BANKING OPERATION

 MEANING OF BANKING:

• As per section 5(B) of the banking regulation act 1949 Banking means
the accepting for the purpose of lending or investment of deposits of
money from the public, repayable on demand or otherwise and
withdrawable by cheque, draft, order or otherwise.
 MEANING OF A BANKER:

• A banker is one who conducts the business of banking or one

who individually or as a member of a company, keeps an
establishment for the deposits or loan of money or for any
transaction in money, bills of exchange etc.
 MEANING OF CUSTOMER:

• The word customer has been derived from the word ‘custom’
which means a habit or tendency to do certain things in a
particular manner. A customer is a party who uses any of the
services provided by the banks that includes deposit of
money or obtaining a loan or any transactions in money etc.
 IMPORTANT POINTS TO BE NOTED TO BE
REGARDED AS A CUSTOMER:
• Customer should be of sound mind.

• He should not be debarred under any law.

• To form a contract between the banker and customer there must be an offer and
acceptance of the proposal.

• A single transaction can constitute a customer.

• Every customer should have an account.

• All the transactions must be of banking nature.

• A customer can be a person, company, society or legal entity.

 Bank Customers
Classifications
•

Those who do
not maintain any
account with the
Prospective or bank but have
Existing potential
Customers i.e. Former Customer one or the other
Customer i.e. kind of
Those who i.e. those who those who may
maintain account had account transactions such
open an account as purchasing a
relationships relationships with the bank in
with bank. with bank. draft, encashing
the future a cheque etc.
Such customers
do not maintain
any account with
the bank.
 BANKER-CUSTOMER RELATIONSHIP:

 GENERAL RELATIONSHIP  SPECIAL RELATIONSHIP

• Debtor and Creditor  Rights of a banker

• Creditor and Debtor • Right to lien

• Pledger and Pledgee • Right to set off

• Bailee and Bailor • Right to appropriate Payments

• Trustee and Beneficiary • Right under Garnishee Order

• Agent and Principal • Right not to produce books of

accounts

• Advisor and Client • Right to charge interest and

commission

• Lessee and Lessor  Obligations of a banker

 GENERAL RELATIONSHIP:
• Debtor and Creditor:
 When a customer opens a account with a banker and deposits money in
his account the banker becomes a debtor of the customer and customer
becomes the creditor.

 The money so deposited by the customer becomes banker’s property

and the banker has a right to use the money.

 A customer remains a creditor until there is a positive balance in his

bank account with the banker. In this case the creditor does not get any
charge over the debtor.
• The relationship of the banker and customer is different from the
conventional commercial debt in the following ways:
 Debtor(Banker) is not liable to repay the debt on his own and in deposits
except fixed deposits there is no maturity date of the debt. The creditor
(customer) must demand payment.

 Demand for payment by the customer must be made at the appropriate

time and place. Traditionally the creditor (customer ) must demand for
payment at the particular branch of the bank in which he has an account.

 Demand for payment from the bank should be made during the working
hours and on the date of maturity in the case of fixed deposits.

 The creditor (customer) must make demand for payment in a proper

manner in the form of cheques, withdrawal slips or pay orders. Other
convenient methods also include ATM, Mobile banking etc.
 CREDITOR AND DEBTOR RELATIONSHIP:
 Customer who borrows money from banker owes money to the banker.
In case of any loan or advances account the banker is the creditor and
the customer is the debtor.

 The relationship in the first case when person deposits money with the
banker reverses when he borrows money from the banker.
 PLEDGER AND PLEDGEE:
 A customer pledges certain assets with the banker in order to get a
loan. In this case the customer becomes the pledger and the banker
becomes the pledgee.

 Such assets and securities remain with the banker until the customer
repays the loan amount.
 BAILOR AND BAILEE:
 Bailment is a contract for delivery of goods to a party to be held in
trust for a specified period of time and is returned when the purpose
is ended.
 Bailor is the party who delivers such goods and bailee is the party to
whom it is delivered.
 Customers deposit valuables for safe custody with the banker for a
specific period of time.
 TRUSTEE AND BENEFICIARY:
 Trustee holds the property for the beneficiary the profits earned from
the property belongs to the Beneficiary.

 If the customer deposits securities or valuables with the banker for safe
custody the banker becomes a Trustee of his customer and the customer
is the Beneficiary.
 ADVISOR AND CLIENT:
 When a customer invests in securities the banker acts as his advisor.
 The banker should take maximum care and diligence to secure the
customer’s money and investment.
 LESSOR AND LESSEE:
 The banks provide safe deposit lockers to the customers who hire them
on lease basis. The relationship is that of lessor and lessee.

 Customer is a lessor when he deposits valuables in safe deposit lockers

with the banker.

 Banker is the lessee when he accepts such deposits from the customer.
 SPECIAL RELATIONSHIP:
 Rights of a banker:
1) Right to lien :
• Lien refers to retaining customer’s security or property until the
borrowed amount is repaid by the customer.
• The creditor has the right to retain the security of the property but not
to sell it.
 TYPES OF LIEN

PARTICULAR LIEN
The banker can exercise
lien only on specific
property and not on all the
properties of the debtor.
GENERAL LIEN
The banker retains
possession on all the goods
and properties deposited
with him which are not
delegated for a specific
purpose.
CONDITIONS WHERE BANKER CONDITIONS WHERE BANKER
CAN EXERCISE RIGHT TO CANNOT EXERCISE RIGHT TO
GENERAL LIEN GENERAL LIEN

• On goods and property entrusted • On the goods and security

as security by the debtor for entrusted with the banker as a
obtaining loan. trustee or agent.

