Banker customer relationship

Hints on Caselets:
Who is a Banker
1. Banker is defined under Section 5(b) of The Banking Regulation Act.
What are the characteristics of a banker to satisfy this definition?
i. Acceptance of deposits from the public
ii. lending in several forms
iii. investments in various avenues
iv. repayment of deposits in a special and unique way- cheque facility
v rendering of other ancillary services under section 6 of Banking regulation Act :
collection of cheques,
issuing guarantee,
safe custody,
lockers,
remittances,
purchase and sale of securities,
executers and trustees role,
tax assistance, consultancy, investment advice,
credit cards,
banc assurance
2. Under which of the following situations, the person will be treated as a customer of the
bank: mark
Yes or NO
a. Vinit Chopra has purchased demand drafts for three times, has sent telegraphic
transfers twice, in the last one year from the same branch of HDFC Bank on paying
cash . NO
b. Gurjeet Bansal has received a sum of Rs. 80000 thru six TTs and Rs. 50000 by two
MTs from Noida branch of ICICI Bank during the last two years by a bankers cheque
in his favour. NO
c. Shashi Sehgal has enchased twenty three cheques in his favour drawn on several
customers of the same branch of Axis Bank during last three years. NO
d. SK Faliman has been maintaining a savings bank account with State Bank of India for
the last two years. YES
e. Sridharan has a fixed deposit receipt for Rs.1000 that he has been renewing from time to
time for the last 3 years. YES
f. Sewa Singh has been holding 500 shares of SBI for the last 25 years but has not done
any other transactions with SBI. NO
g. SC Shukla signed an account opening form, got a proper introduction as per satisfaction
of the bank for current account with ICICI bank Noida branch , deposited initial cash

deposit of Rs.10,000 for this account with bank on 15.09.08. As the cash was deposited
late, it could not be credited to his account. Is he a bank customer on 15.09.08? YES
h. Rajinder Kumra signed the account opening form with satisfactory other formalities and
deposited a cheque of Rs.15,000 in his favour for collection and for the credit of the
new account to be opened with this as initial amount for the account on 15.09.08. Is he
a bank customer on 15.09.08? YES
KYC Norms for new customer accounts for Banks :

KYC stands for Know Your Customer

KYC procedure is the key principle for identification of an individual/corporate opening an
account. The customer identification should entail verification through an introductory reference
from an existing account holder/a person known to the bank or on the basis of documents
provided by the customer like Passport, Valid Driving licence, PAN Card, Election I Card and
verification of residential address documents like Telephone bill, Electricity Bill, property
ownership documents or tenancy agreement, LIC policy etc.
3.

Which one of the following is correct or not correct about KYC Norms:

a) KYC guidelines are issued by SEBI

not correct

b) The purpose is to safeguard the interest of the customer not correct

c) The purpose is to safeguard the interest of the bank.
Explanation:

Correct

1. It saves bank from charges of conversion under section 131 of Negotiable Instruments Act
that means the bank has helped to convert or transfer the right or ownership of goods or money
of the true owner to some one else who can pretend to be the true owner and open account with
the bank and take away money of the true owner by getting the cheques in the name of true
owner collected in the account. Bank will be responsible to make good the loss to the true
owner of the cheque.
2. It will be difficult to recover overdraft by mistake to a person of unknown identity, forged
identity or dubious credit standing.

The protection under section 131 of Negotiable Instruments Act

A banker who in good faith and without negligence received the payment for a customer, of a
cheque crossed generally or specially to himself, shall not, , incur any liability to the true owner
of the cheque by reason only of having received such payment, in case the title to the cheque
is proved defective.

d) Knowing the customer means whether he is the same person that he claims to be. Correct
e) The introducer has a criminal liability in case the customer introduced by him commits any
fraud or wrong doing with bank or other customers thru his account. Not Correct

f) The introducer has only a civil financial liability in case the customer introduced by him
commits any fraud or wrong doing with bank or other customers. Not correct
g) The introducer has no financial or other liability to the bank or third parties unless he is a party
to the fraudulent transactions.
Correct
h) The KYC norms are to safe guard the country from money laundering of drug or other illegal
money or to detect suspicious disruptive activities . Correct
i) The KYC norms also help in checking the growth of Benami transactions ( in the name of
person other than actual owner) and for monitoring large value transactions to avoid payment of
taxes.
Correct

j) As part of KYC, banks insist on documentary proof for identity and residence.
Tick mark the documents acceptable as
Proof of identity:
a.
a Valid Driving licence
b.
an Voter ID card
c.
a Ration card
d.
a passport
e.
a credit card with photograph
f.
a PAN card

