Chapter 1 Introduction 1.

1 Introduction:
The relationship between the banker and the customer depends on the nature of services provided by the banker. For example, when an account is opened in a bank, the relationship created is that of debtor (banker) and creditor (customer). When some valuables are deposited in the safe custody of the banker, the relationship created is that of trustee (banker) and beneficiary (customer). The relationship between a banker and a customer depends on the activities; products or services provided by bank to its customers or availed by the customer. Thus the relationship between a banker and customer is the transactional relationship. Banks business depends much on the strong bondage with the customer. Trust plays an important role in building healthy relationship between a banker and customer. Relation of banker and customer depends upon the service given by the banker. In addition to his primary functions, a banker renders a number of services to his customer. The relationship between them primarily is that of creditor and debtor. A banker also acts as an agent or trustee of his customer if the latter entrusts the former with agency or trust work. In such cases, the banker acts as a debtor, an agent and a trustee simultaneously but in relation to the specified business.

1.2 Research Methodology:

In making this project report the doctrinal method of research has been used.

1.3 Focus area:

This project report focuses on Banker and Customer Relationship.

1.4 Scope of the study:

In this project report meaning of customer and banker, relations of bankers and customers, rights and duties of banks has been explained.

Chapter 2 Conceptual Analysis

2.1 Definition of Banker and Customer:

According to section 3 of the Negotiable Instrument Act, 1881, Banker includes any person acting as a banker and any post office savings bank. According to section 5(b) of the Banking Regulation Act, 1949, Banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, and order or otherwise. To sum up a Banker is who 1) 2) 3) 4) Take deposit account Take current accounts Issue and pay cheques Collect cheques crossed and uncrossed for his customers.

Money lender is not considered as a banker as mere lending does not constitute banking business. Banker is an institution which borrows money by accepting deposits from the public for the purpose of lending to those who are in need of money. The term customer is not defined by law. Ordinarily, a person who has an account in a bank is called a customer. According to Dr. H.L. Hart, A customer is one who has an account with a banker or for whom a banker habitually undertakes to act as such. The High Court of Kerala accepting the Harts view in Central Bank of India Ltd. v. V. Gopinathan Nair1, observed: The term customer is not defined in the Negotiable Instrument Act, 1881. Broadly speaking a customer is a person who has the habit of resorting
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A.I.R. 1970 Ker. 74.

to the same place or person, to do the business. So far as the banking transactions are concerned he is a person whose money has been accepted on the footing that the banker will honour upto the amount standing to his credit, irrespective of his connection being of short or long standing. Thus to be a customer it is not necessary that there must be regularity in operating the account. Single deposit will suffice for becoming a customer. Although the operation of account in future has not pressed, however there should be expectation of habit in present or future and dealing to be of banking nature. Thus to constitute a customer, the following essential requisites must be fulfilled: 1) 2) 3) He must have some sort of an account. Even a single transaction constitutes a customer. The dealing must be of a banking nature.

2.2 Relationship between Banker and Customer:

Relation between banker and customer is consensual depending on express or implied contract between the two. Thereby a contractual relation springs between banker and customer. In case of banking where a person asks the banker to open an account for him and the bankers acceptance thereof, constitutes implied contract of relationship. The main banking function was and is to keep in custody other peoples money and lending a part of it. Gradually, these functions wee extended, and new others were added. As a result the dependence of commerce upon banking has become so great that in modern money economy, the cessation, even for a day or two, of the bankers activities, would completely paralyse, the economic life of a nation. It will be proper to say that banking system has assumed the blood vessel of the economy of the country. Now-a-days the bankers have to deal with a large number of matters. Relation of banker and customer depends upon the service given by the banker. In addition to his primary functions, a banker renders a number of services to his customer. The relationship between them primarily is that of creditor and debtor. A banker also acts as an agent or trustee of his customer if the latter entrusts the former with agency or trust work. In such
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cases, the banker acts as a debtor, an agent and a trustee simultaneously but in relation to the specified business. Having in view of functions of banks and services rendered by banks the relationship of banker and customer may be classified under following heads:

1. Debtor and Creditor

The general relationship between banker and a customer is that of a debtor and a creditor i.e. borrower and lender. In Foley v. Hill2, Sir John Paget remarks, The relation of a banker and a customer is primarily that of debtor and creditor, the respective positions being determined by the existing state of account. Instead of the money being set apart in a safe room, it is replaced by the debt due from the banker. The money deposited with him becomes his property, and is absolutely, at his disposal, and, save as regards the following of the trust funds into his hands, the receipt of money by a banker from or on account of his customer constitutes him merely the debtor of the customer with super added obligation to honour his customers cheques drawn upon his balance, in so far the same is sufficient and available. In Shanthi Prasad Jain v. Director of Enforcement, Foreign Exchange Regulation3, the Supreme Court held that the banker and customer relationship in respect of the money deposited in the account of a customer with the bank is that of a debtor and a creditor. On the opening of an account a banker assumes the position of a debtor. The money deposited by the customer with the bank is in legal terms lent by the customer to the banker who males use of the same according to his discretion. The creditor has the right to demand back his money from the banker, and the banker is under an obligation to repay the debt as and when he is required to do so. A depositor remains a creditor of his banker so long as his account carries a credit balance. But he does not get any charge over the assets of his debtor/banker and remains an unsecured creditor of the banker. Since the introduction of deposit insurance in India in 1962 the element of risk of the depositor is minimized as Deposit Insurance and Credit Guarantee Corporation undertakes to insure the deposits upto a specified amount.

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(1848) 2 HLC, 28. A.I.R. 1964 S.C. 1023.

Bankers relation with the customer is reversed as soon as the customers account is overdrawn. Banker becomes creditor of the customer who has taken a loan from the banker and continues in that capacity till the loan is repaid. As the loans and advances granted by a banker are usually secured by the tangible assets of the borrower, the baker becomes a secured creditor of his customer.

2. Trustee and Beneficiary

Ordinarily, a banker is a debtor of his customer in respect of the deposits made by the latter, but in certain circumstances he acts as a trustee also. A trustee holds money or assets and performs certain functions for the benefit of some other person called the beneficiary. Section 3 of the Trusts Act defines a trustee as one to whom property is entrusted to be administered for the benefit of another called the beneficiary. A banker becomes a trustee under special circumstances. When a customer deposits securities or other valuables with the banker for safe custody, the banker acts as trustee of customer. Fiduciary relations are of several kinds. Indeed every relationship of trust and confidence is a fiduciary relation. Virtually in all cases person holds property of another in any capacity, becomes trustee and he must hold them in the best interest of the owner i.e., beneficiary is one who is beneficially entitled to, or interested in property, that is, entitled to it for his own benefit and not merely as trustee or executor holding it for others. Where money is paid to a banker with specific direction constituted the bank his agent and agency brings about a fiduciary relationship which lasts until the agency is terminated. Therefore, if the customers were to give direction to the bank that ascertain amount must be paid to a certain person. Than till that amount is paid pursuant to directions of the customer, the agency would continue and the bank would hold the amount t not as a debtor of the customer but in the capacity of the trustee. In Official Assignee of Madras v. Rajaram Aiyyar4, it was held that, when the bank holds money for the specific purpose of sending it to somebody the money is impressed with trust. The position of a banker as a trustee or as a debtor is determined according to the circumstances of each case. If he does something in the ordinary course of his business,
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(1910) ILR 6 Mad. 49 (F.B.).

without any specific direction from the customer, he acts as a debtor (or creditor). In case of money or bills, etc., deposited with the bank for specific purpose, the bankers position will be determined by ascertaining whether the amount was actually debited or credited to the customers account or not.