• On goods and property which are • If a contract exists between the

legally in the name of the banker and customer in contrary
borrower. to the right to lien.

• On goods and property only after • On documents deposited with the

the due date for repayment. banker for the purpose of
obtaining loan.

• On goods and property which • On future or contingent debts.

have not been deposited for a
specific purpose.

• On the personal accounts against • On joint accounts where in one

the loan given to the partnership of the account holders is a
firm. customer.
 RIGHT TO 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.
CONDITIONS WHERE BANKER CAN
EXERCISE RIGHT TO SET-OFF
• Two or more accounts must be in the
name of the customer.
• One account should show a debit
balance and the other should show a
credit balance.
• The debit( expenses) amount should
be certain.
• There should not be any agreement
express or implied to the contrary of
such right
CONDITIONS WHERE BANKER
CANNOT EXERCISE RIGHT TO SET
-OFF
• Funds held in capacity of a trust(An
account in which a bank or trust
company acting as an authorized
custodian holds funds for specific
purposes such as to pay property
taxes and/or insurance premiums
associated with a mortgaged property.
Also called escrow account).
• In respect of future or contingent
debts.
• The right cannot be exercised in
respect of future or contingent debt.
• Trust account and personal account of
customer cannot be combined.
 RIGHT TO APPROPRIATE PAYMENTS:
• A customer may owe several distinct debts to the bank.

• When the customer deposits some money in the bank without specific
instructions and the amount is not sufficient to discharge all debts, then
the problem arises as towards which debt this amount should be
adjusted.

• In the absence of any specific instructions, the bank has the right to
appropriate the deposited amount to any loan, even to a time barred
debt. But the banker must inform the customer about the appropriation.
 RIGHT NOT TO PRODUCE BOOKS OF
ACCOUNTS:
 According to bankers book evidence act 1891 the banker is not
supposed to produce the original books of accounts as evidence in
cases where the banker is not a party.

 The banker may issue attested copies of the required portions if such
evidence is required by the court.
 RIGHT TO CHARGE INTEREST AND
COMMISION:
 Banker has an implied right to charge interest on advances and loans
from its customer.

 Interest may be monthly, quarterly, half yearly or annually.

 Banker also charges commission for any services offered to the

customers.
 OBLIGATIONS OF A BANKER:
 To honour customer’s cheque.

 To maintain secrecy of Customer’s account.

 To receive cheques and instruments of collection.

 To honour cheques of customers across the counters .

 To give reasonable notice before closing the customer’s account.

 PARTIAL FREEZING:
• If the customer fails to provide his KYC documents at the time of
periodic up dation bank has the option to close such accounts.

• Before closing the account the bank may however impose partial
freezing (initially allowing all credits and disallowing all debits while
giving an option to the customer to close the account and take their
money back).

• Later even all credits will not be allowed. Partial freezing will be
exercised by the bank after giving them due notice.
 SERVICES RENDERED BY BANKS:

TRADITIONAL SERVICES MODERN SERVICES

Accepting deposits Foreign Currency Exchange

Advancing of Loans Remittance

Cheque Payment Collection and payment of credit

instruments

Discounting of bills of exchange Consultancy

Bank Guarantee

ATM services
 E- BANKING:
• E- Banking refers to delivery of services of banks to a customer at his
home or office by using electronic technology.
• E-Banking services offered in banking industry:
 Electronic Fund Transfer.
 ATM.
 Smart cards.
 Electronic clearing service-Credit clearing and debit clearing.
 E-Mail.
 Internet Banking.
 Fax.
 Tele banking.
 Mobile Banking.
 MANDATE:
• A mandate is a written authorisation or command by a person or
organisation called as ‘Mandator’ to another person called ‘Mandatary’
to take a certain course of action.

• A mandate is automatically terminated on the bankruptcy

incapacitation or the death of the mandatory.
 POWER OF ATTORNEY
• A Power of Attorney is a legal document giving one person ( called an
agent) the power to act for another person( the principal).

• Agent can have broad legal authority or limited authority to make

legal decisions about the principal’s property and finance.

• It is frequently used in the event of principal’s illness or disability or

when the principal can’t be present to sign necessary legal documents
for financial transactions.
 FEATURES OF BANK LOAN
 Short term source of finance.

 Bank loan may be secured or unsecured depending on the

circumstances.

 Interest rate charged by the bank may be either fixed or variable.

 MERITS AND DEMERITS OF BANK
LOANS:
ADVANTAGES DISADVANTAGES

• They can be easily • Some loans carry

procured. prepayment penalty.

• Can be used for short term • Borrowing too much leads to

as well as medium term decreased cash flow.
financing.
• Interest paid on bank loan is • At times bank pays lower
tax deductible expense. cash than the loan
demanded.