Heat of loss caused by `cooling-off' period

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M. S. Parthasarathy on a case of customer discontent arising from bank's delay in collecting foreign currency cheques

M. S. Parthasarathy

THE exodus of Indian professionals, particularly in the IT industry, mainly to the US, has led to a growing volume of remittances by them to their parents and other relatives or for investment in India. The remittances may be made through online banking facilities or by such electronic modes as SWIFT (Society for Worldwide Interbank Financial Telecommunication).

Not infrequently, however, a dollar cheque drawn on a bank in the US is sent to the payee in India, which the latter deposits into his account here for collection and waits for the proceeds to be collected and made available to him. And, more often than not, the collecting bank takes several weeks to credit the rupee equivalent of the collected amount to the payee's account. Are the banks liable to the customers for any loss they may be put to as a result of a time-lag that is considered as unreasonably long?

Recently, a very large cheque in dollars on a bank in the US was deposited by the payee into his rupee savings account with a bank in a large city. The funds were intended and later used to repay a rupee housing loan from another bank. The cheque was presented to, and paid by, the US bank within about 10 days from deposit in India. The payee was immediately informed of the payment by the drawer, his son. Then on, the father made frequent enquiries of his bank to know if the proceeds had been credited to his account. It took another three weeks or so before the proceeds were eventually credited to the account.

The customer claimed that his account was credited after an unreasonably long period after the bank received payment in the US, even though he had promptly informed the bank of the payment. As damages, he claimed from the bank: i) the difference in the rupee equivalent between the date on which the bank had received payment in the US and the date of ultimate credit to his account, the rupee having significantly appreciated vis-à-vis the dollar meanwhile, ii) interest on the difference for the delayed period, and iii) the interest paid on the housing loan for the extended period.

Upon the bank's rejection of the claim, he turned to the Banking Ombudsman, who, after an unsuccessful attempt to bring about a negotiated compromise between the bank and the customer, rejected the customer's claim. The grounds of his ruling seem debatable.

First, in the Ombudsman's opinion, the bank had complied with the rule of the Foreign Exchange Dealers' Association of India (FEDAI) that the proceeds should be credited to the customer's account at the exchange rate prevailing on the date of the credit. With respect, mere compliance with the FEDAI rule would not absolve the bank of liability for any unreasonable delay in crediting the proceeds.

Second, the Ombudsman noted that the customer had not complained about similar time-lags in the past, presumably because the rupee was then depreciating against the dollar and he benefited from the time-lags. The customer's conduct precluded him from complaining in the instant case. Would he have complained had the exchange rate moved in his favour during the time-lag?

The earlier cheques being far smaller than the cheque in the present case, the customer did not care, or consider it worthwhile, to complain. His mere silence was not tantamount to his acquiescence in the bank's laches, if any, in the collection of those cheques. Nor was he estopped by his earlier conduct from complaining in the instant case. A negligent act or a breach of duty would not cease to be so by repetition.

Whether or not the time-lag in the present case was unreasonable should have been considered on the basis of the bank's duty to the customer in collecting the cheque, and the terms on which the bank may have undertaken such a task under its agreement with the customer when the account was opened or during the course of its operation.

The question could not be decided on the basis of the exchange-rate movements during the relevant period. What attitude he would have adopted had the exchange rate moved in his favour during the relevant period is immaterial. On the other hand, the customer may well argue that during a period of continued appreciation of the rupee against the dollar, the longer the delay, the larger is the bank's gain.

A collecting bank, as the customer's agent, owes him a duty of care and to ensure, other than in some exceptional cases, that the cheques deposited by him are speedily processed and collected, and that, if the cheques are duly paid on presentment to the drawee banks, the proceeds are credited to the customer's account within a reasonable time. The bank would be liable to compensate the customer for any breach of that duty. What is reasonable time depends upon the facts in each case, such as the place on which the cheque is drawn, the institutional arrangements the bank has in such a place for presentment of the cheque to the drawee bank, and for repatriation of the proceeds to itself to be able to pass them on to the customer.

Where the cheque is drawn on an overseas bank, the collecting bank may have to forward it to an agent bank in that country (or to a branch of its own that handles the collection process). After the agent bank presents the cheque to the drawee bank and receives payment, that bank remits the proceeds to the collecting bank in India, usually by credit to its foreign currency account maintained with the agent bank or with some other designated bank in that country.

