Negotiable Instruments: Banking Awareness Special Series

Team Adda247 and Bankers Adda have introduced a Special Banking Awareness series for SBI and IBPS Interviews 2021. In this series, we will be introducing the candidates with some banking awareness topics Daily that will improve their general awareness and will also ensure that the candidates do not lack in any banking term when it comes to the interview round. Today the topic of our Banking Awareness Series is Negotiable Instruments.

Negotiable Instruments

Definition: It is a signed document that promises a sum of payment to a specified person or the assignee. Negotiable Instruments are transferable and signed document which gives assurance to pay the bearer a sum of money at a future date or on-demand. The payee, who receives the payment, must be named or otherwise indicated on the instruments. 

Some Negotiable Instruments are Checks, money orders, promissory notes, bill of exchange, certificates of deposits, etc. The Negotiable Instruments are legalized by the law of Negotiable Instruments, 1881.

Here are some Negotiable Instruments below in detail:

1.) Promissory note: Promissory note is a legal instrument in which one person (i.e. issuer) gives the promise to pay a determined sum of money to the other person (i.e. Payee) at a specified time of period in writings. It can also have some provisions regarding the concern to the payee’s rights in the event of issuer’s default including foreclosure of the issuer’s assets. 

A promissory note is also called a note payable and if it is used with a mortgage, in that case, it is called a mortgage note also.

2.) Bill of Exchange: The bill of exchange is a written order which binds one person to pay a determined sum of money to another person on demand or at some point in time in the future.

A bill of exchange contains three parties- The Drawee, who pays the sum of money.

The Payee who receives the sum of money.

The Drawer compels the drawee to pay the sum of money to the Payee. 

It is mostly used in international trade to pay for goods or services. 

Bill of exchange has different types which are as follows: bank draft, sign draft, time draft, etc.

3.) Cheques: It the most common negotiable instrument. It serves as a draft and payable by the payer’s financial institution on receipt defining the amount of money. Cashier’s cheque, Money order, Traveller’s cheque, Personal cheque, etc are types of cheques.

Money order which is a common type of cheque may or may not be issued by the payer’s financial institution and it can be exchanged for cash with the issuing entity’s policies once it received by the payee.

4.) Certificate of deposit: The certificate of deposit is a legal agreement between the depositors and the bank on a determined amount of money for a fixed time period.

The Federal Deposit Insurance Corporation (FDIC) issues CD (Certificate of Deposit) which is regulated by the Reserve Bank of India is a promissory note and the interest on this is paid by the bank.

The CD is issued in Demat form and can be withdrawn principal as well as interest on it after CD matures. 

Maturity period: CD issued by commercial banks has maturity from 7 days to 1 year and issued by financial institutions it ranges from 1 to 3 years.

Minimum certificate of deposit can be issued of Rs.1 Lakh and Certificate of Deposits can be transferred but in Demat form.