Banking Law and

Practice
{ Unit I
Banker and Customer Relationship:

 General Relationship
 Debtor and creditor relationship: When the banker accepts
deposits from the customer then the bank becomes the
debtor and the customer is the creditor. If a customer takes
loans from a bank then the customer becomes a debtor and
the banks becomes a creditor.
 Pledger and Pledgee relationship: when customer pledges

(promises) certain assets or security with the bank in order

to get a loan. In this case, the customer becomes the
Pledger, and the bank becomes the Pledgee. Under this
agreement, the assets or security will remain with the bank
until a customer repays the loan.
 Banker and Customer
Relationship:
 Licensor (Lessor) and Licensee (Lessee) relationship: The
relationship between banker and customer can be that of
a Licensor and Licensee. This happens when the banker
gives a sale deposit locker to the customer. So, the
banker will become the Licensor, and the customer will
become the Licensee.
 Relationship of Trustee and Beneficiary:-A trustee holds

property for the beneficiary, and the profit earned from

this 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.
The customer is the beneficiary so the ownership
remains with the customer.
Banker and Customer Relationship:
 Relationship of Bailor and Bailee: The relationship between
banker and customer can be that of Bailor and Bailee. A
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. Bailor is the party that delivers
property to another. Bailee is the party to whom the property
is delivered. So, when a customer gives a sealed box to the
bank for safekeeping, the customer became the bailor, and the
bank became the bailee.
 Relationship of Advisor and Client:-

 When a customer invests in securities, 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. Here, the banker is an Advisor, and the customer
is a Client.
Banker and Customer
Relationship:

 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, Collection of cheques,
dividends, bills or promissory notes on his behalf.
Banker and Customer
Relationship:
 Special Relationships
 Statutory Obligation to honour cheques:

 When a customer opens an account there arises a

contractual relationship between the banker and the

customer. As long as there is sufficient balance in the
account of the customer, the banker must honour all his
cheques. However, the banker can refuse to honour the
cheques only in certain cases like wrong details.
 Secrecy of customer’s account:

 When a customer opens an account in a bank, the banker

must not give information about the customer’s account to

others. It is one of the principal duties of the banker. There
are certain circumstances in which the banker is entitled to
or required to make disclosures about a customer’s account.
 Banker and Customer
Relationship:
 Banker’s right to claim incidental charges:
 A banker has a right to charge a commission, interest or

other charges for the various services given by him to the

customer. For e.g. an overdraft facility.
 Law of limitation on bank deposits:

 Under the law of limitation, generally, a customer gives up

the right to recover the amount due at a banker if he has not

operated his account for the last 10 years. When a customer
opens an account there arises a contractual relationship
between the banker and the customer.
 Rights and Obligations of
Banker & Customer)
 RIGHTS OF A BANKER
 Right to charge interest

 Every bank in India has the right to charge interest on the

loans and advances sanctioned to customers. Interest is

usually charged monthly, quarterly, semi-annually or
annually.
 Right to levy commission and service charges

 Along with interest, banks also have the right to levy a

commission and service charges for the services rendered.

The service rendered by the bank might be SMS notification
service, retail banking and so on. Banks can also debit these
charges from the customer's bank account.
Rights and Obligations of
Banker & Customer)
 Right of Lien
 Another important right enjoyed by banks is the Right of

Lien. Banks have the right to keep goods and securities

belonging to the debtor as a security, until the loan is
repaid by the debtor. Banks have only the right to
maintain the security of the debtor and not to sell.
 The Right of Set-off

 The banker has the right to set off customer accounts.

Banks can merge a couple of accounts which are in the

name of the customer and set off the debit balance in one
account with the credit balance in the other, provided the
funds belong to the customer.
 Rights and Obligations of
Banker & Customer)
 Right of Appropriation
 Let us consider that a customer has taken many loans from

the bank and he deposits some money in the bank without

any instructions. If that amount is not sufficient to discharge
all loans, the bank has the right to appropriate the amount
deposited to any loan, even to a time-barred debt. But the
customer should be informed on the same.
 Right to Close the Account

 If the customer’s account is not properly maintained, banks

have all the right to close the account by sending a notice to

the customer. Bankers have no right to close the account,
without sending a written notice.
 CUSTOMERS AND
ACCOUNT HOLDERS
 Customer Meaning: - A customer means a person who
seeks to open account which banker accepts with proper
introduction OR a customer is a person who has some
sort of account, either deposit or current account or
some similar relation with the banker.
 Definition of Customer:

 According to John Paget, “a Customer constitutes a person

who has an account with a bank, whether fixed or savings,

and has dealing of banking nature”.
 Bank Account: - Bank account is a contractual agreement
between a bank and its customer, allowing the customer
to use bank services for a fee, Accounts may be
established in the name of individuals or firms. There are
various types of bank account. These are Current account,
Savings account and fixed account.
 Types of Bank Accounts or Deposit Accounts

