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BANKER CUSTOMER RELATIONSHIP
The General Relationship Banker Not a Mere Depository or Trustee: The opening of a current account by a customer and the bankers acceptance thereof involves a contractual relationship by implication. The banker is not a depository i.e. one who receives a sealed package of valuables for safe custody and undertakes to return it unopened. Banks act as custodians but that is only a subsidiary function. Again, if a banker acts as a trustee, i.e. receives money and uses it according to the terms of the trust, and has to account in detail for everything that has been done with it, the function is not that of a banker in the true sense of the word. Relation of Debtor and Creditor: The relation of banker and customer is primarily that of debtor and creditor, the respective positions being determined by the existing state of the account. The money deposited with the banker becomes his property and is absolutely at his disposal. The receipt of money by a banker from or on account of his customer constitutes the banker becoming merely the debtor of the customer with the obligation to honour his customers cheques drawn upon his balance, in so far as the balance is sufficient and available (Foley v. Hill 1848). Even if the banker pays no interest on the money deposited, he is his customers debtor and not a bailee, because he undertakes to repay on demand a sum, equivalent to the amount deposited with him. Banker to afford facility to the Customers to draw funds from the Bank by issue of cheques: The essence of relationship of banker and the customer is the affording of the facility to the customer to draw funds from the bank by issuing cheques. In the absence of such a facility, the term banker can be applied to ordinary moneylenders. Demand Necessary in case of debt from Banker: The relationship between a banker and a customer being that of a debtor and a creditor is not a complete statement. This is because the debt due from a banker to its customer differs from an ordinary commercial debt in one important aspect. In the case of an ordinary commercial debt, a request from the creditor for the payment is unnecessary. This rule does not apply to the debtor and creditor relationship between a banker and the customer where an express demand for repayment by the customer is necessary before the debt becomes actually due. Otherwise, the banker, by offering the money due to his customer, would summarily close his customers account without notice and possibly injure his customers credit by dishonouring his cheques. Refusal to provide service by bank to its customer not proper: If the customer owes large sum of money to the bank and has failed to repay the same the bank is at liberty to initiate a suit or other appropriate proceedings against the customer for recovery of its alleged dues. However, the bank shall provide its services to its customer so as to enable him to carry on its normal day-to-day business transactions. Limitation under the Limitation Act: The time for filing a suit for the recovery of money deposited by a customer with his bankers, when it is payable on demand, is three years from the date of demand. With regard to fixed deposits, the production of the receipt is in the nature of a demand and the period of limitation for filing a suit for recovery of the deposit, if refused by the banker, will be three years from the date the receipt is produced.

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Trustee in case of Safe Custody Deposits: With regard to securities and valuable deposits for safe custody, the property in them remains with the customer, who can claim them back. Liability of the Bank for Embezzlement committed by employee: The liability of an employer (Bank) for the loss caused to a customer through the wrongful act of an employee or agent is that the employer (bank) is liable for the fraud perpetrated in the course of employers business whether the same is done for the benefit of the employer (Bank) or not. Agent of customer: When a banker buys or sells securities on behalf of his customer, he performs an agency function. Similarly, when he collects cheques, dividends, bills or promissory notes on his customers behalf, he acts as his agent. He may also act in various other agency capacities such as a trustee, attorney, executor, correspondent as a representative. Bankers Right to combine accounts: A banker can combine several accounts kept by a customer in his own right, unless by agreement, ear marking, course of business etc., he is under obligation to keep them separate. However it is generally recognized that a banker would be inviting trouble, if he combines two accounts in a customers name and as a consequence of it, returns a cheque drawn on the credit balance of one of them, unless the banker can show that he had given due notice of his intention to set off or there was an agreement, or established course of business in support of his action. A banker can overcome this difficulty by taking a letter of set off from a customer who opens, in the same capacity, more than one account. .But a banker has no right to combine a customers personal account with a joint account. Also, the right to combine two or more accounts is not applicable to contingent or future debts. Bankers can overcome the difficulty by taking a letter of set off from customers who open more than one account. No right of the customer to combine Accounts: A customer has no right to treat two accounts as one or combine them. Even if the accounts are in the same branch he cannot draw a cheque on one with insufficient balance presuming that the banker will pay it since the balance in the other account is sufficient. Bankers lien and several accounts: A customer may have many accounts in a Bank. Under Section 171 of the Indian Contract Act 1872, these constitute but one account. The banker can under his right of lien attach the money if it is earmarked. If the account/accounts are not earmarked then the bank has no lien but the right of set off. SPECIAL FEATURES OF THE BANKER CUSTOMER RELATIONSHIP I. Statutory obligations on Banks in India: Obligation to honour cheques: By opening a current account of a customer, the banker undertakes to honour the cheques drawn by his customer, so long as his balance is sufficient. This is provided that the cheques are presented within a reasonable time after the ostensible date of their issue, and provided that no prohibitory order of the court or any other lawful or a competent authority (such as a tax authority) is in existence against the account of the customer. Extension of the obligation: The statutory obligation to honour a clients cheque may be extended to the amount of overdraft agreed upon. Overdraft arrangement is a contract: An overdraft arrangement between a bank and its customer is a contract and it cannot be terminated by the bank unilaterally even if it is a temporary one,

