument.
1)Negotiable instruments are easily transferable. However, it is to be noted that transferability does not mean negotiability. There is difference between transferability and negotiability.
2The title of the negotiable instrument can be transferred by mere delivery of the instrument if it is bearer or by endorsement and delivery if it is an order one.
3)In above case it should be free from defects.
4)The instrument should contain a right of action itself. The possessor of it is deemed to be the true owner capable of enforcing any claim thereon.

NPA (Non Performing Assets) in banks

A non performing asset is one which is not yielding any interest earning as per directives of RBI. Banks are not allowed to book interest on the loanS accounts which have become NPA until it is upgraded. Banks have to classify their loan accounts in following 4 categories. accounts which are not under first category i.e.standerd category is NPA. Al following 3 categories of accounts are classified in NPA category.

1. Standard Assets

Standard assets are those, which are regular in payment of interest and installment due as per sanction. They are normally treated as accounts without any problems. These accounts are monitored to ensure the compliance of all terms and conditions specified in the sanction.

2. Sub-standard Assets

With effect from 31 March 2005, a sub-standard asset is one, which has remained NPA for a period less than or equal to 12 months. If the entire over dues are recovered by way of cash recovery, the account can be upgraded to standard category immediately. Similarly,
if an account is classified as NPA due to technical reasons, the account shall be upgraded on clearance of technical reasons.
3. Doubtful Assets
With effect from March 31, 2005, an asset is classified as doubtful if it remained in the sub-standard category for 12 months.
Sub-standard and Doubtful accounts which are subjected to restructuring / rescheduling, can be upgraded to standard category only after a period of one year from the date when first payment of interest or of principal, whichever is earlier, falls due, subject to satisfactory performance for the period of 12 months.

4. Loss Assets

A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection. In Loss assets, realizable value of security available is less than 10 % of balance outstanding / dues.
Willful Defaulter
Accounts of Rs 25 lacs and above can be classified as willful defaulter if any

Weaker Section

Weaker section includes the following:

•Small and marginal farmers with land holding of 5 acres and less and landless labourers, tenant farmers and sharecroppers.
•Artisans, village and cottage industries where individual credit limits do not exceed Rs. 50,000/-.
•Beneficiaries of Swarnjayanti Gram Swarojgar Yojana (SGSY), Swarna Jayanti Shahari Rojgar Yojana (SJSRY) & Scheme for Liberation and Rehabilitation of Scavangers (SLRS).
•Scheduled Castes and Scheduled Tribes.
•Advance to Self Help Groups – Bank Linkage Programme
•Beneficiaries of Differential Rate of Interest (DRI) scheme

Priority Sector Advances

Following advances are treated as priority sector advances
•Housing Loans up to Rs.20 lacs irrespective of locations, for constructions of houses.
•Loans for repair and renovations up to Rs. 1 lac in Rural and Semi Urban Area and up to Rs. 2 lacs in Urban Areas.
•Education Loan – Study in India up to Rs.10 lacs and Study abroad – up to Rs.20 lacs
•Traders Loan up to Rs. 20 lacs under Baroda Traders Loan
•Enterprises whose investment in equipments does not exceed Rs.2 crores-. Micro Enterprises and Small Enterprises.
•Agriculture(Direct and Indirect Finance)
•Small Enterprises
•Advance granted to Fair price shops dealing in essential commodities, consumer co operative stores
•Micro Credit- Loan of very small amount not exceeding Rs.50000 per borrower either directly or through SHG/JLG
•Investment by banks in securitized assets, representing loans to various categories of priority sector
•Outright purchase of any loan asset eligible to be categorized under priority sector
•Fresh deposits placed by banks on or after 30.04.2007 with NABARD/SIDBI on account of non achievement of priority sector lending targets

DRI Advances

• As per RBI guidelines for lending under DRI Scheme, banks are required to grant loans at concessional rate of interest 4% p.a. to the eligible beneficiaries.
• Ceiling of family income of the borrower per annum in rural and urban should be Rs18000 and Rs.24000 respectively.
• Only to the borrowers who are not assisted under any subsidy linked schemes of Government.
• Limit Rs.15000. For Housing loan Rs.20000 per beneficiary.
• The loans to be granted under the scheme should be not less than 1% of total advances.
• Not less than 40% of total DRI advances should be granted to borrowers belonging to SC/ST communities and 2/3 rd of DRI advances shall be granted through rural and semi-urban area branches.
• Loans granted to Institutions/organizations for the purpose of their onward lending to beneficiaries eligible for coverage under DRI Scheme shall be covered under DRI advances of the bank.
• Bank is required to lend 1% of total outstanding advances as at the end of previous year under DRI Scheme. Further 2/3rd of advances should be routed through rural and semi urban branches.

Factoring:

The factoring is a process of discounting trade bills with recourse. It is a service beyond giving simple finance against the bills. It entails a host of services. It is a financial arrangement in which the receivables are created out of sale of goods or services are sold to an agency (Know as factor) is called factoring. The factor performs the functions such as purchase of receivables, maintaining the sales of receivable ledgers, submitting sale accounts to the creditors, collection of debts on the due date and providing consultancy services to the customer in respect of marketing, finance and production.

Securitization

The transfer of loans (ASSETS) of a homogeneous nature, from a lending institution to
investors through an intermediary, by packaging them in the form of securities which are usually termed “PASS-THROUGH CERTIFICATES”. The cash flow by way of PRINCIPAL and
interest on the underlying loans is “passed through” to the security holders. The
assignment of loans is mostly without recourse to the original lender. Various assets that generate cash flows can be securitized - as e.g., housing loans and car loans.
The lending institutions benefit by this arrangement since it frees a large amount of funds for reinvestment, long before they become due. The assets are selected from a pool that is carefully selected - this is known as ‘Cherry Picking’. They are subsequently monitored over a period of time to confirm their financial soundness – this part is termed‘Seasoning’. Considering that there is such a careful appraisal coupled with the backing of the underlying assets, the financial instruments that are created present an attractive investment opportunity. Moreover, their investment quality can be determined from theCredit Rating, if available.
A trust or an intermediary termed ‘Special Purpose Vehicle’ (SPV) is involved in the
arrangement of securitization. The SPV holds the loans and issues paper against the
security of the loans, say MORTGAGES. The proceeds from the issue of securities are given to the housing finance company. The periodic interest and principal are collected by the SPV and passed on after retaining service costs and insurance fees.