Collecting banker’s responsibility

Section 131 in The Negotiable Instrument Acts, 1881 provides that.

“A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or especially to him shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment.”

The protection available to the collecting bankers under Section 131of NI Acts 1881 only when following conditions are satisfied by the collecting banker.

1. The check should have been crossed generally or especially to the bank.
2. The bank should have collected such cheque for a customer as an agent for collection and not as a holder for  a value.
3. The proceeds of the collected cheque are credited to only to the account of the payee or to the account of         endorsee if endorsement on the instrument is regular.
4. The collecting banker must have acted in good faith. Here ’good faith’ means banker had no reasonable ground to believe that the customer is not entitled to receive payment of the amount therein mentioned.
5. The collecting banker should have acted without negligence. ’Without negligence’ means the account of the customer on whose behalf cheque is collected, is opened with proper compliance of KYC norms such as verification of identity proof and address proof before opening the account.
6. The collecting banker who received payment based on the electronic image of truncated cheque should have verified the apparent genuineness of the cheque in his possession with due diligence and ordinary care to ensure the prima facie genuineness of the instrument.

Related articles:

(i) Meaning of valid Endorsement

(ii) Who is a holder of a negotiable instrument?

(iii) Holder in due course- explained

(iv) Payment in due course- explained

(v) A better title to ‘Holder in due course’ explained

(vi) Paying bank’s responsibility under NI Acts

(vii) General and Special crossing of cheques

(viii)Effects of ‘Not Negotiable’ mark on a cheque

(ix)Difference between assignment and negotiation

(x) Allonge: When is an allonge to be used