Proof of residence
i. Driving licence
ii. Ration card with photo and DOB
iii.Voter ID card
iv. Telephone bill
v. Electricity bill
vi. Flat allotment letter / rent agreement
vii.LIC Policy for last two year
viii. PAN card

(Correct one marked in Bold)

4. Which one of the following is correct:
a) Banks are required to issue travelers cheques, demand drafts, mail transfers, and telegraphic
transfers for Rs.50,000 and above only by debit to customers accounts or against cheques and
not against cash. Correct
b) Since KYC is now expected to establish the identity of the customer and as the issue of demand
draft etc. for Rs.50,000 and above is by debit to account, the requirement for furnishing PAN
stands increased uniformly to Rs.50,000/-. Correct
c) The banks are required to keep a close watch of cash withdrawals and deposits for Rs.10 lakhs
and above in deposit, cash credit or overdraft accounts and keep record of details of these large
cash transactions in a separate register. Correct
d) Branches of banks are required to report all cash deposits and withdrawals of Rs.10 lakhs and
above as well as transactions of suspicious nature with full details in fortnightly statements to
their controlling offices. Besides, controlling offices are also required to apprise their Head
offices regarding transactions of suspicious nature. Correct

All the instructions have been given to check and detect money laundering and
avoidance of payment of income tax.

Nature of relationship based on transactions

5. State the nature of relationship between banker and a customer in the following types
of dealings with the bank
a. A Customer has been operating a current account with the bank. Debtor -creditor
b. A Customer has a fixed deposit with the bank
Debtor -creditor
c. A Customer has opened a no frills savings bank account with the bank.
Debtor -creditor
d. A Customer has a term loan account with the bank for purchase of machinery
Creditor -Debtor.
e. A Customer has opened a cash credit account as well as an overdraft account with the
bank.
Creditor -Debtor
f. A Customer has a locker facility with the bank and has deposited Rs.10000 in fixed
deposit to avail this locker facility. Locker lessor-lessee, deposit -debtor creditor
g. A Customer has deposited Rs.10000 with the bank for issue of demand draft in favour of
his friend payable at Kanpur on 15.09.08.
agent- principal
h. A Customer has raised a temporary overdraft against security of Fixed deposit with the
same bank in his name. overdraft- Creditor -Debtor,
deposit -debtor creditor
i. A customer has handed over some securities for safe custody with the bank. The
customer dies. Bank is a Trustee, to deliver to proper legal heirs
j. A customer has deposited an outstation cheque with the bank for collection and credit to
his account with the bank.
Customer already a customer, bank is agent for this cheque till credited to account.
k. A customer has instructed bank to remit a sum of Rs. 20,000 to another person having
account with another bank at another place. Agent and Trustee

Obligations of banker towards a customer ( Section 31 of Negotiable

Instruments Act-1881) :
The drawee of a cheque having sufficient funds of the drawer in his hands,
properly applicable to the payment of such 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 be such default.
6. A customer issued a cheque in favor of Insurance company on account of renewal of
medical insurance for the family for Rs.19,500 on 10.09.08 that was expiring on 13.09.08. The
wife of the customer had to undergo a major surgery on 14.09.08 that cost him Rs.5 lakh.
Meanwhile, the bank returned the cheque on 14.09.08 by mail with reason insufficient funds.
The policy could not be issued and insurance company refused to pay for the medical expenses.
It was found that bank had enough funds in the account. What is the position of the bank if there
is claim from the customer for Rs. 5 lakh.
Bank is liable to compensate the customer all financial losses suffered as sufficient funds
were there and bank wrongfully dishonored the cheque.

