U

.I.
THE BANKER & CUSTOMER RELATIONSHIP

.S
.L
Dr. Prashant S. Desai,
Assistant Professor of Law,
NLSIU
Introduction to banker and customer relationship

U
“…the essence, in short, of banker & customer relation is based
on mutual trust and faith but the relation begins with trust

.I.
and in many cases ends-up with litigations
… this module dissects the ever fascinating relationship of
banker and customer from the legal perspective…”

.S
.L
 U
Term Deposits Retail Loans

Demand Deposits Loans (others)

.I.
CUSTOMER
CUSTOMER

BANKER
BORROWING LENDING

.S
Cheques Securities

Collateral securities
.L
Drafts

Other agency functions Other agency functions

The ‘banker’

U
• No specific definition for ‘banker’ but ‘banking’ is defined
[Sec. 5(b)]

.I.
– “banking means the accepting for the purpose of lending
or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdraw able by

.S
cheque, draft, cash or otherwise”
– “Banking company means any company which transacts
business of banking in India” [Sec. 5(d)]
• Hence, ‘banker’ is one who involves in the business of
.L
‘banking’
 U
• US Federal Law
– “any bank, banking association, trust, company,

.I.
savings bank (other than mutual savings bank) or
other banking institution which is engaged in the
business of receiving deposits and which is

• Italy
.S
incorporated under the laws of any state”

– “The acceptance of deposits from the public in any

.L
form and the granting of credit ‘are activities of
public interest’ governed by Banking Law of 1936”
 U
• In Japan
– Banks are institutions conducting commercial banking

.I.
business under Banking Law of 1927
– The banks in Japan are classified as
• Ordinary banks;

.S
• Long term credit banks; and
• Trust banks
– The law of 1927 defines banks as “institutions which
.L
carry on operations of giving as well as receiving
credit”
 U
• Switzerland
– The Swiss law defines banks as “institutions, which

.I.
appeal to the public for deposit”
– The Banking Law of 1934
• Regards banks in the strict sense

.S
– Private banks organized as individuals; firms or
industrial partnerships, savings banks and
finance companies similar to bank which
.L
publicly solicit deposits
Customer – defined

U
• No legal definition available
– In both English and Indian law

.I.
• Hence, Sir John Paget relied upon the ‘time factor’ to
determine the customer of a bank
– By this analogy a person who had just opened an

.S
account is not a customer of the bank
• The time tested elements
– Some recognizable course or habit of dealing between
.L
him and the bank
– The transaction should be in the nature of regular
banking business
Second view point

U
• Of Heber L. Hart
• According to him more than ‘time’ it is the ‘account’

.I.
which determines the customer
• Generally it may be stated that
– a customer is any person, who has some sort of an

.S
account with a bank and that relationship normally
commences as soon as the account is opened
.L
 U
• Commissioners of Taxation v English Scottish &
Australian Bank, [(1920) AC 683]

.I.
– Word ‘customer’ signifies a relationship in which
duration is not of essence
– A customer whose money has been accepted by the

.S
bank on the footing that they undertake to honour
cheques up to the amount standing to his credit is, in
view of their Lordships, a customer of the bank
.L
- Lord Dunedin of Privy Council
 U
• Central Bank of India Ltd. v Gopinathan Nair, AIR 1970
Kerala 74

.I.
– So far as the banking transactions are concerned, the
customer is one whose money has been accepted on
the understanding that the bank will honour

.S
transactions to the amount standing to his credit,
irrespective of his connection being of short or long
standing
.L
– Thus, the element of time is not important
The final point

U
1. To make a man a customer of the bank there must
either a current or deposit account or some similar

.I.
relations
2. Relationship of banker and customer begins as soon as a
sum of money or a cheque is paid in and the bank

.S
accepts it and is prepared to open an account
3. The word ‘customer’ signifies the relationship in which
the duration is not an essence
.L
 U
.I.
Nature of relationship (between banker and
customer)

