BANKER & CUSTOMER RELATIONSHIP, RIGHTS & OBLIGATIONS

BANKER DEFINITION: Sir John Paget Banker to be so called should perform four essential functions: 1.Take Deposit Accounts 2.Take Current Accounts 3.Issue & Pay Cheques 4.Collect Cheques crossed & uncrossed for his customers He also states that the organisation should have the word bank as part of the name. N.I. Act S.3 The term banker may include any person acting as a banker. BRA 1949 Banking Company A company which transacts business of banking in India The words bank, banker or banking should be a part of the name.

BANKING DEFINITION
Accepting for the purpose of lending or investment of deposits of money from public, repayable on demand or otherwise and withdrawal by cheques, draft,order or otherwise. NATIONALISATION OF BANKS ACT Details certain functions in addition to the business of banking that a bank may undertake: 1.Borrow, raise money, lend or advance money with or without security 2.Draw, make, accept, discount, buy, sell, collect or otherwise deal in B/Es, hundis, promissory notes, coupons, drafts, B/Ls, RRs, warrants, debentures, certificates, scrips, securities and other instruments.

3.Grant & issue LCs, Travellers Cheques

4. Buy & sell bullion & specie 5. Buy & sell foreign exchange 6. Accept, hold, issue on commission, underwrite and deal in stocks, funds, shares, debentures, debenture stock, bonds, obligations, securities and investments of all kinds 7. Purchase & sell bonds, scrips and securities of all kinds on behalf of customers and others 8. Provide Safe Deposit Vaults and accept securities etc. for Safe Custody 9. Act as agent for government or local authority 10. Carry on agency business, including clearing and forwarding goods 11. Contracting for public and private loans and negotiating and issuing the same

12. Effect, insure, guarantee, underwrite, participate in managing any issue of state, municipal or other loans or shares, bonds or debentures or debenture stock of any company and lend money for such issue
13. Carry on and transact guarantee and indemnity business 14. Manage, sell etc., of any property that comes into its possession in satisfaction of any of its claims 15. Acquire, hold or otherwise deal with any property as part of security of a loan made by it 16. Undertake Execute Trusts 17. Administer Estates as Executor or Trustee 18. Acquire, construct, manage buildings for own use

19. Deal with its property in any form including selling or mortgaging it

20. Acquire a business or part thereof when such business is what is enumerated in this Section.
21. Do all incidental things 22. Any other business that Central Government may notify. SUMMING UP A banker will accept deposits, lend, pay cheques of customers, and undertake remittances and other agency functions. This has evolved to include merchant banking investment banking and other advisory services.

Definitions of Banking in other countries:

U.S.A.- The business of dealing in credits and by a bank we include every person, firm or company having a place of business where credits are opened by the deposit or collection of money or currency subject to be paid or remitted on draft, cheque or order or money is advanced or loaned on stocks, bonds, bullion, bills of exchange or promissory notes or where stocks, bonds bullion, bills of exchange or promissory notes are received for discount or sale. Japan Japanese Banking Act 1927 Banks as institutions which carry on operations of giving, as well as receiving credit. Switzerland By federal law, a bank is an institution which appeals to the public for deposits. No statutory definition of banking in English Law.

TYPES OF BANKING
1.UNIT BANKING Single bank/branch office in one single state, mostly prevalent in U.S.A Likely to change 2.BRANCH BANKING Most familiar pattern of banking found in England and India. 3.CORRESPONDENT BANKING Banking services offered by a bank to another who is not present in the location or country. The bank offering the services is called a correspondent. This is due to needs of Unit Banking.

4.SPECIALISED BANKING Investment Banks, Retail Banks, Wholesale Banks, Housing Banks etc.

UNIVERSAL BANKING
Broad based activities of banks extending comprehensive financial products to its customers Corporates & Individuals Universal banking is not fully available under one roof although banks are allowed to have subsidiaries dealing with insurance and mutual funds etc. Banks sell the products of the subsidiaries at their branches. CUSTOMER DEFINITION Sir John Paget To constitute a customer, there must be some recognisable course or habit of dealing in the nature of regular banking business. It is difficult to reconcile a single transaction with that of a customer. This is based on the meaning of custom, being a long established practice or habit and a customer as one who has a customary relationship with a bank i.e. regular relationship.

English judgements have however overturned this view stating that duration of relationship is not the essence of determining the nature of the relationship.

Even Indian Courts have held that to constitute a customer, the duration of relationship is not important and that if a bank accepts money in an account, then it will honour banking transactions while there is money in the account.
The situation is similar when a bank accepts a cheque for collection for opening an account. The legal opinion was that at the point of depositing of the cheque, even if the person is not a customer, he was going to become a customer when the cheque was collected.

