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Banker and customer relationships


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Banker and customer relationships

  2. 2. BANKER AND CUSTOMER MEANING? • According to H.L. HART – the ‘banker’ is one who receives money, collects cheques and drafts, for customers, with an obligation to honour the cheques drawn by customers from time to time subject to availability of amounts in the account. • A ‘customer’ is one who has an account with the bank and to whom the banks undertakes to extend business of banking. A customer is a person who maintains an account with the bank, without taking into consideration the duration and frequency of operation of his account. A person becomes a customer and a contract is created when an account is opened.
  3. 3. RELATIONSHIPS • 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.
  4. 4. GENERAL RELATIONSHIP • 1) Debtor-Creditor: • The general relationship between banker and a customer is that of a debtor and a creditor i.e. borrower and lender. In Foley v. Hill, Sir John Paget remarks, “the relation of a banker and a customer is primarily that of debtor and creditor, the respective positions being determined by the existing state of account. Instead of the money being set apart in a safe room, it is replaced by the debt due from the banker. • Banker’s relation with the customer is reversed as soon as the customer’s account is overdrawn. Banker becomes creditor of the customer who has taken a loan from the banker and continues in that capacity till the loan is repaid.
  5. 5. 2) Agent and Principal- Sec.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”. One of the important relationships between a banker and customer is that of an agent and principal. The banker performs various services of the customer, where he acts as the agent. • Buying and selling securities of customer • Collection of cheques, bills of exchange, promissory notes on behalf of customer • Acting a trustee, executor or representative of a customer • Payment of insurance premium, telephone bills etc.
  6. 6. 3)Trustee and beneficiary- • section 3 of the Trusts Act defines a trustee as one to whom property is entrusted to be administered for the benefit of another called the beneficiary. A banker becomes a trustee under special circumstances. • According to Indian Trust Act 1882, trust is an obligation annexed to the ownership of a property, arising out of confidence reposed in and accepted by the person for the benefit of another person.
  7. 7. 4) Bailee and bailor- • During certain circumstances banker becomes bailee. When he receives gold ornaments and important documents for safe custody he takes charge of it as bailee and not trustee or agent. He cannot make use of them as he is bound to return the identical articles on demand. Bailment is a kind of activity in which the property of one person temporarily goes into the possession of another. The ownership of the property remains with the giver, while only the possession goes to another. Several situations in day to day life such as giving a vehicle for repair, or parking a scooter in a parking lot, giving a cloth to a tailor for stitching, are examples of bailment. Section 148 of Indian Contract Act 1872, defines bailment as follows - • Section 148 - 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 and the person to whom they are delivered is called the bailee.
  8. 8. • Duties of a Bailor A bailor may give his property to the bailee either without any consideration or reward or for a consideration or reward. In the former case, he is called a gratuitous bailor, while in the latter, a bailor for reward. The duties in both the cases are slightly different. Section 150 specifies the duties for both kinds of bailor. It says that the bailor is bound to disclose any faults in the goods bailed that the bailor is aware of, and which materially interfere with the use of them or which expose the bailee to extraordinary risk. This means that if there is a fault with the goods which may cause harm to the bailee, the bailor must tell it to the bailee.
  9. 9. Duties/Responsibilities of a Bailee • Duty to take reasonable care • In English law the duties of a gratuitous and non-gratuitous bailee are different. However, in Indian law, Section 151 treats all kinds of bailees the same with respect to the duty. It says that in all cases of bailment, the bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances take, of his own goods of the same bulk, quality, and value as the goods bailed. The bailee must treat the goods as his own in terms of care. • However, this does not mean that if the bailor is generally careless about his own goods, he can be careless about the bailed goods as well. He must take care of the goods as any person of ordinary prudence would of his things. • Duty not to make unauthorized use (Section 154) • Duty not to mix (Section 155-157) • Duty to return (Section 160)
  10. 10. Pawnee and pawner (pledge) • Pawn is a sort of bailment in which the goods are delivered to another as a pawn, to be a security for money borrowed. Thus a banker acts as a pawnee where a customer delivers the goods to him to be kept as security till the debt is discharged. The banker can retain the goods pledged till the debt is paid. Pledge is a special kind of bailment in which a person transfers the possession of his property to another for securing the loan taken from the other. It only differs from bailment in the matter of purpose. When the purpose of the bailment is to secure a loan or a promise, it is called a pledge. Section 172 of Indian Contract Act 1872 defines Pledge as follows - • Section 172 - The bailment of goods as a security for the payment of a debt or performance of a promise is called Pledge. The bailor in this case is called a Pawnor and the bailee is called Pawnee.
