LAW AND Practic EOF Banking

LAW
AND
PRACTIC
E OF
BANKING
LAW AND PRACTICE OF BANKING 2013
UNIT 1: BANKER AND CUSTOMER GFGC DANDINASHIVARA
Banking : Definition
A banking company is defined a company which transacts the business of
banking in India. The Banking Regulation Act defines the business of banking by stating
the essential functions of a banker. It also states the various other businesses a banking
company may be engaged in and prohibits certain businesses to be preformed by it.
The term „Banking‟ is defined as “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 of otherwise” (Section 5(b) .
The sailent features of this definition are as follows:
(i) A banking company must perform both of the essential functions, viz., (a)
accepting of deposits, and (b) lending or investing the same. If the purpose of
accepting of deposits is not to lend or invest, the business will not be called
banking business. The explanation to Section 5(c) makes it clear that any
company which is engaged in the manufacture of goods or carries on any
trade and which accepts deposits of money from the public merely for the
purpose of financing its business, as such manufacturer or trader shall not be
deemed to transact the business of banking.
(ii) The phrase „deposit of money from the public‟ is significant. The banker
accepts deposits of money and not a anything else. The word „public‟ implies
that a banker accepts deposits from anyone who offers his/her money for
such purpose. The banker however, can refuse to open an account in the
name of the person who is considered as an undesirable person, e.g., a thief,
robber, etc. Acceptance of deposits should be the known business of a
banker. The money-lenders and indigenous bakers depend on their own
resources and do not accept deposits from the public. If they ask for money
from their friends or relatives in case of need, such money is not deemed as
deposit accepted from the public.
(iii) The definition also specifies the time and mode of withdrawal of the deposits.
The deposited money should be repayable to the depositor on demand made
by the latter or according to the agreement reached between the two parties.
The essential feature of banking business is that the banker does nor refund
the money on his own accord, even if the period for which it was deposited
expires. The depositor must make a demand for the same. The Act also
specified that the withdrawal should be effected through an order, cheque,
draft or otherwise. It implies that the demand should be made in a proper
manner and through an instrument in writing and not merely by verbal order
or a telephonic message.
It is thus clear that the underlying principle of the business is that the resources
mobilized through the acceptance of deposits must constitute the main stream of funds
which are to be utilized for lending or investment purposes. The banker is, thus, an
intermediary and deals with the money belonging to the public. A number of other
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institutions, which also deal with money, are not designated as banking institutions,
because they do not fulfill all the abovementioned pre-requisites. The specialized
financial institutions, e.g., Industrial Finance Corporation of India and State Finance
Corporation, are not banks because they do not accept the deposits in the prescribed
manner. The essence of banking business lies in the two essential functions. This is
also evident from the definition given by Sir John Paget, a noted authority on Banking.
Sir John Paget‟s Definition: According to Sir John Paget, “No person or body
corporate or otherwise, can be a banker who does not (i) take deposit, accounts, (ii)
take current accounts, (iii) issue and pay cheques, and (iv) collect cheques, crossed
and uncrossed, for his customers.” This definitions points out the four essential
functions of the banking business. Sir John Paget also lays emphasis on the
performance of the above functions in a regular and recognized manner. According to
his, “one claiming to be a banker must profess himself to be one and the public must
accept his as such, his main business must be that of banking from which, generally, he
should be able to earn his living.” The above-mentioned function are considered as the
essential functions of a banker but this definition does not include the other functions
which are now being performed by modern bankers. Name must include the word
„Bank‟, „Banker‟ or „Banking‟. Section 7 makes it essential for every company carrying
on the business of baking in India to use as part of its name at least one of the words-
bank, banker, banker, banking or banking company. Besides, it prohibits any other
company of firm, individual or group of individuals, from using any of these words as
parts of its/his name. Section 7 has been amended in 1983 with the effect that any of
these words cannot be used by any such company event “in connection with its
business.”
RELATIONSHIP BETWEEN BANKER AND CUSTOMER
Before proceeding to discuss the relationship between Banker and Customer, it is
essential to know the precise meaning of the words “Banker” and “Customer”.
Meaning of Banker
There are numerous definitions of the words „Bank‟ and „Banker‟. But most of
them are not satisfactory. Dr. H.C. Hart has given a typical definition. According to him,
“A banker of bank is a person or company carrying on the business of receiving money
s and collecting drafts, for customers subject to the obligation of honouring cheques
drawn upon them from time to time by the customers to the extent of the amounts
available in their Current Account”. The above definition insists on the following
requirements before recognizing a person or institution as a banker or bank.
 Acceptance of money on current account and the collection of cheques
and drafts for the customer.
 Payment of cheques or orders drawn by customers which are essentially
payable on demand. Of course these instruments will be honoured to the
extent amounts are available in the current account or up to an agreed
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overdraft limit, and Banking business must be the main business of such
person or company.
This view was held in Stafford V. Henry (1850). In this case one Lebertouche
had carried on a very varied business, part of which was at that time regarded as
banking, but as it was not his main business, it was held that he was not a banker. Sir
John Paget has given another definition. According to him, oen can be a (banker who
does not 1) take deposit accounts 2) take current account 3) issue and pay cheques
and 4) collect crossed and uncrossed for his customers.
The frequently used definition of a banker as a dealer in money and credit is not
satisfactory, since there are many other forms of financial business other than banking
which deal in money and credit e.g. money lenders deal in money and credit, they may
even receive deposits, but do not come under the category of bankers. Similarly
building societies receive deposits and they also provide credit but they are not banks.
In both cases, demand deposits against which cheques can be drawn by customers are
not kept.
Definition of a customer
The term „customer‟ of a bank is not defined by law. Ordinarily, a person who
has an accounts in a bank is considered its customer. Banking experts and legal
judgments in the past, however, used to qualify this statements by laying emphasis on
the period for which such account had actually been maintained with the bank.
In Sir John‟s view “to constitute a customer there must be some recognizable
course or habit of dealing in the nature of regular banking business”. This definition of a
customer of a bank lays emphasis on the duration of the dealings between the banker
and the customers and is, therefore, called the „duration theory‟. According to this view
point, a person does not become a customer of the banker on the opening of an
account, he must have been accustomed to deal with the banker before he is
designated as a customer. The above mentioned emphasis on the duration of the
account is now discarded. Thus in Ladbroke V. Todd Justice Bailhache said that the
relation of banker and customer begins as soon as the first cehque is paid in and
accepted for collection, and not merely when it is paid.
This view was further supported in Commissioners of Taxation B. English,
Scottish and Australian Bank Ltd. where the Privy Council said that “the word customer
signifies a relationship of which duration is not of the essence. The contract is not
between habitué and newcorner, but between a person for whom the bank performs a
causal service… and a person who has an account of his own at the bank.
According to Dr. Hart, “a customer is one who has an account with a banker or
for whom a banker habitually undertakes to act as such” Supporting this viewpoint, the
K Kerela High Court observed:
“Broadly speaking, a customer is a person who has the habit of resorting to the
same place or person to do business. So for as banking transactions are concerned he
is a person whose money has been accepted on the footing that the banker will honour
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up to the amount standing to his credit. Irrespective of his connection being of short or
long standing” Thus, a person who has a bank account in his name and for whom the
banker undertakes to provide the facilities as a banker, is considered to be a customer.
It is not essential that the account must have been operated upon for some time. Even a
single deposit in the account will be sufficient to designate a person as customer of the
banker. Though emphasis is not being laid on the habit of dealing with the banker in the
past. Such habit my be expected to be developed and continued in future. In other
words. Customer is expected to have regular dealings with his banker in future.
An important consideration which determines a person‟s status as a customer is

