Beruflich Dokumente
Kultur Dokumente
BANKING LAW
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ACKNOWLEDGEMENT
The final outcome of this project required a lot of guidance and assistance from many people
and I am extremely privileged to have got this all along the completion of my project. All that I
have done is only due to such supervision and assistance and I would not forget to thank them.
I respect and thank Prof P. Jogi Naidu, for providing me an opportunity to do the project work
on legal aspect of relation between banker and customer giving us all support and guidance
which made me complete the project duly. I am extremely thankful to his for providing such a
nice support and guidance. he took keen interest on our project work and guided us all along, till
the completion of our project work by providing all the necessary information for developing a
good system.
SIGNATURE
(FACULTY)
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CERTIFICATE
This is to certify that the banking law project titled legal aspect of relation between banker and
customer has been successfully completed by ______________________________________ of
semester VII, in the evaluation of the course of B.A, L.L.B. it has been completed under the
guidance of .
SIGNATURE
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CONTENT
Introduction ………………………………………………………………………….…5
Definition……………………………………………………………………………......6
Who is customer……………………………………………………………………...….7
Termination of relation……………………………………………………………….....16
Conclusion………………………………………………………………………………...26
Bibliography…………………………………………………………………………….....27
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INTRODUCTION
The relationship between the banker and customer is vital. The relationship starts right from the
moment an account is opened and it comes to an end immediately on closure of account. The
relationship stands established as soon as the agreement and contract entered into. The nature of
the relationship depends upon the state of the customer’s account.
In this assignment I’m trying to point out the Legal Aspect of the relationship that exists between
the bankers and customer.
The relationship between a banker and a customer depends on the activities; products or services
provided by bank to its customers or availed by the customer. Thus the relationship between a
banker and customer is the transactional relationship. Bank’s business depends much on the
strong bondage with the customer. “Trust” plays an important role in building healthy
relationship between a banker and customer1.
DEFINITION OF A ‘BANKER’
1
Commissioners of Taxation v English Scottish & Australian Bank, [(1920) AC 683
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drawn upon them from time to time by the customers to the extent of the amounts available on
their current accounts”.2
According to G.Crowther, “A banker is a dealer in debt of this own and other people”. A
between the borrower and the lender. He borrows from one party and lends to another.
According to Doctor Herbert Hart, a banker or a bank is a person carrying on the business of
receiving money and collecting data for customers subject to the obligation of honouring
available on their current accounts. According to the banking company's ordinance 1962 banking
has been defined as accepting for the purpose of lending or investment of deposits of money
from public repayable on demand or otherwise and withdrawals by cheques, draft or order.
The Banking Regulations Act 19493 does not define the term ‘banker’ but defines what banking
is?
As per Sec.5 (b) of the B R Act “Banking' means accepting, for the purpose of lending or
investment, of deposits of money from the public repayable on demand or otherwise and
As per Sec. 3 of the Indian Negotiable Instruments Act 1881, the word “banker includes any
According to Sec. 2 of the Bill of Exchange Act, 1882, ‘banker includes a body of persons,
Sec.5(c) of BR Act defines "banking company" as a company that transacts the business of
banking in India. Since a banker or a banking company undertakes banking related activities we
can derive the meaning of banker or a banking company from Sec 5(b) as a body corporate that:
2
Cited by J.Milness Holden ,The Law and Practice of Banking, Vol. 1
3
Here in after B R Act
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(b) Lends or
Accepting deposits from the ‘public’ means that a bank accepts deposits from anyone who offers
money for the purpose. Unless a person has an account with the bank, it does not accept deposit.
For depositing or borrowing money there has to be an account relationship with the bank. A bank
can refuse to open an account for undesirable persons. It is banks right to open an account.
Reserve Bank of India has stipulated certain norms “Know Your Customer”4 (KYC) guidelines
for opening account and banks have to strictly follow them.
In addition to the activities mentioned in Sec.5 (b) of B R Act, banks can also carry out activities
mentioned in Sec. 6 of the Act.
3-Who is a ‘Customer’?
The term Customer has not been defined by any act. The word ‘customer’ has been derived from
the word ‘custom’, which means a ‘habit or tendency’ to-do certain things in a regular or a
particular manner’s. In terms of Sec.131 of Negotiable Instrument Act, when a banker receives
payment of a crossed cheque in good faith and without negligence for a customer, the bank does
not incur any liability to the true owner of the cheque by reason only of having received such
payment. It obviously means that to become a customer account relationship is must. Account
transactions with a bank, is the customer of bank. However, there are many persons who do
utilize services of banks, but do not maintain any account with the bank.
