GURU GHASIDAS UNIVERSITY, BILASPUR

SCHOOL OF LAW

PROJECT ON

BANKING LAW

“RELATIONSHIP BETWEEN BANKER AND CUSTOMER”

B.A-LL.B 6th SEM

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 CONTENTS

1. Introduction
2. Definition of banker
3. Who is a customer?
4. Classification of relationship
 General relationship
 Special relationship
5. Termination of relationship
6. Duties of banker
7. Rights of banker
8. Conclusion
9. Bibliography

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INTRODUCTION
Banking industry occupies an important place in a nation’s country. A bank is an
indispensable institution in modern society. One cannot think of the development of any
nation without the active assistance rendered by financial institutions. Banks, in fact, do
finance trade, industry and commerce. The modern business and the entrepreneur cannot
carry on the commercial activities without the different methods of financing done by the
banks.

The relationship between the banker and customer is vital. The relationship starts right from
the moment an account is opened and it comes to an end immediately on closure of account.
The relationship stands established as soon as the agreement and contract entered into. The
nature of the relationship depends upon the state of the customer’s account.

The relationship between a banker and a customer depends on the activities; products or
services provided by bank to its customers or availed by the customer. Thus the relationship
between a banker and customer is the transactional relationship. Bank’s business depends
much on the strong bondage with the customer. “Trust” plays an important role in building
healthy relationship between a banker and customer.

DEFINITION OF BANKER
The Banking Regulations Act (B R Act) 1949 does not define the term ‘banker’ but defines
what banking is?
The term banking may define as accepting of deposit of money from the public for the
purpose of lending or investing investment of that money which are repayable on demand or
otherwise and with a draw by cheque, draft or order.
As per Section 5(b)of the Banking Regulation Act “Banking' means 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."

As per Section 3 of the Indian Negotiable Instruments Act 1881, the word “banker includes
any person acting as banker and any post office savings bank”.

As perSection 2 of the Bill of Exchange Act, 1882, ‘banker includes a body of persons,
whether incorporated or not who carry on the business of banking.’

As perSection 5(c) of Banking Regulation Act defines "banking company" as a company that
transacts the business of banking in India. Since a banker or a banking company undertakes
banking related activities we can derive the meaning of banker or a banking company from
Section 5(b) as a body corporate that:
(a) Accepts deposits from public.

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(b) Lends or
(c) Invests the money so collected by way of deposits.
(d) Allows withdrawals of deposits on demand or by any other means.

WHO IS A CUSTOMER?
The term Customer has not been defined by any act. The word ‘customer’ has been derived
from the word ‘custom’, which means a ‘habit or tendency’ to-do certain things in a regular
or a particular manner’s.
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.
However, there are many persons who do utilize services of banks, but do not maintain any
account with the bank.
Thus bank customers can be categorized in to four broad categories as under:
1. Those who maintain account relationship with banks i.e. existing customers.
2. Those who had account relationship with bank i.e. Former Customers
3. Those who do not maintain any account relationship with the bank but frequently
visit branch of a bank for availing banking facilities such as for purchasing a draft,
encashing a cheque, etc. Technically they are not customers, as they do not maintain
any account with the bank branch.
4. Those who intend to have account relationship with the bank.

A person will be deemed to be a ‘customer’ even if he had only handed over the account
opening form duly filled in and signed by him to the bank and the bank has accepted it for
opening the account, even though no account has actually been opened by the bank in its
books or record.

CLASSIFICATION OF RELATIONSHP
(A)GENERAL RELATIONSHIP
(B)SPECIAL RELATIONSHIP

The relationship between a bank and its customers can be broadly categorized in to General
Relationship and Special Relationship. If we look at Sec 5(b) of Banking Regulation Act, we
would notice that bank’s business hovers around accepting of deposits for the purposes of
lending. Thus the relationships arising out of these two main activities are known as General
Relationship. In addition to these two activities banks also undertake other activities
mentioned in Sec.6 of Banking Regulation Act. Relationship arising out of the activities
mentioned in Sec.6 of the act is termed as special relationship.

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General Relationship

Debtor-Creditor:
When banker accepts deposits from the customer he becomes the debtor and the
customer is the creditor. The only obligation is to return the amount deposited with interest
on demand. The banker can deal with the money anyway he likes.

Features of debtor and creditor:-

1. Banker is called a dignified debtor.
2. Customer is not the secured creditor of the bank.
3. Customer’s balance at bank is not repayable.
4. Banker should pay the deposit money on demand by the customer.
5. The deposit should be paid at the appropriate place.
6. The demand should be made by the customer on working days and during the
business hours.

Creditor–Debtor:
Lending money is the most important activities of a bank. The resources mobilized by
banks are utilized for lending operations. Customer who borrows money from bank owns
money to the bank. In the case of any loan/advances account, the banker is the creditor and
the customer is the debtor. The relationship in the first case, whena person deposits money
with the bank reverses when he borrows money from the bank. Borrower executes documents
and offer security to the bank before utilizing the credit facility.
In addition to opening of a deposit/loan account banks provide variety of services,
which makes the relationship more wide and complex. Depending upon the type of services
rendered and the nature of transaction, the banker acts as a Bailee, trustee, principal, agent,
lessor, custodian etc.

