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Module 2

Banker and customer

Banker and customer – Types of relationship between
banker and customer
Bankers obligations to customers
AGENDA
Right of lien, setoff
Appropriation–Bankers legal duty of disclosure and
related matters
Customers` accounts with banks – Opening- operation –
KYC norms and operation
Types of accounts and customers
Nomination – Settlement of death claims
Banking process and clearing house process [Practical]

Bank
• Provide funds for business and individual
• Encourage savings habit
• Acts as an intermediary
• Facilitates business transactions
• Facilitate import and export
• Help in national development
• Help in improving standard of living

Banker
• An individual / institution who advises his
clients with regard to financial matters.
• Provide financial assistance to clients
according to needs

A banker is the one who gets into debts and creates debts.

• H.L. HART – the banker is one who receives money, collects cheques and
drafts, for customers, with an obligation to honour the cheques drawn by
customers from time to time subject to availability of amounts in the
account.

• Section 3 of NI ACT 1881, and Section 2 of BILL OF EXCHANGE ACT
1882. state that the term banker includes person or corporation or a
company acting as banker.

• Under Section 5 (1) of Banking Regulations of 1949, a banking company
is defined as any company which transacts banking business.

• Under Section 5 (1) B , banking business means accepting for the purpose
of landing or investment, deposits of money from the public, repayable
on demand or otherwise withdrawable by cheque , draft or otherwise.

Responsibilities and duties • Daily routine duties • Assess financial state of clients and offer bank schemes • Ensuring that bank complies with rules and regulation of all laws • Help clients with financial questions & needs • Meetings with clients to meet their requests • Reviewing clients financial history • Dealing with various financial transactions • Keeping accurate • Sell financial instruments records .

+ve traits a banker should possess • Preciseness • Good with people • Good mathematical mind • Determined • Professionalism .

• The duration of association of the customer with the bank is of no essence. . • A person who buys goods or services from a shop or a business entity. • A customer is one who has an account with the bank and to whom the banks undertakes to extend business of banking. CUSTOMER • A person you deal with as a business entity. • A casual transaction like encashment of a cheque does not entail a person to be customer. • A person/ company/entity who has an account with a bank is a customer. • There is no unanimity as regards to the time period of the dealings. • There is no statutory definition.

Duties of a customer • Communication of important information and changes • Unambiguous information in orders and instruction • Care in transmission of particular orders • Use of forms • Experss notification of any special instructions • Notification of time limits and dates • Complaints to be made immediately • Checking of confirmations of the bank • Liability arising from neglect of duty .

BANKER AND CUSTOMER – TYPES OF RELATIONSHIP BETWEEN BANKER AND CUSTOMER .

• The money once deposited in the bank becomes the money of the bank and it is prerogative of the bank to use that money as it deems fit.RELATIONSHIP  CREDITOR-DEBTOR • Relationship between the customer having a deposit account and the banker. • Depositor is the lender and the banker is the borrower. The depositor remains a creditor that too an unsecured creditor . • The money handed over to the bank is a debt. • Depositor is the creditor and the banker is the debtor.

he becomes the borrower and the banker becomes the lender. . • The relation is the debtor. the customer being a debtor and the banker a creditor.  DEBTOR-CREDITOR • When the customer avails a loan or an advance then his relationship with the banker undergoes a change to what it is when he is a deposit holder.creditor relation. • Since the funds are lent to the customer .

Under this agreement.Relationship of Pledger and Pledgee • The relationship between customer and banker can be that of Pledger and Pledgee. the customer becomes the Pledger. the assets or security will remain with the bank until a customer repays the loan. . This happens when customer pledges (promises) certain assets or security with the bank in order to get a loan. and the bank becomes the Pledgee. In this case.

. and the customer will become the Licensee. So. the banker will become the Licensor.Relationship of Licensor and Licensee • The relationship between banker and customer can be that of a Licensor and Licensee. • This happens when the banker gives a safe deposit locker to the customer.

and the bank became the bailee. • Bailee is the party to whom the property is delivered. • Bailor is the party that delivers property to another. when a customer gives a sealed box to the bank for safe keeping. • So. the customer became the bailor. • Bailment is a contract for delivering goods by one party to another to be held in trust for a specific period and returned when the purpose is ended. .Relationship of Bailor and Bailee • The relationship between banker and customer can be that of Bailor and Bailee.

and the Banker became the Hypothecatee. • This happens when the customer hypothecates (pledges) certain movable or non-movable property or assets with the banker in order to get a loan. the customer became the Hypothecator. In this case. .Relationship of Hypothecator and Hypothecatee • The relationship between customer and banker can be that of Hypothecator and Hypothecatee.

