Relationship between a banker and customer

Relation of a debtor and a creditor The general relationship between banker and a customer is that of a debtor and a creditor i.e. borrower and lender. In Foley v. Hill, Sir John Paget remarks, ³the relation of a banker and a customer is primarily that of debtor and creditor, the respective positions being determined by the existing state of account. Instead of the money being set apart in a safe room, it is replaced by the debt due from the banker. The money deposited with him becomes his property, and is absolutely, at his disposal, and, save as regards the following of the trust funds into his hands, the receipt of money by a banker from or on account of his customer constitutes him merely the debtor of the customer with µsuper added¶ obligation to honour his customer¶s cheques drawn upon his balance, in so far the same is sufficient and available´. In Shanthi Prasad Jain v. Director of Enforcement, Foreign Exchange Regulation, the SC held that the banker and customer relationship in respect of the money deposited in the account of a customer with the bank is that of a debtor and a creditor. On the opening of an account a banker assumes the position of a debtor. The money deposited by the customer with the bank is in legal terms lent by the customer to the banker who males use of the same according to his discretion. The creditor has the right to demand back his money from the banker, and the banker is under an obligation to repay the debt as and when he is required to do so. A depositor remains a creditor of his banker so long as his account carries a credit balance. But he does not get any charge over the assets of his debtor/banker and remains an unsecured creditor of the banker. Since the introduction of deposit insurance in India in 1962 the element of risk of the depositor is minimized as Deposit Insurance and Credit Guarantee Corporation undertakes to insure the deposits upto a specified amount. Banker¶s relation with the customer is reversed as soon as the customer¶s account is overdrawn. Banker becomes creditor of the customer who has taken a loan from the banker and continues in that capacity till the loan is repaid. As the loans and advances granted by a banker are usually secured by the tangible assets of the borrower, the baker becomes a secured creditor of his customer.

Various legal relationships of banker and customer

2) Agent and Principal- Sec.182 of µThe Indian Contract Act, 1872¶ defines ³an 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 ³the Principal´.

bills of exchange. It is a kind of credit facility to its customer to facilitate international trade. executor or representative of a customer Payment of insurance premium. The relation between the parties is that of a lessor and lessee. Buying and selling securities of customer Collection of cheques. 2) Bailee and bailor. When he receives gold ornaments and important documents for safe custody he takes charge of it as bailee and not trustee or agent. the bank undertakes to take necessary precaution for the safety of the articles in the locker. The banker can retain the goods pledged till the debt is paid. 6) Guarantor and guarantee. where he acts as the agent. 3) Pawnee and pawner. When a customer deposits securities or other valuables with the banker for safe custody. to be a security for money borrowed.pawn is a sort of bailment in which the goods are delivered to another as a pawn. the banker acts as trustee of customer.a bank as guarantor gives guarantee to its customer by issuing a µletter of credit¶. A banker who receives a customer¶s money is under a duty not to part with it which is inconsistent with the customer¶s fiduciary character and duty. A bank guarantee contains an undertaking to pay the amount without any demur on mere demand of the principal amount on the ground for non-performance or breach of contract.the relation between a banker as mortgagee and his customer as mortgagor arises when the latter executes a mortgage deed in respect of his immovable property in favour of the bank or deposits the title deeds of his property with the bank to create an equitable mortgage as security for an advance. He cannot make use of them as he is bound to return the identical articles on demand. 5) Lessee and lessor.when a customer hires a locker in the bank¶s safe deposit vault. promissory notes on behalf of customer Acting a trustee. 4) Mortgagee and mortgagor. The banker performs various services of the customer. A banker becomes a trustee under special circumstances.section 3 of the Trusts Act defines a trustee as one to whom property is entrusted to be administered for the benefit of another called the beneficiary. it was held that where banks old money for a specific purpose of sending it somebody the money is impressed with trust. In Official Assignee v. Rajaram Aiyar.One of the important relationships between a banker and customer is that of an agent and principal. Thus a banker acts as a pawnee where a customer delivers he goods to him to be kept as security till the debt is discharged. . 7) Fiduciary relationship. telephone bills etc. 1) Trustee and beneficiary.during certain circumstances banker becomes bailee.every relation of trust and confidence is a fiduciary relation.

banker accepts the deposits from the customer with an obligation to repay it to him on demand or otherwise. 1881The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do. and.e. Explain the special relationship between banker & customer. The banker is therefore under a statutory obligation to honour his customer¶s cheques because. the banker¶s duties are the customer¶s rights and the banker¶s rights are the customer¶s duties. These rights and obligations are called the special features of relationship between banker and the customer. The special relationship between banker and customer can be presented as under: General obligations of banker towards customer Obligation to honour cheques. These rights and duties are reciprocal i. in default of such payment. OR What is the special relationship arising out of general relationship between a banker and a customer.6. must compensate the drawer for any loss or damage caused by such default. Thus the banker is bound to honour his customer¶s cheques provided the following conditions are fulfilled(a) Sufficient balance in customer¶s account (b) Presentation of cheques within working hours of business (c) Presentation of cheques within reasonable time after ostensible date of its issue (d) Cheques should be presented at the branch where account is kept (e) Fulfilment of requirements of law . OR What are the rights and obligations of a banker towards a customer? By opening an account with the banker. it is recognized under section 31 of the NI Act. there will be some rights conferred and obligations imposed to the banker as well as the customer.

