Chapter Three

RELATIONSHIP BETWEEN BANKER AND

CUSTOMER

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Course: BANKING THEORY & PRACTICES
Course Code: BAFI3211
Specialization: Common
Department of Business Studies
Learning Outcome 3: Understand the different customer and banker
relationship, the features of these relationships, and their respective rights and
obligations in those relationships.

Learning Objectives: After you have studied this chapter, you will:
 Know the different kinds of relationships between banker and customer
 Understand the special features of the relationship
 Know the important obligations of the banker
 Know the important rights of the banker

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Learning Outcome 3:
Understand the different
customer and banker
relationship, the features of
these relationships, and
their respective rights and
obligations in those
relationships.
Contents
- Debtors-Creditors Relationship
- Principal-Agent Relationship
- Trustee-Beneficiary Relationship
- Bailor-Bailee Relationship
- Functions of Commercial Banks
- Special Features Relationships – Obligation to
honor the cheque
- Special Features Relationships – Obligation to
maintain secrecy
- Special Features Relationships – Banker’s
Right of set-off
- Special Features Relationships – Right of
Appropriation of Payment
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 Essential Reading
1. B.Santhanam “Banking theory Law and practices” Published by Margam publication India.,5 th
edition 2007
2. K.P.M.Sundharam & Varshney, “Banking Theory Law & Practice”, Published by Sultan Chand
&Sons publication, India 17th edition 2014

https://www.gr8ambitionz.com/2014/08/general-relationship-between-Banker-Customer.ht
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Kinds of Relationship:

The opening of an account with acceptance of banker, established contractual relationship between the banker
and the customer. Such relationship are like commercial transaction based on mutual obligation, liabilities and
privileges are being built. Though, the contractual relationship is not usually embodied in any written
agreement the parties to be executed but has great legal significance. Many of those customs and practices have
been recognized by the courts and they must be regarded as implied terms of the contract between banker and
customer.
In other words, usually there will be no written contract between the banker and the customer, but due to the
normal banking customs and practices, it is implied that a contractual relationship exists between the banker
and the customer.
As the modern commercial banks perform a vast range of functions and services for and on behalf of the
customers and for the general public as well, different sorts of relationships exists between the banker and the
customer such debtor-creditor, agent-principal, trustee-beneficiary, bailor-bailee and some special features
relationships.

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1. Debtor-Creditor Relationship:
The opening of a bank account and depositing money in it by the customer makes the banker a ‘debtor’ and the
customer a ‘creditor’.
By accepting deposit of money from a customer, the banker incurs a liability to repay the deposit to the
customer on his demand or as per the terms of the contract, hence the banker being a ‘debtor’.
On the other hand, the customer has a legal right to claim back his money from the banker through a proper
demand, hence the customer being a ‘creditor’.

In case of banker’s lending of credit or overdraft facility to customer, the relationship automatically reversed.
Borrowing from banks incurs a liability on customer towards the banker to repay the loan according to the terms
of the loan contract.
This debtor-creditor relationship between banker and customer comes to an end with the closing of the account
of the customer.

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2. Agent-Principal Relationship:-

Modern banks perform a vast range of agency services on behalf of their customers. For example when a
banker buys or sells securities on behalf of his customer or when he collects out-stationed cheques, dividends
or bills on his customer’s behalf, the banker acts as an ‘agent’ of his customer. The customer on whose behalf
the banker carries out these services is called the ‘principal’. As an agent, the banker has to perform the
services strictly in accordance with the instructions of his customer. If the principal (customer) suffers any loss
or damage due to carelessness or negligence of the agent (banker), the agent shall be liable to compensate all
such losses to the principal.

‫ عندمـا يشتري مصرفي‬، ‫ علـى سـبيل المثال‬.‫تؤدي البنوك الحديثـة مجموعـة واسـعة مـن خدمات الوكالـة نيابـة عـن عمالئها‬
، ‫أـو يـبيع أورا ًقـا ماليـة نيابـة عـن عميلـه أـو عندمـا يقوم بتحصـيل الشيكات أـو توزيعات األرباح أـو الفواتيـر نيابـة عـن عميله‬
‫ يُطلـق علـى العميـل الذي يقوم المصـرفي نيابـة عنـه هذه الخدمات باسم‬. ‫فإـن المصـرفي يتصـرف كـ " وكيالتمـن زبونه‬
‫ إذا تعرض األصـل ( العميـل) ألي‬.‫ يتعيـن علـى المصـرفي أداء الخدمات بدقـة وفقًـا لتعليمات عميله‬، ‫ بصـفته وكيل ًا‬."‫" المالـك‬7
3. Trustee-Beneficiary Relationship:

