by Negligence in collection refers to a failure by the collecting banker to exercise reasonable care and caution while collecting cheques on behalf of a customer. Under Section 131 of the Negotiable Instruments Act, 1881, a collecting banker is granted statutory protection if the collection is made in good faith and without negligence. However, this protection is withdrawn if the banker is found to be negligent. Negligence is judged by the standards expected of a prudent banker in similar circumstances.
A collecting banker is required to verify the apparent genuineness of the cheque, the title of the customer to the instrument, and the regularity of endorsements. If there is anything unusual or suspicious about the cheque, the customer, or the account, the banker is expected to make reasonable inquiries. Ignoring such red flags may be construed as negligence.
Examples of Negligence:
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Opening an account without proper verification of identity and address of a customer.
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Collecting cheques for a customer who has no apparent title to the cheque (e.g., third-party cheques deposited without proper endorsement).
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Failure to verify endorsements on the instrument.
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Continuing to collect cheques despite suspicious activity or frequent large transactions that are inconsistent with the customer’s profile.
In the landmark case of Canara Bank v. Canara Sales Corporation (1987), the Supreme Court of India held the bank liable for negligence. The bank had collected cheques in the name of the company for the personal account of an employee, without making proper inquiries. The Court ruled that the bank had not acted with due diligence and therefore was not entitled to statutory protection.
In another case, Indian Overseas Bank v. Industrial Chain Concern, the bank collected a cheque for a customer whose identity was not properly verified at the time of account opening. It was held that the banker had failed to act cautiously, and hence the protection under Section 131 was denied.
To avoid negligence, banks must implement Know Your Customer (KYC) norms strictly. Proper documentation, regular monitoring of transactions, and flagging of unusual activity are crucial. In addition, training staff to identify forged instruments, verify endorsements, and recognize patterns of fraud is essential.
Technological tools like cheque truncation systems, signature verification software, and fraud detection systems also help in reducing errors. Despite these advancements, human oversight remains critical in ensuring that bankers act responsibly while handling negotiable instruments.
In conclusion, negligence in collection arises when a collecting banker does not act with the standard care expected in the banking industry. The consequences of such negligence can include loss of statutory protection, financial liability, and damage to the bank’s reputation. Therefore, banks must combine due diligence, robust internal controls, and staff training to mitigate risks and ensure responsible cheque collection practices.
