Unit-II Banker and Customer Relationship.pdf

Unit-II
Banker and Customer Relationship

INTRODUCTION
The relationship between a banker and a customer comes into
existence when the banker agrees to open an account in the name of the
customer. The relationship between a banker and a customer depends on
the activities, products, or services provided by the bank to its customers
or availed by the customer. Thus the relationship between a banker and
customer is the transaction relationship. Bank’s business depends much
on the strong bondage with the customer. Trust plays an important role in
building a healthy relationship between a banker and a customer.

DEFINITION OF BANKING
The Banking Regulations Act 1949, Sec.5 (b) defines the term banking as
“Banking means accepting, for lending or investment, of deposits of money from
the public repayable on demand or otherwise and withdraw by cheque, draft, and
order or otherwise.”

DEFINITION OF CUSTOMER
The term Customer has not been defined by any act. In simple words, a customer is such a
person to whom you extend your services in return for consideration. A customer is a person who
maintains an account with the bank without taking into consideration the duration and frequency
of operation of his account. To be a customer for any bank the individual should have an account
with the bank. The individual should deal with the bank in its nature of regular banking business
Those who do not maintain any account relationship with the bank but frequently visit a
branch of a bank to availing banking facilities such as for purchasing a draft, en-cashing a cheque,
etc. Technically they are not customers, as they do not maintain an account with the bank branch.
The term ‘customer’ is used only concerning the branch, where the account is maintained. He
cannot be treated as a ‘customer’ for other branches of the same bank.

BANKER CUSTOMER RELATIONSHIP
There are numerous kinds of relationships between the bank and the
customer. The relationship between a banker and a customer depends on
the type of transaction. Thus the relationship is based on contract, and
certain terms and conditions.
These relationships have certain rights and obligations both on the
part of the banker and on the customer. However, the personal
relationship between the bank and its customers is long-lasting.

CLASSIFICATION OF RELATIONSHIP
The relationship between banker and customer is of utmost importance. The
relationship between a bank and its customers can be broadly categorized into
General relationships and Special relationships.
A. GENERAL RELATIONSHIP
If we look at Sec 5(b) of the Banking Regulation Act 1949, we would notice
that the bank’s business is accepting deposits for lending. Thus, the relationship
arising out of these two main activities is known as General Relationship.

1. DEBTOR AND CREDITOR
When a ‘customer’ opens an account with a bank, he fills in and signs the
account opening form. By signing the form he agrees/contracts with the bank. When
a customer deposits money in his account the bank becomes a debtor of the
customer and the customer a creditor. The money so deposited by the customer
becomes the bank’s property and the bank has a right to use the money as it likes.
The bank is not bound to inform the depositor of the manner of utilization of funds
deposited by him. Bank does not give any security to the depositor i.e. debtor. The
bank has borrowed money and it is only when the depositor demands, the banker
pays. Bank’s position is quite different from normal debtors.

2. CREDITOR AND DEBTOR
Lending money is the most important activity of a bank. The resources
mobilized by banks are utilized for lending operations. Customer who borrows
money from the bank own money to the bank. In the case of any loan/advances
account, the banker is the creditor and the customer is the debtor. The relationship is
the first case when a person deposits money with the bank reverses when he
borrows money from the bank. Borrower executes documents and offers security to
the bank before utilizing the credit facility.

B. SPECIAL RELATIONSHIP
In addition to these two activities banks also undertake other
activities mentioned in Sec.6 of the Banking Regulation Act 1949. In
addition to opening a deposit/loan account banks provide a variety of
services, which makes the relationship more wide and complex.
Depending upon the type of services rendered and the nature of the
transaction, the banker acts as a bailee, trustee, principal, agent, lessor,
custodian, etc.

1. TRUSTEE AND BENEFICIARY (BANK AS A TRUSTEE AND CUSTOMER AS A
BENEFICIARY):
In the case of a trust, a banker customer relationship is a special
contract. When a person give some valuable items to another person with
the intention that such items would be returned on demand to the keeper
the relationship becomes of a trustee and trustier. Customers keep certain
valuables or securities with the bank for safekeeping or deposits certain
money for a specific purpose the banker in such cases acts as a trustee.
Banks charge fees for safekeeping valuables.