Another sort of relationship that may exist between the banker and the customer under certain circumstances
is that of the banker being the ‘trustee’ and the customer being the ‘beneficiary’. For example, when a
customer deposits a sealed packet containing securities or valuables in the safe custody of the bank, the banker
is said to be a ‘trustee’ of his customer. The packet remains a property of the customer and the banker shall be
liable to return the same packet in the same condition to the customer on his demand. The banker cannot
make use of the contents of the packet for his benefit. The banker merely holds the possession of the packet in
his safe custody for the benefit of his customer or the ‘beneficiary’.

"‫نوع آخـر مـن العالقـة التـي قـد تكون موجودة بيـن المصـرفي والعميـل فـي ظـل ظروف معينـة هـو أـن المصـرفي هـو "الوصي‬
‫ عندمـا يقوم العميـل بإيداع حزمـة مختومـة تحتوي علـى أوراق ماليـة أو أشياء‬، ‫ علـى سبيل المثال‬."‫والعميـل هـو " المسـتفيد‬
ً ‫ تظـل الحزمـة ملك ًاـ للعميـل ويكون المصـرفي مسؤوال‬.‫ يُقال أـن المصـرفي هـو " وصـيمن زبونه‬، ‫ثمينـة فـي العهدة اآلمنـة للبنـك‬
‫ال يمكـن للمصـرفي االسـتفادة من محتويات العبوة‬. ‫عـن إعادة الحزمـة نفسـها فـي نفـس الحالـة إلـى العميـل بنا ًءـ علـى طلبه‬
‫ يحتفظ المصرفي فقط بحيازة الحزمة في عهدته اآلمنة لصالح عميله أو "المستفيد‬.‫"لصالحه‬. 8
4. Bailee-Bailor Relationship:

When a customer borrows from a bank against the security under pledge, the bank is regarded not only a
pledgee but also a bailee and so the bank has to take care of the security until it is returned to the customer.
But the goods kept in the safe deposit vault will not come under bailment. The customer is keeping the goods
in the safe deposit vault secretly and hence the banker will not be a bailee. As a bailee, the valuables (jewelry,
property documents, etc.) coming into his custody will be protected and the banker is totally aware nature of
the valuables. Thus, the banker will act as a bailee only when valuables are entrusted to him for a specific
purpose. Any expenses incurred towards maintenance of the security or valuables have to be borne by the
customer.
 ‫أيضـا أ بيلـي ولذا يتعيـن علـى البنك‬
ً ‫ ال يعتـبر البنـك فقـط تعهـد ولكـن‬، ‫عندمـا يقترض العميـل مـنـ أحـد البنوك مقابـل الضمان بموجـب التعهـد‬
‫ يحتفظ العميل بالبضائع في قبو‬.‫ لكن البضائع المحفوظة في قبو الودائع لنـ تخضع للكفالة‬.‫أن يعتني باألمن حتى يتم إعادته إلى العميل‬
‫) ستتم‬.‫ إلخـ‬، ‫ وثائـق الملكيـة‬، ‫ فإناألشياء الثمينـة (المجوهرات‬، ‫ بصـفته بايليًـا‬.‫ وبالتالـي لـن يكون المصـرفي وكيل ًا له‬، ‫الودائـع بشكـل سـري‬
ً ‫ فإـن المصـرفي سـوف يتصـرف بصفته وكيال‬، ‫ وبالتالـي‬.‫حمايـة دخولـه إلـى عهدتـه ويكون المصـرفـي علـى درايـة تامـة بطبيعـة األشياء الثمينة‬9
Special Features of the Relationship:-

The contractual relationship of banker and customer has great legal significance from both parties point of
view. This legal nature of relationship creates certain serious obligations or responsibilities to the banker. The
banker has to fulfill such obligations.
This legal nature of the relationship also empowers the banker with some important legal rights.
The legal obligations incurred and the legal rights enjoyed by the banker are called as the ‘Special Features of
the Relationship’. The legal obligations including the honoring of cheques, maintaining secrecy and legal
rights including right to charge, right to set-off and right to appropriation of payment.

Contd.
 
