Duties of banker and customer: honouring cheques and secrecy of accounts

1. Duty to honour cheques

Section 31 of the Negotiable Instruments Act, 1881: 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 to do so, and in default must compensate the drawer for any loss or damage caused by the default.

The duty arises only when every condition is met:

• Sufficient funds, or an agreed overdraft limit, in the account on which the cheque is drawn. The bank need not combine accounts to meet a cheque.
• Properly applicable: the funds are not subject to a lien, a garnishee order, an attachment or a set-off already exercised.
• Duly required: the cheque is presented at the branch where the account is kept (or through clearing), during banking hours, within its validity, which RBI directions fix at three months from the date of the cheque.
• Properly drawn: signed as per the mandate, dated, with words and figures agreeing (if they differ, s.18 makes the words prevail, though banks usually return such cheques), not post-dated, and free from material alteration.

Wrongful dishonour. A bank which dishonours a cheque when the conditions are met breaks its contract and is liable to compensate the drawer. The amount depends on the customer:

• a trader may recover substantial damages without proof of actual loss, because dishonour injures his credit: Rolin v. Steward (1854); the smaller the cheque, the greater the injury;
• a non-trader recovers only nominal damages unless he proves special loss: Gibbons v. Westminster Bank (1939);
• a wrongful return with a remark such as “insufficient funds” may also be defamatory.

Wrongful dishonour is also a deficiency in service under the Consumer Protection Act, 2019 and a ground of complaint to the RBI Ombudsman.

2. When the bank must or may refuse payment

• Countermand (stop payment) by the drawer before payment.
• Notice of the customer's death; the bank's mandate ends.
• Notice of insanity of the customer.
• Insolvency: an order of adjudication, or notice of an insolvency petition.
• Garnishee order or attachment under Order XXI Rule 46 of the Code of Civil Procedure, or an order of a tax or other authority attaching the balance, to the extent of the amount attached.
• Notice of breach of trust: where the bank knows the drawer is misusing money held as trustee.
• Defects in the cheque: stale, post-dated, materially altered, signature not matching, mutilated, or crossed and presented over the counter.
• Closure of the account, or a moratorium or direction under ss.35A or 45 of the Banking Regulation Act restricting withdrawals.

3. Duty of secrecy

The duty is implied in the contract. In Tournier v. National Provincial and Union Bank of England (Court of Appeal, 1924) a bank manager told the customer's employer that the customer was in debt and was paying money to a bookmaker; the customer lost his job. The Court held that the bank owes a legal duty of secrecy, which covers the state of the account and all other information the bank acquires in its character as banker, and continues after the account is closed. Bankes L.J. stated four exceptions, which every answer must give:

• Compulsion by law: an order of court, a statutory demand;
• Duty to the public: for example, where danger to the State or a crime is involved;
• Interest of the bank: for example, a suit by the bank to recover an overdraft, where it must disclose the account;
• Express or implied consent of the customer, as where he gives the bank's name as a reference.

Indian law. There is no general statute on banking secrecy, but the duty is recognised in contract and in particular statutes:

• s.13 of the Banking Companies (Acquisition and Transfer of Undertakings) Acts, 1970 and 1980, and the corresponding provision of the SBI Act, require the nationalised banks to observe the usages and practices of bankers and not to divulge information about customers except as law or practice requires;
• officers of the RBI and DICGC take a declaration of fidelity and secrecy (s.39 of the DICGC Act); credit information furnished to the RBI is confidential (s.45E of the RBI Act).

Statutory exceptions (compulsion of law) are now many: production of certified copies under the Bankers' Books Evidence Act, 1891 and court orders for inspection under s.6 of that Act; powers of income-tax and GST authorities to call for information; reporting of cash and suspicious transactions under the Prevention of Money-Laundering Act, 2002; investigation by police under the Bharatiya Nagarik Suraksha Sansad Hita, 2023 (formerly the CrPC); sharing of credit data with credit information companies under the Credit Information Companies (Regulation) Act, 2005; and RBI inspection under s.35 of the Banking Regulation Act. Data held by banks is also personal data under the Digital Personal Data Protection Act, 2023.

The duty of secrecy does not shield the RBI's own supervisory information from the public. In Reserve Bank of India v. Jayantilal N. Mistry, 2015 INSC 942, (2016) 3 SCC 525, the RBI refused requests under the Right to Information Act for inspection reports and information about banks, claiming a fiduciary relationship with them and economic interest. The Court held that the RBI does not stand in a fiduciary relationship with the banks it regulates, that its duty is to the public and the depositors, and that the information had to be disclosed subject to the specific exemptions in s.8 of the RTI Act.

4. Other duties of the banker

• to keep a proper account and render statements;
• to give reasonable notice before closing an account in credit, so that outstanding cheques are not dishonoured;
• to follow the customer's mandate and standing instructions, and to take care in collecting cheques (s.131 protects it only if it acts without negligence);
• to comply with RBI directions on fair practices, KYC, disclosure of charges, and limited liability for unauthorised electronic transactions;
• to take reasonable care of articles in safe custody, as bailee.

5. Duties of the customer

• To draw cheques with care so as not to facilitate fraud. In London Joint Stock Bank v. Macmillan and Arthur (House of Lords, 1918) a clerk filled in “£120” in a cheque the firm had signed for £2 with blank spaces; the firm bore the loss because it had drawn the cheque carelessly.
• To inform the bank promptly on learning of a forgery. In Greenwood v. Martins Bank (House of Lords, 1933) a husband who knew his wife was forging his signature and kept silent was estopped from recovering from the bank.
• To pay interest and charges agreed, and to repay overdrafts on demand.

There is no duty to examine the pass book or statements and report errors: Canara Bank v. Canara Sales Corporation, 1987 INSC 125, (1987) 2 SCC 666, where the bank that paid forged cheques could not shift the loss to the customer on that ground.

How this is examined

“Explain on banker's duty to honour customer cheque” (January 2026), “Discuss the banker's obligation to maintain the secrecy of customer's account” (June 2025) and “Explain the duties of banker and customer” (February 2025) are the essays. For the first, s.31, the four conditions, damages for wrongful dishonour, and the grounds of refusal. For secrecy, Tournier with the four exceptions, the Indian statutes that make the exceptions concrete, and Jayantilal Mistry. For the combined question, give both banker's duties and the customer's duties under Macmillan and Greenwood, with Canara Sales as the limit.