J&K Bank Held Liable for Unauthorized Loan Disbursal to Third Party; Kupwara Commission Limits Borrower’s Liability

The District Consumer Disputes Redressal Commission, Kupwara has held J&K Bank liable for deficiency in service for disbursing a substantial portion of a sanctioned loan to a third party without the borrower’s consent, while simultaneously initiating recovery proceedings for the full amount.

The Commission, comprising President Peerzada Qousar Hussain and Member Ms. Nyla Yaseen, delivered its order on March 12, 2026 in Nasir Ud Din Zargar v. Al Nawaf Pharmaceutical & J&K Bank, Old Chowk Kupwara (Complaint No. 33/C/2024).

Background

According to the record, the complainant had applied for a loan of ₹10 lakhs under the Prime Minister’s Employment Generation Programme (PMEGP) through J&K Bank’s Old Chowk Branch in Kupwara. As noted in the judgment (page 1), only ₹1.20 lakhs was disbursed to the complainant against a GST bill submitted by him, while the remaining amount continued to remain with the bank.

The dispute arose when the bank allegedly disbursed ₹6.05 lakhs to a third party, Al Nawaf Pharma, without obtaining the complainant’s consent. The complainant further alleged that despite assurances to the contrary, the bank deducted approximately ₹2 lakhs from the guarantors’ accounts.

Bank’s Defence

The bank contested the complaint, arguing that the allegations were misleading and aimed at delaying recovery. It maintained that the loan had been sanctioned with due consent and that proper procedures were followed. It also relied on witness testimonies to support its claim that the disbursement process was valid.

Commission’s Findings

After evaluating the evidence, the Commission found that while the sanction of ₹10 lakhs was undisputed, only ₹1.20 lakhs had been lawfully disbursed to the complainant. Crucially, it held that the bank failed to produce any documentary proof showing that the complainant had authorized disbursal of the remaining amount to Al Nawaf Pharma (as recorded in the findings section on page 3).

The Commission observed that such unilateral disbursement amounted to negligent and arbitrary conduct. It further held that initiating recovery proceedings and charging EMIs on the entire sanctioned amount, despite partial lawful disbursement, constituted deficiency in service under Section 2(11) of the Consumer Protection Act, 2019 (page 3–4).

Importantly, the Commission clarified that a borrower cannot be held liable for amounts neither received nor utilized for their benefit, emphasizing that contractual liability arises only upon lawful disbursement.

Relief Granted

Partly allowing the complaint, the Commission issued the following directions (page 4):

• Restricted the complainant’s liability to ₹1.20 lakhs along with applicable interest
• Held that the guarantor cannot be made liable for the amount disbursed to the third party
• Directed the bank to conduct an internal enquiry and take action against responsible officials
• Ordered release of the remaining sanctioned amount to the complainant in accordance with RBI guidelines
• Directed refund of amounts deducted from guarantors with 5% interest from the date of deduction
• Mandated compliance within 30 days

The Commission, however, declined to adjudicate allegations of fraud, noting that such issues fall outside the limited jurisdiction of consumer fora.

Key Takeaway

The ruling reinforces that banks must strictly adhere to borrower consent and documentation requirements during loan disbursement. Any deviation, particularly involving third-party transfers without authorization, can attract liability for deficiency in service and invalidate recovery claims on the disputed amount.