As per VNSGU Syllabus 2017-18

1. Semester- Sem- III
Subject: Banking Law & Practice

2. Introduction
 The relationship between a customer and a banker arises out of a contractual agreement.
 The contract is completed when the prospective customer signs the account-opening form and
the banker accepts the same for opening the account.
 In this way, the banker-customer relationship comes into existence by the mutual agreement
between them.
 If one of the parties wishes to terminate this relationship, then he has to serve a notice to the
other party or under certain situations under legal provisions this relationship can be
terminated.
 To understand the termination of banker-customer relationship, it is necessary to understand the
following two terms:
i. Stopping an account, and
ii. Closing an account
 In the view of the banker, both these terms are synonymous. But for a customer “Stopping
an account” means there is a time being halt in the banker-customer relationship and it may
restart after sometime, while “Closing an account” means the end of the banker-customer
relationship forever.

3. When a banker finds that the customer is undesirable or unwanted customer then a banker can
prefer to close down his account, and can bring an end to (or a termination of) banker-customer
relationship.
Undesirable Customer
In the view of a banker, the customer is considered to be an undesirable (or unwanted) customer
under the following circumstances:
i. When a garnishee order from a court is served frequently on his account.
ii. When the holder of bank’s account is declared offender by forged signatures on cheques and
bill of exchanges.
iii. When he does not maintain minimum required balance in his account.
iv. When there is no sufficient balance and he issues the cheques frequently.
v. When he issues the cheque without seeking the overdraft facility on his account.
vi. When he issues post-dated cheques frequently.
vii. When he issues the instructions to the bank frequently for stop payment of the cheques issued
to the parties.
Naturally, a banker can prefer to close such an account of undesirable customer. But the banker
cannot close the account of a customer as per his discretion, as the banker-customer relationship is a
contractual one. Bank has to follow the procedure as per Indian Contract Act, 1872.

4. Procedure to Closesuch an Undesirable Customer
Account
1) The banker is required to serve a notice to such an undesirable customer to close his account in
the bank, within a certain time limit.
2) But if a customer does not respond to close his account even after the notice period is over, then
the bank can collect the blank cheques issued to him and can close down his bank account. The
banker should inform the customer that banking transaction will not be entertained after a
particular date under intimation i.e. No credit on such account will be entertained and should
also inform the customer to withdraw his balance immediately. Still then if a customer draws a
cheque then it is necessarily required to be honoured by the bank upto the limit of balance in his
account.

5. Terminationof Banker-Customer Relationshipor
ClosingtheAccount
The starting of the banker-customer relationship makes it clear that both the parties are bound to
follow up their duties and are expected to enjoy their proper rights. The relationship between a
banker and a customer is terminated by the following methods:
Methods of
Termination
Mutual
Agreement Giving
Notice to the
Other
Party
Death of the
Customer
Insanity of
the Customer
Insolvency of
the Customer
Closure of a
Business by a
Banker or his
Customer
Assignment
of Balance in
the
Customer’s
Account
Garnishee
Order on
Customer’s
Account

6. 1) Termination by mutual agreement
(A) Termination by a customer:
• If a customer wants to terminate the relationship with a banker, he gives
written notice to the banker about it.
• If he has a current account or a savings bank account with the banker, it can
be closed immediately; but if he has a fixed deposit account, it can be closed
on the expiry period of the fixed deposit.
• In case of the termination of relationship by a customer with the banker, the
banker has to collect all unused cheques from him and they are to be
destroyed to avoid the mischief of fraud played by some other person.
• A customer may think of terminating its relationship with the banker due to
many reasons like (i) a customer finds his convenience of banking
transactions with some other banker, nearer to his residence; (ii) A customer
may want some special services which the banker may not be willing to give
due to placement of himself in risky position.
(B) Termination by a banker:
• A customer can terminate the banker-customer relationship very easily. But a banker cannot
terminate the banker-customer relationship easily.
• In case a banker wants to close a customer’s account he sends a written notice to him about it.