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without giving notice. No express, oral or written agreement is necessary for an overdraft facility. The agreement for the grant of an overdraft facility can be implied from the conduct of the parties. Overdraft is a loan repayable with interest: Where a customer having a current account in a bank, even without any express grant of an overdraft facility, overdraws on his account and the cheques issued by him are honoured, without there being sufficient balance in his account, the transaction amounts to a loan and the customer is bound to make good the loan to the bank with reasonable interest. Presentation of a cheque within a reasonable Time: Unless the cheque is presented within a reasonable time after the ostensible date of its issue, it should not be honoured. Generally, a cheque presented more than six months after the date of its issue is considered a stale one. A banker is not bound to honour an undated cheque. Bankers to have reasonable time for crediting funds before they can be drawn against: A banker on whom a cheque is drawn should have a reasonable time in which to place the funds paid to the credit of the customers account before they can be drawn against. The question what constitutes a reasonable time, depends upon the circumstances of each case. In the absence of an expressed or implied agreement a banker is entitled to return such cheques with the remarks Effect not cleared where cheques deposited by the customer have not been realized. If however it is the practice of a banker to credit the customers account with uncleared items of credit as cash and communicate the same to the customer (who relying on such items draws upon his account the banker) the banker will not be justified to dishonour his customers orders, except in a case where an agreement to the contrary exists. Consequences of a wrongful dishonour: If a banker, without justification, dishonours his customers cheque, he is liable to compensate the customer for injury to his credit. The amount of compensation recoverable by the drawer of a cheque from a banker in case of a wrongful dishonour, 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. Assessing of damages: The amount of damages will not necessarily be large only because the amount of the cheque dishonoured is large, as a customers creditworthiness in the eyes of his creditors will be considered worse if his cheque for a small amount is dishonored. Remedy for a Cheque Wrongfully Dishonoured. Remedy for a cheque wrongfully dishonored lies in the Civil Court. Liability to return the dishonoured cheque to the customer: When the cheque of a customer sent for collection is dishonoured by the drawee bank, it is the duty of the bank to return the cheque to the customer, or to intimate the customer regarding dishonour, if the cheque had been misplaced. Duties of a Banker: The banker is bound to act according to the directions given by the customer. In the absence of directions, he should act according to usage in the locality and applicable to the matter in hand. The banker is also expected to use reasonable skill and diligence in his work, otherwise he will be liable for damages. Payment of Domiciled bills: In the absence of an agreement, the banker is not bound to honour bills accepted by his customers and made payable by the banker.