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Guidelines issued by Reserve Bank of India
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(a)Those who maintain account relationship with banks i.e. Existing customers.
(b)Those who had account relationship with bank i.e. Former Customers
(c)Those who do not maintain any account relationship with the bank but frequently visit branch
of a bank for availing banking facilities such as for purchasing a draft, encashing a cheque, etc.
Technically they are not customers, as they do not maintain any account with the bank branch.
(d)Prospective/ Potential customers: Those who intend to have account relationship with the
bank. A person will be deemed to be a 'customer' even if he had only handed over the account
opening form duly filled in and signed by him to the bank and the bank has accepted the it for
opening the account, even though no account has actually been opened by the bank in its books
or record.
The practice followed by banks in the past was that for opening account there has to be an initial
deposit in cash. However, the condition of initial cash deposit for opening the account appears to
have been dispensed with the opening of ‘No Frill’ account by banks as per directives of
Reserve Bank of India. ‘No Frill’ accounts are opened with ‘Nil’ or with meager balance.
The term 'customer' is used only with respect to the branch, where the account is maintained. He
cannot be treated as a ‘customer' for other branches of the same bank. However, with the
implementation of’ ‘Core Banking Solution’ the customer is the customer of the bank and not of
a particular branch as he can operate his account from any branch of the bank and from
anywhere. In the event of arising any cause of action, the customer is required to approach the
branch with which it had opened account and not with any other branch.
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(i) A person or entity that maintains an account and/or has a business relationship
(ii) One on whose behalf the account is maintained (i.e. the beneficial owner); (iii)
Brokers, Chartered Accountants, Solicitors etc. as permitted under the law, and
(iv) Any person or entity connected with a financial transaction, which can pose
significant reputational or other risks to the bank, say, a wire transfer or issue of a
BANKER-CUSTOMER RELATIONSHIP:
Banking is a trust-based relationship. There are numerous kinds of relationship 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 on certain terms and conditions.
The relationship between banker and customer is of utmost importance. Now we can define the
According to John Paget, “The relation of a banker and a customer is primarily that of debtor
and creditor the respective position been determined by the existing state of the account.”
These relationships confer 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 the long
lasting relationship. Some banks even say that they have generation-to-generation banking
relationship with their customers. The banker customer relationship is fiducially relationship.
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Guidelines issued by Reserve Bank of India
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The terms and conditions governing the relationship is not be leaked by the banker to a third
party.
CLASSIFICATION OF RELATIONSHIP:
The relationship between a bank and its customers can be broadly categorized in to General
If we look at Sec 5(b) of Banking Regulation Act, we would notice that bank’s business hovers
around accepting of deposits for the purposes of lending. Thus the relationship arising out of
these two main activities are known as General Relationship. In addition to these two activities
banks also undertake other activities mentioned in Sec.6 of Banking Regulation Act.
Relationship arising out of the activities mentioned in Sec.6 of the act is termed as special
relationship.
5(A)-General Relationship:
Debtor-Creditor: When a 'customer' opens an account with a bank, he fills in and signs the
account opening form. By signing the form he enters into an agreement/contract with the bank.
When customer deposits money in his account the bank becomes a debtor of the customer and
customer a creditor. The money so deposited by customer becomes bank’s property and bank has
a right to use the money as it likes. The bank is not bound to inform the depositor 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, banker pays.
Banker does not pay money on its own, as banker is not required to repay the debt voluntarily.
The demand is to be made at the branch where the account exists and in a proper manner and
during working days and working hours. The debtor has to follow the terms and conditions of
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bank said to have been mentioned in the account opening form. In the past while opening
account some of the banks had the practice of giving a printed handbill containing the terms and
conditions of account along with the account opening form. This practice has since been
discontinued. For convenience and information of prospective customers a few banks have
uploaded the account opening form, terms and conditions for opening account, rate charge in
respect of various services provided by the bank etc., on their web site. While issuing Demand
Draft, Mail / Telegraphic Transfer, bank becomes a debtor as it owns money to the payee/
beneficiary.
2. Creditor–Debtor: Lending money is the most important activities of a bank. The resources
mobilized by banks are utilized for lending operations. Customer who borrows money from bank
owns 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 in the first case when a person deposits money with
the bank reverses when he borrows money from the bank. Borrower executes documents and.
