COLLATERAL OR SECURITY

Very easy definition of Collateral or Security as “Something to fall back upon” This means that when banker provides loans or other financing facility, the banker need some tangible or intangible to be provided by the borrower to secure it, and if that loan or facility is not adjusted than banker may adjust them by disposing those tangibles and intangibles.Those tangibles and intangibles in brief are:

Land and Building (Tangible) Plant and Machinery (Tangible) Vehicles (Tangible) Stocks and inventories (Tangible) Guarantees and Bonds (Intangible) Deposit certificates, Credit balances in accounts. (Tangible) Bills of exchange and promissory notes (Intangible)

(In above stated categories there are some items where it should be better that banker must take a letter of intent that the security has been willfully provided by the borrower and it could prove that the borrower has provided them under “Banker Customer Relations”)

Qualities of a Good Security:1. Preferably it should be tangible2. The owner should have absolute title3. The ownership not be undivided or disputed4. If ownership rests with third party then the intention of third party must be

obtained5. Its market and forced sale price can be ascertained/known6. It should have demand in market7. Its price should not be subject to drastic change8. It should not pertain to fashion or season9. It should be easily saleable10.It should not be contra banned item11.It should not be perishable12.If it is agricultural crop, it must be of current season and loan/finance must

be adjusted before next season13.Consumer loans are given without any tangible or intangible but only and

only on repayment capacity of the borrower. For salaried persons on the basis of salary and for small and medium class business, the base is turn over appearing in statement of account. In this situation the most important thing is re-verification of the information

14.In case of finance against receivable or sale proceeds, proper recovery of sale proceeds must be done

RIGHTS AND DUTIES OF BANKER

Under Banker Customer relations there are some rights of bankers towards their customers and they have to abide by the duties those are legally to be performed by them. Similarly there are some rights and duties of customers too.These rights and duties would be discussed in detail in our coming sessions, but now we would start with one of the most important right of banker and this right is known as Right to lien.Right to lien. Lien is the right to retain the property belonging to another until the debt due from the latter has been paid. According to section 171 of contract act, 1872, a banker’s general lien is of peculiar type, for it extends to all the securities placed with him by his customer.The following conditions must be fulfilled before exercising this right:

1. The property of customer must come into the hands of banker as banker of the customer.

2. There should not be any entrustment for special purpose.3. Banker should obtain possession lawfully.4. There should be no agreement inconsistent with the right of lien.

Following are subject to banker’s lien, and as a matter of practice the bank obtains letter of lien duly signed by the customer when loans or such facilities are given to them against these;

1. Bills cheques and documents for collection.2. Bearer bonds and coupons which are left for collection.3. Coupons only where bond is in safe custody.4. Promissory notes, bills of exchange, treasury bills.5. Securities left after adjustment of an advance or loan. 6. Dividend warrants.7. Share certificates purchased by the bank for the customer.

Following are not subject to lien:1. Property of third party, where that third party has not given consent.2. Bills of exchange and other securities deposited for a specific purpose.3. On credit balance in respect of contingent libility.4. Over articles or deposits left for safe custody.5. Over securities for sale.

FORMS OF SECURITY/COLLATERALSecurities are of following types:Tangible: those have physical existence; can be seen touched and felt.Intangible: those do not have physical existence; cannot be seen touched of felt.

Tangibles are: land building, machinery, plants, goods, stocks, inventories agric-products etc.Intangibles are: Guarantee and Indemnity.

Further more tangibles have been subdivided into moveable and immovable.Land and Building are immovable. Immovable property cannot go in the custody or possession of lender, it remains with the borrower but the lender’s charge is created by keeping it with the borrower. Plant, Machinery and Vehicles are moveable, but if used for running the business are supposed to be immovable to the extent that it cannot be given physically in the custody and possession of lender. But if some one is not using them for the running of business but is used as trading item only then it can be assumed as movable and can be given in the custody of lender.So Plant, Machinery installed in a Project and there are vehicles used to support the business cannot be kept in the custody of lender but would remain in the custody of borrower.If someone is trading for the same plant, machinery and vehicle as a product and deals in selling and buying for those; it can be termed as moveable and would be in the custody of lender for the sake of security.In brief, Land and building are subject to be in the possession of borrower, but plant, machinery and vehicles may or may not be in the possession of borrower, depending upon above stated circumstances. Under these situations following are the forms of Collateral/Security>

PledgeThis is the form where the moveable tangibles are in the custody and possession of lender, and lender keeps them under his lock and key with proper guard and secure arrangements so that borrower cannot have his access to these items unless and until the loan against the is not adjusted. These items could be kept in bank premises, rented godown or in the premises of borrower where bank would have own lock and key with proper guard and secure arrangements. In most of the cases the pledged items are raw material, unfurnished goods, furnished goods, stocks and inventories. Since these items are for the trading itself and borrower has to trade with them so they are kept for a temporary period, and can be termed as security for short term financing and not for a longer period. In other words currents assets are the items of pledge. These goods are insured for all possible risks depending upon the nature of goods and risks involved. All expenses for rent of premises, guard’s salary and insurance premium is paid by the borrower.

