CHAPTER III

BANKER CUSTOMER RELATIONSHIP

3.0 INTRODUCTION

The relationship between a banker and his customer depends upon the nature of
service provided by a banker. Accepting deposits and lending and/or investing are
the core banking businesses of a bank. In addition to its primary functions, it deals
with various customers by providing other services like safe custody services, safe
deposit lockers, and assisting the clients by collecting their cheques and other
instruments as an agent and trustees for them.

3.1 MEANING OF A BANKING COMPANY

A banking company is defined as a company which transacts the business of

banking in India . Section 5 (b) of The Banking RegulationAct, 1949 defines the
term banking as “accepting for the purpose of lending or investment of deposits of
money from the public, repayable on demand or otherwise and withdrawable by
cheque, draft, order or otherwise. Section -7 of this Act makes it essential for
every company carrying on the business of banking in India to use as part of its
name at least one of the words – bank, banker, banking or banking company.
Section 49A of the Act prohibits any institution other than a banking company to
accept deposit money from public withdrawable by cheque. The essence of
banking business is the function of accepting deposits from public with the
facility of withdrawal of money by cheque. In other words, the combination of the
functions of acceptance of public deposits and withdrawal of the money by
cheques by any institution cannot be performed without the approval of Reserve
Bank.

3.1.1 FEATURES OF BANKING

The following are the basic characteristics to capture the essential features of
Banking:
(i) Dealing in money: The banks accept deposits from the public and
advance the same as loans to the needy people. The deposits may be of
different types - current, fixed, savings, etc. accounts. The deposits are
accepted on various terms and conditions.
(ii) Deposits must be withdrawable: The deposits (other than fixed deposits)
made by the public can be withdrawable by cheques, draft or otherwise,
i.e., the bank issue and pay cheques. The deposits are usually
withdrawable on demand.
(iii) Dealing with credit: The banks are the institutions that can create credit
i.e., creation of additional money for lending. Thus, “creation of credit”
is the unique feature of banking. (iv)
(iv) Commercial in nature: Since all the banking functions are carried on
with the aim of making profit, it is regarded as a commercial institution.
(v) Nature of agent: Besides the basic function of accepting deposits and
lending money as loans, bank possesses the character of an agent
because of its various agency services.

3.2 WHO IS A CUSTOMER?

The term ‘customer’ of a bank is not defined by law. Ordinarily, a person who
has an account in a bank is considered is customer. Banking experts and the
legal judgments in the past, however, used to qualify this statement by laying
emphasis on the period for which such account had actually been maintained
with the bank. In Sir John Paget’s view “to constitute a customer there must
be some recognizable course or habit of dealing in the nature of regular
banking business.” This definition of a customer of a bank lays emphasis on
the duration of the dealings between the banker and the customer and is,
therefore, called the ‘duration theory’.

According to this viewpoint a person does not become a customer of the

banker on the opening of an account; he must have been accustomed to deal
with the banker before he is designated as a customer. The above-mentioned
emphasis on the duration of the bank account is now discarded.
According to Dr. Hart, “a customer is one who has an account with a banker
or for whom a banker habitually undertakes to act as such.” Supporting this
viewpoint, the Kerala High Court observed in the case of Central Bank of
India Ltd. Bombay vs. V.Gopinathan Nair and others (A.I.R.,1979, Kerala 74)
: “Broadly speaking, a customer is a person who has the habit of resorting to
the same place or person to do business. So far as banking transactions are
concerned he is a person whose money has been accepted on the footing that
banker will honour up to the amount standing to his credit, irrespective of his
connection being of short or long standing.”

For the purpose of KYC policy, a ‘Customer’ is defined as :

– a person or entity that maintains an account and/or has a business

relationship with the bank;

– one on whose behalf the account is maintained (i.e. the beneficial owner);

– beneficiaries of transactions conducted by professional intermediaries, such

as Stock Brokers, Chartered Accountants, Solicitors etc. as permitted under
the law, and

– any person or entity connected with a financial transaction which can pose
significant reputational or other risks to the bank, say, a wire transfer or issue
of a high value demand draft as a single transaction.

Thus, a person who has a bank account in his name and for whom the banker
undertakes to provide the facilities as a banker, is considered to be a customer.
It is not essential that the account must have been operated upon for some
time. Even a single deposit in the account will be sufficient to designate a
person as customer of the banker. Though emphasis is not being laid on the
habit of dealing with the banker in the past but such habit may be expected to
be developed and continued in figure. In other words, a customer is expected
to have regular dealings with his banker in future.
An important consideration which determines a person’s status as a customer
is the nature of his dealings with a banker. It is evident from the above that his
dealings with the banker must be relating to the business of banking. A banker
performs a number of agency functions and tenders various public utility
services besides performing essential functions as a banker. A person who
does not deal with the banker in regard to the essentials functions of the
banker, i.e.. accepting of deposits and lending of money, but avails of any of
the services rendered by the banker, is not called a customer of the banker. For
example, any person without a bank account in his name may remit money
through a bank draft, encash a cheque received by him from others or deposit
his valuables in the Safe Deposit Vaults in the bank or deposit cash in the
bank to be credited to the account of the Life Insurance Corporation or any
joint stock company issuing new shares. But he will not be called a customer
of the banker as his dealing with the banker is not in regard to the essential
functions of the banker. Such dealings are considered as casual dealings and
are not in the nature of banking business. Thus, to constitute a customer the
following essential requisites must be fulfilled:

(i) a bank account – savings, current or fixed deposit – must be opened in his
name by making necessary deposit of money, and

(ii) the dealing between the banker and the customer must be of the nature of
banking business.

A customer of a banker need not necessarily be a person. A firm, joint stock

company, a society or any separate legal entity may be a customer.
Explanation to Section 45-Z of the Banking Regulation Act, 1949, clarifies
that section “customer” includes a Government department and a corporation
incorporated by or under any law.

Since the banker-customer relationship is contractual, a bank follows that any

person who is competent to contract can open a deposit account with a bank
branch of his/her choice and convenience. For entering into a valid contract, a
person needs to fulfill the basic requirements of being a major (18 years of age
or above) and possessing sound mental health (i.e. not being a lunatic). A
person who fulfils these basic requirements, as also other requirements of the
banks as mentioned below, can open a bank account. However, minors (below
18 years of age) can also open savings account with certain restrictions.
Though any person may apply for opening an account in his name but the
banker reserves the right to do so on being satisfied about the identity of the
customer.

By opening an account with the banker, a customer enters into relationship

with a banker. The special features of this relationship impose several
obligations on the banker. He should, therefore, be careful in opening an
account in his name but the banker reserves the right to do so on being
satisfied about the identity of the customer. Prior to the introduction of “Know
Your Customer (KYC)” guidelines by the RBI, it was the practice amongst
banks to get a new customer introduced by a person who has already one
satisfactory bank account with the Bank or by a staff member who knows him
properly. Most of the banks preferred introduction to be given by a current
account holder. Different practices of various banks were causing confusion
and sometimes loss to the bank on not opening “properly” introduced account
when any fraud took place in the account. A new customer was also facing
difficulty in opening an account if he was a new resident of that area. To
overcome all these problems and streamline the system of knowing a
customer, RBI has directed all banks to adopt KYC guidelines.

