BANKER – CUSTOMER RELATIONSHIP

WHO IS A BANKER
 Section 5(c) – BR Act 1949 defines “a banker is a person who undertakes business of banking in India.”
 Section 2 – Bills of Exchange Act 1882 defines as follows: “banker” includes a body of persons whether
incorporated or not who carry on the business of banking.
WHO IS A CUSTOMER
 The term ‘customer’ is not defined by Indian Law. It has been evolved by courts.
 A person who has a bank account in his name and for whom the banker undertakes to provide the facilities as a
banker is known as a customer
 Prerequisites to constitute a customer; a). Open Bank Account b). Dealing between banker and customer in the
nature of a banking business

BANKER-CUSTOMER RELATIONSHIP
The relationship between a Banker and a Customer is based on trust. In today’s world, banks are considered a pivotal
element for the economy of the country. It is an effective banking system that paves the way for the proper growth of the
economy. Customers avail different kinds of services from the bank.

The relationship between banker and customer is of utmost importance. The relationship between a bank and its
customers can be broadly categorized into General relationships and Special relationships.

GENERAL RELATIONSHIP – DEBTOR-CREDITOR

When a customer opens a bank account with the bank, he fills the form and other requisites compulsory for the same.
When he deposits money in his bank account, he becomes a creditor to the bank. The bank becomes the debtor. The
obligations of the bank to carry further business from the deposits of the consumer are solely dependent on their own
choice. The bank can invest that money according to their own convenience. If the consumer wants to take back that
money, then he needs to follow a procedure of withdrawal.

RELATIONSHIP OF PLEDGER AND PLEDGEE

When a customer pledges an article (goods and documents) with the banker as a security for the payment of debt or
performance of the promise, the customer becomes a pledger and the banker becomes the pledgee.

RELATIONSHIP OF BAILOR AND A BAILEE

Section 148 of the Indian Contract Act, 1872 defines Bailment, bailor and bailee. A “Bailment” is the transfer of goods
from one person to another for some purpose, upon a contract that they shall return the goods after completion of the
purpose or will dispose of the goods according to the direction agreed as per the terms and conditions of the contract. The
person delivering the good is called the bailor and the person to whom the good is delivered is called the bailee. Banks
secure their advances by taking some tangible assets as securities. Sometimes they keep valuable items, or land and other
things as security. By doing so, the bank becomes the baillie and the consumer becomes the bailor.

RELATIONSHIP OF LESSER AND LESSE

Section 105 of Transfer of Property Act, 1882 defines lease, lessor, lesse, premium and rent.
A lease of immovable property is transferred to the right to enjoy the property for a certain period of time. The transferor
is the lessor. The transferee is called the lessee.

RELATIONSHIP OF TRUSTEE AND BENEFICIARY

When a bank receives money or other valuable securities, then the banker’s position is of a trustee. On the other hand,
when a bank receives money and uses it in various sectors, the bank becomes the beneficiary.
In certain circumstances the banker acts as a trustee also. A trustee holds money or assets and performs certain functions
for the benefit of some other called the beneficiary. Debtor or Trustee Relationship depends on the facts and
circumstances of the case. 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 the amount.
In New Bank of India Ltd. v. Pyare Lal (AIR 1962 SC 1003) the Court held that a trustee and beneficiary relationship
exists.

PRINCIPAL AND AGENT RELATIONSHIP

A banker acts as an agent of his customer and performs a number of agency functions for the convenience of his
customers. u For example, he buys or sells securities on behalf of his customer, collect cheques on his behalf and makes
payment of various dues of his due customers, e.g. insurance premium, etc.
Section 211 – ICA, 1872 – Agent bound to conduct the business as per the directions of the customer or as per prevalent
customs of the business
Section 212 – Duty to exercise adequate skill/care
Purewal & Associates v. Punjab National Bank AIR 1993 954 – Watch manufacturer denied banking services - Refusal
by bank to provide services to customer not proper – owing and neglecting to repay money due to banks cannot be ground
to totally deny banking services to the customer – Furnishing of Letter of Credit, payment of statutory outgoings, taxes,
salaries, etc. cannot be stopped – Normal day-to-day business not to stopped – liberty to file a suit for recovery
WHEN THE RELATIONSHIP ENDS

The relationship between a bank and a customer ceases on:

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

DUTIES OF BANKER
The duties of a Banker are –

1. It is the responsibility of the banker not to disclose the personal information given by the customer.

2. A banker should follow the guidelines of the customer. If the banker isn’t provided with any guidelines they can follow
the rules and regulations.

