Chapter 5

Banke r C us tome r
Relationship

Abd i f a t ah M a yg a g
2018
 CHAPTER OBJECTIVES

This chapter will help you to understand

• Explain the various types of relationship

• Elaborate KYC Norms

• Explain the special types of accounts.

 VARIOUS TYPES OF RELATIONSHIPS

o Depending on the various functions being performed by banks,

several relationships may also exist.

1. Debtor-Creditor:
o When a bank accepts deposits, it becomes debtor and the
depositor a creditor irrespective of the fact the bank pays
interest or not.
o But the relationship is of a special nature, as established by
several judgments.
o The primary relationship, which flows from the essential
function of a bank.
 VARIOUS TYPES OF RELATIONSHIPS

o Some of the special features of this relationship are discussed

below:

A. The customer cannot claim return of the same notes or

coins from bank, which can repay a sum of equivalent
amount.

B. The depositor being a creditor, is an unsecured creditor.

C. Demand must be made by the customer in prescribed

manner only at the branch at which the account is
maintained and also within normal business hour on
working day only.
 VARIOUS TYPES OF RELATIONSHIPS

2. Trustee-Beneficiary:
o Banks may also act as trustee. The position of a bank will be
that a trustee when:
A. A Person having no account with a bank, deposit money
with instruction to retain it till further instructions.
B. The customer instruct a bank to debit his account or
deposits an amount for utilizing it for a specific purpose
or for remitting to other branch/bank. (But in absence of
specific instruction, this relationship will not be
established).
C. Manages properties of its customer
 VARIOUS TYPES OF RELATIONSHIPS

3. Agent-Principal:
o When the banker accepts, bills etc. for collection on behalf of
his customer,
o Bank acts as an agent and the constituents.
o In such cases the bank is duty bound as act with reasonable
diligence and skill as per instruction of the principal;
o in absence of instruction as per customs.
 VARIOUS TYPES OF RELATIONSHIPS

4. Bailee-Bailor:
o When a bank accepts article for safe custody, its legal position
is that of Notes bailee,
o who is duty-bound to take us much care of the goods bailed
to him as man of ordinary prudence would, under similar
circumstances, take of his own similar goods.
o Example: When someone drops a car off with a mechanic
for a tune up. In this case, the driver is the bailor, as the car
legally belongs to the driver while the mechanic has the car
in physical custody for the agreed upon service.
 VARIOUS TYPES OF RELATIONSHIPS

5. Lessor-Lessee:
o On hiring out of locker, bank becomes lessor and the hirer a
lessee and the relationship is that of landlord and tenant.
o The lessor is not responsible for any loss or damage suitable
clause to the effect is also incorporated in the Lease Deed and
hire are advised, in their own interest, to insure their valuables
deposited in locker
 KYC NORMS

o “Know your Customer” is a term used for customer

identification which involves making reasonable efforts to
determine

 True identity and beneficial ownership of accounts, s

 Source of funds,

 The nature of customer’s business,

 Fairness of operations in the account in relation to the

customer’s business, etc.
o so as to help the banks to manage their risks cautiously.
 KYC NORMS

Objective
o The objectives of the policy are to prevent criminal elements
from using the bank for money laundering activities by
enabling the bank to know the customer and their financial
dealings better.
o KYC has two components - Identity and Address.
o The banks need to periodically change their records since
although the identity remains the same, but the address
may change.
 KYC NORMS

KYC Framework
o The framework of KYC norms mainly incorporates the
following four key elements:

Customer Acceptance Policy;

Customer Identification Procedures;

Monitoring of Transactions; and

Risk Management
 KYC NORMS
KYC Framework - Customer Acceptance Policy;
The Bank will:
I. Classify customer into various risk categories and based on
risk perception decide on
II. Acceptance criteria for each category of customer;
III. Accept customer after verifying their identity as laid down
in Customer Identification Procedures;
IV. Not open accounts in the name of anonymous/fictitious.
V. While carrying out due diligence, ensure that the procedure
adopted will not result in denial of banking services to the
general public especially those who are financially or
socially disadvantaged.
 KYC NORMS

KYC Framework - Customer Identification Procedures;

o The fit requirement of customer identification procedure is to
be satisfied that

I. A prospective customer is who he/she claims to be,

II. Sufficient information is obtained on the nature of the

business that the customer expects to undertake, and any
expected, or predictable, pattern of transactions

 And The information collected will be used for

profiling the customer,
 KYC NORMS
KYC Framework - Customer Identification Procedures;
iii. The identity is to be verified for:
A. The named account holder;
B. The beneficial owner;
C. The signatories to an account; and
D. The intermediary parties
iv. The Customer Identification Procedures are to be carried out
at the stages:
E. While establishing a banking relationship
F. When the bank feels it is necessary to obtain additional
information from the existing customer based on the
conduct or behavior of the account.
 KYC NORMS
KYC Framework - Customer Identification Procedures;
Documents to verify the name/identity of the customer:
A. Passport,
B. PAN card,
C. Voter identity card,
D. Driving license with photograph,
E. Identity card,
F. Letter from a recognized public authority verifying the
identity and residence of the customer to the satisfaction of
the branch official authorized to open the account,
G. confirmation/ letter from employer/ other bank.
 KYC NORMS
KYC Framework - Customer Identification Procedures;
Documents to verify the address are:
A. Telephone Bill,
B. Bank account Statement,
C. Electricity bill,
D. Letter from employer to the satisfaction of the bank.
 KYC NORMS

