According to the section 131 of Negotiable Instrument Act 1881 a collecting bank is provided such statutory protection, “where a banker in good faith and without negligence receives payment for a customer of a cheque crossed generally or specially to himself or the customer has no title or a defective title thereto, the banker shall not incur any liability to the true owner of the cheque by reason of only having received such payment”. For the following circumstance, however, the collecting banker losses its protection:
I. If the cheque is not crossed. The protection is available for the crossed (generally or specially) cheques only.
II. Cheque is collected for person who is not a customer of the bank
III. The cheque is not collected in good faith, i.e. with notice of defective title of the customer and with any involvement in the act of conversion.
IV. For following type of negligence:
a) Opening of account without satisfactory introduction
b) Endorsement is not properly verified
c)Insufficient inquiries in doubtful cases.
d) Failure to take note or account payee crossing and not negotiable crossing.