Assignment:

Banking Laws of Pakistan

Topic:
Banker-Customer Relationship

Submitted to:
Prof. M. Alam

Submitted by:
Banker-Customer Relationship
A banker and customer are linked together by a contract. A part from the trust that a customer
shows towards banker, there are certain legal aspect of this contract. Before we discuss the
nature of relationship, it is necessary to define banker and customer.

Banker:
In simple words banker denotes a bank. He is the person who represents bank in front of client
and customer. Following are definitions of banker.

According to J. W. Gilbert:
"A banker is a dealer in capital or more properly a dealer in money. He is an intermediary party
between the borrower and the lender. He borrows from one party and lends to another."

According to Banking Companies Ordinance 1962:

"Banking means the accepting for the purpose of lending or investment of deposits of the
money from the public repayable on demand or otherwise and withdrawn by check, draft, order
or otherwise."

Customer:
In simple words, a customer is such a person to whom you extend your services in returns of
consideration.

According to an English Court (1910):

"There must be some sort of account either a deposit or a current account in some similar
relation to make a man customer of a banker."

Further in 1920 , again an English Court held that customer signifies a relationship in which
"duration and frequency of operation of account is not an essence."

In Lodges banking practices, only those persons are called customer who maintain a regular
account with the bank irrespective of the duration and frequency of operation of accounts.
Thus, if a person daily comes to bank for encashment of bond depositing in cash on behalf of
others etc. He will not be a customer unless he maintains his own account with a bank.
Nature of Relationship Between Banker and Customer:

Having defined banker and customer. Now we can define the nature of relationship that exist
between a banker and a customer.

The nature of this relationship established completely when in 1848 the court gave a decision
on the Foly Vs. Hill case. The court held that:

"Money paid to the banker is a money by the principal to be placed there for the purpose Of
being made the control of the banker, it is then the banker's money, he is known to deal with it
as his own, he makes what profit he can , which profit he retains to himself he has contracted ,
having received that money, to repay the principal when demanded a sum equivalent to that
paid into his banks."

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."

On the basis Of the decision it is stated that exact relationship between a banker and a
customer is that of debtor and creditor. However apart from this general relationship there are
certain other special relationships also. These relationships are divided into two category and
these are described below.

General Relationships:
Debtor and Creditor:
The basic relationship between a banker and a customer is that of debtor and creditor.

The customer becomes a creditor and the banker becomes debtor when money is deposited in
the bank. The relationship becomes opposite i.e. , a customer become debtor and the bank
become creditor when loan is advanced. In both cases the credit or expect that the debtor will:

• Take care of his money and will keep it safe.

• Return money as agreed, or on demand during normal business hours.

• Give return on money by way of interest.

Special Relationships:
Following are certain special relationships that can exist between a banker and customer.

• Principal and Agent:

Th is relationship arises only in certain cases. When a customer deposits draft, cheques,
dividend certificates etc., for the purpose of collection, he becomes the principal and bank acts
as his agent. In other words when a bank is performing agency services for his customers he is
acting as their agents.

• Bailor and Bailee:

Bailment means delivery Of goods by one person to another for some purpose upon a contract.
When a customer places his valuable with the bank for safe custody he becomes bailor and the
bank becomes bailee.

• Mortgagee and Mortgagee:

When a customer takes loans from the bank and mortgages his immovable property with the
bank as security for the payment of loan , he becomes mortgager and bank becomes
mortgagee.

• Pawner and Pawnee:

A pawner is a person who pledges the goods. A pawnee is a person to whom goods are
pledged.

Further the pledge is the bailment of goods as security for payment of a debtor performance of
a promise. So, when a customer takes loans from the bank and pledges any property as
security with the bank he becomes the pawner and the bank becomes pawnee.

•Banker as Executer, Trustee, Attorney:

Banker acts as an executer, attorney, trustee etc. for his customers.

When a bank is asked to take care of any property or investment in a particular way after the
death of the client then bank becomes executor and the client becomes testator.

When the power of attorney is assigned by the court to the bank, the bank becomes attorney
and the client is called executant.

When a banker is asked to manage a property under a trust, the banker becomes trustee and
the client becomes author.

• Consultant:
Bank usually undertake financial consultancy for their clients. In such a situation the banker
becomes a consultant. When a bank advises his client on any important financial matter, bank
becomes advisor and client becomes advisee.

• Guarantor and Principal Debtor:

Guarantor is the person who gives the guarantee. Principal Debtor is the person for whom the
guarantee is given. Sureity is the person to whom the guarantee is given.