Relationship of Trustee and Beneficiary • A trustee holds property for the beneficiary. and the profit earned from this property belongs to the beneficiary. . The customer is the beneficiary so the ownership remains with the customer. banker becomes a trustee of his customer. • If the customer deposits securities or valuables with the banker for safe custody.

attorney. handling tax problems. etc. bills or promissory notes on his behalf.Relationship of Agent and Principal • The banker acts as an agent of the customer (principal) by providing the following agency services: • Buying and selling securities on his behalf. dividends. correspondent or representative of a customer. executor. • Banker as an agent performs many other functions such as payment of insurance premium. . and • Acting as a trustee. electricity and gas bills. • Collection of cheques.

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

Bankers obligation to customer OTHER RELATIONSHIPS .

Statutory obligation to honour cheques 2. A bankers's duty to maintain secrecy of customer'saccounts 4. Right to claim incidental charges . Banker's Lien 3.1.

Statutory obligation to honor cheques • The availability of money in the account of the customer • The correctness of the cheque • Proper drawing of the cheque • Proper application of the funds • Proper presentation • Reasonable time for collection • Existence of legal bar .

A bankers's duty to maintain secrecy of customer'saccounts 4. Statutory obligation to honour cheques 2. Banker's Lien 3. Right to claim incidental charges .1.

to the contrary. .• What is lien? A lien is the right of a creditor in possession of goods. • It is a legal claim by one person on the property of another as security for payment of a debt. • 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. provided that there is no contract express or implied. • A legal claim or attachment against property as security (right) for payment of an obligation. securities or any other assets belonging to the debtor to retain them until the debt is repaid.

Banker’s Lien • Right to retain the goods • Circumstances for exercising lien – Lien cannot go beyond agreement – A banker's lien is an implied pledge – No general lien on safe custody deposits – No lien on documents entrusted for a specific purpose – No lien on articles left by mistake – No lien until the due date of a loan – No lien on deposits .

Banker's Lien 3. A bankers's duty to maintain secrecy of customer's accounts 4. Right to claim incidental charges . Statutory obligation to honour cheques 2.1.

Bankers duty to maintain secrecy of customer’s accounts • Disclosure under the compulsion of law • Disclosure in the interest of the public • Disclosure in the interest of bank • Disclosure under the express or implied consent of customer .

4. Right to claim incidental charges • Intimation of charges levied through sms/mail/ letter • Notify new charges month before .

A bank has a right to set off a debt owing to a customer against a debt due from him. .• What is set-off? The right of set off is also known as the right of combination of accounts .

• The right of set-off can be exercised by the banker only when the relationship between the customer and the banker is that of. the right of set-off can be exercised by a banker. • The banker can exercised the right of set-off only in respect of.by serving a reasonable notice on the customer.• Set-off means. . • In an on going. situation.that the bank can adjust the credit balance in a customer's account against a debit balance in another account maintained by the same customer.debts due and determined.Debtor and Creditor.

• (c) There should be no agreement to the contrary.• The following condition are required to be fulfilled before a banker can exercise the right of set-off- • (a)The debt must be a sum certain and due immediately. . • (b) The debt must be due by and to the same parties and the in the same right.

(b) On the insolvency of a firm. metal incapacity or insolvency of a customer. or on the liquidation of a company. (c) On the receipt of garnishee order .(a) On the death.• The right to set-off account arise immediately in the following cases.

no document is required to be obtained from the customer. .• For exercising the right of set-off.

• Set-off is in relation to money and may arise from a contract or from mercantile usage or by operation of law.Relationship Between Lien And Set-Off • There is a distinction between a banker’s lien and the bank’s right to set-off. . • A lien is confined to securities and property in bank’s custody.

DEPOSIT ACCOUNTS .

TYPES • Savings bank account • Current deposit account • Fixed deposit account • Recurring deposit account • Salary account .

Steps to open a SB account • Filling up the application form • Proper introduction • Speciman signature • Nomination • Issue of passbook • Issue of cheque book .

Steps to open a deposit account • Deposit in the account • Withdrawal from deposit account • Issue of passbook • Issue of cheque book .

Procedure for closure of accounts • Reasons for closure • Premature closure .

Transfer of accounts .

Types of account holders • Individual • Joint stock company • Joint account holders • Clubs. associations and societies • Illiterates • Trusts • Minors • Executors and administrators • Married women • Government departments • Non resident account • Local authorities • Joint hindu family • Payment of pension • Sole proprietorship • Certificate of deposits • Partnership firms .