the nature of his dealings with the banker. It is evident from the above that his dealing
with the banker must be relating to the business of banking. A banker performs a
number of agency functions and renders various public utility services besides
performing essential functions as a banker A person who dose not deal with the banker
in regard to the essential functions of the banker, I e. accepting of deposits and lending
of money, but avails of any of the services rendered by the banker, is not called a
customer of the banker. For example, any person without a bank account in his name
my remit money through a bank draft, encash a cheque received by him from others or
deposit his valuables in the safe deposit vaults in the bank or deposit cash in the bank
to be credited to the account of the Life Insurance Corporation or any joint stock
company issuing new shares But he will not be called a customer of the banker as his
dealing with the banker are not in regard to the essential functions of the banker. Such
dealing are considered as casual dealings and are not in the nature of banking
business.
Thus to constitute a customer the following essential requisites must be fulfilled:
1. a bank account-savings, current or fixed deposit-must be opened in
his name by making necessary deposit of money, and
2. the dealing between the banker and the customer must be of the
nature of banking business.
A customer of a banker need not necessarily be a person. A firm, joint stock
company, a society or any separate legal entity may be a customer. Explanation to
newly introduced Section “customer” includes a Government department and a
corporation incorporated by or under any law.
General Relationship Between Banker and Customer
The relationship between a banker and his Customer essentially flows from the
contract. It is fundamentally the relationship of debtor and creditor, the respective
positions being determined by the state of the account.However in relation to other
services rendered by banker he is sometimes an agent of the customer, as for example,
in collection of cheques, sale of securities, etc., bailee in relation to the safe custody of
valuables; and trustee when he is entrusted with property to be administered for the
benefit of a named beneficiary.
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Debtor and Creditor relationship