For borrower point of view, such security is availed for their short term financing known as working capital.The borrower cannot have access to them nor sell them unless the facility is adjusted.

HypothecationThis is the form where the security is moveable and it remains in the custody of borrower, but bank has got legal charge on them, meaning by that in case of default by the borrower bank can take possession of them and can dispose them to adjust the loan/facility provided.Under hypothecation there are two situations:

1. Property remains in the custody of borrower; he can use it but cannot sell it. It happens in the case where financing is given against plant, machinery and vehicles (Under current consumer financing).

2. Property remains in the custody of borrower and he can sell it also, with the condition that the over all value of those items should not decrease than the value declared at the time of taking loan. For example if a departmental store has been granted loan against the hypothecated goods worth Rs. 10 million, and items include: fabrics, garments, grocery, cutlery, shoes, electronic items etc, than borrower is free to sell them, but also responsible to replace the sold items to match the value of these items worth Rs.10 million.

These items are also insured at the cost of borrower.

MortgageWhere banker charge is created against immovable property, whereby the borrower can use it but cannot sell it is termed as mortgage. Land and Building could be the example. Banker creates its charge in a way that in case of default from the borrower bank can have access to the property and can adjust the loan by selling that property. In any case borrower cannot sell it without getting clearance from the bank.Mortgage could be commercial and non-commercial. If an enterprise borrows against land and building being used for business or the funds are utilized for running business, it is termed as commercial mortgage. On the other hand if some one avails loan for buying land or for constructing house for his personal use and that land or building has been mortgaged as security it would be consumer mortgage.

FORMS OF SECURITY/COLLATERAL (Contd)

Lien on Accounts

Another form of security is that borrower provides the banker to mark lien on the accounts in the bank; those could either be his own but of third party.The Accounts being maintained are:

Current Account Saving Bank Account Notice Deposit Account Term deposit or fixed deposit Account Foreign Currency Accounts; and those are also in the shape of current,

saving or fixed deposit accounts.

(Just for the knowledge of students, it is being informed that in Pakistan Foreign Currency Accounts can be maintained in Japanese yen, Great Britain Pound, US Dollar and Euro. Deposit in these accounts must be in foreign currency but withdrawal can be done both in foreign and local currency depending upon the choice of customer. Further more deposit of funds in these accounts could be either by cash or through Cheque.)Sometime customer offers his balance of his account as security; and bank accepts it by marking lien on those accounts. In case of current or saving account the amount offered as security is blocked by the bank and customer would not be allowed to withdraw to that extent. In case of Notice deposit or term/fixed deposit the original receipt or certificate is given to the bank and bank keeps it under the custody until the repayment or adjustment of loan.Same is the case with foreign currency accounts. Customer would either allow the bank to block his current or saving account to the extent of the money offered as security, or would surrender his fixed deposit certificate with the bank to remain under the custody of bank till the adjustment of loan.In these entire situations if the customer fails to repay the loan; bank would debit his account if it is current or saving and if it fixed deposit the bank would en cash that certificate, adjust the loan and if there is any remaining balance it would be given to the customer.Another thing to be noted is that customer would continue to receive the agreed profit on that deposit and is bound to pay Interest/Mark up on the finance/loan availed.For further clarification of the students following illustrations are given:

A customer is having is his current account which is his business account and also has deposited Rs.500, 000/- with the bank in the shape of fixed deposit for ten years and is availing profit of 12% per annum. To meet his short term commitment

he needs Rs. 100, 000/-. He has got two options; first to get his fixed deposit to get it encashed, but would loose rate of profit as five are remaining to mature, or the second option is to request the bank to lend him loan of Rs. 100,000/- for a period of one month and as security would surrender that fixed deposit certificate to the bank so that bank may keep it as security. Second option is beneficial for him and he would surrender it to the bank. The bank would allow him loan and it would be the most secured loan as the money is already with the bank in the shape of fixed deposit. In this position both of them have advantages; for customer the interest or mark-up paid on Rs. 100,000/- would be much lesser than the loss, had he got it en cashed before maturity. For the bank it is good that it would not loose deposit and would further earn on loan of Rs.100, 000/- which is secured in all respect. (This illustration is given for a small amount but practically it could be in millions.)