KYC Framework - Monitoring of Transactions

o Monitoring of transactions will be conducted taking into
consideration the risk profile of the account.
o Special attention will be paid to all complex, unusually large
transactions and all unusual patterns, which have no apparent
logical or Notes visible lawful purpose.
o Transactions that involve large amounts of cash inconsistent
with the normal and expected activity of the customer will be
subjected to detailed scrutiny.
 KYC NORMS

KYC Framework - Monitoring of Transactions

o After due diligence at the appropriate level in the Bank
o transactions of suspicious nature and/or any other type of
transaction notified under AML Act will be reported to the
appropriate authority and
o a record of such transactions will be preserved and
maintained for a period as prescribed in the Act.
o Branches would be maintaining a close watch on cash
transactions (whether deposits or withdrawals) abover certain
limit.
 SPECIAL TYPES OF ACCCOUNT

o A financial account between a bank and a customer is known as

a bank account.
o Deposit accounts are those accounts which are opened with the
purpose of holding credit balances whereas
o Loan accounts are opened with the purpose of holding debit
balances.
o Accounts are categorized by the function rather than nature of
the balance they hold, e.g. savings account.
 SPECIAL TYPES OF ACCCOUNT

Current Account
o An account which can be operated any number of times on a
working day without any restriction on the number and amount
of withdrawals is known as a current account.
o As the banker is under a responsibility to repay these deposits
on demand, they are called deemed deposits.
o Current accounts suit the requirements of joint stock
companies, public authorities, corporations, etc.
o Whose banking transactions happen to be numerous per
day.
o Cheque facility is available for the account holder.
 SPECIAL TYPES OF ACCCOUNT

Current Account
o A current account carries certain privileges which are not
available to other account holders
I. Third party cheques and cheques with endorsements may
be deposited in the current account for collection and
credit.
II. Overdraft facilities are given in case of current accounts
only.
III. The loans allowed by banks to their customer are not
given in the form of cash but via the current accounts.
 Thus current accounts earn interest on all types of
advances allowed by the banker.
 SPECIAL TYPES OF ACCCOUNT

Savings Account
o The main purpose of savings accounts is encouraging savings
of households.
o The main features of savings account are:
 Restriction on withdrawals:
 In the interest of the objective of savings bank accounts,
the banks levy certain limitations on the right of depositor
to withdraw money within a given period.
 The number of withdrawals over a period of x months is
limited to x.
 SPECIAL TYPES OF ACCCOUNT

Savings Account
 Restriction on deposits:
 The banks some times do not accept cheques or other
official documents payable to a third party for the purpose
of deposit in the savings account.
 Minimum balance:
 There is a minimum balance that needs to be maintained
in the SB accounts as prescribed by the banks
 and specific charges are levied if the minimum balance is
not maintained.
 SPECIAL TYPES OF ACCCOUNT
Savings Account
 Payment of interest:
 The rate of interest payable by the banks on deposits
maintained in savings accounts is prescribed by the
market/central bank.
 Interest is computed at quarterly or longer rests of period.
 Cheques:
 Cheque facility is provided to the depositor only when
they keep a minimum balance with the bank according to
its rules.
 Only cheques payable to the customer having SB
accounts are collected.
 SPECIAL TYPES OF ACCCOUNT

Savings Account
 Prohibition on savings account:
 The RBI has forbade the banks to open a savings account
in the name of
A. Trading or business concern.
B. A company or an association.
C. Government departments.
D. Bodies depending upon budgetary allocations for
performance of their functions.
E. Municipal corporations.
 SPECIAL TYPES OF ACCCOUNT

Comparison of Savings Account and Current Account

Savings account and Current account come under the demand deposits account.
 SPECIAL TYPES OF ACCCOUNT

Fixed Deposits
o FD refer to the deposits repayable after the expiry of a certain
period, which generally varies.
o The fixing of the period enables the banker to invest money
without having to keep a reserve.
 Rate of interest:
 Higher rates of interest are offered on fixed deposits as
the depositor parts with liquidity for a certain period.
 The longer the period, the higher will be the rate of
interest.
 SPECIAL TYPES OF ACCCOUNT

Fixed Deposits
 Payment before due date:
 Even though a FD is payable after expiry of defined
period, banks allow encashment even before maturity.
 In such a case, certain interest will be charged for the
same.
 In the case of India, according to the RBI directive, banks
should not charge the penalty in case of premature
withdrawal for immediate reinvestment in another FD for
a longer term than the remaining period of the original
contract.