BANKER AND THE CUSTOMER RELATIONSHIP AND TYPES OF ACCOUNT HOLDERS - Banking regulation and operations (BRO)

Notes 29 Pages

Savitribai Phule Pune University

Bachelor of Business Administration

AYK

Contributed by

Alpa Yash Khare

1

FACULTY NAME: Mrs NALINI.N
COLLEGENAME: MES INSTITUTE OF MANAGEMENT
SUB:BANKING REGULATION AND OPERATION

UNIT-2
PART-A
BANKER AND THE CUSTOMER RELATIONSHIP
AND TYPES OF ACCOUNT HOLDERS
PART-A BANKER CUSTOMER RELATIONSHIP-PART-A
Meaning of Banker
Banker is a person doing the banking business is called banker. He must perform following
essential functions such as receiving deposits of various kinds, lending money or creating
credit, issuing cheques, honouring cheques and collecting cheques.
According to Dr.H.C Hart a banker or a bank is a person or company carrying on the business
of receiving money and collecting drafts, for customers subject to the obligation of honoring
cheques drawn upon them from time to time by the customers to the extent of the amounts
available in their current accounts.
Meaning of Customer
The term "Customer" has not yet been statutorily defined. Generally, the term customer
means a person who has an account with bank. Banking experts and legal judgments in the
past, however, used to qualify this statement by laying emphasis on the period for which such
account had actually been maintained with the bank.
Customer is a person who utilizes one or more of the services provided by the bank. Through
customer the bank gets an opportunity to make earnings and banker provides services.
A person can become a customer,
(1) If he opens any type of account fixed, current or savings with the bank.
(2) Such account may be frequently operated or not.
(3) The transaction between banker and customer should be of banking nature One cannot be
called a customer if the transaction is of casual nature even of it is continuously done.
Sir John Paget was one of those experts from the past. According to him, "to constitute a
customer, there must be some recognizable course of habit of dealing in the nature of regular
banking business."
This definition from Sir -John Paget lays emphasis on the duration of the dealings between
the bank and the customer. According to his view, a person does not become a customer of
the banker on the opening of an account; he must have been accustomed to deal with the
banker before he is designated as a customer.
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The emphasis on duration of the bank account is now discarded. According to Dr. Hart, "a
customer is one who has an account with banker or for whom a banker habitually undertakes
to act as such."
Banker-Customer Relationship
The relationship arises between a banker and a customer with the opening of an account by
the customer with a banker. The application for opening an account is considered as a letter
of agreement for establishing the banker-customer relationship.
The general view is that the banker-customer relationship is mainly that of a debtor and a
creditor with certain special features. However, today the range of banking services is more
extensive, and indeed is expanding all the time, so it must be expected that other relationships
will arise besides that of debtor and creditor.
For instance, the relationship of principal and agent is present when the customer instructs his
bank to buy or sell stocks on his behalf, and when items are held in safe-custody the
relationship is that of bailer and bailee. Where the bank’s executorships service takes on the
administration of a deceased’s estate the relationship is that of trustee and beneficiary. Duties
similar to a trusteeship might also happen when a branch comes into possession of funds or
property that belongs to a third party, as when the bank has sold property in mortgage, and
has a surplus to pass to the subsequent mortgagee. Obviously the relationship with the
customer in that situation is that of a mortgagor with a mortgagee. However, if the security
had been given by a third party then another state of affairs would exist between the lender
and his surety. There, duties and obligations would arise irrespective of the banker-customer
