This document discusses key definitions and concepts related to banking law and the banker-customer relationship in India. It defines a banker according to Sir John Paget and defines a customer based on the "duration theory". It outlines general characteristics of the banker-customer relationship including that the banker is a privileged debtor, has the right of set-off, and can lend deposited funds. It also discusses special characteristics such as the banker's obligation to honor checks, maintain account secrecy, exercise lien, and charge incidental fees. The document provides context and examples for understanding these important banking law concepts in India.

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

2. Definitionof a Bankerby Sir John Paget
“That no person or body corporate or otherwise can be a banker who
does not,
(i) take deposit accounts,
(ii) take current accounts,
(iii) issue and pay cheques, and
(iv) collect cheques crossed and uncrossed for his customers.”
Sir Paget further adorns his definition by adding that,
“one claiming to be a banker must profess himself to be a full time
banker and the public must accept him as such and his main business
must be that of banking from which, generally, he should be able to
earn his living”.

3. Definitionof a Customerby Sir John Paget
“To constitute a customer, there must be some recognisable course or
habit of dealing in the nature of regular banking business”.
This definition lays emphasis on the duration of the dealings between the
banker and the customer and is, therefore, called the “Duration Theory”.
According to the new view, following points must be considered to be
called as a Customer:
(i) A person who has an account in a bank in his own name and for
whom a banker undertakes to provide facilities as a banker, is
considered to be a customer.
(ii) Secondly, the dealings between a banker and a customer must be
related to the business of banking.
(iii) A customer of a bank need not necessarily be a person, i.e. A firm,
joint-stock company, a society or any separate legal unit may be a
customer.

4. Main Characteristics of Banker-CustomerRelationship
1) General characteristics of banker-customer relationship
2) Special characteristics of banker-customer relationship

5. General Characteristicsof Banker-Customer
Relationship
Debtor and
Creditor
relation
Banker’s
right of set-
off
Banker is not
simply a
trustee of the
money of the
customer
Banker as an
agent of the
cutomer
Banker as a
bailee of the
cutomer
On
collecting
deposits,
banker can
lend and
invest

6. 1) Debtor and Creditor relation
• A banker when deals with his customer, is primarily in the position of a debtor to his
creditor.
• The depositor is only a creditor, and there is no entrustment to the bank for any
particular purpose.
• The bank is liable to refund the money when demanded.
• Unless demanded, bank is entitled to use the money as it likes.
“A Banker is a Privileged Debtor and a Customer is a Unsecured
Creditor.”
• The customer remains a creditor upto the time there is a balance to his credit.
• The moment customer has overdrawn from the account, the bank will become a
creditor and the customer is a debtor.
But, there is a difference between the banker-customer relationship and the ordinary
commercial debtor creditor relationship.

7. Sr.
No.
Banker’s Debt Ordinary Commercial Debt
1. Banker is a privileged debtor because
a creditor has to demand for payment
to the banker.
The ordinary commercial debtor’s duty
is to seek out the creditor and pay the
money.
2. This demand must be made at the
branch where he has opened an
account.
The debtor can pay the money to the
creditor at any place.
3. The demand for repayment of a
banker’s debt should be made only
during the specified banking hours of
business.
Time is not essential element in this
commercial debt.
4. The banker is able to get the deposit
money without giving any security to
the customer. (i.e. He is a dignified
borrower.)
This is not possible for an ordinary
debtor.
5. Banker cannot close the account of his
creditor at any time without getting his
prior approval.
An ordinary debtor can close the
account of his creditor at anytime.
Banker’s Debt Vs. Ordinary Commercial Debt

8. 2) Banker’s Right of Set-Off
• The right of set-off means combining of two or more accounts (say overdraft and fixed
deposit), one of which is in debt and the other in credit (in the same branch or in a
different branch) subject to certain conditions.
• A banker like other debtors, possess the right of set-off which enables him to combine two
accounts in the name of same customer and adjust the debit balance in the account with
the credit balance in the other.
Example,
Suppose A has taken an overdraft from his banker to the extent of Rs 9,000 and he has
credit balance of Rs 7000 in his savings bank account.
The bank can combine both of these accounts and claims the remainder amount of Rs 2000
only.
• This right of set-off can be exercised by the bank if there is no agreement contrary to this
right and afterwards a notice is served on customer, intimating the customer about the
banker’s intention to exercise right of set-off.

