HISTORY OF BANK

The word “Bank” is derived from an Italian word “Banco” which means “a bench”,
onwhich money changers sat and did their business in ancient days. In 1587, “Banco de Rialto”
was first set up in Venice
 INDIAN SCENARI

In 1786 - The Indian Banking History started with establishment of

“General Bank of India”, followed by “Bank of Hindustan” and
“Bengal Bank”
In 1809 - Presidency Bank of Bengal was established

In 1840 - Presidency Bank of Bombay was eastablisd

In 1843 - Presidency Bank of Madras was established

In 1934 - Reserve Bank of India was formed by passing RBI Act, 1934.
RBI was Nationalized on 1st January, 1949 by passing Transfer
of Public Ownership Act
In March 1949- Banking Regulation Act was passed, which gave more powers

toRBI (to control the working of Commercial Banks)

In 1955 - The Imperial Bank of India was nationalized and came into

existence as “State Bank of India”. Then seven subsidiary banks,

for State Bank, were set up and they together were called by the

name “SBI Group”

On 19th July,
1969 - 14 major Scheduled Banks in the country were nationalized

[Scheduled Commercial Bank is one which is included in the 2nd

schedule of RBI, Act]

In 1980 - Six more commercial banks were nationalized

MEANING OF “BANKER”
The Cambridge dictionary says the word „Bank‟ means “ability to pay” as opposite to
the word “bankrupt” which means “inability to pay”.

According to Dr. Herbert L. Heart “A banker is one who in the ordinary course of his
 business, honours cheques drawn upon him by persons from and for whom he receives money
on current accounts”.

According to Sir John Paget “No person or body corporate or otherwise can be a
bankerwho does not,

1. accept deposit account

2. accept current accounts

3. issue and pay cheques and

4. collect cheques crossed or uncrossed for his customers.

From these definitions, we can arrive at a common concept of banking. Accordingly a

banker is one who

a) accepts deposits

b) grants loans and undertakes investments.

DEFINITION OF “BANKING” UNDER INDIAN LAW

In India, „banking‟ has been defined by Banking Regulation Act, 1949 (Sections5b, c)
as follows:-

 Accepting, for the purpose of lending (or)

 Investment of deposits of money received from the public
 Repayable on demand and
 Withdrawable by cheque, draft, order or otherwise [Section – 5(b)]

A Banking company is “a company which transacts the business of banking in India”

[section 5 (c)].
From the above definitions, we can understand that the following are the core functions a bank.

 Acceptance of Deposits from the public.

 Making deposits of customers withdrawable by cheque or otherwise (Withdrawal slip,
letter, voucher etc) on demand or repayable on maturity to the customers.
 Lending or investing funds collected from customer, subject to the obligation to repay
the deposits to the customer on demand or otherwise as per the term of the deposits.

DEFINITION OF THE WORD “CUSTOMER”

According to Sir. John Paget “to constitute a customer, there must be some
recognizable course or habit of dealing in the nature of regular banking business”. So,
 a) A customer is one who deals with the bank
b) The dealing of the customer must be in the nature of regular banking business

There is no statutory definition of the term „Customer‟ in India under Banking

Regulation Act, 1949 or and other relevant Act. We have to look to the judicial
pronouncement for its definition. For example, the judgement pronounced in the Great
Western Railway Co vs. London and County Banking co Itd., (1901 A.C414) defines a
customer as follows:

"A customer is a person who has some sort of account, either deposit or current account
or some similar relations with a bank. From this, it follows that any person may become a
customer by opening a deposit or current account or similar relation with a bank".