Special Relationship

1. Bank as a Trustee: As per Section 3 of Indian Trust Act, 1882 ‘ A "trust" is an obligation
annexed to the ownership of property, and arising out of a confidence reposed in and
accepted by the owner, or declared and accepted by him, for the benefit of another, or of
another and the owner.’ Thus trustee is the holder of property on behalf of a beneficiary.
A trustee holds money or asset and performs certain functions for the benefit of some other
person called the beneficiary.
In case of trust banker customer relationship is a special contract. When a person entrusts
valuable items with another person with an intention that such items would be returned on
demand to the keeper the relationship becomes of a trustee and trustier. A customer keeps
certain valuables or securities with the bank for safekeeping or deposits certain money for a
specific purpose the banker in such cases acts as a trustee. Banks charge fee for safekeeping
valuables.
If the customer deposits securities or other values with the banker for the safe custody, the
letter acts as a trustee of his customer.

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2. Bailee – Bailor: As perSection 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 that they shall, when the purpose is accomplished, be returned
or otherwise disposed of according to the directions of the person delivering them.
The person delivering the goods is called the "bailor". The person to whom they
are delivered is called, the "bailee".
Banks secure their advances by obtaining tangible securities. In some cases physical
possession of securities goods, valuables, bonds etc., are taken. While taking physical
possession of securities the bank becomes bailee and the customer bailor. Banks also keeps
articles, valuables, securities etc., of its customers in Safe Custody and acts as a Bailee. As a
bailee the bank is required to take care of the goods bailed.

3.Lessor and Lessee: As perSection 105 of ‘Transfer of property Act 1882’ defines lease,
Lessor, lessee, premium and rent. As per the section “A lease of immovable property is a
transfer of a right to enjoy such property, made for a certain time, express or implied, or in
perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service
or any other thing of value, to be rendered periodically or on specified occasions to the
transferor by the transferee, who accepts the transfer on such terms.”

Definition of Lessor, lessee, premium and rent:

(1)The transferor is called the lessor,
(2)The transferee is called the lessee,
(3)The price is called the premium, and
(4)The money, share, service or other thing to be so rendered is called the rent.

The relationship between the bank and the customer is that of lessor and lessee. Banks lease
(hire lockers to their customers) their immovable property to the customer and give them the
right to enjoy such property during the specified period i.e. during the office/ banking hours
and charge rentals. Bank has the right to break-open the locker in case the locker holder
defaults in payment of rent. Banks do not assume any liability or responsibility in case of any
damage to the contents kept in the locker. Banks do not insure the contents kept in the lockers
by customers.

4. Agent and Principal: As per Section 182 of ‘The Indian Contract Act, 1872’ defines “an
agent” as a person employed to do any act for another or to represent another in dealings with
third persons. The person for whom such act is done or who is so represented is called “the
Principal”.
Banks collect cheques, bills, and makes payment to various authorities’ viz., rent, telephone
bills, insurance premium etc., on behalf of customers. Banks also abides by the standing
instructions given by its customers. In all such cases bank acts as an agent of its customer,
and charges for these services. As per Indian contract Act agent is entitled to charges. No
charges are levied in collection of local cheques through clearing house. Charges are levied in
only when the cheque is returned in the clearinghouse.

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5. As a Custodian: A custodian is a person who acts as a caretaker of something. Banks take
legal responsibility for a customer’s securities. While opening an account bank becomes a
custodian.

6. As a Guarantor: Banks give guarantee on behalf of their customers and enter in to their
shoes. Guarantee is a contingent contract. As per sec 31 of Indian contract Act guarantee is a
“contingent contract ". Contingent contract is a contract to do or not to do something, if some
event, collateral to such contract, does or does not happen.
It would thus be observed that banker customer relationship is transactional relationship.

TERMINATION OF RELATIONSHIP BETWEEN BANKER AND A

CUSTOMER

The relationship between a bank and a customer ceases on:

 The death, insolvency, lunacy of the customer.
 The customer closing the account i.e. Voluntary termination.
 Liquidation of the company.
 The closing of the account by the bank after giving due notice.
 The completion of the contract or the specific transaction.

DUTIES OF A BANKER
A Banker has certain duty towards his customers that are:-

 Duty to maintain secrecy of customers’ accounts.

 Duty to honour cheques drawn by customers on their accounts and collect cheque,
bills on his behalf.
 Duty to pay bills etc., as per standing instructions of the customer.
 Duty to provide proper services.
 Duty to act as per the directions given by the customer. If directions are not given the
banker has to act according to how he is expected to act.
 Duty to submit periodical statements i.e. informing customers of the state of the
account.
 Articles kept should not be released to a third party without due authorization by the
customer.

RIGHTS OF A BANKER

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A Banker has certain rights towards his customers that are:-

 Bankers’ right to charge interest, commission, Incidental charges and commitment

charges.
 Right not to produce books of accounts.
 Right to Set-Off.
 Right to appropriate payment.
 Right to general lien.

CONCLUSION
While concluding we can say that the relation between banker and customer is consensual
depending on express or implies contract between the two. Thereby a contractual relation
springs between banker and customer. In case of banking where a person asks the banker to
open an account for him and the banker’s acceptance thereof, constitutes implied contract of
relationship.
The main banking function was to keep in custody other people’s money and lending a part
of it. Gradually, these function extended and new others were added. As a result the
dependence of commerce upon banking has become so great that in the modern money
economy.
Relation of banker and customer depends upon the service given by the banker. In addition to
his primary functions a banker renders a number of his customer. The relationship between
them primarily is that of a creditor and debtor.
If the banker and customer follows their liabilities and duties against each other that will
better for the growth of banking business as well as overall economy of the nation.

BIBLIOGRAPHY
Website referred:-
 https://iedunote.com/relationship-between-banker-and-customer
 https://sol.du.ac.in/mod/book/view.php?chapterid=862&id=1225
 www.scribd.com