Understanding this separation of duties is crucial for questions related to cheque processing.

When a cheque is used for payment, two main banks are involved:

Paying Banker (Drawee Bank): The bank whose customer wrote the cheque. Its job is to pay the money.
Collecting Banker: The bank where the person receiving the cheque deposits it. Its job is to collect the money on behalf of its customer.

Responsibility of the Paying Banker

The primary duty of the paying banker is to honor its customer’s cheques. However, it must do so carefully to be protected by law.

Statutory Protection for the Paying Banker

The law (Negotiable Instruments Act, 1881) protects the paying bank from any liability if it makes a payment under specific conditions. The most important protection is for making a “payment in due course.”

A payment is considered in “due course” if it meets these conditions:

According to Apparent Tenor: The payment is made as per the instructions visible on the cheque.
In Good Faith and Without Negligence: The bank must act honestly and not be negligent. For example, it should not pay a cheque if the signature is obviously forged.
To the Right Person: The payment is made to the person who is in possession of the cheque.

Another key protection is regarding forged endorsements. The bank is not liable if it pays a cheque where the endorsement (signature on the back) is forged, as long as the payment was made in due course.

When a Paying Banker Must Refuse Payment

The bank is obligated to refuse payment in certain situations:

If the customer issues a “stop payment” instruction.
Upon receiving notice of the customer’s death, insolvency, or insanity.
If there are insufficient funds in the account.
If the cheque is post-dated, stale (over 3 months old), or materially altered.
If the customer’s signature does not match the specimen signature on record.

Responsibility of the Collecting Banker

The collecting banker acts as an agent for its customer (the payee). Its main duty is to collect the proceeds of the cheque with due care and credit them to the customer’s account.

Statutory Protection for the Collecting Banker

The law protects the collecting bank if it collects a cheque for a customer who does not have a valid title to it (e.g., the customer deposited a stolen cheque).

To get this protection, the collecting banker must prove two things:

Acted in Good Faith and Without Negligence: The bank must have followed all standard procedures, like verifying the account name and the name of the payee on the cheque, especially for “account payee” crossed cheques.
Collected for a Customer: The bank must have collected the cheque for a person who is a legitimate customer of the bank.

Duties of a Collecting Banker

To present the cheque for payment promptly. Delay can cause loss to the customer.
To send a notice of dishonor to the customer if the cheque is not paid. This is crucial for the customer to be able to take legal action against the drawer.

Summary of Responsibilities

Feature	Paying Banker (Drawee)	Collecting Banker
Primary Role	To pay the cheque.	To collect the cheque proceeds.
Relationship	Debtor to its customer (the drawer).	Agent for its customer (the payee).
Main Duty	To honor cheques with sufficient funds.	To collect cheques with due diligence.
Key Protection	For making “payment in due course.”	For collecting crossed cheques in good faith and without negligence.

How it Applies to Other Instruments

The fundamental roles of “paying” and “collecting” exist for other instruments too, but with some key differences, mainly related to the risk of payment.

1. Demand Drafts (DDs)

A Demand Draft is an instrument issued by a bank, containing an order to another branch of the same bank to pay a specified sum to a specified person.

Paying Banker: The bank branch on which the DD is drawn. Its responsibility is to verify the authenticity of the DD and pay it. The risk of dishonor is almost nil because the money has already been collected from the purchaser.
Collecting Banker: The role is the same as for a cheque. It collects the DD’s value for its customer.

2. Pay Orders (or Banker’s Cheques)

A Pay Order is an instrument issued by a bank, ordering itself (the same branch) to pay a specified sum to a specified person.

Paying Banker: The issuing branch itself is the paying branch. The bank is essentially paying its own instrument, so the risk of dishonor is nil.
Collecting Banker: The role remains exactly the same.

Summary Table

Instrument	Paying Banker’s Main Responsibility	Key Difference from a Cheque
Cheque	To pay, provided there are sufficient funds and no other discrepancies.	Can be dishonored for insufficient funds.
Demand Draft	To pay, after verifying the instrument’s genuineness.	It’s a pre-paid instrument; cannot be dishonored for insufficient funds.
Pay Order	To pay its own instrument, after verifying genuineness.	It’s a pre-paid instrument issued and payable at the same branch.

So, while the concepts of a paying and collecting bank apply to all these, the risks and responsibilities for the paying banker are much lower and simpler for pre-paid instruments like DDs and Pay Orders compared to a personal cheque.

Responsibility of Paying and Collecting Bank