The document provides an overview of banking law and operations, tracing its origins and defining key terms such as 'banker' and 'customer.' It discusses the relationship between bankers and customers, highlighting their roles and obligations, including legal duties regarding cheque handling, secrecy, and various rights such as lien and set-off. Additionally, it explains the nature of a banker's rights regarding interest, commission, and appropriation of funds in the context of multiple debts owed by customers.

1. BANKING LAW AND
OPERATIONS

2. Origin
● Derived from French words Bancus, Banco, Banc,
Banque
● Which means a bench. The early bankers transacted
their business at benches in a market place.
● The business of banking has been existence since 12th
century.
● The first bankers in the modern sense were the
goldsmiths, who accepted bullion and coins for
storage from the public.

3. Banker
Person doing Banking
Business
Earlier View:
“Banker includes a body of
persons whether
incorporated or not who
carry on the banking
business.”
Expert’s View:
The essential business of a
banker is to buy money and
debts by creating other
debt. He is essentially a
dealer in debts or credit.
DEFINITION
According to Sec 5(b) of Banking
Regulation Act.
● “Accepting for the purpose of lending and
investment, of deposits of money from the
public, repayable on demand, order or
otherwise and withdraw able by cheque, draft,
order or otherwise.”

4. CUSTOMER
DEFINITION
According to Lord Davey,
“a customer is a person who has
some sort of account, either deposit
or current account or some similar
relation with the banker”.

5. Customer
Earlier Views:
There must be some sort of an
account – either deposit or
current account or similar
relation – to make a man
customer of a bank.
Second View:
To constitute a customerthere
must be some recognizable
course or habit of dealing in the
nature of regular banking
business
Modern View:
Even a single transaction can
constitute a person a customer.
Requirements to become a
CUSTOMER:
● He must have some sort of an
account
● Even single transaction may
constitute him a customer.
● Frequency of transaction is
anticipated but not insisted upon.
● The dealing must be of banking
nature.

6. Relationship
between a
BANKER & A
CUSTOMER
General
Relationship
Special
Relationship
There are two types of relationship
between banker and customer
SPECIAL RELATIONSHIP
•Obligation to honour
cheques
● Banker’s Lien
● Duty to maintain secrecy
●Banker’s right of
appropriation
● Banker’s right of set-off
●Banker’s right to charge
interest and commission.

7. Relationship as Debtor
and Creditor
● On the opening of an
account of a customer,
the banker becomes s
debtor.
● A customer is a
creditor so long as his
account carries a credit
balance.
Relationship as Trustee
and Beneficiary
● When a banker accepts
securities and
valuables for safe
custody, he becomes a
trustee.
● The person for whose
benefit valuables are
held, is called
beneficiary(customer)
General Relationship of banker and customer

8. Relationship as Agent and
Principal
● Banker becomes Agent
when it provides some
services like payment of
telephone bill, collection
of cheques, paid bills,
interest and dividends on
behalf of the customer etc.
● Customer becomes
principal when he gets
these services from bank
Relationship as Bailee and
Bailor
● Banker becomes Bailee
when it takes the
possession of jewelry
and keep it in the bank
from customer
● Customer becomes
Bailor when he keeps
jewelry or any valuable
articales in the bank.
Contin…

9. SPECIAL RELATIONSHIP
• OBLIGATION TO HONOUR CHEQUES
● BANKER’S LIEN
● DUTY TO MAINTAIN SECRECY
● BANKER’S RIGHT OF APPROPRIATION
● BANKER’S RIGHT OF SET-OFF
● BANKER’S RIGHT TO CHARGE INTEREST
AND COMMISSION.

10. Obligation to
honour Cheques
Availability of
money
Correctness of the
cheque
Proper drawing of
he cheque
Proper application
of funds
Proper presentation
Reasonable time for
collection
Section 31 of the Negotiable Instruments
Act, 1881 states that
“the drawee of a cheque having
sufficient funds of the drawer in his
hand properly applicable to the
payment of such a cheque, must pay the
cheque when duly required to do so.
And in default of such payment, must
compensate the drawer for any loss or
damage caused by such default”.