This concept of debtors and creditor relationship is a departure from the original
view that the banker is a mare depository of the funds of the customer and was
enunciated in Foley V. Hill where it was observed that “the money, when paid into bank
ceases altogether to be the money of the principal; it is then the money of the banker
who is bound to return an equivalent by paying a similar sum to that deposited with him
when he is asked for it.” Normally the customer is the creditor and the banker is the
debtor. But when the account is everdrawn the roles are reversed. However there are
certain difference between the ordinary commercial debts and the debts due from
bankers.
Debtor-Creditor: When a 'customer' opens an account with a bank, he fills in
and signs the account opening form. By signing the form he enters into an
agreement/contract with the bank. When customer deposits money in his account the
bank becomes a debtor of the customer and customer a creditor. The money so
deposited by customer becomes bank’s property 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 depositor i.e. debtor.
The bank has borrowed money and it is only when the depositor demands, banker
pays. Bank’s position is quite different from normal debtors.
Banker does not pay money on its own, as banker is not required to repay the
debt voluntarily. The demand is to be made at the branch where the account exists and
in a proper manner and during working days and working hours.
The debtor has to follow the terms and conditions of bank said to have been
mentioned in the account opening form. {Though the terms and conditions are not
mentioned in the account opening form, but the account opening form contains a
declaration that the terms and conditions have been read and understood or has been
explained. In fact the terms and conditions are mentioned in the passbook, which is
issued to the customer only after the account has been opened.}
In the past while opening account some of the banks had the practice of giving a
printed handbill containing the terms and conditions of account along with the account
opening form. This practice has since been discontinued. For convenience and
information of prospective customers a few banks have uploaded the account opening
form, terms and conditions for opening account, rate charge in respect of various
services provided by the bank etc., on their web site.
While issuing Demand Draft, Mail / Telegraphic Transfer, bank becomes a debtor
as it owns money to the payee/ beneficiary.
Creditor–Debtor: Lending money is the most important activities of a bank. The
resources mobilized by banks are utilized for lending operations. Customer who
borrows money from bank owns money to the bank. In the case of any loan/advances
account, the banker is the creditor and the customer is the debtor. The relationship in
the first case when a person deposits money with the bank reverses when he borrows
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money from the bank. Borrower executes documents and offer security to the bank
before utilizing the credit facility.
In addition to opening of a deposit/loan account banks provide variety of services, which
makes the relationship more wide and complex. Depending upon the type of services
rendered and the nature of transaction, the banker acts as a bailee, trustee, principal,
agent, lessor, custodian etc.
Feature of Debtor and Creditor relationship
1 The creditor must demand payment: Demand Necessary
In case of ordinary commercial debt the debtor pays the amount on the specified
date or earlier of whenever demanded by the creditor as per the terms of the contract.
But in case of a deposit in the bank, the debtor/baker is not required to repay the
amount on his own accord. It is essential that the depositor (creditor) must make a
demand for the payment of the deposit in the proper manner. This difference is up to he
fact that a banker s not an ordinary debtor, he accepts the deposited with an additional
obligation to honour his customer‟s cheques. If he returns the deposited amount on his
own accord by closing the account, some of the cheques issued by the depositor might
be dishonoured and his reputation might be adversely affected. Moreover, according to
the statutory definition of banking the deposits are repayable in demand or otherwise.
The depositor makes the deposit for his convenience, apart from his motive to earn an
income (except current account). Demand by the creditor is, therefore, essential for the
refund of the deposited money. Thus deposit made by a customer with his banker
differs substantially from an ordinary debt.
2 Proper place and time of demand:
The demand by the creditor must be made at the proper place and in proper
time. A commercial bank, having a number of branches, is considered to be one entity,
but the depositor enters into relationship with only that branch where an account is
opened in his name. His demand for the repayment of deposit must be made at the
same branch of the bank concerned otherwise the banker is not bound to honour his
commitment. However, the customer may make special arrangement with the banker
for the repayment of the deposited money at some other branch. For example, in case
of bank drafts, traveller‟s cheques etc., the branch receiving the money undertakes to
repay it at a specified branch or any branch of the bank.
It is also essential that the demand must be made during banking hours only on a
working day of the bank. If the makes payment after or before the banking hours, he
might be held liable for the same.
3 Demand must be made in proper manner :
According to the statutory definition of baking, deposits are withdrawable by
cheques, drafts, order or otherwise. It means that the demand for the refund of money
deposited must be made through a cheque or an order as per the common usage
amongst the bankers. In other words, the demand should not be made verbally or
through a telephonic message or in any such manner.
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1. 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.
As per Sec. 15 of the ‘Indian Trust Act, 1882 ‘A trustee is bound to deal with the
trust-property as carefully as a man of ordinary prudence would deal with such property
if it were his own; and, in the absence of a contract to the contrary, a trustee so dealing
is not responsible for the loss, destruction or deterioration of the trust-property.’ A
trustee has the right to reimbursement of expenses (Sec.32 of Indian Trust Act.).
Banker as Trustee: Ordinarily, a banker is a debtor of his customer in respect of the
deposits made by the latter, but in certain circumstances he acts as a trustee also. The
customer may request the banker to keep his valuables in safe vaults or one may
deposit some amount and can request the bank to manage that fund for a specific
purpose, which the bank does, or in case of corporate debentures, the bank can
become trustee for debenture holders or the bank collects the cheques, hundies of the
customers in the capacity of trustee. Thus, there are wide varieties of trustee functions
discharged by the banker.
2.Bailee – Bailor:
Sec.148 of Indian Contract Act, 1872, defines "Bailment" "bailor" and "bailee". 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. While taking physical possession of securities the bank becomes
bailee and the customer bailor. Banks also keeps articles, valuables, securities etc., of
its customers in Safe Custody and acts as a Bailee. As a bailee the bank is required to
take care of the goods bailed.
3. Banker as Agent:
A banker acts as an agent of his customer and performs a number of agency functions
for the convenience of his customers. These are as follows:
(1) Purchasing or selling of securities.
(2) Collection of income
(3) Making periodical payments as instructed by his customers.
(4) Collecting interest and dividend on securities lodged by his customers.
(5) Receiving safe custody valuables and securities lodged by his customers.
(6) Collecting cheques, hundies, drafts of the customers.
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In this case, the banker and customer relationship is, in the form of an ‘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”. Thus an agent is a person, who acts for and on behalf of the principal and
under the latter’s express or implied authority and the acts done within such authority
are binding on his principal and, the principal is liable to the party for the acts of the
agent. Banks collect cheques, bills, and makes payment to various authorities viz., rent,
telephone bills, insurance premium etc., on behalf of customers. . Banks also abides by
the standing instructions given by its customers. In all such cases bank acts as an agent
of its customer, and charges for theses services. As per Indian contract Act agent is
entitled to charges. No charges are levied in collection of local cheques through clearing
house. Charges are levied in only when the cheque is returned in the clearinghouse.
4.Lessor and Lessee:
Sec.105 of ‘Transfer of property Act 1882’ defines lease, Lessor, lessee, premium and
rent. As per the section “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, or of money, a share of crops, service or any
other thing of value, to be rendered periodically or on specified occasions to the
transferor by the transferee, who accepts the transfer on such terms.”
Definition of Lessor, lessee, premium and rent :
(1)The transferor is called the lessor,
(2)The transferee is called the lessee,
(3)The price is called the premium, and
(4)The money, share, service or other thing to be so rendered is called the rent.”
Providing safe deposit lockers is as an ancillary service provided by banks to
customers. While providing Safe Deposit Vault/locker facility to their customers bank
enters into an agreement with the customer. The agreement is known as “Memorandum
of letting” and attracts stamp duty.
The relationship between the bank and the customer is that of lessor and lessee.
Banks lease (hire lockers to their customers) their immovable property to the customer
and give them the right to enjoy such property during the specified period i.e. during the
office/ banking hours and charge rentals. Bank has the right to break-open the locker in
case the locker holder defaults in payment of rent. Banks do not assume any liability or
responsibility in case of any damage to the contents kept in the locker. Banks do not
insure the contents kept in the lockers by customers.
5. As a Custodian: A custodian is a person who acts as a caretaker of some
thing. Banks take legal responsibility for a customer’s securities. While opening a dmat
account bank becomes a custodian.
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6. As a Guarantor: Banks give guarantee on behalf of their customers and enter