2. BAILEE AND BAILOR (BANK-BAILEE AND CUSTOMER- BAILOR):
Sec.148 of Indian Contract Act, 1872, defines “Bailment” “bailor” and “bailee”. A “bailment” is the
delivery of goods by one person to another for some purpose, when the purpose is accomplished, be returned
or otherwise disposed of according to the directions of the person delivering them. The person delivering the
goods is called the “bailor”. The person to whom they are delivered is called, the “bailee”.
Banks secure their advances by obtaining tangible securities. In some cases, physical possession of
securities goods (Pledge), valuables, bonds, etc., are taken. While taking physical possession of securities the
bank becomes bailee and the customer bailor. Banks also keep articles, valuables, securities, etc., of their
customers in Safe Custody and act as a Bailee. As a bailee, the bank is required to take care of the goods bailed.

3. LESSOR AND LESSEE (BANK- LESSOR AND CUSTOMER- LESSEE):
The relationship between the bank and the customer is that of the lessor
and lessee. Banks lease (hire lockers to their customers) their immovable
property to the customer and give them the right to enjoy such property during
the specified period i.e. during the office/ banking hours and charge rentals.
Bank has the right to break open the locker in case the locker holder defaults
in payment of rent. Banks do not assume any liability or responsibility in case
of any damage to the contents kept in the locker. Banks do not insure the
contents kept in the lockers by customers.

4. AGENT AND PRINCIPAL (BANK- AGENT AND CUSTOMER- PRINCIPAL):
Sec. 182 of ‘The Indian Contract Act, 1872’ defines “an agent” as a person employed to do any act
for another or to represent another in dealings with third persons. Thus an agent is a person, who acts for
and on behalf of the principal and under the latter’s express or implied authority, and the acts that were
done within such authority are binding on his principal and, the principal is liable to the party for the acts
of the agent.
Banks collect cheques, bills, and makes payment to various authorities’ viz., rent, telephone bills,
insurance premium, etc., on behalf of customers. . Banks also accept by the standing instructions given by
their customers. In all such cases bank acts as an agent of its customer, and charges for these services. As
per the Indian contract, the Act agent is entitled to charges. No charges are levied in the collection of local
cheques through the clearing house. Charges are levied only when the cheque is returned to the
clearinghouse.

5. INDEMNITY HOLDER AND INDEMNIFIER (BANK-INDEMNITY HOLDER AND CUSTOMER-
INDEMNIFIER):
The dictionary meaning of the word Indemnity means ‘security or protection against a loss
or other financial burden’. An indemnity is an obligation by a person to provide compensation for
a particular loss suffered by another person. In the case of banking, the relationship happens in
transactions of issue duplicate demand draft, TDR, deceased account payment, etc. In that case,
the indemnifier will compensate any loss arising from the wrong or excess payment. In these
cases, the bank is an Indemnity Holder (Promisee) and the customer is Indemnifier (Promisor).

6. HYPOTHECATOR AND HYPOTHECATEE (BANK- HYPOTHECATEE AND CUSTOMER-
HYPOTHECATOR):
The relationship between customer and banker can be that of
Hypothecator and Hypothecatee. This happens when the customer
hypothecates certain movable or non-movable property or assets with the
banker to get a loan. In this case, the customer became the Hypothecator,
and the Banker became the Hypothecatee.

7. PLEDGER AND PLEDGEE (BANK- PLEDGEE OR PAWNEE AND CUSTOMER- PLEDGER OR PAWNOR):
The relationship between customer and banker can be that of
Pledger and Pledgee. This happens when the customer pledges
(promises) certain assets or security with the bank to get a loan. In this
case, the customer becomes the Pledger or Pawnor, and the bank
becomes the Pledgee or Pawnee. Under this agreement, the assets or
security will remain with the bank until a customer repays the loan.

8. AS A CUSTODIAN:
A custodian is a person who acts as a caretaker of
something. Banks take legal responsibility for a customer’s
securities. While opening a D-Mat account bank becomes a
custodian.