3. A banker is obliged to maintain all the details of transactions made by the customer.

4. The banker is obliged to honour the cheques of its customers up to the amount standing to the credit of the customer’s
account. If the banker is wrongly refusing to honour the cheque, he or she is liable to pay the compensation to the
customer.

5. A banker is responsible to withdraw and deposit funds with attention and accuracy.

6. A banker should gather financial information from new and existing clients to prepare their accounts, loans and
determine their creditworthiness.

7. The banker is obliged to advise, assist, and guide the client to meet their financial goals.

RIGHTS OF A BANKER

1. Right of Lien

This is one of the rights that are enjoyed by the banker. Under this right, a banker can keep the goods or properties which
are under the possession of the debtor until the loan is repaid by the same. The right of general lien is referred to under
Section 171 of the Indian Contracts Act, 1872. A banker is only supposed to maintain the collateral but not allowed to sell
it. But, the banker can sell the collateral after issuing a reasonable notice to the debtor who has defaulted.

Section 171 of the Indian Contract Act, 1872 confers on Banker, the right of general lien. The banker can exercise his
right of lien on all goods and securities entrusted to him in the capacity as a banker. The Banker cannot exercise his right
of lien in respect of :

1. the goods and securities entrusted to him as a trustee or an agent; and

2. the goods and securities entrusted to him for some specific purpose.

Negative Lien - borrower gives an undertaking to the banker as regards his assets that, the assets are free from any charge
and without the permission of the bank, no charge will be created on it – no legal standing

Codified u/sec. 171 of ICA, 1872 – Banker’s Right of General Lien.

CONDITIONS FOR LIEN Conditions necessary for exercising right of lien:

1. Goods and securities must be owned by the debtor in his own name. Banks may sanction advance to a borrower against
third-party securities. Such securities cannot be subject matter of lien. (except in the name of guarantor)
2. Securities must be received in the capacity of Banker. It means for securing loan and not for other purpose like safe
custody, safe deposit vaults, specifically for selling, inadvertently left in the bank, bank handling the securities as trustee
or agent etc.

3. Reasonable notice must be given before the sale of securities.

4. There should not be any contract inconsistent to the right of lien.

Banker’s lien, an implied pledge : If goods are delivered as security by one person to another, it is called ‘Pledge’. Eg. If
a farmer delivers 100 bags of paddy or wheat for securing a loan from the bank, it is called ‘Pledge’. The former is
pledger and the banker is pawnee. In pledge, the pledges (creditor) can exercise the right of sale. With the right of lien, the
banker can sell the goods and securities in case of default by the customer. However, he cannot sell the title deeds of an
immovable property.

Therefore, the Delhi High Court in Vijay Kumar vs. Jullundur Body Builders & Others1) has judicially defined
banker’s lien as an Implied Pledge.

Exceptions to the General lien

The Banker cannot exercise the right of general lien in the following cases :

1. Safe custody deposits : When the customer deposits with the banker, valuables, securities, documents, etc. for safe
custody, the right of General Lien cannot be exercised over them.
2. Documents deposited for Special Purpose.
3. When the customer, negligently or mistakenly left the securities with the banker.
4. When the right of general lien becomes particular lien.

2. Right of Set-off

Under this right, the banker has the right to merge two or more accounts of the customer under the same name in a bank
and set off the debt balance in one account and the credit balance in other, provided the funds belong to the customer.

CONDITIONS FOR SET-OFF

1. Mutual debts must be in same name and capacity. Ex: Loan of X cannot be recovered from Joint A/C of X & Y or from
savings A/C of X’s minor son Z or Partnership A/C
2. Debts must be certain, due and payable. This means, in case of term loan the installment which is due on 10th day of a
month cannot be recovered before 10th.
3. In case the deposit account is in the nature of “Term Deposit”, the right can still be exercised, for a lawful debt;
however only on maturity of the deposit account.
4. Set-off can be exercised in case of guarantor’s account after money is demanded from him.

Automatic Right of Set-off: Banker’s right to set-off arises automatically under the following circumstances:

1. On the death, insanity or insolvency of the customer.

2. On the insolvency of the partner of the firm or on the winding up of a company.
3. On the receipt Garnishee Order.
4. On receiving notice of assignment of a customer’s credit balance, and
5. On receiving notice of second mortgage over the security charged to the banker.

