Banking Principles,

Procedures and Practices

What is a Banking?
• Banking means the accepting, for the purpose of lending or investment, of
deposits of money from public, repayable on demand or otherwise, and
withdrawable by cheque, draft, order or otherwise
• Any company doing banking business on these lines will be termed as a
bank and individuals involved are the bankers.
 Banker and Customer
• A banker is a dealer in capital, or more properly a dealer in money. He is an
intermediate party between the borrower and the lender. He borrows from
one party and lends to another.
• A customer: any one conducting banking transactions with a bank is a
customer. A person who has an account in a bank is said to be a customer of
the bank. A person whose money has been accepted by a bank on the footing
that they undertake to honor cheques up to the amount standing to his credit.
• According to current banking practices only those persons are said to be
customers who maintain a regular bank account .
 Banker Customer Relationship
Different activities undertaken by a bank. • Acting as an agent on behalf of the customer.
• Borrowing and lending of money. • Underwriting dealing in stocks, shares on
behalf of the customer.
• Collecting Negotiable instruments on • Issuance of Guarantees.
behalf of the customer.
• Dealing with property that may come to it as
• Dealing in foreign exchange. security in satisfaction of its outstanding
claims.
• Granting Letter of Credit to customers.
• Offering different value added services like
• Providing Safe custody facility / lockers. ATM,
Online banking and internet banking.
• Issuance of currency notes.
 Qualification of a customer
• Nature of relationship is purely contractual.
• Any one who is capable of entering into a contract can be a customer.
• He must not be a minor.
• He must have attained the age of majority. A person is deemed to have attained majority when
he has completed his age of 18 years.
• He should be a person of sound mind (he understands the contract at the time of making it). If
not he is incompetent to contract. Section 12 of the contract act says that a person is said to be
of sound mind for the purpose of making a contract if at the time when he makes it, he is
capable of understanding it and of forming a rational judgment as to its effect upon his interests.
• He shall not have been debarred from entering into any contract under any law.
 Rights Duties of the Customer.
RIGHTS.
• To draw cheque against his credit balance.
• To get passbook, cheque book, and periodic accounts statement.
• To make bank liable to correct any over crediting or over debiting.
• To sue the bank for the cost, loss, and damages when his cheque is
wrongfully dishonored.
• To sue the bank if the secrecy of his account was not maintained.
• To claim for and receive the profit / return on his deposits as promised by
the bank.
 Rights Duties of the Customer.
DUTIES.
• To present the cheque for payment or collection with in the banking hours.
• To insure that cheques should not be Stale or Post dated. The customer should
see that the cheques and other instruments are presented for payment within a
reasonable time from the date of their issue.
• To keep his cheque book / ATM in safe custody.
• He should draw the cheque in a manner that no alteration can be done for fraud.
• To pay charges to the bank. Bankers have the right to charge for the services
they provide to their customers.
 Different types of Banker Customer
Relationships.
• As Creditor and Debtor.
• When customer deposit money, he becomes creditor and bank as debtor by accepting and then
further utilizing it.
• Creditor: a person from whom deposits have been received on the basis of participation in the
profit & loss.
• Debtor : a person to whom finance has been provided.
• As Bailor and Bailee.
• When a person gives goods to some one for some purpose.
• When banks provide safe custody facility to customers to keep their valuable belongings.
• Customer is bailor and bank is bailee
 Different types of Banker Customer
Relationships.
• As Principal and Agent.
• When a banker performs Agency service he becomes Agent of his customer.
• This may include collection of cheques and other instruments or payments on behalf of the customer
with his standing instructions. Collection of utility bills and fees etc.
• As Pawner/Pawnee, Mortgagor and Mortgagee.
• When a customer pledges goods and documents with the bank as security for an advance, he becomes
the Pawner and the bank becomes Pawnee.
• Similarly, when advance to the customer is made against security of immovable property, the
relationship becomes that of Mortgagor and Mortgage.
 Special feature of Relationship.
• The following are special features of this relationship.
• Obligation to honor cheque.
• It is obligation on the bank to honor the cheques drawn on him by his customer as
long as his balance is sufficient, provided the cheque is not Stale or Postdated and
that there is no prohibiting order of any court against then account of the customer.
 Right to Lien.
• Lien means right to retain the property belonging to another until the debt due
from the latter has been paid
• Bank has a right of Lien on any kind of securities deposited by the customer.
• Following conditions do apply for exercising right of Lien
• The property of the customer must come into the hands of the banker.
• There should not be any entrustment for special purpose.
• Banker should obtain possession lawfully.
• There should be no agreement inconsistent with the right of Lien.
 Right of Set Off.
• Set-off means adjusting debit balance against credit balance in other
account or accounts of the same borrower
• It is a legal right of the banker.
• Normally, banks get written authority from the customer in advance for
this so that there is no need of notice.
• Credit balance of one account of the customer can be used to adjust the
debit balance in another branch.
• For partnership, the personal account of the partner cannot be used to set-
off the firm account but for sole proprietor it can be used.
• The balance of the single account cannot be set-off for any joint account
un till otherwise agreed by the joint account holders.
• Individual account can be used for set-off for Trust account but Trust
account cannot be used.
 The Bankers duty of Secrecy.
• The banker customer relation is a confidential agreement/contract so it is the duty of the
banker not to disclose any kind of information to third party who so ever he/she may be.
• It include both personal information and the information of the status of the account.
• Banks can disclose information in the following cases.
• Under Compulsion of Law.
• Duty to public to disclose.
• In the Interest of the bank.
• Express or Implied Consent of the customer.
• Common courtesy to the other banks.
 Termination of Relationship.
• Since banker-customer relationship is a contractual one, it may be terminated by any one
of the two by serving a notice to other.
• Notice by the customer:
• The following are reasons when customer serves notices to the bank for termination of
the contract.
• Due to the change in residence.
• Unsatisfactory services by the bank.
• Death of the customer.
• Shifting of account to the other branch/bank.
• Changing of account nature.
• To close accounts for special purposes like salary accounts.
 Notice by the Banker.
• Banker may close the account of the customer for a number of valid reasons.
• Cannot be done without giving reasonable notice.
• Serve the notice generally on the following reasons.
• Insufficient balance in the account. Presentation of customer’s cheques for payment
without having sufficient funds in the account.
• Having very less balance for a long time. When a customer is unable to keep a
remunerative credit balance in the account.
• Regular presentation of cheques after business hours.
 Notice by a banker Obstinacy of the
customer/ Death of customer.
• When the customer does not close his account even after the expiry of
reasonable notice given to him the banker may close the account by
returning the entire credit balance in his account and asking for return of
unused cheques.
• Death of customer. As soon as banker receives the intimation about the
death of his customer he must stop payment of cheques drawn on him by
deceased customer.
 Unsatisfactory operation.
• Customer insanity:
• The mental disorder or insanity of customer automatically terminates the bank’s
authority to act as his agent, since the banker customer relationship comes to an end.
• Customer insolvency:
• Insolvent customer looses all his rights. As soon as the banker receives the notice of
insolvency of his customer his authority to take any action on behalf insolvent
customer comes to an end. Order of court. Unsatisfactory operation.
 The First Class-work
Group Presentation:
Bank Customer Relationship in
Somaliland?
 The First Class-work
Group Presentation:
Process of Money Multiplier?
Questions