Another illustration is Lien of Foreign currency account. The situation is that customer has got EUR 100,000/-(which is almost equivalent to Rs.8 million) with the bank, and needs Rs. 2 million for a period of six months to meet his business commitments or other wise. For him the first option is to withdraw from his foreign currency account and meet his needs; but he feels that the rate would Euro would rise in future and within next six months its local value might rise to Rs. 8.2 million, and does not want to loose the gain due to exchange rate rise. Customer would like to go for next option and which is that he should borrow Rs. 2 million from the bank by allowing the bank to mark lien in his account to the extent of Rs. 2 million ( Equal to Foreign Currency). The customer would be financed but his foreign currency account would be blocked to the extent of Euro 25000/-.

MARGINWe have now come to know that what collateral/ security and why it is taken by the bank or why offered by the borrower. But the question lies that to what extent a bank can allow to borrow against a security. Meaning by that if the value of security is Rs. 5.million can a bank allow loan for Rs. 5 million or less and if less than how much less, and what would we call the difference of between the value of security offered and why that difference is maintained?One thing is for sure that bank would never allow a customer to avail loan either more than the value of security or even equal to the value of security.For example the value of security is Rs.5 million; bank would not allow loan for Rs. 5 million or more against the same security. Bank must allow below Rs. 5 million; either 4 million 3 million or 2 million.So there is difference between the value of security and amount of loan that can be availed. The amount of loan that can be availed against a specific security is termed as Drawing Power of the borrower. It means that how much power has borrower got to draw loan against specific security, and what would we term the

difference between the value of security and amount of loan (drawing power). The term is known as margin.We can say that difference between value of security and drawing power is termed as “Margin”Value of Security 10 millionDrawing Power 7 millionDifference is 3 million (it is known as margin)

Value of Security 500,000Drawing Power 400,000Margin 100,000

Value of Security 500,000Drawing Power 250,000Margin 250,000

In first situation the margin amount is 3 million; which is 30% of value of security, in second situation the value of margin is 100,000/- which is 20% of the value of security, and in last case the value of margin is 250,000/- which is 50% of value of security.So question arises that why there is variation in the value or percentage of margin and why this margin is retained. Its simple answer is that it depends upon the nature of security. If the nature of security is such that it holds all the qualities of goods security the lesser would be the margin, and if the security is very week and does not hold qualities of good security the higher would be the margin. Margin is retained so that the loan could be secured in a way that if the security is to be sold it must have so much value that it could adjust the loan and expenses to be incurred.Here under the first situation where the margin is 30% it might be inventories having risk of loosing price to the extent of 30%. Under second situation the security could be land or building which might loose price not above 20% and under the last situation where the loan amount and margin amount is 50% the security is very week and might be agricultural crop which might get destroyed if not adjusted.

DRAWING POWERThe amount or value which the borrower is allowed to avail against a security is termed as drawing power or DP.It very simple definition is:Difference between value of security and margin is drawing power. In the above stated situations the drawing power is:Value of Security 10 millionMargin 3 million

Drawing Power 7 million

Value of security 500,000Margin 100,000Drawing Power 400,000

Value of Security 500,000Margin 250,000Drawing Power 250,000

FORMS OF FINANCING

Basically we have two forms:Fund BasedNon-Fund Based

Fund Based: Here the banker provides finance by involving their funds physically. Or we can say under fund based financing banks funds are involved in a way that it has to part from their funds and those are at disposal of borrower(s).Types of fund based financing:

Loan Name in Pakistan. (Demand Finance) Overdraft. Name in Pakistan (Cash Finance) Bill Purchased and discounted. Bridge Financing Consortium Loans or Financing

Loan or Demand Finance;

It is the form under which the entire sanctioned/approved finance amount is credited in the account of borrower. The total funds are put at his disposal by crediting his account. Its accounting entry is;Debit Loan or Demand Finance AccountCredit Customer’s Current AccountFollowing are its characteristics;

Entire amount is credited or given to the borrower in lump sum. The loaned amount is adjusted in equal and periodic installments In most of the cases this financing is termed as long term financing’ and

borrower shows it as long term liability in has financial papers; Balance Sheet etc.

The collateral/security in most of the cases is fixed Assets. This finance is mostly used by the borrower for the purchase of fixed assets;

land, building or Plant and Machinery.

The amount adjusted in this type of financing cannot be re-availed under the same loan. Either it is re-structured or a fresh loan is granted.