relationship with the borrowing customer. The nature of the relationship depends upon the
type of services rendered by the banker, which has two aspects: one is legal and another is
behavioural.
Some of the important relationships they share are depicted below.
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(I) PRIMARY RELATIONSHIP
1. Relationship of Debtor and Creditor When a customer opens an account with a bank and
if the account has a credit balance, then the relationship is that of debtor (banker / bank) and
creditor (customer). In case of savings / fixed deposit / current account (with credit balance),
the banker is the debtor, and the customer is the creditor. This is because the banker owes
money to the customer.
The customer has the right to demand back his money whenever he wants it from the banker,
and the banker must repay the balance to the customer. In case of loan / advance accounts,
banker is the creditor, and the customer is the debtor because the customer owes money to the
banker. The banker can demand the repayment of loan / advance on the due date, and the
customer has to repay the debt. A customer remains a creditor until there is credit balance in
his account with the banker. A customer (creditor) does not get any charge over the assets of
the banker (debtor). The customer's status is that of an unsecured creditor of the banker.
(II) SECONDARY RELATIONSHIP
2. Relationship of Pledger and Pledgee The relationship between customer and banker can
be that of Pledger and Pledgee. This happens when customer pledges (promises) certain
assets or security with the bank in order to get a loan. In this case, the customer becomes the
Pledger, and the bank becomes the Pledgee. Under this agreement, the assets or security will
remain with the bank until a customer repays the loan.
3. Relationship of Licensor and Licensee The relationship between banker and customer
can be that of a Licensor and Licensee. This happens when the banker gives a sale deposit
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locker to the customer. So, the banker will become the Licensor, and the customer will
become the Licensee.
4. Relationship of Bailor and Bailee The relationship between banker and customer can be
that of Bailor and Bailee. Bailment is a contract for delivering goods by one party to another
to be held in trust for a specific period and returned when the purpose is ended. Bailor is the
party that delivers property to another. Bailee is the party to whom the property is delivered.
So, when a customer gives a sealed box to the bank for safe keeping, the customer became
the bailor, and the bank became the bailee.
5. Relationship of Hypothecator and Hypothecatee The relationship between customer
and banker can be that of Hypothecator and Hypotheatee. This happens when the customer
hypothecates (pledges) certain movable or non-movable property or assets with the banker in
order to get a loan. In this case, the customer became the Hypothecator, and the Banker
became the Hypothecatee.
6. Relationship of Trustee and Beneficiary A trustee holds property for the beneficiary,
and the profit earned from this property belongs to the beneficiary. If the customer deposits
securities or valuables with the banker for safe custody, banker becomes a trustee of his
customer. The customer is the beneficiary so the ownership remains with the customer.
7. Relationship of Agent and Principal The banker acts as an agent of the customer
(principal) by providing the following agency services: Buying and selling securities on his
behalf, Collection of cheques, dividends, bills or promissory notes on his behalf, and Acting
as a trustee, attorney, executor, correspondent or representative of a customer. Banker as an
agent performs many other functions such as payment of insurance premium, electricity and
gas bills, handling tax problems, etc.
8. Relationship of Advisor and Client When a customer invests in securities, the banker
acts as an advisor. The advice can be given officially or unofficially. While giving advice the
banker has to take maximum care and caution. Here, the banker is an Advisor, and the
customer is a Client.

