Duties of a Banker: Honouring Cheques under Section 31 NI Act and Secrecy

The customer's side of the banking relationship is mostly rights; the bank's side is mostly duties. Three of them matter above all: the duty to pay a cheque when it ought to be paid, the duty to keep the customer's affairs to itself, and the duty to exercise reasonable care in everything it does for him. The first has a statutory home, the second comes from a case decided in 1924, and the third is a creature of the general law.

1. The Duty to Honour Cheques

Section 31, 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 so to do, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default.

What must be true before the bank is bound to pay

Figure 1: What must be true before the bank is bound to pay

Sufficient funds properly applicable: the balance must be enough, and it must be available for this cheque. Money held under lien, already earmarked, or standing to a different account in a different right is not properly applicable.
Duly required: the cheque must be properly drawn, correctly dated, free of material alteration, signed in accordance with the mandate, and presented at the branch where the account is kept, during banking hours, within its period of validity, which by the Reserve Bank's direction is three months.
The duty is owed to the drawer alone: Section 31 gives the remedy to the drawer, not to the payee. A holder who is disappointed by dishonour has no contractual claim against the drawee bank, because there is no privity, although Section 138 may give him a remedy against the drawer.
The obligation is strict: the bank must judge correctly at its own risk. An honest mistake about the balance is no defence to a claim for wrongful dishonour.

When the bank must or may refuse

Countermand: a valid stop payment instruction from the drawer, received before payment, terminates the authority to pay.
Notice of death, insolvency or insanity: once the bank has notice, the authority to pay is at an end, on the ordinary principles of agency in the Indian Contract Act.
Garnishee or attachment order: service of an order of a court or of a competent authority freezes the balance to the extent specified.
Defective cheque: a post dated or stale cheque, one bearing a material alteration that is not authenticated, one irregularly endorsed, or one whose signature differs from the specimen.
Suspicion of title or of fraud: where the bank has reasonable grounds to suspect that the presenter has no title, or that the account is being used for fraud.

2. Wrongful Dishonour

Dishonour and payment compared

Figure 2: Dishonour and payment compared

The wrong: refusing a cheque that the bank was bound to pay. It is a breach of contract and, by the express words of Section 31, sounds in compensation for any loss or damage.
The trader rule: where the drawer is a trader, dishonour of his cheque is treated as an injury to his credit and he may recover substantial damages without proving actual loss, because the harm to commercial reputation is presumed.
The non trader: an ordinary customer recovers only nominal damages unless he proves special loss, since no presumption of injury to credit arises.
The smaller the cheque, the larger the damages: the rule of practice is that dishonour of a small cheque is more damaging to reputation than dishonour of a large one, because it suggests the customer cannot meet even a trifling obligation.
Defamation: the words written on the returned cheque may themselves be defamatory. Expressions such as refer to drawer have been held capable of conveying that the drawer has no money, and a bank should use a factual and neutral return memorandum.
Consumer remedy: wrongful dishonour is also a deficiency in service under the Consumer Protection Act, 2019, which in practice is the route most customers take.

3. The Duty of Secrecy

📖 Tournier v. National Provincial and Union Bank of England, [1924] 1 KB 461 (Court of Appeal, England)

Facts: The customer's account was overdrawn. A cheque drawn by another customer in his favour had been endorsed by him to a bookmaker, which the bank learned on enquiry from the bookmaker's bank. The branch manager telephoned the customer's employers, disclosed the overdraft and said that he was betting. The employers did not renew his engagement, and he sued for breach of the duty of secrecy.

Held: The banker owes the customer a duty of secrecy which is an implied term of the banking contract, so that breach sounds in damages without any need to prove a trust or a fiduciary relationship. The duty is not absolute. It yields in four classes of case: where disclosure is under compulsion of law; where there is a duty to the public to disclose; where the interests of the bank require disclosure; and where the disclosure is made with the express or implied consent of the customer.

Ratio: The four Tournier exceptions define the limits of banking confidentiality in India as in England. The duty extends beyond the state of the account to anything the bank learns by reason of the relationship, and it survives the closing of the account.

The exceptions in Indian practice

Compulsion of law: summons and requisitions under the income tax law, now the Income-tax Act, 2025, which replaced the 1961 Act from 1 April 2026; a summons to produce a document under Section 94 of the Bharatiya Nagarik Suraksha Sanhita, 2023 (formerly Section 91 of the Code of Criminal Procedure); orders under the Prevention of Money-Laundering Act, 2002; and production under the Bankers' Books Evidence Act, 1891. Reporting to the Financial Intelligence Unit is itself a statutory compulsion.
Duty to the public: narrow and seldom invoked. It covers disclosure where national security or the prevention of a serious crime requires it, and not a general sense that the public ought to know.
Interest of the bank: chiefly where the bank sues the customer or a guarantor and must plead the state of the account. It does not permit disclosure for the bank's commercial advantage, such as marketing by a group company.
Consent: express, as in an authority to give a reference, or implied, as where the customer names the bank as a referee. Consent given in standard terms must be genuine, which is now a live question under data protection law.
Statutory sharing: the Credit Information Companies (Regulation) Act, 2005 requires banks to furnish credit information to credit information companies, and Section 13 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 states the obligation of fidelity and secrecy of a nationalised bank, which yields to disclosure required by law.
Data protection: the Digital Personal Data Protection Act, 2023 adds a statutory layer above the contractual duty, with obligations of notice, purpose limitation and security safeguards, and rights of access and correction in the customer. The Digital Personal Data Protection Rules, 2025, notified in November 2025, bring most of these obligations into force in phases over eighteen months.

