MODULE_2_12_

BANKING &
INSURANCE

CERTIFICATE COURSE

DEVELOPED BY
Corp Comm Legal

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MODULE - 2

OBLIGATIONS OF THE BANKS

When a customer opens an account with a bank, ▪ The funds in the account must be sufficient.
there are certain rights given to the banker and They must at least be equal to the amount
certain responsibilities or obligations which are that the cheque has been presented for. The
imposed upon him. These rights and responsibilities banker is to pay the sum of money to the
determine the relationship between the banker and payee and in the event of such sum not being
the customer. present with the banker at the time the
cheque is presented, the banker does not
2.1. OBLIGATION TO HONOUR CHEQUES have any obligation to make the payment of
the cheque. The banker should not disclose
It is one of the duties that the banker performs and it the amount by which the credit balance in the
is that of an implied nature. The banker accepts the drawer’s account falls short of the amount of
deposits from the customer which creates an the cheque to the payee. He will otherwise, be
obligation on the part of the banker to repay the liable for damages for disclosing information
deposit to the customer by way of honouring the of his customer’s account to a third party.
cheques drawn upon the banker. Honouring of
cheques is a statutory obligation under Section 31 of ▪ There may be times when a customer might
the Negotiable Instruments Act. The Section states be having several accounts in the same bank
that “The drawee of a cheque, having sufficient funds in various capacities. But the account on
of the drawer in his hands, properly applicable to the which a cheque is drawn must have sufficient
payment of such cheques, must pay the cheque when funds.
duly required so to do, and in default of such payment,
must compensate the drawer for any loss or damage ▪ The cheque must be presented for payment
cased by default.”i Therefore, it is the duty of the within six months. The cheque is said to be
banker to pay cheques of his customer who has an stale and the banker will be justified in
account provided that these conditions are fulfilled dishonouring the cheque after the expiry of
this period.

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▪ According to Section 65 of Negotiable reputation. While assessing the damages, there are
Instruments Act, presentment of the cheque certain things that need to be considered. Whose
must be made during the working hours of the cheque is dishonoured, whether the person is a trader
bank.ii or not, what is the amount of the dishonoured
cheque, is it meagre or large.
▪ The cheque should be presented at the
branch where the account of the customer is If the cheque of a person who is not a trader is
maintained i.e., the demand for payment must dishonoured, generally he is entitled only to
be made in the same branch. substantial damages. If the cheque of a trader is
dishonoured, he will be entitled to get more damages
Therefore, when the customer makes a because it affects the reputation that the person
proper written demand for payment, the bank holds in his respective business.
shall honour the cheque. The banker shall not
injure his customer’s credit by refusing to pay When the amount in the cheque is of a lesser amount,
his cheque except on reasonable and proper the damages claimed are higher. It is an inverse
grounds.iii Wrongful dishonour of a cheque phenomena. While assessing the damages, loss to the
means failure to make payment against the person’s status, his financial position and the injury to
cheque by mistake or negligence on the part his reputation must be kept in mind. The liability of
of the banker or its employee. For example, if the banker for dishonour of cheque extends only
a deposit is made by the customer had not towards the drawer of the cheque and not towards
been duly credited to his account in time and the payee. In addition to the claim of damages,
consequently the cheques that were issues by wrongful dishonour also gives rise to an action for
the customer have been dishonoured due to libel (defamation). It is up to the customer to institute
lack of sufficient funds in his account. an action against the banker for libel.

If the banker, without any justification, dishonours a The banker can only be made liable for the dishonour
customer’s cheque, he will be made liable to of a cheque when there is no justification or a valid
compensate the customer for the injury caused.iv In reason which backs his act. However, there are a few
simple terms, the banker will be made liable for grounds that are considered to be reasonable and
damages. These damages can be either a monetary
loss caused to the party or loss to his credit or

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justifiable, and the banker can dishonour a ▪ When the banker is restricted by the
customer’s cheque under any of these groundsv- government

