Chapter 13: Responsibility of Paying Bank (JAIIB - Paper 2)
1. Under the Negotiable Instruments Act, 1881, the primary responsibility of the paying bank is to:
A. Ensure the cheque has sufficient endorsements
B. Verify the drawer’s signature matches the payee
C. Honor the cheque if funds are sufficient and the instrument is valid
D. Guarantee payment to the collecting bank
The paying bank must honor the cheque if the drawer has sufficient funds, the cheque is valid, and there are no legal prohibitions (like stop payment instructions).
2. If a paying bank makes payment on a materially altered cheque without proper verification, it will:
A. Bear the loss, as payment is not in due course
B. Recover the amount from RBI
C. Pass the loss to the collecting bank
D. Recover from the payee automatically
A paying bank must ensure the cheque is free from material alteration. If it fails, the payment is not in due course, and the bank bears the loss.
3. A customer issues a cheque with a forged drawer’s signature. If the paying bank honors it, who bears the loss?
A. Customer, as account holder is responsible
B. Collecting bank, since it presented the cheque
C. RBI, since clearing is through RBI
D. Paying bank, as it must verify drawer’s signature
The paying bank is liable if it makes payment against a forged drawer’s signature, since it is duty-bound to verify the signature before honoring.
4. Which of the following is considered a valid ground for a paying bank to refuse payment of a cheque?
A. Cheque is post-dated and presented before the date
B. Drawer has issued stop payment instructions
C. Payee has minor spelling mistake in name
D. Cheque amount is in words and figures
Stop payment instructions from the drawer are legally valid. In such cases, the paying bank must refuse payment even if sufficient funds exist.
5. Payment in due course under Section 10 of the Negotiable Instruments Act means payment:
A. To any person presenting the instrument
B. Without verifying signatures and alterations
C. In accordance with the apparent tenor of the instrument, in good faith and without negligence
D. Only to the named payee regardless of endorsements
Payment in due course requires the bank to act in good faith, follow the instrument’s terms, and ensure no negligence while making payment.
6. If a paying bank honors a cheque where the drawer’s signature is forged, who will bear the loss?
A. Customer, since cheque was issued in his name
B. Paying bank, since it is duty-bound to verify signatures
C. Collecting bank, as it presented the cheque
D. RBI, since clearing is routed through it
If the drawer’s signature is forged, the paying bank cannot debit the customer’s account and must bear the loss, as verifying signatures is its primary responsibility.
7. A forged endorsement on a cheque is paid by the bank in good faith. Who is responsible for the loss?
A. Customer always
B. RBI since cheque passed through clearing
C. Drawer since account is debited
D. Paying bank, because payment was not in due course
When a forged endorsement exists, payment is not considered "in due course" and the paying bank cannot claim statutory protection, hence it bears the loss.
8. To claim protection under Section 10 of the Negotiable Instruments Act, the paying bank must prove that:
A. Payment was made only to the payee named on the cheque
B. Payment was done without seeking drawer’s confirmation
C. Payment was made in good faith, without negligence, and in accordance with the apparent tenor of the instrument
D. Payment was made only during banking hours
Section 10 of NI Act provides protection only when the payment is made in due course i.e., in good faith, without negligence, and as per the instrument’s tenor.
9. A cheque is materially altered without authentication by the drawer. If the bank pays, what is the consequence?
A. Paying bank bears the loss as payment is not in due course
B. Loss is automatically borne by the collecting bank
C. Drawer is held responsible since account is debited
D. Payee is liable to refund the proceeds
Material alteration without authentication makes the cheque invalid. If the bank pays, it cannot claim protection, and the paying bank bears the loss.
10. Which of the following is not a requirement for payment to be considered “in due course”?
A. Payment in accordance with the apparent tenor
B. Payment in good faith
C. Payment without negligence
D. Payment only to the named payee, regardless of endorsements
Section 10 NI Act does not require payment only to the named payee. Endorsements are valid, and as long as payment is bona fide and without negligence, protection applies.
