HIDAYATULLAH NATIONAL LAW UNIVERSITY,

RAIPUR
BANKER-CUSTOMER RELATONSHP- AS CREDITOR
& DEBTOR

SUBMITTED TOMRS. PADMA A.PARIJJA

SUBMITTED BYNITI
ROLL NO-85
SEM- VII(C)
B.A, L.L.B(Hons.)

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ACKNOWLEDGEMENTS
I feel highly elated to work on this dynamic topic on BANKER-CUSTOMER RELATONSHIP:
AS CREDITOR & DEBTOR
The practical realization of this project has obligated the guidance of many persons. I express my
deepest regard for our faculty Mrs. Padma A.Parijja. His consistent supervision, constant
inspiration and invaluable guidance and suggestions have been of immense help in carrying out
the project work with success.
I extend my heartfelt thanks to my family and friends for their moral support and encouragement.

Niti
Roll no-85

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TABLE OF CONTENTS

1. ACKNOWLEDGEMENTS....2
2. RESEARCH STRUCTURE............................................4
3. OBJECTIVE5
4. HYPOTHESIS.6
5. RESEARCH QUESTIONS.6
6. INTRODUCTION...7
7. EVOLUTION OF BANKING SYSTEM IN INDIA.9
8. WHO IS BANKER.........................................................................................................11
9. WHO ARE CUSTOMERS..13
10. RELATIONSHIP BETWEEN BANKER AND CUSTOMER.14
11. RELTIONSHIP OF BANKER AND CUSTOMER AS DEBTOR AND
CREDITOR...16
12. CONCLUSION..18
13. REFERENCE.19

RESEARCH STRUCTURE

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This research paper is descriptive and analyticala doctrinal in approach. It is largely based on
secondary sources. Books and other references are primarily helpful for the completion of this
project.

For the present project relevant data and information has been received and collected from
secondary sources and there has been use of authentic books and websites which provided
reliable information and data.

OBJECTIVE
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To understand the definition of the term banker and customer.

To study the relationship of banker and customer as debtor and creditor.

HYPOTHESIS
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It is hypothesized that banker and customer has the relationship of debtor and creditor and not
more than that.

RESEARCH QUESTIONS

Who are the bankers and customer?

What are the relationship between banker and customer?
How banker and customer has the relationship of debtor and creditor?

INTRODUCTION
The significance of banks in modern market economies cannot be underestimated. Like any other
economic sector, banks have a very crucial role to play in the functioning of the markets.
Generally, the term bank and banker are used interchangeably. The bank is used strictly to refer
to the corporate body while the term banker may mean both the institution and the individuals
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that work within the corporation. The relationship between a banker and a customer depends on
the activities, products or services provided by the bank to its customers. Thus the relationship
between a banker and its customers is a transactional relationship. A banks business depends
much on the strong bond with its customers. Trust plays an important role in building healthy
relationship between a banker and customer. Dr H.L Hart, in the book, Law of Banking defines a
bank/banker:
As a person or company carrying on the business of receiving money and collecting drafts for
customers subject to the obligation of honoring cheques drawn upon them from time to time by
customers to the extent of the amount available on their current account.
A person becomes a customer of a bank when he goes to the bank and has an account opened in
his name, the bank accepts money or cheque from him after which such a person becomes
entitled to be called a customer of the bank. A customer is also any person having an account
with a bank or for whom a bank has agreed to collect items and this also includes when a bank
has an account with another bank.
The relationship between a Banker and a Customer s contractual and begins as soon as a
customer opens an account with a banker. Banks continues to act as custodian but that is only a
subsidiary functions.
The banker-customer relationship is multi-faceted and covers many areas. Some of the dynamics
of these various relationships are discussed below:

Debtor and Creditor

Pledger and Pledgee
Licensor and Licensee
Bailor and Bailee
Trustee and Beneficiary
Agent and Principal
Advisor and Client
Fudiciary relationship
Other miscellaneous relationships.

This project mainly deals with who is banker, who is customer, and their relation as debtor and
creditor. If a customer is a depositor, the relationship with the bank is, Banker will become
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Debtor and Customer will become Creditor All deposits of the bank are shown as liability by the
bank & RBI calling Total deposits in the bank as Demand Time Liabilities.
If a customer is a Borrower, the relationship under law Banker will become Creditor and
customer will become Debtor.