3. Right of Appropriation

This right is used when a customer who has taken many loans from the bank, deposits some money without any
instructions. In such cases, the banker can use his right to appropriate the deposited amount to any loan, even to a time-
barred- debit after informing the customer about the appropriation.

Rule in Clayton’s case – First-In First-Out (FIFO) Rule

In England, it has been considered a basic rule since the case of Devaynes vs Noble, also known as Clayton’s case. In this,
it was held that the debtor can request the creditor to appropriate the amount to any of the debt in case he owes to the
creditor several and distinct debts, if the creditor agrees to it, then he is bound by it.
In the Devaynes vs Noble[1] case, a partner in a banking firm died. The surviving partners continued to trade without
making any changes. They later fell into bankruptcy. Creditors of the bank at the date of the death still traded with the
bank with varying changes in their banking accounts. So, it was held that: The fact that they continued to trade with the
continuing partners did not discharge the estate of the deceased partner. The Judge Grant MR said: ‘I apprehend by the
general mercantile law, a partnership contract is several as well as joint. That may probably be the reason why courts of
equity have considered joint contracts of this sort, that is joint in form, as standing on a different footing from others.’

The Rule in Clayton’s case – Devaynes v Noble (1816) - First credits in are appropriated to meet the first credits out. The
rule states that “the first item on the debit side of that is discharged or reduced by the first item on the credit side”. Based
on Chronological order of Debit transactions.

EXCEPTION TO RULE IN CLAYTON’S CASE - Re Hallett’s Estate (1879) 13 Ch D 696, Facts: Mr. Hallett, a
solicitor, held bonds for Mrs. Cotterill worth £2145 until he wrongfully sold them and put the proceeds in his current bank
account, with Winning’s Bank, mixed with his own money. When he died the account had £3000.

Held, The rule does not apply to payments made by a fiduciary which contains a mixture of trust funds and the fiduciary’s
personal funds money. In case of misappropriation, the first amount withdrawn by him will not be allocated to the
discharge of trust funds but his own personal deposits though made at a later point in time

In M/S Kharavela Industries Pvt. Ltd. v. Orissa State Financial Corporation, the Court held that the amount paid should
be appropriated towards the interest amount first before appropriated towards the principal amount of the loan. Gurpreet
Singh v. Union of India (2006) 8 SCC 457 – Clayton’s Rule applicable in India

4. Right to charge interest and commission

Every bank in India has the right to charge interest on the loans they provided to their customers. The interests are charged
monthly, quarterly, semi-annually or annually. Along with interests, the banks also have the right to levy commissions for
the services they are rendering for their customers like SMS notification service, multi-city cheque service, retail banking
etc.

5. Right to close the Account

After sending a written intimation to the customer, the banker has the right to close an account if it is found to be not
operated properly.

6. Banker's Right to claim Incidental Charges

Every customer is expected/supposed to maintain a minimum balance with his account. If he fails to do so, the banker
may impose/collect certain incidental charges for the purpose. Similarly, the banker may collect charges for issuing the
statement of account of the customer’s account.

SPECIAL TYPES OF CUSTOMERS

Minors, Illiterate Person, Mentally Unsound, Joint Account, HUF, Trustees, Partnership, Corporations and Local
Authorities, Companies, Clubs and Association, Liquidators.

MINOR

A minor is a person, who has not completed 18 years of age. The minority extends to 21 years, if a guardian of his person
or property is appointed by the Court (See 3 of Indian Majority Act, (1875). Before 1969, in England the age of minority
was 21 years. The age of minority is reduced to 18 years after passing of the Family Law Reforms Act, 1969. In other
words, in England also, a person who has not completed the age of 18 years is a minor.

According to Sec. 11 of the Indian Contract Act, 1872, a minor is not competent to contract. A contract entered into by a
minor is void ab initio i.e. invalid from the very beginning (as laid down by the Privy Council in Mohori Bibee v/s
Dharmodas Ghose1). However, a contract with a minor for supplying of necessaries to minor or his dependants is valid
and enforceable (Section. 68, Indian Contract Act, under the Principle of Equity).

According to Section. 26 of the Negotiable Instruments Act, a minor may draw, endorse, deliver and negotiate such
instruments so as to bind all the parties, except himself. He need not incur any liability under the negotiable instrument,
but he can acquire rights over the instruments. However, the minor is bound by the withdrawals made by him and the
bank can legally debit his account.
Therefore, a Banker may open an account in the name of a minor in the following ways:

1. In the name of the minor or

2. In the joint names of the minor and his guardian or
3. In the name of the guardian.
In the first case an account can be operated by the minor himself and there is nothing unlawful, since, Sec. 26 of the Act
allows the minor to do so. In the second case, an amount can be operated jointly by the minor and his guardian. In the
third case, when the account is operated on behalf of the minor, the Minor should have completed 14 years and he must be
capable of reading and writing.