7. • If the customer does not close the account after receipt of the notice, the banker will
send him a cheque for the full amount in his account.
• In case, the customer does not encash the cheque, the banker will continue to honour
the cheque drawn on the account till the funds last, but will not accept any deposits in
the account.
2) Termination by giving notice to the party
• Generally, a banker cannot close the customer’s account as per his discretion. But he can close if
the account is dormant and has no transactions and profitable to a customer.
• So when the banker desires to close such account, the banker has to write a letter showing the final
balance and clears the point that the customer should draw the balance at a time and should return
the unused cheques, pay-in slips and a passbook to the banker.
• In spite of such efforts of a banker, if the customer does not approach for response then the banker
can close the account and keeps the account in tact which the banker cannot use and pays as soon
as he finds out the true owner.
3) Termination on the death of a customer
• As soon as the banker receives information about the death of a customer, his account should be
closed and no payment should be made from such account.
• Even cheque written before his death but presented after drawer’s death should not be honoured.
• After the death of the customer, his legal heirs inherits the right of his account and the banker has
to act in accordance with his instructions after the legal heir has obtained a succession certificte
from a competent court.

8. • The successor can open his account as per desire only after producing succession certificate or can
withdraw amount from the account.
• The account of deceased cannot be continued after his death under any circumstances.
4) Closing the account due to insanity of customer
• The banker should close a customer’s account as soon as he hears about his insanity (i.e. unsound
mind).
• But this can be reopened when he is declared to be normal by a competent authority. The banker,
however, has to be very cautious because it is very difficult to ascertain whether a person is really
insane.
• Because when the customer stops the operation of account merely on the base of rumours, it is
illegal and bank is responsible for such type of dealings.
• So normally the bankers transact the business with the customers thinking them of sound mind.
5) Closing the account due to insolvency of customer
• When the customer is declared as insolvent then bank can refuse payment of cheque as his right.
• The account of a customer should be closed as soon as his banker gets information about his
insolvency.
• The government appoints a liquidator to manage the assets and property of such insolvent person.
• After closing the account, the said account can be operated only under the instruction of liquidator
appointed by the honourable court, to handle the affairs of the insolvent customer.

9. 6) Termination of relationship due to winding up of business
• In case a partnership firm is dissolved or a company is liquidated, the banker on receiving
information about such dissolution or liquidation, has to close their account.
• These accounts can be operated only under instructions of the official liquidator appointed for the
liquidation process.
• On the other hand, when bank terminates its business, then the relations between customer and
banker also end.
• When one bank merges with another, then the accounts of customers are transferred to the new
bank and he becomes the customer of a new bank.
• In this case, a customer remains the same but the bank changes.
7) Termination of relationship due to assignment of balance in
customer’s account
• In some cases, the customer may assign the credit balance in his account to some other person
asignee) and may give notice of such assignment to the banker.
• After receipt of such notice, the banker will not honour the cheques received on the credit balance
assigned or upto the extent of balance assigned. Banker is responsible to pay balance of accounts
to a third party.
• In this case, banker remains the same but the customer has been changed.
• In case where a part of the credit balance is assigned, the relationship between the banker and
customer is not terminated and the banker may honour the cheques on the remaining part of the
credit balance in the customer’s account.

10. 8) Termination of bank-customer relation due to Garnishee order
on customer’s account
• If a bank receives an order from a court to stop payment from a customer’s account (i.e. Garnishee
order), the banker must not honour cheques drawn by the customer on such account.
• If the order is to attach the whole balance in the account, the banker cannot honour any cheque of
the customer, i.e. the banker-customer relationship is temporarily restricted.
• If on the other hand, the Garnishee order attaches a part of the balance, cheques may be honoured
only upto the amount that would remain after the Garnishee order has been implemented.
• The relationship between the banker and his customer is continued after the Garnishee order is
lifted by the court.