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When a bank having opened an account for a person collects a cheque for him, anticipating regular transactions, the single transaction makes the person a customer of the bank. NI Act S.131- provides protection to the Banker collecting cheques for a customer in good faith and without negligence. Cheques Act , lays down that a person is a customer of a bank if he keeps either a current or deposit account with the bank or if the bank undertakes to act habitually for him as such.

1.A CUSTOMER MUST HAVE OPENED AN ACCOUNT BY DEPOSITING MONEY/CHEQUES FOR COLLECTION
2.DURATION/FREQUENCY OF OPERATIONS IN THE ACCOUNT NOT ESSENTIAL ALTHOUGH THESE MIGHT BE ANTICIPATED 3.DEALINGS MUST RELATE TO BANKING BUSINESS

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BANKER CUSTOMER RELATIONSHIP:

1.Relationship begins with opening of an account. 2.A term deposit account holder is also a customer. 3.When a person deposits money with a bank, he is in fact giving the money to the banker with some objectives in view: A. The money will be available for use when he has a need for it B. The money will be invested with greater professional skill than the depositor himself is capable of C. The money the depositor turns over to the bank is money lent to the banker and the depositor cannot follow the specific sum of money and seek the return of the money from a specific asset of the bank. Deposits made with the bank are in the nature of debts of a bank and not Money given to the bank in trust with specific instructions on how they should be invested or used.
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The relationship between a banker and customer would fall under two categories Primary & Others. PRIMARY - Debtor & Creditor Overdraft - Customer is Debtor & Banker is Creditor. A/C in Credit Balance - Banker is Debtor & Customer is Debtor A/C in Debit Balance - Customer is Debtor & Banker is Creditor Balance in the account is payable on demand, except for Term (Fixed/Time) Deposits. Money is only payable in accordance with the terms of agreement between the banker and customer, with reference to place of payment.

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Advent of internet/on line banking can be paid any where and received from any where. The customer is in the position of an unsecured creditor as regards the issue of repayment. If the bank goes into liquidation, the customer cannot claim that his money be repaid in full his claim will rank along with all the other creditors of the bank., OTHER RELATIONSHIPS When a customer gives money to the bank for specific payment to a person or according to specific instructions, then the banker becomes an Agent of the customer and the money is held in trust until the instructions are carried out. Money held as a Trustee will not be the property of a bank and will not be available for distribution if the bank goes into liquidation.
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BAILOR & BAILEE

Banker becomes a bailee when he accepts an article for Safe Keeping. He has to preserve the article valuable or otherwise in the same condition in which it was received and must deliver the same goods that were lodged with him. If there is an appreciation of goods or merchandise received in bailment, the profit or appreciation must also be transferred over to the depositor. Banker does not own the material held but only as agent but can recover any payment due for his services. PRINCIPAL & AGENT When a banker undertakes to purchase or sell stocks or securities, collect cheques, bills, interest, dividend, etc. or pay insurance premia, or other utility payments on behalf of customers, he becomes an Agent. When banks collect taxes on behalf of Govt departments by debit to customer accounts under their authority, they act as Agents of Govt departments and carry out standing instructions for the account holders.
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TRUSTEE & BENEFICIARY At times Bankers act as trustees for the valuables or securities deposited with them. A Banker becomes a trustee for funds held by him when they have not been applied as per instructions of the customer, if circumstances intervene before such act is performed. A Banker also acts as a trustee when he is specifically appointed to act as a trustee.

ADVISORY ROLE
Bankers also act as advisors in merchant banking roles, collecting cheques, promissory notes etc. Bankers act as Managers to issues, underwrite issues, act as Executors or Administrators of Estates etc. These are some special agency functions of banks.

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RIGHTS & OBLIGATIONS OF A BANKER

Though the depositor is a creditor (unsecured) of the Bank, there are obligations of the banker towards his customer since the banker raises such deposits from the public. Again as he has a duty to the community of depositors certain rights accrue to him over any single depositor. RIGHTS OF BANKERS: 1.Right of General Lien 2.Right of Particular Lien 3.Bankers Lien 4.General Lien of a Banker

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GENERAL LIEN Lien means the right of the creditor to retain the goods and securities owned by the debtor until the debt is paid. Banker has a lien on goods owned by the debtor but in the BANKS POSSESSION until the debt to the banker is paid. PARTICULAR LIEN The lien could be on specific goods or security deposited or general. An example of particular lien is the right of a carrier of goods to be paid for the transport charges and until then a lien on the goods carried. He has the right to hold on to the goods until he is paid and not sell them unless he is specifically authorised.

