Banker and Customer, Relationship between banker and customer

1. LAW AND PRACTICES OF
BANKING

2. History
▪ ITALY – World wide
▪ 1st bank - Bank of Hindustan, in 1770
• liquidated in 1829–32
▪ General Bank of India, in 1786 but failed in 1791.
▪ The largest bank, and the oldest still in existence, is the S.B.I.
Bank of Calcutta in mid-June 1806

3. Origin of banking
• French word ‘Banque’
• Italian word ‘Banca’
• Bench for keeping, lending, and exchanging of money or
coins in the market place by money lenders and money
changers
• Banks are a huge part of our lives. We deposit our
paychecks, take out loans, and set up savings accounts, all
at a bank.

4. Bank
⚫A bank is a financial institution licensed to receive
deposits and make loans.
⚫Banks may also provide financial services, such as
wealth management, currency exchange, and safe
deposit boxes.
⚫Types of Bank accounts
1) Senior citizen saving bank account- As the name indicates the Senior
Citizen Savings Bank Account, is tailor made for people above the age of
60. There are various benefits attached to it such as preferential rates of
FD and comparatively less charges involved with fees and charges.
2) Women Saving Accounts - Many banks have accounts specially
designed for women with features catering to womens financial needs,
investment and lifestyle needs. Some banks offer higher withdrawal limit
with attractive benefits and cash back offers.

5. 3) Normal Saving Accounts- Normal savings account which can be
opened by anyone. Average Quarterly balance needs to be maintained
for such accounts, failing which banks charge penalty. Normal savings
account comes with features such as passbook, net banking, phone
banking, cheque book facility and Debit cards.
4) No-Frill Saving Accounts - Individuals having a no frill account need
not maintain minimum balance criteria or very low minimum balance.
This was after instruction from the Reserve Bank of India to reach vast
sections of the population. However, the no-frills account comes with
certain restrictions, which vary from bank to bank.
5) Student Savings Account- Only few banks offer student savings
account, with no minimum balance or very less balance to be
maintained.
6) Current Account Current Account is a type of bank account which is
relevant to the people who run business. Such accounts can be opened
with public or private sector banks. Current accounts is ideal for
carrying out day-to-day business transactions.
7) Kids Account Individual can open separate account for kids. Which
will help in saving money and the same can be used for future fee
payment or making any further investment.

6. NRI related Accounts There are different accounts for non Residents,
they are:
� 8) NRE Savings Account- In this account rupee denominations can
be maintained. The account can opened in the names of two or more
non-resident individuals provided all the account holders are
persons of Indian nationality or origin.
� 9) NRO Savings Account- NRO accounts may be opened /
maintained also in the form of rupee denomination could be in the
form of current, savings, recurring or fixed deposit accounts. You
can transfer money into an NRO account from any account - even
other individuals residing in India can transfer money into an NR I's
NRO account.
10)Salary account It is a type of bank account, where the salary gets
credited. As savings account can be opened by anyone, salary account
will be opened by the employer for its employees.
11) Recurring deposit account - Recurring deposit account can be
opened by a customer who wants to save a certain amount of money
regularly for a specific period and get a higher interest rate. The
minimum period of deposit is six months and maximum ten years. No
withdrawals are allowed from the recurring deposit account

7. 12) FIXED DEPOSIT

8. Who is the present governor of
RBI in 2019?

9. � RBI GOVERNOR – SHAKTIKANTA DAS

11. FEATURES OF BANK
1. Dealing in money
2. Individual/ Firm/ Company
3. Acceptance of Deposit
4. Giving advances
5. Payment and withdrawal
6. Agency and Utility services
7. Profit and Service Orientation
8. Ever increasing functions
9. Connecting link
10. Banking business
11. Name Identity

12. Banker
DEFINITION According to sec 5(c) of the Banking
Regulation Act 1949,
• a banker is a person who undertakes business
of banking.
• Banking means accepting deposits from public,
for the purpose of lending, repayable on
demand or otherwise withdrawable by
cheque, draft, order.

13. Customer
◻ A customer means a person who seeks to open
account which banker accepts with proper
introduction.
◻ The relationship is not based on frequency of
transactions, and durations.
Legal Requirements to be qualified as Customer:
◻ Customer should be a major
◻ Customer be of sound mind
◻ He should not be debarred under any law
◻ There must be an offer and acceptance of the
proposal.