7. Padam Singh Rana had an overdraft with SBI at Noida branch and a Savings bank balance at
New Delhi branch. On non payment of overdraft balance, his S/B deposit balance was adjusted
towards overdraft amount and his lawyer advised him that the bank was within its rights to do
so. Unhappy with SBI, he later, opened savings bank accounts at two different branches of
HDFC Bank and balances in accounts were as under : Brach A Rs. 50000 branch B Rs.20000.
He issued a cheque for Rs.51000 on branch A for advance payment of purchase of property
worth 15 lakh. This cheque was dishonored by the branch ignoring the fact that he had enough
balance at the other branch. He lost his reputation and could not buy property and claims Rs.15
lakh for this loss and another 10 lakh for reputation loss. Discuss.
Bank is not obliged to combine accounts at two different branches to pass the cheque. The
cheque is drawn on a particular account of a particular branch. Bank is not liable.
8. Sam issued a cheque for Rs. 15,000 on 12.09.08. He had Rs.14500 balance in SB account and
had deposited cheques for Rs.20,000 on the morning of 09.09.08 in this account that had not
been returned un paid. But the cheque for Rs.15000 was dishonoured by the bank due to
oversight of the executive who credited the amount of cheques to some other account. What
recourse Sam has against the bank.
Bank is liable for compensating the drawer for loss suffered due to banks mistake of not
passing the cheque in spite of sufficient balance.
9. In the above case (6), the executive further informed the presenter of the cheque on the counter
that there was a shortfall of Rs.500 in the account. Does this matter?
Bank will be liable to compensate for loss for breach of secrecy if customer can prove that
he suffered a loss on account of this.
10. Ram Kapoor had fixed deposit of Rs.20,000 with the bank branch. He issued a cheque on his
savings bank account for Rs.50000 that had a balance of Rs.49000. at the same branch. The
cheque was dishonored by the bank . Discuss rights and liabilities of both the parties.
Bank is not obliged to combine the Fixed deposit balance with savings bank account to
pass the cheque and is not liable unless bank has agreed beforehand to do this.
11. Baldev Raj, a reputed businessman. had enjoyed overdraft facility upto Rs.20,000 from time to
time for the last four years with SBI, Noida branch without any loan agreement in writing due to
his reputation and relations. The new branch manager returned a cheque for Rs.50000 as the
credit balance in the account was Rs..45000. On complaint by the customer, the branch manger
replied that there was no contract in writing, so bank is not liable for consequences for
returning the cheque. Discuss the liability of the bank.
Bank is liable as bank can not stop this facility without giving prior notice.
12. A reputed customer got a compensation of Rs.1 lakh from the court for wrongful dishonour of a
cheque for Rs.1,25,000. Would there be any difference in compensation if the cheque amount
would have been Rs. 1250 only ?

For a given stature of a customer, smaller the amount of cheque, greater the loss of
reputation, and hence higher the compensation for wrongful dishonour of cheque.
13. Will dishonor of cheques by the bank be justified and why in the following situations?
i. Cheque dated 19.09.08 presented for payment on 18.09.08
This is a postdated cheque that will be effectively a cheque on its date 19.09.08 and on
18.09.08 it is not a cheque and can not be paid.
ii.

Cheque dated 15.03.08 presented for payment on 18.09.08.

It is a stale cheque more than 6 months old and can not be passed because it is expected
that cheques are issued to settle payments within a short period of say max. 6 months (in
practice and agreed in law). If not presented to bank, then it should be canceled and reissued.
iii. Cheque for Rs. 20000 presented on 18.09.08 when there is a Garnishee Order
served on bank for Rs. 50000 and balance in the account is Rs.74000.
(minimum balance in the account required Rs.5000)
Cheque will be passed (without bothering amount minimum balance for which there is
only small penalty if quarterly average comes down Rs. 5000.)
iv. Cheque for Rs. 20000 presented on 18.09.08 when there is a Garnishee Order
served on bank for Rs. 50000 and balance in the account is Rs.80,000. But
there is a loan liability due of the customer as a guarantor and loan of the
principal
borrower for Rs.50,000 is not in default currently.
Bank can not set off the liability of depositor fo gurantee as the amount is not yet due.
After setting aside garnishee order amount Rs.50000, the balance is Rs.30000 and
bank will pass the cheque.
v. The garnishee order is in name of Randhir but the account is joint names of
Randhir and Samita. The order will not apply.
vi. The garnishee order is in joint names of Randhir and Samita but the account
is in the name of Randhir singly. The order will apply.
vii. The an Income Tax Attachment Order is in name of Randhir but the account is
joint names of Randhir and Samitha. Order will apply to 50% balance.
viii. The an Income Tax Attachment Order is in joint names of Randhir and Samitha
but
the account is in the name of Randhir singly. Order will apply to this account.
ix. The Income Tax attachment order is received on 15.09.08 but the Fixed deposit is
due on 15.08.09. Does it apply to Fixed Deposit that is not due on date of order?
Yes, it applies.
x. The Income Tax attachment order is received on 15.09.08 and customer is advised
but the cheques deposited realized Rs.10000 on 17.09.08. Does it apply to this
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amount received in account after date of order?

