Banks and customers Relation

• Contents-

• Who is a bank or a banker

• Who is a customer
• What are the various services rendered by the bank
• Relation of a bank vis-à-vis customers
Who is a bank or a banker?

• A dealer in capital or say, a dealer in money

• H.L.A.Hart- the banker is one who receives money,
collects cheques and drafts, for customers , with an
obligation to honour the cheques drawn by
customers from time to time subject to availability of
amounts in the account
• N.I Act, 1881, section 3 and section 2 of bills of
Exchange Act 1882, state that the term banker
includes person or corporation or a company acting
as banker
Who is a customer?
• A person who buys goods and services
• A customer is a person who maintains an account
with the bank, without taking into consideration the
duration and frequency of operation of his account
• A casual transaction like encashment of cheque ,
buying of stamps, etc does not entail a person to be a
customer
• No statutory definition.
• There are two theories –
• The Old Theory (The Duration Theory)
• The Modern Theory(The Expanded Theory)
• The Old Theory-
• Sir John Paget- to constitute a customer, there must
be some recognizable course or habit of dealing in
the nature of regular banking business
• There should be some sort of account with the bank,
there should be some kind of continuity of
transaction
• The Modern Theory –
• H.L.A.Hart- A customer is one who has an account
with a bank or for whom a banker habitually
undertake to act as such.
• In Central Bank of India Ltd. V. Gopinathan Nair- A person
whose money has been accepted on the footing, that the
banker will honour up to the amount standing to his credit,
irrespective of his connection being of short or long
standing.
• Savory & Co. v. Lloyads Banks Ltd, 1932 TLR 344- A single
transaction may constitute a customer
• Hence, frequency of transactions is not necessary but , his
position is such that transactions are likely to happen
• Dealing should be banking in nature, irrespective of a
habitual customer or new customer. The transaction must
be a casual service of banking business, Commissioner of
taxation v. The English Scottish and Australian Bank
• Vimal Chand Grover v. Bank of India- a client
becomes customer when a bank issues bank draft in
his favour
• Account is a sin qua non for the relation
• Services rendered by bank-
• General Services to depositors and borrowers
• Ancillary services
• Special services
• General utility services for all
Relation between Banker and customer

• Debtor and Creditor

• Trustee and Beneficiary
• Principle and Agent
• Trader and Customer
• Bailee and Bailor
• Guarantor and beneficiary
• Mortgager and Mortgagee
• Pawnor and Pawnee
• Lessor and Lessee
Debtor and Creditor

• It is the true relation between banker and customer

• The opening of the account with the bank, and the
bank’s acceptance to the same , constitutes
contractual relationship between the two
• When the customer deposits money with a bank,
bank becomes the debtor and customer is the
creditor
• Depositor being the lender and bank as the borrower
• The money handed over to the bank being the debt
• The banker being the debtor is bound to repay the
deposit as and when the customer asks for it
• Shanti Prasad Jain v. Director of Enforcement- money
deposits in the account of a customer with the bank
is that of a debtor and creditor , it was further
followed by Court in respect of fixed deposits
• Anumati v. Punjab national bank- SC held- fixed
deposit in the name of joint persons is nothing but a
joint account, is repayable on the expiry of the time
period, the bank is thus a debtor to the account
holders
Conditions for payment of deposits

• The creditor must demand the payment ( in case of

cheques, drafts etc)
• Proper place and time of demand (if any specific
branch and working hours)
• Demand must be made in a proper manner ( not
telephonic)
Bank debt and commercial debt