The above judgement has been also followed by Indian Courts as regards the meaning or
essential elements of a customer. By opening a Bank account Current, Savings, Fixed Deposit
etc., in one's name and by depositing required money in such an account, a person becomes the
customer of that particular branch of the bank.
BANKER-CUSTOMER RELATIONSHIP:

The main relationship between bank and a customer is that of debtor -creditor in the
case of deposit account and creditor-debtor in the case of overdraft or loan account. The bank
acts trustee in case of valuables entrusted with the bank branch and as agent or bailee in other
kinds of transactions. These kinds of relationships enjoin different rights and duties on the
bank, involving different degrees of care and diligence as below:

The Relationship between banker and customer can be in the form of

1. Debtor - Creditor
2. Trustee - Beneficiary
3. Agent - Principal
4. Bailor - Bailee
5. Assignor - Assignee
I. Debtor-Creditor
A debtor is an entity that owes a debt to another entity. The entity may be an
individual, a firm, a government, a company or other legal person. When the counterpart of this
debt arrangement is a bank, the debtor is more often referred to as a borrower.

a) Bank as debtor:
The principal relationship of bank-customer is that of debtor-creditor in case of deposit
accounts like Savings Bank account, Current account, Fixed Deposit account and Recurring
 Deposit account.

b) Bank as creditor:
The relationship between bank-customer becomes that of creditor-debtor, when customer has
borrowed money from the bank by way of OD(Overdraft), CC(Cash credit), Demand loan,
Term loan, Bills discount or any other kind of loan or advance, either on secured or unsecured
basis.

According to Sir John Paget, “the relationship between banker and customer is primarily that of a
debtor-creditor and the respective position is determined by the state of the account”. This means
when a banker receives deposit from a customer, if the deposit is to the credit ofthe customer, the
banker becomes a debtor and the customer creditor. Thus, in all savings account where the
customer's account is in credit balance, the banker is the debtor and the customer, creditor.
If the customer
deposits II. TRUSTEE – BENEFICIARY
securities or
valuables with the Trustee is an individual who is responsible for a property or an organization on behalf of
banker for safe
custody, banker some other individual or a third party. Trustee is supposed to make profitable decision for the
becomes a
trustee of his entity under it authorization. It is a legal relationship between the trustee and the party, where the
customer. The
customer is the trustee is totally responsible for the maintenance, performance, and profitability of the trust
beneficiary so the
ownership under his guidance. When a bank receives money or other valuable securities, then the banker’s position is of a trustee. On the
remains with the other hand, when a bank receives money and uses it in various sectors, the bank becomes the beneficiary.
customer. A beneficiary is any person who gains an advantage and/or profits from something.

III. Agent – Principal

An agent is a person who acts for or represents another.

The principal is the person who gives authority to another, called an agent, to act on his or
her behalf.

Banker acts as an agent of a customer, when

 Purchasing and selling securities on behalf of the customers

 Collecting dividend warrants and interest warrants
 Paying club subscription, insurance premium, rent and other bills, as per instruction of
the customer
Here again, the relationship cannot be called in the true sense as agent - principal. In
the case of a normal agent-principal relationship, the agent has to render accounts to the principal
and should also inform the principal how the amount given to him by the principal has been
spent or invested. In other words, the agent has to render accounts to the principal while dealing
with the funds of the principal.
 However in the case of a banker- customer relationship, though the banker is dealing
with the money belonging to the customer, he need not render accounts to the customer or
inform the customer as to how the money is lent or invested. Though the money invested or lent,
belong to the customers the banker need not tell them the extent of profit or return he made from
such investment or loan. But in the case of normal agent- principal relationship, it is the duty of
the agent to render accounts to the principal and also inform the return earned on the investment.
Thus, though a banker may act as an agent of customer, in the true legal sense, he is not an agent
and so he need not render account for the money deposited with him.

IV. BAILOR – BAILEE

A bailor is a person who entrusts a piece of his or her property to another person
(the bailee). A bailee does not have ownership of the property.

When a customer borrows from a bank against the security under pledge, the bank is
regarded not only a pledgee but also a bailee and so the bank has to take care of the security
until it is returned to the customer. But the goods kept in the safe deposit vault will not come
under bailment. The customer is keeping the goods in the safe deposit vault secretly and hence
the banker will not be a bailee. As a bailee, the goods coming into his custody will be protected
and the banker is totally aware of the nature of the goods. Thus, the banker will act as a bailee
only when goods are entrusted to him for a specific purpose. Any expenses incurred towards
maintenance of the security or goods have to be borne by the customer.

