RETAIL BANKING

02 BANKER & CUSTOMER RELATIONSHIP

Banker
The Banking regulation Act 1949 (Section 5c) defines a banker as a person undertaking business
of banking. Banking means (section 6) accepting deposits from public, for the purpose of lending
or investment, repayable on demand or otherwise withdraw able by cheque, draft, order or
otherwise. Banks also undertake some ancillary services like, remittance services, safe custody
of articles, locker facility and consultancy and advisory services.
Customer
There is no legal definition of a customer but from various courts judgements, a customer
means a person who opens account which bank accepts with proper introduction. A person,
who maintains any type of account with the bank, be it deposit account or a loan account, related
to essential activities of banking, is a customer.
When customer tenders an account opening form to open the a/c and banker accepts it,
contractual relationship is established. The initial deposit for opening an account is normally
cash but it could be cheque or no deposit even at the time of opening the account, as ZERO
balance account can be opened. The frequency of transactions, relationship and the duration are
not material to constitute relationship of banker and customer. A person frequently visiting
banks branch for purchasing draft or encashing cheques is not a customer, if he does not open an
account.
A person can be treated as a customer of a branch where he maintains an account. He cannot be
treated the customer of other branches of the same bank.
KYC (Know Your Customer) Norms for new customer accounts:
KYC procedure is the key principle intended for identification of an individual or a corporate
opening an account. The customer identification should entail verification through an
introductory reference from an existing account holder / a person known to the bank or on the
basis of documents provided by the customer.
Proof of identity :
Valid Driving licence / an election ID card/ PAN card / Passport/ Photo credit card/ Ration Card
with photo and date of birth
Proof of residence:
Driving licence/ Election ID card/ Telephone bill/ Electricity bill/ Photo ration card/ Passport /
Flat allotment letter / Rent or lease agreement / LIC Policy for last two years / Credit Card
statement with copy of credit card
The person who introduces the account is called the introducer who is asked how long he
knows the account holder and in what context. The bank needs to satisfy itself about the
establishment of identify of account holder through the introducer so that banker is not held
negligent in opening the account. The introducer is responsible for establishing the identity of the
account holder and is not responsible for any loss or fraud committed by the account holder.
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MAIN RELATIONSHIP: DEBTOR-CREDITOR

The main relationship between a bank and a customer is of debtor and creditor. When a bank
accepts deposits, it becomes debtor and the depositor is a creditor, irrespective of the fact that the
bank pays interest or not. But the relationship is of a special nature, with following features, as
established by several judgements:
a. Customer cannot claim return of the same notes or coins from bank, which can repay a
sum of equivalent amount.
b. Depositor is an unsecured creditor.
c. For repayment, creditor must raise demand. Demand must be made by the customer only
at the branch at which the account is maintained and also within normal business hours
on a working day only. It is pertinent to add that payment outside business hours in not a
payment in due course which deprives the bank of the protection available u/s 85 or 85A
of Negotiable Instrument Act.
BANKER-CUSTOMER RELATIONSHIP various accounts/transactions
Transaction/ account type
Bank
Customer
Deposit account
Debtor
Creditor
Loan from Bank /loan account
Creditor
Debtor
Locker account
Lessor
Lessee
Safe custody of articles /securities
Bailee
Bailor
Purchase of draft
Agent
Principal
Payee of draft
Trustee
Beneficiary
Collection of cheque
Agent
Principal
Standing instructions
Agent
Principal
Sale/purchase of securities on behalf of customer Agent
Principal
BANKERS OBLIGATIONS
Banker deals in public money and therefore various relationships with the customer impose
certain duties on the Banker.
a. Duty to honor cheques of a customer.
b. Duty to maintain secrecy of a/cs.
Banks deposits are withdrawable by demand or otherwise. As and when a cheque is presented
before the bank, banker is bound to accept and honour it if it is otherwise in order. According to
Sec.31 of the Negotiable Instrument Act, 1881, a banker is bound to honour the cheque if the
following conditions are fulfilled:
SUFFICIENT BALANCE
Customer must have sufficient funds in his account. Where an overdraft limit has been
sanctioned to the customer, banker cannot refuse to honour the cheque drawn within the limit.
a. Banker is not bound to make part payment of amount of the cheque.
b. The customer cannot draw against cheques/draft/ instruments until these are realized.
c. The banker is not bound to combine different accounts of the customer for the purpose of
honoring the cheques unless bank has already agreed to such an arrangement.
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d. Credit balance of customers account at one branch cannot be applied for the payment of
cheques at another branch.
e. If a presenter of the cheque comes to know that drawers account shows a lesser balance
and deposits the difference in drawers accounts with an intention to get the cheque
passed, banker is justified in payment of that cheque passed provided the banker does not
disclose the balance to the presenter OR banker is not negligent for such information
coming to notice of the presenter.
WHERE MORE THAN ONE CHEQUES ARE PRESENTED SIMULTANEOUSLY
If the balance available in the account is sufficient to pay a few cheques only and not all, those
cheques are to be passed where the maximum liability of the customer is discharged (Golden
Rule of damages under Indian Contract Act 1872 Section 54-58). The maximum liability is
settled when the tax liability is met first. Hence the decision to pass the cheques should be based
on name of the payee, maximum no. of cheques and the cheque of higher amount, in that order.
OBLIGATIONS OF A CUSTOMER:
PROPER DEMAND & FORM
Bankers duty to pay the cheque arises only when demand made by the customer for payment is
in a proper manner, which implies:
a. Cheque should be properly filled (cheque filled with pencil is considered undesirable so
far paying bank is concerned, as per a Supreme Court judgement).
b. Amount in words and figures must tally (desirable),
c. Cheque should not be mutilated.
d. Cheque should not be post dated i,e bearing a date later than the date of giving cheque,
or stale i.e bearng more than six months old and is presented within 6 months of its issue.
e. Must be presented within business hours of the branch of which he is a customer, unless
other arrangements to pay are made.
f. Even if customers are allowed to issue cheques payable at par at other branches and can
draw cash from other branches under Core Banking Solutions, the customer is still
deemed as attached to the base branch where he has opened the account for all other
purposes.