9. Points to be remembered for a banker to exercise the right
of set-off:
1) The right can be exercised only after sending a prior notice to the customer.
2) The accounts to be set-off must be in the same name.
3) The accounts must be in the same capacity/right. Example, The personal account and
the account as partner are the account in different capacities and hence cannot be
combined.
4) The amount of debts must be certain.
5) The right may also be exercised in the absence of an agreement to the contrary.
6) The right of set-off can be exercised in respect of debts due and not in respect of future
debts. Example, If a loan given to a customer is repayable on demand or at a future
date the debt becomes due only when the banker make a demand or on the specified
date and not earlier.
7) The banker may exercise this right at his discretion. Customer cannot compel or
pursue the banker to exercise the right and to pay the credit balance at another branch.
8) The banker has right to exercise this right before the garnishee order is made effective
for the lawful debt which is due.

10. 3) Banker is not simply a trustee of the money of the customer
• Banker acts as a trustee in certain cases, while in certain cases it is not a trustee but a
debtor.
Example, When bank accepts securities and valuables from a customer for safe custody , the
position of the banker is that of a trustee and he is liable to return them to customer when
demanded. But when accepts deposits in the customer’s account bank becomes a debtor and
ceases to be a trustee.
Thus, banker is not simply a trustee of the money of the customer.
4) Banker as an agent of the customer
• In the business of banking, bank act as an agent of the customer and provides many
services such as:
i. Buying and selling securities on customer’s behalf.
ii. Collection of cheques, dividends, interest and bills on customer’s behalf.
iii. Acting as a trustee, attorney, executor or representative of a customer.
• In such situations banker is an agent and customer is a principal.

11. 5) Banker as a Bailee
• A banker becomes a bailee when he receives gold, ornaments and important documents
for safe custody.
• Here, bank does not get the ownership of the articles and so cannot make use of them and
he is bound to return the identical articles on demand.
• Bank does not allow any interest on the articles kept in custody of the bank.
• Moreover, customer has to pay rent for the lockers provided by banks.
• Banker acts as a bailee when he receives articles for safe custody and not when he
receives money on deposit account.
•Here, Banker is a “Bailee”and the Customer who
handovers the items to the banker for security is
known as “Bailor”.
•The agreement made between abailee anda bailor
is known as “Bailment”.

12. 6) On Collecting the Deposit Banker can Lend and Invest
• As per the bank rules, depositors are given interest on their deposits, looking to the
duration of the deposits.
• When the deposits has been made for a fixed period, the banker can use the deposited
money to give loans to individuals, companies, and others as per his discretion, at a rate
of interest which is higher than the interests given to the depositors.
• This difference of interest becomes the earning of the bank or the banker.

13. Special Characteristics of Banker-Customer
Relationship
Banker’s
obligations
to honour
cheques
Banker’s
obligation for
the secrecy of
accounts
Banker’s
Lien
Banker’s
right to
claim
incidental
charges
Banker’s
right to
collect
compound
interest
Law of
Limitation
on bank
deposits

14. 1) Banker’s Obligation to Honour Cheques
• The deposits from the customers are accepted by a banker and these deposits are
liabilities repayable on demand or otherwise.
• The banker is under a statutory obligation to honour his customer’s cheques
whenever they are presented by self or the bearer.
As per Section 31 of the Negotiable Instruments Act, 1881, it is
said that “The drawee of a cheque having sufficient funds of
the drawer in his hands, properly applicable to the payment
of such cheques must pay the cheque when duly required to
do so and in default such payment must compensate the
drawer for anyloss or damage causedby such default.”

