General obligations of a banker towards customer
1. The obligation of Honor Cheques
2. Obligation to Maintain Secrecy and Disclosure of information required by Law.
The obligation to Honor Cheques
Banker accepts the deposits from the customer with an obligation to repay it to him by way of honoring the cheques drawn upon the banker. This obligation on the banker is imposed by Section 31 of the Negotiable Instruments Act, 1881 which reads as
“ The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default”.
Conditions to honor the cheque:-
Banker is under an obligation to honor the cheque if the following conditions are fulfilled:-
There must be sufficient balance in the drawer (customer) account that too equal to the amount mentioned in the cheque. Basically the banker has a sufficient amount of drawer.
In the case of the current accounts situation is different because there is implied or expressed agreement between the bank and the current account holder of overdraft. The Overdraft allows the customer to borrow the funds from the bank in case of zero balance in their account.
In Indian Overseas Bank, Madras v. Naran Prasad Govindlal Patel, Ahmedabad [AIR 1980 Guj. 158]
It has been held that overdraft is an express and implied agreement between the bank and its customer. Banker is bound to honor the cheque as the overdraft arrangement between the bank and a customer is a contract and it cannot be terminated by the bank unilaterally.
Presentation of the cheque within working hours of business
The presentation of a cheque must be within the usual hours of business and if at all then the banking hours.
Presentation of the cheque within a reasonable time
The cheque must be presented within a reasonable time after the ostensible date of its issue. If the cheques are presented after six months after the ostensible date of issue it will be considered as stale cheque. A cheque must contain the date and banker is not bound to honor the undated, postdated or a stale cheque.
The cheque must be presented at the branch where the account is kept.
Signature of the customer
The signature on the cheque should be totally the same taken at the time of opening of the account. Banker is not bound to encash the forged cheque.
In Keptigalla Rubber Estate Ltd. V National Bank of India ltd.
It was held the banker is liable to pay compensation to the customer if he neglects to verify the signature a paid the amount on forged signatures.
The proper form of cheque
The cheque will be honored if it fulfills all the conditions required by law. It must be drawn on a printed form supplied by the banker and it should not contain ‘request’ to pay the amount.
The cheque must not be torn, mutilated or canceled. If a cheque is turned and does not affect any printed or written matter of cheque, the drawer should certify on it with the words “This cheque accidentally torn by me’’ and should sign underneath the statement.
The correctness of amounts in words and figures.
The banker should verify the amount mentioned in the cheque. If he finds the difference between words and figures, then he can refuse to honor it. Section 18 of the Negotiable Instrument Act 1881 says the amount written in words must be taken into consideration if the amount mentioned in words and figures does not match. And if the cheque contains the amount in words but there is no mentioning of the amount written in figures then banker should return it but not vice versa.
The banker should not accept a cheque materially altered. He should verify it to the drawer. If a cheque is altered by the drawer he should consent the alteration and if the cheque is altered by the third party then the bank should refuse it.
Proper Application of the funds
The banker will honor a cheque when the funds meant for its payment. For e.g., if the funds are withdrawn for private use, the banker will not honor it.
Existence of legal bar
The banker will not honor the cheque if there will be any legal bar on the holder of the cheque. The bank should note instruction of attachment by courts, income-tax officers immediately in the accounts ledger and concerned records.
Death, insolvency, etc. of customer
The banker should stop payment on cheques after receiving the information about the customer’s death, insolvency, etc.
Cheques of partnership firm, company accounts
The banker should verify the signature of the partners on the cheque and seal of the company before honoring the cheque.
Obligation to maintain secrecy and disclosure of information required by law
Maintenance of Secrecy
The relationship of banker and customer is of confidential and secretive nature. The banker should not disclose any financial information of the customer without his consent to any person as it can likely affect his reputation, creditworthiness, and business.
In Shankarlal v. State bank of India
It was held that the secretive and confidential relationship between the banker and the customer is a legal one not the moral. Breach of it will give a claim for nominal or substantial damage if the injury resulted from such breach.
Such duty is subjected to certain exceptions
– The duty to obey the order under the Bankers Books Evidence Act.
– Bank issuing writs for the payment of overdraft
– Where the duty of state or public duty may supersede the private duty
Under the Criminal Procedure Code,1973
– Under Section 91 of CrPC wherever any officer in charge of Police station considers that the production of any document is necessary or desirable for the purpose of any investigation, inquiry, trial or other proceedings, such officer with the written order can demand from the personal possession of any document, record or thing.
– Under Section 94 of CrPC magistrate may by warrant authorize any police officer to enter such place, to search, to take possession of counterfeit cash, counterfeit currency notes, forge documents, etc.