9. ADVISOR AND CLIENT (BANK-ADVISOR AND CUSTOMER- CLIENT):
When a customer invests in securities, the banker acts
as an advisor. The advice can be given officially or
unofficially. While giving advice the banker has to take
maximum care and caution. Here, the banker is an
Advisor, and the customer is a Client

VARIOUS TYPES OF RELATIONSHIPS
Type of Transaction Bank Customer
Deposit in bank Debtor Creditor
Loan from bank Creditor Debtor
Safe Deposit Vault (SDV Locker) Lessor Lessee
Safe Custody Bailee Bailor
Issue of Draft Debtor Creditor
Payee of a Draft Trustee Beneficiary
Collection of Cheque Agent Principal
Pledge Pledgee (Pawnee) Pledger (Pawnor)
Mortgage Mortgagee Mortgagor
Hypothecation Hypothecatee Hypothecator
Sale/purchase of security on behalf of customer Agent Principal
Money deposited, but no instructions for its disposal Trustee Beneficiary

KYC (Know Your Customer)
Definition of KYC
Know Your Customer is the process of verifying the identity
of customer. The objective of KYC guidelines is to prevent banks
from being used, by criminal elements for money laundering
activities. It also enables banks to understand its customers and
their financial dealings to serve them better and manage its risks
prudently.

KYC (Know Your Customer)
Importance of KYC
KYC is the means of identifying and verifying the identity of the customer through
independent and reliance source of documents, data or information. For the purpose of verifying
the identity of:
- Individual customers, bank will obtain the customer’s identity information, address and recent
photograph. Similar information will also have to be provided for joint holders and mandate
holders.
- Non-Individual customers – banks will obtain identification data to verify the legal status of the
entity, operating address, the authorized signatories and beneficial owners.
Information is also required on the nature of employment/business that the customer does
or expects to undertake and the purpose of opening of the account with the bank.

Purpose of KYC
The KYC guidelines have been put in place by the Reserve
Bank of India in the context of the recommendations made by the
Financial Action Task Force (FATF) on Anti Money Laundering
(AML) standards and on Combating Financing of Terrorism
(CFT). The Prevention of Money Laundering Act requires banks,
financial institutions and intermediaries to ensure that they
follow certain minimum standard of KYC and AML

Periodicity of KYC Refresh
KYC is to be provided at the time of opening a new account as
well as refresh. It may be necessary to obtain additional information
from existing customers based on the conduct of the account, where
there are changes to the account or at fixed periodic refresh cycles
based on the risk categorization of the customer. Similarly, an existing
customer will be required to provide fresh KYC for new account
opening to adhere to the latest applicable KYC standards.

Failure to provide KYC
Banks are entitled to refuse to open an account or
discontinue an existing relationship if there is failure to meet the
minimum KYC requirements. However, there is flexibility
provided to certain categories of customer who are unable to
provide the necessary document at the time of account opening.

Customer Relationship Management in Bank
Managing and retention of customers are the strategic platform for the
Banking industry. Customers are the king for their business. Meeting the customer
needs and satisfying their expectation are the twin objectives of retail banking. The
banks have developed a new strategy to attract new customers and to retain the
existing customers. In this direction, Customer Relationship management embraces
a new phase in retaining the customers and enhancing the customer loyalty.
The customer delight is developed with the components of CRM to build a
unique and long-term relationship between the customers and the bank.

CRM in banking industry plays a pivotal role in creating the trust among the
people. An adequate attention is established to customer care support, making
timely information about interest payments, maturity of time deposit, issuing credit
and debit cum ATM card, creating awareness regarding online and e-banking,
adopting mobile request which are required to maintain the relationship with
customers. It has gained importance with the aggressive strategies for customer
acquisition and retention. This has resulted in the adoption of various CRM
initiatives by these banks.

Customer Relationship Management in Bank
In common words CRM means, it is a combination of business
strategies, software and processes that enable companies to build long-lasting
relationships with their customers.
Customer relationship management (CRM) is the combination of
practices, strategies and technologies that companies use to manage and
analyze customer interactions and data throughout the customer lifecycle.
A Customer Relationship Management solution in banking helps
banks manage customers and better understand their needs in order to
provide the right solutions, quickly.

Factors influencing to maintain relation between banker and customer
1. Customer Acquisition
Applying the techniques of the CRM, it boosts up the banking customer
acquisition strategy with the depth of data and the processing capabilities. The
conversation with the customers focuses on the capturing the insights on different
products and services offered by the banks and making them to believe that their
financial and non-financial needs will be met by the unique process with the help of
CRM tools.

