B.

COM 2nd SEM CHAPTER- Banker and customer relationshipBANKING INNOVATIONS

UNIT-2: BANKER AND CUSTOMER RELATIONSHIP

Meaning of Banker
Banker is a person who performs various banking operations which are specified as conducting savings
accounts, current account or term deposit account for his customers, collects cheques or bills amount, paying
cheques amount on behalf of his customers.

Meaning of Customer
Customer is a person who has an account either savings account, current account, term deposit account or
maintains any similar relationship with a banker such as deposit cash to others account, makes DD, deposits
cheques to others account etc.

Importance of Banker - Customer Relationship

 Boosted Sales
 Increased Lead Conversion
 Personalized Customer Journeys
 Increased Productivity
 More Efficient Communication
 Inter-Department Data Tracking
 Better Service
 Improved Customer Experience
 Increased Customer Loyalty

Relationship between Banker and Customer

A) General Relationship between Banker and Customer

B) Special Relationship between Banker and Customer

A) General Relationship between Banker and Customer

1. Debtor and Creditor

When a ‘customer’ opens an account with a bank or he enters into an agreement/contract with the banker or
deposits money in his account, banker becomes the debtor and the customer becomes the creditor.

2. Creditor and Debtor

Lending money is the primary activity of a banker. When banker lends money to customer, the banker becomes
the creditor and the customer becomes the debtor.

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B.COM 2nd SEM CHAPTER- Banker and customer relationshipBANKING INNOVATIONS
3. Agent and Principal

Agent is a person who acts for and on behalf of the principal. Banker collects cheques, bills and makes payment
to various authorities’ such as rent, telephone bills, insurance premium, subscription etc., on behalf of its
customers. In all such cases banker acts as an agent of his customer and the customer acts as a principal.

4. Trustee and Beneficiary

A trustee is an entity who takes care of assets and performs certain functions for the gain or benefit of other
person known as beneficiary. For instance, when a customer gives certain standing instructions to the banker
about the usage of certain sum of money, the banker becomes the trustee and the customer becomes beneficiary.

5. Pledgee and Pledger

The relationship between banker and customer can be that of Pledgee and Pledger as well. This happens when a
customer pledges (promises) certain assets or security with the banker in order to get a loan. In this case, the
customer becomes the Pledger and the banker becomes the Pledgee.

6. Bailee and Bailor

The relationship between banker and customer can be that of Bailee and Bailor. Bailment is a contract for
delivering goods by one party to another to be held in trust for a specific period and returned when the purpose
is ended. Bailor is the party who delivers property to another. Bailee is the party to whom the property is
delivered. So, when a customer gives valuables to the banker for safe keeping, the customer becomes the bailor
and the banker becomes the bailee.

7. Advisor and Client

The banker acts as an advisor when a customer invests in securities. While giving advice the banker has to take
maximum care and caution. Here, the banker becomes an Advisor, and the customer becomes the client.

B) Special Relationship between Banker and Customer

1. Rights of a Banker 2. Obligations of a Banker

1. Rights of a Banker

It is not that the bank has only duties towards its customers; it too has certain rights vis-à-vis his customers.

i) Banker’s Right to Lien: A lien is the right of a creditor in possession of goods, securities or any other assets
belonging to the debtor to retain them until the debt is repaid. The creditor (bank) has the right to maintain the
security of the debtor but not to sell it. There are two types of lien:

(a) Right of Particular Lien: A 'particular lien' gives the right to retain possession only of those goods
in respect of which the dues have arisen. It is also termed as ordinary lien. If the bank has obtained a
particular security for a particular debt, then the banker's right gets converted into a particular lien.

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(b) Right of General Lien: A 'general lien' gives the right to retain possession of any goods in the legal
possession of the creditor until the whole of the debt due from the debtor is paid. Banker has a right of
general lien against his borrower. General lien confers banks right in respect of all dues and not for a
particular due.

ii) Banker’s Right to set-off: The banker has the right to set off the accounts of its customer. It is a statutory
right available to a bank, to set off a debt owed to him by a creditor from the credit balances held in other
accounts of the borrower.

iii) Banker’s Right to Appropriate payment: It is the right of the customers to direct his banker against which
debt (when more than one debt is outstanding) the payment made by him should be appropriated.

iv) Banker's right to charge interest and commission: Banker has an implied right to charge for services
rendered and sold to a customer.

v)Right not to produce books of accounts: According to the provisions of the bankers book evidence act
1891, the banker need not produce the original books of accounts as evidence in the cases in which the banker is
not a party.

vi) Banker’s Right to Garnishee order: Garnishee Order is a legal procedure by which a creditor can collect
what a debtor owes by reaching the debtor's property when it is in the hands of someone other than the debtor.

