Unit 2 - Bank and Customer Relationship

Course Code: 19BMC205B
Course Title: Banking and Financial Institutions
Course Leader
Mrs. Savitha Kulkarni

savitha.ms.mc@msruas.ac.in
1
Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Lecture No. 5-8
Banker and Customer Relationship
At the end of this session, students will be able to:
• Discuss the concept of banker and customer

• Explain the General Relationship between banker and customer
• Discuss the Obligations of Bankers
• Explain the Disclosure of information about customers account as
required by law
2
Introduction
• Banking industry occupies an important place in a nation’s economy

• A bank is an indispensable institution in a modern society
• One cannot think of the development of any nation without the
active assistance rendered by financial institutions
• Banks, in fact, do finance trade, industry and commerce
• The modern business and the entrepreneur cannot carry on the
commercial activities without the different methods of financing
done by the banks
• Therefore, one has to accept that the banking industry play a vital
role in every field and at every juncture of the business
3
Meaning of Bank
Banking Regulation Act of India, 1949 defines Banking as

“accepting, for the purpose of lending or investment of deposits of
money from the public, repayable on demand or otherwise or
withdrawable by cheque, draft order or otherwise.
G. Crowther: “A banker is a dealer in debt, his own and other people.”
4
Special Types of Customers
• Special types of customers are those who are

distinguished from other types of ordinary
customers by some special feature
5
Special Types of Customers Contd…
• Minors: According to Indian Contract Act, a minor is recognized as a

highly incompetent party to enter into legal contracts and any
contract entered into with a minor is not only invalid but voidable at
the option of the minor.
• The law has specially protected minor merely because his mental
faculty has not fully developed and as such, he is likely to commit
mistakes or even blunders which will affect his interests adversely.
• It is for this reason, the law has come to the rescue of a minor.
6
• Lunatics: A lunatic or an insane person is one who, on account of

mental derangement, is incapable of understanding his interests
and thereby, arriving at rational judgement.
• Drunkards: A drunkard is a person who on account of consumption

of alcoholic drinks get himself intoxicated and thereby, loses the
balance over his mental faculty and hence, is incapable of forming
rational judgement.
7
• Married Women: An account may be opened by the bank in the

name of a married woman as she has the power to draw cheques
and give valid discharge
• At the time of opening an account in the name of a married
woman, it is advisable to obtain the name and occupation of her
husband and name of her employer
8
• Joint Stock Company: A joint stock company has been defined as

an artificial person, invisible, intangible and existing only in
contemplation of law. It has separate legal existence and it has a
perpetual succession. The banker must satisfy himself about the
following while opening an account in the name of a company
a) Memorandum of Association
b) Articles of Association
c) Certificate of Incorporation
d) Certificate to Commence Business
e) Application Form and Copy of the Board’s Resolution
f) A Written Mandate
g) Registration of Charges
h) Any Change in the Company’s Constitution or Offices
9
• Clubs, Associations and Educational Institutions: Clubs, Associations

and Educational Institutions are non-trading institutions interested in
serving noble causes of education, sports etc.
• The banker should observe the following precautions in dealing with
them:
(a) Incorporation
(b) Rules and by-laws of the Organisation
(c) A Copy of Resolution of Managing Committee
(d) An Application Form
(e) A Written Mandate
(f) Transfer of Funds
(g) Death or Resignation
10
• Joint Hindu Family: Joint Hindu family is an undivided Hindu family

which comprises of all male members descended from a common
ancestor
• They may be sons, grand sons and great grand sons, their wives and
unmarried daughters. “A joint, Hindu family is a family which consists
of more than one male member, possesses ancestral property and
carries on family business.” Therefore, joint Hindu family is a legal
institution
• It is managed and represented in its dealings and transactions with
others by the Kartha who is the head of the family
• Other members of the family do not have this right to manage unless
a particular member is given certain rights and responsibilities with
common consent of the Kartha
11
• Insolvents
• Illiterate Persons
• Agents
• Partnership Firm
• Joint Accounts
• Trustees
12
• The relationship between the banker and customer is very important.