Here is illustration;Demand Finance Account;Date Debit Credit Balance01.01.07 500,000. (500,000)31.31.07 50,000 (450,000)30.06.07 50,000 (400,000)30.09.07 50,000 (350,000)31.12.07 50,000 (300,000)Here loan was debited with Rs. 500,000/- and was adjusted with installments of Rs.50, 000/- per quarter (three months). Amount in bracket indicates debit balance.

Overdraft or Cash Finance;

Under this form of financing a limit is approved in favour of borrower; and he is allowed to overdraw his account within that limit. The entire approved amount may be utilized in single day or as much as he needs in peace meals. Suppose a customer has got approved facility for Rs. 500,000/- under Cash Finance; at the time of approval of this type of facility Rs. 500,000/- would not be given to him nor credited to his account, but he would be allowed to overdrawn his account for Rs. 500,000/-. This facility is unlike demand finance is on revolving basis. It means that the amount once availed and adjusted can be re-availed multiple times.Here is illustration:Cash Finance Account. (Facility was allowed/approved on Jan.01.2007. and on that date there were Rs. 50,000/- his own balance in his account)Date Debit Credit Balance01.01.07 50,000 His own balance01.01.07 75,000 (25,000) Account overdrawn by 2500015.01.07 175,000 (200,000) Account overdrawn by 200,00017.01.07 100,000 (100,000) Account overdrawn by 100,00002.02.07 150,000 50,000 His own balance27.02.07 250,000 (200,000) Account overdrawn by 200,00004.03.07 150,000 (350,000) Account overdrawn by 350,00006.03.07 150,000 (500,000) Account overdrawn by total limit22.03.07 300,000 (200,000) Account overdrawn by 200,00002.04.07 400,000 200,000 His own balance20.04.07 300,000 (100,000) Account overdrawn by 100,000

In this illustration it has been noted that this type of finance is running finance and is operated like a current account; sometime credit balance (his own money) and sometime debit balance; account overdrawn. Also it shows that twice the facility was adjusted and again re-availed.

Bill PurchasedIf a customer deposits a cheque in his account which is drawn on other bank and usually out of city and country and account holder needs to be financed against that cheque so that later on bank may adjust after that cheque is credited; the finance thus made is known as finance against bill purchased. Here bill means cheque.Bill discounted.Sometime customer has got post dated cheque/cheques; those are payable on future date and needs funds currently. He would deposit those cheques to the bank and bank would pay him by creating finance and also would charge Interest/Mark up for the remaining period; this finance is termed as finance against bill discounted.

Bridge FinancingIt is a short term financing and is for a temporary period. The term can be well understood with the term bridge, as bridge means a link between two ends. This type of financing maintains a link between current financing which is to be adjusted with immediate expectation of funds.

IllustrationA person wants to buy a house and he intends to buy after selling his house where he is residing presently. One option is to sell his house first and then buy new one. But in this situation he would not have any house to reside. If he contacts banker for a very short term and temporary loan whereby the banker would lend him to buy new house first, would shift there and would sell his house and adjust the loan taken from the bank.

Another illustration is about corporate body (Public Limited Company) which would start its business after getting funds in shape of share subscription. Before the shares are offered and subscribed company need funds to establish office and to meet preliminary expenses. Such expenses are met from the funds borrowed from the banker for a short and temporary period; and those would be adjusted as soon as funds are received in shape of share subscription.

But one thing is clear that while allowing bridge financing the lending bank are sure for the receipt of funds for its adjustment.

In case of bridge financing allowed for purchase of house, banker gets authority to get the sale proceed of house. In case of allowing financing to corporate body the bank which lends to the company underwrites or we can say gets authority to get the funds in the shape of subscription of share.

Consortium FinancingIt is joint financing by two or more financial institution. If a heavy project where huge financing is needed that cannot be met by single institution then two or more

financial institution gets together and share their lending. In simple words when more than one lending institution is involved in lending to a person or project the financing is termed as consortium financing.On International level when group of countries are lending loan to a country for its development; it is also consortium financing.

Non-Fund Based: Here banker’s funds are not involved but there is commitment or undertaking given by it on behalf of its customer. At any stage it might or might not be converted into fund based financing.

In this respect presently we must only know that following are non-fund based financing;

Letter of credit Letter of guarantee

GUARANTEEIt is defined as “A contract to perform the promise, or discharge liability of a third person in case of his default” A guarantee may be written or oral. Therefore a guarantee is a promise or undertaking whereby one person promises another person to discharge the liabilities pf a third person in case the third person fails to perform.There are three persons or parties.