.S
.L
introduction

U
• It is essentially the contract that exists between ‘banker’
and ‘customer’

.I.
• But this is regulated further by
– Specific banking related laws; and
– Customary practices as developed (and crystallized)

.S
over a period of time
.L
Classifying the ‘transactions’

U
.I.
SERVICES

.S LOAN TRANSACTIONS
.L
DEPOSIT TRANSACTIONS
Deposit transaction

U
• Banks have been used by the general public as a
repository to keep their surplus funds

.I.
• ‘P’ Segment accounts – are those which are personal
segment deposits
• Others – are accounts maintained

.S
– Proprietary concerns,
– Partnerships
– Limited companies
.L
– Trusts etc.,
‘P’ segment accounts

U
• Generally SB Accounts
• They are of two types viz.

.I.
– bank account from which money can be withdrawn by
cheque (This is called ‘checking’ or ‘cheque book
facility’ account)

.S
– These accounts can be operated in single names or in
joint names.
• In the case of joint accounts
– there can again be ‘either or survivor’ or ‘former or
.L
survivor’
– Again these accounts can be operated either jointly or
individually.
Further…

U
• There are some restrictions like
– a minimum balance of certain sum of money to be

.I.
maintained in the account and
– there shall not be more than 50 withdrawals in the
account in a calendar year

interest
.S
• There will be interest paid at some minimal rate of

– about 4 to 5% on the minimum balance standing on

.L
the credit of the account between 10th and 30th of
the calendar month
Precautions to be taken (by banker)

U
• Proper reference (about the prospective customer)
– The banker should obtain reference from respectable

.I.
parties about the proposed customer's integrity and
respectability

.S
.L
 U
• Hence, bankers (as a matter of customary practice) insist
– For an introduction by an existing customer of the

.I.
branch before opening a new account
– They also insist on the PAN supplied by the Income Tax
Department (wherever applicable) and

.S
– Two copies of passport size photographs of the new
customer
.L
Term deposits (or fixed deposits)

U
• This is yet another method of taking money as deposits
• Those generally who have surplus money will invest in

.I.
these type of deposits
• Individuals, firms, companies and all legal entities are
entitled to open fixed deposit accounts

.S
• The banks pay higher rates of interest for such deposits
.L
 U
• When person deposits money with the banker on a fixed
deposit
– a ‘deposit receipt’ is given to him by way of

.I.
acknowledgement for the amount deposited
– This document is usually marked ‘not negotiable’,
which means that it cannot be transferred by mere

.S
endorsement and delivery.
– It was held in Evans v. National Provincial Bank of
England
• that payment to a person wrongfully dealing with
.L
even a signed deposit receipt was no discharge to
the bank, unless the depositor was estopped by his
conduct from disputing such payment.
 U
• The amount is repayable only after the maturity period
– However, the banks at their discretion grant loans up

.I.
to 75% of the amount in FD
– These loans carry an interest at the rate which will be
2% higher than the rate at which the banks receive

.S
the money from the depositor
.L
 U
• There is also a facility to withdraw the money
prematurely i.e. before the expiry of the period for which

.I.
the amount has been deposited
• However the depositors are penalized by the bank by
paying interest at a rate lower than that rate for which

.S
the term deposit has run.
.L
Recurring deposit scheme

U
• Deposits on daily (or some other recognized period) basis
• All monies deposited will be returned (as a lump sum)

.I.
with interest calculated on a compounded basis (at the
end of the period on the date of maturity)

.S
.L
Current account

U
• Can be stated as non ‘P’ segment account
• Are generally opened and operated by individuals or

.I.
organizations
– Who issue cheques in larger numbers
– Examples are firms, traders, manufacturers, limited

.S
companies, trusts etc.,
.L
• Salient features

U
– Stipulation of minimum balance to be maintained
• Rs.500 to 5000 generally

.I.
– Exercise of option to close the account if there is non-
maintenance of minimum balance
– Cheque book/s facilities