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1. Obligation to Honor Cheques:-
This statutory obligation arises when banker accepted deposit from the customer. The banker has
an obligation to honor customer cheques so long as sufficient funds are available in the customer
account, provided that the cheques are presented within a reasonable time and provided that the
account of the customer has not been stopped by any competent legal authority. If the banker
defaults in honoring of right cheque or wrongly refuses the payment of cheques without any valid
reason, the banker has to compensate the customer for any loss or damage of reputation and
business.

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2. Obligation to Maintain Secrecy:-
Under this obligation the banker has to maintain secrecy of his customer’s account since, the
account of a customer in the books of the bank is a complete record of all the financial dealings
between him and the banker. It reflects the actual financial condition of the customer. If any of the
facts relating to a customer’s account are made known to others, it is legally recognized that the
customer may suffer loss of reputation and incur monetary losses also. This obligation continued
even with closing of the customer’s account. However, under certain exceptional circumstances,
the banker is justified in disclosing the information of his customer’s account. For example, if a
court of law or any other competent legal authority, like Tax Department, requires the information,
the banker is justified in disclosing the information.

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3. Banker’s Right to Charge:-
Another important special feature of the relationship is that as long as the relation of banker and customer
exists, the banker has an absolute right to directly charge the customer’s account with any interest due from the
customer, in case of loan accounts, even without the permission of the customer. Similarly, the banker has the
right to directly charge the customer’s account with any commission or incidental charges the banker might have
incurred on behalf of the customer as an agent in the course of performing various agency services. The
customer cannot direct the banker not to charge the overdue interest of his loans and the commission or
incidental charges to his account

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4. Banker’s Right of “Set-off”:-
The right of set-off enables a debtor to take into account a debt owed to him by a creditor before the latter could
recover the debt due from the former. A banker also possesses this right which enables him to combine the two
accounts in the name of the same customer and to set-off the debit balance in one account with the credit balance
in another account of the same customer. For example, Mr. Ali has two separate accounts in a bank in the same
capacity, one is a loan account (Debit Balance) and another is a current account (Credit Balance). There is a debit
balance of OMR 4,500 in his loan account which has become due. At the same time, he has a credit balance of
OMR 3,000 in his current account. Now the banker, exercising his right of set-off, can combine these two accounts
of Mr. Ali and adjust the credit balance of RO 3,000 in the current account with the overdue balance of OMR
4,500 in his loan account and ask Mr. Ali to pay only the balance of RO 1,500.
There is no need for the banker to take the permission of Mr. Ali for doing so, because the banker has an implied
right of set-off. The banker can exercise his right of set-off only when the debit balance in one account of the
customer has actually become due, but not before that and both the accounts must be in the name of the same
customer in the same capacity. For example, the banker cannot combine a personal account of a customer with his
business account.
 
 

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5. Right of Appropriation of Payment:-
Right of appropriation is the right of a banker to appropriate the money paid by the customer to any one of
the loans including the time-barred debts. The banker can do so when the customer (debtor) has not asked
the banker at the time of making the payment to cancel or reduce any one of the loans, irrespective of the
order of the time when the debt is incurred. For example, Mr. Ahmed borrowed from a banker OMR 2,000
on 1st January, OMR 2,500 on 10th March and OMR 3,000 on 15th May 2019 and he makes payment of
OMR 1,500 to the bank on 1st January, 2020. The customer (debtor) has the right to say which loan shall be
cancelled or reduced by the payment he has made. The banker is bound to make appropriation according to
the instruction given by the customer. But if the customer does not state to which loan the amount should be
applied or appropriated at the time of payment, the banker (creditor) may appropriate the payment as he
likes. He may use the amount paid to reduce or cancel any loan including time-barred loan.

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Review Questions:

1. Define the terms Banker and Customer

2. Explain the relation between a banker and customer based on debtor-creditor relationship.
3. Explain right of set off
4. What are the duties of a banker when honoring customer’s cheques?
5. Under what conditions will the banker disclose the customer’s account information?
6. Discuss the agency services performed by commercial banks
 

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 References:

1. B.Santhanam “Banking theory Law and practices” Published by Margam publication India.,5 th
edition 2007
2. K.P.M.Sundharam & Varshney, “Banking Theory Law & Practice”, Published by Sultan Chand
&Sons publication, India 17th edition 2014

https://www.gr8ambitionz.com/2014/08/general-relationship-between-Banker-Customer.ht
ml
 

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CONTACT INFORMATION:

Name of the Staff: Dr. Mohammed Muslim

Office: BS045
Email: mohammed-muslim@hct.edu.om

VERSION HISTORY

Version No Date Approved Changes incorporated

02 Sem. (II) 2019/2020

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