UNIT- 7

LEGAL NATURE OF BANK AND CUSTOMER RELATIONSHIP

The general relationship between bank and its customer

The general legal relationship of bank and customer is contractual relationship, started
from the date of opening an account. When customer deposits money into his bank
account, the bank becomes a debtor of the customer. No new contract is created every
time there is a new deposit as the account is continuing in nature. The banker is not, in
the general case, the custodian of money. The money paid into a bank account becomes
the property of the bank and bank has a right to use the money as it likes. The bank is
not bound to inform the depositor the manner of utilization of funds deposited by him.
Bank does not give any security to the debtor (depositor). The bank has borrowed
money but does not pay money on its own, as banker is to repay the money upon
payment being demanded. Thus, bank’s position is quite different from normal
debtors. On the other hand, when the bank lends money to his customer, the relationship
between the bank and customer is reversed. Then the bank takes the position as a
creditor of the customer and the customer becomes a debtor of the bank. Borrower
executes documents and offer security to the bank before utilizing the credit facility.
Therefore, the general relationship between bank and its customer is that of a debtor
and a creditor.
On the other hand, the relationship between the customer and the banker can be that of
principal and agent. Agent can be defined 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". In acting on
instructions to make periodical payment or transfer money from customer's account to
others, to collect cheques or bills, the bank acted as agent of its customer. Prima facie
every agent for reward is bound to exercise reasonable skill and care in carrying out the
instructions of his principal. The standard of care expected is one of an ordinary and
prudent banker and not that of a detective.
The legal relationship between the banker and his customer has varied over the
centuries. Unquestionably, the core banking activities of deposit-taking and lending are
not fiduciary in character. Thus, the legal relationship between a bank and its customers
can be distinguished from that between other service providers and their customers is
that of fiduciary relationship. Nevertheless, due to the complexities of business and
banking, the relationship between bankers and customers goes beyond the primary
relationship of creditor and debtor. Some other activities that modern multifunctional
banks frequently engage in are more obviously fiduciary in character, e.g. where the
bank manages its customer's investment portfolio or provides its customer with
corporate finance services. Therefore, it is possible that a banker act as an agent or
trustee of the customer like any other service providers.
 The banker-customer relationship is that of a:
 Trustee and Beneficiary,
 Agent and Principal,
 Debtor and Creditor,
 Pledger and Pledgee,
 Licensor and Licensee,
 Bailor and Bailee,
 Hypothecator and Hypothecate,
 Advisor and Client, and
 Other miscellaneous relationships.
Discussed below are important banker-customer relationships.

1. Relationship of Trustee and Beneficiary

A trustee holds property for the beneficiary, and the profit earned from this property
belongs to the beneficiary. If the customer deposits securities or valuables with the
banker for safe custody, banker becomes a trustee of his customer. The customer is the
beneficiary so the ownership remains with the customer.
2. Relationship of Agent and Principal
The banker acts as an agent of the customer (principal) by providing the following
agency services:
 Buying and selling securities on his behalf,
 Collection of cheques, dividends, bills or promissory notes on his behalf, and
 Acting as a trustee, attorney, executor, correspondent or representative of a
customer.
 Banker as an agent performs many other functions such as payment of insurance
premium, electricity and gas bills, handling tax problems, etc.
3. Relationship of 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 demand back his money whenever he wants
it from the banker, and the banker must repay the balance to the customer.
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). 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 ways:
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.
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
centres. 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.
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 e-
banking, ATM, mobile-banking, etc.
4. Relationship of Pledger and Pledgee
The relationship between customer and banker can be that of Pledger and Pledgee. This
happens when customer pledges (promises) certain assets or security with the bank in
order to get a loan. In this case, the customer becomes the Pledger, and the bank
becomes the Pledgee. Under this agreement, the assets or security will remain with the
bank until a customer repays the loan.
5. Relationship of Licensor and Licensee
The relationship between banker and customer can be that of a Licensor and Licensee.
This happens when the banker gives a sale deposit locker to the customer. So, the
banker will become the Licensor, and the customer will become the Licensee.
6. Relationship of Bailor and Bailee
The relationship between banker and customer can be that of Bailor and Bailee.
 Bailment is a contract for delivering goods by one party to another to be held in
trust for a specific period and returned when the purpose is ended.
 Bailor is the party that delivers property to another.
 Bailee is the party to whom the property is delivered.
 So, when a customer gives a sealed box to the bank for safe keeping, the
customer became the bailor, and the bank became the Bailee.
7. Relationship of Hypothecator and Hypothecate
The relationship between customer and banker can be that of Hypothecator and
Hypothecate. This happens when the customer hypothecates (pledges) certain movable
or non-movable property or assets with the banker in order to get a loan. In this case,
the customer became the Hypothecator, and the Banker became the Hypothecate.

8. Relationship of Advisor and Client

When a customer invests in securities, the banker acts as an advisor. The advice can be
given officially or unofficially. While giving advice the banker has to take maximum
care and caution. Here, the banker is an Advisor, and the customer is a Client.