15. The banker is bound to honour his customer’s cheques
provided the following conditions are fulfilled:
Conditionsto be fulfilledfor
honouringcheques
Sufficient
funds of
the drawer
in the
hands the
of drawee
Cheque
should be
written
properly
Cheque
should be
presented
at a
proper
time
Cheque
should be
presented
at a
proper
place
Cheque
should be
written
only after
the
sufficient
fund in the
account
Cheque
should be
honoured
upto the
limit of
bank
overdraft

16. 2) Banker’s Obligation for the Secrecy of Accounts
 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 Undertakings) Act, 1970, specifically requires a banker not to
disclose any information relating to the affairs of the constituents,
except in circumstances in which they are in accordance with law and
practice andusage customary among bankers.
 Hence, the banker should not disclose balance of the accounts, financial position of the
customer and details of dealings in customer’s account.
 If these facts are disclosed, it may harm the reputation of the accountholder and bank may
be made liable.

17. Duty to maintain secrecy of customer’s account is related to
the following main points:
1) Banker’s duty of secrecy is a legal one and not moral one. It arises out of implied
terms of the contract.
2) Obligation of secrecy is not for a particular account of the customer. It extends to all
the transactions that go through the account and securities offered in that respect.
3) Duty is not discontinued even when customer is dead or account is closed.
4) Obligation is extended to the information obtained from various sources regarding
customer’s account or financial position.
The banker is thus under an obligation not to disclose deliberately or intentionally any
information regarding his customer’s account to a third party and also to take all necessary
precautions and care to ensure that no such information leaks out of the account books.
There are certain situations when general rule of secrecy of accounts
may be dispensed. Following are the circumstances:

18. Limitation of Banker’s
Obligation for the
Secrecyof Accounts
Disclosure of accounts
under legal compulsion
Disclosure of accounts in
the interest of banker
Disclosure of accounts in
the interest of the public
Disclosure of accounts as
per the orders of the
customer
Disclosure of accounts for
getting the loan
Disclosure of accounts for
professional courtesy

19. Precautions to be taken by a banker while disclosing the
state of his customer’s account:
In disclosing the state of customer’s account a banker has to take good care. If the banker
is careless, then he is liable for the damages to the customer who suffers damage because
of unreasonable disclosure or to a third party who incurs loss relying upon the information
which is misleading and vague.
Hence, the banker should have certain precautions about disclosing the customer’s
account. Following are the precautions:
1) The banker should not be negligent in giving information.
2) He should strictly give only general information and should not disclose the actual
state of account.
3) Information should be given only after getting the express consent of the customer.
4) He should not speak too favorably or unfavorably of a customer.
5) The information should be given with a note of remarks.
6) As far as possible the banker should supply the information only to a fellow banker.
7) On no account should banker disclose to the holder of a cheque the exact balance in a
customer’s account.

20. Types of
Lien
3) Banker’s 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 debthas beenpaid.
Lien is available on goods and securities only. Example, bills, cheques, promissory notes,
share certificates, bonds and debentures, etc.
General
Lien
Particular
Lien

21. Particular Lien: A particular lien confers to a right to retain the goods in
connection with which a particular debt arose i.e. A particular lien applies to one
transaction or certain transactions only.
Example, A tailor has the right to retain the clothes made by him for his customer until
his tailoring charges are paid by the customer.
General Lien: A general lien gives the right to the creditor to retain the possession
till all amounts due from debtor are paid or discharged. This is available to bankers,
intermediaries, wharfingers, attorneys of high court and police brokers only.
A banker is given the general lien against his borrowers. Under
the banker’s lien, the banker is authorized to retain securities
etc. in respect of the general due by their owner to the banker.
The banker can retain all the properties which have been
receivedfrom theownerlegally.

22. Conditions for right of general lien:
A banker can exercise his right of lien, if the following conditions are fulfilled:
1) There must not be any agreement inconsistent with the right of lien.
2) The property must come into the hands of a banker in his capacity as a qua-banker.
3) The possession should be lawfully obtained in his capacity as a banker.
4) The property should not be entrusted to the banker for a specific purpose.
5) The goods or other securities must be in the name of the borrower only and not jointly
with other.
Circumstances under which the banker cannot exercise the
right of lien:
1) When there is any contract inconsistent with this right between banker and customer.
2) When the goods and securities are entrusted to the bank as a trustee or as an agent.
3) When the goods and securities are entrusted for some specific purpose.
4) When the loan is granted to one person and the goods and securities are owned by more
than one person.
5) When goods and securities handed over for safe custody.
6) When the bills of exchange or other documents have been handed over by the customer
with specific instructions to utilize their proceeds for the specific purpose.