CONDITIONS FOR MINOR’S ACCOUNT (OWN NAME) - Minor should be of some minimum age of 10 years. (12
years until recently) - Should be literate - No overdrafts are allowed in these accounts - Two minors cannot open a joint
account - Father is the natural guardian for opening a minor account but as per RBI guidelines mother is also authorized to
sign as a Guardian

Illiterate
Illiterate persons cannot sign their names and hence the banker take their thumb impression as a substitute for signature,
and also a copy of their recent photograph. The application form and the photograph should be attested by an approved
witness. For withdrawing money, he must attend personally and affix his thumb impression in the presence of an official
of the bank, for the purpose of identifications.

Lunatic
According to Sec. 12 of the Indian Contract Act, 1872, a person of unsound mind is not competent to enter into a valid
contract. A person is said to be of sound mind for the purpose of making a contract if he is capable of understanding it and
of forming a rational judgement as to its effect upon his interests 2). It is important that he should be of sound mind at the
time he enters into a contract. If a person is usually of unsound mind but occasionally of sound mind, he may make a
contract when he is of sound mind. Similarly, if a person is usually of sound mind but occasionally of unsound mind, he
cannot enter into a valid contract when he is of unsound mind. A contract entered into by a person of unsound mind is a
void contract according to the Indian Contract Act, 1872.

The banker should therefore, not open an account in the name of a person who is of unsound mind. But if a banker has
discounted a bill duly written, accepted or endorsed by a lunatic he can realize the money due on the same from such
person except in the circumstances where it is proved that the banker was aware of the lunacy of the person concerned at
the time he discounted the bill. The banker should suspend all operations on the account of a customer as soon as he
receives the news of his lunacy till he gets the proof of his sanity or is served with an order of the court.

Joint Account
While opening the joint account, all the concerned persons should sign the application form. The necessary forms are
filled up and signed to specify how the account is to be operated and also who is authorised on all matters including
cheques, bills, securities, advances etc. Operation of the account may be by one or more persons but clear instructions are
essential to draw cheques etc. Instructions regarding survivorship are also a part of the process of opening of accounts.
Generally the account is made payable to either or survivor and the survivor is entitled to the amounts standing to the
credit. The joint holders may nominate a person, if they so desire. Example of Joint Account is Husband and Wife. In a
case of an account with instructions payable to either or survivor it is held that on the demise of the husband, the wife
would be entitled to the amount if the husband had such an intention to benefit her, but, if there is no intention, it becomes
part of the estate of the husband and hence heirs will be entitled as per law. Death of the husband, will not constitute a gift
to the wife. The burden of proving the intention is on the wife.3)

Partnership Firm
When two or more persons (subject to a maximum of 100) carry on business to share profits and losses equally or in
proportion of capitals, it is called ‘Partnership business’. The Indian Partnership Act, 1932 defines partnership as “The
relation between the persons who have agreed to share the profits of the business carried on by all, or by any one of them
acting for all”. The persons are called ‘Partners and the business is called ‘Partnership Firm’. In partnership, the liability
of partners is unlimited.

A banker should take the following precautions, while opening an account in the name of a partnership firm:

1. He (Banker) must examine carefully, the partnership deed to acquaint himself with the constitution and business of
the firm.
2. He must check that the number of partners is not less than two and not more than 100.
3. The account should be opened in the name of the firm, not in the name of partner/partners.
4. The Banker can insist all the partners to join, to open the account, and must obtain specimen signatures of all the
partners.
5. The Banker should take a letter or mandate containing:
a. the names and addresses of the partners;
b. nature of business undertaken by the firm;
c. name/names of the partner/partners who will operate the account.
6. If a cheque in favour of firm is endorsed to a partner, the banker should not honour it without making necessary
enquiry.
7. If there is a minor partner, his date of majority should be obtained to ensure that a fresh partnership later signed by
him on attaining majority.

Joint Stock Companies

A company is an artificial person, created by law with perpetual existence and common seal. To acquire legal personally
(to sue and be sued) it must be incorporated/registered under the Indian Companies Act, 1956. A Banker has to take the
following precautions while opening an account in the name of a Joint Stock Company.