▪ When the cheque presented is out-dated ▪ When a notice is issued by either the banker
(when it is presented after a period of six or the customer for closing of the account
months)
▪ When there is a breach of trust
▪ When the cheque presented is post-dated ▪ When the title of the parties seems to be
(presented for a future date)
defective
▪ When the funds in the account are ▪ When the holder of the cheque issues a
insufficient
notice stating that the cheque was lost
▪ When the customer countermands or cancels ▪ When the customer gives notice of
or revokes the payment of the cheque
assignment
▪ When the validity or legality of the cheque is
doubtful 2.2. OBLIGATION TO MAINTAIN SECRECY OF
ACCOUNTS
▪ When the amount of payment differs in words
and figures The banker has an implied obligation to maintain the
utmost secrecy of the customer’s account. It is
▪ When the cheque is cut into pieces generally treated as confidential information and the
▪ When the signature of the customer does not banker should not disclose any information that is
concerned with the customer’s financial position to
match the one in the records of the bank any third person. This duty starts the moment the
▪ When the customer has dies and the banker relationship is established between the banker and
the customer. Disclosing such information may affect
receives a notice of his death, the authority of the customer’s reputation, his credit-worthiness and
the bank to pay is terminated as the funds of business. This was held in the landmark case of
the deceased now vest in his legal Harvey v Veasey (1868).
representatives
▪ When the banker receives notice of the In the case of Tournier v National Provincial and
customer’s insanity Union Bank of Englandvi, it was held that the banker
▪ When the customer is declared insolvent must not disclose the position of the customer’s
▪ By a Garnishee order passed by a court of law

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account except on reasonable and proper passed the judgement in his favour in which the court
circumstances. The banker should not disclose the opined that the bank manager violated his duty and
state of the customer’s account even after the caused great loss to the plaintiff.
account is closed.
Five instances where the disclosure by the banker
Tournier was the plaintiff in the case. He was working may be justified were listed out in the same casevii-
in M/s. Kenyon and Co. on temporary basis and his
employment was to be permanent. He overdrew from ▪ When the disclosure is required by law
the defendant bank, a sum of 9 pounds, 8 cents and 6 ▪ When it is the duty of the banker to disclose
d., and he agreed to repay the sum by means of weekly
instalments of 1 pound. Out of this amount, he paid such information to public
some amount to the bookmaker towards the ▪ When it is with the implied or express consent
purchase of certain goods. Tounier did not come for
duty on one day. The Directors of Kenyon and Co. of the customer himself
called up to the bank manager of the defendant ▪ When it is for the bank’s own interest
company to ask for the plaintiff’s address. In the ▪ When the practice and usage of the bank
conversation, the bank manager also gave them the
information that the plaintiff had overdrawn from the permits it to do so
bank and that he had made a certain payment to a
bookmaker. The Directors misunderstood the These points are explained in detail as under-
information and formed the impression of the
plaintiff as a gambler, that he was in the practice of ▪ When the banker is under a public duty, he
betting and that he was insolvent. Therefore, they did can disclose the position of the customer’s
not grant a permanent job to the plaintiff and fired account to the relevant authority. The duty
him from the company. This caused an unbearable that the banker had towards his nation or the
grievance to the plaintiff who subsequently filed a public is superior and it overrides his duty
suit against the bank for disclosing information of his towards his customer.
account, and for the bank to compensate him for the
job that he lost. The lower court dismissed this ▪ The customer may instruct the banker to give
petition. The court of appeal allowed his appeal and a few or all other particulars of his account to
a person. For example, an auditor. In such a
case, the bank is allowed to disclose the
information. The banker can also disclose
such information to a referee when his name
is suggested by the customer. And in case the

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customer provides the bank with the name of banker, or if the law requires disclosure, then
a guarantor, it is implied that the banker can it can be divulged.
disclose information to him as and when
required. viii 2.2.1. DISCLOSURE OF INFORMATION AS
▪ When the protection of the bank’s own REQUIRED BY LAW UNDER VARIOUS
interest legally requires the disclosure of the LEGISLATIONS
actual position of the customer’s account, the
banker can do so. For example, when a 2.2.1.1. Under the Income Tax Act, 1961
customer fails to repay money which is due to
the banker, the banker has a right to file a suit The Income Tax officials possess the same powers as
for recovery of the said money in which he will that of a court under the Code of Civil Procedure,
have to disclose the exact amount which is 1908, for call for the attendance of any person,
due to him from the customer. The banker will including any officer of a bank, to examine him on
not be made liable for such a disclosure. oath and to compel the production of books of
▪ The Banking Companies (Acquisition and account and other documents.x The Income Tax
Transfers of Undertakings) Act, 1970, officials have the power to call for any necessary
requires the banker to “observe, except as information or to furnish statements of accounts and
otherwise requires by the law, the practices affairs which will be useful or relevant to the
and usages customary amongst bankers in officials.xi They can obtain this information from any
particular not to divulge any information person, including a banking company or any of its
relating to the affairs of the constituents officers. They can obtain information from the banker
except in circumstances in which they are, in for the purpose of assessment of the bank’s
accordance with law or practices and usages customers.
customary among bankers, necessary or
appropriate for them to divulge such 2.2.1.2. Under the Companies Act, 2013
information.”ix Therefore, it imposes an
obligation of the banker to not disclose any When an Inspector is appointed by the Central
information of his customer’s account. But if it Government to investigate and look into the affairs of
is on the basis of usage or usual practice of the any company under Section 210 or 212 or 213 of this
act, it shall be the duty of all officers and other
employees and agents, including the bankers of the

