Topic: The special Relationship of Banker and Customer

SYNOPSIS

Introduction

Definition of Banker

Definition of Customer

Banker’s obligation to honour his customer’s cheques

Banker’s obligation to maintain the secrecy of the customer’s account

Banker’s Right of general lien

Right of set off

Banker’s right to charge compound interest

Banker’s right to charge incidental charges

Banker’s right of Appropriation

Termination of relationship

Conclusion
Introduction

Banking is an ancient business in India with some of oldest references in the

writings of Manu.
During the early part of the East India Company era, agency houses were
involved in banking. Three Presidency Banks were established in Bengal,
Bombay and Madras in the early 19th century. These banks functioned
independently for about a century before they were merged into the newly
formed Imperial Bank of India in 1921.
In 1935, the Reserve Bank of India was established under the Reserve Bank of
India Act as the central bank of India.

The Reserve Bank of India was nationalized in 1949. The nationalization of the
Imperial bank through the formation of the State Bank of India and associates in
1959 made the government the dominant player in the banking industry.

In 1969, fourteen major Indian commercial banks were nationalized. And in

1980 six more banks were nationalized. In mid 1990s again the banking sectors
were opened up for private players. Many new generation private sector Banks
came in to existence.

Banking sector has under gone a lot of changes in the recent past. Information
technology has taken the forefront. ATMs, Internet banking, App banking,
mobile banking has become the order of the day. Still the foundation of the
banking is relationship between Banker and customer. The basics are contracts
and negotiable instruments.
Relationship of Banker and Customer

Before we take up relationship that exists between a banker and his customer,
let us understand the definitions of the term banker and customer.

Definition of Banker

As per H.L. Hart a Banker is one who in the ordinary course of his business,
honours cheques drawn upon him by persons from and for whom he receives
money on current accounts.

As per Negotiable Instruments Act, 1881, "banker" means a person transacting

the business of accepting, for the purpose of lending or investment, of or
deposits of money from the public, repayable on demand otherwise withdraw
able by cheque, draft, order, or otherwise, and includes any Post Office Savings
Bank;.1

Definition of Customer

The term customer of a bank is not defined by law. Ordinarily, a person who
has an account in a bank is considered its customer. Banking experts and legal
judgment 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.
According to Sir John Paget’s view ―to constitute a customer there must be
some recognizable course or habit of dealing in the nature of regular banking
business.2
This definition of a customer of a bank lays emphasis on the duration of the
dealing between the banker and the customer and is, therefore, called the
duration theory. According to this view point, 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.
The “Duration Theory” was exploded by Mr. Justice Bailhache in Ladbroke v.
Todd3 who observed that the relation of banker and customer begins as soon as
the first cheque is paid in and accepted for collection and not merely when it is
paid. The same was confirmed in Commissioner of Taxation v. English Scottish
and Australian Bank4.
In conclusion frequency of transitions is not essential to constitute a person as a
customer, but it is true to say that his position must by such that transactions are
likely to become frequent.
For the purpose of KYC policy vide RBI Master circular 5, customer, is defined
as :

1. A person or entity that maintains an account and/ or has a business

relationship with the bank.

2. One on whose behalf the account is maintained (i.e. the beneficial owner);

3. Beneficiaries of transaction conducted by professional intermediaries , such

as stock brokers, charted accountant, Solicitors etc. as permitted under the law,
and

4. Any person or entity connected with financial transactions which can

possess significant reputational or other risks to the bank, say, a wire transfer or
issue of high value demand draft as a single transaction.

One may conclude that a “Customer” is one who has either a current or a
deposit account or, in the absence of it, some relation with the bank in the
ordinary course of business, that can be seen as banking business.

Now, coming to Banker-Customer Relationship, The main relationship between

bank and a customer is that of debtor -creditor in the case of deposit account
and creditor-debtor in the case of overdraft or loan account.

The Relationship between banker and customer can be in the form of Debtor –
Creditor, Trustee – Beneficiary, Agent – Principal, Bailor – Bailee,,Assignor –
Assignee, Pledgee – Pledgor etc., Which are all considered as primary or
General relationship.

The special relationship between a banker and a customer refer to the special
obligations and rights of the banker against the customer and vice-versa. The
rights and obligations are reciprocal. The special relationship of Banker and
customer are basically derived from the General relationship only.