Yes

Obligation to maintain secrecy of the account:

Banker, under section 13 of Banking Companies (Acquisition and Transfer of Undertakings)
Act 1970,
is required to maintain secrecy of the affairs of customers except under some reasonable and
justified circumstances or when expressly or impliedly authorized by the customer to do so.
14. Discuss whether the banker is lawfully justified or not in disclosing the customers
information in following situations:
i. The statement of account is given to the Income Tax Inspector on his written instructions.
NO (only to ITO is justified)
ii. All transactions totaling Rs.10 lakh or above in a year are reported to the ITO for all such
accounts. Yes
iii.
The Sub inspector from a local police station is shown the account details for three years
of a person under criminal investigation.
NO ( sub inspector must be Station in charge/station house officer SHO)
iv. The account details of a customer are produced in court as per court order. Yes
v. The credit information of borrowers is passed on to the RBI without their consent.. Yes
vi. The credit information is passed on to another bank and based on this the other bank rejects
his loan application. Yes
vii. the balance in account is disclosed to the wife of the depositor without his consent.NO
vii. the information of account and facilities is disclosed to the guarantor before signing the
guarantee. Yes
viii. The Enforcement Directorate Officer informs the Branch Manager that the person is
involved in smuggling activities and his accounts need to be scrutinized and account details are
given to them. Yes

Bankers Rights of General Lien

15. Which one of the following is correct:
The lien is a right of the creditor to retain the goods or securities of the debtor till the debt is paid.
Yes
a) A particular lien is a right to retain a particular security or goods related to payment obligation.
Yes
b) A general lien is applicable in respect of all amounts due from the debtor to the creditor. Yes
a. A scooter mechanic can hold the scooter repaired by him if the repair charges have not
been paid. It is not a case of particular lien.
Yes, It is a case of particular lien.
c) A bank took security of Kisan Vikas Patras for a loan of Rs.50,000 to Mr. Hiren. This loan was
adjusted on 14.09.08 but by the time customer came to collect the KVPs on 16.09.08, , there was
a demand on the bank received in the morning to pay under a bank guarantee issued for Mr.

Hiren. The customer claimed that Bank can not hold KVPs as these were for a loan which has
been adjusted already .
Bank can hold KVPs as bankers lien is considered a general lien.
d) Bank can sell the property under lien if debt is not paid after giving a reasonable notice for sale
of securities to the debtor. This is an implied pledge of securities. Yes.
e) Bank can exercise lien for debt in single name on fixed deposit in joint names. No, unless agreed
by joint depositor also.
f) Bank has a lien on safe custody articles like shares or jewellery, documents deposited for special
purpose like bills given for collection to pay for another bill liability, shares given for sale above
a certain price and lying unsold, or money tendered for remittance to some other person or
securities held in trust or securities left with bankers negligently.
NO, these are given for a special purpose.
g) Bank has a lien on any securities received in ordinary course of business and not fo r specific
purpose e.g cheques and dividend warrants received for collection without any specific
instructions for any special purpose..
Yes

Right of set off

It is general right under general law.
Which one of the following is correct:
a) Right of set off enables the debtor to take into account a debt owned to him by the creditor
before the creditor could recover the debt due to him from the debtor . Yes
b) A bank has fixed deposit of Rs. 25000 in name of customer X that is due today but the bank has
allowed an overdraft of Rs.10000 in current account of X. Bank can offset this amount of Rs.10000
and pay only Rs.15000 to X after offsetting the balance due to the bank.
Yes
c) X has to pay overdraft of Rs.50000 but has defaulted. Bank wants to recover this amount from a
joint account in the name of X and Y( his wife).
No, both accounts are not in same right and capacity.
d). X Enterprises owes Rs.10000 to bank and X is the proprietor of this firm. There is credit
balance in account in personal name of X. Bank wants to exercise right of set off.
Yes, Proprietor of a firm is not different from individual self as per law.
e). Money owed by father can be recovered from the account of his minor son under guardian ship of
the father.
No
f). The customer can claim the refund of deposits in his account from the bank within a period of
three years from the date of deposit as per Limitation Act.
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Yes (Limitation period is time within which a claim can be made through court of law)