In today's banking business, giving of a guarantee is an ordinary job of a bank. When a bank
gives guarantee, it becomes guarantor and client becomes principal debtor.
• Assignor and Assignee:
When any property or obligation is assigned to the bank then the bank becomes assignee and
the client becomes assignor. Rights or interest in policies can be assigned by a client to the
bank in order to secure loan from a bank.

• Indemnifier and Indemnity Holder:

Indemnity is a contract where one party promises to save the other party from the loss caused
to him by the conduct of the promisor himself or by the conduct of any other person. The
person who promises to make good the loss is called indemnifier and promise is called
indemnity holder. So, by this logic when bank makes a contract of indemnity with the client,
bank becomes indemnifier and client becomes indemnity holder.

• Financier and Financee:

We all know that bank give loans to their clients after accepting appropriate security. When a
loan is granted or finance is provided, bank becomes financier and client becomes finance.

Rights and Duties of Banker and Customers:

Having defined banker and customer, let's study their rights and duties:

Rights of Banker:
• Right to Lien:
Lien means the right to retain a property belonging to some other person until the debt payable
by him has been paid.

According to section 171 of Contract Act 1872, Banker's lien extends to all securities placed with
him by the customers.

In 1864, it was held in a court (Brando vs. Bernett)

"Bankers must undoubtedly have a general lien on all securities deposited with them as a
banker by a customer unless there be an express contract or circumstances that show an
implied contract in consistent with lien."

• Right to Set-off:
Set-off means adjusting a debit balance against a credit balance. Banker can adjust or set off
the debit balance of the account of the customer against the credit balance in another account
of the same customer.

According to the Institute of Banker of London (1924):

"So long as the accounts are active, banker cannot set off the debit balance of one account
against the credit balance of another except after a reasonable notice given to the customer."

So, it can be deduced from this that to have a right if set off bank should take a written
permission from his customer. However, in certain cases, e.g. , in case of death of customer or
his bankruptcy, the bank can exercise his right of set-off without any restriction.

• Right to charge for their Services:

The banker has a right to charge for services that he provides to the customers. This right of
charging commission arises on the basis of course of dealings between banker and customers
and it also arises because of an express agreement with the customer regarding the charge of
commission.

Duties of a Banker:
The duties of a banker are extremely important. This is because he is the man who has been
trusted by a number of persons in respect of their savings and wealth. Following are the duties
of a banker:

• To Honour of Cheques of Customers:

It is the foremost duty of a banker to honour customer's cheque and make payment
accordingly. He can refuse to honour cheque only in certain cases.

• Duty of secrecy:
As already stated that the basic relationship that exist between bankers a nd customers is that
of trust. So , both the parties should take every step to preserve this relation. A banker is duty-
bound to care for the secrecy of the client.

In 1924, it was held in a court (Tournier vs. National Provincial and Union Bank of England) that

"Banker must not disclosed the conditions of his customer's account, except on reasonable and
proper occasion and the obligation to observe secrecy does not end even with the closing Of
the account. "

However , under the following circumstances banker is not required to keep the secrecy of his
customers."

However, under the following circumstances banker is not required to keep the secrecy of his
customers.

Requirement of Law:
Where any evidence is required by court of law, banker, on order of the court, can produce
copies of the accounts and dealings of his customers.
National Interest:
Where there is a question of national interest and integrity the banker can disclose information
about his customer.

Suit against Customers:

Under certain cases ban for the recovery of loans. In these circumstances' banker can disclose
relevant information of customer in front of the court.

Express or Implied Agreement with Customer:

Sometimes a customer has an expressed or implied agreement with the bank. Whereby bank is
advised to send some of the information of customer's account to his financial advisor for
review. Under such cases bank is free from his duty towards secrecy of customer.

• Execution of Standing Orders:

It is a banker's duty to execute all standing orders and instructions of the client.

Garnishee Order:
According to Asrar H. Siddiqui:

" A Garnishee order is an order issued by a court to a judgement creditor to attach the funds in
the hands of the third person who owes money to the judgement debtor.

The Garnishee warns third person called "Garnishee" against releasing the money attached until
directed by the court to do so."

So, when a Garnishee order is declared by court in respect of a customer, it is a banker's duty
to stop operation of his account.

• Safe Custody:
The banker is duty-bound to ensure proper safety of the valuables and belongings of the
customer. As there is a bailor-bailee relationship between banker and customer so all the duties
of the bailee are also the duties of the banker.