2. Banker’s Obligation
The various Bankers’ Obligations are as follows:
i) Banker’s obligation to honour customer’s cheques
The basic contract between the banker and customer is that whenever the customer demand payment needs to
be made. A banker must honour customers’ cheque drawn on him provided, there is
 Sufficiency of funds
 Applicability of funds
 Banker duly required to pay
 Presented within a reasonable time.
ii) Banker’s obligation to maintain secrecy of customer’s Account
The banker has an implied obligation to maintain secrecy of the customer’s account. He should not disclose
matters relating to the customer’s financial position since it may adversely affect the customer’s credit and
business. This obligation continues even after the account of the customer is closed.
EXCEPTIONS TO BANKER’ S OBLIGATION
 Disclosure as a banking practice
i. Where the customers consent has been obtained
ii. Where bankers own interest requires it.
iii. Where credit information is required by other banks.
 Disclosure in the public interest.

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B.COM 2nd SEM CHAPTER- Banker and customer relationshipBANKING INNOVATIONS
i. When a bank is asked for information by a government official concerning the commission of a
crime
ii. When bank considers that the customer is involved in activities prejudicial to the interests of the
country.
iii. Where banks books reveal that the customer is contravening the provisions of law.
iv. Where sizeable funds are received from foreign countries by a constituent.
iii) Banker’s obligation to maintain proper records
The banker should maintain the proper records of customer’s transactions. Any mistake of maintaining the
records, customer is not liable.
iv) Obligation to honor the cheques of customers across the counter.
When a customer presents an open cheque for withdrawal of cash across the counter in a bank, it makes the
obligation of banker to honor the customers cheques.
Meaning of Garnishee Order
Garnishee Order is a court order instructing a garnishee (a bank) that funds held on behalf of a debtor (the
judgement debtor) should not be released until directed by the court. The order may also instruct the bank to pay
the settlement amount to the judgement creditor (the person to whom a debt is owed by the judgement debtor)
from these funds.
Process of Garnishment
Garnishee order is issued under two steps:

Step-1:Order NISI

Under this step, the court gives order to the Debtor’s banker to stop payment out of the account. This order is
called as Order NISI.

Step-2:Order Absolute

Under this step, the bank should pay the debt amount to the judgement creditor on receipt of the confirmation
from court order. This order is called as Order Absolute.

Termination of the relationship between a Banker and a customer -

1. By mutual agreement -
The relationship between banker and customer may be terminated by mutual agreement.

2. Death of customer –
Death of a customer is an obvious reason for terminating the relationship between banker and customer. On the
receiving the notice of death of the customer the bank stops the payment. The dissolution of a corporation
customer is equivalent to death.

3. Lunacy of customer –
The Lunacy of a Customer terminates the relationship between banker and a customer. Bankers authority to pay
cheques is revoked by notice of insanity. But unless the evidence of insanity is fairly conclusive, the banker's
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B.COM 2nd SEM CHAPTER- Banker and customer relationshipBANKING INNOVATIONS
wisest course would appear to be to treat the customer as sane in so that the banker is not held liable for
damages for wrongful dishonor.

4. Notice to terminate –
In case of any current account, no such notice by the customer to a banker appears necessary. But if it is a
deposit account the banker could insist on the notice period specified on the fixed deposit receipt/book.

5. Bankruptcy –
The bankruptcy or winding up of the bank is a sufficient ground for terminating the relationship between a
Banker and customer.

6. Order of court –
If the court restrains the banker to carry on further of the banking business, the account of the customer comes
to an end.

7. Transfer of balance amount –

If the customer transfers the whole amount of balance of his account to any other person, then the account may
be closed by the banker. In this way the relationship of banker and customer comes to an end.

COLLECTING BANKER

Meaning-A Collecting Banker undertakes to collect cheques, drafts, bills, pay orders, traveller’s cheque, Letter
of credit, dividend warrants, debenture interest etc, on behalf of the customer.