Customer
Customer is an individual or business that purchases the goods or services produced by
a business. Attracting customers is the primary goal of most public-facing businesses,
because it is the customer who creates demand for goods and services. Businesses often
compete through advertisements or lowered prices to attract an ever-larger customer
base. In a bank, there exists different types of customers namely; individual, corporate,
government and NGOs.
1. Retail Banking/ Individual Customer

Individual banking is a type of banking service and product line offered by banks to
retail customers, that is consumers rather than businesses, intermediaries and
institutions. Banks worldwide offer personal banking products that typically include
savings and transaction facilities such as a bank transaction account, debit cards/EFT,
an interest bearing floating account (savings account) and a fixed interest deposit
account for a specific agreed period (certificates of deposit / term deposit) which can
vary according to the bank. In addition it also includes debt facilities such as loans,
mortgages and credit cards.
Retail banking, also known as consumer banking, is the provision of services by
a bank to individual consumers, rather than to companies, corporations or other banks.
Services offered include savings and transactional accounts, mortgages, personal
loans, debit cards, and credit cards.
2. Individual Banking
The customers of personal banking services and products are commonly the general
public that includes adult individuals, retirees, and students, children who may be
citizens, residents and non-residents depending on the requirements of the country or
bank. While affluent individuals may also use personal banking services, they may also
be offered private banking services by banks which can include more sophisticated
services and investments.
The depositor should be properly introduced to the bank and KYC norms are to be
observed. Introduction is necessary in terms of banking practice and also for the
purpose of protection of customer. Usually, banks accept introductions from the
existing customers, employee of the bank, a locally well-known person or another bank.
A joint account may be opened by two or more persons and the account opening form
etc., should be signed by all the joint account holders.

3. Corporate Customer
Corporate banking is defined as custom-tailored financing and banking services for
corporations. Corporate banking is typically offered by commercial banks, and entails
all the services that can be extended on a financial level to corporate entities to ease
day-to-day operations. Cash management, working capital loans and commercial
mortgages are just some of the products available in this form of banking; some banks
even offer financial supply chain optimization. Corporate banking is the tailor-made
financial services that financial institutions offer to corporations in the context of
corporate financing and raise capital. Typically, corporate banking is a specialized
division of a commercial bank that offers various banking solutions, such as credit
management, asset management, cash management, and underwriting to large
corporations as well as to small and medium-sized enterprises (SMEs).
Commercial banks focus on business banking as it is one of their major sources of profit
and assign specialized finance professionals, able to assist corporations to meet their
business objectives. Unlike what many people think, business banking is completely
different than investment banking; however, the terms are often used interchangeably.
4. Government
5. NGO
Provisions Relating to Know Your Customers
Since it is necessary to follow clear procedures relating to know your customers by
banks and financial institutions licensed from this Bank, these Directives have been
issued having exercised the powers conferred by Section 79 of the Nepal Rastra Bank
Act, 2002.
 Banks and financial institutions shall have to prepare know your customers
procedures concentrating on the customers transaction monitoring process and
risk management process and so on.
 The Banks and Financial Institutions shall, at the time of Opening Customers
Account, Extension of Credit, Preparing Foreign Currency Draft, T.T., Mail and
Telegraphic Transfer or Accepting Remittance through Draft, TT Mail and
Telegraphic transfer, as well as doing business with the customer relating to
money or substitution of money and other transactions, including Letters of
Credit Transaction, compulsorily obtain information relating to the customer as
provided in Schedule-1, as may be necessary. (Banks and Financial Institutions
may seek additional information on matters not provided in the Schedule and
which they deem necessary for the purpose of controlling money laundering and
investment or transactions relating to terrorist activities). While opening new
account for any purpose whatsoever, the account shall be opened only after
completing the entire procedures including customer identification.
 Banks and Financial Institutions shall maintain record of the documents
including those provided in Schedule-1 getting them duly attested by the
designated employees.
 Banks and financial institutions may, for the purpose of operating credit or any
other Banking transaction, take as, a basis the latest tax clearance certificate and
the certificate of approval obtained from the concerned agency of Government
of Nepal in case of the customers running various industries, trade and business
 not being registered at the offices under Ministry of Industries and Ministry of
Commerce of Government of Nepal, but having obtained license from local
bodies such as Municipal Corporation, sub-Municipal Corporation,
Municipalities and VDC or Department of Drugs Administration, Department
of Mines and other governmental agencies and having obtained the permanent
account number and/or Value Added Tax No. From the Department of Inland
Revenue, Government of Nepal.
 Where the Banks and Financial Institution is doubtful as to a customer or finds
that the transactions in the account has increased or decreased abnormally or
unusual amount is received from foreign country through remittance or other
means or source of remittance is not disclosed nor is it clear; the particulars of
such customers (individual, firm, company or organization) with description of
such doubtful and unnatural transactions has to be prepared and submitted to
their own Board of Directors on a monthly basis. Moreover, a separate
procedural mechanism has to be developed for the operation of the accounts (all
types of deposit accounts and personal accounts in the books of the bank) in
which money is received in excess of Rs. 1 (one) million. An up to – date record
has to be maintained obtaining disclosure as to the source of such transactions
from the customers. For this purpose, Customer's self-declaration shall be
sufficient.
 In respect of transactions amounting to less than one million rupees also, where
the transaction remains doubtful and unnatural, up-to-date record has to be
maintained of such accounts (all types of deposit accounts and personal
accounts in the books of the bank).
 Banks and Financial Institutions shall maintain the records of customer related
transactions (including electronic records) up to a period of Five Years from the
completion of such transaction
 Returns in respect of the particulars as referred to in Clause 5 and 6 of these
Guidelines shall be filed with Regulation Department regularly within 15 days
of the close of each quarter. The particulars according to the circulars issued by
the Financial Intelligence Unit and or this Bank shall have to be submitted
according to the said Directives.
 The particulars as provided in Schedule -2 shall be compulsorily obtained at the
time of extending loan by the Banks and Financial Institutions to any individual,
firm, company or organization.
Repeal and Saving:
The following Directives issued by this Bank heretofore have been repealed: -
 Provisions relating to know your customers made in Unified Directives, the
Directives issued under Directive No. 19/066 and all circulars issued until mid-
July, 2010 relating to the matters under this subject.
 Actions taken under the Directives repealed pursuant to sub-clause (1) shall be
deemed to have taken under these Directives.

