Banking Unit 3

Customer and Banker

As per Section 5(b) of the Banking Regulation Act, 1949 “Banking” is defined to mean “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.”

But it is also provided that “no person other than a banking Company, the Reserve Bank, the
State Bank of India or any other banking Institution, firm or other person notified by the Central
Govt. in this behalf on the recommendation of the Reserve Bank shall accept from the public
deposits of money withdrawable by cheque.”

Meaning of Banker
There is no proper definition of the term banker.
 SECTION 3 of the Negotiable Instruments Act, 1881 the term “banker” includes any
person acting as a “banker” and any post office savings bank.
 Even in the Banker’s Books Evidence Act 1891 and the Indian Stamps Act, 1899 failed to
lay down what exactly was meant by banking business, and what conditions were
required to be fulfilled by a person, so as to be regarded as a banker for the purposes of
these Acts.
 Even the English Law has failed to provide us with any satisfactory definition of the term
“banker” and “customer”.

Meaning of Customer
It has been held that a person becomes a customer either when the banker opens an account in
his name; or when the bank accepts his instruction to open an account and receives a deposit
to be credited to it.
DEFINITION:
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.”
The Kerala H.C. observed in the case of Central Bank of India Ltd. Bombay v. V. Gopinathan Nair
A customer is a person who has the habit of resorting to the same place or person to do
business. So far as banking transactions are concerned he is a person whose money has been
accepted on the footing that banker will honour up to the amount standing to his credit,
irrespective of his connection being of short or long standing”.

What Constitutes A Customer

For the purpose of KYC Policy, a ‘Customer’ is defined as:
(i) a person or entity that maintains an account and/or has a business relationship with the
bank;
(ii) one on whose behalf the account is maintained (i.e. the beneficial owner);
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(iii) beneficiaries of transactions conducted by professional intermediaries, such as Stock

Brokers, Chartered Accountants, Solicitors etc. as permitted under the law; and
(iv) any person or entity connected with a financial transaction which can pose significant
reputational or other risks to the bank, say, a wire transfer or issue of a high value demand
draft as a single transaction.

Features of Banking
 Dealing in Money: The banks accept deposits from the public and advance the same as
loans to the needy people. The deposits may be of different types – Current, fixed,
savings, etc. accounts. The deposits are accepted on various terms & conditions.
 Deposits must be withdrawable: The Deposits (other than fixed deposits) made by the
public can be withdrawable by cheques, draft or otherwise, i.e., the bank issue and pay
cheques. The deposits are usually withdrawable on demand.
 Dealing with Credit: The banks are the institutions that can create credit i.e., creation of
additional money for lending. Thus“creation of credit” is the Unique feature of banking.
 Commercial in nature: Since all the banking functions are carried on with the aim of
making profit, it is regarded as a Commercial institution.
 Nature of Agent: Besides the basic function of accepting deposits & lending money as
loans, bank possesses the character of an agent because of its various agency services.
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A banker customer relationship can be classified as:

(1) Debtor/ Creditor
(2) Creditor / Debtor
(3) Bailee / Bailor
(4) Lesser / Lessee
(5) Agent / Principal
(6) Trustee/Beneficiary

Nature of Relationship:
The relationship is best captured in the judgment in Joachimson v. Swiss Bank Corporation
“The bank undertakes to receive money and to collect bills for its customer’s account. The
proceeds so received are not to be held in trust for the customer, but the bank borrows the
proceeds & undertakes to repay them. The promise to repay is to repay at the branch of the
bank where the account is kept and during banking hours. It includes a promise to repay any
part of the amount due against the written order of the Customer addressed to the bank at the
branch and as such written orders may be outstanding in the course of business for two or
three days, it is a term of the contract that the bank will not cease to do business with the
customer except upon reasonable notice. The customer, on his part, undertakes to exercise
reasonable care in executing his written orders so as not to mislead the bank or to facilitate
forgery…..”

RELATIONSHIP AS DEBTOR AND CREDITOR

 On the opening of an account the banker assumes the position of a debtor. He is not a
depository or trustee of the customer’s money because the money over to the banker
becomes a debt due from him to the customer.
 The money deposited by the customer with the banker is, in legal terms, lent by the
customer to the banker, who makes use of the same according to his discretion.
 The creditor has the right to demand back his money from the banker, and the banker is
under and obligation to repay the debt as and when he is required to do so.
 But it is not necessary that the repayment is made in terms of the same currency notes
and coins.
 The payment, of course, must be made in terms of legal tender currency of the country.
 A depositor remains a creditor of his banker so long as his account carries a credit
balance.
 But he does not get any charge over the assets of his debtor/banker and remains an
unsecured creditor of the banker.
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Since the introduction of deposit insurance in India in 1962, the element of risk to the depositor
is minimized as the Deposit Insurance and Credit Guarantee Corporation undertakes to insure
the deposits up to a specified amount.