EVOLUTION OF BANKING SYSTEM

IN INDIA
Banking was in existence in India during the Vedic times (2000 BC to 1400 BC). Money lending
was regarded as an old art and was practiced in the early Aryan days. Rina (debt) is often
mentioned in the Rig Veda reflecting a normal condition prevalent in the Vedic Society. The
transition from money-lending to banking must have occurred before Manu-he states that a
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sensible man should deposit his money with a person of good family, good conduct, wellacquainted with law, wealth and honorable. There are references to lending and banking in the
two epics namely Ramayana & Mahabharata. During that period banking had become a full
fledged business.
More details pertaining to money lending in the Sutra period (7th century to 2nd century) are
available from the Jatakas (Buddhist writings). Jatakas establish the existence of seths (money
lenders) and contain several stories of Kings receiving financial help from the guilds. From these
accounts it is evident that money lending, banking and trading were interlinked. In the Buddhist
period even the Brahmins & Kshatriyas started taking banking as a business. Bills of exchange
came into use in this period. The banking business was being carried out even in the Smriti
period and the Smritis explained the methods of regulation of interest.
The tradition from money-lending to banking appears to have taken place in the 2nd or 3rd
century AD. During This period, people were enjoined upon to make deposits with respectable
bankers. This period is characterized as one in which the activities of the bankers/money lenders
were well controlled and regulated. Rules for safeguarding the interest of borrowers were
introduced.
Kautilya in his Arthashastra which was written in the Maurya period in the 4th century
mentioned the maximum rate of interest which could be charged by the lenders. The bankers
during this period was known as Shakuras and Mahajans.1
During the Moghul period indigenous banking was in its prime. There was hardly any village
without its money-lender or Sharoff who financed trade and commerce. The system of currency
and coinage rendered money lending a highly profitable business.
The British came to India in the 17th century. The East India Company established its Agency
houses in Bombay, Calcutta & Madras. These agency houses were the combination of trade &
banking in India.
Bengal bank was established in 1784 and General Bank of India was established in 1786. It was
the 1st joint stock company with limited liability. Presidency banks were established in Calcutta,
1 http://hanumant.com/Banking%20law%20-%20Meenakshi%20Natesan.html#_Toc269552258
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Bombay & Madras. It amalgamated into the Imperial bank in 1921. 2 In 1865 Allahabad Bank
was set up under European management. In 1875 Alliance Bank of Shimla was started Oudh
Commercial bank was the 1st purely Indian management joint bank. Swadeshi movement stated
in 1905 and the period from 1906 to 1913 was a period of boom for Indian Banking. The Bank of
Burma was established in 1904. Bank of India, Bank of Rangoon & Indian Specie Bank was
established in 1906. Some of the important banks which were established later were Bank of
India, Central Bank of India, Bank of Baroda, etc.

WHO IS BANKER?
In general, bank or banker means a financial institution that accepts deposits and lends money to
the needy people. It deals in money.
Halsburys Laws of England states, A banker is an individual, partnership or corporation,
whose sole or predominating business is banking, that is, the receipt of money on current or
deposit account, and the payment of cheques drawn by and the collection of cheques paid in by a
cheques.
According to Sir John Paget, No person or body corporate or otherwise can be a banker who
does not take deposit accounts, take current accounts, issue and pay cheques and collect cheques
crossed and uncrossed for his customers.
2 http://hanumant.com/Banking%20law%20-%20Meenakshi%20Natesan.html#_Toc269552258
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According to Walter Leaf, A banker is an institution or individual who is always ready to

receive money on deposits to be returned against the cheques of their depositors.
In Indian context, the term banker has been defined by the Banking Regulation Act, 1949 as
Any company which transacts the business of banking in India.
According to section 3 of the Negotiable Instrument Act, 1881, banker includes any person
acting as a banker and any post office savings bank.
Section 6 of the Act3 states the various functions which a banking company can undertake. Some
of these functions are

The borrowing, raising or taking up of money in the form of deposits in time, current or

savings accounts.
The drawing, making, ,accepting, discounting, buying, selling, collecting and dealing in

bills of exchange, promissory notes, bill of lading etc.

Issuing letters of credit, travellers cheques etc.

It is clear that the scope of activities of a banking company is very wide. Now, it is important to
discuss the essential conditions that must be fulfilled by a banker or banking company. They are

No individual is permitted to act as bank. Only a firm or a company is permitted to act as

bank.
The banker must accept deposits from the public for the purpose of lending or
investment. Joint stock companies accepting public deposits for financing their business
activities is not banking. Nidhis or societies which accept deposits from its members are

not bankers.
The deposits may be fixed, current or savings and the current accounts must be operated

through cheques.
The deposits are with drawable by cheque, draft, order or otherwise. The banker must

refund the money when demanded by the customer.

The word Bank or Banking Company must be added with the name of the bank to
identify itself as the banking company.