3. Principal and Agency

A banker acts as an agent of his customer and performs a number of agency functions for the convenience of his customers. Sec.182 of The Indian Contract Act, 1872 defines an agent as a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done or who is so represented is called the Principal. The range of such agency functions has become much wider and the banks are now rendering a large number of agency services of diverse nature. For example, some banks have established tax service department to take up the tax problems of their customers. During the course of business a banker performs many services to the customer incidental to banking business in performance of which the banker acts as an agent of the customer. Agency in its widest sense includes every relation in which one person acts for another. Thus agency is created and principle of agency will become applicable, such services rendered by the bank for the customers may include: 1. Buying or selling of shares, stock, debentures and other securities; 2. Collection of dividend warrant, bonus, dividends or shares etc; 3. Collection of cheques, bills of exchange and promissory notes; 4. Acting as a trustee, attorney, executor, correspondent; 5. Payment of insurance premium, telephone or electricity bills; 6. Payment of income tax, gift tax, wealth tax and service tax; 7. Acting as a valuer, Auctioneer, Administrator etc.

In Bank of India v. The official Liquidator,5 it was held that when a customer sends cheques for collection to the banker. His (banker) role becomes as an agent of the customer.

4. Trader and Customer

The Consumer Protection Act, 1986 is one of the social legislation intended to protect the consumers from exploitation. Banking Institution used to give banking services to its customers for consideration. Section 2(i) (d) defines consumer and it includes any person who: 1. Buys or uses goods for consideration, and 2. Hires or avails any service for consideration. Banking is the business of banks and it includes services rendered by the bank. Banking means the accepting, for the purpose of lending or investment of deposit of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft or otherwise. When banks advance loan or accept deposit or provide facility of locker, they undoubtedly render service. A State Bank or nationalized bank renders as much service as private banks. The legislative intent is thus clear to protect consumers against services rendered even by statutory bodies. Banks provide services/facilities to its customers and non-customers. A bank renders various facilities or services such as provisions of remittances, accepting deposits, provisions of lockers, facility of cheques, collection of cheques, issue of bank drafts or facility of loan etc., to costumers or non-consumer.

5. Bailee and Bailor Relation

Sec.148 of Indian Contract Act, 1872, defines "Bailment" "bailor" and "bailee". A "bailment" is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the "bailor". The person to whom they are delivered is called, the "bailee". Banks secure their advances by obtaining tangible securities. In some cases physical possession of securities goods (Pledge), valuables, bonds etc., are taken. While taking physical possession of securities the bank becomes bailee and the customer bailor. Banks also keeps articles,
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A.I.R. 1915 Bom. 375.

valuables, securities etc., of its customers in Safe Custody and acts as a Bailee. As a bailee the bank is required to take care of the goods bailed. Whatever a customer deposits in his account is not a bailment because the banker is not bound to return the same coins or notes of rupees. It creates the relation of debtor and creditor.

6. Guarantor and Beneficiary

Now-a-days bank guarantee has become very common. 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 performance of some duty in the case of failure of another person, who, in the first instance, is liable to such payment or performance. A bank issues letter of credit for its customers. It is a kind of credit facility to its customer; hence customers position remains as a beneficiary. The extent of the liability of the guarantor is determined by the terms of the agreement or contract of guarantee. Such relation is governed under sections 124 and 147 of the Contract Act, 1872. In Hindustan Steel Works Construction Ltd. v. Tarapore and Co.,6 it was held that bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transactions and the beneficiary and is not qualified by the underlying transactions and the primary contract between the person at whose instance the bank guarantee is given and the beneficiary.

7. Mortgagor and Mortgagee

Mortgagor is one who transfers an interest in specific immovable property by creating a mortgage. Generally it is made for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt or performance of an agreement which may give rise to pecuniary liability. A customer of the bank often takes advances from the bank on the security of immovable property. The customer is mortgagor and the bank is mortgagee and their relation is governed under the provisions of the Transfer of Property Act.

A.I.R. 1996 S.C. 2268.

8. Pawnor and Pawnee

A customer of the bank takes loan from the bank by way of security of movable property is called Pawnor (pledgee) and the relation between customer and banker stands Pawnor (pledgor) or Pawnee (pledgee). A pawn is a sort of bailment in which goods or chattels are delivered to another as a pawn, to be a security of money borrowed.