11. If a cheque is altered but the alteration is not apparent on the face of the instrument, and the bank pays in good faith, then:
A. The paying bank gets statutory protection under Section 89 of NI Act
B. The customer must bear the entire loss
C. The collecting bank is responsible for the payment
D. The endorser becomes liable for the fraud
Section 89 of the Negotiable Instruments Act protects a paying banker who makes payment in due course on an instrument that has an alteration not apparent to the naked eye.
12. A cheque presented has a slight chemical alteration not visible to the naked eye. The bank pays in good faith. Later fraud is discovered. Who bears the loss?
A. Customer, since account was debited
B. Payee, since cheque proceeds were taken
C. Collecting bank, since it presented the cheque
D. Paying bank is protected under Section 89, hence customer bears the loss
If alteration is not apparent, the paying bank is not negligent. Section 89 provides protection, and the loss ultimately falls on the drawer/customer.
13. Which of the following conditions must be satisfied for a bank to get protection under Section 89 of the NI Act?
A. The instrument must be endorsed by at least two parties
B. Payment must be in due course and alteration should not be apparent
C. The drawer must provide written confirmation of cheque details
D. Payment must be made only through clearing house
Protection under Section 89 is available only if payment is made in due course and the alteration is not visible to the paying banker exercising ordinary care.
14. A cheque is altered but the alteration is so neatly done that no ordinary banker could detect it. The bank makes payment in good faith. This payment is:
A. Not protected, as bank should have suspected fraud
B. Void, and bank must recover from collecting bank
C. Protected under NI Act, as alteration was not apparent
D. To be borne by RBI, as cheque cleared through it
Section 89 provides that if an alteration is not apparent and the bank acts in good faith without negligence, the payment is considered valid and banker is protected.
15. In case of apparent alterations on a cheque, what is the duty of the paying banker?
A. Refuse payment unless alteration is duly authenticated by the drawer
B. Honor the cheque since alteration is visible
C. Send the cheque to RBI for verification
D. Report to police immediately
If alteration is apparent, the paying bank must refuse payment unless the alteration is authenticated by the drawer’s full signature; otherwise, protection under NI Act is lost.
16. A bank makes payment on a cheque believing the customer has sufficient balance, but later realizes the account had insufficient funds. Can the bank recover the amount from the payee?
A. Yes, always recoverable from payee
B. No, if payment was made under a mistake of fact and the payee received in good faith
C. Yes, provided customer agrees in writing
D. No, unless cheque was post-dated
If a bank makes payment under mistake of fact but the payee acted in good faith and has changed position, the bank cannot recover the money. This principle protects innocent parties.
17. Payment made by a bank under a mistake of law (e.g., misinterpretation of legal rule) is:
A. Always recoverable from the customer
B. Recoverable from the collecting bank
C. Not recoverable, as law expects parties to know the law
D. Recoverable if customer provides indemnity
Mistake of law is not excusable. Payments made under such mistake are generally not recoverable, since ignorance or wrong interpretation of law is not protected.
18. Which of the following is the primary feature of Cheque Truncation System (CTS)?
A. Cheque image is transmitted electronically instead of physical movement
B. Cheques are physically moved faster between branches
C. Only high-value cheques are cleared through CTS
D. Cheques are sent to RBI for signature verification
In CTS, the physical cheque remains with the presenting bank. Only a secure image of the cheque is transmitted electronically for clearing, reducing time and risk.
19. Under CTS, who is responsible for verifying the physical cheque before truncation?
A. RBI
B. Paying bank
C. Clearing house
D. Presenting bank (collecting bank)
The presenting bank must verify the cheque’s physical details (date, signature, alterations, etc.) before truncation. The paying bank only relies on the scanned image.
20. Which of the following is NOT an advantage of Cheque Truncation System (CTS)?
A. Faster clearing of cheques
B. Reduction in cheque frauds through image analysis
C. Increased physical movement of cheques across branches
D. Cost and time savings for banks
CTS eliminates physical movement of cheques, hence option C is NOT an advantage. Instead, CTS ensures faster, safer, and cost-effective clearing.