3 Banking Regulation Act, 1949

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WHO IS CUSTOMER?
The term Customer has not been defined by any act. The word customer has been derived from
the word custom, which means a habit or tendency to-do certain things in a regular or a
particular manners.4 In terms of Sec.131 of Negotiable Instrument Act, when a banker receives
payment of a crossed cheque in good faith and without negligence for a customer, the bank does
not incur any liability to the true owner of the cheque by reason only of having received such
payment. It obviously means that to become a customer account relationship is must. Account
relationship is a contractual relationship. It is generally believed that any individual or an
organization, which conducts banking transactions with a bank, is the customer of bank.
According to Dr. Herbert L. Hart, A customer is one who has an account with a banker or for
whom a banker habitually undertakes to act as such.

4 http://vidyagyan.blogspot.in/2009/09/relationship-between-banker-and.html
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A person becomes a customer of a bank when he goes to the bank and has an account opened in
his name, the bank accepts money or cheque from him after which such a person becomes
entitled to be called a customer of the bank.5 A customer is also any person having an account
with a bank or for whom a bank has agreed to collect items and this also includes when a bank
has an account with another bank. This definition was held in the Nigerian Court of Appeal case
of Oku V. Banigo.6

RELATIONSHIP BETWEEN BANKER

& CUSTOMER
The relationship between the banker and customer arises out of the contract between them and
cannot be created except by mutual consent. The legal relationship arises between two parties
when they conclude contract through proposal and acceptance. The opening of an account with a
banker and the bankers acceptance for such opening of account gives rise to a contractual
relationship. The relationship between the banker and customer is, generally, like commercial
transaction. The relationship between a banker and customer is the foundation on which mutual
duties, liabilities and privileges are being built.

5 http://thelawyerschronicle.com/basics-of-banker-customer-relations/
6 (2003) FWLR (Pt. 175)
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Banking is a trust-based relationship. There are numerous kinds of relationship between the bank
and the customer. The relationship between a banker and a customer depends on the type of
transaction.7 Thus the relationship is based on contract, and on certain terms and conditions.
Some banks even say that they have generation-to-generation banking relationship with their
customers. The banker customer relationship is fiducial relationship. The terms and conditions
governing the relationship is not be leaked by the banker to a third party.
The relationship between a banker and a customer arises from a contract. Fundamentally
speaking, it is the relationship of debtor and creditor, the respective positions being determined
by the state of the account. However, in relation to other services rendered by banker, he is
sometimes an agent of the customer, for example, collection of cheques, sale of securities, etc.,
bailee in relation to the safe custody of valuables; and trustee when he is entrusted with property
to be administered for the benefit of a named beneficiary.

CLASSIFICATION OF RELATIONSHIP
The relationship between a bank and its customers can be broadly categorized in to General
Relationship and Special Relationship.
According to Sec 5(b) of Banking Regulation Act, banks business is to hovers around accepting
of deposits for the purposes of lending. Thus, the relationship arising out of these two main
activities are known as General Relationship. In addition to these two activities banks also
undertake other activities mentioned in Sec.6 of Banking Regulation Act. Relationship arising
out of the activities mentioned in Sec.6 of the act is termed as special relationship.
General relationship of banker and customer is of debtor and creditor and vice-versa. Special
relationship of banker and customer is of trustee, as bailor-bailee, principal and agent, lessee and
lessor, pawnee and pawnor, etc.
This project deals only with the general relationship of banker and customer i.e. as Debtor &
Creditor and Creditor & Debtor.
7 http://vidyagyan.blogspot.in/2009/09/relationship-between-banker-and.html
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RELATIONSHIP OF BANKERCUSTOMER: AS DEBTOR AND

CREDITOR
When a customer opens an account with a bank and if the account has a credit balance, then the
relationship is that of debtor (banker / bank) and creditor (customer). In case of savings / fixed
deposit / current account (with credit balance), the banker is the debtor, and the customer is the
creditor. This is because the banker owes money to the customer. The customer has the right to