9. Lessor and Lessee

Sometimes relation of a banker and customer also arises as lessor and lessee. Where there is a transfer of interest relating to immovable property between the banker and its customer, the relationship between a banker and its customers, the relationship between a banker and a customer is that of lessor and lessee. When a customer hires a locker, the relationship between the parties is that of a lessor and a lessee.

2.3Termination of Banker and Customer Relationship:

The above relationship between a banker and customer exists so long as they are such. Termination of banker and customer relationship extinguishes such relation. The relationship between a banker and customer may be terminated by the parties voluntarily and by operation of law. (A) Termination by the Customer A customer at his own sweet will at any time may terminate his relationship with the bank closing his account in the following circumstances: (i) (ii) (iii) (iv) (v) Where customer is dissatisfied with the services of the banker. Where banker is unable to provide better facilities to the customer. Where customer loosed his confidence in the banks reputation/economic stability. Where he does not agree with the terms of the banker. Where there is rumour of winding up of the banking company.

These grounds are not exhaustive, there may be some more like conditions for discontinuance of banking service.

(B) Termination by the Banker I. Under the operation of law Under the following circumstances the banker is legally bound to close the accounts of the customer and thereby terminating such relationship. It is to be held noted here that banker and customer relation is contractual which comes to an end on:(1) Death of the Customer- When the fact of customers death comes to know to the knowledge of banker; he should stop the transactions of the account. In such case, the bank should close the account and handover the balance to the nominee or legal heirs of the deceased customer on the production of his death certificate and succession certificate from the prescribed authority. Bank will also obtain an indemnity bond from the recipient. (2) Insanity of Customer- Where a person after opening of account becomes a person of unsound mind i.e., lunatic or insane, the banker should stop the transactions of the account of such customer. Banker will proceed according to the order of the court. If the lunatic customer resumes normal condition the banker may resume his account, if he is satisfied with the conduct of the customer and the certificate issued by the medical authorities. (3) Insolvency of Customer- Knowledge of the fact of insolvency of the customer terminates his relation with the bank. Not only this, but also immediately after knowing the fact that an insolvency petition has been filed against the customer the banker should ipso facto stop the transactions of his account and thereafter, he should act according to the order of the court. It should be notes that adjudication of insolvency is not required, only filing of petition will suffice the purpose. (4) Assignment- If a customer assigns his account with its funds o any other person and gives an assignment order to the banker, the banker should handover the funds of the account to the assignee and should close the customers account. (5) Orders of the Court- In certain circumstances under the provisions of Civil Procedure Code, or Specific Relief Act, Courts issue Granishee Orders, attachment orders or seizure orders. In such cases the bank has to follow the order of the court. (6) Winding up of Company- If a company is wound up, its existence comes to an end. Thus the account of the company has to be closed by the bank.

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(7) Dissolution of Partnership Firms- Dissolution of the partnership firm determines the existence of the firm, so, bank should stop the transactions and then close the account of the firm. (8) Customer of Enemy Character- During war period relation with persons of enemy country becomes illegal; the bank is justified in closing of account of individual, firms and companies belonging to enemy country. II. Undesirable Accounts Where a customer does not follow healthy and fair norms of banking i.e., failure to follow sound principles of banking, failure to honour an overdraft agreement, issuing of cheques without sufficient funds, using of account for illegal and fraudulent transactions, flouting the norms of SEBI etc. may lead to undesirable activities, hence branding as undesirable account. In such case banker may ask customer to close his account failing which he may close the account and stop transactions. The circumstances that lead for the closure of the customer account may be as under: (i) (ii) (iii) (iv) If the customer becomes fraudulent and cheater; If the activities of the customer are immoral or opposed to public policy; If the transactions of the customer are prejudicial to the interest of the country; If the customer harasses the staff of the banker and behaves with indecent manner with the staff. (v) (vi) If the customer carries on hostile activities against the bank; Drawing the cheques without maintaining proper balance.