In addition to opening of a deposit/loan account banks provide variety of services, which makes
the relationship more wide and complex. Depending upon the type of services rendered and the
nature of transaction, the banker acts as a bailee, trustee, principal, agent, lessor, custodian etc.
In order to constitute a person a customer, Lord Davey said, in Great Trestern Railway v.
London and County Bankin; Co.6: " I think there must be some sort of account, either a deposit
or a current account or some similar relation." When money has lain dormant with a banker for
six years, the Statute of Limita tions no doubt applies, as in an ordinary case of debtor and
creditor, but a banker never takes advantage of the statute, and is always ready to repay the
6
1901, A.C. 414
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5(B)-Special Relationship:
I. Bank as a Trustee:
As per Sec. 3 of Indian Trust Act, 1882 ‘ A "trust" is an obligation annexed to the ownership of
property, and arising out of a confidence reposed in and accepted by the owner, or declared and
accepted by him, for the benefit of another, or of another and the owner.’ Thus trustee is the
holder of property on behalf of a beneficiary. As per Sec. 15 of the ‘Indian Trust Act, 1882 ‘A
trustee is bound to deal with the trust-property as carefully as a man of ordinary prudence would
deal with such property if it were his own; and, in the absence of a contract to the contrary, a
trustee so dealing is not responsible for the loss, destruction or deterioration of the trust-
In Canara Bank v Canara Sales Corporation 8 Supreme Court held that there is always an element
of trust between the Bank and its customer. The bank’s business depends upon this trust.
In case of trust banker customer relationship is a special contract. When a person entrusts
valuable items with another person with an 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 (Escrow accounts) the banker in such cases acts as a trustee. Banks charge fee for
safekeeping valuables.
Sec.148 of Indian Contract Act, 1872, defines "Bailment" "bailor" and "bailee".A "bailment" is
upon a contract that they shall, when the purpose is accomplished, be returned or
7
Sec.32 of Indian Trust Act
8
AIR 1987 S.C. 62 Com.Cas.280
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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 keeps articles, valuables, securities etc., of its customers in Safe Custody and acts as a
Bailee. As a bailee the bank is required to take care of the goods bailed.
Sec.105 of ‘Transfer of property Act 1882’ defines lease, Lessor, lessee, premium and rent. As
per the section “A lease of immovable property is a transfer of a right to enjoy such property,
made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or
promised, or of money, a share of crops, service or any other thing of value, to be rendered
periodically or on specified occasions to the transferor by the transferee, who accepts the transfer
on such terms.”
(4) The money, share, service or other thing to be so rendered is called the rent.”
Providing safe deposit lockers is as an ancillary service provided by banks to customers. While
providing Safe Deposit Vault/locker facility to their customer’s bank enters into an agreement
with the customer9. The agreement is known as “Memorandum of letting” and attracts stamp
9
Bank of India v Gopinathan Nair, AIR 1970 Kerala 74
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duty. The relationship between the bank and the customer is that of 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.
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. The person for whom such
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 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 abides by the standing instructions
given by its customers. In all such cases bank acts as an agent of its customer, and charges for
these services. As per Indian Contract Act agent is entitled to charges. No charges are levied in
collection of local cheques through clearing house. Charges are levied in only when the cheque is
Pawn is a sort of bailment in which the goods are delivered to another as a pawn, to be a security
for money borrowed. Thus a banker acts as a Pawnee where a customer delivers the goods to him
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to be kept as security till the debt is discharged. The banker can retain the goods pledged till the
debt is paid.
As a Custodian:
A custodian is a person who acts as a caretaker of some thing. Banks take legal responsibility for
a customer’s securities. every relation of trust and confidence is a fiduciary relation. A banker
who receives a customer’s money is under a duty not to part with it which is inconsistent with
the customer’s fiduciary character and duty. In Official Assignee v. Rajaram Aiyar10, it was held
that where banks old money for a specific purpose of sending it somebody the money is
VII-As a Guarantor:
Banks give guarantee on behalf of their customers and enter in to their shoes. Guarantee is a
contingent contract. As per sec 31,of Indian contract Act guarantee is a " contingent contract ".
contract, does or does not happen. It would thus be observed that banker customer relationship is
transactional relationship.
10
Bank of India v Gopinathan Nair, AIR 1970 Kerala 74
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(d) The closing of the account by the bank after giving due notice.
The relationship developed between a banker and customer involves some duties on the part of
both.