BANKER AS CREDITOR
Banker’s relationship with the customer is reversed as soon as the customer’s account is
overdrawn.
Banker becomes creditor of the customer who has taken a loan from the banker and continues
in that capacity till the loan is repaid.
As the loans and advances granted by a banker are usually secured by the tangible assets of the
borrower, the banker becomes a secured creditor of his customer.

This relationship differs from similar relationship arising out of ordinary commercial
debts in following respects:
 The creditor must demand payment. In case of ordinary commercial debt, the
debtor pays the amount on the specified date or earlier or whenever demanded by
the creditor as per the terms of the contract. But in case of deposit in the bank, the
debtor/ banker 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 due to the fact that a banker is not an ordinary debtor; he accepts
the deposits 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 on
demand or otherwise. The depositor makes the deposit for his convenience, apart from his
motives to earn an income (except current account).
 Proper place and time of demand. The demand by the creditor must be made at the
proper place and in proper time as prescribed by a bank.
For example, in case of bank drafts, travellers’ cheques, etc., the branch receiving the money
undertakes to repay it at a specified branch or at any branch of the bank.
 Demand must be made in proper manner. According to the statutory definition of
banking, deposits are withdrawable by cheque, draft, 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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BANKER AS TRUSTEE
A trustee holds money or assets and performs certain functions for the benefit of some other
person called the beneficiary.
For example, if the customer deposits securities or other valuables with the banker for safe
custody, the latter acts as a trustee of his customer.
 The customer continues to be the owner of the valuables deposited with the banker.
 The legal position of the banker as a trustee, therefore, differs from that of a debtor of
his customer.
In the former case the money or documents held by him are not treated as his own and are not
available for distribution amongst his general creditors in case of liquidation.

 The position of a banker as a trustee or as a debtor is determined according to the

circumstances to the each case. If he does something in the ordinary course of his
business, without any specific direction from the customer, he acts as a debtor (or
creditor).
 In case of money or bills, etc., deposited with the bank for specific purpose, the bankers’
position will be determined by ascertaining whether the amount was actually debited or
credited to the customer’s account or not.
 For example, in case of a cheque sent for collection from another banker, the banker
acts as a trustee till the cheques is realized and credited to his customer’s account and
thereafter he will be the debtor for the same account.
 If the collecting banks fails before the payment of the cheque is actually received by it
from the paying bank, the money so realized after the failure of the bank will belong to
the customer and will not be available for distribution amongst the general creditors of
the bank.
 The relationship between the banker and his customer as a trustee and beneficiary
depends upon the specific instructions given by the latter to the former regarding the
purpose of use of the money or documents entrusted to the banker.
 In New Bank of India Ltd. vs. Pearey Lal, the Supreme Court observed in the absence of
other evidence a person paying into a bank, whether he is a constituent of the bank or
not, may be presumed to have paid the money to be held as banker ordinarily held the
money of their constituent.
 If no specific instructions are given at the time of payment or thereafter and even if the
money is held in a Suspense Account the bank does not thereby become a trustee for
the amount paid.
 In case the borrower transfers to the banker certain shares in a company as a collateral
security and the transfer is duly registered in the books of the issuing company, no trust
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is created in respect of such shares and the banks’ position remains that of a pledge
rather than as trustee.
 Pronouncing the above verdict, in New Bank of India vs. Union of India, the Delhi High
Court observed that a trustee is generally not entitled to dispose of or appropriate trust
property for his benefit.
 “In the present case the banker was entitled to dispose of the shares and utilize the
amount thereof for adjustment to the loan amount if the debtor defaults.
 The banker’s obligation to transfer back the shares can arise only when the debtor
clears dues of the bank was not considered as trustee.

BANKER AS BAILOR/BAILEE
Section 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.
As per the contract, the goods should when the purpose is accomplished, be returned or
disposed off as per the directions of the person delivering the goods.

