Holiday banking

Mahavir Jayanthi this year (April 2) turned out to be a historic one for the banking sector, even though the historic part went mostly unnoticed. On that day, banks functioned on a holiday declared by various State governments under the Negotiable Instruments Act, 1881.

Before going into the legality of a bank functioning on a government-declared holiday, let us analyse some implications of such actions.

Legally bound The Negotiable Instruments Act, 1881 deals with financial instruments such as cheques, bills of exchange and promissory notes. Persons dealing with these instruments are governed by the provisions of the Act and any deviation from the stipulations of the Act may attract consequences.

Section 25 of the Negotiable Instruments Act says that when the day on which a promissory note or bill of exchange is at maturity happens to be a public holiday, the instrument shall be deemed to be due on the next business day.

Holidays are declared by notification by the government in the official gazette under the provisions of the Act. Hence, the business day of banks has legal sanctity and it cannot be compromised.

Banks honour cheques issued by their customers according to the provisions of the Act. If funds are available in the account and if the cheque is drawn properly, the bank is bound to honour the cheque and, according to Section 85 of the Act, the bank is discharged by “payment in due course”. Section 10 narrates the conditions under which a payment will be considered as a “payment in due course.”

It is well settled that if a bank pays for a cheque after business hours, it will not be considered a “payment in due course” and the bank will run the risk of action by its customer.

That is why, after business hours, banks will pay only to their customers and not to third parties, as payment to third parties after business hours may be disputed at a later date.

Demands clarification If a bank functions on a holiday (as declared by the official gazette of the government), there cannot be any business hours on that day and hence all payments made by the bank may not satisfy the condition of “payment in due course”.

When the payments do not satisfy the condition of “payment in due course”, the bank is not discharged from its liability as stipulated under Section 85. It will be anybody’s guess as to what will be consequence of a large number of payments which are not ‘payment in due course.

If a bank is allowed to function contrary to the notification of the State government or the Centre, will it be legal and tenable? Will it not warrant action by the concerned governments? If a bank is allowed to function, what is the sanctity of the notification of the government?

It will be in the public interest if the RBI clarifies the position on the functioning of banks on a holiday declared under the Negotiable Instruments Act.

The writer is a retired banker

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