.S
– No restriction on the number of withdrawals in any
given period of time
– No interest is paid on the minimum balance
.L
maintained at the account
– Letter of introduction is compulsory
 U
• Current Account & Companies
– Certified copies of

.I.
• Memorandum of Association
• Articles of Association
• Certificate of Incorporation

.S
• Certificate of Commencement of Business
• Board resolution (regarding the opening of
account)
.L
– Such situation no need of introductory reference
 U
• Other procedures
– Specimen signatures of authorized signatories (or

.I.
those who are authorized to operate the account ) are
taken
– Periodically a ‘statement of accounts’ are sent to the

.S
customers for their verification
.L
Before we proceed further …

U
• Indian Banks Association
– It is an association of all the scheduled commercial

.I.
banks in India
– It has codified standard formats for the use of banks in
India

.S
• Now we have standardized
– Account opening forms
– Pay-in-slips
.L
– Cheque formats etc.,
 U
.I.
Introductory reference & its significance

.S
.L
Introduction

U
• There is no legal requirement to obtain any introductory
reference

.I.
• But… the banking custom and practice insist that
introductory reference is essential during opening of a
new account

.S
• Many internal rules of banking practice stipulate for it
.L
The objective

U
• “to identify the prospective customers of the bank”
• Also to ensure that, the new customer will not use his

.I.
account for fraudulent purposes
• It is established law that the introducer will not run into
any legal problems only for having introduced an account
holder
.S
.L
“the modern banking requires that a constituent should either

U
be known to the banker or should be properly introduced.
The bank owed a duty to make enquiries directed to discover
whether a new constituent might use the account for any

.I.
fraudulent purposes. The underlying object of the bank
insisting on producing reliable reference is only to find out, if
possible, whether the new constituent is a genuine party or
an impersonator or a fraudulent rogue … however the burden

.S
of establishing good faith and absence of negligence is on the
defendant. The bank has to establish that they acted without
negligence not only in the receipt of the payment of the
cheque amount but even earlier at the time of opening the
account”
.L
-- Union of India v National Overseas and Grindlays Bank (1978)
48 CompCas 277 Delhi
 U
.I.
Debtor & creditor relationship

.S
.L
introduction

U
• The primary relationship between a banker and customer
is that of a debtor and creditor

.I.
• But banker is a privileged debtor
– One of the terms implied in that contract is that,
money lent to the banker is not payable except on
demand
.S
– Of course in accordance with other formalities
.L
 U
“…the relationship of banker and customer is primarily of
debtor and creditor; the respective positions being

.I.
determined by the existing state of account, instead of
the money being set apart in a safe room, it is replaced
by a debt due from the banker. The money deposited

.S
with him becomes his property and is absolutely at the
disposal of the bank…”
-- Sir John Paget
.L
 U
“It is fundamental rule of banking law that, in case of a
general deposit of money in a bank, the moment money

.I.
is deposited it becomes the property of the bank, and
the bank and the depositor assume the relationship of
debtor and creditor. The legal effect of the transaction is

.S
that of a loan to the bank upon the promise and
obligation, usually implied by bank, to pay or repay the
amount deposited usually upon demand…”
-- Section 444 of Seven American Jurisprudence
.L
Finally…

U
• The banker customer contract is an exception to the rule
that a debtor should find his creditor

.I.
– In Delhi Cloth General Mills Co. Ltd., v Harnam Singh
[AIR 1955 SC 590]

.S
.L
Agency Relation

U
• The following are the agency functions
– Collection of customer’s cheques

.I.
– Collection of bills & other instruments
– Dividend warrants
– Interest warrants

.S
– Pension bills etc.,
.L
 U
• Some additions in the recent times
– Buying and selling of stocks and shares on behalf of

.I.
the customer
– Acting as executor and trustee of customer
– Acting as representative of customer

.S
• Filing of IT returns
• Other bills etc.
.L
Bailor and bailee relation

U
• When banker receives things
– For safe custody

.I.
.S
.L
 U
.I.
Special customers

.S
.L
Special customers

U
• Limited companies
– Different format of account opening form

.I.
– Certified copy of Memorandum of Association and
Articles of Association
– A Certificate of incorporation or certificate of