3.3 RELATIONSHIP AS DEBTOR AND CREDITOR

On the opening of an account the banker assumes the position of a debtor. He

is not a depository or trustee of the customer’s money because the money over
to the banker becomes a debt due from him to the customer. A banker does
not accept the depositors’ money on such condition. The money deposited by
the customer with the banker is, in legal terms, lent by the customer to the
banker, who makes use of the same according to his discretion. The creditor
has the right to demand back his money from the banker, and the banker is
under and obligation to repay the debt as and when he is required to do so. But
it is not necessary that the repayment is made in terms of the same currency
notes and coins. The payment, of course, must be made in terms of legal
tender currency of the country.

A depositor remains a creditor of his banker so long as his account carries a

credit balance. But he does not get any charge over the assets of his
debtor/banker and remains an unsecured creditor of the banker. Since the
introduction of deposit insurance in India in 1962, the element of risk to the
depositor is minimized as the Deposit Insurance and Credit Guarantee
Corporation undertakes to insure the deposits up to a specified amount.

Banker’s relationship with the customer is reversed as soon as the customer’s

account is overdrawn. Banker becomes creditor of the customer who has taken
a loan from the banker and continues in that capacity till the loan is repaid. As
the loans and advances granted by a banker are usually secured by the tangible
assets of the borrower, the banker becomes a secured creditor of his customer.
Though the relationship between a banker and his customer is mainly that of a
debtor and a creditor, this relationship differs from similar relationship arising
out of ordinary commercial debts in following respects:

(i) The creditor must demand payment. In case of ordinary commercial

debt, the debtor pays the amount on the specified date or earlier or
whenever demanded by the creditor as per the terms of the contract.
But in case of deposit in the bank, the debtor/ banker is not required to
repay the amount on his own accord. It is essential that the depositor
(creditor) must make a demand for the payment of the deposit in the
proper manner. This difference is due to the fact that a banker is not an
ordinary debtor; he accepts the deposits with an additional obligation
to honour his customer’s cheques. If he returns the deposited amount
on his own accord by closing the account, some of the cheques issued
by the depositor might be dishonoured and his reputation might be
 adversely affected. Moreover, according to the statutory definition of
banking, the deposits are repayable on demand or otherwise. The
depositor makes the deposit for his convenience, apart from his
motives to earn an income (except current account). Demand by the
creditor is, therefore, essential for the refund of the deposited money.
Thus the deposit made by a customer with his banker differs
substantially from an ordinary debt.
(ii) Proper place and time of demand. The demand by the creditor must be
made at the proper place and in proper time as prescribed by a bank.
For example, in case of bank drafts, travellers’ cheques, etc., the
branch receiving the money undertakes to repay it at a specified
branch or at any branch of the bank.
(iii) Demand must be made in proper manner. According to the statutory
definition of banking, deposits are withdrawable by cheque, draft,
order or otherwise. It means that the demand for the refund of money
deposited must be made through a cheque or an order as per the
common usage amongst the bankers. In other words, the demand
should not be made verbally or through a telephonic message or in any
such manner.

3..3.1 BANKER AS TRUSTEE

Ordinarily, a banker is a debtor of his customer in respect of the deposits

made by the latter, but in certain circumstances he acts as a trustee also. A
trustee holds money or assets and performs certain functions for the benefit of
some other person called the beneficiary. For example, if the customer
deposits securities or other valuables with the banker for safe custody, the
latter acts as a trustee of his customer. The customer continues to be the owner
of the valuables deposited with the banker. The legal position of the banker as
a trustee, therefore, differs from that of a debtor of his customer. In the former
case the money or documents held by him are not treated as his own and are
not available for distribution amongst his general creditors in case of
liquidation.

The position of a banker as a trustee or as a debtor is determined according to

the circumstances to the each case. If he does something in the ordinary
course of his business, without any specific direction from the customer, he
acts as a debtor (or creditor). In case of money or bills, etc., deposited with the
bank for specific purpose, the bankers’ position will be determined by
ascertaining whether the amount was actually debited or credited to the
customer’s account or not. For example, in case of a cheque sent for collection
from another banker, the banker acts as a trustee till the cheques is realized
and credited to his customer’s account and thereafter he will be the debtor for
the same account. If the collecting banks fails before the payment of the
cheque is actually received by it from the paying bank, the money so realized
after the failure of the bank will belong to the customer and will not be
available for distribution amongst the general creditors of the bank.

On the other hand, if a customer instructs his bank to purchase certain

securities out of his deposit with the latter, but the bank fails before making
such purchase, the bank will continue to be a debtor of his customer (and not a
trustee) in respect of amount which was not withdrawn from or debited to his
account to carry out his specific instruction. The relationship between the
banker and his customer as a trustee and beneficiary depends upon the specific
instructions given by the latter to the farmer regarding the purpose of use of
the money or documents entrusted to the banker. In New Bank of India Ltd. vs.
Pearey Lal ( A.I.R. 1962, Supreme court 1003), the Supreme Court observed
in the absence of other evidence a person paying into a bank, whether he is a
constituent of the bank or not, may be presumed to have paid the money to be
held as banker ordinarily held the money of their constituent. If no specific
instructions are given at the time of payment or thereafter and even if the
money is held in a Suspense Account the bank does not thereby become a
trustee for the amount paid.
In case the borrower transfers to the banker certain shares in a company as a
collateral security and the transfer is duly registered in the books of the
issuing company, no trust is created in respect of such shares and the banks’
position remains that of a pledge rather than as trustee. Pronouncing the above
verdict, in New Bank of India vs. Union of India (1981) 51 Company Case p.
378, the Delhi High Court observed that a trustee is generally not entitled to
dispose of or appropriate trust property for his benefit. “In the present case the
banker was entitled to dispose of the shares and utilize the amount thereof for
adjustment to the loan amount if the debtor defaults. The banker’s obligation
to transfer back the shares can arise only when the debtor clears dues of the
bank was not considered as trustee. This is the main problem of our research
which has been discussed in full details in the chapter VI ROLE OF
BANKER AS A TRUSTEE.

3.3.2 BANKER AS A BAILOR / BAILEE

Section 148 of Indian Contract Act,1872, defines bailment, bailor, and bailee.
A bailment is the delivery of goods by one person to another for some purpose
upon a contract. As per the contract, the goods should when the purpose is
accomplished, be returned or disposed off as per the directions of the person
delivering the goods. The person delivering the goods is called the bailer and
the person to whom the goods are delivered is called the bailee. Banks secure
their loans and advances by obtaining tangible securities. In certain cases
banks hold the physical possession of secured goods (pledge) – cash credit
against inventories; valuables – gold jewels (gold loans); bonds and shares
(loans against shares and financial instruments) In such loans and advances,
the collateral securities are held by banks and the relationship between banks
and customers are that of bailee (bank) and bailer.(borrowing customer)

3.3.3 BANKER AS A LESSER / LESSEE

Section 105 of ‘Transfer & Property Act’ deals with lease, lesser, lessee. In
case of safe deposit locker accounts, the banker and customer relationship of
lesser/lessee is applicable. Banks lease the safe deposit lockers (bank’s
immovable property) to the clients on hire basis. Banks allow their locker
account holders the right to enjoy (make use of ) the property for a specific
period against payment of rent.