1. Guarantor; A person who gives guarantee or undertakes the responsibility. He is also known as surety.

2. Creditor; a person to whom guarantee is given.3. Principal debtor; a person on whose behalf guarantee is issued.

Suppose Ameen needs to borrow money from Bashir, but Bashir is hesitant to lend him foreseeing that he might not return money back. He may ask Bashir to provide guarantee from some one that in case Bashir does not return then he could get money from the guarantor. Now if Dawood guarantees Ameen that in case Bashir does not pay back money, then he would pay it to Bashir. This is the process of guarantee. Here The Guarantee is being given by Dawood; so he is guarantor. Guarantee is being given to Bashir; so he is creditor, and the person on whose behalf guarantee is being given is Ameen; and he is Principal debtor. In all the cases under guarantee; the main and primary responsibility lies with the person on whose behalf guarantee is given i.e. principal debtor, and responsibility of guarantor begins where principal debtor fails to perform. In the above case to return money is primary responsibility of Ameen, and Dawood will only be responsible to pay to Bashir, when Ameen becomes defaulter. So Bashir would first ask Ameen to pay back money, and when Ameen refuses to pay, then Bashir would go to Dawood and Dawood is bound to pay to Bashir.

Above stated example pertains to promise to perform the liability related to transaction or dealing of money, but practically there are other undertakings also and those are related to commercial trading and transactions.

Illustration related to other dealing can be done that Police department needs uniforms for its 50,000/- staff. It would give add in the newspaper so that the suppliers could offer their rates for the supply of uniforms. The purpose of asking rates from various suppliers is to get those uniforms at the most competitive price. Various suppliers would offer their rates and the supplier bidding the minimum rates would win the tender and would get into an agreement with the police department to supply them the uniforms not only on the rates quoted, but also of the quality and quantity within the specified period of time. Before entering into an agreement Police department would ask the supplier to provide a bank guarantee; that in case he fails to perform the supply of uniform as per specified quality and quantity and within the agreed date then they may seek for the compensation from the guarantor bank. The important thing to be noted here is that would not undertake to supply uniform but to make payment to the Police department as agreed in guarantee.

TYPES OF BANK GUARANTEE

Payment Guarantee; In such guarantee bank undertakes to pay money to the Creditor in case the principal debtor fails to pay money. Here the real dealing is related to payment of money and not any other commercial dealing.Example; Shahid is borrowing money from Habib Bank, and United Bank guarantees Habib Bank that in case Shahid fails to pay money, United Bank would pay it to Habib Bank.Example; Adeel has applied for electricity connection of his factory. The connection of factory would be commercial and would result the bill to the extent of millions of rupees. Wapda would ask Adeel to provide a bank guarantee from United Bank that in case the bill is not paid by him, bank must guarantee to make the bill. Such types of guarantees are very common in our country. Same happens in case connections of Sui Gas and other utilities. Bid Bond Guarantee; When some one bid a tender to buy, supply or build any building in that situation the person who wants to sell, get supplies or want to get the building constructed; he would need a bank guarantee that in case the bid is accepted the bidder would enter into agreement and would not escape after the bid has been accepted.Performance Guarantee; This guarantee is issued by the bank that the person entering into contract for supplying goods or construction of any building (building does not mean any house, it could be hospital, school, plaza, road, bridge or dam) would act according to the contract in terms of quality, quantity or time period. In

case the person on whose behalf guarantee is issued fails to perform; the bank issued guarantee would compensate the party to whom the guarantee is issued.

TYPES OF BANK ACCOUNTS

Dormant Account

Current Account not operative for six months and Saving Bank Account not operative for one year is separated as “Dormant Account” These accounts become dormant from the last date of transaction; whether deposit or withdrawal. A separate ledger is maintained for such accounts; each for Current and Saving.When account is segregated as dormant it is not operative in normal manner. Since such accounts are away from the customer it is separated from other accounts only to keep them protected from any fraud or loss to the customer.

Following requirements are to be fulfilled;

Any one can deposit money in this account, but if deposited by any one else it does not become operative but remains dormant.

For withdrawal, customer himself or herself has to come to branch with some identity, usually NIC, plus any account holder or staff member confirms that the customer is known to them.

Additional care is taken while making payment from this account and for this purpose payment will be made with joint supervision.

They have to give an application to the banker in writing if needs to convert such account from dormant to operative account.

Inoperative Accounts

Current account not operative for 02 years and saving account not operative for 03 years are declared as “Inoperative Account” This period is also calculated from the date of last transaction. It means that a current account not in operation for six months first becomes dormant and if it continues to remain dormant for 2 years and six months it is converted into inoperative account. Similarly saving account not in operation for one year would become dormant and if remains dormant for further 02 years would be converted into inoperative account.