2.4 General Obligations of Banker towards Customer:

1. Obligation to honour cheques- Banker accepts the deposits from the customer with an obligation to repay it to him on demand or otherwise. The banker is therefore under a statutory obligation to honour his customers cheques because, it is recognized under section 31 of the NI Act, 1881- The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default. Thus the banker is bound to honour his customers cheques provided the following conditions are fulfilled11

(a) Sufficient balance in customers account (b) Presentation of cheques within working hours of business (c) Presentation of cheques within reasonable time after ostensible date of its issue (d) Cheques should be presented at the branch where account is kept (e) Fulfillment of requirements of law 2. Obligation to maintain secrecy and disclosure of information required by law- The banker is under an obligation to take utmost care in keeping secrecy about the accounts of the customers since it may affect his reputation, credit-worthiness and business. It was firmly laid down in Tournier v. National Provincial and Union Bank of England Ltd.7 in India it was made compulsory after 1970. The duty to maintain secrecy will be continuing even after the account is closed or the death of the customer. This obligation is subject to certain exceptions. 3. Obligation to keep a proper record of transactions- The banker must keep a proper record of transactions of the customer. If he wrongly credits the account of the customer and intimates him with the same and the customer acts upon the intimation bonafide and withdraws cash the banker cannot contend that the entries were wrongly made. He shall not succeed in recovery of money from the customer. 4. Obligation to abide by the instructions of the customer- The banker must abide by any express instructions of the customer provided it is within the scope of their banker-customer relationship. In the absence of any express instructions, the banker must according to prevailing usages at the place where the banker conducts his business.

(1924) 1 K.B. 461.

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2.5 Rights of a Banker:

1. Bankers right of general lien- One of the important rights enjoyed by a banker is the right of general lien. Lien means the right of the creditor to retain goods and securities owned by the debtor until the debt due from him is paid. It may either be general or particular. 2. Bankers right of set-off- The right to set off is a statutory right which enables debtor to take into account a debt owing to him by a creditor, before the latter could recover the debt due to him from the debtor. Thus when a customer keeps two or more accounts at the same bank, some of which are overdrawn and some in credit, the bank has a right to combine such accounts and pay the resultant balance. 3.Bankers right for appropriation of payment- When a debtor owes two or more debts to a creditor and he pays some amount which is not sufficient to meet any debt to the creditor appropriation is done. It applies to a banker if the customer has more than one deposit or more than one loan account. In Devaynes v. Noble8, famously known as Claytons case, a principle was laid down as to when the customer has current account and deposits and withdraws money frequently the first item on debit side will be discharged by the first item on credit side. The credit entries in the account adjust or set off the debit entries in chronological order. 4. Bankers right to claim incidental charges- The banker may claim incidental charges on unremunerative accounts such as service charges, processing charges, ledger folio charges, appraisal charges, penal charges and so on.

(1816) 1 Mer. 529.

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Chapter 3 Conclusion

The relationship arises between a banker and a customer with the opening of an account by the customer with a banker. The application for opening an account is considered as a letter of agreement for establishing the banker-customer relationship. The general view is that the banker-customer relationship is mainly that of a debtor and a creditor with certain special features. However, today the range of banking services is more extensive, and indeed is expanding all the time, so it must be expected that other relationships will arise besides that of debtor and creditor. For instance, the relationship of principal and agent is present when the customer instructs his bank to buy or sell stocks on his behalf, and when items are held in safe-custody the relationship is that of bailer and bailee. Where the banks executorships service takes on the administration of a deceaseds estate the relationship is that of trustee and beneficiary. Duties akin to a trusteeship might also happen when a branch comes into possession of funds or property that belongs to a third party, as when the bank has sold property in mortgage, and has a surplus to pass to the subsequent mortgagee. Obviously the relationship with the customer in that situation is that of a mortgagor with a mortgagee. However, if the security had been given by a third party then another state of affairs would exist between the lender and his surety. There, duties and obligations would arise irrespective of the banker-customer relationship with the borrowing customer. The nature of the relationship depends upon the type of services rendered by the banker, which has two aspects: one is legal and another is behavioral.

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