The various special features of relationship between the banker will arise
because of the following obligations and rights:

I. Obligations

1. Banker’s obligation to honour his customer’s cheques:

 When a current account is opened by banker in the name of a customer there is
an obligation on the banker to honour the customer’s cheque as long as there are
sufficient funds available in the customer’s account for meeting the cheques.

The amount held in current account is repayable by the banker to the customer
on demand as per contract entered in to between them. So, whenever the
customer demands the repayment of his deposits by issuing cheques, there is a
contractual obligation on the banker to honour his customer’s cheques and
repay his deposits.

Negotiable instrument act, 1881 provide, “ 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 to do so, and in
default of such payment, must compensate the drawer for any loss or damage
caused by such default”6.

Consequences of wrongful dishonour of the Cheque:

If a banker, without justification, dishonours his customer’s cheque, he is liable

to compensate the customer for injury to his credit/reputation. The amount of
compensation recoverable by the drawer of a cheque from a banker is not
limited to the actual pecuniary loss, sustained by reason of such dishonour. The
customer is entitled to claim substantial damages, even if he has sustained no
actual pecuniary loss, provided he can show that his credit has suffered by the
dishonour of his cheque.

If the customer is a trader or businessman, the damages may be substantial but

it may now be taken as settled law that a non trader is not entitled to recover
substantial damages for the wrongful dishonour of his cheque unless the
damage he has suffered is proved as special damage. In an action for breach of
contract, the damages are not at all large; a customer must always plead and
prove his actual loss, otherwise he is entitled to nominal damages only.

The Madras high court has held in New Central Hall v. United commercial
Bank Ltd7 that where a banker having sufficient funds of a customer in his
hands fails, even by mistake to honour cheques issued by the customer, the
customer has rights to claim damages.
The court awarded a decree in favour of the plaintiffs for Rs. 6000 as special
damages with interest at 6 per cent, per annum as the plaintiff was a trader.

In the above case the suit has been filed by the plaintiff against the United
Commercial Bank Ltd., Madurai, for recovering damages of Rs. 50,000, with
interest at 6 per cent, per annum, for dishonouring 11 cheques of theirs issued
amounting to about Rs.4000 on the defendant Bank though the defendant Bank
had sufficient funds of theirs in its hands and could have easily paid all the 11
cheques.

When the banker is justified in dishonouring the customer’s cheques?

In the following cases, a banker is justified in dishonouring the customer’s

cheques
 If the customer has stopped the payment of the cheque
 If there are no funds in the customer’s account
 If the customer has issued cheque of one account to other account
 If the cheque is presented after banking hours or on a holiday
 If the cheque is stale i.e date is older than 3 months.
 If the cheque is mutilated
 If there is overwriting, addition or material alteration etc. without the
authentication under customer’s full signature.
 When the bank has notice of customer’s death, then bank can refuse to
pay the customer’s cheque.
 If customer becomes insolvent
 If a bank gets a notice that his customer has become insane or lunatic.
 When bank has received a attachment order on the customer’s account by
Tax authority, central and state government, garnishee order, ED etc,.
 If the cheque is post dated
 If the cheque is irregular i.e it does not bear the stamp or date etc
 If the cheque is not properly drawn.

2. Banker’s obligation to maintain the secrecy of the customer’s

account:
It is an implied term of the contract between a banker and his customer
that the banker will not divulge to third persons, without the express or
implied consent of the customer, the state of his accounts. As the
disclosure of matters relating to the customer’s financial position may do
considerable harm to his credit and business. This obligation on the part
of the banker, although recognised in practice, was not legally imposed
on him till 1924 i.e judgement in Tournier v. National provincial and
union bank of England8,

Exception to banker’s obligation to observe secrecy:

i. 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. For instance, when a customer instructs
his banker in writing to give some or all the details of his
account to an authorised person, say his lawyer, auditor,
manager or secretary, then there is an express consent of the
customer for disclosure.

ii. When there is an implied consent of the customer:

