What Are Negotiable Instruments In Banking? – HowFlux

What Are Negotiable Instruments In Banking?

What Are Negotiable Instruments In Banking ?


Negotiable instruments are also called instruments of credit which are given to the parties to facilitate trade and commerce. They are deemed to be convertible into money and easily passable from one person to another. If these instruments are not present the trade and commerce activities would be adversely affected.

What Are Negotiable Instruments In Banking ?

What Are Negotiable Instruments In Banking

Negotiable Instruments :

The provisions regarding the negotiable instruments are contained in “The Negotiable Instruments Act,1881”

However the act does not define a negotiable instrument, it only mentions three kinds of negotiable instruments namely ,bills, notes and cheques. For a common understanding we can mean negotiable instrument an instrument which is acquired by anyone in good faith, bonafide and for value assuming that there does not exist any defect in the title of any prior party.

Some Key Points:

  • Written instrument with signature

A negotiable instrument is a written instrument. Any oral instrument has no validity and it is considered complete only when it is duly signed.

  • Made or drawn for consideration

It is presumed by law that every negotiable instrument is made or drawn for consideration which means something in return. There should be adequate consideration.

  • Transferability

A negotiable instrument may be transferred by endorsement and delivery if it is payable to order and by mere delivery if it is a bearer instrument.

  • More than one payee

A negotiable instrument may name more than one person payee jointly or alternatively.

Promissory Note :

A promissory note is defined under Sec 4 of The Negotiable Instruments Act which states that :

“A promissory note is an instrument in writing (not being a bank- note or a currency – note )containing and unconditional undertaking signed by the maker to pay a certain sum of money only to -a certain person or

  • the order of a certain person
  • Or the bearer of the instrument.

For example : “I promise to pay Raj or order $500”

Parties to a promissory note are maker and payee.

Maker is the one who makes the promissory note and payee is the one to whom money is to be paid and is named in the promissory note.

Bill of Exchange:

A bill of exchange is defined under Sec 5 of the act which states that :

“A bill of exchange is an instrument in writing containing an unconditional order signed by the maker directing a certain person to pay a certain sum of money only to -a certain person or

  • the order of a certain ┬áperson or
  • the bearer of the instrument .

For example : ” Two months after 25 January 2015, pay to Mr. Ram a sum of rupees 50000, for value received.

Parties to a bill of exchange are drawer ,drawee and payee.

Drawer is the person who draws (makes) the bill
Drawee is the person on whom the bill is drawn

Payee is the person to whom money is to be paid and is named in the bill.


Sec 6 of the Negotiable Instruments Act states that :

” A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand ( i.e. it is always payable on demand ) and it includes the electronic image of a truncated cheque and a cheque in electronic form .”

Parties to a cheque are drawer, drawee and payee.

It must be noted that in case of cheque the drawee is always a bank.


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