• As to demand of payment
• Payment on specific date
• Place of payment
• Payment during official hours
• Withdrawal by cheque
• Right to combine the accounts
• Recovery of loans
Trustee and Beneficiary
Cestui que trust- Banker as a trustee and
customer as a beneficiary
• A trustee holds money or assets and performs
certain functions for the benefit of some other
person called as beneficiary
• If a customer keeps certain valuables or securities
with the bank for safe keeping or deposits a certain
amount of money
• Customer continues to be the owner of the valuables
deposited with the banker
• Sec 3 of the Trusts Act,1882 defines trustee as one of
whom property is entrusted to be administered for
the benefit of another
• Sec 3 of the Specific Relief Act , 1963, every person
holding, expressly, by implication or constructively a
fiduciary character
• Canara Bank v. Canara Sales Corporation- SC held that
there is always an element of trust between the bank and
its customer. Bank’s business depends upon trust
• Official Assignee of Madras v. J.W.Iron- bank stood in a
position of trustee to the remitter and hence entitled to
refund the unspent balance of the amount.
• The relation between banker and customer as a trustee
and beneficiary depends upon the specific instruction
given by the latter to the former regarding the purpose
or use of money or documents entrusted to the banker
• K.N.Bhate v Bhagwandas and others Bomb HC. In
respect of joint account, on the death of one, there is
resulting trust in favour of his heirs or legal
representatives unless there are special facts and
circumstances to shoe contrary intention.
Principal and Agent

• Banker acts as an agent of his customers and

performs a number of functions for his customers
• Example- buying of securities, collects cheques,
payment of dues like insurance premium, tax related
functions, electricity, phone bills, instalments of
loans, buying and selling of shares, debentures,
collection of dividends, etc
• Agency in its widest sense includes every relation in
which one person acts for the another.
• Sec 182 of the Indian Contract Act, 1872- an agent as
a person employed to do any act for another or to
represent another in dealings with third person
• Bank acts as an agent of his customer but it cannot
provide services without the authority/consent of
the customer, VeljiLakhamsey and Co. v Dr Banji
Trader and Customer (consumer)

• Sec 2(i)(d) defines consumer as any person who-

• Buys or uses goods for consideration, and
• Hires or avails any services for consideration
• In Vimal Chand Grover v. Bank of India it was held
that banking is a business transaction of a bank and
customers of bank are consumers within the
meaning of section 2(1)(d) of the consumer
protection act,1986
• Punjab National Bank v. K.B.Shetty , Consumer forum
has jurisdiction and the bank can be held liable
• K. Co operative Bank Ltd. V A.R.Manoharan, all things
concerned with bank transactions are a matter of its
internal management
• Anumati v. Punjab National Bank
Bailee and Bailor Relation
• Sec 148 of Indian Contract Act, 1872, a bailment is the
delivery of goods by one person to another for some
purpose, upon a contract that when the purpose is
accomplished, be returned or otherwise disposed of
according to the directions of the person delivering
them.
• Person delivering- bailor
• Person to whom it is delivered- bailee
• He is bound to take care of the goods as if its his own-
sec 151 of the Indian Contract Act
• In banking banker and his customer will be controlled
by the provisions of the Indian Contract Act
• Banks may provide such safe custody-
• As bailment
• As Lockers
• In bailment , the things are delivered to the bailee,
whereas, in case of lockers it is put in a pigeon hole
hired by the customer.
• Punjab National Bank v. K.B. Shetty , bank was held
liable for the negligence in taking care of the
maintenance and operation of the lockers resulting in
customer losing some ornaments.
• Allahabad Bank v. Banbeer Singh and Madan Lal
Chawla v Central Bank of India , banks duty to keep
an eye on the lockers
• Knowledge of the contents of the locker-
• In case of death- when legal representatives with
special authority asks the bank in case of death , also
in case of insolvency or legal dispute
• In case of Search and Seizure – For example search
and seizure by Income Tax authority or vigilance
department or police officer
• By order of the Court
• Registers-
• Locker user register
• Safe Custody Register
• Withdrawal of articles Register
Guarantor and Beneficiary
• Guarantor is one who gives a promise to answer for the
payment of some debt or the performance of some duty
in case of failure of another person , who in the first
instance, is liable to such payment or performance
• The extent of liability of the guarantor is determined by
the terms and conditions of the guarantee.
• It is usually governed under sec 124-147 of the contracts
Act.
• A beneficiary under a bank credit or letter of credit has
been held as a consumer and therefore, entitled to
institute a consumer action for the failure of the
confirming bank to honour the letters, Pardes
Dehydration Co. v. SBI (1995)
Mortgager and Mortgagee

