Banks liable for unauthorised withdrawals from customer accounts: Kerala High Court

The Kerala High Court has held that banks cannot be exonerated from liability for loss caused to a customer on account of unauthorised withdrawals made from his/her account, merely on the ground that the customer did not respond promptly to the SMS alert given by the bank.

The court observed that a bank has a duty to its customers to take necessary steps to prevent unauthorised withdrawals from their accounts.

As a corollary, if a customer suffered a loss on account of transactions not authorised by him, the bank was liable to the customer for the loss.

Safe transactions

The court added that it was the obligation of banks to create a safe electronic banking environment to combat all forms of malicious conduct, which result in loss to their customers.

The basis of the obligation was the implied term in the contracts entered into by the banks with their customers.

Justice PB Suresh Kumar further observed that if a customer suffered loss in connection with transactions made by fraudsters, it had to be presumed that it was on account of the failure of the bank to put in place a system which prevented such withdrawals, and the bank was, therefore, liable for the loss caused to the customer.

Bank contract

The court added that if there exists a specific term in the contract between a bank and its customer to the effect that the bank would be exonerated from the liability in connection with any unauthorised transaction if the customer did not respond to the SMS alerts, such notifications cannot be the basis for determining the liability of the customer.

The ruling was made by the court while dismissing an appeal filed by the State Bank of India, challenging an order of a sub-court, Pala, allowing the plea of an NRI for realisation of ₹2.40 lakh lost through unauthorised withdrawal by fraudsters in Brazil.

The SBI took the stand that since the loss caused to the customer was not due to any action or inaction on the part of the bank, even if the withdrawals were made fraudulently by third-parties without the knowledge of the plaintiff, the bank was not liable for the same.