3.3.4 BANKER AS AGENT

A banker acts as an agent of his customer and performs a number of agency

functions for the convenience of his customers. For example, he buys or sells
securities on behalf of his customer, collects cheques on his behalf and makes
payment of various dues of his customers, e.g.. insurance premium, etc. The
range of such agency functions has become much wider and the banks are
now rendering large number of agency services of diverse nature. For
example, some banks have established Tax Services Departments to take up
the tax problems of their customers.

3.4 OBLIGATIONS OF A BANKER

Though the primary relationship between a banker and his customer is that of
a debtor and creditor or vice versa, the special features of this relationship,
impose the following additional obligations on the banker:

OBLIGATIONS TO HONOUR THE CHEQUES

The deposits accepted by a banker are his liabilities repayable on demand or

otherwise. The banker is, therefore, under a statutory obligation to honour his
customer’s cheques in the usual course. Section 31 of the Negotiable
Instruments Act, 1881, lays down that: “The drawee of a cheque having
sufficient funds of the drawer in his hands, properly applicable to the payment
must compensate the drawer for any loss or damage caused by such default.”

OBLIGATION TO MAINTAIN SECRECY OF ACCOUNT

The account of the customer in the books of the banker records all of his
financial dealings with the latter and the depicts the true state of his financial
position. If any of these facts is made known to others, the customer’s
reputation may suffer and he may incur losses also. The banker is, therefore,
under an obligation to take utmost care in keeping secrecy about the accounts
of his customers. By keeping secrecy is meant that the account books of the
bank will not be thrown open to the public or Government officials and the
banker will take all necessary precautions to ensure that the state of affairs of
a customer’s account is not made known to others by any means. The banker
is thus under an obligation not to disclose—deliberately or intentionally—any
information regarding his customer’s accounts to a third party and also to take
all necessary precautions and care to ensure that no such information leaks out
of the account books.

The nationalized banks in India are also required to fulfill this obligation.
Section 13 of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970, specially requires them to “observe, except as
otherwise required by law, the practices and usages customary amongst
bankers and in particular not to divulge any information relating to the affairs
of the constituents except in circumstances in which they are, in accordance
with law or practices and usages or appropriate for them to divulge such
information.” Thus, the general rule about the secrecy of customer’s accounts
may be dispensed with in the following circumstances:

I. When the law requires such disclosure to be made; and

II. When practices and usages amongst the bankers permit such
disclosure.

A banker will be justified in disclosing information about his customer’s

account on reasonable and proper occasions only as stated below:

(a) Disclosure of Information required by Law. A banker is under statutory

obligation to disclose the information relating to his customer’s account
when the law specially requires him to do so. The banker would, therefore,
be justified in disclosing information to meet statutory requirements:
(i) Under the Income- Tax Act, 1961. According to Section 131, the
income tax authorities possess the same powers as are vested in a
Court under the Code of Civil Procedure, 1908, for enforcing the
attendance of any person including any offer of banking company or
any offer thereof, to furnish information in relation to such points or
matters, as in the opinion of the income-tax authorities will be useful
for or relevant to any proceedings under the Act. The income –tax
authorities are thus authorized to call for necessary information from
the banker for the purpose of assessment of the bank customers.
Section 285 of the Income- tax Act, 1961, requires the banks to furnish
to the Income-tax Officers the names and addresses of all persons to
whom they have paid interest exceeding ` 400 mentioning the actual
amount of interest paid by them.
(ii) Under the Companies Act, 1956. When the Central Government
appoints an Inspector or to investigate the affairs of any joint stock
company under Section 235 or 237 of the Companies Act, 1956, it
shall be the duty of all officers and other employees and agents
(including the bankers ) of the company to- produce all books and
papers of, or relating to, the company, which are in their custody or
power, and otherwise to give the Inspector all assistance in connection
with investigation which they are reasonably able to give (Section
240). Thus the banker is under an obligation to disclose all information
regarding the company but no of any other customer for the purpose of
such investigation (Section 251).
(iii) By order of the Court under the Banker’s Books Evidence Act,
1891. When the court orders the banker to disclose information
relating to a customer’s account, the banker is bound to do so. In order
to avoid the inconvenience likely to be caused to the bankers from
attending the Courts and producing their account books as evidence,
the Banker’s Books Evidence Act, 1891, provides that certified copies
of the entries in the banker’s book are to be treated as sufficient
 evidence and production of the books in the Courts cannot be forced
upon the bankers. According to Section 4 of the Act, “ a certified copy
of any entry in a banker’s book shall in all legal proceedings be
received as prima facie evidence of the matters, transitions and
accounts therein recorded in every case where, and to the same extent,
as the original entry itself is now by law admissible, but not further or
otherwise.” Thus if a banker is not a party to a suit, certified copy of
the entries in his book will be sufficient evidence. The Court is also
empowered to allow any party to legal proceedings to inspect or copy
from the books of the banker for the purpose of such proceedings.
(iv) Under the Reserve Bank of IndiaAct,1934. The Reserve Bank of
India collects credit information from the banking companies and also
furnishes consolidated credit information from the banking company.
Every banking company is under a statutory obligation under Section
45-B of the Reserve Bank. The Act, however, provides that the Credit
information supplied by the Reserve Bank to the banking companies
shall be kept confidential. After the enactment of the Reserve Bank of
India (Amendment) Act, 1974, the banks are granted statutory
protection to exchange freely credit information mutually among
themselves.
(vi) Under the Banking Regulation Act, 1949. Under Section 26, every
banking company is requires to submit a return annually of all such
accounts in India which have not been operated upon for 10 years.
Banks are required to give particulars of the deposits standing to the
credit of each such account.
(vii) Under the Gift Tax Act, 1958. Section 36 of the Gifts Tax Act, 1958,
confers on the Gift Tax authorities powers similar to those conferred on
Income- Tax authorities under Section 131 of the Income Tax Act
[discussed above (i).]
(viii) Disclosure to Police. Under Section 94 (3) of the Criminal Procedure
Code, the banker is not exempted from producing the account books
 before the police. The police officers conducting an investigation may
also inspect the banker’s books for the purpose of such investigations
(section 5. Banker’s Books Evidence Act).
(ix) Under the Foreign Exchange Management Act, 1999, under section
10. Banking companies dealing in foreign exchange business are
designated as ‘authorized persons’ in foreign exchange. Section 36, 37
and 38 of this Act empowers the officer of the Directorate of
Enforcement and the Reserve Bank to investigate any contravention
under the Act.
(x) Under the Industrial Development Bank of India Act, 1964. After the
insertion of sub-section 1A in Section 29 of this Act in 1975, the
Industrial Development Bank of India is authorized to collect from or
furnish to the Central Government, the State Bank, any subsidiary bank,
nationalized bank or other scheduled bank, State Co-operative Bank,
State Financial Corporation credit information or other information as it
may consider useful for the purpose of efficient discharge of its
functions. The term ‘credit information’ shall have the same meaning as
under the Reserve Bank of India Act,1934.
(b) Disclosure permitted by the Banker’s Practices and Usages. The
practices and usages customary amongst bankers permit the disclosure of
certain information under the following circumstances:
(i) With Express or Implied Consent of the Customer. The banker
will be will be justified in disclosing any information relating to his
customer’s account with the latter’s consent. In fact the implied term
of the contract between the banker and his customer is that the
former enters into a qualified obligation with the latter to abstain
from disclosing information as to his affairs without his consent
(Tourniers vs. National Provincial and Union Bank of India). The
consent of the customer may be expressed or implied. Express
consent exists in case the customer directs the banker in writing to
intimate the balance in his account or any other information to his
 agent, employee or consultant. The banker would be justified in
furnishing to such person only the required information and no more.
It is to be noted that the banker must be very careful in disclosing the
required information to the customer or his authorized
representative. For example, if an oral enquiry is made at the
counter, the bank employee should not speak in louder voice so as to
be heard by other customers. Similarly, the pass-book must be sent
tot the customer through the messenger in a closed cover. A banker
generally does not disclose such information to the customer over
the telephone unless he can recognize the voice of his customer;
otherwise he bears the risk inherent in such disclosure. In certain
circumstances, the implied consent of the customer permits the
banker to disclose necessary information. For example, if the banker
sanctions a loan to a customer on the guarantee of a third person and
the latter asks the banker certain questions relating to the customer’s
account. The banker is authorized to do so because by furnishing the
name of the guarantor, the customer is presumed to have given his
implied consent for such disclosure. The banker should give the
relevant information correctly and in good faith. Similarly, if the
customer furnishes the name of the banker to a third party for the
purpose of a trade reference, not only an express consent of the
customer exists for the discloser of relevant information but the
banker is directed to do so, the non – compliance of which will
adversely affect the reputation of the customer. Implied consent
should not be taken for granted in all cases even where the customer
and the enquirer happen to be very closely related. For example, the
banker should not disclose the state of a lady’s account to her
husband without the express consent of the customer.
(ii) The banker may disclose the state of his customer’s account in order
to legally protect his own interest. For example, if the banker has to
recover the dues from the customer or the guarantor, disclosure of
 necessary facts to the guarantor or the solicitor becomes necessary
and is quite justified.
(iii) Banker’s Reference. Banker follows the practice of making
necessary enquires about the customers, their sureties or the
acceptors of the bills from other bankers. This is an established
practice amongst the bankers and is justified on the ground that an
implied consent of the customer is presumed to exist. By custom and
practice necessary information or opinion about the customer is
furnished by the banker confidentially. However, the banker should
be very careful in replying to such enquiries.

