Rights of a banker
Apart from the obligations, the banker has certain rights also. Following are the major rights that a banker can exercise on his customer.
· Right of Lien
· Right of set-off
· Automatic right of set off
· Right of Appropriation
· Right to charge interest
· Right to charge service charges
Right of Lien
The right of a creditor (Bank) to retain goods and securities owned by the debtor bailed (as security) to the bank until the loan due from the debtor is repaid is called the right of lien. But the banker can insist on lien only in the absence of an agreement to the contrary. The creditor (bank) has the right to maintain the security of the debtor but not to sell it. There are two types of lien such as:
· Particular Lien
· General Lien
Particular lien is one, in that the craftsman can retain those goods on which he has spent time, effort and money until he is paid. In Particular lien the creditor doesn’t have the right to retain all the properties of the debtor.
General lien gives the banker the right to retain goods and securities delegated to him in his capacity as a banker, in the absence of a contract contradictory to the right of lien. It extends to all goods/properties placed with him as a banker by his customer which are not particularly identified for another purpose.
Cases in which lien cannot exercise:
· If the goods and securities have been entrusted to the banker as a trustee or an agent
· If a contract exists between the banker and the customer that is contradictory with the banker’s right of general lien
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. The right of lien is granted upon the banker by the Indian Contract Act and it helps to avoid the need of a separate agreement. To be in a safe position the banker should take a letter of lien stating that the goods/ properties are entrusted as security for a loan at present and in future and that the banker can exercise his lien on them. The banker can also sell the goods if the customer doesn’t make the payment (defaults).
· The banker can exercise the right of lien only on goods standing in the name of the borrower and not jointly with others.
· The banker can exercise his right of lien on securities remaining in his possession after the loan for which they were lodged is repaid by the customer only if there is no contract to the contrary.
Exception to the Right of lien:
· The banker cannot exercise the right of lien lien on valuables entrusted to the banker as a bailee or trustee.
· Right of lien is not applicable on documents deposited for a special purpose or with specific instruction that the earnings are to be utilized for a specific purpose.
· The banker’s general lien is displaced by circumstances that show an implied agreement contradictory to the right of general lien.
· The banker has no right of lien on securities left with the banker negligently or unintentionally.
· The banker doesn’t have the right of lien on securities deposited as a trustee in respect of his personal loan.
The banker’s right of lien extends over goods and securities handed over to him. Money deposited in the bank and credit balance in his/her account does not fall in the category of goods and securities. Therefore the banker can use his right of setoff as opposed to lien with regard to money deposited with him.
· The right can be exercised only on the customer’s property and not on joint accounts the customer.
· The banker cannot have the right to exercise the lien when the debt has not matured.
· The banker cannot exercise the lien when he can exercise set off.
Right of set-off
The banker has the right to set off the accounts of its customer. This enables a debtor (Bank) to set off a debt owed to him by a creditor (customer) before the latter recovers a debt due to him from the debtor. Banks can merge two accounts in the name of the same customer and set off the debit balance in one account with the credit balance in the other. But the funds should belong to the customer.
The right of set-off can be exercised only if there is no agreement express or implied that is divergent to this right. It can be exercised only after a notice is served on the customer informing the customer that the banker is going to exercise the right of set-off. To be on the safe side bankers must take a letter of set-off from the customer authorizing the bank to exercise the right of set-off without giving him any notice.
Automatic right of set off
Sometimes the set off will happen automatically, it depends on the situation. In automatic set off there is no need of permission from the customer. The cases in which automatic set off can exercise are as follows:
· In case of the death of the customer.
· When the customer becomes insolvent.
· If a Garnishee order is issued on the customer’s account by court.
· When a notice of assignment of credit balance to someone else is given by the customer to the banker.
· When a bank receives the notice of second mortgage on the securities already charged to the bank.
Conditions while exercising right of Set - Off:
· The accounts must be in the same name and same right. The account should be in the sole name of the customer
· Funds held in trust accounts are not allowed to set off.
· The right cannot be exercised in respect of future or contingent debts.
· The amount of debts must be certain and measurable.
· The banker might exercise this right at his judgment.
· The banker has the right to exercise this right before a garnishee order is issued.
· There should not be any agreement to the contrary.
Right of Appropriation
In the normal course of business, a banker accepts payments from customers. If the customers have more than one account or he/she has taken more than one loan, the customer has the right to direct his banker against which debt the payment should be appropriated/settled. If the customer does not direct the banker and there is more than one debt outstanding in his/her name, the bank can exercise its right of appropriation and apply it in payment of any debt. The banker can apply it against time barred debts also. Once an appropriation has been made it cannot be reversed.
Section 59 of the Indian Contract Act states that the right of appropriation is vested in the hands of debtor. He/she can appropriate the payment by an express intimation. Money received will first be set off against interest.
Section 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.
Section 61 of the Indian Contract Act states that where neither party makes any appropriation, the payment shall be used in discharge of the debts in order of time. If the debts are of equal standing, the payment should be applied in discharge of each proportionately. Any payment made by a debtor should be applied in the first instance towards fulfillment of interest and thereafter towards principal unless there is an agreement to the contrary. 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.
Right to charge interest
The banker has an implied right to charge interest on the advances granted to its customer. Bankers generally charge interest monthly, quarterly or semiannually or annually. There may be an agreement between the banker and customer in this case the manner agreed will decide how interest is to be charged.
Right to charge service charges
• Banks charge customers a particular amount if their balance is below a predetermined amount, for the usage of ATMs and withdrawals.
• Banks are free to charge these but the Reserve Bank of India expects banks to advise their customers of these charges at the time of opening an account and advise them when changes are being made.
Obligations of Banker
· Banks have an obligation to honour the cheques drawn on it if the customer has sufficient funds in his account. It is also obliged to honor cheques up to the overdraft limit of a customer.
· Banker is bound to act as per the directions given by the customer. If directions are not given the banker should act according to how he is expected to act.
· Care should be taken to make sure that the information given is general and only facts that are evident should be revealed.
· Banks are obliged to maintain secrecy of their client accounts. There are times when information may be revealed.
When a banker can reveal the information:
· When the customer is statutorily required to do so.
· With express or implied permission of the customer.
· In common common courtesy, whenever the other banks ask for details they have to provide. In this case no specific information such as balances, etc is given.
· If the bank’s interest requires that the bank can reveal the information
· If the disclosure is under the intention of protecting public/ national interest.
Termination of Banker - Customer Relationship
The relationship between banker and customer terminates in the following situations:
• Voluntary termination.
• Death of the customer
• Bankruptcy of the customer
• Liquidation of the company
• Insanity of the customer