This document provides an overview of banking law and operations. It defines key terms like bank, banker, and banking. It describes the characteristics and functions of banks, including their primary functions of accepting deposits and granting credit, as well as subsidiary functions like buying/selling securities. The document defines customer and explores the general and special relationships between bankers and customers. It examines obligations like honoring checks, maintaining secrecy, and following customer directions. The document concludes by outlining some rights and duties of bankers, such as the right of lien and the right to charge interest.

1. Chapter 1
Banking Law & Operations
Prepared & Presented by
Ms. Himani R.

2. Layout of the presentation
• Introduction
• Meaning of Banker
• Meaning of Customer
• General & Special Relationships
2Prepared by: Ms. Himani R.

3. Definitions
• Bank: A bank is a financial institution which
deals with deposits and advances and other
related services.
• Banker: A person who borrows money by
accepting deposits from the public for the
purpose of lending to those who are in need of
money.
• Banking: Banking means the accepting for the
purpose of lending or investment of deposits of
money from the public repayable on demand or
otherwise and withdrawable by cheque, draft,
order or otherwise.
3Prepared by: Ms. Himani R.

4. Characteristics/Features of a Bank
• Dealing in money
• Individual/firm/company
• Acceptance of deposit
• Giving advances
• Payment & withdrawal
• Agency & Utility
services
• Profit & service
orientation
• Ever increasing
functions
• Connecting link
• Banking business
• Name identity
4Prepared by: Ms. Himani R.

5. Functions of Banks
• Primary Functions
– Receipts of deposits
– Granting credit
– Remittance of funds
– Accepting bills
– Issuing bank notes
• Subsidiary Functions
– Buying & Selling
securities
– Executing standard
payments
– Collecting interest &
dividend
– Payment of bills
– Safe custody of
valuables
– Acting as a trustee
– Issuing letters of
credit 5Prepared by: Ms. Himani R.

6. Customer
• Definition: Any person having an account
with a bank from whom bank has agreed to
collect items & includes a bank carrying an
account with another bank.
• The relationship between a banker and a
customer is basically contractual. This
relationship depends on the type of
transaction.
6Prepared by: Ms. Himani R.

7. Banker-Customer Relationships
Relationship
General
Relationship
Primary
Relationship
Secondary
Relationship
Special
Relationship
7Prepared by: Ms. Himani R.

8. General Relationship
• Primary
– Debtor & Creditor
• Deposits do not become time barred
• Creditor demanding payment
• Proper place & time of demand
• Demand in proper manner
• Secondary
– Bailor & bailee
– Principal & agent
– Trustee & beneficiary 8Prepared by: Ms. Himani R.

9. Special Relationships
• Obligation to honor the cheques
• Consequences of improper dishonor of
customers’ cheques
• Obligation to maintain secrecy of the
account
• Obligations to carry out directions given by
the customer
9Prepared by: Ms. Himani R.

10. Obligation to honor the cheques
• Section 31 of the Negotiable Instruments Act,
“The drawee of a cheque having sufficient
funds of the drawer in his hands properly
applicable to the payment of such cheques
when duly required to do so and in default of
such payment must compensate the drawer for
any loss or damage caused by such a default.”
• The drawee becomes the bank and drawer is
the customer. It is subject to certain conditions:
10Prepared by: Ms. Himani R.

11. Continued
• Funds must be sufficient in the hands of a banker.
• If banker has o/d facility, bank is bound to honor.
• Banks cannot use trust funds to make customers’
payments
• The cheques must be properly drawn up
• Stale cheques will be dishonored
• Banker must have reasonable time for crediting
funds or it will be returned with a remark E.N.C
• There must be no legal bar preventing the payment
of cheques
11Prepared by: Ms. Himani R.

12. Consequences of improper
dishonor of customers’ cheques
• Section 31 negotiable Instruments Act
• In case if the banker dishonors the cheque
intentionally or by mistake, he is liable to
compensate the customer for the loss, unless
– A garnishee order has been issued
– Cheque is issued against cheques sent for
clearance
– Cheque is presented at the branch other than the
one in which he keeps his account 12Prepared by: Ms. Himani R.