2. Customer Response
The reply to the customer queries depends upon the understanding and
interpreting in the best way to provide the possible solution. It is an important
criterion to build a better relationship and to enhance the satisfaction and loyalty
with the customers. Prompt response in a professional way provides a better avenue
for smooth interaction between its customers, employees and enhance the
satisfaction and loyalty with the customers

3. Customer Knowledge
Understanding the demographic conditions, background of the customers, the
customer segments, helps the banking industry to understand their needs and wants.
Thereafter the knowledge about the customers helps to deliver a quality service
which in turn leads to customer loyalty.

4. Customer Value Evaluation
CRM captures the holistic view of the customers on the products and services
offered to them. The customers value is the weapon for devising a strategy to attract
and retain the customers. It allows the banking industry to serve the customers
according to their needs and in turn elevate the customer satisfaction and increase
the loyalty of the customers. The banking industry can compete with the
competitive advantage by driving the customer relationship.

5. Customer Satisfaction
It is the primary performance indicator for the performance of the banking
industry. The effective implementation of CRM strategy maintains and enhances the
customer base. The CRM practices are the positively having a great deal towards
the customer satisfaction. Customer satisfaction is the key differentiated factor and a
key element for successful business strategy of banking industry. In reaching out the
customer satisfaction, the feedback from the customers is frequently obtained in
regular intervals and the strategy is adopted for enhancing the quality service to the
customers which in turn increases the loyalty of the customers resulting in higher
performance and growth of the banking sector.

6. Customer Retention
The winning Customer Retention is the first start for every organization to
improve its performance and the growth in the market share. It is achieved by
reducing customer defections. CRM practices are implemented effectively to win
over the customers and retain them throughout the entire life time of the business. It
is all about exceeding the expectations of the customers and creates a reputation in
the marketplace. Adapting the CRM practices in the banking sector, deliver a
consistent quality service in a competitive environment and maintain a high
standard in the market place.

Guidelines for Opening of Different Bank Accounts and Procedure for their Operation.
1. Opening of Bank Accounts:
A large number of frauds are perpetrated in banks mainly through opening of accounts in fictitious
names, irregular payment of cheques, manipulation of accounts and unauthorized operations in accounts.
Considering the fact that opening of an account is the first entry point for any person to become a customer
of the bank.
a. Introductionnot Mandatoryfor opening accounts
• Before implementation of the system of document-based verification of identity, as laid down in PML Prevention of
Money-Laundering Act/ Rules, introduction from an existing customer of the bank was considered necessary for
opening of bank accounts. In many banks, obtaining of introduction for opening of accounts is still a mandatory
part of customer acceptance policy even though documents of identity and address as required under our
instructions are provided. This poses difficulties for prospective customers in opening accounts as they find it
difficult to obtain introductionfrom an existing account holder.
• Since introduction is not necessary for opening of accounts under PML Act and Rules or Reserve Bank's extant
KYC instructions, banks should not insist on introduction for openingbank accountsof customers.

b. Photographs of Account Holders
• Mandatory Obtention of Photographs
(i) The banks should obtain photographs of the depositors/account holders who are authorized to operate the accounts at the time
of opening of all new accounts. The customers' photographs should be recent and the cost of photographs to be affixed on the
account opening forms may be borne by the customers.
(ii) Only one set of photographs need to be obtained and separate photographs should not be obtained for each category of deposit.
The applications for different types of deposit accounts should be properly referenced.
(iii) Photographs of persons authorized to operate the deposit accounts viz. S.B. and Current accounts should be obtained. In case
of other deposits viz. Fixed, Recurring, Cumulative etc. photographs of all depositors in whose names the deposit receipt stands
may be obtained, except in the case of deposits in the name of minor, where guardians' photographs could be obtained.
(iv)The banks should also obtain photographs of Non-Resident (External) (NRE), Non-Resident Ordinary (Rupee) (NRO), Foreign
Currency Non-Resident (FCNR) account holders.
For operations in the accounts, banks should not ordinarily insist on the presence of account holder unless the circumstances so
warrant. Photographs cannot be a substitute for specimen signatures

• Exceptions
(i) Banks, local authorities and Government departments (excluding public sector
undertakings or quasi-Government bodies) are exempted from the requirement of
photographs.
(ii) The photographs need not be obtained for borrowable accounts viz. Cash Credit,
Overdrafts accounts, etc.
(iii) The banks may not insist for photographs in case of accounts of staff members
(Single/Joint).

