Liability of Bank under Consumer Protection Act

THE CONSUMER PROTECTION ACT, 1986

To protect the interests of the consumers, the Consumer Protection Act was enacted. The Act
extends to the whole of India except the State of Jammu and Kashmir. The Act covers all goods
and services, except goods for resale or for commercial purpose and services rendered free of
charge and a contract of personal service. Complaints (i.e., any allegation should be in writing
made by a complainant to obtain any relief provided by or under this Act)
The complaint may be made by the complainant who includes a consumer or any voluntary
consumer association registered under the Companies Act,1956 or any other law or the Central
or State Government or one or more consumers, having the same interest and in case of death of
a consumer his/ her legal heirs or representative.
The Act is for speedy disposal of the redressal of consumer disputes.
Consumer councils are established to promote and protect the rights of consumers. The Central
Council has the jurisdiction for the entire country, followed by the State Council for each state
and District Council for each district.
The Councils at the State level is headed by the chairman of the council, i.e., the Minister-in-
Charge of the Consumer Affairs in the State Government.
The consumers complaints are dealt by District Forum, State and National Commission. District
forum and State Commission are established by the State Governments, and the National
Commission established by Central Government. District Forum has powers to deal with cases
up to 20 lakhs. The State Commission deals with complaints exceeding value of 20 lakh and
below One crore and appeals against the orders of any District forum within the State. The cases
exceeding One crore would be handled by the Central Commission. They also deal with appeals
against the order of any State Commission.
Complaints should be in a prescribed manner, with full details, evidence and applicable fee.
Supporting affidavit is required. Admissibility of complaint is to be decided within twenty one
days. Similarly, other procedures and requirements as per the Act which are in force, would be
applicable.
Liability of Bank under Consumer Protection Act

Liability of Bank under Consumer Protection Act:
The principles laid down by the various decisions of the Consumer Commissions and the
Supreme Court provide for the nature and extent of the liabilities of a bank towards his customer.
They are as follows:
(i) Failure /Delay in repaying deposits
Withholding of the amount due on a fixed deposit after its maturity amounts to deficiency in
service. Delayed payment of term deposits on maturity also amounts to deficiency in service.
The principle applies to cases of inordinate delay in payment of proceeds of premature
encashment of deposits as well.

(ii) Payment and Collection of Cheques/Drafts
Wrongful dishonour of cheques due to the negligence or mistake on the part of the bank has been
held to amount deficiency in service. Dishonour of DDs due to the lapse or omission on the part
of the officials of the bank like non affixation of signatures, failure to mention code number etc.
have also been held to be amounting to deficiency in service.
CASE: The complainant had deposited a cheque with the opposite party bank for collection and
to credit the proceeds to its account. The bank after collecting the cheque did not credit the
amount to complainant's account on the ground that the amount has been held as margin money
for a bank guarantee issued on behalf of the complainant. It was held that bank guarantee could
have been issued by the bank only after margin money had been deposited by the complainant,
and in the present case the bank guarantee was issued much before the cheque was received by
the bank. Further, even after the expiry of bank guarantee, the amount was wrongfully retained
as margin money. Therefore, it was held that bank is liable to credit the proceeds of cheque to
complainant with interest and also pay exemplary damages. [M/s Sovintorg (India) Pvt. Ltd.
Vs. State Bank of India - 1992(1) CPR 833 (NC).]


Liability of Bank under Consumer Protection Act

(iii) Loans and Advances:
Refusal to grant loans
Matters concerning the eligibility of parties to any credit assistance, viability of the project and
continuation of the credit facilities or the operation of the account by any party, are within the
discretion of the financial institution/bank depending upon various factors like financial
discipline and past history of borrower and his ability to pay the loan, if such discretion is
exercised bonafide. Even though the bank has the right to refuse or grant loan, causing undue
delay in releasing the installments of the sanctioned loan might be held to amount to deficiency
in service.
CASE: No relief can be sought under the Consumer Protection Act against a Bank where Bank
failed to advance further amount or discontinued the overdraft or cash credit facility. [Mukesh
Jain Vs. V.K. Gupta & another 1991(1) CPR 364 (NC).]
The complainant is a small scale unit which obtained loan from bank which was sanctioned for
one year. The complainant applied for extension of loan facility on expiry of period. Sanction for
extension had been received from the Divisional Office but branch office did not issue the
sanction. Instead the Branch office started debiting interest from the account of the complainant.
The Commission held that the action taken by the bank in debiting complainant's account with
interest vitiates principles of natural justice. Instead of passing any order on the application for
extension of period of the loan facility, the bank started debiting interest from the complainant. It
was held that this constituted deficiency in service for which bank is liable to compensate
complainant for harassment and sufferings.[M/s.Bharat Appliances Vs. Syndicate Bank & Ors
1993(2) CPR 651(SCDRC- UP)]
Interest:
Charging interest at a rate higher than the rate stipulated in the loan agreement would also
amount to deficiency in service. Interest cannot be claimed in a consumer case under section 34
of the Code of Civil Procedure as these provisions are not applicable .However, based on the
underlying principles of justice, equity and good conscience, the Forums and Commissions can
grant appropriate interest in each case. Although banks cannot give interest exceeding that
Liability of Bank under Consumer Protection Act