PROCEDURES RELATING TO KNOW YOUR CUSTOMER

With respect to the transactions, the Banks and Financial Institutions shall obtain the
following information and documents depending on the nature of the customers.
Further, personal interviews shall also be carried out, if necessary.
Account- Holders
Personal Accounts
 Name and Surname
 Name of Father or Husband
 Permanent Address (document evidencing the address need to be enclosed.
Such documents include citizenship certificate, passport, water / electricity bill,
location map prepared by the bank staff who has visited the place, if necessary,
voter’s identity card, certificate of land ownership etc.)
 Temporary address
 Date of Birth
 Telephone Number (mention if available)
 Citizenship/Passport (Number and particulars)
 Photocopy of identity card if employee of Government of Nepal or Government
of Nepal owned institutions.
 Photo
 Other necessary documents (to be specified by Bank /Financial Institution).
Accounts of Partnership or Individual Firm
 Name of the firm
 Address
 Telephone / Mobile Number (mention if available)
 Name of all partners and their addresses (with Phone Nos.)
 Photographs of Partners
 Firm Registration Certificate
 Partnership Deed
 If partnership, delegation of authority to carry economic and administrative
transactions.
 Other necessary documents (to be specified by Bank /Financial Institution).
Company Accounts
 Name of the company
 Head Office Address
 Full Address (including telephone and fax)
 Certificate of incorporation and Memorandum and Articles of Association
 Name and Addresses of members of the Board (mention phone number if
available)
 Photographs of Board members
 Board resolution as to opening and operation of the account and delegation of
authority
  Board resolution regarding delegation of authority to the Chief Executive and
other employees to carry economic transactions.
 Other necessary documents (to be specified by Bank /Financial Institution).
Accounts of Club/Non-Governmental Organizations
 Name of the Club/Non-Governmental Organization
 Address
 Certificate of incorporation of the Institute
 Charter
 Name and Addresses of Executive Committee (mention phone number if
available)
 Telephone Number
 Executive Committee resolution as to opening of the account.
 Photographs of Directors/members of Executive Committee of the Club/ Non-
Governmental Organization.
 Resolution regarding operation of the account and delegation of authority to
carry economic transactions.
 Other necessary documents (to be specified by Bank /Financial Institution).
Accounts of Cooperatives
 Name of the Organization
 Address
 Phone Number (if available)
 Bylaws of the Organization
 Name and Addresses of Board members (mention phone number if available)
 Photographs of Board Members
 Certificate of incorporation
 Resolution regarding operation of the account and delegation of authority to
carry economic transactions.
 Other necessary documents (to be specified by Bank /Financial Institution).

Accounts of Public Trust or Private Trust (Guthi)

 Name
 Address
 Phone Number (if available)
 Statute
 Agreement for institution of the Trust (Guthi)
 Name and Address of Executive Trustee
 Photographs of Executive Trustee
 Certificate of institution of Trust (Guthi)
 Name and Addresses of members of Management Committee.
 Resolution of the Management Committee or Board regarding opening of the
account and delegation of authority to carry economic transactions.
  Name, surname, address, photo of 2 Board Members, including documents
evidencing the address.
 Other necessary documents (to be specified by Bank /Financial Institution).
Note:
 "Doubtful and unnatural transactions" include the transactions and amount not
matching with nature of particulars furnished to the Banks and Financial
Institutions at the time of opening of the account.
 The words "source not disclosed" also include receipts in which the name and
address of remitting individual, firm, company or organization is not clear, and
in case of income from employment, business or other sources, the prevalent of
a situation in which the particulars of the source is not received to the
satisfaction of the banks/financial institutions.