PRECAUTIONS TO BE TAKEN BY THE BANKER.

The banker should observe the following precautions while giving replies about
the status and financial standing of a customer:

(i) The banker should disclose his opinion based on the exact
position of the customer as is evident from his account. He should
not take into account any rumour about his customer’s
creditworthiness. He is also not expected to make further
enquiries in order to furnish the information. The basis of his
opinion should be the record of the customer’s dealings with
banker.
(ii) He should give a general statement of the customer’s account or
his financial position without disclosing the actual figures. In
expressing his general opinion he should be very cautious—he
should neither speak too low about the customer nor too high. In
the former case he injures the reputation of the customer ; in the
latter, he might mislead the enquirer. In case unsatisfactory
opinion is to be given, the banker should give his opinion in
general terms so that it does not amount to a derogatory remark.
It should give a caution to the enquirer who should derive his
 own conclusions by inference and make further enquiries, if he
feels the necessity.
(iii) He should furnish the required information honestly without bias
or prejudice and should not misrepresent a fact deliberately. In
such cases he incurs liability not only to his own customer but
also to the enquirer.

Duty to the public to disclose : Banker may justifiably disclose any information
relating to his customer’s account when it is his duty to the public to disclose such
information. In practice this qualification has remained vague and placed the
banks in difficult situations. The Banking Commission, therefore, recommended a
statutory provision clarifying the circumstances when banks should disclose in
public interest information specific cases cited below:

(i) when a bank asked for information by a government official

concerning the commission of a crime and the bank has reasonable
cause to believe that a crime has been committed and that the
information in the bank’s possession may lead to the apprehension
of the culprit,
(ii) where the bank considers that the customer’s is involved in
activities prejudicial to the interests of the country.
(iii) where the bank’s books reveal that the customer is contravening
the provisions of any law, and (iv)where sizable funds are received
from foreign countries by a constituent.

RIGHTS OF A BANKER

Right of Appropriation

In case of his usual business, a banker receives payments from his customer. If the
latter has more than one account or has taken more than one loan from the banker,
the question of the appropriation of the money subsequently deposited by him
naturally arises. Section 59 to 61 of the Indian Contract Act, 1872 contains
provisions regarding the right of appropriation of payments in such cases.
According to Section 59 such right of appropriation is vested in the debtor, who
makes a payment to his creditor to whom he owes several debts. He can
appropriate the payment by (i). an express intimation or (ii) under circumstances
implying that the payment is to be applied to the discharge of some particular
debt. If the creditor accepts such payment, it must be applied accordingly. For
example, A owes B several debts, including ` 1,000 upon a promissory note which
falls due on 1st December, 1986. He owes B no other debt of that amount. On 1-
12-1986 A pays B ` 1,000. The payment is to be applied to the discharge of the
promissory note.

If the debtor does not intimate or there is no other circumstances indicating to

which debt the payment is to be applied, the right of appropriation is vested in the
creditor. He may apply it as his discretion to any lawful debt actually due and
payable to him from the debtor (Section 60) Further, where neither party makes
any appropriation, the payment shall be applied in discharge of each
proportionately (Section 61).

In M/s. Kharavela Industries Pvt. Ltd. v. Orissa State Financial Corporation and
Others [AIR 1985 Orissa 153 (A)], the question arose whether the payment made
by the debtor was to be adjusted first towards the principal or interest in the
absence of any stipulation regarding appropriation of payments in the loan
agreement. The Court held that in case of a debt due with interest, any payment
made by the debtor is in the first instance to be applied towards satisfaction of
interest and thereafter toward the principal unless there is an agreement to the
contrary. In case a customer has a single account and he deposits and withdraws
money from it frequently, the order in which the credit entry will set off the debit
entry is the chronological order, as decided in the famous Clayton’s Case. Thus
the first item on the debit side will be the item to be discharged or reduced by a
subsequent item on the credit side. The credit entries in the account adjust or set-
off the debit entries in the chronological order. The rule derived from the
Clayton’s case is of great practical significance to the bankers.

In a case of death, retirement or insolvency of a partner of a firm, the then existing

debt due from the firm is adjusted or set-off by subsequent credit made in the
account. The banker thus loses his right to claim such debt from the assets of the
deceases, retired or insolvent partner and may ultimately suffer the loss if the debt
cannot be recovered from the remaining partners. Therefore, to avoid the
operation of the rule given in the Clayton’s case the banker closes the old account
of the firm and opens a new one in the name of the reconstituted firm. Thus the
liability of the deceased, retired or insolvent partner, as the case may be, at the
time of his death, retirement or insolvency is determined and he may be held
liable for the same. Subsequent deposits made by surviving/ solvent partners will
not be applicable to discharge the same.