Precautionary measure to operate these accounts is same as are applicable for dormant account, but the difference is that extra care is taken at the time of withdrawal and converting them into operative accounts.(The period may vary from bank to bank but it is considered as standard period in most of the banks)

Unclaimed Deposits

In Pakistan it is compulsory for every bank to surrender balances of every type of accounts where there is not any operation for the last 10 years; declaring them as unclaimed deposits. It includes balances of current accounts, saving accounts, term and fixed deposits. These balances are surrendered to State Bank of Pakistan with complete information of the account and account holders.

These balances also include funds lying with the bank in any sector of account or deposit where no one has claimed them for the last 10 years. Other balances include funds not clamed under demand draft, payment order, security deposit receipt or any such type of accounts.

Deceased Account

In case of Individual and Joint account either current, saving or fixed deposit; when account holder or any of the account holder dies the account becomes deceased account.

How account is marked as Deceased Account:

When banker comes to know from any authentic source of news that account holder has died; it becomes the duty of banker to declare and mark that account as deceased account. Here the important thing is that banker would mark it as deceased only after receiving information from any authentic source or by the legal heirs of the deceased. Information may come from any known person of account holder, printed or electronic media, even in small villages such information might comes from the loud speaker of mosque, but important thing is to confirm and verify it.

It is very much possible that the account holder might have died long ago and banker has not come to know about it, nor any of the legal heirs has contacted the bank to inform; so the account would be declared dormant on the date when banker has come to know about the death of account holder.

As soon as information is received changes are made in the system in such a way that amount is blocked and information is noted on account opening form about the date and time of information received and also source is noted. In case the information has been brought by the legal heirs, than it must be in written form and is kept as record.

What happens when account is marked as “Deceased?”

Money can be deposited There cannot be any withdrawal, other than bank’s charges or any loan

outstanding against the deceased person All cheques issued prior to marking of account cannot be honoured All instructions given by the deceased will be revoked or cancelled forth

with Balance would be paid to legal heirs only and that too after they submit

succession certificate from the court of law. Every bank has set procedure for payment of balances to the legal heirs, but

one thing is common and it is submission of succession certificate and death certificate

As stated above the account would be declared deceased only when bank comes to know about it; so it is possible that account holder might have died earlier and banker not knowing it could honour and pay the cheques issued by him or her; in that case banker would not be held for any loss or violation.

In case of other accounts, such as Joint account or partnership account; the account would be closed and balance would be paid as instructions contained in account opening form, but the account would be closed and new account might open if the remaining persons intend so.

If deceased is one of the signatories in Corporate account, like Limited Company than account would not be closed but cheque signed by him would not be honoured and another person would be authorized by the corporate body to operate account .

Illiterate Person’s Account

Any person who cannot sign a firm signature is illiterate person for a banker. Usually the people are those who cannot sign at all and if sign is in such a raw position that it can be copied or forged by any one very easily. There can be situation that a person is highly qualified but for medical reason cannot draw firm signature or a person who has not seen the gate of school but signs a firm signature which cannot be easily copied; so the earlier one is illiterate for banker and later one not.

In brief a person who cannot sign or sign in such a way that it can be easily copied by any one is considered as an illiterate person and accounts pertaining to them are known as “Illiterate Person’s Account” These accounts are opened and operated with different way as compared to the person’s account those are not considered as Illiterate.

Requirements to open account

At the time of opening account, account holder has to provide his 02 photographs, as one has to be attached with account opening form and other with specimen signature card.

Places where signature is to be done, there the account holder would affix thumb impressions. Male would affix left thumb impression and female would affix right thumb impression.

Operation in this account

Any one can deposit funds or cheque in this account For withdrawal account holder must come himself of herself in the bank She or he would come to the bank must affix thumb impression in the

presence of officer making payment. If thumb impression is affixed before coming to bank and not in presence of paying officer; banker may refuse to pay the cheque.

This account holder cannot issue and give cheque to any other person. The cheque of this account holder cannot be honoured in clearing or

collection as no one else can get the payment other than account holder.

PURDAH NASHIN ILLITERATE WOMEN

For the reason that she would not provide her photograph, she cannot open account with bank. She can open Joint account authorizing some one else to operate the account.

Minor Account

In Pakistan a person not attaining the age of 18 is minor. Person with age of 18 and above is major.Minor, if signs a firm signature can open a bank account. But bank usually avoid to open their account, for the reason that opening of account means entering into a contract with the account holder and contract acts says that “Contract with a minor is void” But banker may open saving bank account or fixed deposit account of minor as in these accounts chances of banker is least and minimum.Other way is that a major known as “Guardian” opens account in the name of minor, but the opening of account and operation is done by major. Only name of minor is used as account holder.