A banker is justified in disclosing the state of his customer’s
account to an outsider even when there is an implied consent of
the customer for such disclosure.
iii. When he is compelled by the laws of the country:
A Banker can disclose the state of his customer’s account to
public authorities when he is compelled by the laws of the
country like, companies’ act 1956, R.B.I act 1934, Banker Book
of evidence Act, 1891, Banking Regulation Act, 1949, FEMA
1999, IT Act, 1961 etc,.
Case Law: Shankarlal Agarwalla v. State Bank of India and another9,
On Jan. 16, 1978, an ordinance was promulgated By which
Government of India demonetised High Denomination Bank Notes.
The petitioner deposited 261 bank currency notes of Rs. 1000/- each
with the SBI. Instead of crediting the amount in the customer’s
account, the bank informed the same to Income Tax Authorities. The
petitioner contented that the bank had a duty of secrecy and claimed
interest and damages.
The Calcutta High court held that though a bank had a duty of secrecy,
in the instant case, the bank was directed by the RBI and Ministry of
Finance to furnish all particulars regarding deposit of such notes to
Income Tax department and hence the petitioner’s claim for damages
and interest was rejected.
iv. When he is under a public duty to disclose:
A banker can disclose the state of his customer’s account when
he is under a public duty to disclose. For instance, if a banker
comes 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-national activity, banker can disclose
the state of the customer’s account to the government in the
interest of the state.
v. When his own interest requires disclosure:
A banker can disclose the state of his customer’s account when
his own interest requires disclosure. For instance, when a
banker takes legal action against the customer for the realization
of the amount due, he is permitted to disclose the exact state of
his customer’s account to his banker’s lawyer, the court etc,.

Consequences of unjustified disclosure:

Disclosure of the state of a customer’s account by a banker to
an outsider, except on reasonable and proper grounds as stated,
is regarded as unjustified disclosure.
When there is an unjustified disclosure by banker, the banker
makes himself liable to compensate the customer on the ground
of breach contract. The amount of compensation payable by the
banker to his customer may be nominal or substantial,
depending upon the circumstances of each case. If no serious
damage is caused to the customer, only nominal damage is
awarded. On the other hand, if any serious damage is caused to
the customer, substantial damage is awarded.

II. Rights
1. Right of general lien
A general lien is the right of creditor to retain any property of
the debtor in his possession until the general balance is repaid
by the debtor.

Banker’s general lien:

Banker’s general lien is the right of a banker to retain the goods
and securities entrusted to him as a banker by a customer in
 respect of the general balance due from the customer. However,
a banker’s general lien empowers the banker not only to retain
the securities, but also to sell them without getting any order
from the court as in the case of pledge. So a banker’s general
lien is considered as an implied pledge.
Circumstances under which a banker can exercise his right of
general lien:
i. Lien on customer’s funds or deposits or credit balance
lying with the banker in his capacity as a banker.
ii. Banker has a general lien on goods that come in to his
hands as a banker.
iii. A banker has general lien on documents of title to goods,
such as bill of lading, railway receipts, dock warrant etc,.
that come into his hands as a banker.
iv. The Banker has a general lien on cheques, bills of
exchange and promissory notes deposited with him for
collection.
However, a banker cannot exercise his right of general
lien in the following cases:
 Money deposited by the customer, because the
money deposited into a bank by customer cease to
be the money of the customer
 On securities deposited with him for safe custody
 On bills, promissory notes, cheques, and any other
documents deposited for a specific purpose.
 On Securities left with him inadvertently.

2. Right of set off or banker’s right to combine account:

A banker’s right to set-off refers to the right of banker to adjust the

amount due to him from a customer on one account against the
amount due to his customer from him (banker) on another account.
In short, it is the right of a banker to combine or adjust the debit
and credit balances of two or more similar account held by a
customer in the same capacity.
3. Banker’s right to charge compound interest: When a banker
grants an advance to a customer, he becomes the creditor of the
customer. When he is the creditor of the customer, the banker has
an implied right to charge interest on the customer by virtue of
banking customs.
4. Banker’s right to charge incidental charges:
Banker has right to claim incidental charges, if a customer is
unable to keep a remunerative credit balance in his account. It may
be in the form of service charges, ledger folio charges, processing
charges, appraisal charges, handling charges, penalties etc.

5. Banker’s right of Appropriation (Clayton’s Case):

When a customer owes several distinct debts to a banker and
makes a payment which is insufficient to discharge his entire
indebtedness, and if money is paid by a debtor with the express or
implied intimation that money is to be applied to a particular debt,
if creditor accepts the payment, must apply the money received
according to the direction of the debtor.
If the debtor fails to intimate to the creditor at the time of payment
as to the application of money, then the creditor may exercise his
right to appropriate the money by applying such payment to any
lawful debt at his choice including even time barred debts.

