The Negotiable Instruments: Banking Awareness

In all the business activities, exchange of goods and services are very common. Goods are bought and sold for cash as well as on credit. All these activities require transfer of cash either immediately or after a certain period of time. In businesses, where large number of transactions takes place every day, it is quite inconvenient as well as risky for either party to make and receive payments in cash. Therefore, they make use of certain documents as means of making payment. Some of them are called Negotiable Instruments. In this blog, we would learn about the types of negotiable instruments in detail, which may come in general or banking awareness section of exams like IBPS RRB Officer, IBPS RRB Assistant, IBPS PO, IBPS Clerk, SSC, RBI Grade B, etc.

Negotiable Instruments

Negotiable Instruments are documents that guarantee the payment of a specific sum of money, either on demand or at a set time to a specific person. It is a transferable, signed document that can be transferred from person to person. The person who receives the payment, must be named or otherwise indicated on the instrument.

According to Section 13 of the Negotiable Instruments Act, 1881, a negotiable instrument refers to “promissory note, bill of exchange, or cheque, payable either to order or to bearer”.

So, as per Negotiable Instruments Act, 1881 there are just three types of negotiable instruments i.e.,

  • Promissory note
  • Bill of exchange
  • Cheque

But apart from these, many other documents are also recognized as Negotiable Instruments on the basis of custom and usage, like Negotiable Instruments 29 treasury bills, share warrants, hundis, etc. (only if they possess the features of negotiability).

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Promissory Note

Section 4 of The Negotiable Instruments Act, 1881 defines Promissory Note as:

“A ‘Promissory note’ is an instrument in writing (not being a bank-note or a 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 to the bearer of the instrument.”

A promissory note is a financial instrument which contains a written promise by one party to pay another party a definite amount of money, either on demand or at a specified future date. It typically contains all the terms pertaining to the indebtedness, such as the principal amount, interest rate, date, maturity date, and place of issuance, and issuer’s signature. This document, once signed by the specified person, duly stamped and handed over to another person involved, becomes a Negotiable Instrument.           

There are mainly two parties involved in a promissory note.

The Maker or Drawer: the person who makes the promissory note and promises to pay the amount stated therein.

The Payee: the person to whom the amount is to be paid.

Features of a Promissory Note

  • Written Instrument
  • Duly Signed and Stamped by the maker
  • Contain undertaking or Promise to pay
  • Conditional
  • Sum of money
  • Promise to pay ‘money’ only
  • Payable on demand or after a certain date
  • Maker must be certain
  • Payee must be certain
  • Sum payable must be certain, i.e. can be calculated

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Bill of Exchange

Section 5 of the Negotiable Instruments Act, 1881 defines a bill of exchange a

‘an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument’.

There are three parties involved in a bill of exchange. They are

  1. The Drawer: The person who makes the order for making payment.
  2. The Drawee: The person to whom the order to pay is made.
  3. The Payee: The person to whom the payment is to be made.

Features of Bill of Exchange

  • Written
  • Duly Signed by drawer
  • Drawee
  • Duly Stamped
  • Order to pay
  • In terms of Money only
  • Parties must be Certain
  • Sum payable must be Certain
  • Unconditional
  • Date

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Transactions through cheques are quite common these days. Cheques are a type of bill of exchange and were developed as a way to make payments without the need to carry large amounts of money. It is a 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. The person writing the cheque is known as a drawer. The amount is transferred only to the person to whom a cheque is addressed.

Section 6 of The Negotiable Instruments Act, 1881 defines cheque as:

“A ‘cheque’ is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.”

There are various types of cheques and these are described in the following sections.

  • Order Cheque
  • Bearer Cheque
  • Blank Cheque
  • Counter cheque
  • Stale Cheque
  • Multilated Cheque
  • Post Dated Cheque
  • Open Cheque
  • Crossed Cheque
  • Gift Cheque
  • Traveller’s Cheque
  • Self Cheque, etc.

For Details, Refer:

Types of Cheques and Crossing of Cheques

Features of a Cheque:

  • Written
  • Duly Signed by the drawer
  • Unconditional order
  • Issued by Specified banker
  • Amount must be Certain
  • Amount mentioned both in figures and words
  • Payee must be Certain
  • Payable on Demand
  • Must be Dated

That is all from us in this blog. We’ll discuss more topics related to banking awareness in the upcoming posts. Hope you find the information useful. All the Best!

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