WHERE BANKER CAN REFUSE TO PAY

In following cases, bankers liability to pay the cheque does not arise because funds are not
applicable to the cheque:
a. Customer having several bank accounts draws a cheque on a particular account in which
sufficient balance is not available even if other account is having enough funds to pass
the cheque or even if the customer owns a fixed deposit account also.
b. Cheque is issued by the customer exceeding his overdraft limit.
c. Payment of cheque is stopped by the drawer.
d. A court order or Income Tax attachment order has been served, attaching customers
funds.
e. Notice of customers death has been received or customer has become insolvent.
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DUTY TO MAINTAIN SECRECY OF CUSTOMERS ACCOUNT

In addition to implied contract between bank and customer not to disclose the affairs of the
customer, Section 13 of the Banking Companies (Acquisition & Transfer of Undertaking) Act,
1970, specifically requires a banker not to divulge any information relating to the affairs of the
constituents, except in circumstances in which they are in accordance with law and practice and
usage customary among bankers.
Hence the banker should not disclose balance of the account, financial position of the customer
and details of dealings in customers account. If these facts are disclosed it may harm the
reputation of the account holder and bank may be held liable.
a. Bankers duty of secrecy arises out of implied terms of the contracts with customer. Such
duty is a legal one and not merely a moral one.
b. Obligation of secrecy is not for a particular account of the customer. It is extended to all
the transactions that go through the account and securities offered in that respect,
c. Duty is not discontinued even when customer is dead or account is closed,
d. Obligation is extended to the information obtained by the bank from various sources,
regarding customers account/ financial position,
JUSTIFIED DISCLOSURE OF CUSTOMERS ACCOUNT INFORMATION
There are certain circumstances under which a banker is justified if it discloses information
regarding customers account. These disclosures may be under banking practices or under
compulsion of law.
DISCLOSURE UNDER BANKING PRACTICES
It is customary among bankers that they obtain necessary information about parties from other
bankers where these parties are maintaining accounts, in order to ascertain their financial
position and credit worthiness. Disclosure under this clause would be fully justified as implied
consent of the customer is presumed to exist.
DISCLOSURE IN THE INTEREST OF BANK
Disclosure of information to guarantor to recover the dues and disclosure of state of affairs of
account to banks lawyer to file the suit, is in order.
DISCLOSURE IN PUBLIC INTEREST
During war, if customer is dealing with the enemy, or is anytime dealing in money laundering
it is bankers duty to disclose it to the government authorities.
DISCLOSURES WITH EXPRESS OR IMPLIED CONSENT OF THE CUSTOMER
It is express consent when the customer himself directs the banker to provide information to his
agent or representative. When a customer takes loan by furnishing a guarantee, he impliedly
authorizes that bank for giving information to the guarantor
DISCLOSURE UNDER LAW
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Any information about the customer accounts can be justifiably disclosed under law as per:
1. Court order U/s 6 of Bankers Book Evidence Act 1891 or The Code of Civil Procedure
or under section 94 of Criminal Procedure Code 1973.
2. Central Govt. order in exercise of powers conferred u/s 235/237 of Companies Act
1956,.
3. Directorate of Enforcement and RBI orders under Section 43 of Foreign Exchange
Management Act 1999.
4. Under order of Astt Commissioner or Income Tax Officer U/s 131/133 of The
Income Tax Act 1961.
5. Order of RBI under Reserve Bank of India Act or Banking Regulation Act.
BANKERS RIGHTS
RIGHT OF LIEN
Lien has been defined as the right of a creditor to retain the possession of the goods and
securities owned by the debtor until the debt has been paid. Lien does not include the right of
sale of goods and securities, so retained by the creditor. Lien is available on goods and securities
only (such as bills, cheques, promissory notes, share certificates, bonds, and debentures). It is not