15. Relationship between Banker
and Customer
A) General Relationship B) Special Relationship
1. Debtor and creditor
2. Creditor and Debtor
3. Agent and Principal
4. Trustee and Beneficiary
5. Pledger and Pledgee
6. Bailor and Bailee
7. Advisor and Client

16. General Relationship
When Customer Deposits their Money in bank
1.Debtor and Creditor
Banker (Debtor) – Borrower
Customer (Creditor) – Lender
When bank offer the Finance amount through
offer letter
2. Creditor and Debtor
Banker (Creditor) – Lender
Customer (Debtor) – Borrower

17. Features of debtor and
creditor
Features of creditor and
debtor
⚫ Banker is called a dignified
debtor
⚫ Customer is not the secured
creditor of the bank (Eg
Liquidation of bank)
⚫ Customer’s balance at bank is
not repayable
⚫ Banker should pay the deposit
money on demand by the
customer.
⚫ The deposit should be paid at
the appropriate place.
⚫ The demand should be made
by the customer on working
days and during the business
hours.
⚫ Executes documents and
offers security
⚫ Banker is a secured creditor
⚫ Banker have right to retain
the property
⚫ Banker have a right to charge
interest
⚫ Charge for services

18. 3. Agent and Principal
⚫ In India, section 182 of the Contract Act 1872 defines “Agent is a
person employed to do any act for another in dealing with
third parties”.
⚫ The person for whom such act is done, or who is
represented, is called the principal.
⚫ Pay Insurance premium,
⚫ Electricity bills,
⚫ Taxes,
⚫ Credit card Payment etc.,
⚫ Collect Interest on Investment,
⚫ Dividends on shares,
⚫ cheques etc.,
⚫ Banks – Agent
⚫ Customer - Principal

19. Duties of the Agent (Banker):
� To follow the instructions given by principal
� To show required skill and carefulness
� Duty to provide proper accounts
� Duty of good faith and good conduct
Duties of Principal (customer):
� Pay remuneration
� Not prevent his agent from performing the duties
� Any lawful expenses - indemnified
� Duty to Deal fairly and in good faith

20. 4. Trustee and Beneficiary
� A trustee holds property for the beneficiary, and the profit
earned from this property belongs to the beneficiary.
� For example:
� Customer Deposits Securities or valuables for safe custody.
� Ownership remains with the customer.
� Trustee?
� Beneficiary?
� Bank’s Liquidation
� – Not distributed to creditors

21. 5.PLEDGER
AND
PLEDGEE
• Against collateral security
of movable property
• Customer pledges
(Promises) – to get a loan
• Customer – Pledger
• Bank – Pledgee
• Until a customer repays-
Security will remain with
the bank

22. 6. Bailor and Bailee
◻ Bailment is a contract for
delivering goods by one party to
another to be held in trust for a
specific period and returned when
the purpose is ended.
◻ Bailor is the party that delivers
property to another.
◻ Bailee is the party to whom the
property is delivered.
◻ So, when a customer gives a
sealed box to the bank for safe
keeping
◻ Customer became the bailor
◻ Bank became the bailee.
◻ Charges

24. 7. Advisor and Client
◻ Customer – invest in
securities- banker
acts as an advisor
◻ Advice- Officially or
unofficially
◻ Take maximum care
and caution
◻ Banker- Advisor
◻ Customer - Client

25. 8. Mortgagor and Mortgagee
◻ When credit facility
is provided by the
bank to a customer
against the security
of immovable
property
◻ Mortgagor—
Customer
◻ Mortgagee—
Bank

26. ◻ A pen you borrow from a friend.
◻ A security guard on night duty at an art gallery
◻ company borrows money from its bank
◻ If a manufacturer sells merchandise to a
retailer with terms of net 30 days
◻ Employee ordering supplies on behalf of the
company
◻ In large companies however, shareholders
often appoint corporate managers to run
things on their behalf.
◻ Bank has issued a credit card to a
customer once they have signed a legal
contract.

27. ◻ The bank takes actual possession of Ramu’s
assets- Gold /Jewellery Loans
◻ Bank provided credit facilities for Advance
against goods,/stock
◻ Suresh got approval from Bank worth of
Rs.25,00,000 for constructing House
◻ Banker may provide for customers are general
investment advice, asset and portfolio
management, currency exchange or currency
hedging services, tax planning and estate
planning.
◻ Customer avails loans from Advances against
National Saving Certificates

28. ◻ Let's assume Company XYZ issues $100
million of bonds. Company XYZ will appoint a
person, usually a bank, to act on behalf of
the bondholders. The bank maintains lists of
the bondholders in addition to receiving and
distributing interest payments. The bank also
monitors Company XYZ's compliance with the
agreements and communicates with the
bondholders.