II Bankers General Lien Bankers may, in the absence of an agreement to the contrary, retain as security for a general balance of accounts any goods and securities bailed to them. This right to retain goods is known as lien. The bankers general lien confers upon him the right to securities etc. for the general balance due by their owner to the banker. It extends to all securities placed in his hand as a banker by his customer, which are not specifically appropriated. A banker can draw on them to liquidate a general balance due from

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the customer, either at the time when the securities were deposited, or at any subsequent time while they remain in his hands. Lien an implied pledge: The general lien is regarded as an implied pledge. General lien to apply only in the absence of express contract to the contrary: In cases where the customer and the bank have an express contract by way of counter-guarantee providing the method of re-imbursement, the bank has no general lien. Lien can be enforced if mutual demand exists between banker and customer: Two rights flow out of the relationship of debtor and creditor (1) the right of the customer to demand repayment of the amounts due to him when he desires and (2) the right of the bank to appropriate the moneys and securities of the customer coming into his possession. No agreement for creation of lien necessary: No agreement is necessary to create the right of lien, for, under the Indian Law. Such an agreement is implied by the terms of section 171 of the Indian Contract Act, 1872 so long as the same is not expressly excluded. Banker has No lien on Safe Custody Deposits: Banks generally receive for custody, customers valuables, such as securities, documents of title, etc. Such articles, being regarded as those left with the banker for a specific purpose, are not subjected to bankers general lien and a contract to the contrary is implied. No lien on Bills of Exchange or other documents entrusted for special purpose: On the dishonour of a documentary bill, the bank is not entitled to apply the security accompanying the bill to any other debt due from the customer for whom the bank discounted the bill. Where fixed deposit receipts had been deposited with the bank as security for a guarantee issued by the bank, it was held that it amounted to a particular lien and the bank has no general lien. Bankers Lien not available against TDR in joint names: Lien attaches to bonds and coupons deposited for collection: If bonds are deposited with a banker, who is authorized to cut-off the coupons and collect them, the lien attaches to the bonds as well as the coupons, because they come into his hands as collecting banker. But if the bonds are deposited merely for safe custody, and the customer cuts off the coupons and hands them to the banker for collection, the lien can be exercised only on the coupons and their proceeds, which come into his hand as a collecting banker. No lien on Money deposited for a specific purpose: A banker has no right of lien in respect of money deposited by a customer, or a credit balance earmarked by a customer for a specific purpose, although the lien could be exercised if the banker had no express or implied notice of the purpose of the deposit. Lien on securities allowed to remain in bankers hand after repayment of loan secured: If the securities deposited are left in the hands of a banker after the loan secured is cleared, the securities become subject to the general lien as the customer by leaving them is supposed to have re-deposited them. No lien on documents or valuables left in the bankers hand inadvertently: No lien can arise in respect of documents or valuables left inadvertently with the banker. The banker will not get lien, if he knows at the time of the deposit of the securities or the valuables, that they are not the property of his customer. Credit and the liability must be in the same right: No lien arises on the current account balance or the deposit account of a partner in respect of a due from the firm, as the credit on one hand and the liability on the other do not exist in the same rights. A banker cannot set off any credit balance of a partnership account against moneys due from one or more of its partners on their individual accounts. Bankers lien and the limitation Act: The effect of the Limitation Act is only to bar the remedy and not to discharge the debt. Consequently, it does not affect property over which the banker has a lien.

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No lien for the amounts not due: No lien arises until the due date, in respect of an advance of a specific amount made for a definite period, as there is no debt owing till then. No lien in respect of the Trust Account: The banker has no right of lien in respect of a separate account maintained by a customer. This is known to the banker as a trust account. However, if the bank has no knowledge, and it has not received during the currency of the account any notice of the trust character of the funds, the lien can be exercised.