⚠ Note

A banker's reference about a customer, given to another bank, is the classic illustration of the consent exception at work. The practice is to answer in general and guarded terms, without figures, and the bank owes a duty of honesty to the enquirer and of secrecy to the customer at the same time. A carelessly favourable reference may expose the bank to the enquirer in negligence, and an unfairly damaging one to the customer in contract.

4. The Duty of Reasonable Care

Source: an implied term of the banking contract and a duty in tort, requiring the bank to exercise the care and skill of a reasonably competent banker.
In paying: verifying the signature against the specimen, noticing material alterations, observing the mandate, and attending to anything on the face of the instrument that should arouse suspicion.
In collecting: opening the account with proper enquiry, noticing a cheque payable to a third party credited to a personal account, and generally acting without negligence, which is the condition of the statutory protection for a collecting banker.
In advising: where a bank goes beyond the mechanics of banking and gives investment or product advice, it assumes a duty to take care in giving it, and mis-selling has been treated as a deficiency in service.
In electronic banking: the Reserve Bank's framework on unauthorised electronic transactions limits a customer's liability where the loss is due to the bank's own negligence or to a third party breach that is not attributable to either party and is reported within three working days, and shifts the burden of proving customer negligence onto the bank.
Standing instructions and mandates: the bank must execute them promptly and accurately, and is answerable for loss caused by failure to do so.

5. Questions Arising

Can the payee of a dishonoured cheque sue the bank?

Not on the cheque. The drawee bank has no contract with the payee, and Section 31 gives the remedy to the drawer alone. The payee's remedies lie against the drawer, in a civil suit on the underlying debt and in a complaint under Section 138 of the Negotiable Instruments Act. A payee may sue the bank only where the bank has assumed an independent duty to him, for example by marking or certifying the cheque.

Does the duty of secrecy end when the account is closed?

No. Tournier treats the duty as extending to information acquired by reason of the relationship, and it survives the termination of the account. A bank that discloses a former customer's past dealings is in breach just as if the account were open. What changes after closure is only the scope of the consent and interest of the bank exceptions, since there is no longer a live relationship to protect.

⚠ Key point

Section 31 of the Negotiable Instruments Act, 1881 obliges the drawee of a cheque having sufficient funds properly applicable to pay it when duly required, and on default to compensate the drawer for loss or damage. The duty is owed to the drawer alone. It is displaced by countermand, by notice of death, insolvency or insanity, by a garnishee or attachment order, and by a defect in the instrument. On wrongful dishonour a trader recovers substantial damages without proof of loss, and a non trader only nominal damages unless special loss is shown. The duty of secrecy is an implied term of the contract, established in Tournier v. National Provincial and Union Bank of England, [1924] 1 KB 461, subject to four exceptions: compulsion of law, duty to the public, interest of the bank and consent of the customer. It survives the closing of the account. The duty of reasonable care runs through paying, collecting, advising and electronic banking.

6. Quick Revision

✦ Points worth fixing

Section 31 is the duty to pay, and the remedy belongs to the drawer, not the payee.

Sufficient funds, properly applicable, duly required. The three conditions in the section.

Trader gets substantial damages without proof; a non trader gets nominal.

The smaller the cheque, the larger the damages.

Law, public, bank, consent. The four Tournier exceptions, in that order.

Secrecy survives the closing of the account.

Three months is the validity of a cheque.

Paying, collecting, advising, electronic. The four fields of the duty of care.

7. Frequently Asked Questions

Is a bank bound to honour its customer's cheque?

Yes, where it has sufficient funds of the drawer properly applicable to the payment and the cheque is duly required to be paid, that is properly drawn and duly presented. Section 31 of the Negotiable Instruments Act, 1881 says it must pay, and on default must compensate the drawer for any loss or damage.

What damages can a customer recover for wrongful dishonour?

A trader may recover substantial damages without proving actual loss, because injury to his commercial credit is presumed. A non trader recovers only nominal damages unless he proves special loss. Either may recover more where the bank acted with malice or gross negligence, and the words on the return memorandum may found a separate claim in defamation.

What are the exceptions to a banker's duty of secrecy?

The four laid down in Tournier: disclosure under compulsion of law; disclosure where there is a duty to the public; disclosure where the interests of the bank require it, as when the bank sues the customer; and disclosure with the express or implied consent of the customer.

Can a bank pay a cheque after the customer's death?

Not once it has notice of the death. The authority to pay derives from the customer's mandate, and that authority is determined by death on ordinary principles of agency. A payment made before notice is good, but once notice is received the account is stopped and the balance is dealt with by the nominee under Section 45ZA of the Banking Regulation Act or by the legal representatives.

Who bears the loss in an unauthorised electronic transaction?

Under the Reserve Bank's framework, a customer bears no liability where the loss is due to a contributory fraud, negligence or deficiency on the part of the bank, and also where the fault lies with neither party but the customer notifies the bank within three working days. Liability is limited where notification is delayed, and falls on the customer where the loss is due to his own negligence, such as sharing credentials. The burden of proving customer negligence rests on the bank.

8. Related Topics and Provisions

Nature of the banker and customer relationship
Rights of a banker: lien, set-off and appropriation
Garnishee orders, attachment and termination of the relationship
Special types of customer
Electronic banking and customer liability