in to their shoes. Guarantee is a contingent contract. As per sec 31,of Indian contract
Act guarantee is a " contingent contract ". Contingent contract is a contract to do or not
to do something, if some event, collateral to such contract, does or does not happen.
It would thus be observed that banker customer relationship is transactional
relationship.
Special Relationship:
The relationship between the banker and the customer creates certain
obligations on the part of the banker. These obligations along with the rights of the
banker create special relationship. The various special features of the relationship are
detailed below:
1. Banker has an obligation to honor the cheques of the customer up to the
amount standing to the credit of the customer’s account.
2. The banker has to maintain the secrecy of his customer’s account.
3. The banker can charge interest all compound rates for defaults in
payments of loan by the customer or for overdrawn amounts.
4. Banker is allowed to produce certified copies of the entries made in the
original books of account as proof of transaction in legal proceedings
under certain circumstances and cases in accordance with the provisions
of banker’s book evidence act, 1891.
5. A banker is under the obligation of law to suspend the operation of
accounts by the customer in case of receipt of garnishee order from the
court.
Obligations of a banker: Though the primary relationship between a banker and his
customer is that of a debtor and creditor or vice-versa the special features of this
relationship as noted above impose the following additional obligations on the banker:
Obligation to honor the cheques: Section 31 of Negotiable Instrument act, 1881
imposes upon bank the obligation to honor the cheques. The text of the act is as
follows: “The drawee of a cheque having sufficient funds of the drawer in his hands
properly applicable to the payment of such cheques must pay the cheque when duly
required so to do and in default of such payment must compesate the drawer for any
less or damage caused buy such default.”
Time and Place of Payment: The demand of payment by the creditor must be made to
the debtor at the proper palace and in proper time. Transactions in the banks are
carried out up to 2 p.m. on working days and up to 12 noons on every Saturday. A
commercial bank, having a number of branches is considered to be one entity but the
depositor enter into relationship with only that branch where an account is opened in his
name.
Demand made in proper order: The statutory definition of banking system explains
that deposits are withdrawal by cheque, drafts, order or otherwise. This is to be done as
per the common usage amongst the bankers.
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Cases in which the Banker Refuses Customer’s Cheques

When may a banker refuse to honour a customer’s cheque?
1. When the balance to the credit of the customer not sufficient to meet the cheque.
2. When money deposited by the customer cannot be withdrawn on demand e.g.,
fixed deposits.
3. When the cheque is state i.e. it has become older than six months and has not
been presented for payment with in reasonable time of the date of the issue.
4. When the account is in joint names and all the persons have not signed the
cheque.
When the banker must reuse to honour customer’s cheques:
1. When the customer has stopped the payment of the cheque.
2. When the banker is served with “garnishee order” or a prohibitory order by
any court.
3. When the bank comes to know of the defect in the title of the person
presenting the cheque before the bank.
4. When the holder of the cheque gives a notice of its loss to the bank.
5. When the cheque is post-dated and is presented for payment before its
ostensible date.
Garnishee Order: A garnishee order INS an order issued by the court under order 21
rules 46 of the code of civil Procedure, 1908, generally served on banks. Such order
prohibits a banker from making payments from a particular a particular account named
therein. When a debtor does not repay the debt owed by him to his creditor, the latter
may apply to the court for the issue of a Garnishee Order on the banker of his debtor.
Such order attaches the debts not secured by a negotiable instrument. The important
features of a garnishee order are as under the order attaches either the entire deposit or
a specified sum.
It attaches only the balance in the account at the time the order is received.
Cheques etc. are sent for collection and the amounts deposited by the customer after
the order is received are not attached. However, uncleared effects already placed to
customer’s credit are attached.
A Garnishee order is issued in two parts. In the first instance the court issue an
order, called order nisi directing the banker to stop payments from the accounts of the
judgement-debtor. The banker is also required to submit explanation, if any, as to why
the funds in the said account should not be utilised for meeting the claim or the
judgement. After the receipt of order nisi, the banker stops all payments from the said
accounts and informs his customer accordingly.
Garnishee order is an order from the court obtained by a judgment-creditor
attaching the funds in the hands of a third party due to the judgment debtor. This is
subject to the condition that the funds attached must be actually due from the
garnishee, i.e., the third party and in our context, the banker. However an existing debt
through payable at a further date, may be attached. Thus fixed deposits coming under
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this category can be subject to attachment. But fixed deposits which can be withdrawn
after the customer‟s notice cannot be attached. The reason is simple. In such a case
there is no existing debt unless and until the notice is given by the customer.
Types of orders: There are two types of orders that may be made by a court
Garnishee order is only an interim order and operates as an order freezing debt. No
funds are payable by the banker to the court until the order is made absolute by the
court. Since the Garnishee order attaches only the existing debt., it is possible for the
banker to open new account for sums deposited subsequently and allow him to draw
cheques. The following are some of the legal decision affecting garnishee orders:
1. Where there is joint account in the name of husband and wife, such
an account cannot be attached in favour of husband‟s judgments creditor.
2. Funds paid into the customer’s account subsequent to the receipt
of the order are not attachable.
3. The banker immediately, after the order is received, can exercise
his right or set-off.
4. Unclosed cheques previously paid into the customer’s account are
not attached unless the banker by agreement or usage allowed cheques to the
drawn against such accounts.
5. Partnership accounts cannot be attached unless the order is made
against all the partners, or in the name of the partnership.
6. Garnhishee orders can attach trust moneys also, provided the
amount is to the customer’s credit. The reason is that such a money is a debt
owing to the customer and as such attachable.
7. Balances to the credit of customer’s account at branches of the
bank in a foreign country cannot be attached.
Banks procedure on receipt of order
1. If the order is served on the banks head office, then the branch where the
account is held should be notified for which a reasonable time is always allowed.
2. The question of attachment does not arise, if the customer’s balance is in
debit. Such an order will be withdrawn and therefore, does not warrant by action.
3. The garnishee order must state the name of the customer correctly, to enable
the baker to identify the judgment-debtor. Otherwise, the bank is not bound to act upon
it.
4. Customer should be advised of the order and also the banker’s intention to
comply with the order.
5. When the customer is having a large balance and the attachment is for a
limited amount far less than the balance, the banker can transfer the necessary amount
(including court costs if any) to a separate account pending payment to the court and
the customer can be allowed to operate the balance in the account. But if the order
attaches all the debts owing to the customer without limit, then his account must be
stopped. Even in such a case, if the amount of the judgment debt and the costs is
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ascertained, the banker at his discretion can allow the customer an overdraft on a new
account against the surplus balance of the garnished account.
Liability of the Banker in case of wrongful Dishonour of Cheques: A banker
has the statutory obligation to honour his customer‟s cheques unless there are valid
reasons for refusing payments of the same. In case be dishonours a cheque,
intentionally or by mistake, he is liable to compensate the customer for the loss suffered
by him. According to Section 31 of the Negotiable Instruments Act, 1881, the banker is
liable to compensate the drawer for any loss or damage caused by the default on his
part in dishonouring the cheques without sufficient reason. The banker thus incurs
heavy liability for any mistake or default committed in dishonouring his customers‟
cheques.
Causes of Wrongful Dishoour: Wrongful dishonour of a cheque means a
dishonour committed by mistake of by negligence on the part of the banker or any of its
employees. A banker must honour the cheques of the customer so long as the latter‟s
account has sufficient funds. If the banker commits a mistake in his account books
which reduces correct balance in the account of the customer and thus a cheque is
dishonoured, the banker will be liable for such wrongful dishonour. For example, if a
credit made by a customer is posted to some other account or debit entry of some body
else is posted to the customer‟s account, the latter will not show the correct balance.
Similarly, if a post-dated cheque is honoured by the banker before eh date of the
cheque and thus the balance in the customer‟s account is reduced, the banker will be
liable for wrongful dishonour of a cheque subsequently presented for payment.
The banker will, however, not be responsible for wrongful dishonour if the
customer makes a deposit or a credit is received by main in order to make the funds
sufficient after the cheque has been dishnonoured by the bank.
Similarly, if the banker has not been furnished with the names and specimen
signature of the persons who have been authorized to sign cheques on behalf of a
person, company or institution, he can justifiably dishonour the cheques signed by
them.
It was stated earlier that when a banker allows the customer to open a current
account the stipulation is that he should not injure the customer‟s credit by refusing the
payment of cheques drawn against such account expect on reasonable and proper
grounds. From this it naturally follows that when a customer‟s credit is injured the
banker has to compensate by paying damages. This has been stated in Section 31 of
the Negotiable Instruments Act. 1881 (ref. Obligation to honour customer‟s mandate:).
This damage is not limited to the actual loss suffered by the customer and extends to
loss of credit or business reputation which entitles a customer to claim heavy damages.
After an analysis of the various decisions on this point the following rules emerge.
1. The amount of damages will be more in the case of a trader customer and
such damages are presumed without proof. Damages may be substantial or exemplary.
13
In the case of non-trading customers substantial damages will be awarded only if it is