With the widespread use of modern information technology in banking transactions, the proceeds can be remitted expeditiously, on a real-time basis or immediately after receipt of the funds by the agent bank. What then remains is the action by the collecting bank in India to respond to the credit or remittance by the overseas agent bank and to make over the rupee equivalent to the payee-customer. Again, with real-time modern communication methods available to banks, such responding and crediting should not take more than a day or two, and certainly not weeks. Any extra time taken by banks would only reflect on the inadequacy or inefficiency of their systems and processes, lack of care for their customers' interests, and the banks' avidity to make use of the free float of funds for longer than they can if they passed them on to the customers promptly.

In his verdict, the Ombudsman did not consider and express a view on whether the time taken by the bank for eventual crediting of the proceeds to the customer's account after receiving payment of the cheque in the US was inordinate and unreasonable. No facts seem to have been presented by the bank to show when it had actually received the dollar funds from its agent bank in the US or the payment came to its notice or knowledge.

The bank seems to have claimed that, in accordance with US banking practice, the payment received by it from its agent bank in the US was merely a provisional payment, which became irrevocable and final only after a certain "cooling-off period" within which the agent bank could reclaim the payment in certain circumstances. Hence, in turn, credit could only be given to the customer after the payment became final. However, the bank seems to have produced no material to the Ombudsman evidencing such a US banking practice and the length of any cooling-off period that would have applied in this case.

The (US) Uniform Commercial Code (1991) (Section 4-215) allows a drawee bank to make a provisional settlement of a cheque presented to it, which becomes final on fulfilment of certain conditions.

In general, a provisional settlement may be revoked by returning the cheque before the "midnight deadline", which expires at midnight on the next banking day following the banking day on which the bank has received the cheque. Section 4-214 permits a collecting bank to make a provisional settlement with its customer and await final settlement by the drawee bank. If there be no final settlement, the collecting bank may charge back any credit given to the customer or obtain refund from him. The rights and obligations of banks are also governed by the Expedited Funds Availability Act 1988, to implement which the Federal Reserve System has issued Regulation CC on Availability of Funds and Collection of Cheques.

The Act and the Regulations are intended to ensure that banks expedite, and eliminate tardiness in, the collection process and make the collected funds available to their customers promptly, within the framework of prescribed time schedules. Regulation 229.12 requires that where a cheque is received for collection and paid, the collecting bank should make the funds available for withdrawal by its customer not later than the second business day in the case of a local cheque and the fifth business day in the case of a non-local cheque, following the banking day on which the cheque is deposited.

For cheques larger than $5,000, the collecting bank may extend the time schedule by a reasonable period not exceeding five banking days. Banks are required by the Act to disclose their funds availability policy to their customers. The disclosed policy of a leading US bank shows that funds from collected cheques will be made available within two to five business days from deposit, depending upon the types of cheque deposited. Although the Regulations do not seem to apply to cheques collected for an account held by a bank, it is unlikely that a far longer time-schedule than five business days will apply to collection of cheques for such bank-customers.

Third, the Ombudsman expressed that, since the amount was very large and was meant to repay a loan, the son should have remitted the amount by electronic means rather than by a paper cheque, or, alternatively, the complainant should have got the cheque purchased by his bank and not deposited it for collection. That may be wise counsel to a customer in the position of the claimant, but cannot colour a decision on the unreasonableness or otherwise of the time-lag that occurred in this case.

In these days of inexpensive instant communication which has made global real-time banking transactions a reality, it is anachronistic that one has to wait for weeks to get the proceeds of foreign currency cheques deposited with banks in India for collection.

It is suggested that FEDAI or the Reserve Bank of India introduce binding rules, regulations, or guidelines to ensure that banks speed up the collection process and make the collected funds available to customers expeditiously, without making undue use of the free float of such funds.

Finally, it is rather unfortunate that the complainant seems to have no remedy under the Ombudsman scheme if he is not satisfied with the Ombudsman's award, though he can approach civil courts. Long-winding and expensive litigation cannot be a preferred option for a small customer, pitted against a bank that may well be prepared, if need be, to take its case to the highest court.

In all fairness, the scheme should provide for an inexpensive appeal by the complainant against the Ombudsman's verdict to some designated appellate authority.

(The author is a writer on banking law.)

(This article was published in the Business Line print edition dated March 17, 2005)
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