11. Damages
“the smaller the amount
of cheque the greater
the damage” – principle
Ordinary Damage
Special Damage
Grounds of Confrontation
● Breach of Contract
● Negligence
● Liability
Implicationof law:
•
•
•
Damage for breach of contract to pay cheques
Damage to general drawer’s business
• Damage to general reputation and credit
Damage for the negligence of the banker.

12. Obligation to Maintain Secrecy
One of the implied terms of the contract
between banker and customer is that,
banker is obliged to keep the affairs of
his customer secret except under special
circumstances.

13. When can a banker disclose secrecy?
● Where disclosure is made under compulsion
of law.
● Where there is a duty to the public to
disclose.
● Where the interest of the banker requires
disclosure.
● Where the customer consents, expressly or
in an implied manner, for such disclosure.

14. Disclosure under the Compulsion of LAW!
● Sec 4 – Bankers Book Evidence Act – certified copy of
customer’s account in his ledger.
● Sec 285 – Income Tax Act – interest earned beyond Rs.
10000/-pa
● Sec 45B – Reserve Bank of India Act – Collect Credit
Information
● Sec 26 – Banking Regulation Act – Annual return of
deposits (unclaimed for 10 years)
● Sec 36 – Gift Tax Act – Books of Account
● Exchange Control Act
● Garnishee Order Nisi

15. Disclosure in the Interest of the Public
● Political Purpose
● Unlawful association
● Revolutionary body
● Enemy at times of war.

16. Disclosure in the Interest of Bank
● Disclosure of the account of the customer who failed
to repay the loan to the guarantor.
● Disclosure to a fellow banker
● Defend the past action

17. Disclosure under the Express or Implied Consent
of Customer
● Trade Reference
● To the guarantor

18. Banker’s Lien
Right to retain the goods
Kinds of Lien:
General Lien
Particular Lien
Circumstances of
Exercising a lien:
Any agreement in
consistent of lien
Acquired in the capacity
of a banker
Not for specific purpose.
Lien means right of a creditor to
retain in his possession the goods
and securities owned by the debtor
until the debt has been discharged.
●Particular lien gives the right to
retain possession only of goods in
respect of which the charges or
dues have arisen.
●A general lien is applicable in
respect of all amounts due from the
debtor to the creditor.

19. Conti….
● Lien cannot go beyond the agreement.
● Banker’s lien as an implied pledge.
● Lien on quasi & negotiable securities.
● No general lien on Safe custody deposits.
● No lien on documents entrusted for specific purpose.
● No lien on articles left by mistake.
● Lien on securities taken back after repayment of the loan.
● Lien on Bonds & Coupons
● No lien until the due date of a loan.
● No lien on deposits.

20. Inapplicability of Right of lien
● Safe custody deposits.
● Documents deposited for special purpose.
● Securities left with the banker negligently.
● Securities held in trust.
● Money deposited for specific purpose.

21. Bankers right of appropriation
When bank customer has several
debts, a question arises as to , which
debt, the money deposited by the
customer is to be appropriated as in
Clayton’s case

22. Clayton’s rule
● When money is paid it is to be applied according to
the expressed will of the payer.
● In the event of debtor failing to give instructions, the
banker has a right to make appropriation according
to his choice.
● In the absence of the above two, the law says the first
debt is to be cleared first.

23. Banker’s right of set-off
Right of set-off is a right of a banker
that entitles him to adjust a debit
balance in the account of a customer
against any credit balance in his
other accounts.

24. Banker’s right to charge interest and
commission
●Banker is entitled to interest on
advancs and a reasonable commission
for other services rendered by him. This
is an implied right available to a
banker.
●Bankers usually follow the practice of
charging interest every 3 to 6 months
once.