proved as special damages. Gibbon V. West minister Bank Limited (1930).
In this case the plaintiff was a customer of the defendant bank and she paid a
certain sum of money to her account. Which was by mistake credited to a wrong accunt
by the banker. Later on a cheque issued by her was dishonoured because of this
mistake. Upon the dishonour she filed a suit claiming substantial damages. But it was
held that as the plaintiff was a non-trader, who had not proved any special damager,
she was entitled to nominal damages only and was awarded just 40 shillings. The same
view was held in an Indian case New Central Hall V. United Commercial Bank Ltd.
2. The maxim is “smaller the cheque, greater the damage”. It must not be
assumed that special damages will be awarded only if the amount of the cheque is very
large. Courts have invariably awarded more damages in the case of cheques involving
small amounts. The reason is simple. Customer suffers more loss of reputation when a
cheque for a small amount is dishonoured. Davidson. V. Barclays Limited. In this case
the plaintiff, a book maker drew a cheque for 42-15-8. It so happened that the banker
paid previously a cheque which the plaintiff had counter manded. On the account the
cheque in question was returned because of insufficient funds on a suit by the plaintiff
for damagers the court awarded a sum of $250.
3. The amount of damages will depend upon the history of the customer‟s
account. If the customer already has to his discredit one or two instances of his cheques
being dishnonoured due to insufficient funds, the court may award nominal damages
only.
Any additional or alternative action for the tort or libel may be brought under
certain circumstances. For example if the cheque is marked “Refer to drawer”, the
general view is that the words “Refer to drawer” merely inform the holder that he must
approach the drawer as to the reason for the dishonour of the cheque. The old view was
in case of improper dishonour with such an answer there would be breach of contract
but not libel. Libel is sometimes more expensive for the banker than a breach of
contract because damages are awarded without the need to prove a specific loss.
Whereas if it is simply a breach of contract; such loss will have to be proved.
Duties of a banker:
A 'Banker' has certain duties vis-à-vis his customer. These are:
(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
14
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
Duty to maintain secrecy:
Banker has a duty to maintain secrecy of customers' accounts. Maintaining
secrecy is not only a moral duty but bank is legally bound to keep the affairs of the
customer secret. The principle behind this duty is that disclosure about the dealings of
the customer to any unauthorized person may harm the reputation of customer and the
bank may be held liable. The duty of maintaining secrecy does not cease with the
closing of account or on the death of the account holder.
As per Sec. 13 of “Banking Companies Acquisition and Transfer of Undertakings
Act 1970”- “Every corresponding new bank shall observe, except as otherwise required
by law, the practices and usages customary among bankers, and, in particular, it shall
not divulge any information relating to or to the affairs of its constituents except in
circumstances in which it is, in accordance with law or practices and usages customary
among bankers, necessary or appropriate for the corresponding new bank to divulge
such information.”
Maintaining secrecy is implied terms of the contract with the customer which
bank enters into with the customer at the time of opening an account. Bank has not only
to maintain secrecy of transactions, but secrecy is also to be maintained in respect of
operations through ATM/ debit cards. Bank has also to maintain secrecy of user ID pins
with due care so that it does fall in wrong hands.
Failure to maintain secrecy:
Bank is liable to pay damages to the account holder for loss of money and
reputation if it fails in its duty to maintain secrecy and discloses information relating to a
customer's account or conduct of the account to any unauthorized person.
Bank can also be liable to the third party if its wrongful disclosure harms the
interest of the third party. If bank Knowingly furnishes wrong information There has
been a misrepresentation Over estimation of favourable opinion
Circumstances under which banker can disclose information of customer's
account:
A bank can disclose information regarding customer's account to a person(s)
under the following circumstances.
(a)Under compulsion of law.
(b)Under banking practices.
(c)For protecting national interest.
(d)For protecting bank’s own interest
(e)Under express or implied consent of the customer
Disclosure under compulsion of law:
15
Banks disclose information to various authorities who by virtue of powers vested