Rights of Customers:
As against the banker's rights customer too has given several rights by law. They are as
follows:

• To Draw Cheque:
Customer has a right that he can draw cheque on the credit balance of his account. This right
exists in case of overdraft also.
• To Receive Pass Book / Statement of Account:
A customer has a right to receive pass book or a statement of account. The statement of
account shows all transactions that has been taken place in his account over a particular time
period.

• To Sue Bank for Wrong Dishonour:

If the banker wrongly dishonours the cheques of the customer, a suit for damages can be filed
against him. The general rule is that the smaller the amount the greater will be the damages.
This is because the customer repute suffers much if a small amount cheque is dishonoured.

• To Sue Bank for Disclosing Secret Information:

The customer has the right to also sue a bank if he finds banker guilty of disclosing his
important information before others.

Duties of Customers:
Following are the duties of the customer:

• Within Business Hours:

Although it is the duty of banker to honour cheques drawn by customers the same time it is the
duty of the customers to present them during normal business hours.

• Within a Reasonable Time:

The cheques should be presented for payment within a reasonable time from the date of their
issue.

• Custody of Cheque-book:
It is the duty of the customer to take good care of the cheque books and related documents. In
case of any loss or theft he should immediately inform the banker.

• Careful Filling of Cheques:

The customer should be extremely careful when filling cheques. In case he fills cheques in such
a way that is suspicious and which may facilitate fraud then this will be the breach of duty by
customer and he will be responsible for any loss suffered by the bank.

Summing up:
These are the rights and duties of the customer and banker. It must be noted that these are all
equally important and should be observed by both banker and customer.
Steps involved in debt amount
recovery when customer becomes
defaulter

The National Assembly Thursday passed "Financial Institutions (Recovery of Finances

(Amendment) Bill, 2016" to facilitate process of bank loans and to minimize the loan defaults
and incidence of written-off loans. Parliamentary Secretary for Finance Rana Muhammad Afzal
Khan tabled the Bill in the Lower House of the Parliament. The House passed the Bill with
majority.

The Financial Institutions (Recovery of Finances) Ordinance, (FIRO) was promulgated in 2001,
primarily to deal with the recovery process of the bank loans and loan defaults. The FIRO would
provide a comprehensive legal framework on foreclosure specially Section 15 which empowered
the financial institutions to sale the mortgaged property. However, Supreme Court of Pakistan
in its Order passed on December 10, 2013 declared Section 15 of the aforesaid Ordinance as
ultra vires to the Constitution of Islamic Republic of Pakistan.

In case of default in payment by a customer, the financial institution may send a notice to the
mortgagor demanding payment of the mortgage money outstanding within fourteen days from
service of the notice and failing payment of the amount within due date, it shall send a second
notice of demand for payment of the amount within fourteen days. In case the customer on the
due date given in the second notice sent, continues to default in payment, financial institution
shall serve a final notice on the mortgager demanding the payment of the mortgage money
outstanding within thirty days from service of the final notice on the customer.

When a financial institution serves a final notice of demand, all powers of the mortgagor in
regard to recovery of rents and profits from the mortgaged property shall stand transferred to
the financial institution until such notice is withdrawn and it shall be the duty of the mortgagor
to pay all rents and profits from the mortgaged property to the financial institution:

Provided that where the mortgaged property is in possession of any tenant or occupier, other
than the mortgagor, it shall be the duty of such tenant or occupier, on receipt of notice in this

behalf from the financial institution, to pay to the financial institution the rent or lease money or
other consideration agreed with the mortgagor.

Where a mortgagor fails to pay the amount as demanded within the period prescribed under
sub-section (2), and after the due date given in the final notice has expired, the financial
institution may, without the intervention of any court and subject to any rules made by the
Federal Government under sub-section (5), sell the mortgaged property or any part thereof by
public auction and apply the proceeds thereof towards total or partial satisfaction of the
outstanding mortgage money in the following manner, namely:-

(a) the financial institution shall have the mortgaged property evaluated by a reputable
valuation company on the panel of the Pakistan Banks Association as on the date of the
final notice sent to the mortgagor under sub-section (2);
(b) the financial institution shall cause to be published a notice in one reputable English
daily newspaper with wide circulation and one reputable Urdu daily newspaper with wide
circulation in the Province in which the mortgaged property exists. In addition to its
powers, the federal government may, by notification in the Official Gazette, make rules
specifying the mode, conduct or method of sale of the mortgaged property.