DUTIES OF A BANKER:
(e)Duty to act as per the directions given by the customer. If directions are not
(f)Duty to submit periodical statements i.e. informing customers of the state of the
account
Banker has a duty to maintain secrecy of customers' accounts. Maintaining secrecy is not only a
moral duty but bank is legally bound to keep the affairs of the customer secret. The principle
behind this duty is that disclosure about the dealings of the customer to any unauthorized person
may harm the reputation of customer and the bank may be held liable. The duty of maintaining
secrecy does not cease with the closing of account or on the death of the account holder.
As per Sec. 13 of “Banking Companies Acquisition and Transfer of Undertakings Act 1970”-
“Every corresponding new bank shall observe, except as otherwise required by law, the
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practices and usages customary among bankers, and, in particular, it shall not divulge any
is, in accordance with law or practices and usages customary among bankers, necessary or
Maintaining secrecy is implied terms of the contract with the customer which bank enters into
Bank has not only to maintain secrecy of transactions, but secrecy is also to be maintained in
respect of operations through ATM/ debit cards. Bank has also to maintain secrecy of user ID
Bank is liable to pay damages to the account holder for loss of money and reputation if it fails in
its duty to maintain secrecy and discloses information relating to a customer's account or conduct
of the account to any unauthorized person. Bank can also be liable to the third party if its
circumstances.
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(a) Disclosure under compulsion of law:Banks disclose information to various authorities who
by virtue of powers vested in them under provisions of various acts require banks to furnish
Banks are required to furnish only the called for information (no additional information is to be
furnished) on receipt of written request of the person who is vested with the authority to call for
such information under the said acts. The customer is kept informed about the disclosure of the
information.
Banks are under duty bound to provide proper accounts to the customer of all the transactions
done by him. Bank is required to submit a statement of accounts / passbook to the customer.
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As 'banking' means accepting of deposits withdrawable by cheque, draft, order or otherwise, the
banker is duty bound to honour cheques issued by the customers on their accounts.
Sec. 31of Negotiable Instruments Act, 1881 specifies the liability of drawee of cheque. As per
Sec. 31 “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 so to do, and,
in. default of such payment, must compensate the drawer for any loss or damage caused by such
default.”
Therefore it is the duty of a bank to honour the cheques issued by the account holder if:
The cheque has been properly drawn and is in order in all respects i.e. it is properly dated,
amount in words and figures have been expressed properly, is neither stale nor post dated nor
mutilated and the signature of accountholder tallies with the specimen recorded with the bank.
The cheque should be drawn on the branch where the account is maintained. (Due to
implementation of technology and core banking solution a customer can present cheques on any
branch of a bank. RBI has advised banks to issue multi city cheques to account holders.)
(c)A garnishee order attaching the balance in the account or an income-tax attachment order
(d) Drawer of the cheque becoming insolvent and/or a lunatic at the time of drawing
the cheque.
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Cheque issued does not pertain to the account on which it has been drawn.
1.If the cheque is not in order (postdated, stale, payment countermanded, amount in words and
RIGHTS OF A BANKER:
It is not that the bank has only duties to wards its customers, it too has certain rights vis-à-vis his
A lien is the right of a creditor in possession of goods, securities or any other assets
belonging to the debtor to retain them until the debt is repaid, provided that there is no
contract express or implied, to the contrary. It is a right to retain possession of specific goods
or securities or other movables of which the ownership vests in some other person and the
possession can be retained till the owner discharges the debt or obligation to the possessor.
The creditor (bank) has the right to maintain the security of the debtor but not to sell it.
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A 'particular lien' gives the right to retain possession only of those goods in respect of which the
dues have arisen. It is also termed as ordinary lien. If the bank has obtained a particular security
for a particular debt, then the banker's right gets converted into a particular lien.
Banker has a right of general lien against his borrower. General lien confers banks right in
respect of all dues and not for a particular due. It is a statutory right of the bank and is available
even in absence of an agreement but it does not confer the right to pledge. A 'general lien' gives
the right to retain possession of any goods in the legal possession of the creditor until the whole
Section 171 of Indian Contract Act, 1872 confers the right of general lien to banks. As per the
section “ Bankers, factors, harbingers, attorneys of a High Court and policy-brokers may, in the
absence of a contract to the contrary, retain, as a security for a general balance of account any
goods bailed to them; but no other persons have a right to retain, as a security for such balance,
Bank has a right of lien only when goods, securities are received in the capacity as a creditor.
While granting advances banks take documents. These documents confer right to convert general
lien as an implied pledge. A banker’s lien is more than a general lien, it is an implied pledge and
he has the right to sell the goods in case of default Bank has a 'Right of Sale' of goods under lien.