in them under provisions of various acts require banks to furnish information about
customer’s account. The information is called under:
(i)Section 4 of Banker's Book Evidence Act, 1891
(ii)Section 94 (3) of Code of Civil Procedure Act, 1908
(iii)Section 45 (B) of Reserve Bank of India Act, 1934
(iv)Section 26 of Banking Regulation Act, 1949
(v)Section 36 of Gift Tax Act, 1958
(vi)Sections 131, 133 of Income Tax Act, 1961
(vii)Section 29 of Industrial Development Bank of India Act, 1964
(viii)Section 12of Foreign Exchange Management Act, (FEMA) 1999
(ix)Section 12 of the Prevention of Money Laundering Act, 2002
Banks are required to furnish only the called for information (no additional
information is to be furnished) on receipt of written request of the person who is vested
with the authority to call for such information under the said acts. The customer is kept
informed about the disclosure of the information.
Disclosure under banking practices:
In order to ascertain financial position and credit worthiness of the person banks
obtain information from other banks with which they are maintaining accounts. It is an
established practice among bankers and implied consent of the customer is presumed
to exist. The opinion is given in strictest confidence and without responsibility on the
part of the bank furnishing such information. Credit information is furnished in coded
terms to other banks on IBA format and without signatures.
Rights of a banker:
1. Right of “Set off or the right to combine accounts”: A banker can combine
two or more accounts of a customer and shoe the net balance as the amount due
to from him.
2. Banker’s General Lien: The banker has a right of general lien against the
customer; the right to retain as security for a general balances of accounts any
goods and securities bailee to him.
3. Right of Application: Where customer has not directed the bank
to appropriate a deposit against a particular debt, it is the bank’s right to
appropriate the Payment to any debt.
Law of Limitation: Under article 22 of part 2 of the schedule to the limitation act 1963
the period of limitation for the refund of bank deposits is there years from the date the
customer demand repayment.
It is not that the bank has only duties to wards its customers, it too has certain
rights vis-à-vis his customers. The rights can broadly be classified as:
Right of General Lien
a)Right of Set-Off
b)Right of Appropriation
16
c)Act as per the mandate of customer

d)Right to Charge Interest, Commission, Incidental Charges etc.
Lien:
A lien is the right of a creditor in possession of goods, securities or any other
assets belonging to the debtor to retain them until the debt is repaid, provided that there
is no contract express or implied, to the contrary. It is a right to retain possession of
specific goods or securities or other movables of which the ownership vests in some
other person and the possession can be retained till the owner discharges the debt or
obligation to the possessor. The creditor (bank) has the right to maintain the security of
the debtor but not to sell it. There are two types of lien viz.
1.Particular Lien and
2.Right of General Lien
(a) Particular Lien:
A 'particular lien' gives the right to retain possession only of those goods in
respect of which the dues have arisen. It is also termed as ordinary lien. If the bank has
obtained a particular security for a particular debt, then the banker's right gets converted
into a particular lien.
(b) Right of General Lien:
Banker has a right of general lien against his borrower. General lien confers
banks right in respect of all dues and not for a particular due. It is a statutory right of the
bank and is available even in absence of an agreement but it does not confer the right
to pledge. A 'general lien' gives the right to retain possession of any goods in the legal
possession of the creditor until the whole of the debt due from the debtor is paid.
Section 171 of Indian Contract Act, 1872 confers the right of general lien to
banks. As per the section “ Bankers, factors, wharfingers, attorneys of a High Court and
policy-brokers may, in the absence of a contract to the contrary, retain, as a security for
a general balance of account any goods bailed to them; but no other persons have a
right to retain, as a security for such balance, goods bailed to them, unless there is an
express contract to the effect.”
Bank has a right of lien only when goods, securities are received in the
capacity as a creditor. While granting advances banks take documents.
These documents confer right to convert general lien as an implied pledge.
A banker’s lien is more than a general lien, it is an implied pledge and he
has the right to sell the goods in case of default Bank has a 'Right of Sale'
of goods under lien. Banker's right of lien is not barred by the Law of
Limitation.
Exercising Right of Lien:
Bank has the right of lien on goods and securities entrusted to him legally
and standing in the name of the borrower. Bank can exercise right of lien
17
on the securities in its possession for the dues of the same borrower, even
after the loan taken against that particular security has been re-paid. Right
of lien can be exercised on bills, cheques, promissory notes, share
certificates, bonds, debentures etc.
Where right of lien cannot be exercised:
Bank cannot exercise right of lien on goods received for safe custody,
goods held in capacity as a trustee, or as an agent of the customer, SDV,
or left in bank by mistake
Right of set-off:
The banker has the right to set off the accounts of its customer. It is a
statutory right available to a bank, to set off a debt owned to him by a
creditor from the credit balances held in other accounts of the borrower.
The right of set-off can be exercised only if there is no agreement express
or implied to the contrary. This right is applicable in respect of dues that are
due, are becoming due i.e. certain and not contingent. It is not applicable
on future debts. It is applicable in respect of deposits that are due for
payment.
The right of set off enables bank to combine all kinds of credit and debit
balances of a customer for arriving at a net sum due.
The right is also available for deposits kept in other branches of the same
bank. The right can be exercised after death, insolvency, and dissolution of
a company, after receipt of a garnishee/ attachment order .The right is also
available for time barred debts. Deposits held in the name of a guarantor
cannot be set off to the debit balance in borrowers account until a demand
is made to the guarantor and his liability becomes certain. Banks cannot
set off the credit balance of customer's personal account for a joint loan
account of the customer with another person unless both the joint
accountholders are jointly and severally liable. Banks exercise the Right of
set off only after serving a notice on the customer informing him that the
bank is going to exercise the right of set-off.
Automatic right of set off:
Depending on the situation, sometimes the set off takes place automatically
without the
permission from the customer. In the following events the set off happens
automatically i.e. without the permission from the customer.
18
a)On the death of the customer,