.S
commencement of business (in case a public limited
company)
– A certified copy of the resolution to open the bank
.L
account from the board (with other related
information)
 U
• Partnership firms
– Certified copy of the ‘partnership deed’

.I.
– Authorized signatory for operating account

.S
.L
 U
• Some matters of consideration
– Any partner has the implied authority to draw the
cheque (unless relinquished)

.I.
– There is no implied authority to open a separate
individual account in firms name
– Banks do not accept for credit of the personal account

.S
of a partner, cheques payable to his firm
– One partner has the authority to stop the payment of
a cheque drawn in the name of the firm by another
partner
.L
– The death or insolvency of a partner automatically
dissolves the firm
 U
• Accounts by HUFs
– A proper letter of introduction

.I.
– The opening form is signed by the Karta and all adult
coparceners
– If there are minors the other adult coparceners should

.S
sign for self and as guardian of the minor/minors
– The karta is given the authority to operate the
account by all the coparceners
.L
 U
• Minors
– Minor can open and operate a bank account

.I.
– The bank should not permit the minor to overdraw his
account
– Should exercise caution while credit for large sums

.S
and debits for large sums are transacted in the
minor’s account
– The age of majority of a non-domiciled minor is
.L
decided by the law of the minor’s country where the
minor is domiciled
 U
.I.
Duty of secrecy

.S
.L
introduction

U
• ‘banker is a privileged creditor’ – in some special sense
the customer is also privileged in some sense

.I.
• The banker is obligated to maintain the secrecy of the
customers accounts
• ‘…the duty to maintain secrecy is an added obligation or

.S
an exception to the general rule that the relationship
between a banker and the customer is that of a debtor
and creditor…’
.L
The origin

U
• May be it has woven in to the banking tradition from
time immemorial

.I.
• All employees and officers of the bank have to sign and
submit a declaration of fidelity and secrecy at the time of
their joining service

.S
.L
 U
“…the duty of maintaining secrecy is a legal one, arising out
of contracts, not merely a moral one. Breach of it,

.I.
therefore gives a claim for nominal damages, or for
substantial damages if injury has resulted from the
breach. It is however, not an official duty, as has been

.S
contended, but qualified, being subject to certain, if not
essential exceptions. The obligation to secrecy does not
end even with the closure of the customer’s account…”
-- Banks L.J, in Tournier v National Provincial and Union
.L
Bank of England [(1924) 1 K B 461]
Grounds of disclosure

U
1. Where the disclosure is under compulsion of law;
2. Where there is a duty to the public to disclose;

.I.
3. Where the interests of the bank require disclosure; and
4. Where the disclosure is made with the express or
implied consent of the customer.

.S
.L
Compulsion of law

U
• Where evidence has to be given by the banker in a court
of law

.I.
– Bankers Book of Evidence Act, 1891 allows certified
copies of the entries of the books to be produced
– Banker is not supposed to disclose to investigating

.S
authority without the order of the court (or the
authority must have power under some special law)
• Furnishing the information to RBI
.L
 U
• Shankarala Agarwalla v SBI, AIR 1987 Cal. 29
– Customer tendered 261 notes of Rs.1000 to SBI

.I.
– This information was forwarded to the Income Tax
Dept. – the account was further attached by the IT
Dept.

