Legal Nature of Bank and Customer Relationship

Bank is an establishment authorized by government that collects deposits, grants loan, pays
interest, provides agency services, trusteeship services, acts as the financial intermediary,
and provides various other financial services. Bank is a legal entity and an artificial person.
Bank acts as the legal person, which have existence, common seal, and registration number.
The relationship between bank and customer starts when the customer opens an account in
the bank. Every bank keeps legal relationship with its customer and vice-versa. The
violation of rule or act of deception by either of parties is punished by law. Either of the
parties can sue a case on other in case of deception, fraud, and misconduct.

Thus, the relationship between customer and bank is defined by law. The relationship
between bank and customer can be as of trustee-beneficiary, agent-principal, and debtor-
creditor as well as creditor-debtor.

Relationship as of Trustee-Beneficiary

Trustee is a person or firm or organization who holds and administers the property for the
benefit of third party or beneficiary. The major duty of trustee is to safeguard the property
of third party or beneficiary. On the other hand, beneficiary is the person who believes that
his or her property will be safe in the hand of trustee and keeps his or her property in the
custody of the trustee.

Bank acts as a trustee and customer acts as a beneficiary. Customers keep their valuable
tangible and intangible assets which includes jewelries, precious stones, share certificates,
bond certificates, property valuation papers, and so on in the locker of the bank. Bank
charges commission fee for such locker facility.

Features of Trustee-Beneficiary Relationship

 Bank holds trusteeship

 Customer acts as a beneficiary
 Customer depositors valuables and securities with the banker for safety
 Bank charges certain commission for trustee service
 The ownership of property lies with customer
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 Bank acts as the custodian.

Relationship as of Agent-Principal

Agent is a person or firm or organization that acts on behalf of the principal. The
relationship between bank and customer can be of agent and principal. Bank acts on behalf
of customer or as directed by the customer.

Some of the agency functions carried out by bank are as follows:

 Collection and Payment of credit instruments

 Purchase and Sell of securities
 Collection of dividend on shares
 Acts as correspondent
 Execution of standing orders

Features of Agent-Principal Relationship

 Bank performs agency function with certain commission

 Customer acts a principal
 Bank performs activities as per the instruction by customer
 Law of agency binds both bank and customer
 Customer is liable for any losses due to fault in instruction
 Bank is liable for any losses due to fault in execution of instruction

Relationship as of Creditor-Debtor

Creditor is a party to whom the money is owed. Creditor is a person or organization to

whom the money or any other valuable property must be paid. Debtor is a party who owes
the money. In order words, Debtor is a person or organization from whom the money or
valuables must be obtained. Thus, creditor and debtor are opposite to each other; debtor
owns money or valuables of creditor and must return it on demand or at the specified future
date.

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Customer as Creditor and Bank as Debtor

When customer deposits money in the bank, the customer becomes creditor for bank. That
is, the bank owes money of customer and must return the deposited money on demand or
at specified future date with or without interest. But, bank does not act as the custodian of
money deposited as it can invest money in any sector it thinks lucrative without having
consent or informing the depositors.

Customer as Debtor and Bank as Creditor

When bank grants loan to customer, the customer becomes debtor for bank. That is,
customer owes the money of bank and must repay the loan on demand or at specified future
date with or without interest. Customer must disclose where the loan amount is being used,
adequate collateral to recover the loan in case of default, and a commitment to utilize the
credit facility properly.

Balance Sheet of Bank

Liabilities Assets

Deposits (Creditors) [Payables] Loans (Debtors) [Receivables]

Interest paid to customers Interest paid by customer

Balance Sheet of Customer

Liabilities Assets

Loan (Creditors) [Payables] Deposit (Debtors) [Receivables]

Interest paid to bank Interest paid by bank