the banker must keep a proper record of transactions of the customer. credit-worthiness and business. the banker must according to prevailing usages at the place where the banker conducts his business. In Brando v. . it was held that bankers most undoubtedly have a general lien on all securities deposited with them as bankers unless there is an express or implied contract inconsistent with lien. Rights of a banker Banker¶s right of general lien. This obligation is subject to certain exceptions. some of which are overdrawn and some in credit.the banker must abide by any express instructions of the customer provided it is within the scope of their banker-customer relationship.the right to set off is a statutory right which enables debtor to take into account a debt owing to him by a creditor. It was firmly laid down in Tournier v. In the absence of any express instructions. It may either be general or particular. National Provincial and Union Bank of England Ltd.. The duty to maintain secrecy will be continuing even after the account is closed or the death of the customer. any goods bailed to them. Thus when a customer keeps two or more accounts at the same bank. If he wrongly credits the account of the customer and intimates him with the same and the customer acts upon the intimation bonafide and withdraws cash the banker cannot contend that the entries were wrongly made. Obligation to keep a proper record of transactions. In Halesowen Presscook and Assemblies Ltd v.the banker is under an obligation to take utmost care in keeping secrecy about the accounts of the customers since it may affect his reputation.may in absence of a contract to the of the important rights enjoyed by a banker is the right of general lien.Obligation to maintain secrecy and disclosure of information required by law. Barnet. In India sec 171 of the Indian Contract Act confers general lien upon bankers as followsbankers«. Obligation to abide by the instructions of the customer. in India it was made compulsory after 1970. He shall not succeed in recovery of money from the customer. Banker¶s right of set-off. Lien means the right of the creditor to retain goods and securities owned by the debtor until the debt due from him is paid. before the latter could recover the debt due to him from the debtor. retain as a security for a general balance of account. the bank has a right to combine such accounts and pay the resultant balance.

a principle was laid down as to when the customer has current account and deposits and withdraws money frequently the first item on debit side will be discharged by the first item on credit side. If some funds are earmarked by the customer for some . A banker should be given sufficient time to release the amount of the cheque sent for collection before the said amount can be drawn upon by the customer.when a debtor owes two or more debts to a creditor and he pays some amount which is not sufficient to meet any debt to the creditor appropriation is done. 7. Banker¶s right to charge compound charges. However. Thus the banker is bound to honour the customers cheque provided the following conditions are fulfilled(a) Sufficient funds. penal charges and so on. the adding of unpaid interest due to the principal amount is recognized. then he is liable to the customer for damages. Noble. In Syndicate Bank v.the banker may claim incidental charges on unremunerative accounts such as service charges.a customer might be having several bank accounts in his various capacities. Banker¶s right for appropriation of payment. The banker can dishonor the cheques if there are insufficient funds. In Devaynes v. West Bengal Cement Ltd. appraisal charges. What are the obligations of a banker? 1. processing charges. It applies to a banker if the customer has more than one deposit or more than one loan account.a banker has a special privilege to charge compound interest. The credit entries in the account adjust or set off the debit entries in chronological order. ledger folio charges. the SC abolished this in case of agricultural loans in theBank of India case.there must be sufficient funds of the drawer in the hands of the drawee. (b) Funds must be properly applicable.the banker is under a statutory obligation to honour his customer¶s cheques in the ordinary course of business. it was held that a banker has the right to combine two accounts and to set off unless he has made some agreement express or implied to the contrary. But is essential that the account on which a cheque is drawn must have sufficient funds.Westminister Bank Ltd. Banker¶s right to claim incidental charges. If he wrongfully dishonors the cheque. famously known as Clayton¶s case. Obligation to honour cheques.