available for deposits, since deposits are neither goods nor securities.
Particular lien- In case of a particular lien (Section 170 of Indian Contract Act) the creditor
gets the right to retain possession only of goods or securities for which the dues have arisen and
not for other dues. For example, a watch-repairer can withhold the delivery of watch until his
charges of repairing the watch are paid to him.
General lien- A general lien (Section 171) gives the rights to the creditor to retain the possession
of goods or securities till all amounts due from debtor are paid or discharged. This is available to
bankers, factors, wharfingers, (the Wharfinger takes custody of and is responsible for goods
delivered to the wharf. ... A wharf is a landing place or pier where ships may tie up and load or
unload.) Banker has right of general lien against his borrowers
Conditions for bankers right of lien:. To exercise the right of lien the possession of the
property must be obtained lawfully in the capacity of the banker and not otherwise. A banker can
sell the goods or securities after giving the debtor a reasonable notice. The right of general lien is
available in case of all goods and securities, entrusted to bank in the capacity as a banker.
WHERE RIGHT OF LIEN CANNOT BE EXERCISED
a. Where there is any contract inconsistent with this right between banker and the
customer.
b. Where the goods and securities are entrusted to the bank as a trustee or as an agent, for
some specific purpose, or for safe custody or where some documents or valuable are
left in banks possession by the customer by mistake or negligence
c. Where the loan is granted to one person and the goods and securities are owned by more
than one person

d. Where the securities are given to the bank to secure a loan, but that has not been granted
as yet.
BANKERS RIGHT OF SET OFF
The right of set off means combining of two or more accounts, one of which is in debit and the other
in credit, (say overdraft and fixed deposit), in the same branch or a in a different branch, subject to
certain conditions:
Notice- The right can be exercised only after sending a prior notice expressing the intention to
exercise the right.
Time for exercising the right- The right is normally exercised in case of insolvency, death or lunacy
of the customer, insolvency or dissolution of firm or liquidation of the company, receipt of court
order.
Same capacity- It is essential that the account must be in the same name and in the same
capacity/right. The money belonging to someone else cannot be made available to satisfy personal
debts of some other person.
Partners/partnership- where a partners account shows credit balance, the right can be exercised for
the dues of the partnership firm because all partners are individually and jointly liable. But where the
firms account shows credit balance, the bank cannot set off the credit balance against the debts due
from the individual partner(s).
Guardian- where a person has an account in the capacity of a guardian of minor under 18 years of
age, it is not to be treated in the same right as his own account with the bank.
Trust- The funds held by a person in trust account are to be treated in different rights from his
liability as an individual.
Joint accounts- If the individual account of a person shows debit balance, such dues cannot be
recovered from his joint account with others. Where the joint account is payable to former or
survivor, the formers debt can be set off during his life time against the balance of joint account.
Debt due- The debt should be certain, determined, due & not a future or contingent debts and where
no agreement to the contrary exists. It can, however, be exercised for time barred debts also.
Guarantor- Against the guarantor, such right can be exercised only when demand is made on the
guarantor and his liability has been determined.
TERMINATION OF BANKER CUSTOMER RELATIONSHIP
The relationship terminates:
1. When the customer closes the account.
2. With knowledge of the death, insanity and insolvency of the customer.
3. On receipt of Court order or Income tax attachment order
4. When bank closes the account after due notice of reasonable period, (which is compulsory and
failing which, the banker may be held accountable for damage, if any, due to dishonour of
cheques).