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company to produce all books and documents officer of bank not compellable to produce books —
relating to the company which are under their No officer of a bank shall in any legal proceeding to
custody or power, and otherwise to give to the which the bank is not a party be compellable to
Inspector all the assistance in connection with the produce any banker’s book the contents of which can
investigation which they are reasonably able to be proved under this Act, or to appear as a witness to
give.xii The banker has an obligation to disclose all prove the matters, transactions and accounts therein
information regarding the company but not to any recorded, unless by order of the Court or a Judge
other customer for the purpose of such investigation. made for special cause.”xiv If a banker is not a party to
a suit, a certified copy of the entries will suffice as
2.2.1.3. By the order of the Court under the Banker’s evidence. The Court also has the power to allow any
Books Evidence Act, 1891 party to legal proceedings to inspect or copy from the
books of the banker for the purpose of such
The banker is bound to disclose information relating proceedings.
to a customer’s account when the Court passes such
an order. The Act provides that certified copies of the 2.2.1.4. Under the Reserve Bank of India Act, 1934
entries in the banker’s books are to be treated as
sufficient evidence. The production of the books in The RBI collects credit information from the banking
the Court cannot be forced upon the banker. This companies and also provides consolidated credit
provision aims at avoiding the inconveniences that information to any banking company. Every banking
are likely to be caused to the banker. “A certified copy company in the country is under a statutory
of an entry in a banker’s book shall in all legal obligation under Section 45-B of the Act to provide
proceedings be received as prima facie evidence of such credit information to the Reserve Bank. The Act,
the existence of such entry and shall be admitted as however, provides that the credit information that is
evidence of the matters, transactions and accounts supplied by the Reserve Bank to the banking
therein recorded in every case where, and to the companies must be kept confidential. After the
same extent as the original entry itself is now by law amendment to the Act in 1974, the banks were
admissible, but not further or otherwise.”xiii It is also granted statutory protection to exchange freely
important to note that Section 5 of the Banker’s credit information among themselves.
Books Evidence Act, 1891 states that “Case in which

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2.2.1.5. Under the Banking Regulation Act, 1949 Act respectively empowers the Reserve Bank of India
and officers of the Directorate of Enforcement to
Under 26 of this Act, every banking company is inspect the books and accounts or any other
required to submit a return of all such accounts in documents of any authorised dealer and also to
India which have not been operated for more than 10 examine on oath such dealer or its director or officials
years. This is to be done annually. Banks are supposed in relation to its business.
to give particulars of the deposits standing to the
credit of each such account. 2.2.1.8. Under the Industrial Development Bank of
India Act, 1964
2.2.1.6. Disclosure to the Police
After the insertion of sub-section (I-A) to Section 29
Section 94 of the Criminal Procedure Code, 1973, of the Act in the year 1975, IDBI is authorised to
says that the banker is not exempted from producing collect or provide to the Central Government, the
the account books before the police. The police State Bank, any subsidiary bank, nationalised bank or
officers conducting an investigation may also inspect other scheduled bank, State Co-operative bank, State
the banker’s books if necessary. Financial Corporation, any credit information or
other information as it may consider useful for the
2.2.1.7. Under the Foreign Exchange Regulation Act, purpose of efficient discharge of its functions, in such
1999 manner and at such times, as it may deem fit. ‘Credit
information’ is used in the same sense as in the
Banking companies dealing in foreign exchange Reserve Bank of India Act, 1934.
business are designated as ‘authorised dealers’ in
foreign exchange. Section 12 and section 37 of this

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i Section 31, Negotiable Instruments Act, 1881. viii Sunderland v Barclays Bank.
ix Section 13, Banking Companies (Acquisition and Transfers
ii Section 65, Negotiable Instruments Act, 1881. of Undertakings) Act, 1970.
x Section 131, Income Tax Act, 1961.
iii 1990 A.C. 577. xi Section 133, Income Tax Act, 1961.
xii Section 217, Companies Act, 2013.
iv Marzetti v Williams, 1830 1 K.B. 415. xiii Section 4, Banker’s Books Evidence Act, 1891.
xiv Section 5, Banker’s Books Evidence Act, 1891.
v CMA Students Newsletters,
http://icmai.in/upload/Students/Stud_NL_15th_January_2016_
1B.pdf.

vi 1924 1 K.B. 461.
vii ‘When banks required to disclose Customer Information’,
iEduNote, https://iedunote.com/bank-required-to-disclose-
information-about-customers.

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