It extends to all transactions and thus more extensive. he may commit some wrong. the customer¶s reputation might suffer and he might incur losses also. Obligation to keep a proper record of transaction. . In Brando v.1) specific or particular lien and 2) general lien A particular lien is one which confers a right to retain the goods in connection with a particular debt only while a general lien is a right to retain all the goods or any property of another until all the claims of the holder are satisfied. The banker is therefore under an obligation to take utmost care in keeping secrecy of the details of the customer. However. lien may be defined as ³a right in man to retain that which is in his possession belonging to another. must be presented before the banker at the proper time. If any of these facts are made known to others.specific purpose. Barnet. 2. But where the customer has overdraft facility the banker has the obligation to honour the cheque upto the amount of overdraft sanctioned. The cheque. Banker¶s right of general lien One of the important rights enjoyed by a banker is the right of general lien. (c) The banker must be duly required to pay. 8.the banker is bound to honour the cheque only when hi is duly required to pay. until certain demands of the person in possession is satisfied´. Explain the banker¶s right of general lien. Lien is of two kinds. Sometimes. this rule has exceptions(mention briefly) 3. it was held that bankers most undoubtedly have a general lien on all securities deposited with them as bankers unless there is an express or implied contract inconsistent with lien. According to Halsbury. they are not available for honouring the cheques. complete and in order. Obligation to maintain secrecy of accounts-The customer¶s account details are recorded in the books of the banker and the true state of his financial dealings are available with the banker. Lien means a legal claim to hold property as security.the banker must keep a proper and accurate record of all the transactions of the customer.

may in absence of a contract to the contrary. 3) On articles lefty by mistake or negligence. 7) On trust account. 4) On deposit account. at the request of customer. 4) Property should not be entrusted to the banker for a specific purpose. 6) Until due date of the loan. 8) On title deeds of immovable properties. Incidents of lien. 2) Dividend warrants and interest warrants paid to the banker under mandates issued by the customer. which the banker has purchased or taken up. 4) Securities.banker has no general lien 1) On safe custody deposits. . retain as a security for a general balance of account. for the amount paid. Circumstances for exercising general lien 1) No agreement inconsistent with the right of lien. 2) Property must be possessed in his capacity as a banker. 5) On stolen bond. Exceptions.. negotiable or not. any goods bailed to them. 3) Securities deposited to secure specific loan but left in banker¶s hand after loan is repaid. 3) Possession should be lawfully obtained.lien attaches to 1) Bills of exchange or cheques deposited for collection or pending discount.In India sec 171 of the Indian Contract Act confers general lien upon bankers as followsbankers«. 2) On securities or bills of exchange entrusted for specific purpose.

1. The duty of the banker to maintain the secrecy is not an absolute one. therefore.when a garnishee order nisi is received. (g) Under CrPC. (a) Under the Income ±Tax Act. 1956.a banker may be asked for the Court to produce a certified copy of his customer¶s account in his ledger. the banker must produce all books and papers relating of the Company.when the Central Government appoints an inspector to investigate the affairs of any joint-stock company under section 135 or section 137 of the Companies Act. Income Tax authorities have powers to call for the attendance of any person or for necessary information from banker for the purpose of assessment of the bank¶s customers. 1891. be justified in disclosing information to meet the following statutory requirements. 2. (e) Under the garnishee order. 1970 also allows certain exceptions. (f) Under the Companies Act. Section 13 of the Banking Companies (Acquisition and Transfer of Undertakings) Act.9. The exceptions were stated in the landmark judgment Tournier v National Provincial Bank Limited. The baker would. Explain. (b) Under the Banker¶s Books Evidence Act. 1949.Banker¶s obligation to his customer is subject to his duty to the law of the country.1934.every bank is compelled to submit an annual return of deposits which remain unclaimed for 10 years.Vide Section 131 & 133. Disclosure under the compulsion of Law. 1961. the banker must disclose the nature of the account of a customer to the Court.the police officers conducting an investigation may also inspect the banker¶s books for the purpose of such investigation.the RBI is empowered to collect credit information from Banking Companies relating to their customers (d) Under the Banking Regulation Act. Disclosure in the interest of the public-the following grounds generally fall under this category (a) disclosure of the account where money is kept for extreme political purposes in contravening the provisions of any law . (c) Under the Reserve Bank of India. What are the circumstances under which a disclosure by banker is justified? OR Banker¶s duty of secrecy is not absolute. It is also subject to certain exceptions.

It is implied that the banker can disclose information to the guarantor. . Disclosure under Banker¶s enquiry. disclosure of necessary facts to the guarantor or the solicitor becomes necessary and is justified. Disclosure under the express or implied consent of a is an established banking practice to provide credit information about their customers by one bank to another. 4. 5. The customer gives implied consent to this practice at the time of opening the account.the banker may disclose the state of his customer¶s account in order to legally protect his own interest. Disclosure in the interest of the bank.(b) disclosure of the account of an unlawful association (c) disclosure of the account of a revolutionary or terrorist body to avert danger to the State (d) disclosure of the account of an enemy in time of war (e) disclosure of the account where sizable funds are received from foreign countries by a constituent. For example. Banker can also disclose to a referee whose name is suggested by the customer.if the baker has to recover the dues from the customer or the guarantor. his auditor. in such case banker can disclose. 3.the customer may instruct his banker to give some or all other particulars of his account to say.

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