.S
– The disclosure was made under directions from RBI
and Finance Ministry
– Held this disclosure by the bank in this case falls
.L
within the exception to the general rule
 U
• Disclosure under BR Act, 1949
– The bank shall submit a return of unclaimed money to

.I.
RBI within 30 days of the close of the year (accounts
which are not operated for ten years)
– When Inspectors are appointed to investigate into the

.S
matters of the company under Companies Act, 1956
.L
Duty to disclose in the interest of public

U
• This scenario arises rarely
– For example during war time – the bank should

.I.
disclose information of such accounts which have
some dealing with enemy country
– The banking Commission recommended a statutory

.S
provision clarifying the circumstances when banks
should disclose in public interest
.L
 U
i. When a bank asked for information by a govt official
concerning the commission of a crime and the bank has
reasonable cause to believe that a crime has been

.I.
committed and that the information in the bank’s
possession may lead to the apprehension of the culprit,
ii. Where the bank considers that the customer is involved

.S
in activities prejudicial to the interests of the country
iii. Where the bank’s books reveal that the customer is
contravening the provisions of any law, and
.L
iv. Where sizable funds are received from foreign
countries by a constituent.
Disclosure in the interest of the bank

U
• Very rare instance
– Arose in sole English case of Sutherland v Barclays

.I.
Bank
– Customer a woman issued a cheque to her dress
maker, which was dishonoured for insufficiency of
funds
.S
– The bank knew of the customer’s bookmaking
transactions and did not wish to allow overdraft
.L
– She wanted to protest and take up the matter with
banker over phone (as she was advised by her
husband to do so)
 U
– While she was in conversation with the banker her
husband took the phone to add his protest over the

.I.
matter
– And during this conversation the banker disclosed her
habit of drawing the cheques in favour of bookmakers

.S
– Then the action was brought but held, that the banker
is justified in such disclosure
• Firstly as there is implied consent by the women
.L
and
• It was justified in the interest of the bank
Express or implied consent of the customer

U
• Customer may advise the banker expressly for various
needs

.I.
• Implied consent will also protect the banker

.S
.L
 U
.I.
Pass book

.S
.L
Introduction

U
• Pass book is issued to bank’s customer, who generally
keeps savings account

.I.
• In case of current accounts – it is issued only upon
demand by the customer
• Pass book is replica of the ledger at the bank branch

.S
• In case of current accounts statement of their accounts
are given to them periodically (daily, weekly, fortnightly
etc.)
.L
Contents of the passbook

U
• Name & address of the customer and the nature of his
account

.I.
• The account number and related details
• The ledger number
• Mode of operation

.S
– Either or survivor
– Former or survivor
– Any one
.L
• Date of opening of the account
• Signature of the manager of the bank
Entries made in the passbook & its finality

U
• Two prominent thoughts
– Once the passbook entry is made and passed on the

.I.
customer – he shall verify and raise objection if any –
afterwards the entries made in the passbook shall be
treated as final

.S
– Passbook entries are for general convenience hence,
the entries can be questioned any time by the parties
.L
“position of the passbook in law is unsatisfactory from the

U
standpoint of the banker. Saving, negligence, or reckless
disregard on the part of either banker or customer, its

.I.
proper function is to constitute a conclusive
unquestionable record of the transactions between them,
and it should be recognized as such. After full

.S
opportunity of examination on the part of the customer,
all entries, at least to his debit, ought to be final and not
liable to be reopened later at any rate to the detriment
to the banker. Such is however, definitely not the effect
.L
of the passbook…“
-- Sir John Paget
 U
“a secretary of the company, by going to the bank on his own
purpose in order to prevent the discovery of his own fraud
and without knowledge on the part of any of the directors

.I.
and getting the passbook, can bind the company for all
purposes. Clearly, an officer of a company cannot bind the
company by approving the balance shown in the company’s

.S
passbook. In the case of forged cheques, the primary cause of
the loss is the negligence of the bank in honouring the forgery
and the forger may be in a position to suppress the evidence
in the passbook form his employers”
.L
-- Bray J, in Kepatigalla Rubber Estates Ltd., National Bank Ltd.,
[(1909) 2 KB 1010]
 U
• “banks do business for their benefit. Customers also get
some benefit. If the banks are to insist upon extreme care by

.I.
the customers in minutely looking into the pass book and the
statements sent by them, no bank perhaps can do profitable
business. It is common knowledge that the entries in the pass
books and the statements of account sent often by the bank

.S
are not readable, decipherable or legible. There is always an
element of trust between bank and its customer. The bank’s
business depends upon this trust. Whenever a cheque
.L
purporting to be by a customer is presented before a bank, it
carries a mandate to the bank to pay…”
 U
“…if a cheque is forged there is no such mandate. The bank
can escape liability only if it can establish knowledge to

.I.
the customer of forgery in the cheques. Inaction for
continuously long period cannot by itself afford a
satisfactory ground for the bank to escape the liability..”