Both serve the society to grow and the economy to expand
• A banker is a dealer in capital or more properly a dealer in money
• He is an intermediate party between the borrower and lender. He
borrows from one party and lends to another
• A customer is a person who maintains an account with the bank, without
taking into consideration the duration and frequency of operation of his
account
13
14
• The relationship between the banker and customer is very

important. It is generally studied under the following two heads.
General Relationship
1. Primary relationship, and
2. Secondary relationship.
Special Relationship
15
General Relationship
• Debtor and Creditor:

• The true relationship between banker and customer is primarily of a
debtor and creditor
• When a customer deposits money with a bank, the bank then is the
debtor and the customer is the creditor
• The position is reversed if the customer is advanced loan then the

banker becomes creditors and customer is debtors
16
Debtor and Creditor
• The creditor must demand payment
• Proper Place and Time of Demand

• Demand Must be Made in Proper Form
17
Banker as Agent
• Principal and agent:

• The special relationship between the customer and the banker is that
of principal and agent
• Purchasing or selling of securities
• Making periodical payments as instructed by his customers
• Collecting interest and dividend on securities lodged by his customers
• Receiving safe custody valuables and securities lodged by his
customers
• Collecting cheques, drafts of the customers
• When the bank performs such agency services, he becomes an agent
of his customer
18
Banker as Trustee
• Bank as a Trustee and Beneficiary

• The bank act as a trustee for his customer in those cases where he
accept securities and other valuables for safe custody
• The bank can become trustee for debenture holders or the bank
collects the cheques, hundis of the customers in the capacity of
trustee
• In such cases the customer continues to be the owner of the

valuables deposited with the bank
19
Banker as Bailee
• Bailer and Bailee (Bailment) relationship

• Section 2 of the Indian Contract Act defines that bailment as the
delivery of goods by one person to another for some purpose upon a
contract that they shall, when the purpose is accomplished, be
returned or otherwise disposed of according to the direction of the
person delivering them
• In such a case the customer is the Bailer and the bank is bailee
• The bank (bailee) charges a very small amount as service charges for
safe custody of the valuables from his customer (bailer)
• This relationship between the bank and the customer as bailee and
bailer started from the days of earlier goldsmiths
20
Special Relationship
• The special relationship between banker and customer takes the form
of rights which the banker can exercise and the obligations which he
owes to his customers.
1. Right of general lien
2. Right of set-off
3. Right to appropriate payments
4. Right to charge interest, incidental charges
5. Right not to produce books of accounts
6. Right under Garnishee order
7. Right to close accounts
21
Right of General Lien
• One of the important rights enjoyed by a banker is that of general lien

• A lien may be defined as the right to retain property belonging to a
debtor until he has discharged a debt due to the retainer of the
property
• In case lien is exercised by a trader on his customer’s goods, he has
no right to use the goods nor any right to sell them
• All that he can do is to retain the goods until the obligations are
cleared
• Once the obligations are cleared by the customer, it is an obligation
on the part of the trader to return back his goods immediately
22
Right of General Lien
• There are two kinds of lien

• Particular Lien: Particular lien confers a right to retain the goods in
respect of a particular debt involved in connection with a particular
transaction
• This lien is enjoyed by the persons who have spent their labour on such
properties and have not yet recovered their labour charges or service
charges from the debtors
• General lien: A general lien confers a right to retain goods not only in
respect of debts incurred in connection with a particular transaction but
also in respect of any general balance arising out of the general dealing
between the two parties
• The basic object of general lien is to have protection for the bank funds.
The loans or advances granted to customers can be recovered easily if
the general lien is exercised by the bankers 23
Right of Set-off
• The right of set-off is a statutory right which enables a debtor to take

into account a debt owed to him by a creditor
• In other words, the mutual claims of debtor and creditor are
adjusted together and only the remainder amount is payable by the
debtor
• Conditions Necessary for Exercising the Right of Set-off
• The accounts must be in the same name and in the same right
• The right can be exercised in respect of debts due and not in respect
of future debts or contingent debts
• The amount of debts must be certain
• If there is letter of set-off given by customer
24
Right to Appropriate Payments
• Whenever the customer deposits funds into his account in the bank, it
is his duty to inform the bank to which account they are to be credited
• Once the customer gives specific directions regarding appropriation,
the banker has no right to alter them
• This right of appropriation is to be exercised by the customer at the
time of depositing funds and not later
• In case the customer is silent or fails to give instructions, the banker
has every right to appropriate in his own way
25
Right to Charge Interest
• As a creditor, a banker has the implied right to charge interest on the

advances granted to the customer
• The rate of interest is nowadays levied as per the directions of
Reserve Bank of India
• Interest may also be fixed by the banker and customer by mutual
consent
• It may not however be beyond the prescribed limits of Reserve Bank
of India
• It is charged on half yearly or quarterly basis and generally compound
interest is used
26
Right not to Produce Books of Accounts
• According to the provisions of the Bankers Book Evidence Act, the