BANKERS LIEN This lien is not subject to no sale restriction. A banker has the right to sell the goods or securities to recover his dues. A bankers lien is considered to be in the nature of an implied pledge.
GENERAL LIEN OF A BANKER S.171 of the Indian Contract Act gives a lien on any goods, or any money bailed to him for any of his dues from the customer. No separate agreement necessary to exercise this right. This right may be exercised even to satisfy a time barred debt.

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Requirements to be satisfied before excercise of Lien:

1. Goods/security should have come into his possession as a banker i.e, lien cannot be exercised in respect of goods lodged under safe custody.

2.Lien cannot be exercised when the goods pledged or deposit made is governed by the specific instructions of the customer as to how they may be disposed off. A pledge made for a specific loan can be withdrawn when the loan is repaid.
3.No right of general lien for goods/security left with the banker inadvertantly. 4.Possession of securities must be lawful No force 5.Lien arises only in respect of goods belonging to the customer in the same capacity. For example, a banker cannot apply credit balances in the savings bank account of a customer to the debit balances of a firms account in which the customer is a partner. This also applies to credit balances in Trust Accounts.

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A lien cannot be exercised towards future dues Eg. A B/E payable after one month. RIGHT OF SET OFF Entitles a banker to apply the credit balances in an account to the dues in another account of the customer or other dues to the bank by the customer. (There are however some legal problems in such cases and due notice to the customer before exercising the right of set off is necessary Eg. Opening of two accounts for the customer was deemed that these are to be kept separate). RIGHT OF SET OFF subject to: 1.Both accounts must be in the same name and in the same right. 2.Right available for current dues and not for contingent debts. 3.Credit balance in one account cannot be applied to another loan account where the money is being paid in accordance with the repayment schedule. 4.Right available only if there is no agreement to the contrary

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RIGHT OF OFF arises automatically

1. In the event of Death or Insolvency of a customer 2. Insolvency of a partner of a firm or the winding up of a company 3. On receiving a notice of assignment or a notice of second mortgage over property charged to the bank. RIGHT OF APPROPRIATION Banker has a right to appropriate money paid by a customer towards any of the debts due from the customers, including time-barred debts. If an appropriation as such is not made and the customer has not given a specific Instruction, nor is the banker given notice of his intentions, then the funds received must be applied to the debt in chronological order in which these have arisen.

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RULE IN CLAYTONS CASE

Where there is a single account of a customer with overdraft balances, the first credit in the account will be off set against the first debit.

The proceeds of a cheque deposited will not be available for withdrawal and may be set off against the overdraft balance.

LAW OF LIMITATION Debt becomes time barred if not paid within 3 years after it is contracted Period of limitation does not begin for current and savings accounts unless a demand for final payment is made by the customer.

In case of term deposits, the period of limitation starts from the maturity date.
Law of Limitation does not extinguish a right it only bars recourse to legal action to enforce the right. RIGHT TO COMPOUND INTEREST Implied right, subject to documentation and RBI guidelines INCIDENTAL CHARGES

On unremunerative accounts subject to proper disclosure to the account holders.

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BANKERS OBLIGATIONS
1.Honour cheques provided the account is in funds. S.31 or NI Act provides that a banker who fails in this obligation has to compensate the customer. This obligation is subject to court orders. 2.Maintain Confidentiality Banker bound to maintain secrecy about the details of the customers account(s), unless compelled by Law.

3.Can also provide confidential opinion on the creditworthiness of a customer to other bankers, unless the customer has specifically forbidden providing such opinions. 4.Can also obtain such opinions from other bankers for processing of loan proposals etc.

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FURNISHING OF OPINIONS Important Aspects 1.An implied authority of customer available to the bank to disclose information to the other bank to facilitate loan processing, LCs etc. 2.Opinion based on factual records at the bank. No special efforts. Unwarranted/unjustified disclosure renders a banker liable for damages. 2.No personal opinions & No volunteering of uncalled for information. 3.Opinion to be worded in GENERAL (bank conventional) TERMS only.

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OPINION REPORTS Contd. Bank should specify that the report submitted is WITHOUT ANY RESPONSIBILITY on its part or its officers and that it should be treated as strictly confidential. In case of any bad experience about the customer in the past, the report should Invariably convey the signal to the fellow banker about the negative feature(s).

CLOSURE OF ACCOUNT Once an account is opened, banker has a contractual obligation to maintain and service the account. If the banker has sufficient reasons to consider the account UNDESIRABLE, in terms of costs of maintenance, or other reasons, he can close the account AFTER DUE NOTICE to the customer. Such notice necessary to provide for transactions in the pipeline to be completed, or contemplated by the customer.

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