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.
Apart from the obligations, the banker has certain rights also. Following are the major rights that a banker can exercise on his customer.
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 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.
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’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 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.
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.
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.
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.
The relationship between banker and customer terminates in the following situations:
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