prescribed by the Reserve Bank, they have a duty to inform the depositor about this, the failure
of which, would amount to deficiency in service.
CASE: The complaint was filed under section 2(1) and 14 for deficiency in service for charging
of interest at higher rate contrary to stipulation of loan the opposite party bank. It was held that
the charging of the interest by a bank contrary to the stipulation of loan is deficiency in banking
service and the Complainant was entitled to get Rs.5 lakhs as compensation. Complaint allowed.
[Narayan Rao Mahadeo Manjrekar Vs.Sangli Bank Ltd.& another, CPR1995 (1) 582
(SCDRC Maharastra]
(iv) Security for loans
Non-return of documents
Banks are liable for deficiency in service in cases where they fail to return the security
documents even after repayment of the whole loan.
Insurance of security:
Banks are not bound to insure the security taken for a loan unless the loan agreement provides
for insurance and as such, failure to insure does not amount to deficiency in service. Further,
merely because the owner of a vehicle has given the cheque for insurance premium to the bank
along with monthly installment of loan taken for purchase of the vehicle, liability arising out of
an accident to third parties cannot be shifted to the bank.
(v) Lien
Banks have a right to exercise lien under section 171 of the Indian Contract Act against the dues
from constituents/customers. However, the banks cannot exercise lien over the personal account
of a customer on the ground that money was due to the bank in another account where he acts in
a different capacity, if there is no agreement to that effect.
CASE: Where even after discharging the loan for which jewels were pledged, the bank did not
return the jewels on the ground that the complainants earlier loan is still due, it was held that
bank is entitled to retain the jewels as a lien under Section 171 of the Indian Contract Act. [The
Branch Manager, Canara Bank Vs. P.Moovendan - 1992(2) CPR 455 (SCRDC Mad)]
Liability of Bank under Consumer Protection Act

The bank refused to pay the two FDRs jointly owned by the complainants and purchased by
them in 1990 by invoking its general lien for enforcing guarantee given by one of the
complainants. It was held that the bank was legally not justified in creating a lien unilaterally on
the FDRs for enforcement of guarantee given by one of the complainants in 1983. It was held
that there has been serious deficiency in service on the part of the bank. [Smt. Putlibai & Anr.
v. State Bank of Indore 1998 (1) CPR 503 (SCDRC - Madhya Pradesh)]
(vi) Bank Guarantee
The failure of a bank to honor bank guarantee is a deficiency in service. However, in cases where
a demand was made not in accordance with the conditions of the guarantee and therefore, the
guarantee was not honored, it would not amount to deficiency in service.
CASE: The bank was alleged to have failed to issue bank guarantee despite sufficient security
and the complainant suffered financial loss. It was held that the non-issuance of bank guarantee
despite security deposit with the bank would amount to deficiency in service and the complainant
would be entitled to interest on that security amount. M/s. Anand Lubricating & Pneumatic
Systems Ltd. Vs. State Bank of India - 2003 (2) CPR 53
(vii) Locker
A bank is liable for loss of articles kept in the locker with the bank. The bank cannot contract out
of its responsibilities in relation to a locker by describing the agreement as that between a
landlord and a tenant. When locker was found emptied and contents lost, the banks have been
held liable for deficiency in service. However, in some such cases, the disputes were left open to
be decided by the Civil Court after taking detailed evidence.
The leasing of a locker in the custody and control of the Bank and which is also responsible
exclusively for its security, does not and cannot create the relationship of landlord and tenant
between the Bank and the locker holder. The character of an agreement has to be determined by
its contents and its true nature cannot be altered by agreement among the parties.
Again the parties cannot be relieved of their obligations under the agreement by merely changing
the name of the agreement as being between a landlord and a tenant. In fact, the appellant could
not have contracted out of his responsibilities in relation to the locker by describing the
Liability of Bank under Consumer Protection Act

