Banker and Customer

Relationship

Definition of a BANKER
The Banking Regulations Act (B R Act) 1949

does not define the term banker but defines

what banking is?
As per Sec.5 (b) of the B R Act Banking'

means 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, order or
otherwise."

Who is a 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.
The term 'customer' is used only with respect
to the branch, where the account is maintained.
He cannot be treated as a customer' for other
branches of the same bank.

Bank customers can be

categorized
in
to
four
Those who maintain account relationship with
banks i.e. Existing
customers.
broad
categories

Those who had account relationship with bank i.e.

Former Customers
Those who do not maintain any account
relationship with the bank but frequently visit
branch of a bank for availing banking facilities
such as for purchasing a draft, en-cashing a
cheque, etc. Technically they are not customers,
as they do not maintain any account with the
bank branch.
Prospective/ Potential customers

Banker and a Customer

Relationship
The relationship between a banker and

a
customer depends on the type of transaction.
These relationships confer certain rights and
obligations both on the part of the banker and
on the customer.

Classification of
Relationship
General

Relationship
Special
Relationship

General Relationship
Debtor-Creditor
CreditorDebtor

Special Relationship
Bank as a Trustee
As per Sec. 3 of Indian Trust Act, 1882: A "trust"
is an obligation annexed to the ownership of
property, and arising out of a confidence
reposed in and accepted by the owner, or
declared and accepted by him, for the benefit
of another, or of another and the owner.
Thus trustee is the holder of property on behalf
of a beneficiary.

Special Relationship
Bailee Bailor
Sec.148 of Indian Contract Act, 1872: 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.

Special Relationship
Lessor and Lessee
Sec.105 of Transfer of property Act 1882: A

lease of immovable property is a transfer of a

right to enjoy such property, made for a certain
time, express or implied, or in perpetuity, in
consideration of a price paid or promised.
Safe deposit lockers
Bank lessor
Customer - lessee

Special Relationship
Agent and Principal
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.

Banks

collect cheques, bills, and makes

payment to various authorities viz., rent,
telephone bills, insurance premium etc., on
behalf of customers

Special Relationship
As a Custodian
A custodian is a person who acts as a caretaker
of some thing.
Banks take legal responsibility for a customers
securities.
While opening a Demat account bank becomes
a custodian.

Special Relationship
As a Guarantor
Banks give guarantee on behalf of their
customers and enter in to their shoes.
Guarantee is a contingent (conditional)
contract.
As per sec 31, of Indian contract Act, guarantee
is a contingent contract ."

Termination of
relationship
between
a
The death, insolvency, lunacy of the customer.
banker
andclosing
a customer
The customer
the account i.e.
Voluntary termination.
Liquidation of the company.
The closing of the account by the bank after

giving due notice.

The completion of the contract or the specific

transaction.

Types of Bank Accounts in

India
Current deposits / accounts
Saving bank / saving fund deposits / accounts
Recurring deposits / accounts
Fixed deposits / accounts or term deposits

Types of Bank Accounts in

Traditionally banks in India have four types
India

of
deposit accounts, namely Current Accounts, Saving
Banking Accounts, Recurring Deposits and, Fixed
Deposits.

However, in recent years, due to ever increasing

competition, some banks have introduced new

products, which combine the features of above two
or more types of deposit accounts.
These are known by different names in different

banks, e.g 2-in-1 deposits, Smart Deposits, Power

Saving Deposits, Automatic Sweep Deposits etc.
However, these have not been very popular among

the public.

Current Account
(Who uses current accounts?)
Current Accounts are basically meant for businessmen and are

never used for the purpose of investment or savings.

These deposits are the most liquid deposits and there are no limits

for number of transactions or the amount of transactions in a day.

Most of the current account are opened in the names of firm /

company accounts.
Cheque book facility is provided and the account holder can

deposit all types of the cheques and drafts in their name or

endorsed in their favour by third parties.
No interest is paid by banks on these accounts.
On the other hand, banks charges certain service charges, on such

accounts.