b)On customer becoming insolvent.
c)On receipt of a Garnishee order on customer’s account by court.
d)On receipt of a notice of assignment of credit balance by the customer to the banker.
e)On receipt of notice of second charge on the securities already charged to the bank.
Conditions while exercising right of Set - Off:
a)The account should be in the sole name of the customer.
b)The amount of debts must be certain and measurable.
c)There should not be any agreement to the contrary
d)Funds should not be held in trust accounts
e)The right cannot be exercised in respect of future or contingent debts.
f)The banker has the right to exercise this right before a garnishee order is received by
it.
Right of Appropriation:
It is the right of the customers to direct his banker against which debt (when more than
one debt is outstanding) the payment made by him should be appropriated. In case no
such direction is given, the bank can exercise its right of appropriation and apply it in
payment of any debt. Section 59,60 and 61 of Indian Contract Act, 1872 lays down the
rules of appropriation. Sec.59.Application of payment where debt to be discharged
is indicated: (i.e.– As per borrowers instructions) Where a debtor, owing several
distinct debts to one person, makes a payment to him, either with express intimation, or
under circumstances implying that the payment is to be applied to the discharge of
some particular debt, the payment, if accepted, must be applied accordingly. Sec.60.
Application of payment where debt to be discharged is not indicated: (i.e. in the
absence of express or implied intention of debtor) Sec.60 of the Indian Contract Act
states that if the debtor does not intimate or there is no circumstance of indicating how
the payment is to be used, the right of appropriation is vested in the creditor. According
to the Act, “Where the debtor has omitted to intimate and there are no other
circumstances, indicating to which debt the payment is to be applied, the creditor may
apply it at his discretion to any lawful debt actually due and payable to him from the
debtor, whether its recovery is or is not barred by the law in force for the time being as
to the limitation of suits.”
Sec.61.Application of payment where neither party appropriates.
Where neither party makes any appropriation the payment shall be applied in discharge
of the debts in order of time, whether they are or are not barred by the law in force for
the time being as to the limitation of suits. If the debts are of equal standing, the
payment shall be applied in discharge of each proportionally. Unless there is an
agreement to the contrary, any payment made by a debtor is applied first towards
interest and thereafter towards principal. If a customer has only one account and he
19
deposits and withdraws money from it regularly, the order in which the credit entry will
set off the debit entry is in the chronological order, this is known as Clayton’s rule.
Rule in Clayton’s case:
The rule was laid down in famous Devayanas Vs. Noble. The rule applies to running
accounts like CC/ OD with debit balance. The rule states that each withdrawal in a debit
account is considered as a new loan and each deposit as a repayment in that
chronological order.
Banker's right to charge interest, commission, incidental charges etc. :
Banker has an implied right to charge for services rendered and sold to a customer.
Bank charges interest on amount advanced, processing charges for the advance,
charges for non-utilization of credit facilities sanctioned, charges commission,
exchange, incidental charges etc. depending on the terms and conditions of advance
banks charge interest at monthly, quarterly or semiannually or annually. Banks charge
customers if the balance in deposit account falls below the prescribed amount. Usually
the bank informs such charges to the customer by various means.
Nomination Facility:
Nomination is expression of wish of a person about transfer of his assets after his death
to a named person. Nomination is not a will but it serves the purpose of will. In terms of
Sections 45ZA to 45 ZF of the Banking Regulation Act, 1949, Banking Companies
(Nomination) Rules, 1985 have been framed. Nomination facility simplifies the
procedure for settlement of claims of deceased depositors and locker holders. In an
unfortunate event of the death of a depositor, nomination enables the bank to make
payment to the nominee of a deceased depositor, of the amount standing to the credit
of the depositor, return the articles left by a deceased person in the bank's safe custody
to the nominee without asking for succession certificate or verifying claims of legal heirs.
Nomination does not take away the rights of legal heirs on the estate of the deceased.
The nominee receives the money from the bank as a trustee of the legal heirs. In the
case of a joint deposit account the nominee's right arises only after the death of all the
depositors. Nomination facility is intended for individuals and sole proprietary concerns.
Where the nominee is a minor, the depositor making the nomination appoints any
person to receive the amount of deposit in the event of his death during the minority of
the nominee. A person legally empowered to operate a minor's account can file a
nomination on behalf of the minor. Nomination can be made in account opening form
itself or on a separate form indicating the name and address of the nominee. The
account holders can change the nomination any time. There can be only one Nominee
for a deposit account whether held singly or jointly. There can be two nominees for a
jointly held locker.
Availability of the Nomination facility:
Nomination facility is available for all types of bank deposits, safe deposit lockers, and
safe custody articles. This is also applicable to deposits having operating instructions
"Either or Survivor".
20
Nomination can be made in favour of one person only. In case of a joint account,
nomination is to be made by all depositors jointly. Nomination cannot be made in
accounts where deposits are held in a representative capacity e.g. trust accounts etc.
and in accounts of partnership firms, H.U.F., companies, associations, clubs etc.
Nomination can be made in favour of a minor. However while making the nomination,
the nominee has to appoint another person (not a minor), to receive the amount of the
deposit on behalf of the nominee in the event of the death of the depositor during the
minority of the nominee. Date of birth of minor be obtained and noted.
A nomination will continue to be in force even on renewal of term deposit, unless
specifically cancelled or changed. Banks obtain separate nomination form for each term
deposit receipt A non-resident can be nominated as a nominee in a resident account