Capacity of collecting banker:- In all situations, the collecting banker acts as either “agent for collection” or
“Holder for value”

Agent for collection A collecting banker acts merely as an agent of his customer, when

a) Banker receives the cheque for collection

b) Sends to the paying Banker for realization of the cheque

c) Receives the proceeds (i.e) realized amount

d) Credits to the customer’s account after charging the collection expenses, his commission

Holder for value When a collecting banker, advances some amount to his customer, before realisation of his
cheque, the banker becomes owner of the cheque now and he is termed as “Holderfor value”.

As holder for value: The collecting banker is said to acting as holder for value,

i. When the collecting banker advances money to the customer before the realisation of the cheques
given for collection.
ii. When the collecting banker settles the loan amount due from the customer with the cheque amount
given for collection, even before its realisation.
iii. Where a collecting banker reduces an overdraft with the amount for collection before its realisation.
iv. Where a part of the cheque amount is given by the collecting banker to the customer even before the
realisation of the cheque.
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B.COM 2nd SEM CHAPTER- Banker and customer relationshipBANKING INNOVATIONS
v. By allowing the customer to draw the full amount of the cheque before its realisation.

DUTIES OF A COLLECTING BANKER:-

 Exercise due-care and diligence in collection of Cheque- Banker should exercise due care, diligence
and skill in collection of cheques. Collecting banker must observe utmost care while presenting the
cheque for collection.

 Present cheque for collection in time-Collecting banker must present the cheques for payment to the
drawee bank within a reasonable time. Generally, if the collecting and paying banker are in the same
place, the cheque should be presented by collecting banker by the next day. To outstation cheques
should be dispatched for collection by the next day on the day when it has received by collecting banker.

 Notice to customer in case of dishonour of Cheque-The collecting banker must serve a notice of
dishonour to customer within a reasonable time. Collecting banker held be liable for the loss, if he fails
to serve such notice.

 Placing the proceeds to the account of customer- The collecting banker is under an obligation to place
the proceeds of the cheque to the account of customer after collection of cheque has been made.

The collecting banker must fulfil the following conditions:

 Cheque must be crossed. Only crossed cheque should be accepted collection by the bank. Crossing
may be general or special.

 Payment must be received on behalf of customer. The banker collects the cheque on behalf of
customer who has an regular account with the bank, Cheques related to strangers should not be accepted
for collection.

 Banker received the payment in good faith and without negligence. The collecting banker must be
received the payment in good faith and without negligence.

A collecting banker cannot avail the protection if.

 Opens the account without proper introduction.

 Irregular endorsement;

 No enquiry is made in doubtful cases.

 Collects an Account Payee cheque for any other person, Fails to take note of 'Not Negotiable Crossing.

Paying Banker

A paying banker is the person who pays the cheque either to his customer or on the instructions of his customer.
A cheque is a Negotiable instrument that orders a banker to pay when certain conditions are met.

Duties of Paying Banker

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B.COM 2nd SEM CHAPTER- Banker and customer relationshipBANKING INNOVATIONS
To honour a customer’s cheque is a paying banker’s statutory duty provided that the customer has sufficient
funds and the cheque is in order.

Precautions to be taken by the paying banker

In that case a paying banker must exercise extreme precautions while making the payments in due course of his
duty.

i. Form of Cheque: The form of cheque placed before him must be in valid form and not damaged or
torn or cancelled. The signature must be authenticated to verify the issuer.
ii. Date of Cheque: The cheque must not have been issued before 6 months. It must bear the date
clearly on which it was issued.
iii. Amount of Cheque: The amount should be mentioned without fail in words and in numbers. Both
the amount in words and in numbers must match. It should be written in a way that any insertion or
alteration is impossible.
iv. Fund of the customer: The customer who has drawn the cheque must have sufficient funds in his
account to clear the cheque. In case of insufficient funds the cheque is bounced. There cannot be a
partial payment, the cheque must be paid in full by the paying banker at all times or outright reject it
altogether.

