State Bank of India v Dr. V.P.S. Rathore

Facts

• Cheques drawn in favour of Dr VPS Rathore were endorsed by a third party using forged signatures
• The third party deposited the cheques in their account at SBI
• SBI collected the cheques without verifying whether the depositor had authority to endorse
• Dr Rathore did not receive the funds and discovered the fraud
• A consumer complaint was filed against SBI for negligence in collection

Issues

1. Whether a collecting bank loses S.131 NI Act protection when it fails to verify endorsements
2. What standard of care applies to collecting bankers in verifying depositor's title

Held

• S.131 NI Act protects a collecting banker only when it acts "without negligence" and "in good faith"
• Collecting a cheque with forged endorsement without basic verification of the depositor's title constitutes negligence
• SBI failed to exercise reasonable care: it did not verify the identity or authority of the person endorsing
• Protection under S.131 lost; SBI liable to compensate Dr Rathore

Ratio Decidendi

The statutory protection under S.131 is conditional on due care and good faith. A bank that blindly collects instruments without verifying that the depositor has legitimate title acts negligently. The test is what a reasonable banker exercising ordinary prudence would have done. Failure to make basic identity and authority checks negates the defence.