The Collecting Banker plays an essential role in the banking and negotiable instruments ecosystem. They are responsible for collecting payments on behalf of their customers and are legally protected if they act in good faith.
Who is a Collecting Banker?
A Collecting Banker is a bank that receives a cheque or negotiable instrument from a customer (the payee) for the purpose of collection from the drawer’s bank (the paying banker).
Example: If Mr. A deposits a cheque issued by Mr. B into his bank account, Mr. A’s bank is the collecting banker.
Legal Recognition and Governing Law
The legal provisions related to collecting bankers are primarily found in:
- Negotiable Instruments Act, 1881
- Section 131 – Protection to collecting banker
- Section 72 – Presentment of cheque to banker
- Section 85 – Related to order cheques
- Banking Regulation Act, 1949
- Indian Contract Act, 1872 (for duties and responsibilities)
Duties of a Collecting Banker
✔ Act as an Agent
- The collecting banker acts as an agent for the customer and not as the owner of the cheque.
✔ Due Diligence
- Must ensure that the cheque is crossed, genuine, and free from material alteration.
✔ Present Cheques Promptly
- Must present the cheque to the paying banker without unreasonable delay.
✔ Verify Title of the Customer
- Should collect cheques only for known and honest customers to prevent fraud.
✔ Serve Notice of Dishonour
- If the cheque is dishonoured, the bank should promptly inform the customer.
Rights of a Collecting Banker
- Right to Recover Charges: May recover collection charges from the customer.
- Right to Lien: Can exercise general lien over customer’s credit balance for recovering dues.
- Right to Refuse Collection: Can refuse to collect doubtful or suspicious cheques.
Statutory Protection Under Section 131 of the NI Act
A Collecting Banker is protected under Section 131 if:
- The cheque is a crossed cheque.
- The bank collects it in good faith and without negligence.
- The customer had no defective title known to the bank.
If all these conditions are met, the bank is not liable even if it turns out the customer had no legal right to the cheque.
When is a Collecting Banker Liable?
If Not Acting in Good Faith
- Collecting a cheque for a stranger or suspicious account can amount to negligence.
If Cheque is Uncrossed
- Section 131 protection applies only to crossed cheques.
Conversion
- Wrongful collection can lead to liability for conversion of funds, where the banker may be treated as having taken the property unlawfully.
Difference Between Paying Banker and Collecting Banker
| Basis | Paying Banker | Collecting Banker |
|---|---|---|
| Definition | Bank that pays the cheque | Bank that collects cheque for a customer |
| Relationship | Debtor-Creditor with customer | Agent-Principal with customer |
| Legal Protection | Section 85 & 10 of NI Act | Section 131 of NI Act |
| Nature of Instrument | Instrument drawn on it | Instrument drawn in its favour |
| Risk | Wrongful payment | Collection of stolen/forged cheques |
Case Law Example
Canara Bank v. Canara Sales Corp. (AIR 1987 SC 1603)
Held: A collecting banker is liable for negligence if it collects a cheque for someone with a defective title and fails to conduct proper due diligence.
Precautions a Collecting Banker Should Take
- Collect only crossed cheques.
- Verify the identity and account activity of customers.
- Maintain detailed records and acknowledgments.
- Avoid collecting cheques for third parties or non-customers.