  11. 11. Lessee and lessor • when a customer hires a locker in the bank’s safe deposit vault, the bank undertakes to take necessary precaution for the safety of the articles in the locker. The relation between the parties is that of a lessor and lessee. • under Section 109, Transfer of Property Act, 1872. This section deals with the case of an assignment of the reversion, i.e., the lessor's interest. An assignment of the reversion may be: (i) an assignment of the whole reversion, or (ii) an assignment of the reversion in part of the property, or (iii) Part of an assignment of the reversion.
  12. 12. Guarantor principal debtor and surety • A bank as guarantor gives guarantee to its customer by issuing a ‘letter of credit’. It is a kind of credit facility to its customer to facilitate international trade. A bank guarantee contains an undertaking to pay the amount without any demur on mere demand of the principal amount on the ground for non-performance or breach of contract. A bank guarantee is a commercial instrument in the nature of a contract, intended between two parties, to secure compliance with the contract. • Section 126 of the Indian Contract Act, 1872 defines a “contract of guarantee” as contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the "surety", the person in respect of whose default the guarantee is given is called the "principal debtor", and the person to whom the guarantee is given is called the "creditor".
  13. 13. INDEMNIFIER- INDEMNIFIED- • The customer is indemnifier and the bank is indemnified. A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or the conduct of any other person is called a contract of indemnity – section 124 ( Indian Contract Act, 1872). In the case of banking, this relationship happens in transactions of issue of duplicate demand draft, fixed deposit receipt etc. The underlying point in these cases is that either party will compensate the other of any loss arising from the wrong/excess payment.
  14. 14. SPECIAL TYPE CUSTOMERS • LUNATICS- Under Indian Contract Act , a contract with or by a lunatic is void. The reason being the lunatic being of unsound mind is not competent to comprehend a contract. If the banker without knowing that the person is lunatic opens an account and enters into a contract acting in good faith is protected. But when once he gets a notice of lunacy of a person, he should not entertain any contract either existing or new. • DRUNKARDS- Under section 12 of Indian contract act 1872, a sane man who is delirious from favour or who is drunk that he cannot understand the contract, or form rational judgment cannot enter into contract while such delirium or drunkedness lasts. When a customer who is drunk presents a cheque across a counter the payment must be witnessed.
  15. 15. • MINORS- Any person under the age of 18 yrs is a minor. If a court appoints a guardian and the minor is below 18 yrs the minority extendsupto 21 yrs. A minor is not competent to enter into a contract and all the contracts entered in by him are void. The banker can open an account but he has to be careful that the account will never be allowed to be overdrawn. The minor can be a partner but cannot be held liable for the liabilities of the partnership. • MARRIED WOMEN- The Hindu married women are governed by the Hindu Succession Act and other married women by Indian Succession Act. A banker may open an account in the name of a married woman like any other customer. However, a banker should exercise caution while opening account for the wife of an undischarged insolvent.
  16. 16. • PARDHANISHIN WOMEN- Before dealing with such kind of women in banking transactions the bank must verify whether she has free consent or not? Whether she knows about everything about the contract or not? In case of a pardhanishin woman who remains completely secluded the following presumption exists- • Any contract entered into by her may be subject to undue influence • The same might not have been done with free will and with full understanding of what the contract actually means. • JOINT HINDU FAMILY- All the major members must signed the document before opening up an account for Joint Hindu Family.
  17. 17. ILLETERATE PERSONS Thumb impression is needed and photo is always required at the time of transaction and in time of withdrawal that person who have account must come and the photo thumb impression must be matched. An illiterate person is competent to contract and bank may open an account in his name, but special care should be taken by the banker before opening an account. • The account of an illiterate person may be opened provided he/she calls the bank personally along with a witness who is known both to the banker and the depositor. • A passport size photograph of the illiterate person is identified before the banker in presence of the account holder. The photographs have to be attested by the bank officer/ witness. • The left hand thumb impression in case of male illiterate and right hand thumb impression in case of female illiterate are duly attested by some responsible person on the account opening form. • One or two identification marks of the depositor should be noted on the account opening form.