Statutory protection for Paying Banker

 Protection regarding the cheque-
In case, payment is made to a wrong person whose signature is not according tospecimen signature, the
protection is given to a banker under Section 16 (2) of theNegotiable Instruments Act: "It is not possible
for a banker to know each of the endorsersand their signatures."
 Protection in case of bearer cheques-
The protection is given in the Act on the basis that a bearer cheque always remains a bearer cheque and
it bears endorsement in blank or full whether any endorsement restricts further negotiation or not. In
case a bearer cheque is stolen of lost and the banker honours the cheque without any knowledge, the
banker will be discharged from his duty.
 Protection in case of crossed cheques-
In case the payment is made on the instructions of the drawer in good faith without any negligence, the
paying banker gets the statutory protection under the Negotiable Instruments Act, 1881: "The payment
of crossed cheque in due course makes the drawee banker liable to the true owner of the cheque besides
disentitling himself to debit the customer's account."
 Protection in case of obliterated cheques-
Payment of instrument on which alteration is not apparent where a promissory note, bill of exchange or
cheque has been materially altered but does not appear to have been so altered, or where a cheque is
presented for payment which does not at the time of presentation appear to be crossed or to have had a
crossing which has been obliterated, payment thereof by a person or banker liable to pay, and paying the
same according to the apparent tenor thereof at the time of payment and otherwise in due course, shall
discharge such a person or banker from all liability thereon, and such payment shall not be questioned
by reason of the instrument having been altered, or the cheque crossed.

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B.COM 2nd SEM CHAPTER- Banker and customer relationshipBANKING INNOVATIONS
 Protection in case of draft-
Section 85A of the NI Act states that, Drafts drawn by one branch of a bank on another payable to order
where any draft, that is an order to pay money, drawn by one office of a bank upon another office of the
same bank for a sum of money payable to order on demand, purports to be endorsed by or on behalf of
the payee, the bank is discharged by payment in due course.

PAYMENT IN DUE COURSE

Payment in due course is the process of giving funds to the holder of a promissory note or bill of exchange or
cheque when due, without any knowledge that the document had been acquired by fraud or that the holder did
not have valid title. The true owner of the bill or note cannot also demand payment, but must look to the
recipient of the funds.

MEANING OF PAYMENT IN DUE COURSE

Section 10 of the Act defines payment in due course as payment in accordance with the apparent tenor of the
instrument in good faith and without negligence to any person in possession thereof under circumstances which
do not afford a reasonable ground for believing that he is not entitled to receive payment of amount mentioned
therein."

REQUISITES FOR PAYMENT IN DUE COURSE

 Payment must be made at or after the date of maturity.

 Payment must be made to the holder.
 Payment must be made by the debtor in good faith and without notice that his title is defective.
 If payment is made before maturity, it would constitute a negotiation back to the personprimarily liable
and he can renegotiate it. Payment doesn't discharge the instrument.
 Payment to endorsee who is not in possession of the instrument is not payment to a person other than the
holder is at the risk of the party so paying if the person wasn't authorized by the holder to receive
payment. So also, the payment to the original payee after the note had been transferred by him to a
holder in due course doesn't discharge the note.
 Payment to a person by the debtor who knows that such person stole it, is not payment in due course, as
such payment is not in good faith. The maker of a note or the acceptor of a bill must satisfy himself,
when it is presented for payment, that the holder traces his title through genuine endorsements, and if
there is a forged endorsement, it is a nullity and no right passes by it.

The Duties and Responsibilities of the paying banker

 Cheques drawn on Branch: the paying banker shall honor only those cheques which are drawn against
the account maintained at a branch of the bank where the cheques are presented

 Presentation within validity needed: The paying banker is legally bound to pay only such cheques
which are presented to him for payment within a reasonable time. Reasonable time is six months from
the date of issue of the cheque. Usually the cheque presented after six months of their issue are
considered "stale" cheque.

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 Presentation within Banking hours: cheque must be presented within the banking hours. Any cheque
presented after the banking hours has no legal effect and thereof banker cannot be held liable for
refusing payment on such cheques.

 Sufficient Balance: Funds in the account must be sufficient and available to honor thecheques.

 Must be valid Instrument: cheques not drawn in the proper form are refused by the paying banker.

MEANING OF LENDING BANKER

A lender is an individual, a public or private group, or a financial institution that makes fund available to a
person or business with the expectation that the funds will be repaid. Repayment will include the payment of
any interest or fees. Repayment may occur in increments, as in a monthly mortgage payment (one of the largest
loans consumers take out is a mortgage) or as a lump sum.

DUTIES AND RESPONSIBILITIES OF LENDING BANKER

 Evaluate credit worthiness by processing loan applications and documentation within specified limits.
 Interview applicants to determine financial eligibility and feasibility of granting loans.
 Determine all applicable ratios and metrics and set up debt payment plans.
 Communicate with clients either to request or to provide information.
 Justify decisions (approvals/rejections) and report on them.
 Complete loan contracts and counsel clients on policies and restrictions.
 Update job knowledge on types of loans and other financial services.
 Maintain and update account records.
 Assess customer needs, explore all options and introduce different types of loans.
 Develop referral networks; suggest alternate channels and cross-sell products and services to accomplish
quotas.
 Go the "extra mile" to build trust relationships, customer loyalty and satisfaction throughout the
underwriting process.
 Operate in compliance with laws and regulations and adhere to lending compliance guidelines.