In case of non-resident nominees, the amount entitled to him from the account(s)/
deposits(s) of a deceased person, will be credited to his NRO account. The amount so
credited cannot be remitted outside India.
Insurance of Bank Deposits:
The Deposit Insurance and Credit Guarantee Corporation of India, a public limited
company promoted by Reserve Bank of India, insure bank deposits. The authorised
capital of the Corporation is Rs.50 crore, which is fully issued and subscribed by the
Reserve Bank of India (RBI). The management of the Corporation vests in a Board of
Directors of which a Deputy Governor, Reserve bank of India, is the Chairman.
The Corporation protects the interest of depositors and infuses confidence by providing
deposit insurance on account of failure of banks. All commercial banks including the
branches of foreign banks functioning in India, local area banks, regional rural banks, all
eligible co-operative banks are covered under the Deposit Insurance Scheme. The
insurance covers the loss of all or part of their deposits in all branches of a bank to a
maximum of Rs.1, 00,000. It insures all deposits such as savings, fixed, current,
recurring, etc except the following types of deposits.
(i) Deposits of foreign Governments,
(ii) Deposits of Central/State Governments,
(iii) Inter-bank deposits,
(iv) Deposits of the State Land Development Banks with the State co-operative bank;
(v) any amount due on account of and deposit received outside India
(vi) any amount, which has been specifically exempted by the corporation with the
previous approval of Reserve Bank of India.
The Corporation charges insurance premium from banks on deposits @10 paisa per
Rs.100of assessable deposits per annum. The premium is charged twice a year on the
assessable deposits as at 31st March and 30th September. Though the premium is
charged on the full amount of deposit kept by depositors in a bank is insured up to a
maximum of Rs.1,00,000 (Rupees One Lakh) only for both principal and interest
amount.
21
The corporation pays to each depositor through the liquidator, the amount of his deposit
up to Rupees one lakh within two months from the date of receipt of claim list from the
liquidator. If a bank is reconstructed or amalgamated / merged with another bank, it
pays the bank concerned, the difference between the full amount of deposit or the limit
of insurance cover in force at the time, whichever is less and the amount received by
him under the reconstruction / amalgamation scheme within two months from the date
of receipt of claim list from the transferee bank / Chief Executive Officer of the insured
bank/transferee bank as the case may be. In the second report of Narasimham
Committee (April 1998) on “Banking Sector Reforms” recommendations have been
made for reforming scheme of Deposit insurance. The committee has recommended
that instead of “flat’” rate premium, it should be ‘ risk based’ or ‘variable rate’ premium.
Know Your Customer Norms and Cash transactions:
The objective of KYC guidelines is to prevent banks from being used, intentionally or
unintentionally, by criminal elements for money laundering activities. KYC procedures
enable banks to know/understand their customers and their financial dealings better,
which in turn help them, manage their risks prudently. Necessary checks before
opening a new account ensures that the identity of the customer does not match with
any person with known criminal background or with banned entities such as individual
terrorists or terrorist organizations etc. and that no account is opened in anonymous or
fictitious/ benami name(s). Banks are supposed to adopt due diligence and appropriate
KYC norms at the time of opening of accounts. The objectives of the KYC are to ensure
appropriate customer identification and to monitor transactions of a suspicious nature.
While opening an account a bank is supposed to obtain all information necessary for
establishing the identity/legal existence of each new customer by taking and verifying
the introductory reference from an existing account holder/a person known to the bank
or on the basis of documents provided by the customer. The means of establishing
identity can be passport, driving license etc. In respect of existing customers banks are
required to complete customer identification at the earliest.
Ceiling and monitoring of cash transactions
As per RBI guidelines issued under Section 35 (A) of the Banking Regulation Act, 1949:
(i)Banks are required to issue travellers cheques, demand drafts, mail transfers, and
telegraphic transfers for Rs.50, 000 and above only by debit to customers’ accounts or
against cheques and not against cash. While purchasing travellers cheques, demand
drafts, mail transfers, and telegraphic transfers for Rs.50, 000 and above purchaser has
to mention his Permanent Income Tax Account Number (PAN) on the application.
(ii) The banks are required to keep a close watch of cash withdrawals and deposits for
Rs.10 lakhs and above in deposit, cash credit or overdraft accounts and keep record of
details of these large cash transactions in a separate register. Branches of banks are
required to report all cash deposits and withdrawals of Rs.10 lakhs and above as well
as transactions of suspicious nature with full details in fortnightly statements to their
controlling offices.
22
Bankers’ Fair Practice Code:

Indian Banks’ Association has prepared a code, which sets standards of fair banking
practices. This document is a broad framework under which the rights of common
depositors are recognized. It is a voluntary Code that promotes competition and
encourages market forces to achieve higher operating standards for the benefit of
customers. The Code applies to current, savings and all other deposit accounts,
collection and remittance services offered by the banks, loans and overdrafts, foreign-
exchange services, card products and third party products offered by banks.
23

LAW AND Practic EOF Banking

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LAW AND Practic EOF Banking

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LAW

An important consideration which determines a person‟s status as a customer is

Debtor and Creditor relationship

6. As a Guarantor: Banks give guarantee on behalf of their customers and enter

Cases in which the Banker Refuses Customer’s Cheques

In the case of non-trading customers substantial damages will be awarded only if it is

given the banker has to act according to how he is expected to act.

Banks disclose information to various authorities who by virtue of powers vested

c)Act as per the mandate of customer

a)On the death of the customer,

Bankers’ Fair Practice Code:

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