 1. Current Account

 2. Savings Bank Account

 3. Fixed Deposit Account

 4. Recurring Deposit Account

 . Current Account: Current bank account is opened by
businessmen who have a higher number of regular transactions
with the bank. It includes deposits, withdrawal transactions. In
current account, amount can be deposited and withdrawn at
any time without giving any notice.
 Features: a. It’s opened with a minimum deposit of Rs 2000 to Rs
3000.
 b. It is an active or a running account because a customer
can deposit into a account any amount of money and any
number of times. Similarly, a customer can withdraw from
account any amount and any number times as there are
sufficient funds to his credit.
 c. These deposits are repayable on demand, hence it is
demand deposit and banker has to keep a major portion Cash in
the liquid form.
 d. Internet banking Facility is available.
 e. Opening of Current account is restricted only for businessmen,
Companies or Institutions.
 Saving Bank Account : Saving bank accounts are meant for
middle and low income groups who can deposit only small
sums for the purpose of saving a part of their income for
future needs and for earning a fair interest on their deposits.
Features: a. It can be opened with a very small deposits of Rs 100,
Rs 500 and Rs 1000/-
 b. A customer can deposit any amount of money and any number
of times
 c. Restrictions are made on withdrawals of deposits to promote of
saving habit among the depositors. E.g. 5 times a day and Rs
25.000/- per day only.
 d. A fair interest is allowed by the banker on saving bank
deposits on daily credit balances with the banker e.g. 4% pa
according RBI directions.
 e. Internet banking Facility is available.
 f. Proper introduction is necessary for opening Saving Account.
 Fixed Deposit Account :FD means deposits repayable after the
expiry of a certain period of time, which varies from 1 month to 10
years which is also known as Time or Term deposits.
 Features: a. It is opened with an intention of investing their money
on safe bank deposits and to earn a high and interest on their
deposits i.e 6 to 9%
 b. No introduction is necessary for opening FD Account.
 c. In a FD account, a fixed amount of money is deposited by a
customer for a fixed period of time at a fixed rate of interest.
 d. It can be opened with a minimum deposit of Rs 50 and
maximum no limit.
 e. A FD can be withdrawn by returning the FD receipt which is
given by bank at the time of depositing money.
 f. It cannot be withdrawal before maturity, if so, prepayment
charges are made
 Recurring Deposit Account : A Recurring deposit is a special kind
of term deposit offered by banks which help people with regular
incomes to deposit a fixed amount every month into their
recurring deposit account and earn interest at the rate
applicable to fixed deposits.
 Features a. No introduction is necessary for opening RD
Account.
 b. It can be opened with a minimum deposit of Rs 50 and
maximum no limit.
 c. A RD can be withdrawn by returning the RD book which is
given by bank at the time of depositing money.
 d. It cannot be withdrawal before maturity, if so, prepayment
charges are made.
 e. It is meant for people who gets regular income and to save
their income.
A bank opens accounts for various types of customer’s
like,
  Individual/s-
either singly or jointly with other individuals
  Sole relationship

  Hindu Undivided Family

  Limited Liability Partnership firm

  Limited Company (Joint Stock Company)

  One – Person Company Ltd.,

  Club and Association, Institution, Society

  Trust

  Executor and Administrator

  Official Liquidator

  Co-operative Society

While opening the accounts, the banker keeps in mind the

various legal aspects and practices involved in opening and
conducting these accounts.
 Types of Account Holder
and Customer in Bank
 Banks open accounts for a variety of customers, including
individuals, partnership firms, trusts, and corporations. While
opening the accounts, the banker must consider the numerous legal
aspects of opening and operating those accounts, as well as the
techniques used to operate those accounts.

 Real and Artificial (or Juridical) people are examples of different

types of customers. Individuals in single and joint capacities are
considered real persons: Individuals are divided into three categories:
residents, non-residents, and foreign nationals.

 Proprietorships, Partnerships, Private and Public Limited Companies,

Trusts, Clubs, Associations, Executors, Administrators, Liquidators,
Co-operative Societies, and other artificial persons are few examples.
Collecting Banker

 A Collecting banker is one who undertakes to collect

cheques, drafts, bill, pay order, traveller cheque, letter of
credit, dividend, debenture interest, etc., on behalf of the
customer. For undertaking this collection, the collecting banker
will be charging commission.
What are the Duties and
Responsibilities of a
Collecting Banker?
 The duties and responsibilities of a collecting banker are discussed
below:
 1. Due care and carefulness in the collection of cheque.
 2. Serving notice of dishonour.
 3. Agent for collection.
 4. Payment of interest to the customer. 5. Collection of bills of
exchange.
1. Due Care and
carefulness in the
Collection of Cheques:

 The collecting banker is bound to show due care and

carefulness in the collection of cheques presented to him. In
case a cheque is entrusted with the banker for collection, he
is expected to show it to the drawee banker within a
reasonable time.
2. Serving Notice of Dishonour:

 When the cheque is dishonoured, the collecting banker is

bound to give notice of the same to his customer within a
reasonable time. It may be noted here, when a cheque is
returned for confirmation of endorsement, notice must be
sent to his customer.
3. Agent for Collection:

 In case a cheque is drawn on a place where the banker is not a

member of the 8clearing-house9, he may employ another
banker who is a member of the clearing-house for the purpose
of collecting the cheque. In such a case the banker becomes a
substituted agent.