V. ASSIGNOR – ASSIGNEE
An assignor is a person who transfers property rights or powers to another.
An assignee is a person or entity to which property rights or powers are transferred.
An assignee is the one to whom assignments are made.
Whenever a bank gives loan against life insurance policy or book debts or supply bills,
the banker is the assignee and the customer the assignor. Under assignment, the actionable
claim of the customer is transferred to the bank as security for loan. Thus, assignment is done
by customers whenever they take loan against insurance policy or book debts. Even contractors
after undertaking public works for the government, obtain loan from the bank by assigning the
supply bills in favour of the bank.
RIGHTS OF BANKER

I. Right of set-off

A debtor can recover any debt due from a creditor before settlement of debt with the
creditor. This is called “Right of set-off”

 When a bank accepts deposit from customer, he is a Debtor

 When a bank lends money to the customer, the banker is a creditor and customer
becomes Debtor.

 In this situation, if the customer approaches the bank for closing his deposit account,
the bank will allow the customer to close the account only after recovering the loan
taken by the customer, from his deposit money

Three conditions are to be fulfilled to exercise right of set-off

a) The same customer should have the deposit account and loan account
b) The loan must be outstanding and overdue when the loan amount is not overdue, the
right of set-off can not be exercised.
c) There should not be any agreement between the banker and customer, by which the
banker is prevented from exercising right of set-off.

Right of set-off can be exercised when a partner‟s individual account has a credit balance
and the firm‟s account has a debit balance, due to loan taken from bank. But vice-versa can
not be done.

II. Right of Lien

Lien is a right of a banker, by which he can retain any security coming to his possession
for the purpose of any loan due by customer.

One of the important rights enjoyed by a banker is the right of general lien. Lien means
the right of the creditor to retain goods and securities owned by the debtor until the debt due
from him is paid. It may either be general or particular. Bankers most undoubtedly have a
general lien on all securities deposited with them as bankers unless there is an express or implied
contract inconsistent with lien. In India sec 171 of the Indian Contract Act confers general lien
 upon bankers as follows - Bankers may in absence of a contract to the contrary, retain as security
for a general balance of account, any goods bailed to them.

III. Right of appropriation:

It is a right exercised by a creditor upon his debtor for the purpose of setting loan account. Sec. 59
to 61 of the Indian contract Act deal with the provisions of the right of appropriation of payments.

In right of appropriation, we find how a debtor who has three or four debit account
settler by making payments to the credits.
IV. Right to charge, interest, commission and brokerage

A banker grants loan and advances to customers and charges interest on the same
banker usually debit the customer‟s account when the customer fails to pay the interest amount
every month. After three months the interest will be added to the principal amount. Interest will
be then charged on the new principal amount.

 Similarly for collecting cheques, dividends and interest warrants, the banker can
commission and brokerage charges

V. Right to close the account of undesirable customer

Undesireable customer is one who has been frequently issuing cheques which are
bouncing or which are getting dishonoured. Due to this, the reputation of the banker is affected.
In such situation, the banker after giving due notice to the customer, can close the
account.

DUTIES OF A BANKER
I. Duty to honour cheque
It is the duty of the banker to honour cheque of customer which are drawn properly andpresented
during the working hours of the bank.

However the Bank has the right to dishonour the cheques under exceptional circumstances. (NI ACT)
II. Duty to Maintain Secrecy of Customer’s Account

The banker has an obligation towards customer to maintain secrecy about the status of
account. He should not reveal the secrecy of customer‟s account in the normal course of
business. However, in the following conditions the secrecy of the customer‟s account will be
disclosed.
 i) Express or Implied condition
ii) Under compulsion of law
iii) In the course of banking business
iv) Disclosure in the public interest
v) Bankers among themselves.

III. Duty to render proper account of deposits made and withdrawn by customer

It is the duty of the banker to render proper account of deposits and withdrawalsby the customer
by making entries in passbook and statement of account of customers.
It is the duty of the customer to verify the entries in the pass book then and thereand inform the
banker about the discrepancies, if any, shown in the pass book.

CASE LAWS-