.S
-- Supreme Court in Canara Bank v Canara Sales
Corporation & Others [(1987) 62 Com. Cases 280]
.L
Entries in the passbook

U
• If there is 100% correctness in the entries made – no
legal hassles

.I.
• Although banker’s take adequate care, mistakes do
creep in
• There are two situations

.S
– Entries favouring the customer; and
– Entries favouring the banker
.L
Entries favouring the customer

U
• “the passbook … belongs the customer and the entries
made in it by the bank are statements on which the

.I.
customer is entitled to act…” – In Atlantic Mines Ltd., v
Economic Bank [(1904) 2 KB 471]
• If the position of the customer has not been adversely

.S
affected, by relying upon the passbook, the banker may
rectify it (within reasonable time)
.L
 U
• What is ‘affecting adversely’? – is question of fact to be
determined depending upon the circumstances of each

.I.
case
• “In determining this question of fact, a great deal
depends upon whether the customer was led through

.S
the erroneous entry to act in a manner in which he
would otherwise not have done and whether such action
has been to his detriment”
.L
 U
• A fictitious entry made by a bank employee cannot be
relied upon by a customer

.I.
• Example – State Bank of India v Shyama Devi, AIR 1978
SC 1263

.S
.L
Entries favourable to the bank

U
• The proposition of law is extremely difficult to make in
this regard

.I.
• Therefore, the following few points in this regard are to
be taken into account (all these points arise out of
decisional law from time to time)

.S
.L
 U
• Where the customer has so acted, as to render the
entries of the settled or stated account, and is guilty of

.I.
negligence in regard to them and as a result, the
banker’s position is affected in a manner
disadvantageous to him, probably the customer will not

.S
be allowed to dispute the correctness of the entry
.L
 U
• The customer is not bound to examine the entries in his
passbook and the banker, upon receipt of the passbook

.I.
from the customer without any objection from time to
time, is not entitled to infer that the latter has accepted
the entries as correct

.S
• The above proposition was laid down in Chatterton v
London and County Bank (1891)
.L
Vigliano bros. v Bank of England, (1891)23 QBD 243

U
• “the plaintiff from time to time received from the bank his
passbook, with entries debiting the payments made, for
which the bank sent bills as vouchers, which were retained by

.I.
the plaintiff when he returned without objection, the
passbook. It was contended that this was a settlement of
account between him and the bank, and that he had been

.S
guilty of such negligence with respect to the examination of
the vouchers as would have prevented him from being
relieved from the settlement of account. But there was no
evidence to show that, as between a customer and his banker,
.L
is an implied contract as to the settlement of the account by
such a dealing between the banker and his customer, the
plaintiff had done anything which can be considered a neglect
of his duty to the bank or negligence on his part”
 U
• Essa Ismail v Indian Bank Ltd., [(1963) 1 Comp. L.J. 194]
– (Kerala) High Court held that, unless there is evidence

.I.
to show that the practice or custom indicated or
stated a settled account, the customer is not
precluded from questioning the debit entries in the
passbook

.S
.L
Balance confirmation letters

U
• These are letters confirming the balance of the account
to the customers

.I.
• With a request to return the same to the bank
• For loan account this can be used as ‘acknowledgment
of debt’

.S
• The balance confirmation letters are sent by the bank at
half yearly or yearly intervals
• ‘having confirmed the balance by returning the
.L
confirmation letter duly signed to the bank, whether the
customer can object to any debit entry preceding the
balance, is a question not free from doubt…’