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demand back his money whenever he wants it from the banker, and the banker must repay the
balance to the customer.8
A bank performs a number of functions for the customer. After the account in the bank is opened
and the relationship of a banker and customer is established, the bank not only undertakes to
collect the cheques which are deposited in the account but also makes the payment on behalf of
the customer, whenever there is a mandate from the customer. The cheques which are realized by
the bank are deposited in this account of the customer and on many occasions, the bank performs
certain other functions on behalf of the customer such as keeping the valuables, etc., deposited
by the customer with the bank as a trustee. 9 On many occasions, when the customer gives bills
for collection to his bank and the said bank passes the bills for collection to another bank and the
amount of the bills is reduced as a result of debiting the customer's account with collection
charges as a result of an agreement between two banks, the bank is always acting on behalf of the
customer. There are thus too many occasions relating to so many matters which arise during the
mutual dealings between the banker and the customer and at each time, a question arises as to
what is the relationship between a banker and a customer. It has now been well settled that the
first and foremost relationship between the customer and the bank is the relationship of a
Creditor and debtor.
When a customer opens an account with a bank and if the account has a credit balance, then the
relationship is that of debtor (banker/bank) and creditor (customer). This is because when a
customer pays in money into his/her account, the banker automatically owes that money to the
customer and must be payable upon demand either through a cheque or withdrawal slip. The
customer has the right to demand back his money whenever he wants it from the banker and the
banker must repay the balance to the customer.10 This relationship was authoritatively established
in the celebrated case of Foley V. Hill.11.
8 http://kalyan-city.blogspot.in/2012/04/banker-customer-relationship-explained.html
9 http://articlestorm.blogspot.in/2012/08/debtor-and-creditor-relationship.html
10 http://thelawyerschronicle.com/basics-of-banker-customer-relations/
11 (1948) 2 H.L. Cas 28; 9 ER 1002
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In case of loan / advance accounts, banker is the creditor, and the customer is the debtor because
the customer owes money to the banker. The banker can demand the repayment of loan / advance
on the due date, and the customer has to repay the debt. A customer remains a creditor until there
is credit balance in his account with the banker. A customer (creditor) does not get any charge
over the assets of the banker (debtor).12 The customer's status is that of an unsecured creditor of
the banker.
The debtor-creditor relationship of banker and customer differs from other commercial debts in
the following ways13:
1. The creditor (the customer) must demand payment. On his own, the debtor (banker) will
not repay the debt. However, in case of fixed deposits, the bank must inform a customer
about maturity.
2. The creditor must demand the payment at the right time and place. The depositor or
creditor must demand the payment at the branch of the bank, where he has opened the
account. However, today, some banks allow payment at all their branches and ATM
centers. The depositor must demand the payment at the right time (during the working
hours) and on the date of maturity in the case of fixed deposits. Today, banks also allow
pre-mature withdrawals.
3. The creditor must make the demand for payment in a proper manner. The demand must
be in form of cheques; withdrawal slips, or pay order. Now-a-days, banks allow ebanking, ATM, mobile-banking, etc.

CONCLUSION

12 http://kalyan-city.blogspot.in/2012/04/banker-customer-relationship-explained.html
13 http://kalyan-city.blogspot.in/2012/04/banker-customer-relationship-explained.html
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Banker is defined as a person or company carrying on the business of receiving money and
collecting drafts for customers subject to the obligation of honoring cheques drawn upon them
from time to time by customers to the extent of the amount available on their current account.
A person becomes a customer of a bank when he goes to the bank and has an account opened in
his name, the bank accepts money or cheque from him after which such a person becomes
entitled to be called a customer of the bank. A customer is also any person having an account
with a bank or for whom a bank has agreed to collect items and this also includes when a bank
has an account with another bank.
Banker-Customer comes into play as soon as there is customer opens an account in the bankers
company and the banker accepts the deposits. The banker-customer relationship is multi-faceted
and covers many area. Banker-Customer relationship includes: pledger & pledgee, creditor &
debtor, guarantee & guarantor, bailor & bailee, trustee & beneficiary etc. All this relationship
comes into play according to the situation and nature of the deposits.
The general relationship of banker and customer is of debtor & creditor. When a customer opens
an account with a bank and if the account has a credit balance, then the relationship is that of
debtor (banker / bank) and creditor (customer). In case of savings / fixed deposit / current
account (with credit balance), the banker is the debtor, and the customer is the creditor. In case of
loan / advance accounts, banker is the creditor, and the customer is the debtor because the
customer owes money to the banker. The banker can demand the repayment of loan / advance on
the due date, and the customer has to repay the debt. A customer remains a creditor until there is
credit balance in his account with the banker. A customer (creditor) does not get any charge over
the assets of the banker (debtor).

REFERENCE

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http://hanumant.com/Banking%20law%20-%20Meenakshi

%20Natesan.html#_Toc269552258
http://vidyagyan.blogspot.in/2009/09/relationship-between-banker-and.html

http://thelawyerschronicle.com/basics-of-banker-customer-relations/
http://thelawyerschronicle.com/basics-of-banker-customer-relations/
http://kalyan-city.blogspot.in/2012/04/banker-customer-relationship-explained.html
http://articlestorm.blogspot.in/2012/08/debtor-and-creditor-relationship.html

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