Encashment Certificate Issue - Two Meanings in Banking Law

In Indian banking there are two completely different things called "Encashment/Encumbrance Certificate" and both create fraud litigation:

A. NSC / KVP Encashment Certificate Issue - The Banking Fraud Context

This is what your previous question connects to. This is the core of co-operative bank frauds.

What it is:
When a customer pledges National Savings Certificate (NSC) or Kisan Vikas Patra (KVP) for a loan, the bank must:

1. Verify issuance from the Post Office
2. Get lien marked in Post Office records
3. At maturity, get an Encashment Certificate / Verification Letter from Post Office confirming that the certificate is genuine, lien is noted, and it can be encashed.

The Fraud Modus:

1. Thief steals blank NSC/KVP or prints fake ones
2. Forges Post Office stamp and signature
3. Opens account in fake name (as in Vaish Co-op Bank case - Account No. 704993 of Gurdeep Kamboj)
4. Bank employee in connivance does NOT send letter of thanks / does NOT verify from Post Office, Maujpur
5. Bank sanctions loan against fake securities
6. Money withdrawn via cheques by employee
7. When bank sends for encashment, Post Office replies: "Not issued by us, no lien marked" - vide letter No. F-1/13/2006-2007 dt 22.01.2007 in Vaish case.

The loss is Rs 44.57 lakhs in that case. The bank then claims under Bankers Indemnity Clause D.

Legal Issues:

1. Who bears loss - Bank or Post Office?
Pradeep Kumar & Anr vs Post Master General & Ors, Civil Appeal No. 8775-8776 of 2016, Supreme Court decided 07.02.2022

Facts: Appellants purchased KVPs in 1995-96 with maturity value Rs 32.60 lakhs from various post offices. They wanted to transfer. Post office employee committed fraud.

Supreme Court held:

Once it is established that fraud or any wrongful act was perpetrated by an employee of a post office during the course of their employment, the post office would be vicariously liable for the wrongful act of such employee.

This overruled the defence that post office is not liable for fraud of its clerk. Post office / Banks are liable for employee frauds under Consumer Protection Act. This is now the landmark for all KVP/NSC encashment frauds.

2. Is fake NSC/KVP a valid security? Can bank recover from person who encashed?

A.N. Rastogi vs Central Bank of India, W.P.(C) 8339/2005, Delhi High Court 03.01.2014

• Petitioner was charged with duty of getting sample KVPs transferred.
• 3394 KVPs found fake, including 9 transferred by petitioner.
• Court held employee liable for not exercising due diligence - encashment certificate must be verified independently, not by sample.

3. Bank's duty when paying forged instrument:

Canara Bank vs Canara Sales Corporation, AIR 1987 SC 1603 - Supreme Court principle followed in N. Venkanna vs Andhra Bank (NCDRC):

When a cheque duly signed by a customer is presented for encashment, it carries mandate to pay. If signature is not genuine, there is no mandate. Bank cannot resist claim with defence of negligence on customer's part.

Applied to DD/Encashment Certificate: If DD/NSC leaf is stolen and signatures of bank/post office officials forged, it is not valid instrument and could not have been honoured. Burden shifts under Section 118 of Negotiable Instruments Act to person who accepted it.

4. The Vaish Co-op Bank case - Encashment failure as proof of conspiracy:

The Vaish Co-operative New Bank Ltd vs Oriental Insurance Co Ltd, Complaint Case No. 219/2009, Delhi State Commission 21.04.2014

Commission detailed how encashment failure proved criminal conspiracy:

a) NSCs/KVPs were stolen
b) Not issued by concerned Post Office
c) Forged stamp to show lien mark in favour of bank
d) Fake address, deliberate non-sending of letter of thanks to suppress detection
e) FIR No. 279/07 under Sec 420/467/468/471/120B IPC

The insurer argued: This is negligence (not verifying) and trading loss, not covered. Commission rejected and held it is dishonest act under Clause D of Bankers Indemnity Policy.

B. Property Encumbrance Certificate (EC) - The Other Meaning

If you meant property EC - this is a certificate from Sub-Registrar office showing charge / mortgage / lien on property.

Why banks ask: Before loan against property, bank requires EC for 13-30 years to ensure property is not already mortgaged.

Fraud here: Forged EC, forged Encumbrance Certificate, non-encumbrance certificate showing clear title when property already mortgaged. Cases like K.B. Sampath vs Indian Bank - forged encumbrance certificate, forged sale deed, forged TNGST/CST certificates submitted for loan.

Liability: Bank is negligent if it does not verify EC from Sub-Registrar online portal. NCDRC has held banks guilty.

Key Takeaways for Your Bank

To avoid repudiation of your insurance claim:

1. Always obtain independent encashment verification from Post Office before disbursement, not after.
2. Preserve the reply letter from Post Office stating "not issued / no lien" - that letter is primary evidence of dishonesty, not negligence.
3. File FIR u/s 408 IPC (criminal breach of trust by clerk/servant) + 467/468 (forgery of valuable security) - Vaish case succeeded because they had it.
4. For property EC, now use online verification - Karnataka Kaveri, Tamil Nadu EC online - don't rely on paper EC.