Banker Customer

Relationship

20th December 2010

Definition
Bank:
SECTION 5(1) B : BANKING MEANS ACCEPTING FOR THE PURPOSE OF
LENDING OR INVESTMENT OF DEPOSITS OF MONEY FROM PUBLIC,
REPAYABLE ON DEMAND OR OTHERWISE AND WITHDRAWABLE BY
CHEQUES,DRAFT, ORDER OR OTHERWISE
Customer:
Term not defined by any law. Based on various court decisions a person can be a
customer of a bank if the following conditions are fulfilled.
1. A bank account (savings, current or fixed deposit) is opened by making
necessary deposit of money/ cheques.
2. Duration of the account and frequency of transactions not essential.
3. Dealings between bank and customer must be of the nature of banking
business. Any casual service rendered by bank to a person not having a bank
account doesn’t make him a customer.
4. It is essential for the banker to ascertain the identity/ whereabouts of a
customer while opening the account.
Types of Relationships

1. General relationship: Debtor and Creditor

2. Special relationship:
A. Principal and Agent
B. Bailor and Bailee
C. Banker as advisor
D. Other relationships
General relationship:
Type of deposits Banker Customer
and functions
Deposit account Debtor Creditor

Loan account Creditor Debtor

Safe custody Bailee Bailor

Collection of Agents Principal

cheques
Debtor-Creditor Relation
 Creditor must demand payment – For banker as
creditor the demand is not necessary. For Debts
due from a bank, an expressed demand (in proper
manner – cheque) by customer is necessary.
 Proper place and time of demand – cheques to be
issued on the branch where the account is kept and
during banking hours.
 Law of limitation – Deposit with bank doesn’t get
time barred. Any other debts get time barred after
the limitation period.
Special relationships – Bailor-Bailee:

Safe custody of valuables and securities

 Bailee doesn’t have the freedom to use the

money/ articles bailed to him

 Bailee has to redeliver the same goods to the

customer on demand
 In case of bank deposits, bank has the

freedom to utilise the money

Principal and agent:
 Purchase and sale of securities
 Collection of cheques, bills.
 Payment of insurance premium and other
standing instructions

Other relationships:
•Lessor and lessee
•Advisor
•Guarantor, etc
Banker’s rights

 Right of General Lien

 Right of Set-off
 Right of Appropriation
 Right to charge compound interest
 Right to charge incidental expenses
General lien
 Lien - Rights of the creditor to retain the goods and
securities owned by debtor but lying with creditor until the
debt extended by him is repaid. (Right to sell is not
included)
 Particular lien – This right is related to the specific security
and the loan extended for the same.
 General lien – Relates to any security placed in the hands
of the banker – education loan not repaid, gold loan repaid
but bank can retain the gold. No separate agreement for
this purpose is necessary (section 171 of Indian Contract
Act).
 In case of banker’s general lien, right to sell is included
because banker’s lien is treated as an implied pledge.
Banker has to give a reasonable notice to the customer
before the sale.
Conditions to be satisfied for exercise of
Banker’s General Lien
 Securities should have come to the bank in his capacity as
banker (safe custody articles, locker articles excluded)
 Securities should not have been entrusted for any special
purpose – no lien account
 Securities documents left inadvertently in a bank cannot be
included.
 Lien can be exercised on accounts operated in the same
capacity. (individual account/ partnership)
 The securities must have been lawfully obtained (not by
force)
 Lien cannot be exercised on security amounts that may
become due on a future debt (bill under collection)
 Right on lien can be exercised on account of time barred
debt.
Right to set-off
 This is the right of a debtor to adjust a debt owed to him by his
creditor with a debt which he has availed from the same creditor.
 A banker can set-off credit balances of a customer in a deposit
account against any outstanding loan due of the same customer.
 A reasonable notice to the customer before exercising set-off is
considered desirable but not legally mandatory (there are
conflicting decisions on this).
 Set-off can be exercised for accounts of the same customer in
different branches of the same bank.
 Both the accounts should be in same name and capacity (trust/
partnership/ individual).
 Right to set-off arises automatically on death or insolvency of the
customer/ on receipt of garnishee order (first set-off and then pay
to court).
Right of appropriation
 This is the right to appropriate money paid by the
customer for any of the loan accounts including a
time barred debt.
 However this cannot be done if there is a specific
direction from the customer to credit the money in a
specific loan account.
 If there is no specific appropriation instruction by the
debtor or creditor, the payment will be appropriated
in the chronological order as per law (Clayton’s rule
– example, cash credit account).
Banker’s obligations

 Obligation to honour cheques

 Obligation to maintain secrecy
 Obligation not to close the account without
proper notice to the customers (in the
absence of such an obligation banker may
close the account any time and dishonor all
the outstanding cheques)
Obligation to honour cheques
 This matter is covered by section 5B of Banking regulation Act
and section 31 of Negotiable Instruments Act.
 There should be sufficient balance in the account. The cheque
should be presented by a valid holder (NI Act).
 The banker need not make a part payment.
 The cheque cannot be paid against proceeds in clearing.
 Cheque to be presented for payment during banking hours.
 Banker’s obligation to honour cheques is extinguished on receipt
of garnishee order from the court (order 21, rule 46 of civil
procedure court 1908).
 Garnishee order: Court directs the bank to stop payment from the
account of judgment debtor (order Nishi). Bank has to file an
explanation to court on why this amount cannot be appropriated.
After this explanation court issues a final order (order Absolute) by
which the funds are attached by court to be handed over to the
judgment creditor. Garnishee is the third party (bank).
Obligation to maintain secrecy
 Not to divulge any information to third party about
customer’s account except under
1. compulsion of law (section 131 of IT Act, section 4 of
Banker’s Book of Evidence Act, section 94(3) of criminal
procedure code, section 43 of foreign exchange regulation
act)
2. duty to the public (customer engaged in prohibited trading
activity, money laundering, funds for terrorism)
3. interest of the bank (defaulters, CIBIL, information to lawyer
for filing suit, banker’s report)
4. with express or implied consent of the customer (guarantor)