1. He (Banker) must ensure that the company (applicant to open an account in the Bank) is incorporated/registered under
the Indian Companies Act, 1956 (so that the Banker can sue the company for default or breach of contract if any in
future).
2. He has to thoroughly examine the following documents of the company:
a. Certificate of Incorporation, issued by the Registrar of Joint Stock Companies to ensure that the company
(whether Private Limited or Public Limited) is incorporated under Companies Act.
b. Certificate of Commencement of Business in case, the applicant is a Public Limited Company. (A Private
Company can start business after getting the certificate of Incorporation. But a public company can start business
only after obtaining the certificate of commencement of Business issued by the Registrar of Joint Stock
Companies).
c. Memorandum of Association and Articles of Association are the most important documents, submitted to the
‘Registrar for Incorporation. Memorandum contains the relationship between the company and outsiders (public)
while the Articles contain the constitution of the company.
3. He must obtain from the applicant, a copy of the ‘Resolution passed by the Board of Directors’:
a. to ensure that the Bank is appointed as Banker of the Company’.
b. To know the persons authorized to operate the Account, and
c. to know the borrowing power of the company and the persons so authorized to borrow.
4. If the person authorized to operate the company’s account is having his personal account also with the bank, the
banker must properly enquire about the cheques endorsed and deposited in personal account so as to avoid
unauthorized transfer/diversion of Company’s funds.

JOINT HINDU FAMILIES

The concept of joint Hindu Family is recognized by law. A business, according to law is a distinct heritable asset. Where a
Hindu dies, leaving a business it passes on the heirs. If he leaves male issues it descends to them and the property
becomes joint Hindu Family property. The members of the family are called co- parceners and the eldest male member is
the manager or the karta.

When an account in the name of the JHF is opened all the adult co- parceners are to sign the account opening form, even
though the karta would operate on the account. In addition, the bankers also obtain a letter of undertaking signed by all the
adult co- parceners stating that the business carried on by the family through births and deaths will be advised to the
banker. If the business is ancestral, the co- parceners are liable to the extent of their share in the family property, whereas
if the business is not ancestral, co- parceners will be personally liable for the family from the bank.

The main problem in dealing with a JHF arises in respect of loans. In the JHF governed by mithakshara law, all the
members acquires a right in the property by birth and this right starts from the date of conception in the womb and so
there is always the danger of a loan being repudiated by a member who was not even born on the date of the transactions.
The burden of proving this necessity lies on the banker and the banker has to not only prove the legal necessity, but also
prove that he made reasonable inquiries and was satisfied as to the existence of the legal necessity. To avoid these and
several other difficulties, some banks requires a Hindu customer opening an account, to furnish a statement to this effect
that the money deposited is his self acquired property and not that of JHF.

The account should clearly indicate that it is a JHF. • The JHF letter should be signed by all the co- parceners. • The letter
should clearly indicates the powrs of the karta. • All co- perceners should sign the documents for loans. •
Death/Lunacy/Insolvency of co- perceners does not dissolve the JHF. It continues till partition of property.

TRUSTEES

According to the Indian Trusts Act, 1882, a 'trust' is an obligation annexed to the ownership of property, and arising out of
a confidence responed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of
another and the owner Section 3. The person who resposes the confidence is called the author of the trust. Trustees is the
person in whom the confidence is resposed. The person for whose benefit the trust is formed is called beneficiary. In the
case of New Bank of India v. Union of India[15], Supreme Court observed that a trustees 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 share
and utilities the amount thereof for adjustment to the loan account if the debtor defaults. This bankers obligation to
transfer back the shares can arise only when the debtor clears dues of the bank. Hence bank was not considered as
trustees.

LIQUIDATORS

A liquidator is a person appointed by the court to wind up the affairs of a company. His business is to realize the
company's assets and apply funds thus collected in repayment of debts and distribute the balance among shareholders. He
has power to borrow money on the security of the company's assets and to draw endores and accept instruments on behalf
of the company. While exercising such powers, the liquidator is free personal liability. Every official liquidator is required
to maintain a personal ladges account with RBI or SBI or any Nationalized Bank in terms of the court order.

CO – OPERATIVE SOCIETIES

These are established under Co – operative societies act in force in various states. They are governed by their respective
rules and by – laws. Before opening the accounts, these have to be scrutinized to see if there are any restrictions on
opening bank accounts. In some states, the co- operative societies cannot open accounts with commercial banks without
permission from the registrar of co- operative societies and the registrar may also impose certain conditions like maximum
balances. All such conditions should be observed while opening and operating the accounts.