(III) SPECIAL RELATIONSHIP BETWEEN BANKER & CUSTOMER
This is related to the mutual rights and obligation of the customer and banker. Following are
the right enjoyed by the banker with regard to the customer's account:
A. Rights of a Banker
1. Banker's right to lien 'Lien' is a term used to identify the right to retain a property
belonging to a debtor till such time he discharges the debt due to the retainer of the property.
Lien is simply a right to possess a property. Line will be lost when the possession of the
property is lost.
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Lien is the right of one person to retain the property, in his possession, belonging to the other
person, until the debt due from the owner of that property is repaid. In other words, it is the
right exercised by the creditor over the property of debtor until the debt is repaid.
The lien may be a particular lien or general lien.
Particular lien: This lien refers, to a particular which is retained by the lender or creditor
against the specific or particular loan. The particular property will be retained until the
particular debt is cleared by the debtor. This lien is enjoyed by people who have sent their
labour on such properties and has not yet recovered their labour charges or service charge
from the debtors.
General lien: general lien is enjoyed by banker, mercantile agents (factors), attorneys of
High Court and policy Brokers General lien is a right of the bankers (creditors) to retain an
the properties of debtors (customer's) till the sums due to the bank are recovered. In the
absence of any agreement to the contrary, banker may retain any goods and securities bailed
to him as a security for general balance of accounts. The Indian Contract Act (U/s171)
provides, this right and rights is called General lien.
The banker can enjoy the right of lien when,
 Bank holds safe custody of deposits and valuables
 Bank receives any bills or instruments for collection or any other specific purposes
 Bank receives a fund that belongs to any trust to utilise for the stated purpose.
 If customer left the security by mistake, then banker can exercise the right of lien
 Bank also enjoy the right over the goods under its possession prior to the completion
of loan by customer
 When customer pledges ay asset which is stolen for loan, banker can exercise this
right
2. Right to charge interest, commission, incidental charges, commitment charges.
(i) Interest: The banker has a right to charge interest on customer’s loan account. Normally
interest is calculated at every quarter or half year and debited to the customer’s loan account.
The interest on the first quarter becomes the principal in the next interest charging period and
hence interest on interest (compound interest) is charged. This is a right enjoyed by the
banker.
(ii) Commission: the banker has an implied right to charge commission for the services he
render to the customers.
(iii)Incidental Charges: incidental charges is a levy imposed by the banker on
unremunerative current accounts. Again this is an implied right enjoyed by the banker.
(iv)Commitment charges: this is a charge made by the banker on overdrafts and cash credit
accounts. Besides charging interest on the utilized portion of the overdraft, the commitment
charge is charged on the unutilized portion of the sanctioned limit which does not earn any
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profit to the Banker incorporates 'Commitment Charge Clause' in overdraft and commitment
charges agreements.
3. Right to set off: A bankers’ right to set off refers to the right of the banker to adjust the
amount due to him from a customer on one account against the amount due from him to the
customer on another account. It is the right of a banker to combine or adjust the debit and
credit balances of two or more similar accounts held by a customer in the same capacity. The
right of set off facilitates the banker to know the set amount due to him from the customer
and ensures the safety of funds.
For instance X has to pay y Rs.10,000 and y has to pay X Rs.4, 000 to X's account, as Y has
to a net balance of Rs 6,000. This adjustment, between the parties is called set- off. The
banker, as a debtor has the right of set- off. This right empowers the banker to the banker to
adjust the balance at the credit of the customer's account towards the amount due to the
banker. If a customer holds two accounts in the same capacity, the account can be adjusted
one against one against the other or the accounts can be combined as per the right of set -off.
The right of set-off facilities the banker to know the net amount due to him from the customer
and ensures the safety of funds.
When to exercise the right of set-off
 By giving a prior notice to the customer
 By obtaining a letter of set off from the customer when the customer opens more than
one account.
 By having the right of automatic set-off under certain circumstances.
The banker gets the right of automatic set off under following circumstances.
 On the death of the customer.
 On the insolvency of the customer
 On the insanity of the customer
 On the receipt of a garnishee order attaching the customer’ account.
Automatic set off refers to the right of a banker to adjust the debit and credit balances of two
or more accounts held by a customer in the same name and right or capacity without
obtaining any letter of set off from the customer or without giving him any pervious notice.
Conditions to be satisfied for the exercise of the right of set-off by a banker