Right of General Lien

One of the important rights enjoyed by a banker is the right of general lien. Lien
means the right of the creditor to retain the goods and securities owned by the
debtor until the debt due from him is repaid. It confers upon the creditor the right
to retain the security of the debtor and not the right to sell it . Such right can be
exercised by the creditor in respect of goods and securities entrusted to him by the
debtor with the intention to be retained by him as security for a debt due by him
(debtor). Lien may be either (i) a general lien or, (ii) a particular lien. A particular
lien can be exercised by a craftsman or a person who has spent his time, labour
and money on the goods retained. In such cases goods are retained for a particular
debt only. For example, a tailor has the right to retain the clothes made by him for
his customer until his tailoring charges area paid by the customer. So is the case
with public carriers and the repair shops. A general lien, on the other hand, is
applicable in respect of all amounts due from the debtor to the creditor. Section
171 of the Indian Contract Act, 1872, confers the right of general lien on the
bankers as follows: “Bankers… may, in the absence of a contract to the contrary,
retain as a security for a general balance of account, any goods bailed to them.”
Special Features of a Banker’s Right of General Lien

(i) The banker possesses the right of general lien on all goods and securities
entrusted to him in his capacity as a banker and in the absence of a contract
inconsistent with the right of lien. Thus, he cannot exercise his right of general
lien if –

(i) the goods and securities have been entrusted to the banker
as a trustee or an agent of the customer; and
(ii) a contract – express or implied – exists between the
customer and the banker which is inconsistent with the
banker’s right of general lien. In other words, if the goods
or securities are entrusted for some specific purpose, the
banker cannot have a lien over them. These exceptional
cases are discussed later on.

A banker’s lien is tantamount to an implied pledge: As noted above the right of

lien does not confer on the creditor the right of sale but only the right to retain the
goods till the loan is repaid. In case of pledge8 the creditor enjoys the right of
sale. A banker’s right of lien is more than a general lien. It confers upon him the
power to sell the goods and securities in case of default by the customer. Such
right of lien thus resembles a pledge and is usually called an ‘ implied pledge’.
The banker thus enjoys the privileges of a pledge and can dispose of the securities
after giving proper notice to the customer.

(iii) The right of lien is conferred upon the banker by the Indian
Contract Act: No separate agreement or contract is,
therefore, necessary for this purpose. However, to be on
the safe side, the banker takes a letter of lien from the
customer mentioning that the goods are entrusted to the
banker as security for a loan—existing or future—taken
from the banker and that the latter can exercise his right of
lien over them. The banker is also authorized to sell the
 goods in case of default on the part of the customer. The
latter thus spells out the object of entrusting the goods to
the banker so that the same may not be denied by the
customer later on.
(iv) The right of lien can be exercised on goods or other
securities standing in the name of the borrower and not
jointly with others. For example, in case the securities are
held in the joint names of two or more persons the banker
cannot exercise his right of general lien in respect of a debt
due from a single person.
(v) The banker can exercise his right of lien on the securities
remaining in his possession after the loan, for which they
are lodged, is repaid by the customer, if no contract to
contrary exists. In such cases it is an implied presumption
that the customer has re-offered the same securities as a
cover for any other advance outstanding on that date or
taken subsequently. The banker is also entitled to exercise
the right of general lien in respect of a customer’s
obligation as a surety and to retain the security offered by
him for a loan obtained by him for his personal use and
which has been repaid. In Stephen Manager North
Malabar Gramin Bank vs. ChandraMohan and State of
Kerala, the loan agreement authorized the bank to treat the
ornaments not only as a security for that loan transaction,
but also for any other transaction or liability existing or to
be incurred in future. As the liability of the surety is joint
and several with that of the principal debtor, such liability
also came within the ambit of the above provision of the
agreement. Section 171 of the Contract Act entitles a
banker to retain the goods bailed to him for any other debt
due to him, i.e., any debt taken prior to the debt for which
 the goods were entrusted as security. But in a lien there
should be a right of possession because, lien is a right of
one man to retain that which is in his possession belonging
to another. Possession of the goods by the person claiming
right of lien, is anterior to the exercise of that right and for
which possession whether actual or conductive is a must.
(Syndicate Bank Vs. Davander Karkare (A.I.R. 1994
Karnataka 1)

Exceptions to the Right of General Lien

As already noted the right of lien can be exercised by a banker on the

commodities entrusted to him in his capacity as a banker and without any contract
contrary to such right. Thus the right of lien cannot be exercised in the following
circumstances:

(a )Safe custody deposits.

When a customer deposits his valuables – securities, ornaments, documents, etc. –

with the banker for safe custody, he entrusts them to the banker s a bailee or
trustee with the purpose to ensure their safety from theft, fire, etc. A contract
inconsistent with the right of lien is presumed to exist. For example, if he directs
the banker to collect the proceeds of a bill of exchange on its maturity and utilize
the same for honouring a bill of exchange on his behalf, the amount so realized
will not be subject to the right of general lien. Similarly, if a customer hands over
to the banker some shares with the instruction to sell them at or above a certain
price and the same are lying unsold with the banker, the latter cannot exercise his
right of lien on the same, because the shares have been entrusted for a specific
purpose and hence a contract inconsistent with the right of lien comes into
existence.

But if no specific purpose is mentioned by the customer, the banker can have lien
on bills or cheques sent for collection or dividend warrants, etc. If the security
comes into the possession of the banker in the ordinary course of business, he can
exercise his right of general lien.

(b) Right of General Lien becomes that of Particular Lien.

Banker’s right of general lien is displaced by circumstances which show an

implied agreement inconsistent with the right of general lien. In Vijay Kumar v.
M/s. Jullundur Body Builders, Delhi, and Others (A.I.R. 1981, Delhi 126), the
Syndicate Bank furnished a bank guarantee for ` 90,000 on behalf of its customer.
The customer deposited with it as security two fixed deposit receipts, duly
discharged, with a covering letter stating that the said deposits would remain with
the bank so long on any amount was due to the Bank from the customer. Bank
made an entry on the reverse of Receipt as “Lien to BG 11/80.” When the bank
guarantee was discharged, the bank claimed its right of general lien on the fixed
deposit receipt, which was opposed on the ground that the entry on the reverse of
the letter resulted in the right of a particular lien, i.e., only in respect of bank
guarantee. The Delhi High Court rejected the claim of the bank and held that the
letter of the customer was on the usual printed form while” the words written by
the officer of the bank on the reverse of the deposit receipt were specific and
explicit. They are the controlling words, which unambiguously tell us what was in
the minds of the parties of the time. Thus the written word which prevail over the
printed “word”. The right of the banker was deemed that of particular lien rather
than of general lien.

(c) Securities left with the banker negligently.

The banker does not possess the right of lien on the documents or valuables left
in his possession by the customer by mistake or by negligence.

(d) The banker cannot exercise his right of lien over the securities lodged with
him for securing a loan, before such loan is actually granted to him.

(e) Securities held in Trust.

The banker cannot exercise his right of general lien over the securities deposited
by the customer as a trustee in respect of his personal loan. But if the banker is
unaware of the fact that the negotiable securities do not belong to the customer,
his right of general lien is not affected.