– Section 100 of the CrPC, the person in charge of closed place to allow search under Section 100(1), whenever any place liable to search or inspection is closed, any person residing in or being in charge of, such place shall allow him free ingress thereto, and afford all reasonable facilities for a search therein.
– Under Section 122 of CrPC, the police officer has the power to seize certain property which creates suspicion of the commission of any offense.
The Rights of a Banker
1. Bankers Right of a General Lien
2. Bankers Right of set-off
3. Bankers Right for Appropriation of Payment
Bankers Right of a General Lien
Lien means a legal claim to hold property as security. Bank retains certain goods, property or any other assets as security in return of an unpaid debt. The ownership of the security should be with the person holding the debt.
A lien does not require any special agreement, written or oral but it arises only by operation of law subject to the conditions:-
1. That the creditor is in possession of goods, security, etc. and has come in possession thereof in the ordinary course of business.
2. That the owner of the goods, securities have a lawful debt to pay to the person in possession thereof.
3. That there is no contract, express or implied to the contrary.
Bankers right to set off
Set-off is the legal right which states that a person who owns a debt may deduct it from any debt which is immediately payable to him by the creditor.
For instance, if A has two accounts in the same bank. He also owns 1 lakh to bank. Now banks have the right to debit the second account of A. if A deposits any money in his second account. The bank will combine the accounts of A to set off the amount due.
Bankers right for appropriation of payment
Rule of appropriation says the money given for specific purposes should be applied only for that. Banker is obliges to clear only that debt which is specified by the customer. The question of appropriation arises when debts owed by the creditor is two or more.
The appropriation of payment is defined under Indian Contract Act under Section 59 to 61 .
Appropriation by the Debtor (Section 59)
The debtor has the right to instruct expressly the debt he wants to set off first. He can appropriate the payment by either an express intimation or under circumstances implying that the payment is to be applied to the discharge of some particular debt.
For instance, if A owned three debts to B of 250rs, 300rs and last one of 500rs which falls due on 30th December 2019. Here, if A doesn’t mention the type of debt to be set off and pays the amount of 500 to B. It would be clearly taken, payment is meant to be appropriation towards the third debt.
Appropriation by the Creditor (Section 60)
The creditor’s right of appropriation will only be applied if the debtor had the opportunity to exercise such a right of appropriation but has omitted to do so. Creditor may exercise his right of appropriation at any time. He needs not to declare his intention in any express term.
Appropriation by law neither by any party (Section 61)
If neither party has made any appropriation of payment, the payment shall be discharge each one after another based on the time.
If the debt carrying interest and the principal amount then the amount paid first be applied to set off the interest than the surplus amount is paid to set off the principal amount.
(M/s Kharavela Industries Pvt. Ltd v. Orissa State Finance Corporation and Others)
Bankers Right to claim incidental Charges
Another special feature of the relationship that exists between banks and a customer is that the banker may claim incidental charges on unremunerated accounts. The incidental charges mean ledger folio charges, service charge etc.
Bankers right to charge compound interest
As per general law levying of compound interest is strictly prohibited. But, a banker is given the special privilege of charging compound interest. Usually bankers charge interest on the money lent at the end of every quarter. But agricultural loans are exempted from compound interest.
“The views of the authors are personal“
Frequently asked questions
Is the bank liable for the actions of his servants?
Yes, banks are liable for the acts of his servants.
Section 238, Indian Contract Act, provides that misrepresentation made or frauds committed by agents acting in the course of their business for their principals, have the same effect on agreement made by such agents as if such misrepresentation or frauds had been made or committed by the principals.
In-State bank of India v. Shyama Devi
The plaintiff’s husband gave some cash and cheque to his friend, who was an employee in the defendant bank, for being deposited in the plaintiff’s account. The amount and cheque were given in his private capacity as a friend, not as a banker’s agent. The said employee misappropriated funds. It was held by the Supreme Court that the employee, when he committed the fraud, was not acting in the scope of the bank’s employment and therefore, the bank cannot be made liable for the same.
What is alteration of cheque and its effect after the cheque is the issue?
Alteration as the word says making changes in the cheque. In fact, overwriting on the cheque is not allowed. If the sum for which a cheque was drawn is fraudulently altered and the amount payable increased, the bank should not pay the increased amount. If the bank pays in excess of the customer’s original mandate, it has to bear the loss for the same. There is, however, an exception to this rule. If the customer failed to take reasonable precautions to prevent such an alteration and forgery and forgery takes place, the customer is liable to bear the loss of such a forgery.