29. 2. SPECIAL RELATIONSHIP
BETWEEN BANKER AND
CUSTOMER
◻ The opening of an account by a customer with a
banker creates an obligation on the banker
towards its customer in respect of certain rights
and responsibilities.
a) Right to lien
b) Right to set-off
c) Right to appropriate payments
d) Right to charge interest, commission, incidental
charge
e) Right not to produce the books of accounts
f) Right under garnishee order

30. a. Right to lien
◻ Banks have the right to keep goods and
securities belonging to the debtor as a
security, until the loan is repaid by the debtor.
◻ Banks have only the right to maintain the
security of the debtor and not to sell.
◻ There are two types of lien such as:
◻ Particular Lien
◻ General Lien

31. Particular Lien
The creditor gets the right to retain the goods or
securities for which the dues have arisen and
not for other dues
The ingredients of a Particular Lien are
◻ A right to retention of goods till debt due is
paid off.
◻ It does not need any specific agreement.
◻ Arises in the ordinary course of business.

32. Examples of Particular Lien
◻ Example 1:
◻ A delivered some gold to B, a goldsmith for
the purpose of making ornaments. B made the
ornaments. Here, B is entitled to retain the
ornaments till he is paid for the services he
has rendered.
◻ Example 2:
◻ A delivered a car to B, a mechanic for
repair. B repaired the car. Here B can retain
the car untill the repair charges are paid.

33. 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, Lawyers of High Court
and Policy Brokers only
Example of General Lien
◻ K deposited certain jewels with a bank to secure
certain debt. After payment of this debt, he demanded
the return of these jewels from the bank. He was still
indebted to the bank for certain other debts. On banks
refusal to return, it was held that he could not recover
unless he proved that the bank had agreed to give up
its general lien.

34. Conditions for exercising general
lien by banker
◻ The securities should belong to the customer
◻ The banker can lien on bills, cheques,
promissory notes, certificates, bonds,
debentures
◻ Banker can exercise lien on the personal
accounts of partners against the loan availed
by firm.
◻ when the loans are due for payment .

35. Circumstances under which a
banker cannot exercise right of
general lien
◻ No lien on safe custody deposits
◻ No lien on money deposit for a specific
purpose.
◻ No lien on securities left with the banker by
mistake
◻ No lien on joint accounts where in one joint
account holder is a customer.
◻ No lien on securities received for sale.
◻ If a banker acts as a trustee under an
agreement he cannot exercise lien on trust

36. 2. Right to set-off
◻ The set-off refers to “combining of two or more
account for final settlement of accounts”
◻ In other words set off is a process where the
bank recovers its due loan, to the debit of
deposit account of the borrower
◻ The essential condition is that one of such
accounts must show a debit balance and the
other, a credit balance
◻ Different Branches are one unit

37. Conditions while exercising right
of Set - Off:
� RELATIONSHIP - ?
� NOTICE- prior notice
� TYPE OF LOAN- paying the loan promptly
� TIME BARRED LOANS - setoff
� SAME NAME AND CAPACITY –set off
� PARTNERS/PARTNERSHIP – no set-off
� GUARDIAN – Minor
� TRUST – no set-off
� JOINT ACCOUNTS – no set off

38. ◻ Automatic right of set off
� Death , mental incapacity or insolvency
� Insolvency of firm and liquidation of firm
� On Garnishee order

39. 3.Right to appropriate payments
If the customer owes several debts to the
banker and makes payments, he has the
right to request the banker to apply the
payment to the discharge of some particular
debt.

40. 4. Right to charge interest,
commission, incidental charge
◻ Rights to charge interest: As a creditor the banker
has the implied right to charge interest on the
advance granted to the customer.
◻ Right to charge commission: A banker render
several services to the customers and they
cannot be offered free hence the banker has an
implied right to levy certain charges known as
commission.
◻ Incidental charges: Incidental charges are levied
by banker on the inoperative or unremunerated
current accounts of the customer’s. Incidental
charges rates are revised by the bank from time to
time

41. 5. Right not to produce books of
accounts
◻ According to the provisions of the banker
books Evidence Act 1891, the banker need not
produce the original books of accounts as
evidence in cases in which the banker is not a
party. He can issue only an attested copy of
the required portion of the account which
can be utilized as evidence before the court.