Where neither party makes any appropriation, the payment shall be

applied in discharge of debts in order of time. If the debts are of
equal standing payment shall be applied in discharge of each debt
proportionately. This is as per the rule in clayton’s Case.10
The principle laid down in clayton’s case particularly in the case of
running account like current account and cash credit account is:
 Where the account goes in to debit, the first item on the debit
side is cancelled by the first items on the credit side i.e
appropriation takes place in the order of time.
 Where the account goes in to credit, the first item on the
credit extinguished by the first items on the debit side i.e
appropriation takes place in chronological order.
Termination of banker and customer Relationship
A. Termination by customer
A customer at his own wish at any time can terminate the relationship
with the bank by closing his account.

B. Termination by the Banker

In the following cases the Banker customer relationship will be
terminated under the operation of law:
 Death of the customer.
 Insanity of customer.
 Insolvency of customer.
 Order of the court.
 Winding up of company.
 Dissolution of partnership firm.
 Customer of enemy character.

The Banker can terminate the relationship with his customer by closing
the account upon giving suitable notice in writing to that effect.
Conclusion:

Relation between banker and customer is consensual depending on

express or implied contract between two. Thereby a contractual relation
springs between banker and customer. In case of banking where a person
asks the banker to open an account for him and the banker’s acceptance
thereof, constitutes implied contract of relationship.

The main banking function was and is to keep in custody other people
money and lending a part of it. Gradually, these functions were extended,
and new others were added. As a result the dependence of commerce
upon banking has become so great that in modern money economy, the
Cessation, even for a day or two, of the banker’s activity, would
completely paralyse the economic life of a nation. It will be proper to say
that banking system has assumed the blood vessel of the economy of the
country.

In addition to his primary functions, a banker renders a number of

services to his customer. The relationship between them primarily is that
of a creditor and debtor. And all other relationships are incidental to this
basic relationship.
The Banker is the custodian of Public money and hence he has got great
responsibility and needs to be extra cautious while discharging his duties
and exercising his rights.
 END NOTE

1. Sec 3(b), The Negotiable Instruments Act, 1881

2. M.L.Tannan, Banking Law and Practice In India, 21st Edition, Wadhwa
Nagpur , P-257
3. Ladbroke v. Todd, 30 TLR(1914) 433: (1914-15) All ER Rep 1134
4. Commissioner of Taxation v. English Scottish and Australian Bank, (1920)
AC 683.
5. Para 1.2, RBI Master circular No. RBI/ 2014-15/70, DBOD. AML. BC.
No.22/14.01.001/2014-15 available at https://rbidocs.rbi.org.in/rdocs/
notification/PDFs/ 70MK010714FL.pdf visited on 15.07.2021
6. Sec.31,The negotiable instrument act, 1881
7. New Central Hall v. United commercial Bank Ltd , 29 Comp. Cas 78, AIR
1959 Mad 153
8. Tournier v. National provincial and union bank of England, case 1924 1 KB
461
9. Shankarlal Agarwalla v. State Bank of India and another, AIR 1987 CAL.29
10.Devaynes v Noble, (1816) 35 ER 781
 BIBLIOGRAPHY

I. STATUTES/ENACTMENTS:

1. The banking regulation act, 1949

2. The Indian contract Act, 1872
3. The negotiable Instruments Act, 1881

II. CASE LAWS

1. Ladbroke v. Todd, 30 TLR(1914) 433: (1914-15) All ER Rep 1134
2. Commissioner of Taxation v. English Scottish and Australian Bank, (1920)
AC 683.
3. New Central Hall v. United commercial Bank Ltd , 29 Comp. Cas 78, AIR
1959 Mad 153
4. Tournier v. National provincial and union bank of England, case 1924 1 KB
461
5. Shankarlal Agarwalla v. State Bank of India and another, AIR 1987 CAL.29
6. Devaynes v Noble, (1816) 35 ER 781

III. BOOKS

1. M.L.Tannan, Banking Law and Practice In India, 21 st Edition, Published by

Wadhwa Nagpur, 2015, Reprint 2017

IV. ARTICLES:

1. Kuldeep Singh, Relationship between Banker and Customer, available at

https://www.ijtsrd.com/papers/ijtsrd23441.pdf

V. INTERNET:
1. https://www.gklawcollege.com/wp-content/themes/gklaw-theme/
downloads/library/studymaterials/1banking-law.pdf
2. https://www.ijtsrd.com/papers/ijtsrd23441.pdf
3. https://indiankanoon.org/doc/1717455/
4. https://www.ma-law.org
5. https://rbidocs.rbi.org.in/rdocs/ notification/PDFs/ 70MK010714FL.pdf
6. http://www.uniset.ca/other/css/19241KB461.html