Bank has the right of lien on goods and securities entrusted to him legally and standing in the
name of the borrower. Bank can exercise right of lien on the securities in its possession for the
dues of the same borrower, even after the loan taken against that particular security has been re-
paid. Right of lien can be exercised on bills, cheques, promissory notes, share certificates, bonds,
debentures etc.
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Bank cannot exercise right of lien on goods received for safe custody, goods held in capacity as a
The banker has the right to set off the accounts of its customer. It is a statutory right available to
a bank, to set off a debt owned to him by a creditor from the credit balances held in other
accounts of the borrower. The right of set-off can be exercised only if there is no agreement
express or implied to the contrary. This right is applicable in respect of dues that are due, are
becoming due i.e. certain and not contingent. It is not applicable on future debts.
The right of set off enables bank to combine all kinds of credit and debit balances of a customer
for arriving at a net sum due. The right is also available for deposits kept in other branches of the
same bank. The right can be exercised after death, insolvency, and dissolution of a company,
after receipt of a garnishee/ attachment order. The right is also available for time barred debts.
Deposits held in the name of a guarantor cannot be set off to the debit balance in borrowers
account until a demand is made to the guarantor and his liability becomes certain. Banks cannot
set off the credit balance of customer's personal account for a joint loan account of the customer
with another person unless both the joint accountholders are jointly and severally liable.
Depending on the situation, sometimes the set off takes place automatically without the
permission from the customer. In the following events the set off happens automatically i.e.
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bank.
f) The banker has the right to exercise this right before a garnishee order is received by it.
It is the right of the customers to direct his banker against which debt (when more than one debt
is outstanding) the payment made by him should be appropriated. In case no such direction is
given, the bank can exercise its right of appropriation and apply it in payment of any debt.
Section 59,60 and 61 of Indian Contract Act, 1872 lays down the rules of appropriation.
borrowers instructions) Where a debtor, owing several distinct debts to one person, makes a
payment to him, either with express intimation, or under circumstances implying that the
payment is to be applied to the discharge of some particular debt, the payment, if accepted, must
be applied accordingly.
Sec.60. Application of payment where debt to be discharged is not indicated: (i.e. in the
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Sec.60 of the Indian Contract Act states that if the debtor does not intimate or there is no
circumstance of indicating how the payment is to be used, the right of appropriation is vested in
the creditor. According to the Act, “Where the debtor has omitted to intimate and there are no
other circumstances, indicating to which debt the payment is to be applied, the creditor may
apply it at his discretion to any lawful debt actually due and payable to him from the debtor,
whether its recovery is or is not barred by the law in force for the time being as to the limitation
of suits.”
debts in order of time, whether they are or are not barred by the law in force for the time being as
to the limitation of suits. If the debts are of equal standing, the payment shall be applied in
discharge of each proportionally. Unless there is an agreement to the contrary, any payment
made by a debtor is applied first towards interest and thereafter towards principal. If a customer
has only one account and he deposits and withdraws money from it regularly, the order in which
the credit entry will set off the debit entry is in the chronological order, this is known as
Clayton’s rule.
Rule in Clayton’s case: The rule was laid down in famous Devayanas Vs. Noble11. The rule
applies to running accounts like CC/ OD with debit balance. The rule states that each withdrawal
in a debit account is considered as a new loan and each deposit as a repayment in that
11
38(1816)Mer.529,572
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CONCLUSION
While concluding we can say that the relation between banker and customer is consensual
depending on express or implied contract between the two. Thereby a contractual relation springs
between banker and customer. In case of banking where a person asks the banker to open an
account for him and the banker‘s acceptance thereof, constitutes implied contract of relationship.
The main banking function was to keep in custody other people‘s money and lending a part of it.
Gradually, these functions extended and new others were added. As a result the dependence of
commerce upon banking has become so great that in the modern money economy.
Relation of banker and customer depends upon the service given by the banker. In addition to his
primary functions a banker renders a number of to his customer. The relationship between them
primarily is that of a creditor and debtor. Beside this there are many aspects of their relationship.
Not only the Bank Regulation Act and Negotiable Instrument Act but also several other Acts and
Provision confers and guide to maintain their relationship smooth and healthy.
If the banker and customer follows their liabilities and duties against each other that will better
for the growth of banking business as well as overall economy of the nation.
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BIBLIOGRAPHY
http://rbi.org
http://legalindiaservice.com
http://lawersclubindia.com
http://legalessay.com
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