42. 6. Right under garnishee order
◻ Garnishee order is a order issued by the court
at the request of a judgmental creditor(bank) to
the garnishee warning him not to pay the
money which is with him to the judgement
debtor until the claims of the judgement credit
is disposed of.

44. Duties of a Bank
The relationship between the banker and customer creates some
obligations on the part of a bank. The main obligations of the banker
towards the customers are as follows:
◻ 1. Obligation to Honour Cheques:
� Sufficient of funds
� Applicability of funds
� Banker duly required to pay
� Presented within a reasonable time

45. ◻ 2. Obligation to Maintain Secrecy:
� Disclosure as a banking practice
■ Where the customers consent has been obtained
■ Where bankers own interest requires it
■ Where credit information is required by other banks
� Disclosure in the public interest
■ By government officials
■ Involved in Prejudicial activities
■ Against the law
■ Sizeable funds from foreign country
◻ 3. Obligation to receive cheques and Follow Customer’s
Instructions:
◻ 4. Obligation to Maintain Proper Records:
◻ 5. Obligation to give Notice before Closing the Account:

46. ◻ 1. Obligation to Honour Cheques:
◻ The drawee of a cheque having sufficient funds of the drawer in his hands,
properly applicable to the payment must compensate the drawer for any loss or
damage caused by such default.”
◻ You know that a bank is the debtor of his customer. The bank has a statutory
obligation to honour the cheques of its customers up to the amount standing to the
credit of the customer’s account. If a bank wrongfully refuses to honour the
cheque of its customer, the bank shall be liable to compensate the customer. This
obligation is subject to some conditions, namely:
◻ a) There must be sufficient funds of the customer in the hands of the bank.
b) The funds must be properly applicable for the payment of the customer’s
cheque.
c) The cheque must be properly drawn Up i.e., it should be complete in all
respects.
d) The cheque must be presented for payment within a reasonable time.
e) There must be no legal bar preventing the payment of such cheques. If the
bank has received any order from a court or any other competent authority
prohibiting payment, it is the duty of the bank to obey such orders.
◻ 2. Obligation to Maintain Secrecy: The relationship between the banker and
customer is of a nature. The bank must not disclose to any outsider the details
concerning the customer’s account; as such disclosures may adversely affect the
credit and business of the customer. However, a disclosure can be made under
the following two situations:

47. ◻ 3. Obligation to Follow Customer’s Instructions: The
banker is under a legal obligation to follow the
instructions of the customer. This is so because there
is the contractual relationship between the bank and
the customer.
◻ 4. Obligation to Maintain Proper Records: The banker
is under an obligation to maintain accurate record of all
the transactions of the customers made with the bank.
◻ 5. Obligation to give Notice before Closing the
Account: If a bank wishes to close the account of a
customer, it must give a reasonable notice to this
effect to the customer.
Thus, a bank cannot close the account of a customer
on its own, because it may have serious
consequences to the customer.

48. Termination of Banker -
Customer Relationship
◻ The relationship between banker and
customer terminates in the following situations:
◻ Voluntary termination.
◻ Death of the customer
◻ Bankruptcy of the customer (Loss)
◻ Liquidation of the company
◻ Insanity of the customer

49. Duty to honor cheque
◻ Court Case: Tina Motors v. ANZ Banking Group
◻ In this case, Mr and Mrs I own a used car business together named Tina Motors Pty Ltd. The
cheque account of this business entity is with ANZ Bank and the manager was Hardy. In this
banker-customer relationship, only Mrs I as the customer could sign and issue a cheque from this
account. Mrs. I’s brother in law, Mr Stella worked in Tina Motors Pty Ltd together with Mr and Mrs
I. Under one incident, Mr Stella forged Mrs I’s signature on cash cheques and he was paid on
cheque by ANZ Bank.
◻ After seven months, his unethical act was subsequently found out. Tina Motors responses by
issuing a court sue towards ANZ Banking Group for not obligating its duty as a banker to honor the
cheque only when it is properly noted and signed. The judge of this case, Crockett J analyzed the
background, facts and evidence of this case and voiced out his opinion. In usual similar cases like
the current case would succeed because an authorized signatory from Mrs I did not sign the
cheque issued.
◻ However, in this case, evidence showed that Mr Hardy as the representative banker from ANZ
Bank had twice been doubtful on the authenticity of signature and he acted accordingly by seeking
confirmation from Mr I on the issuance of the cheque. Upon his act, he has been reassured by Mr I
that the cheque was authorized by Mrs I and can be paid. Mr I put on inquiry and chose not to
examine the situation deeper after being asked by Mr Hardy. Mr Hardy’s efforts to seek for
confirmation from Mr I twice on the particular cheque when he found doubts on it has proved his
continuing responsible to act with reasonable care to ensure proper working of account of the
plaintiff.
◻ Hence, the court judged that the defendant is to be claimed no guilty and that he had obliged to his
duty to honor cheque of plaintiff, although the cheque was later found out to be forged on its
signature.