23. 8) In case of shares which are given to bank for selling them in future and apply the sale
proceeds for a specific purpose.
9) When the securities are given to bank to secure a loan, but that has not been granted as
yet.
4) Banker’s right to claim incidental charges
Banks in India resort to this practice of claiming incidental charges on an increasing scale.
These incidental charges take the form of:
i. Service charges
ii. Processing charges
iii. Ledger folio charges
iv. Penal charges
However, these service charge regulations are not strictly followed by all banks and the
charges may vary from bank to bank.
Banks have a tendency to manipulate the service charge regulations so as to attract more
and more customers.

24. 5) Banker’s right to collect compound interest
• As a creditor, a banker has the implied right to charge interest on the advances granted to
the customer.
• Bankers usually follow the practice of debiting the customer’s account periodically with
the amount of interest due from the customer.
6) Law of Limitation
• Article 59 and 60 of the Indian Limitation Act,1918 define the law of limitation.
•Article 59 originally provided a period of 3 years for the recovery of money lent under one
agreement and payable on demand from the time when the loan was made.
• Article 60 originally provided the same period for “money deposited under an agreement”.
• These articles 59 and 60 of Indian Limitation Act, 1908 have become articles 21 and 22
respectively, under the Limitation Act, 1963.
• Later on, an amendment was made in Article 60, in which the words, “including money of
a customer in the hands of his bankers so payable” have been added after the words “payable
on demand”. The effect of the amendment is to make an express demand a necessary
condition for a cause of the action to recover a debt due for a banker.
•Further, according to article 22 of the Law of Limitation Act, 1963, the period of 3 years
will be calculated from the date of demand for repayment of the banking debt and not from
the date of deposit. Practically when the demand is made, the banker will return the money
immediately and so this Law does not apply to a banking debt.

25. Garnishee Order
• Garnishee Order is an order issued by a court on the request of a creditor known as
Judgement Creditor for the attachment of funds of the debtor available with his bank.
• The debtor is called Judgement Debtor and the banker (i.e. judgement debtor’s debtor)
on whom this order is issued is called Garnishee.
Effects of Garnishee Order
• The relationship between the banker and customer is suspended temporarily and as long
as Garnishee order is in force, banker is under no obligation to pay the cheque of
judgement debtor upto the amount of the order.
• A Garnishee order, normally does not mention the amount , due to which entire amount
becomes attachable. But if the amount is specified the order will apply for that specified
amount only.
.
Stage of implementation of Garnishee Order
Garnishee order is implemented in two stages:
(i) Order Nisi, and (ii) Order Absolute

26. Order Nisi:
• Through order nisi, court seeks the bank to advise as to why the funds in the account of
judgement debtor should not be attached for meeting the obligation towards the
judgement creditor.
• On receipt of order nisi, bank stops honouring customer’s cheque and customer is advised
about the order immediately to avoid dishonouring of cheques issued by him.
• At this stage, bank recovers its own dues first and subsequently informs the court about
remaining balance available for attachments.
Order Absolute:
• After receiving the explanation from the bank, the court may issue the absolute order.
• This order attaches amount of judgement creditor deposited with the Garnishee bank.
• On receipt of this order, bank remits funds of judgement debtor to the court, without
production of any passbook or issuing any receipt.

27. Types of account in
which garnishee order is
applicable
Capacity
Type of deposit account
Amount not withdrawn
Order on Head Office
Joint account
Firm’s account

28. Types of account in which garnishee order is not applicable
1) Marked good for payment
2) Specific sum
3) Cash credit/ Overdraft account
4) Cheques presented in clearing
5) Amount deposited after order
6) Different name in order
7) Joint accounts
8) Single partner
9) Payment already made
10) Assigned amounts
11) Trust account
12) Funds in other capacities