(f) Banker possesses right of set-off and not lien on money deposited.

The banker’s right of lien extends over goods and securities handed over to the
banker. Money deposited in the bank and the credit balance in the accounts does
not fall in the category of goods and securities. The banker may, therefore,
exercise his right of set –off rather the right of lien in respect of the money
deposited with him. The Madras High Court expressed this view clearly as
follows:

The lien under Section 171 can be exercised only over the property of someone
else and not own property. Thus when goods are deposited with or securities are
placed in the custody of a bank, it would be correct to speak of right of the bank
over the securities or the goods as a lien because the ownership of the goods or
securities would continue to remain in the customer. But when moneys are
deposited in a bank as a fixed deposit, the ownership of the moneys passes to the
bank and the right of the bank over the money lodged with it would not be really
lien at all. It would be more correct speak of it as a right to set-off or
adjustment.”(Brahammaya vs. K.P. Thangavelu Nadar, AIR (1956), Madras 570)

RIGHT OF SET- OFF

The right of set-off is a statutory right which enables a debtor to take into account
a debt owed to him by a creditor, before the latter could recover the debt due to
him from the debtor. In other words, the mutual claims of debtor and creditor are
adjusted together and only the remainder amount is payable by the debtor. A
banker, like other debtors, possesses this right of set-off which enables him to
combine two accounts in the name of the same customer and to adjust the debit
balance in one account with the credit balance in the other. For example, A has
taken an overdraft from his banker to the extent of ` 5,000 and he has a credit
balance of ` 2,000 in his savings bank account, the banker can combine both of
these accounts and claim the remainder amount of ` 3,000 only. This right of set-
off can be exercised by the banker if there is no agreement—express or implied—
contrary to this right and after a notice is served on the customer intimating the
latter about the former’s intention to exercise the right of set-off.

To be on the safer side, the banker takes a letter of set-off from the customer
authorizing the banker to exercise the right of set-off without giving him any
notice. The right of set-off can be exercised subject to the fulfillment of the
following conditions:

The accounts must be in the same name and in the same right.

The first and the most important condition for the application of the right of set-
off is that the accounts with the banker must not only be in the same name but
also in the same right. By the words ‘the same right’ meant that the capacity of
the accountholder in both or call the accounts must be the same, i.e., the funds
available in one account are held by him in the same right or capacity in which a
debit balance stands in another account. The underlying principle involved in this
rule is that funds belonging to someone else, but standing in the same name of the
account – holder, should not be made available to satisfy his personal debts. The
following examples, make this point clear:

i) In case of a sole trader the account in his personal name and that in
the firm’s name are deemed to be in the same right and hence the right
of set-off can be exercised in case either of the two accounts is having
debit balance.

ii) In case the partners of a firm have their individual accounts as well as
the account of the firm with the same bank, the latter cannot set-off the
debt due from the firm against the personal accounts of the partners.
But if the partners have specially undertaken to be jointly and
 severally liable for the firm’s debt due to the banker, the latter can set-
off such amount of debt against the credit balances in the personal
accounts of the partners.

iii) An account in the name of a person in his capacity as a guardian for a

minor is not be treated in the same right as his own account with the
banker.

iv) The funds held in Trust account are deemed to be in different rights. If
a customer opens a separate account with definite instructions as
regards the purpose of such account, the latter should not be deemed to
be in the same right. The case of Barclays Bank Ltd. v. Quistclose
Investment Limited may be cited as an illustration. Rolls Rozer Ltd
.borrowed an amount from Quistclose Investment Ltd. with the
specific purpose of paying the dividend to the shareholders and
deposited the same in a separate account ‘Ordinary Dividend No. 4
Account with Barclays Bank Ltd. and the latter was also informed
about the purpose of this deposit. The company went into liquidation
before the intended dividend could be paid and the banker combined
all the accounts of the company, including the above one. Quistclose
Investment Ltd., the creditors of the company, claimed the repayment
of the balance in the above account which the bank refused. It was
finally decided that by opening an account for the specific purpose of
paying the dividend a trust arose in favour of the shareholders. If the
latter could not get the funds, the benefit was to go to the Quistclose
Investment Ltd. and to the bank. The banker was thus not entitled to
set-off the debit balance in the company’s account against the credit
balance in the above account against the credit balance in the above
account. The balance held in the clients’ account of an advocate is not
deemed to be held in the same capacity in which the amount is held in
his personal account.
 v) In case of a joint account, a debt due from one of the joint account-
holders in his individual capacity cannot be set-off against an amount
due to him by the bank in the joint account. But the position may
appear to be different if the joint account is payable to ‘ former or
survivor’. Such an account is deemed to be primarily payable to the
former and only after his death to the survivor. Thus the former’s debt
can be set-off against the balance in the joint account.

The right can be exercised in respect of debts due and not in respect of future
debts or contingent debts. For example, a banker can set-off a credit balance in the
account of customer towards the payment of a bill which is already due but not in
respect of a bill which will mature in future.If a loan given to a customer is
repayable on demand or at a future date, the debt becomes due only when the
banker makes a demand or on the specified date and not earlier.

(iv) The amount of debts must be certain. It is essential that the amount of
debts due from both the parties to each other must be certain. If
liability of any one of them is not determined exactly, the right of
setoff cannot be exercised. For example, if A stands as guarantor
for a loan of ` 50,000 given by a bank to B, his liability as
guarantor will arise only after B defaults in making payment. The
banker cannot setoff the credit balance in his account till his
liability as a guarantor is determined. For this purpose it is
essential that the banker must first demand payment from his
debtor. If the latter defaults in making payment of his payment of
his debt, only then the liability of the guarantor arises and the
banker can exercise his right of set-off against the credit balance in
the account of the guarantor. The banker cannot exercise this right
as and when he realizes that the amount of debt has becomes
sticky, i.e., irrecoverable.
(v) The right may be exercised in the absence of an agreement to the
contrary. If there is agreement— express or implied—inconsistent
with the right of set-off, the banker cannot exercise such right. If
there is an express contract between the customer and the banker
creating a lien on security, it would exclude operation of the
statutory general lien under Section 171 of the Indian Contract Act,
1872. In Krishna Kishore Karv. Untitled Commercial Bank and
Another (AIR 1982 Calcutta 62), the UCO Bank, on the request of
its customer K.K. Kar, issued guarantee for ` 2 lakhs in favour of
the suppliers of coal guaranteeing payment for coal supplied to
him. The customer executed a counter- guarantee in favour of the
Bank and also paid margin money ` 1.83 lakhs to the Bank. After
fulfilling its obligations under the guarantee, the Bank adjusted `
76,527 due from the customer under different accounts against the
margin money deposited by the customer in exercise of its lien (or
alternatively the right of set-off). The High Court held that the
bank was not entitled to appropriate or adjust its claims under
Section 171 of the Contract Act in view of the existence of the
counter- guarantee, which constituted a contract contrary to the
right of general lien.
(vi) The Banker may exercise this right at his discretion. For the purpose
of exercising this right of all branches of a bank constitute one
entity and the bank can combine two or more accounts in the name
of the same customer at more than one branch. The customer,
however, cannot compel or pursue the banker to exercise the right
and to pay the credit balance at any other branch.
(vii) The banker has right to exercise this right before the garnishee
order is made effective. In case a banker receives a garnishee order
in respect of the funds belonging to his customer, he has the right
first to exercise his right of set-off and thereafter to surrender only
the remainder amount to the judgement creditor.
RIGHT TO CHARGE INTEREST AND INCIDENTAL
CHARGES, ETC.