BANKING OMBUDSMAN

Banking Ombudsman is a quasi-judicial authority created in 2006, and the authority was created pursuant to a
decision made by the Government of India to enable resolution of complaints of customers of banks relating to
certain services rendered by the banks. The Banking Ombudsman Scheme was first introduced in India in 1995,
and was revised in 2002. The current scheme became operative from 1 January 2006, and replaced and
superseded the banking Ombudsman Scheme 2002. Presently the Banking Ombudsman Scheme 2006 (As
amended up to July 1, 2017) is in operation.

FEATURES OF OMBUDSMAN
 An ombudsman investigates complaints organizations, including the government.

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B.COM 2nd SEM CHAPTER- Banker and customer relationshipBANKING INNOVATIONS
 The processing time for a complaint can be between 90 days and nine months, depending on the type
and complexity of the complaint.
 An ombudsman typically has a broad mandate that allows them to address overarching concerns in the
public, and sometimes the private, sector.
 An ombudsman is free for consumers to use and is typically paid via levies and case fees.
 Ombudsmen are in place across a wide variety of countries and organizations within those countries.
They may be appointed at a national or local level, and are often found within large organizations, too.
Ombudsmen may focus exclusively on and deal with complaints regarding a particular organization or
public office, or they may have wider ranges.
 Depending on the jurisdiction, an ombudsman's decision may or may not be legally binding. However,
even if not binding, the decision typically carries considerable weight.

TYPES OF OMBUDSMEN
 An industry ombudsman
An industry ombudsman, such as a telecommunications or insurance ombudsman, may deal with consumer
complaints about unfair treatment the consumer received from company that operates within that industry.
 Organizational Ombudsman
A large public entity or other organization may have its own ombudsman-an example being the
California Department of Health Care Services. Depending on the appointment, ombudsman may
investigate specific complaints about the services or other interaction consumer has had with the entity
concerned.
 Classical Ombudsman
Ombudsmen duties may be more wide-ranging nationally. For example, some countries have
ombudsmen in place to deal with issues such as corruption or abuses of power by public officials.
Furthermore, some countries have ombudsmen whose main function is to protect human rights within
those countries.
 Advocate Ombudsman
An advocate ombudsman, just as the name suggests, advocates for people who have filed grievances or
for those with whom the grievances concern. They can be found in the private or public sectors but are
typically found championing for long-term care residents, the elderly, the underserved, and those who
lack the capacity to advocate for themselves.
 Media Ombudsman
Familiar too many is the media or news ombudsman who receives complaints about news reporting. The
media ombudsman promotes accurate and transparent news reporting in an environment that fosters trust
with the general public.

BENEFITS OF AN OMBUDSMAN
 Ombudsman provide a channel for people to submit complaints against institutions.
 Reports may be published as to systematic issues arising within an agency or with delivery of a
government program.
 Where corruption is present, ombudsmen can investigate, expose, and help correct illegal behaviors.
 Ombudsmen help prevent governments from abusing their power, such as imposing unfair laws and
exerting controls over their citizens without constraints. They also help restore confidence in the system
and its ability to fairly address issues.
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B.COM 2nd SEM CHAPTER- Banker and customer relationshipBANKING INNOVATIONS

 In addition to investigating and providing resolutions, ombudsmen serve as a source of information

about policies and procedures. Serving as an unbiased party, they are able to promote communication
between parties and clarify issues that stifle progress.

LIMITATIONS OF AN OMBUDSMAN
 An ombudsman offers no benefit when their work produces lackluster or no results.

 A lack of dedication and service erodes the trust of the complainant and the audience theyare appointed
to serve.

 If the claim is complex, receiving a quick resolution is unlikely.

 Unlike lawyers, ombudsmen are impartial except in cases where they advocate for therights of others.

 Some are familiar with or have legal training; however, they cannot provide legal advice. If the
complainant disapproves of the resolution, they may pursue other actions, such assuing the institution.

 An ombudsman cannot, however, investigate a case after submitted to a court.

 If legal action is later pursued for the same complaint, the ombudsman's suggested remedy can influence
judicial decisions.

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