Special Relationship between the Banker and Customer

What is a Banker?

According to Section 3 of the Negotiable Instruments Act the term ‘banker’ includes any person acting as a banker.

According to Halsbury’s Laws of England a banker as “an individual, partnership or corporation whose sole predominating business is banking, that is the receipt of money on current account or deposit account and the payment of cheques drawn by and the collection of cheques paid in by the customer.”

A banker is one who in the ordinary course of his business, honors cheques drawn upon him by persons from and for whom he receives money on their account. No person or body corporate can be a banker who does not (1) take deposit accounts and current accounts, (2) issue and pay cheques and (3) collect cheques crossed and uncrossed for its customers. One claiming to be a banker must acknowledge himself to be one, and the public must accept him as such; his main business must be that of banking from which normally he should be able to earn his livelihood.

What is a Customer?

A customer is a person who has some kind of account, such as deposit or current with a bank and from this it follows that any person may become a customer by opening a deposit or current account or having some similar relation with a bank.”

To constitute a customer, there must be some identifiable course or habit of dealing in the nature of regular banking business. It is difficult to settle the idea of a single transaction with that of a customer.   A customer is a person; he should have some kind of an account with the bank. The initial transaction in opening an account will not create the relation of a banker and customer. According to the ‘duration theory’ the relation of a banker and customer begins as soon as the first cheque is paid in and accepted for collection.

In simple words a customer can be any person for whom the bank agrees to conduct an account.

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Legal Requirements to be qualified as Customer:

•          Customer should be a major
•          Customer be of sound mind
•          He should not be debarred under any law
•          There must be an offer and acceptance of the proposal.

Things to be noted:

•          A single transaction can constitute a customer
•          Every customer should have an account
•          There should be some frequency in transactions
•          All the dealing must be of banking nature
•          The customer can be a person, a company, a society or a legal entity.

Special Relationship between the Banker and Customer

Bellow given are the general relationship between a banker and customer

•          Debtor – Creditor
•          Creditor – Debtor
•          Principal – Agent
•          Bailor – Bailee 
•          Trustor – Trustee
•          Pledger – Pledgee
•          Mortgagor – Mortgagee

Debtor and Creditor Relationship

When customer deposits money with a bank the relationship of debtor and creditor will be established, in this case Banker is the Debtor and Customer is the Creditor. It is the basic rule of banking law that in the case of a general deposit of money in the bank, the moment the money is deposited it becomes the property of bank; here the bank and the depositor assume the legal relation of debtor and creditor.

Creditor and Debtor

When a bank grants loan and other credit facilities to the customer, the relationship between the banker and customer is reversed, that is Customer is Debtor and Banker is Creditor. In such cases banker doesn’t carry/ hold the money of the customer but it is the money of the bank in the hands of the customer.  In all such cases when a customer’s account is over drawn, the customer does not cease to be a customer.

See also: Types Of Cheques

Principal and Agent

In some situations, the banker serves as agent of the customer (principal). Some of the agency activities of a banker are specified below:

•          Collecting cheques on behalf of the customer
•          Collecting dividends and bills of exchange
•          Acting as an attorney, representative or executor of a customer
•          Buying and selling securities on behalf of his customer.

Duties of the Agent (Banker):

Some of the important duties of an agent are given below:

•          To follow the instructions given by principal
•          To show required skill and carefulness
•          Duty to provide proper accounts
•          Duty to pass on any benefits derived from agency

Duties of Principal (customer):

•          The principal should pay remuneration to the agent
•          The principal should not prevent his agent from performing the duties/ acts assigned to him under the contract and for which remuneration is payable.
•          Any lawful expenses which have been incurred by the agent in the course of performance of his duties are to be indemnified by the principal.

Bailor and Bailee Relationship:

Bailment is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is fulfilled, be returned or disposed of according to the directions of the person delivering them. The person delivering the goods is called the “bailor” and the person to whom these are delivered is called the “bailee”.

Bailment is also an important type of relations between the banker and customer. It may arise in the following situations:

•          Availing safe custody services (lockers)
•          Pledge of stocks as security for availing credit from bank

In these cases Customer is the Bailor and the Bank is the Bailee 

Pledger and Pledgee Relationship

Pledge means the bailment of goods as security for payment of a debt or performance of a promise. When credit facility is provided by a bank to its customers against collateral security of movable property, the Relationship of Pledger and Pledgee is established.

In this case customer is the Pledger and banker is the pledgee.

Mortgagor and Mortgagee Relationship

Mortgage means the transfer of an interest in specific immoveable property for the purpose of getting the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a financial liability.

When credit facility is provided by the bank to a customer against the security of immovable property, the relationship of Mortgagor and Mortgagee is established.

In this situation:

•               Mortgagor— Customer
•               Mortgagee— Bank     

Rights of A banker

Following are the rights of a banker:

1. Right of general lien:

Lien is a right to keep possession of a property belonging to someone else until that person discharges the debt they owe you. As such, lien gives the banker a right to retain assets, securities or goods, pledged as securities/collateral belonging to the clients/borrower until the borrower repays the loan/debt. The right of general lien is conferred on the bankers by Section 171 of the Indian Contract Act.

A banker should exercise his right of general lien only as a banker not as a bailee. Also, the banker can sell or realize the collateral/security only after giving a reasonable notice to the customer who has defaulted. Banks cannot realize valuables deposited with them for safe custody. This is a case of bailment. Hence, the bank cannot exercise the right of general lien in case of bailments.

A banker cannot exercise the right of general lien in the following cases:

a. If valuables are deposited for safe custody

b. If money or documents are deposited for specific purposes

c. If there is an express agreement that the bank shall not exercise this right.

2. The Right of Set-off:

Right of set-off gives the banker the power to adjust the amounts due to them from a customer, against the amount payable by the customer to the banker. This helps in determining the net balance payable by one party to another. If a customer has two or more accounts by the same name in a bank, the banker has the right to set-off the amounts in both the accounts. In other words, the banker has a right to combine two accounts.

3. Right of Appropriation:

A customer may owe several distinct debts to the bank. When the customer deposits some money in the bank without specific instructions and the amount is not sufficient to discharge all debts, then the problem arises as towards which debt this amount should be adjusted. In the absence of any specific instructions, the bank has the right to appropriate the deposited amount to any loan, even to a time barred-debt. But the banker must inform the customer about the appropriation.

4. Right to charge interest and commission:

A banker has a right to charge interest on loans and advances. A bank also has the right to charge a commission for services that it renders to clients. Such services can be SMS notification services, retail banking, multi-city cheque service, etc. Such charges can be debited to the customer’s account.

5. Right to close the account:

The banker has the right to close an account, if it is of the opinion that an account is not being operated properly. It may do so only by sending a written intimation to the customer.

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Duties of bankers:

The most important duty of a banker is to help their clients with all their financial queries and needs. The banker may do so by meeting their clients in person or speaking with them over the phone.

Following are the duties of a banker:

1. Review client’s history:

The banker must review their clients’ financial history and current financial position.

2. Advise clients:

Reviewing a client’s history helps the banker learn about the customer’s desired financial needs. The banker should assist and guide them to meet their financial goals.

3. Keep records:

The banker has to maintain complete and check records of the bank’s transactions on a daily basis. Documents such as loan applications, bank statements and so on, must be reviewed and filed by the banker.

4. Gather financial information:

A banker should gather financial information from both new and existing clients. A banker should speak with the clients and use the information gathered to prepare accounts, loans and determine their creditworthiness.

5. Disbursal of funds:

A banker must withdraw and deposit funds. This requires a lot of attention and accuracy.

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