As a creditor, a banker has the implied right to charge interest on the advances
granted to the customer. Bankers usually follow the practice of debiting the
customer’s account periodically with the amount of interest due from the
customer. The agreement between the banker and the customer may, on the other
hand, stipulate that interest may be charged at compound rate also. In Konakolla
Venkata Satyanarayana & Others vs. State Bank of India (AIR, 1975 A.P. 113)
the agreement provided that “interest….. shall be calculated on the daily balance
of such amount and shall be charged to such account on the last working day of
each month.” For several years the customer availed the overdraft facilities and
periodical statements of accounts were being sent to the customer showing that
interest was being charged and debited at compound rate and no objection was
raised at any time. The High Court, therefore, held that there was no doubt that
the customer had agreed to the compound rate of interest being charged and
debited to his account. The customer need not pat the amount of interest in cash.
After making a debit entry in the account of the customer, the amount of interest
is also deemed as a debt due from the customer to the banker and interest accrues
on the same in the next period. The same practice is followed in allowing interest
on the savings accounts. Banks also charge incidental charges on the current
accounts to meet the incidental expenses on such accounts.

VARIOUS TYPES OF CUSTOMERS

Individuals Accounts of individuals form a major chunk of the deposit accounts in

the personal segment of most banks. Individuals who are major and of sound
mind can open a bank account.

(A) MINORS:

In case of minor, a banker would open a joint account with the natural guardian.
However to encourage the habit of savings, banks open minor accounts in the
name of a minor and allows single operations by the minor himself/ herself. Such
accounts are opened subject to certain conditions like

(i) the minor should be of some minimum age say 12 or 13 years or above

(ii) should be literate

(ii)No overdraft is allowed in such accounts

(iv) Two minors cannot open a joint account.

(v) The father is the natural guardian for opening a minor account, but RBI has
authorized mother also to sign as a guardian (except in case of Muslim minors)

(B) JOINT ACCOUNT HOLDERS:

A joint account is an account by two or more persons. At the time of opening the
account all the persons should sign the account opening documents. Operating
instructions may vary, depending upon the total number of account holders. In
case of two persons it may be

(i) jointly by both account holders

(ii) either or survivor

(iii) former or survivor In case no specific instructions is given, then the

operations will be by all the account holders jointly, The instructions for
operations in the account would come to an end in cases of insanity, insolvency,
death of any of the joint holders and operations in the account will be stopped.

(C)ILLITERATE PERSONS

Illiterate persons who cannot sign are allowed to open only a savings account
(without cheque facility) or fixed deposit account. They are generally not
permitted to open a current account. The following additional requirements need
to be met while opening accounts for such persons: – The depositor’s thumb
impression (in lieu of signature) is obtained on the account opening form in the
presence of preferably two persons who are known to the bank and who have to
certify that they know the depositor. – The depositor’s photograph is affixed to
the ledger account and also to the savings passbook for identification.
Withdrawals can be made from the account when the passbook is furnished, the
thumb impression is verified and a proper identification of the account holder is
obtained

(D)HINDU UNDIVIDED FAMILY (HUF)

HUF is a unique entity recognized under the Hindu customary law as comprising
of a ‘Karta’ (senior-most male member of the joint family), his sons and
grandsons or even great grandsons in a lineal descending order, who are
‘coparceners’ (who have an undivided share in the estate of the HUF). The right
to manage the HUF and its business vests only in the Karta and he acts on behalf
of all the coparceners such that his actions are binding on each of them to the
extent of their shares in the HUF property. The Karta and other coparceners may
possess self-acquired properties other than the HUF property but these cannot be
clubbed together for the HUF dues. HUF business is quite distinct from
partnership business which is governed by Indian Partnership Act, 1932. In
partnership, all partners are individually and collectively liable to outsiders for the
dues of the partnership and all their individual assets, apart from the assets of the
partnership, would be liable for attachment for partnership dues. Contrarily, in
HUF business, the individual properties of the coparceners are spared from
attachment for HUF dues.

The following special requirements are to be fulfilled by the banks for opening
and conducting HUF accounts: – The account is opened in the name of the Karta
or in the name of the HUF business.

– A declaration signed by Karta and all coparceners, affirms the composition of

the HUF, its Karta and names and relationship of all the coparceners, including
minor sons and their date of birth.

– The account is operated only by the Karta or the authorized coparceners.

– In determining the security of the family property for purposes of borrowing,
the self-acquired properties of the coparceners are excluded.

– On the death of a coparcener, his share may be handed over to his wife,
daughters and other female relatives as per the Hindu Succession Act, 1956. The
Hindu Succession Act, 1956 has been amended in 2005. The Amendment Act
confers equal rights to daughters in the Mitakshara Coparcenary property . With
this amendment the female coparcener can also act as Karta of the HUF. When
any HUF property is to be mortgaged to the Bank as a security of loan, all the
major coparceners (including female coparceners) will have to execute the
documents

(E)FIRMS

The concept of ‘Firm’ indicates either a sole proprietary firm or a partner- ship
firm.Asole proprietary firm is wholly owned by a single person, whereas a
partnership firm has two or more partners. The sole-proprietary firm’s account
can be opened in the owner’s name or in the firm’s name. Apartnership is defined
under section 4 of the Indian PartnershipAct, 1932, as the relationship between
persons who have agreed to share the profits of business carried on by all or any
of them acting for all. It can be created by an oral as well as written agreement
among the partners. The Partner- ship Act does not provide for the compulsory
registration of a firm. While an unregistered firm cannot sue others for any cause
relating to the firm’s business, it can be sued by the outsiders irrespective of its
registration. In view of the features of a partnership firm, bankers have to ensure
that the following requirements are complied with while opening its account: –
The account is opened in the name of the firm and the account opening form is
signed by all the partners of the firm.

– Partnership deed executed by all the partners (whether registered or not) is

recorded in the bank’s books, with suitable notes on ledger heading, along with
relevant clauses that affect the operation of the account.
– Partnership letter signed by all the partners is obtained to ensure their several
and joint liabilities. The letter governs the operation of the account and is to be
adhered to accordingly.

The following precautions should be taken in the conduct of a partnership

account:

– The account has to be signed ‘for and on behalf of the firm’ by all the
authorized partners and not in an individual name.

– A cheque payable to the firm cannot be endorsed by a partner in his name and
credited to his personal account.

– In case the firm is to furnish a guarantee to the bank, all the partners have to
sign the document.

– If a partner (who has furnished his individual property as a security for the loan
granted to the firm) dies, no further borrowings would be permitted in the account
until an alternative for the deceased partner is arranged for, as the rule in
Clayton’s case operates.