13. Obligation to maintain secrecy of
the account
• Secrecy does not end with the closing of a/c
• Exceptions:
– Compulsion of law
– Public interest
– Banker’s own interest
– Consent of the customer for bankers’ opinion
• Effects of improper/unjustified disclosure
– Liability to the customer
– Liability to third parties
13Prepared by: Ms. Himani R.

14. Obligations to carry out
directions given by the customer
• The banker is bound to act according to the
directions given by the customer.
• In the absence of such directions, the banker
is bound to use reasonable skill and
diligence in his work.
14Prepared by: Ms. Himani R.

15. Garnishee Order
• Rule 46 of Code of Civil Procedure 1908
• If a debtor fails to pay the debt owed by him to his
creditor the latter may apply to the court for the
issue of a garnishee order on the banker of his
debtor.
• The banker is under the obligation not to make the
payment after the receipt of a Garnishee order.
• The creditor becomes the judgement creditor, the
debtor becomes judgement debtor and the banker
is called the Garnishee 15Prepared by: Ms. Himani R.

16. Continued
• Following points are imp for Garnishee Order:
• It applies to the current balance present at the time of the
order
• It has no future prospective operation
• Order is not attached after receiving Garnishee & a new
account is opened
• A fixed deposit can also be attached as a present debt
payable at a future date
• Before paying the balance to the judgement creditor the
banker is entitled to debts due to him
• Most importantly the customer’s account must be in credit
& should belong to him only
16Prepared by: Ms. Himani R.

17. Rights & Duties of a banker
1. Right of Lien
– Lien means a right exercised by one, over
someone else’s property.
– General Lien: Entitling the person in possession
to retain the goods and securities until all his
claims against the owner of the goods have
been satisfied.
– Particular Lien: A specific right to retain goods
& securities till all the charges in respect of
those goods have been paid off. 17Prepared by: Ms. Himani R.

18. Continued
• Exceptions to the right of lien
– Articles for safe keeping
– Instruments left for specific purpose
– Money deposited for specific purpose
– Securities left negligently
– Trust accounts
– Before grant of loans
18Prepared by: Ms. Himani R.

19. 2. Right to appropriate payment
as per the rules in Clayton’s Case
• The customer has more than one loan account
and has not specified the account to which the
said money should be used.
• When there are several debts outstanding
between the creditor and the debtor the
question arises as to which of the debts is to
be discharged.
• Then the law appropriates the payment in
chronological order as in the Clayton’s Case
(1816).
19Prepared by: Ms. Himani R.

20. Continued
• Rule in Clayton’s Case
– Applicable to loan & current accounts other
than savings account.
– The law appropriates the payment in the
chronological order
– The first item on the debit side to be discharged
by the first item on the credit side.
– The balance if any to be carried forward.
– Applicable only to accounts which are still
running.
20Prepared by: Ms. Himani R.

21. 3. Right to set off & combine
accounts
• Banker can adjust the debit balance in one
account against the credit balance in the
other.
• This right can be exercised only:
– Debts are certain and due on the date
– Both the sums are due as between the same
parties and in the same right.
– When there is no expressed or implied
agreement or understanding to the contrary.
21Prepared by: Ms. Himani R.

22. 4. Right to close an account
• A customer can close an account at any time he
feels without assigning reasons
• He should inform the banker and return the unused
cheques with him
• The banker can also decide to close an account
which has been unsatisfactorily conducted by
sending a written intimation to the customer.
• Or the banker may inform that he will honor the
cheques only till the balance is exhausted.
• The banker usually gives sufficient time.
22Prepared by: Ms. Himani R.

23. 5. Right to charge interest and
commission
• It is known as bank charges
• The right to charge interest ceases on the
death or insolvency of the customer
• Bank charges are levied in the case of
drafts, cash credit and current accounts but
not in case of savings account.
• But if the customer maintains large balance
in current account bankers waive these
charges as it is profitable. 23
Prepared by: Ms. Himani R.

24. 6. Right not to produce books of
accounts
• Under the Banker’s Book Evidence Act 1891, a
bank can no more be compelled to produce actual
books of account in any legal proceeding to which
itself is not a party.
• The books are so heavy and so much in
continuous use so the banker cannot be called
upon to produce them.
• A certified copy of any entry in a banker’s book
shall serve as prima facie evidence of that matter.
24Prepared by: Ms. Himani R.

25. 25Prepared by: Ms. Himani R.