• Mortgager is one who transfers an interest in specific

immovable property by creating a mortgage
• It is usually for securing the payment of money
advanced or to advance by way of loan.
• The customer on taking advances from the bank on
the security of immovable property is said to be the
mortgager and the bank being the mortgagee,
governed under the Transfer of Property Act
Pawnor and Pawnee

• When a customer takes any loan from the bank , by

way of security of any movable property (pledge)
• Relation between them becomes that of a pawnor
(pledgor) or pawnee (pledgee)
• Lessee and Lessor
• The bank provides safe deposit lockers to the
customers who hire them on lease basis. The
relationship therefore, is that of the lessee and
lessor. In some banks it is also called as licensee and
licensor
Termination of banker and customer
Relationship
• The relation between banker and customer can be
terminated
• by parties or
• by operation of law
• Termination by customer- At any time a customer
may terminate the relation by closing the account , if
it is
• Dissatisfied with the services of the bank
• Losses its confidence in banks stability, reputation
• Does not agree with the terms and conditions of the
bank
• Where bank is unable to provide better services to the
customer
• Discontinuance of banking service.
• Termination by Banker
• 1.Operation of law
• Death of the customer
• Insanity of the Customer
• Young v. Toynbee customers insanity should automatically
terminate the authority given to the banker to act as his
customers’ agent.
• Sec 201 of the Indian Contracts Act provides that an
agency is terminated when the principal or agent dying or
becoming of unsound mind, or by knowledge of insanity
will be valid
• Insolvency of Customer, (adjudication is not required
only filing of petition will suffice the purpose)
• Orders of the court
• Winding up of the company
• 2. Undesirable Accounts
• Customer becomes fraud or cheater
• His activities are immoral or opposed to public policy
• Prejudice to the interest of the country
• Harasses the staff
• Drawing the cheques without proper balance
(reasonable time and notice should be given)
Obligations and rights of banker and customer

• Banker’s obligation-
• 1. obligation to honour cheques –
• Sec 31 of the N.I. Act banker is bound to honour his
customer’s cheques provided
• There is sufficient funds
• Funds must be properly applicable to the payment of
the cheque
• Banker is duly required to pay on proper time
• Presentation of cheque during working hours and
reasonable time
• Obligation to maintain secrecy of Accounts-
• It should not be thrown open to the public or Govt
officials
• Tournier case
Secrecy of customers can be dispensed -

• Required by law
• 1. Under the Income Tax Act 1961 (sec 131, 133 and
285)
• 2. Bankers Book of Evidence Act 1891 (Sec 4)
• 3. RBI Act, 1934 (Sec 45- B)
• 4. Banking Regulation Act (Sec 26)
• 5. Gifts Tax Act 1958 (sec 36)
• 6. CrPC (Sec 94 to the police)
• 7. Industrial Development Bank of India Act, 1964
(Sec 29)
• Disclosure Permitted by Banker’s Practices and
Usage
• 1. with express or implied consent of the customer
• 2. duty to disclose to public
• Obligation to honour guarantee
• Bank guarantee amounts to service to customers and
thus, failure to honour it amounts deficiency in
service , P. Dehydration Co. V. SBI (1995)
• Obligation as to recovery of debts
• ICICI Bank v. Prakash Kaur (not through muscle man )
• Obligation to maintain correct account of the
customer ,
• SBI v. National Open School Society
• Not to convert excess credit as overdraft
Banker’s Right
• Right to charge interests
• Right to publish defaulting borrowers
• Right to set off- mutual claims of debtor and creditor
can be set off, and only the remaining amount is
payable.
• Conditions-
• accounts must be in the same name and same
• Only in respect of debt due and not future debts
• Amount of debts must be certain
• There shouldn't be any agreement inconsistent with
set off
• No set off in case of joint accounts
• Automatic right to set off-
• On death, insanity or insolvency of customer
• Insolvency of firm
• Winding up of company
• On receipt of garnishee order
Obligation of customers

• Not to draw cheques without sufficient funds

• Drawing cheques with reasonable care
• To repay overdrafts
• To pay reasonable charges for services rendered by
bank
• To make a demand on repayment of deposits