The financial institution shall be entitled, in its discretion, to participate in the public auction and
to purchase the mortgaged property for an amount ten percent higher than the highest bid
obtained in the public auction, provided that where the financial institution chooses to purchase
the mortgaged property at the highest bid obtained in the public auction, it shall issue notice to
the mortgagor who shall have three business days from the service of the notice to match the
financial institution's bid. If the mortgagor is able to match the financial institution's bid, he
shall be allowed to purchase the mortgaged property.

Where the mortgagor or his agent or servant or any person put in possession by the mortgagor
or on account of the mortgagor does not voluntarily give possession of the mortgaged property
sought to be sold or sought to be purchased or purchased by the financial institution, a Banking
Court on application of the financial institution or purchaser shall put the financial institution or
purchaser, as the case may be, in possession of the mortgaged property in any manner deemed
fit by i

Provided that the Banking Court may not order eviction of a person who is in occupation of the
mortgaged property or any part thereof under a bona fide lease, except on expiry of the period
of the lease, or on payment of such compensation as may be agreed between the parties or as
may be determined by the Banking Court to be reasonable.

Explanation: Where the lease is created after the date of the mortgage and it appears to the
Banking Court that the lease was created so as to adversely affect the value of the mortgaged
property or to prejudice the rights and remedies of the financial institution, it shall be presumed
that the lease is not bona fide, unless proved otherwise.

For purposes of execution and registration of the sale deed in respect of the mortgaged
property, the financial institution shall be deemed to be the duly authorised attorney of the
mortgagor and a sale deed executed and presented for registration by duly authorised
attorneys of the financial institution shall be accepted for such purposes by the Registrar and
Sub Registrar under the Registration Act, 1908 (XVI of 1908).

Provided that no such sale deed shall be executed or registered until expiry of seven days after
the completion of the public auction for the sale of the mortgaged property.

Upon execution and registration of the sale deed of the mortgaged property in favour of the
purchaser all rights in such mortgaged property shall vest in the purchaser free from all
encumbrances and the mortgagor shall be divested of any right, title and interest in the
mortgaged property.

Net sale proceeds of the mortgaged property, after deducting all expenses of sale or expenses
incurred in any attempted sale, shall be distributed ratably amongst all mortgagees in
accordance with their respective rights and priorities in the mortgaged property. Any surplus
left, after paying in full all the dues of mortgagees, shall be paid to the mortgagor.

A financial institution which has sold mortgaged property in exercise of powers conferred herein
shall file proper accounts of the sale proceeds in Banking Court within fourteen days of the sale.
All disputes relating to the sale of the mortgaged property under this section including disputes
amongst mortgagees in respect of the mode, conduct or method of the sale or the distribution
of the sale proceeds, shall be decided by the Banking Court to the exclusion of any Other court
of law, including the High Court.

The Banking Court may grant an injunction restraining the sale or proposed sale of mortgaged
property, if- Where any mortgaged property has been sold, the mortgagor or any person
entitled to a share in the rateable distribution of assets, or whose interest is affected by the
sale, may apply to the Banking Court to set aside the sale on the ground of fraud:

Provided that no sale shall be set aside on the ground of fraud unless, upon the facts proved,
the Banking Court is satisfied that the applicant has sustained substantial injury by reason of
such fraud and such injury cannot be compensated by damages. An application for setting aside
the sale under sub-section (14) must be made within seven days of completion of the public
auction for the sale of the mortgaged property and shall not be entertained by the Banking
Court unless the applicant deposits an amount equal to twenty-five percent of the reserve price
or furnishes security for the same amount to the satisfaction of the court.

The rights and remedies provided under this section are in addition to, and not in lieu of, any
other rights or remedies a financial institution may have under this Ordinance.

The provisions contained in this section shall have effect notwithstanding anything contained in
this Ordinance or any other law for the time being in force or any judgment of any court and in
case of any conflict between the provisions contained in this section, and any other law for the
time being in force or any judgment of any court, the provisions contained in this section shall
prevail." An offence of wilful default shall be cognisable, non-bailable and non-compoundable
and punishable with imprisonment which may extend to seven years or fine, not exceeding the
amount of default or with both.

Any person convicted of the offence of wilful default by a Banking Court shall not be eligible to
receive any loan, advance or finance from any financial institution for a period Of ten years and
shall not be permitted to contest any election as a member of the Majlis-e-Shoora (Parliament),
any Provincial Assembly or a local body for a period of five years, after serving out a sentence
after conviction."