banker need not produce the original books of accounts as an
evidence in the cases
• He can issue only an attested copy of the required portion of the
account which can be utilized as an evidence before the court
• When the court is not satisfied with the certified copy, the court can
summon the original books
• 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.
27
Right under Garnishee Order
• The term “Garnishee” is derived from the Latin word “garnire” which
means “to warn.”
• This order warns the holder of money of judgement debtor, not to
make any payment out of it till the court directs
• It is an order issued by a competent court of law addressed to a
banker instructing him to stop or withhold payment of money
belonging to a particular person who has committed a default in
satisfying the claim of his creditors
• Therefore, whenever a bank receives such an order, the banker has to
obey the order fully. Let us take an example to clearly explain this
procedure
28
Right under Garnishee Order
• Harish is a contractor and obtains a loan from Eshwarappa a money

lender or banker. Harish fails to pay the money to Eshwarappa as per
the stipulation
• Hence Eshwarappa files a suit in the court of law for dues.
Eshwarappa also knows that the money is due to Harish from the
agency (third party) with which he is doing his contract business. Now
Eshwarappa can request the court to issue an order directing the
Harish agency not to make any payment to Harish.
• If the court issues the order that becomes a garnishee order. In this
suit Harish is judgement debtor and Eshwarappa is a judgement
creditor
• The third party is garnishee.
29
The Garnishee order is issued in two parts.
• Order-Nisi: It is an order issued by a court on a specific banker

ordering him, not to release any funds belonging to a particular
customer (judgement debtor) until further orders are issued. In the
meantime, the judgement debtor is requested to appear before the
court for further proceedings
• Order-Absolute: This is an order of the court issued to a banker after
completion of the hearing of the parties concerned and through this
order, the court specifies how much amount is to be kept separate.
The banker has to follow these orders after looking at the position of
the customer’s account
30
In the following circumstances the Garnishee order
would not be applicable
(a) Where the account of the judgement debtor is a joint account
holder with another person
(b) Where the identity of the judgement debtor is doubtful
(c) Where the judgement debtor has previously made an official
assignment of his balance in favor of a third party and the banker is
informed about it in writing
(d) Where the account of the judgement debtor reveals a debit
balance
31
Right to Close Accounts
• Banker also enjoys the right to close his customer’s account and
discontinue operations. This process terminates the relationship
between banker and customer
• This is done only in situations where the continuation of relationship
seems unprofitable to the banker
• These are the rights enjoyed by the banker with regard to the
customer’s account
32
Obligations of Bankers
• Bankers are under the obligations to fulfil certain duties while dealing
with customers. Such obligations are as under:
1. Obligation to honour the customer’s cheques

2. Obligation to maintain secrecy of customer’s account
3. Obligation to receive the cheques and other instruments for collection.
4.Obligation to give reasonable notice before closing the customer’s
accounts
33
Obligation to Honour the Customer’s Cheques
• Section 31 of the Negotiable Instruments Act, 1881, imposes a

statutory obligation upon the banker to honour the cheques of his
customer
• “The drawee of a cheque having sufficient funds of the drawer in his
hands, properly applicable to the payment of such cheque, must pay
the cheque when duly required so to do and in default of such
payment, must compensate the drawer for any loss or damage,
caused by such default.”
• This provision clearly indicates that the banker should honour the
customers demand for payment by cheque on certain condition
34
Obligation to Honour the Customer’s Cheques Contd..
• Sufficient Balance
• Application of the Funds
• Duly Required to Pay
• The instrument used for drawing the amount should be properly
written and fulfil and legal obligations.
• There should not be any legal restriction to pass the cheque for
payment say in case of Garnishee order, restriction is imposed in the
account.
• Consequences of Wrongful Dishonor of Cheque
35
Obligation to Maintain Secrecy of Customer’s
Account
• A bank’s profession also demands that he should maintain the
particulars of his customer’s accounts in secret
• The banker has an implied obligation to maintain secrecy of the
customers account
• He should not disclose matters relating to the customer’s financial
position since it may adversely affect the customer’s credit and
business
• This obligation continues even after the account of the customer is
closed
36
Obligation to Maintain Secrecy of Customer’s Account Contd..
• Only in the following circumstances, disclosure is justified:

• To Satisfy Statutory Requirements
• As a Common Courtesy
• Disclosure at the will of Customer
• To Protect his Own Interest
• To Protect Public Interest
Where considerable amounts are received from other countries
In case the bank thinks that the customer is carrying on such activities which
are not congenial in the interest of the nation
In case the banker thinks that the customer is trying to break the provisions
of the law on the basis of his records
When the Government calls upon the bank to give information regarding a
particular customer and when the bank feels that a particular customer has
committed an offence 37
Obligation to Receive Cheques and Other
Instruments for Collection
• Basically, the business of banking acceptance of money on deposit
account and payment of cheques
• It also includes collection of cheques. It may rightly be contended that
anyone who does not perform these essential services is not a banker
• Whenever a banker is entrusted with the job of collection of cheques,
they must be collected as speedily as possible through the accepted
channels
• Failure to exercise proper care and employ the recognized route for
collection may make the bank liable for any loss which the customer
may sustain
38
Obligation to Give Reasonable Notice before
Closing the Account
• According to law, a debtor and a creditor may terminate the
relationship without notice – by the debtor paying off the balance or
the creditor recalling the debt
• It is not so simple between a banker and a customer for the obvious
reason that the banker is under an obligation to honour his
customer’s cheques
• If this obligation could be terminated by the banker without notice,
the customer might be faced with an embarrassing situation
39
Disclosure of information about customers account
as required by law
• When the law requires such disclosure to be made
Under the Income- Tax Act, 1961
Under the Companies Act, 1956
By order of the Court under the Banker’s Books Evidence Act, 1891
Under the Reserve Bank of India Act,1934
Under the Banking Regulation Act, 1949
Under the Gift Tax Act, 1958
Disclosure to Police
Under the Foreign Exchange Management Act, 1999
Under the Industrial Development Bank of India Act, 1964
40
Summary
• The special relationship between banker and customer takes the form
of rights which the banker can exercise and the obligations which he
owes to his customers.
• A lien may be defined as the right to retain property belonging to a
debtor until he has discharged a debt due to the retainer of the
property.
41
Summary
• Accepting, for the purpose of lending or investment of deposits of

money from the public, repayable on demand or otherwise or
withdrawable by cheque, draft order or otherwise.
• He is an intermediate party between the borrower and lender. He
borrows from one party and lends to another.
• The relationship between the banker and customer is very
important. Both serve the society to grow and the economy to
expand.
• Bankers are under the obligations to fulfil certain duties while
dealing with customers
42
References
a. Essential Reading
1. Class Notes
2. L M Bhole and Jitendra Mahakud (2017), financial institutions and Markets, 6th edition,
Mc Graw Hill.
3. Benton Gup (2016) Banking and Financial Institutions, Wiley Publications.
b. Recommended Reading
1. N Kannan, (2017),Banking sectors reforms in India, Abhijit publications
2. IIBF (2017) Legal and Regulatory Aspects of Banking, 3rd edition, Macmillan
3. Indian Institute Of Banking & Finance, (2015), Banking Products And Services,
Taxmann Publications Pvt. Ltd
c. Magazines and Journals

1. Business India, fortnight subscription (India Book House Ltd)
2. Business Today, fortnight subscription (Living media India Limited)
3. Money Today, monthly subscription (Living media India Limited)
43
Disclaimer
• All data and content provided in this presentation

are taken from the reference books, internet –
websites and links, for informational purposes only.
44

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Unit 2 - Bank and Customer Relationship

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Course Code: 19BMC205B

Course Title: Banking and Financial Institutions

Mrs. Savitha Kulkarni

At the end of this session, students will be able to:

• Discuss the concept of banker and customer

• Banking industry occupies an important place in a nation’s economy

Banking Regulation Act of India, 1949 defines Banking as

G. Crowther: “A banker is a dealer in debt, his own and other people.”

• Special types of customers are those who are

• Minors: According to Indian Contract Act, a minor is recognized as a

• Lunatics: A lunatic or an insane person is one who, on account of

• Drunkards: A drunkard is a person who on account of consumption

• Married Women: An account may be opened by the bank in the

• Joint Stock Company: A joint stock company has been defined as

• Clubs, Associations and Educational Institutions: Clubs, Associations

• Joint Hindu Family: Joint Hindu family is an undivided Hindu family

• The relationship between the banker and customer is very important.

• The relationship between the banker and customer is very

• Debtor and Creditor:

• The position is reversed if the customer is advanced loan then the

• The creditor must demand payment

• Proper Place and Time of Demand

• Principal and agent:

• Bank as a Trustee and Beneficiary

• In such cases the customer continues to be the owner of the

• Bailer and Bailee (Bailment) relationship

• One of the important rights enjoyed by a banker is that of general lien

• There are two kinds of lien

• The right of set-off is a statutory right which enables a debtor to take

• As a creditor, a banker has the implied right to charge interest on the

• According to the provisions of the Bankers Book Evidence Act, the

• Harish is a contractor and obtains a loan from Eshwarappa a money

• Order-Nisi: It is an order issued by a court on a specific banker

1. Obligation to honour the customer’s cheques

• Section 31 of the Negotiable Instruments Act, 1881, imposes a

• Only in the following circumstances, disclosure is justified:

• Accepting, for the purpose of lending or investment of deposits of

c. Magazines and Journals

• All data and content provided in this presentation

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