agreement as that of between landlord and tenant. It appears to be tour de force on the part of the
appellant to seek release from its obligations under the locker agreement. In view of the above, it
was held that Bank is liable for loss of ornaments in the locker hired by it to the customer.
[Punjab National Bank, Bombay vs. K.B.Shetty 1991 (2) CPR 633 (NC).]
(Viii) Security in banks premises:
A bank is responsible for deficiency in service for lack of security in its premises and loss caused
to customers accordingly.
This is on the ground that ensuring the safety of the money to be deposited and/or withdrawn
inside the bank premises is implicitly a part of the service rendered by a bank to a customer.
(ix) Consumer Forum- Jurisdiction and Procedure
A consumer complaint may not be entertained by the Consumer Forums when the matter is sub-
judice before a competent Civil Court. A person who acts as surety for another and does not
hire/avail service from the bank, is not a consumer of the bank and therefore, his complaint may
not be entertained .
(x) Voluminous Evidence- Complicated Questions of Law and Fact
In cases involving complex questions of facts and interpretation of laws and rights and
obligations of parties under various Statutes, the complainants have to seek redressal of their
grievances before Civil Courts not the Consumer Forum. Similar is the case when elaborate
evidence is required to be taken.
(xi) Limitation
A bank may exercise lien under section 171 of Contract Act even where the debt is barred by
limitation. A consumer can initiate proceeding against a banker for non-release of securities even
after the expiry of the period of limitation. This is based on the principle that the banker holds
any goods as security from a customer as trustee and the security is not intended to be transferred
to him, nor can he acquire any title to it, except on the basis of legal proceedings.
(xii) Other Banking Services
Liability of Bank under Consumer Protection Act

Operation of Account
The stoppage of operation of account of a partnership firm on account of an arbitration award
and the subsequent legal opinions obtained by the bank would not amount to deficiency in
service.
Refusal of Cheque book:
The refusal to provide cheque book facility to a customer on the ground of not maintaining the
minimum balance in his account may not amount to deficiency in service.
A complaint was filed against the State Bank of India when the complainant who is holding a
savings bank account in the bank, came to know that his pass book was missing from his room
and applied for a duplicate pass book. On receipt of the same, he noticed that Rs.800/- had been
withdrawn from his account, which was due to the negligence of the concerned official who did
not take it seriously because of the paltry amount involved. Held that if the bank official was not
careful and vigilant in verifying signatures of account holder with signatures presented while
withdrawing amount and some unauthorized person withdrew the money, it would amount to
deficiency in service on the part of the bank. [State Bank of India Vs. Amar Kumar Prem
2005 (2) CPR 261]
Fixed Deposit:
The complaint was filed for deficiency in banking service for withholding of amount even after
date of maturity of a term deposit. It was held that withholding of amount even after date of
maturity is deficiency in service and the complainat was entitled to get the maturity amount with
interest at 15% from date of its maturity till payment. [Sumangal Rao & another Vs.Vijaya
Bank, CPR(1) 163 (SCDRC - Karnataka).]
Shares:
The complainant's case in the lower forum was that he had given a power of attorney in favour of
the State Bank of India for transferring share on his behalf and that in pursuance of the said
power it had acted malafide causing loss to the complainat and creating a bad debt against the
complainant. The District Forum dismissed the complaint on the ground that the service of
Liability of Bank under Consumer Protection Act

selling the shares to others hired by the complaint was not a banking service and that it was a
service under personal contract. The State Commission held that if selling of shares or
purchasing the same out of account maintained by customer is undertaken by bank then it is
service and complaint about deficiency in such service is maintainable. Appeal allowed.
[T.K.Goswami Vs. State Bank of India, CPR1995(1)No.559 (SCDRC - West Bengal)]
Insistence on denomination of notes:
A customer cannot as of right insist for a particular denomination of notes, as the notes provided
by the bank are legal tender and therefore, no deficiency in service in failing to comply with the
demand.
Forgery of Power of Attorney:
Once a registered power of attorney is produced before the bank, the bank does not have to make
any further verification of signature. As the bank is not expected to verify signature, it cannot be
held responsible for negligence in verification of signature. The failure in respect of an act which
does not form part of the service cannot be considered as a deficiency in service.
Compliance of RBI directions:
It has been held that the Consumer Forum may not direct the banks to make payment to a
depositor contrary to the directions issued by RBI under section 35A of the Banking Regulation
Act or allow the directions issued by RBI to be flouted.
Vicarious Liability:
A bank is bound by the act of negligence of its staff during the course of employment. Thus
where the bank cashier fails to account for the money deposited with him at the counter, the bank
would be liable.
Rude behavior:
A bank may be held liable for deficiency in service owing to rude behavior of its officials and be
ordered to pay compensation for the mental agony and discomfort caused.
Notice before auction:
Liability of Bank under Consumer Protection Act

A notice to pay or face auction without making any earlier demand for repayment of loan and
without giving date of auction was held to constitute deficiency in service.
Non-return of dishonored cheque:
The failure to return a dishonored cheque has been held to be deficiency in service where the
complainant was unable to take action against the drawer without the instrument.
Strike:
A bank may not be liable to pay compensation for suspension of business due to illegal strike by
the employees and when no loss is caused due to the negligence of the bank. However, in a case
when the strike by award staff was not such as to paralyse work and when the officers and other
employees were willing to work and still the salary accounts were not credited, it was held that
the bank was liable for deficiency in service.