2002. intentionally or unintentionally. by criminal elements for money laundering or terrorist financing activities. • The objective of KYC/AML/CFT guidelines is to prevent banks from being used.• Introduction • Know Your Customer (KYC) Norms/Anti-Money Laundering (AML) Measures/Combating of Financing of Terrorism (CFT)/ Obligations of banks under PMLA. KYC procedures also enable banks to know/understand their custom ers and their financial dealings better which in turn help them manage their risks prudently. .

KYC Policy Banks should frame their KYC policies incorporating the following four key elements: a) Customer Acceptance Policy. b) Customer Identification Procedures. and d) Risk Management . c) Monitoring of Transactions.

1. 3. medium and high risk. Customers requiring very high level of monitoring. The A] Customer Acceptance Policy must ensure that explicit guidelines are in place on the following aspects of customer relationship in the bank. No account is opened in anonymous or fictitious/benami name.Customer Acceptance Policy (CAP) Every bank should develop a clear Customer Acceptance Policy laying down explicit criteria for acceptance of customers. 2. Categorisation of customers into low. Documentation requirements and other information to be collected in respect of different categories of customers depending on perceived risk .

4.bank is unable to verify the identity and /or obtain documents required as per the risk categorisation due to non cooperation of the customer or non reliability of the data/information furnished to the bank. i. . Not to open an account or close an existing account where the bank is unable to apply appropriate customer due diligence measures.3. Necessary checks before opening a new account so as to ensure 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 organisations etc.e.

nature of business activity. social/financial status. The customer profile may contain information relating to customer’s identity. individuals (other than High Net Worth) and entities whose identities and sources of wealth can be easily identified and transactions in whose accounts by and large conform to the known profile. may be categorised as low risk. duly approved by their boards. controls and procedures.B] Banks should prepare a profile for each new customer based on risk categorisation. D] Banks/FIs should have policies. . information about his clients’ business and their location etc C] For the purpose of risk Categorisation . in place to effectively manage and mitigate their risk adopting a risk-based approach.

data or information. . Customer Identification Procedure (CIP) The policy approved by the Board of banks should clearly spell out the Customer Identification Procedure to be carried out at different stages: •While establishing a banking relationship •Carrying out a financial transaction •When the bank has a doubt about the authenticity/veracity or the adequacy of the previously obtained customer identification data. independent source documents. Customer identification means identifying the customer and verifying his/her identity by using reliable.

. where the amount of transaction is equal to or exceeds rupees fifty thousand. whether conducted as a single transaction or several transactions that appear to be connected.Customer Identification Requirements – Indicative Guidelines Walk-in Customers In case of transactions carried out by a non-account based customer. that is a walk-in customer. the customer's identity and address should be verified. Salaried Employees In case of salaried employees. banks should rely on certificate/letter of identity and/or address issued only from corporate and other entities of repute and should be aware of the competent authority designated by the concerned employer to issue such certificate/letter. it is clarified that with a view to containing the risk of fraud.

Accounts of companies and firms Banks need to be vigilant against business entities being used by individuals as a ‘front’ for maintaining accounts with banks. banks should take reasonable precautions to verify the identity of the trustees and the settlors of trust (including any person settling assets into the trust). determine the source of funds and identify the natural persons who have a controlling interest and who comprise the management. grantors.Trust/Nominee Accounts While opening an account for a trust. . protectors. beneficiaries and signatories. Banks should examine the control structure of the entity.

Banks should pay special attention to all complex. Banks can effectively control and reduce their risk only if they have an understanding of the normal and reasonable activity of the customer so that they have the means of identifying transactions that fall outside the regular pattern of activity. .Monitoring of Transactions Ongoing monitoring is an essential element of effective KYC procedures. However. the extent of monitoring will depend on the risk sensitivity of the account. unusually large transactions and all unusual patterns which have no apparent economic or visible lawful purpose.

Risk Management •It should cover proper management oversight. assess risk in dealing with various countries. •Responsibility should be explicitly allocated within the bank for ensuring that the bank’s policies and procedures are implemented effectively. systems and controls. •Banks’ policies should address effectively managing and mitigating these risks adopting a risk-based approach . segregation of duties. delivery channels. in consultation with their boards. geographical areas and also the risk of various products. services. etc. devise procedures for creating risk profiles of their existing and new customers. •Banks should. training and other related matters. transactions.

the bank should consider closing the account or terminating the banking/business relationship after issuing due notice to the customer explaining the reasons for taking such a decision. Such decisions need to be taken at a reasonably senior level. .Closure of accounts Where the bank is unable to apply appropriate KYC measures due to non-furnishing of information and /or non-cooperation by the customer.