In this case any person known as major can open account in the name of minor; male or female (obviously his or her age must be below 18).The title of account would be;Master Zubair MinorMr. Shahid Guardian(Both names would appear in account opening form in the same manner)

This account will be totally operated by the person Mr. Shahid known as guardian but the owner of the balances in the eyes of law would be Zubair, the minor.The purpose of maintaining such account is to give legal right of succession to the minor in case of death of Major.If Shahid opens his account in his name and he dies, in this case the balance would be given to the heirs as per “Sharia” but if he opens an account in the name of any of his son or daughter, naming him or her as MINOR, then the total sum would be paid to the minor.When an account is opened in the name of person known as minor, he or she would be entitled to operate that account after attaining the age of 21 and not 18. Joint Account

When two or more person open one account jointly, and it is non-commercial or not pertaining to business the account is known as “Joint Account” If any business or commercial account is opened by two or more person, it is not termed as joint account but “Partnership Account”

When joint account is opened, all the account holders would sign account opening form, but its operation depends on the instructions given by all jointly.Usually such account is maintained within the family members as; husband and wife, father and son or daughter, mother and son or daughter, father with mother and daughter or mother with son and daughter. But it can be opened by two or more friends or acquaintances also.

This account can be operated by any one, two of them or by all of them, but the condition is that such instructions must be given by all of the accounts holders jointly either at the opening of account. The operational instructions can be changed or revoked even after opening of account any time in future but conditions rests that all of them would write to the banker jointly.

Corporate Accounts

Accounts of Private and Public Limited Companies are termed as corporate accounts.

These are routine accounts and are basically current accounts and are operated like any other regular current account, but the difference lies that they have to provide some additional documents before opening the account.

Requirement for Corporate accounts

In addition to account opening form they have to provide the followings1. Memorandum of Association2. Articles of Association3. Certificate of Incorporation4. Certificate of Commencement of business5. Resolution from board of directors6. Last years balance sheet or projected financial statements

For Private limited companies, they need not to provide letter of commencement of business.

Memorandum of AssociationIt is charter of company stating name, address, nature and scope of business.

Articles of AssociationIt contains rules, laws, salaries and authorities of directors.

Certificate Of IncorporationIt is permission letter from Corporate Law authority to confirm that the company has been legally established.

Certificate Of Commencement Of BusinessIt is permission from Corporate law Authority to start business, and it is given by them when the company gets subscription from the share holder. This is not needed in case of Private Limited Company.

Resolution From Board Of DirectorsIn this resolution board of directors resolve and confirm that they can open account with the one or more banker. Unless resolution is passed by the board of directors that ay which bank they intend to open account, directors are not authorized to open or operate account.

Last Year Balance Sheet Or Projected Financial StatementsIt is mandatory for every banker to know and maintain the maximum information about source and utilization of funds of account holders. The term is known as KYC “KNOW YOUR CUSTOMER” and it can be known by the financial

documents of the corporate body and the best available one is Balance Sheet or Projected financial documents.

Banker Customer RelationsBefore we come to Banker Customer Relation, we must know about Banker and Customer.

BankerBanker is a legal person who accepts deposit from one customer and lends it to another customer. The customer depositing money is known as depositor and person to whom bank lends is called borrower. Banker pays to the depositor and earns from borrower. What banker pays to depositor is known as Profit and what earns from borrower is mostly Mark-up (In Pakistan). Rate of mark-up is always much higher than the rate of profit, and the difference of this mark-up and profit is spread or Profit of the bank.

CustomerA person who maintains his account is customer. Irrespective of the fact that the person is maintaining Current, Saving, Term and Fixed Deposit and whether maintains heavy or petty deposit all are equal and respectable as customer of bank. Person who borrows money from the banker is also customer. It is very obvious that banker would not lend to any person who is does not maintain any account with bank.

Most of the bank’s product and services are for its customer; but there are services those are provided to non-customers also. The prominent services are transfer of funds and accepting utility bills.

Some of the Banker Customer relations are

Debtor and CreditorA Depositor who keeps money with the banker is Creditor and Banker is Debtor. When a person borrows money from banker; the banker is Creditor and customer is Debtor.

Principal and AgentWhen banker accepts any cheque from its customer to be sent on clearing and collection and payment to be credited in his account; this act is done by the banker under principal and customer relation. Here the Customer is Principal and Banker is Agent.