Savings Bank Account

(Who uses Saving Bank Accounts?)
These deposits accounts are for individual accounts.
These accounts not only provide cheque facility but also havelot

of flexibility for deposits and withdrawal of funds from the

account.
Most of the banks have rules for the maximum number of

withdrawals in a period and the maximum amount of withdrawal,

but hardly any bank enforces these.
However, banks have every right to enforce such restrictions if it

is felt that the account is being misused as a current account.

Till 24/10/2011, the interest on Saving Bank Accounts was

regulared by RBI and it was fixed at 4.00% on daily balance

basis.
However, wef 25th October, 2011, RBI has deregulated Saving

Fund account interest rates and now banks are free to decide the
same within certain conditions imposed by RBI.

Savings Bank Account

(Who uses Saving Bank Accounts?)
Under directions of RBI, now banks are also required

to open no frill accounts (this term is used for

accounts which do not have any minimum balance
requirements).
Although Public Sector Banks still pay only 4% rate of

interest, some private banks like Kotak Bank and Yes

Bank pay between 6% and 7% on such deposits.
From the FY 2012-13, interest earned upto Rs 10,000

in a financial year on Saving Bank accounts is

exempted from tax.

Fixed Deposit Accounts or

Term Deposits

All Banks offer fixed deposits schemes with a wide

range of tenures for periods from 7 days to 10

years.
In case of need, the depositor can ask for closing

(or breaking) the fixed deposit prematurely by

paying a penalty (usually of 1%, but some banks
either charge less or no penalty).
Variable interest fixed deposits, the rate of interest

on such deposits keeps on varying with the

prevalent market rates i.e. it will go up if market
interest rates goes and it will come down if the
market rates fall.

Recurring Deposit Accounts

(Who use Recurring Deposit Accounts?)
Suitable for people who do not have lump sum amount of

savings, but are ready to save a small amount every month.

Normally, such deposits earn interest on the amount already

deposited (through monthly installments) at the same rates

as are applicable for Fixed Deposits / Term Deposits.
Some Banks besides offering a fixed installment RD, have

also introduced a flexible / variable RD.

Under these flexible RDs the person is allowed to deposit

even higher amount of installments, with an upper limit fixed

for the same e.g. 10 times of the minimum amount agreed
upon.
Recurring

Deposit accounts are normally allowed

maturities ranging from 6 months to 120 months.

for

Obligations/Duties of a
banker
a)

Duty to maintain secrecy/confidentiality of customers'

accounts.

b)

Duty to honour cheques drawn by customers on their

accounts and collect cheque, bills on his behalf.

c)

Duty to pay bills etc., as per standing instructions of the

customer.

d)

Duty to provide proper services.

e)

Duty to act as per the directions given by the customer. If

directions are not given the banker has to act according to
how he is expected to act.

f)

Duty to submit periodical statements i.e. informing

customers of the state of the account

g)

Articles/items kept should not be released to a third party

without due authorization by the customer

Right of set of

In the right of set off, the banker combines

the two accounts of the customer, one in
which customer is the creditor i.e., the deposit
account and the other the loan account in
which the banker is the creditor and the
customer is debtor.

The banker recovers the money from the

deposit account and settles the loan account

and then repays the balance amount to the
customer.

Example
A banker has allowed an overdraft to Mr. X

amounting to Rs 25000 and Mr. Xs savings

bank account shows a credit balance of Rs
10000. In case X fails to pay the overdraft, the
banker can exercise his right of set off by
combining both accounts by which the banker
can claim the net difference of Rs 15000 from
his customer.

Conditions
The capacity of the parties both in the debit

and credit account should be one and the

same. i.e., the same customer should have
the deposit account and loan account, in the
same capacity.
The loan must be outstanding and over due,

where a loan amount is not over due; right of

set off cannot be exercised.

Cont
There should not be any agreement between

the banker and customer by which the banker

is prevented from exercising the right of set
off.
Thus, for the purpose of exercising the right of

set off, the banker will take a prior letter from

the customer so that the banker can exercise
the right of set off.

A banker has the

On the death, insolvency or insanity of the
automatic
right
of
set
of
customer.
On
the insolvency
of the firm.
in
the
following
cases:
On winding up of the company.
On receipt of the garnishee order.
As a general rule, a banker can exercise his

right of set off but it must give the customer

reasonable notice of his intention to do so.