 The debts must be mutual i.e., must be due between the same parties.
 The right of set-off can be exercised only if the mutual debts are determined and
certain in amount.
 The right of set-off can be exercised if the customer’s account are opened in the same
name and capacity.
 The right of set-off can be exercised only in respect of debts which are due and
recoverable on the date of set-off
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 The right of set-off can be exercised by the banker only in the absence of an
agreement to the contrary.
4. Right to appropriate Payments: When the customers raises more than one loan account,
the question of appropriation arises. The payments made by the customer may not be
sufficient to clear all debts due by the customer. Similarly, when a customer holds more than
one current account and regularly operates these accounts by depositing funds and making
withdrawals simultaneously in all the accounts he holds, it will be a problem for the banker to
appropriate which funds to which account.
If the choice of appropriation is not made by the customer as well as banker then Clayton’s
law will come in to force.
Clayton's Case: In Devaynes v. Noble, famously known as Clayton's case principle was laid
down as to when the customer has current account and deposits and withdraws money
frequently the first item on debit side will be discharged by the first item on credit side. The
credit entries in the account adjust or set off the debit entries in chronological order.
Clayton's law: Clayton's law is applicable when there is no implied and expressed
instruction on discharge of debt by the customer and even no action by the banker to
discharge the various debt of customer.
Clayton's law states on apportionment of debt, as per law the apportionment of debt should be
chronological one. i.e. first side of the debt should be cleared by the first side of the credit
amount.
5. Right not to Produce Books of Accounts: The banker need not produce the original
books of Accounts as evidence in the cases in which the banker is not a party. He can issue
only the certified copy, of the required portion of the account. But when a banker is a party to
the suit, the court can force the banker to produce the original records in support of his claim.
6. Right under Garnishee order: The term ‘gamishee' is derived from the Latin word
‘gamire’ which means 'to warn’. This order warns the holders of money of judgments debtor,
not to make any payments out of it till the court directs. Garnishee order is issued by the court
at the request of the judgments creditor.
A garnishee order is an order issued by the court, at the instance of judgment creditor to
the garnishee first attaching the funds of the judgment debtor lying with the garnishee and
later directing him to pay the same to the judgment creditor if he does not have any
objection to do so.
Let us see how a garnishee order can affect the relationship between the banker and the
customer. Suppose Mr. A is the customer of SBI. He has taken a loan from his friend Mr. B.
But Mr. A fails to repay the loan to Mr. B and as a result Mr. B files a case against Mr. A.
Now Mr. B requests the court to issue an order on the bank of Mr. A directing the banker
(SBI) not to make any payment from the available balance in the account of Mr. A. If the
court issues such an order, it is known as ‘Garnishee Order’. Here, Mr. A (debtor) is known
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as ‘judgement debtor’, Mr. B (creditor) is known as ‘judgement creditor’ and the SBI is
known as ‘garnishee’.
The garnishee order is issued in two phases. First, ‘order nisi’ is issued directing the
garnishee (banker) not to make any payment from the account of the garnishee debtor. The
garnishee is asked to give his reply in the court whether the funds in the account of the
garnishee debtor can be appropriated towards the payment of the particular debt in question.
If the garnishee has no objection then in the second phase the court issues the ‘order absolute’
i.e. the garnishee order, to make the payment to garnishee creditor to satisfy the debt from the
account of the judgement debtor.
Then the banker’s obligation to the customer (garnishee debtor) is discharged to that extent.
The banker as garnishee has to discharge the following duties on receipt of the garnishee
order.
 He must issue notice to his customer regarding the garnishee order received against
his account.
 The banker should also inform, whether the entire amounts is attached or only a part
of it is subjected to garnishee order.
 He should advise the customer to open a new account for future operations, as the
existing account cannot be operated because of attachment under garnishee order.
 Banker has no right to surrender the amount to the court until the ‘order Absolute’ is
received.
 He can ask the customer to raise any objection against the garnishee order.
Conditions to be satisfied for the operation of a garnishee order served on a banker:
 The customers’ account must be in credit.
 The account should belo0ng to the customer in his own right and should not be held
as a trustee or jointly with another person.
 If the garnishee order attaches several accounts held by the customer, then all the
accounts must be held by him in the same right or capacity.
 The debt to be attached by a garnishee order must be actually due or accruing due at
the time the order to be served.
 The garnishee order must state the name and the address of the customer accurately