III Bankers Obligations Secrecy of the customers account: The banker must not disclose the condition of his customers account except on reasonable and proper occasions, and the obligation to observe secrecy does not end even with the closing of the customers account. Reasonable and proper occasions for disclosure: Answering questions by a proposed guarantor or under compulsion of law are reasonable grounds. If an overdraft is overdrawn, a person guaranteeing it is entitled to know the state of the account. When disclosure is justified: In cases where the customer has given his banker as a reference, the banker will be fully justified in answering all the trade references invited by the customer. A banker can disclose the state of his customers account by order of a court, as his duty to obey the courts order overrides the duty to his customer. A banker can divulge the state of his customers account when he is under a public duty to disclose as in case of danger of treason to the state. Also, when the protection of bankers own interests legally requires, the banker is justified in disclosing the state of his account, as in an action against the customer for money due. When a bank calls upon a guarantor for payment, giving the amount of indebtedness of his customer for which the guarantor is liable, the disclosure is justified. Bankers obligation to disclose Banks are also required to make certain disclosures under various enactments such as the Bankers Book Evidence Act, the Reserve Bank of India Act, the Foreign Exchange Management Act and The Banking Regulation Act Defence of fidelity not available if Public Funds are involved. If a public sector undertaking seeks information about an employees bank account, the bank is bound to give it. Common Courtesy: Bankers will as a common courtesy give another bank information. Information given in response to such enquiries is given confidentially and is worded with scrupulous care so as to disclose no more than the general position of the customer. Such cases are permissible. This is because there is an implied consent of the customer, derived from evidence of a well-known practice among bankers and the circumstances giving rise to the enquiry. When a bank gives information about his customers account, he must adhere to the facts as disclosed by the account. Such information should be given only to a fellow banker, or to a person authorized by the customer to receive such information in confidence and without prejudice. The information should be as far as possible very general to avoid any liability as to any claim for defamation or for fraudulent mis-representation. The banker may make himself liable to the party to whom the information is given, to compensate him for the loss which the latter may suffer on account of having relied on such information; provided it can be proved that the banker gave the information knowing it to be false, or without having justifiable reason to believe it to be true.

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Bare Facts: If a banker is to give information about a clients account he should ensure he adheres to the facts as disclosed in the accounts. He must not convey anything heard as a rumor

IV Unremunerative Accounts An important feature of the relationship between banker and the customer is that, as long as relation of banker and the customer exists, the banker has the right to claim incidental charges. In India, the bankers charge a nominal amount. This is based on the average balance the customer has maintained and the number of transactions in unremunerative accounts per half year. These charges do not contribute an appreciable amount to their profits. The banks in India desiring to encourage the opening of current accounts either make no charges or make only a nominal charge. V Law of Limitation and Deposits An important feature of the relationship is that the period of limitation does not begin till a demand for payment is made by the customer. The law in India on the subject is contained in Article 22 of the Limitation Act, 1963 which provides a period of three years from the time when the demand is made by the customer. Under the provisions of Section 26 of the Banking Regulation Act, 1949, banking companies have to submit an annual return of all accounts which have not been operated upon for ten years. But in case of money deposited for a fixed period, the period of ten years will be counted from the date of expiry of such fixed period. Deposit accounts: If the customer has given notice to the banker to withdraw the deposit after a specified time, the limitation period will begin to run from the expiry of the specified time. However if the return of the deposit receipt is made a condition to the withdrawal of the money, its return fixes the starting point of the period of limitation. Overdrafts: In the case of an overdraft, the period runs from the time the overdraft is made use of unless it is extended by an acknowledgement of the debt in writing signed by the debtor or his agent, or part payment of the debt has been made and the fact of such payment appears in the hand writing of the debtor or his agent. The reason is the overdraft granted by a banker is a loan and not money deposited with the banker. Demand Draft: Where a customer delivers to the bank bills along with demand drafts for collection from specific persons and the money is collected by the bank, it holds such money as a trustee for the customer, and in the event of suspension of business of the bank, the customer is entitled to obtain the payment of the full amount of the money so collected. Safe deposit Vault: Where the lockers were tampered with and valuables kept therein were removed, the suit of recovery of the value of the contents of the locker will not be barred by the limitation act Current Account: Period of limitation for a suit for the balance due on mutual, open and current account, where there have been reciprocal demands between the parties shall be three years from the closing of the year in which the last item admitted or proved is entered in the account. Where a customer of a bank draws a cheque on the bank, knowing that the funds at his credit are insufficient to meet it but expecting the bank nevertheless to honour it, he impliedly applies to the bank for an overdraft or a loan. Each such transaction is an independent loan, the limitation for recovery for which runs from the date of each loan. Payment by Cheque: A payment by cheque made by a debtor in favor of a creditor is a payment which satisfies condition of section 20 of the Indian Limitation Act. Thus the period of the limitation is to be calculated from the last payment by the cheque. In case of post dated cheques

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the payment for the purpose of section 20 can only be on the date which cheque bears and cannot be the date on which the cheque is handed over.