To elaborate it an illustration is given;

A Customer Saleem has his account with United Bank Limited, and Zubair gives him a cheque of Rs. 50000/-. Account of Zubair is at Habib Bank Limited and would be paid by the same bank. Saleem who has received the cheque has to go to Habib Bank to get cash from there, but it might be difficult for him due to distance, cost and time involved. Other available option is that Saleem deposits this cheque to his banker, United Bank to present it on his behalf to Habib Bank, get payment from that bank and give credit to his account.When bank would do this act; it would be done under the relation of Principal and Agent.

Bailor and BaileeWhen movable property which a person gives in the custody of banker for purpose of safe custody; the relations so established are Bailor and Bailee. Here Customer is Bailor and banker is Bailee. Example can be given for hiring of Safe Deposit Lockers where a customer keeps his valuables in the bank’s premises. Other than Safe Deposit Vault customer can hand over any valuable items or documents to the banker to keep it in its own safe.

Pawner and PawneeWhen any borrower provides his movable property to banker to be kept as security against borrowing; the relation so established are Pawner and Pawnee. Instance can be given when goods are pledged with the borrower to the banker. Customer would be Pawner and banker would be Pawnee.

Mortgagor and MortgageeUnder the situation when borrower offers his immovable property as security against borrowing the relations so established are Mortgagor and Mortgagee. Illustration can be given as Mortgage of property of borrower by the banker.

Stop Payment InstructionAccount holder has right to instruct his banker to Stop Payment of his cheque either issued in favour of some one or it is blank. Some time account holder can instruct his banker to stop payment of full cheque book or remaining cheques after utilization.

If a cheque is issued in favour of some one, customer would write to banker to stop payment of cheque giving following information;

Cheque Number Date of issuance Amount of cheque Name of person to whom issued

Customer may or may not write the reason for stopping the payment; he could simply write that he intends not to pay the cheque.As stated earlier, customer may instruct to stop payment of numerous cheques. It usually happens when the cheque book is either lost or stolen. In such situation customer would write that cheques from this number to that number have been lost or stolen and if any of these cheques are presented should not be paid.On receipt of such instructions bank verifies signature of account holder from specimen signature card and if found genuine would accept and entertain this instruction.

Banker would feed that cheque number in system (Computer) and block its payment. Any time that cheque is presented to the banker; system would not accept it and payment would not be made.

As already discussed, whenever cheque is returned, banker must state reason for returning it and that too in writing. In this case the true and genuine reason would be written and it would be “PAYMENT STOPPED BY DRAWER” Same would be the case when instructions are to stop payment of numerous cheque.

STOP PAYMENT INSTRUCTIONS ON PHONE OR E-MAILIn rare cases customer is in such an awkward position that he cannot come to bank to instruct stop payment of cheque and informs bank not to pay the cheque. It happens only when the cheque has been lost, misplaced or looted and has been issued as BEARER. Main reason is that the customer is afraid that by the time he reaches the bank; cheque may be presented and paid. Therefore he gives phonic instruction or could send e-mail. The problem with the banker would be that bank accepts and accommodate only instructions those are in writing. Apprehension for the bank is that if it acts on verbal instruction the customer might say later on that he did not instruct so; and if such situation arise banker might face allegation of “Wrongful Dishonour of Cheque”

On other hand if banker refuses to accept such instruction, its customer may face loss of money due to wrong or false payment.This situation is handled in a way that both ends are saved. Banker accepts this instruction from customer with the condition that banker would not honour and pay cheque for a limited period and in between that period customer must come and give instruction in writing.

So payment would not be made between these periods and if cheque comes during that period, cheque would be returned with following reason;PAYMENT PENDING REQUIRE DRAWER”S CONFIRMATION

Later on customer would come and give instruction in writing and then banker would have genuine ground to return it with reason as “Payment Stopped by Drawer”. If during this time customer does not come and give instruction in writing then banker has no option but to pay it. The condition would be that cheque is otherwise in order.

Removal of Stop Payment InstructionCustomer has right to cancel or revoke his stop payment instructions, but he would do it by giving such cancellation instruction in writing. In that case he would write to banker and banker would release this cheque or numerous cheques from system and if cheque is presented would be paid.

STOP PAYMENT IN JOINT ACCOUNT AND PARTNERSHIP ACCOUNTIn Joint account any one of joint account holder can stop payment of cheque whether he or she is authorized signatory or not, but in account opening form appear as one of the joint account holder. Same would apply in Partnership account where any partner can give instruction to stop payment of cheque issued and signed by other partner/partners. In both cases banker is bound to accept and act on such instruction.As far as Cancellation of Stop Payment is concerned; it must be done by all the Joint account holders in case of joint account and all partners in case of partnership account.