OBLIGATIONS OF A BANKER (DUTIES)
Obligation to honour customer's cheques: When a current account is opened by a banker in
the name if a customer, there is an obligation on the banker to honour the customer’s cheques
as long as there are sufficient funds available in the customer’s account for meeting the
cheques. So whenever the customer demands the repayment of his deposits by issuing
cheques there is a contractual obligation on the banker to honour his customers’ cheques and
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repay his deposits. This obligation is provided by stature in section 31 of the Indian
Negotiable Instruments Act of 1881.
Obligation to honour the cheques
Conditions to be satisfied to honour the cheques of the customers:
1. Sufficient funds must be available: The customer should have credit balance in his account
which should be equal to the amount stated in the cheque.
2. Funds must be properly applicable to the payment of the cheque:
 The funds available to the credit of the trust account are applicable only for the
purposed covered by the trust.
 If the banker has received a notice of the assignment of the customer’s credit balance
to a third party or
 (c) If certain funds in the customer’s account are set-aside for some specific purpose.
Such funds will not be available for the payment of the customer’s cheques.
3. Banker must be duly required to pay the cheque: The instrument used for drawing the
amount should be properly written and fulfil all legal obligations. It should be presented
within a reasonable time after its date of issue. In India as per the Banking custom and
practice, a cheque must be presented for payment within 3 months from the date of issue.
Otherwise it becomes stale and invalid and such a cheque need not be honoured
If a cheque is not properly drawn then the banker need not honour the cheque. Similarly if a
cheque is presented for payment before the date of payment mentioned in the cheque (if the
cheque is post dated) the banker is not required to pay the cheque. If a cheque is presented
outside business hours the banker is not required to honour the same.
4. There must be no legal ban preventing the payment of cheque: A cheque drawn against an
account on which a garnishee order has been issued by the court need not be honoured by the
banker. Similarly if there is any order issued by the income-tax authorities attaching the
customer’s funds in an account, such a cheque need not be honoured.
5. No obligation to honour cheques drawn against the uncleared cheques or bills: If cheques
are drawn by a customer against uncleared cheques or bills i.e. cheques or bills deposited by
the customer for collection but not yet collected and credited to the customer’s account.
Obligation to maintain secrecy of customers account:
It is a general understanding between the customer and banker that the banker should
maintain secrecy regarding the customer's account. It is believed and the fact is also that if the
accounts are enclosed to others, the image of the customers will be lost or it would affect the
customer's business heavily. Hence, it was the practice of the bankers not to disclose the
accounts and banking operations of the customers to others. The court held that 'the banker
must not disclose the state of his customer of his affairs except on reasonable and proper
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occasion'. In case, damages for breach of contracts is awarded if it found that customer's
interest has suffered because of the disclosure of the account which is not justified.
Circumstances the banker is justified in disclosure:
1. When there is an express consent of the customer: A banker is justified in disclosing the
state of his customer’s account to a third party when there is an express consent of the
customer. For instance when the customer has given the name of his banker to a third party
for the purpose of trade reference, in such a case as a referee the banker can answer all trade
enquiries made by the third party about the customer.
2. When he is compelled by the laws of the country;
For instance,
(a) Under the Banker’s Book of Evidence Act of 1891 banker can disclose the state of a
customer’s account to a court.
(b) Under section 285 of the Income Tax Act of 1961 every banker is required to furnish to
the income tax authorities the names, the address and the amounts of interest paid to
depositors who get more than Rs 10,000 as interest during any accounting year.
(c) Under Exchange control Act 1947 a banker can give information relating to a customer’s
account to the exchange control authorities
(d) Under Criminal Procedure Code a banker can disclose the state of a customer’s account to
the police officials for the purpose of investigation.
(e) Under the Companies Act of1956 a banker can give information relating to a company’s
account to the inspectors appointed by the Central Government to investigate the affairs of
the company.
(f) Under the Customs Act a banker can give information to the Customs authorities.
(g) Under Gift Tax Act of 1958 information can be given to the gift tax authorities.
(I) Under RBI Act of 1934 the commercial bank has to give credit information of any account
to the RBI.
4. When he is under a public duty to disclose:
For instance
if a banker com4es to know from his customer’s bank account that his customer is engaged in
trading with an enemy country during war or is engaged in anti-social activity he can disclose
the state of the customer’s account to the government in the interest of the state.
5. When his own interest requires disclosure: For instance when a banker takes legal action
against the customer for the Realisation of the amount due he is permitted to disclose the state
of the customer’s account to his lawyer, the court etc.
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BANKER AND THE CUSTOMER RELATIONSHIP AND TYPES OF ACCOUNT HOLDERS - Banking regulation and operations (BRO)

BANKER AND THE CUSTOMER RELATIONSHIP AND TYPES OF ACCOUNT HOLDERS - Banking regulation and operations (BRO)

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