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Wednesday, April 21, 2010

ROBUST BANKING SYSTEMS - TO ERR IS ....... EERIE HAPPENING

In day to day life, there are innumerable transactions which require payment and the commonest way is payment by cheque. Cheque primarily is an order to the bank where one holds an account to make a payment. In some ways, cheques are transferable orders and are negotiable instruments.


A negotiable instrument is a type of contract for the payment of money that is unconditional but is capable of transfer by negotiation. The payment of money is promised and the instrument can be used by the holder in due course as money. These being open ended, the document falling into wrong hand can spell disaster. The bank would readily effect payment to anybody who presents a bearer cheque, provided there are enough funds.


To prevent encashing by parties other than those who are intended to receive, cheques are crossed. This is done by merely putting two parallel transverse lines. The lines are usually drawn on the left-hand top corner of the cheque. But they may be drawn anywhere across the face. Crossing affects the mode of payment of the cheque. The cheque is no more payable to the payee or holder at the counter of the bank. The payment of a crossed cheque can be obtained only through a banker i.e., it is credit to an account only. Still a wrong party could take the payment to their account.


To prevent this there is Restrictive crossing - `A/c Payee only' crossing, which becomes a directive to the paying bank that the proceeds be released for the account of payee only. But, it is the collecting bank which has to ensure that the proceeds are credited to the account of payee only and no other.


Simple and easy to understand. Banks have lakhs of transactions and have very robust systems in place to ensure that this work properly.


Well, that is not the end of the story. Howsoever robust the systems are, it is the handlers that make or mar the system and here is a recent experience.


1) a payment to a service provider (Firm) was approved and Finance prepared cheque favouring the same service provider – ABC
2) the right payment was sent wrongly to another service provider – DEF due to a clerical error
3) Upon receipt of cheque, DEF did not check whether it was theirs and whether drawn in their name
4) the same instrument was tendered to their bankers
5) the bankers of DEF (collecting banker) without basic verification sent it for collection
6) the payee bank approved the same and advised the collecting bank
7) the collecting bank credited the account of DEF even where the cheque was not in their favour and was crossed as “Account payee only”


All these came to light, only when the rightful recipient ABC asked for their payment and upon tracing these facts were unearthed. Being known parties, the simplest solution was to recover the amount from DEF and effect fresh payment to ABC.


However, this story reveals the woeful inadequacies that plague the so called fool proof system. It is men everywhere and to err is human.


Regards – S Sampathkumar.

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