50. Duty to safeguard trust property
◻ Court case: Cowan v Scargill and ors
◻ In this case, the defendants refused to allow any funds of the claimant to be invested abroad. The
claimant held that it is the obligation of the defendant as the trustee to exercise their duty in the
best interests of the present and future beneficiaries of the trust, which is the customers in this
case, by holding the scales impartially between different classes or levels of customers. This duty
to safeguard the trust property of their beneficiaries is overriding any other matters. Yes, it is true
that the defendant is obliged to obey the law, but subject to that, trustees must put the interests of
their beneficiaries beyond others. When the purpose of the trust is to provide financial benefits to
the beneficiaries, the objectives of the customers that the trustees or bankers need to achieve is to
make the best investment to maximize the financial interests of plaintiff. If trustees for social or
ethical reasons fail to make a wise investment decision which is able to give the best benefits to
the beneficiary, then they would be subject to criticism. In making the best decision based on the
interest of plaintiff the beneficiary, defendant as the trustee has to forgo all personal interests or
views. Under a trust, if investment of any types would be more beneficial to the customers than
other investments, banker must not cease from doing it by the reasons that they hold.
◻ Hence, it is held by the court that the trustee (defendant)’s refusal to approve investment plan with
regards to the choices of investments and diversification of investment was in violation of his duty
to do the best that he can afford to safeguard the trust properties of plaintiff, including his duty to
ensure that the property remain suitable for the trust’s objective, which in the current case is the
maximize monetary returns. Defendant has an overriding obligation to the plaintiff to take
advantage of a full range of investments.

51. Banker’s duty of confidentiality to
customer (Secrecy Duty)
◻ Court Case: Tournier v National Provincial and Union Bank of
England
◻ This case was a legal case in United Kingdom. In this case, the
National Provincial and Union Bank of England had disclosed one
of the customer’s unpaid cheques to its customer’s employer. This
cheque was drawn in favour of a bookmaker’s account. This made
the employer refuse to renew his contact with the customer. The
Court of Appeal held that confidentiality was an implied term in
term in customer’s contract and any breach can make a liability if
loss results.
◻ However, subsequently from the case about, there are four
principles that stated the condition where the bank can disclose the
information. It’s named as Tournier Principles. These principles
are:
◻ where the bank is compelled by law to disclose the information
◻ if the bank has public duty to disclose the information
◻ if the bank’s own interests require disclosure; and
◻ where the customer has agreed to the information being disclosed.

52. To exercise reasonable care in
drawing cheque
◻ Court Case: Grindlays Bank International (Z) Limited v
Nahar Investments Limited
◻ The banker (Grindlays Bank International (Z) Limited) is the
respondent who was sued by Nahar Investmens Limited.
The respondent’s employee, Daya overdrew money from
respondent’s account with the appellant. Daya withdraw a
sum of total K5,ooo for her own used and she has
committed fraud by taking all this money for her own used.
Bank of Zambia.
◻ The respondents suit the appellant for recovering the sum of
K50,000 plus interest. The result approve the overdraft
since the company belong to non-Zambians and the
exchange control regulation required such approval. By the
way, the High Court found that the appellant had been
negligent in allowing a fraudulent employee of the
respondent to overdraw on the latter’s account resulting in a
loss which must be borne by the appellant.

53. To disclose forgery
◻ Court Case: Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank
Ltd
◻ The company has a current account in the bank and
approximately 33 cheques were withdrawn from the bank
with the total amount of HK$ 5.5 million. The money drawn
is bear with the signature of Mr. Chen the managing director
of the company who was authorized signatories to its
cheques. The cheques are debited to the company current’s
account but indeed the cheques were not drawn by the
company. The signatures were not signed by Mr. Chen they
were forged by an account clerk, Leung Wing Ling. It is the
customer’s duty to disclose the forgery to the banker so it
can enable banker to take adequate precautions to against
future loss. Leung Wing Ling opened an account which
name similar to real suppliers’ name and persuade Mr.
Chen to sign cheques in their favour by producing to him
forged documents as evidence of transactions with these
fictitious.