c. Address of Account Holders
It is not proper for banks even unwittingly to allow themselves to be utilized
by unscrupulous persons for the purpose of tax evasion. Therefore, banks should
obtain full and complete address of depositors and record these in the books and the
account opening forms so that the parties could be traced without difficulty, in case
of need. Independent confirmation of the address of the account holder should be
obtained in all cases.

d. Other Safeguards
1. Permanent AccountNumber (PAN)/GeneralIndex Register (GIR) Number
The banks are required to obtain PAN number of a depositor opening an account with an initial deposit of
Rs.50,000/-and above.
2 Authorization
The opening of new accounts should be authorized only by the Branch Manager or by the Officer-in-Charge
of the Deposit AccountsDepartment concernedat bigger branches.
3 Completion of Formalities
The banks should ensure that all account opening formalities are undertaken at the bank's premises and no
document is allowed to be taken out for execution. Where it is absolutely necessary to make exception of the above
rule, banks may take precaution such as deputing an officer to verify the particulars, obtaining a signed photograph on
a suitably formatted verification sheet, forwarding by registered Acknowledgement Due, mailing a copy of the
account opening form and accompanying instructions to the client for necessary verification before any operations are
conductedin the accounts.

e. NOMINATION FACILITIES
Nomination facility should be made available to all types of accounts, irrespective of the
nomenclature used by different banks.
Banks are advised to generally insist that the person opening a deposit account makes a
nomination. In case the person opening an account declines to fill in nomination, the banks should
explain the advantages of nomination facility. If the person opening the account still does not want
to nominate, the banks should ask him to give a specific letter to the effect that he does not want
to make nomination. In case the person opening the account declines to give such a letter, the
bank should record the fact on the account opening form and proceed with opening of the account
if otherwise found eligible. Under no circumstances, a bank should refuse to open an account
solely on the ground that the person opening the account refused to nominate. This procedure
should be adopted in respect of deposit accounts in the name of Sole Proprietary Concerns also.

OPERATIONS IN ACCOUNTS
BANK'S CUSTOMER AS INDIVIDUALS
Accounts of individuals comprise a majority of the accounts in Personal segment of most banks.
Any individual who is a major and of sound mind can open a - Savings account and / or Fixed deposit
accounts.
An account for a minor child can also be opened and operated by the Father / Mother / Guardian.
This minor's account can be operated in one of the following modes (child will operate the account only on
attaining the majority):
1.In the single name of the child through the father / mother / guardian.
2.In the joint names of the father / mother / guardian and the child (payable to either or survivor).
3."Kids accounts" - Many banks allow minor children above specified age to open and operate savings
account in their single name. These accounts have certain limitations on withdrawals. This is to inculcate
savings and banking habits in the children while they are young.

BANK'S CUSTOMER AS JOINT DEPOSITOR
Joint deposit accounts are accounts that are opened by multiple number of
people coming together for some specific reasons or convenience. For practical
reasons the transactions are done by:
• One of the persons who is on the account as a account holder
• Jointly by two or more persons
Their transactions would be accepted as per the instructions given for at the time of
opening of the account.

ACCOUNTS WITH ILLITERATE PERSONS
Illiterate persons who cannot sign are allowed to open only Savings account
(without cheque facility) and Fixed deposit account. Current account is not
generally opened for such persons. Withdrawals are permitted from the account on
production of the passbook after verification of the thumb impression and proper
identification of the account holder.
NOMINATION IN ACCOUNTS
A valid nomination is required in the event of the death of the sole depositor
or all depositors, the amount lying in the account will be returned to the nominee
without any further legal formality.

CLOSING A ACCOUNT UPON CUSTOMER’S REQUEST
A customer is entitled to terminate the relationship with a bank by applying for closing the
account if account holder is not satisfied with the services of the bank or for any other reason e.g.
transfer to another place.
CLOSURE OFACCOUNTS BY BANK
A banker may close an account or stop operation on a customer’s account by giving
reasonable notice to the customer, in any of the following cases:
• An Account may be closed on receipt of notice of death
• A joint account may also be closed on the death of any one of the account holders and fresh
account opened in the names of the surviving account holders, to avoid legal problems.

Unit-II Banker and Customer Relationship.pdf

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Unit-II Banker and Customer Relationship.pdf