(F) COMPANIES

A company is a legal entity, distinct from its shareholders or managers, as it can

sue and be sued in its own name. It is a perpetual entity until dissolved. Its
operations are governed by the provisions of the Companies Act, 1956. A
company can be of three types: – Private Limited company: Having 2 to 51
shareholders. – Public company: Having 7 or more shareholders. – Government
company: Having at least 51per cent shareholdings of Government (Central or
State). The following requirements are to be met while opening an account in the
name of a company: – The account opening form meant for company accounts
should be filled and specimen signatures of the authorized directors of the
company should be obtained. – Certified up-to-date copies of the Memorandum
and Articles of Association should be obtained. The powers of the directors need
to be perused and recorded to guard against ‘ultra vires’ acts of the company and
of the directors in future. – Certificate of Incorporation (in original) should be
perused and its copy retained on record. – In the case of Public company,
certificate of commencement of business should be obtained and a copy of the
same should be recorded. A list of directors duly signed by the Chairman should
also be obtained. – Certified copy of the resolution of the Board of Directors of
the company regarding the opening, execution of the documents and conduct of
the account should be obtained and recorded.

(G) TRUSTS

A trust is a relationship where a person (trustee) holds property for the benefit of
another person (beneficiary) or some object in such a way that the real benefit of
the property accrues to the beneficiary or serves the object of the trust. A trust is
generally created by a trust deed and all concerned matters are governed by the
Indian Trusts Act, 1882. The trust deed is carefully examined and its relevant
provisions, noted. A banker should exercise extreme care while conducting the
trust accounts, to avoid committing breach of trust: – A trustee cannot delegate his
powers to other trustees, nor can all trustees by common consent delegate their
powers to outsiders. – The funds in the name of the trust cannot be used for
crediting in the trustee’s account, nor for liquidating the debts standing in the
name of the trustee. – The trustee cannot raise loan without the permission of the
court, unless permitted by the trust deed. Clubs Account of a proprietary club can
be opened like an individual account. However, clubs that are collectively owned
by several members and are not registered under Societies RegistrationAct, 1860,
or under any other Act, are treated like an unregistered firm. While opening and
conducting the account of such clubs, the following requirements are to be met: –
Certified copy of the rules of the club is to be submitted. – Resolution of the
managing committee or general body, appointing the bank as their banker and
specifying the mode of operation of the account has to be submitted, – The person
operating the club account should not credit the cheques drawn favouring the
club, to his personal account.
(H) LOCAL AUTHORITIES MUNICIPAL CORPORATION,
PANCHAYAT BOARDS ARE LOCAL .

Their constitution, functions, powers, etc. are governed by those Acts. Bankers
should ensure that accounts of such bodies are opened and conducted strictly as
per the provisions of the relevant Act and regulations framed there under. The
precautions applicable for company or trust accounts are also applicable in the
case of these accounts, in order to guard against ultra vires acts by the officers of
the local authority operating the account. Co-operative societies Co-operative
societies are required to open accounts only with these banks which are
recognized for this purpose (under the Co-operative Society Act). The following
documents should be obtained while opening their account: – Certificate of
registration of the society under the Co-operative Society Act. – Certified copy of
the bye-laws of the society. – Resolution of the managing committee of the
society prescribing the conditions for the conduct of the account. – List of the
members of the managing committee with the copy of the resolution electing
them as the committee members.

CLOSING OF A BANK ACCOUNT –

TERMINATION OF BANKER-CUSTOMER RELATIONSHIP

Banker-customer relationship is a contractual relationship between two parties

and it may be terminated by either party on voluntary basis or involuntarily by the
process of law. These two modes of termination are described below.

1.Voluntary Termination:

The customer has a right to close his demand deposit account because of change
of residence or dissatisfaction with the service of the banker or for any other
reason, and the banker is bound to comply with this request. The banker also may
decide to close an account, due to an unsatisfactory conduct of the account or
because it finds the customer undesirable for certain reasons. However, a banker
can close an account only after giving a reasonable notice to the customer.
However, such cases of closure of an account at the instance of the banker are
quite rare, since the cost of securing and opening a new account is much higher
than the cost of closing an account. If a customer directs the banker in writing to
close his account, the banker is bound to comply with such direction. The latter
need not ask the reasons for the former’s direction. The account must be closed
with immediate effect and the customer be required to return the unused cheques.

2. If the Bank desires to close the account:

If an account remains un-operated for a very long period, the banker may request
the customer to withdraw the money. Such step is taken on the presumptions that
the customer no longer needs the account. If the customer could not be traced
after reasonable effort, the banker usually transfers the balance to an “Unclaimed
Deposit Account”, and the account is closed. The balance is paid to the customers
as and when he is traced. The banker is also competent to terminate his
relationship with the customer, if he finds that the latter is no more a desirable
customer. The banker takes this extreme step in circumstances when the customer
is guilty of conducting his account in an unsatisfactory manner, i.e. if the
customer is convicted for forging cheques or bills or if he issues cheques without
sufficient funds or does not fulfil his commitment to pay back the loans or
overdrafts, etc. The banker should take the following steps for closing such an
account.

(a) The banker should give to the customer due notice of his intention to close
the account and request him to withdraw the balance standing to his credit.
This notice should give sufficient time to the customer to make alternative
arrangements. The banker should not, on his own, close the account without
such notice or transfer the same to any other branch.

(b) If the customer does not close the account on receipt of the aforesaid
notice, the banker should give another notice intimating the exact date by
which the account be closed otherwise the banker himself will close the
account. During this notice period the banker can safely refuse to accept
 further credits from the customer and can also refuse to issue fresh cheque
book to him. Such steps will not make him liable to the customer and will be
in consonance with the intention of the notice to close account by a specified
date. The banker should, however, not refuse to honour the cheques issued by
the customer, so long as his account has a credit balance that will suffice to
pay the cheque. If the banker dishonours any cheque without sufficient
reasons, he will be held liable to pay damages to his customer under Section
31 of the Negotiable Instruments Act, 1881. In case of default by the customer
to close the account, the banker should close the account and send the money
by draft to the customer. He will not be liable for dishonouring cheques
presented for payment subsequently.

3. Termination by Law: The relationship of a banker-customer can also be

terminated by the process of law and by the occurrence of the following events:

(a) Death of customer: On receiving notice or information of the death of a

customer, the bank stops all debit transactions in the account. However,
credits to the account can be permitted. The balance in the account is given to
the legal representative of the deceased after obtaining the letters of
administration, or succession certificate, or indemnity bond as per the
prescribed procedure, and only then, the account is closed.

(b) Bankruptcy of customer: An individual customer may be declared

bankrupt, or a company may be wound up under the provisions of law. In such
an event, no drawings would be permitted in the account of the
individual/company. The balance is given to the Receiver or Liquidator or the
Official Assignee and the account is closed thereafter.

(c) Garnishee Order: After receiving a garnishee order from a court or

attachment order from income tax authority, the account can be closed as one
of the options after taking the required steps.

(d) Insanity of the customer: A lunatic/person of unsound mind is not

competent to contract under Section 11 of the Indian Contract Act, 1872.
Since banker-customer relationship is contractual, the bank will not honour
cheques and can close the account after receiving notice about the insanity of
the customer and receiving a confirmation about it through medical reports.