Rights and Obligations - duties - of the Banker

Rights of a banker

Apart from the obligations, the banker has certain rights also. Following are the major rights that
a banker can exercise on his customer.

Right of Lien
Right of set-of

Automatic right of set of

Right of Appropriation

Right to charge interest

Right to charge service charges

Right of Lien

The right of a creditor (Bank) to retain goods and securities owned by the debtor bailed (as
security) to the bank until the loan due from the debtor is repaid is called the right of lien. But the
banker can insist on lien only in the absence of an agreement to the contrary. The creditor (bank)
has the right to maintain the security of the debtor but not to sell it. There are two types of lien
such as :

Particular Lien
General Lien

Particular Lien

Particular lien is one, in that the craftsman can retain those goods on which he has spent time,
effort and money until he is paid. In Particular lien the creditor doesnt have the right to retain all
the properties of the debtor.
General Lien

General lien gives the banker the right to retain goods and securities delegated to him in his
capacity as a banker, in the absence of a contract contradictory to the right of lien. It extends to
all goods/properties placed with him as a banker by his customer which are not particularly
identified for another purpose.
Cases in which lien cannot exercise :
If the goods and securities have been entrusted to the banker as a trustee or
an agent
If a contract exists between the banker and the customer that is
contradictory with the bankers right of general lien

A bankers lien is more than a general lien, it is an implied pledge and he has the right to sell the
goods in case of default. The right of lien is granted upon the banker by the Indian Contract Act
and it helps to avoid the need of a separate agreement. To be in a safe position the banker should
take a letter of lien stating that the goods/ properties are entrusted as security for a loan at present
and in future and that the banker can exercise his lien on them. The banker can also sell the
goods if the customer doesnt make the payment (defaults).

The banker can exercise the right of lien only on goods standing in the name
of the borrower and not jointly with others.
The banker can exercise his right of lien on securities remaining in his
possession after the loan for which they were lodged is repaid by the
customer only if there is no contract to the contrary.

Exception to the Right of lien :

The banker cannot exercise the right of lien lien on valuables entrusted to the
banker as a bailee or trustee.
Right of lien is not applicable on documents deposited for a special purpose
or with specific instruction that the earnings are to be utilized for a specific
purpose.

The bankers general lien is displaced by circumstances that show an implied

agreement contradictory to the right of general lien.

The banker has no right of lien on securities left with the banker negligently
or unintentionally.

The banker doesnt have the right of lien on securities deposited as a trustee
in respect of his personal loan.

The bankers right of lien extends over goods and securities handed over to him. Money
deposited in the bank and credit balance in his/her account does not fall in the category of goods
and securities. Therefore the banker can use his right of setoff as opposed to lien with regard to
money deposited with him.

The right can be exercised only on the customers property and not on joint
accounts the customer.
The banker cannot have the right to exercise the lien when the debt has not
matured.
The banker cannot exercise the lien when he can exercise set of.

Right of set-of

The banker has the right to set off the accounts of its customer. This enables a debtor (Bank) to
set off a debt owed to him by a creditor (customer) before the latter recovers a debt due to him
from the debtor. Banks can merge two accounts in the name of the same customer and set off the
debit balance in one account with the credit balance in the other. But the funds should belong to
the
customer.

The right of set-off can be exercised only if there is no agreement express or implied that is
divergent to this right. It can be exercised only after a notice is served on the customer informing
the customer that the banker is going to exercise the right of set-off. To be on the safe side
bankers must take a letter of set-off from the customer authorizing the bank to exercise the right
of set-off without giving him any notice.
Automatic right of set of

Sometimes the set off will happen automatically, it depends on the situation. In automatic set off
there is no need of permission from the customer. The cases in which automatic set off can
exercise are as follows :

In case of the death of the customer.

When the customer becomes insolvent.

If a Garnishee order is issued on the customers account by court.

When a notice of assignment of credit balance to someone else is given by

the customer to the banker.

When a bank receives the notice of second mortgage on the securities

already charged to the bank.

Conditions while exercising right of Set - Of :

The accounts must be in the same name and same right. The account should
be in the sole name of the customer
Funds held in trust accounts are not allowed to set of.

The right cannot be exercised in respect of future or contingent debts.

The amount of debts must be certain and measurable.

The banker might exercise this right at his judgment.

The banker has the right to exercise this right before a garnishee order is
issued.

There should not be any agreement to the contrary.

Right of Appropriation

In the normal course of business, a banker accepts payments from customers. If the customers
have more than one account or he/she has taken more than one loan, the customer has the right to
direct his banker against which debt the payment should be appropriated/settled. If the customer
does not direct the banker and there is more than one debt outstanding in his/her name, the bank
can exercise its right of appropriation and apply it in payment of any debt. The banker can apply
it against time barred debts also. Once an appropriation has been made it cannot be reversed.
Section 59 of the Indian Contract Act states that the right of appropriation is vested in the hands

of debtor. He/she can appropriate the payment by an express intimation. Money received will
first
be
set
off
against
interest.
Section 60 of the Indian Contract Act states that if the debtor does not intimate or there is no
circumstance of indicating how the payment is to be used, the right of appropriation is vested in
the
creditor.
Section 61 of the Indian Contract Act states that where neither party makes any appropriation,
the payment shall be used in discharge of the debts in order of time. If the debts are of equal
standing, the payment should be applied in discharge of each proportionately. Any payment made
by a debtor should be applied in the first instance towards fulfillment of interest and thereafter
towards principal unless there is an agreement to the contrary. If a customer has only one account
and he deposits and withdraws money from it regularly, the order in which the credit entry will
set off the debit entry is in the chronological order, this is known as Claytons rule.
Right to charge interest

The banker has an implied right to charge interest on the advances granted to its customer.
Bankers generally charge interest monthly, quarterly or semiannually or annually. There may be
an agreement between the banker and customer in this case the manner agreed will decide how
interest is to be charged.
Right to charge service charges
Banks charge customers a particular amount if their balance is below a
predetermined amount, for the usage of ATMs and withdrawals.
Banks are free to charge these but the Reserve Bank of India expects banks
to advise their customers of these charges at the time of opening an account
and advise them when changes are being made.
Obligations of Banker
Banks have an obligation to honour the cheques drawn on it if the customer
has sufficient funds in his account. It is also obliged to honor cheques up to
the overdraft limit of a customer.
Banker is bound to act as per the directions given by the customer. If
directions are not given the banker should act according to how he is
expected to act.

Care should be taken to make sure that the information given is general and
only facts that are evident should be revealed.

Banks are obliged to maintain secrecy of their client accounts. There are
times when information may be revealed.

Obligations of Banker
When the customer is statutorily required to do so.
With express or implied permission of the customer.

In common common courtesy, whenever the other banks ask for details they
have to provide. In this case no specific information such as balances, etc is
given.

If the banks interest requires that the bank can reveal the information

If the disclosure is under the intention of protecting public/ national interest.

Termination of Banker - Customer Relationship

The relationship between banker and customer terminates in the following situations:

Voluntary termination.
Death of the customer

Bankruptcy of the customer

Liquidation of the company

Insanity of the customer