The person delivering the goods is called the bailer and the person to whom the goods are
delivered is called the bailee.
Banks secure their loans and advances by obtaining tangible securities.
In certain cases banks hold the physical possession of secured goods (pledge) – cash credit
against inventories; valuables – gold jewels (gold loans); bonds and shares (loans against shares
and financial instruments)
In such loans and advances, the collateral securities are held by banks and the relationship
between banks and customers are that of bailee (bank) and bailer (borrowing customer).

BANKER AS LESSOR/LESSEE
Section 105 of ‘Transfer & Property Act’ deals with lease, lesser, lessee.
In case of safe deposit locker accounts, the banker and customer relationship of lesser/lessee is
applicable. Banks lease the safe deposit lockers (bank’s immovable property) to the clients on
hire basis.
Banks allow their locker account holders the right to enjoy (make use of ) the property for a
specific period against payment of rent.

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.
For example, he buys or sells securities on behalf of his customer, collects cheques on his behalf
and makes payment of various dues of his customers, e.g.insurance premium, etc.
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The range of such agency functions has become much wider and the banks are now rendering
large number of agency services of diverse nature.
For example, some banks have established Tax Services Departments to take up the tax
problems of their customers.

In the case of Canara Bank vs. Canara Sale Corporation and others, a wider approach was
taken into consideration and it was held that a relationship between the customer of a bank and
a customer is that of a debtor and creditor.

Q. What are ancillary services in banking?

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Ancillary services are other services that banks offer to common men along with the necessary
banking services. These ancillary services form a very minuscule of the services offered by the
banks. Some of the ancillary services provided by the banks are:

 Funds transfer service: Useful for sending and receiving money from all over the world.
 Forex service: You can buy the foreign exchange for any purpose of expenditures like
travel, buying merchandise, etc. and sell the same to the bank when you earn or receive
from abroad.
 Custodial Service: You can keep your valuables like jewels, documents, etc. Under this
service, this is commonly known as Locker facility (Safe Deposit Vaults).
 Gold sale: only a few selected branches of banks or banks are allowed to provide this.
 e Banking: also known as Net banking or Internet banking is the latest and most
convenient facility of the banks .You can get id and password to operate your account
online : for transfer of funds to another account in the same bank or another bank. You
can keep the surplus funds in fixed deposit by using this facility.
 Travelers cheque: Traveller’s cheque is for a prepaid fixed amount and operates like cash,
so a purchaser can use it to buy goods or services when traveling. A customer can also
exchange a traveller’s check for cash. These cheques are used by the traveller as they are
safer and more convenient to travel with instead of currency notes. In case of losing the
traveller, cheque banks may cancel the previous one and may issue the new one. Now a
days these cheques are not common as we have other convenient methods like plastic
money.
 Merchant banking: The corporate houses which generate capital by issuing financial
securities such as shares, bonds, debentures, mutual funds etc must face disputes and
problems related to it. To overcome such problems various financial and nonfinancial
institutions are providing specialized services of merchant banking. Basically, it is
consultancy services which provides advices to its clients for financial, marketing,
managerial and legal matters related to financial and banking services.
 Mutual funds: The basic purpose of mutual funds is to collect investment form large
number of the investors and depositors, then invent the capital in diversified manner.
These investment schemes reduce the risk of loss like equity investments. These services
are very beneficial for the investors who have little or no knowledge of the investment
and equity market.
 Insurance: Commercial banks provide wide variety of the insurances like life insurance,
health insurance, vehicle insurance, insurance on loans etc. Banks are providing
insurance with the help of joint ventures with insurance companies like PNB MetLife,
SBI life etc.
 Bank cards: Banks provide various types of cards to the customers like debit cards, credit
cards, gift cards etc. With the help of these cards the card holder can transact without the
help of hard cash currency. These cards are also known as plastic money.
 . Mobile banking: As name says such services can be enjoyed with the help of a smart
phone and banking applications. Such services are similar like internet banking with
some limitations. Usually such applications can be installed in the smart phone for free of
cost.

Q. AGENCY FUNCTIONS OF BANKS

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A commercial bank is a kind of financial organization that carries all the operations related to
the deposit and withdrawal of money for the general public, providing loans for investment,
etc. These banks are profit-making organizations and do business only to make a profit.
Agency functions of a commercial bank
Commercial banks provide certain services to their customers in return for some commission,
these are called agency functions. Some of the agency functions of a commercial bank are listed
below
 Collection of cheques, bills, and drafts.
 Payment of interest, installments of loans, insurance premium, etc.
 Purchase and sale of securities
 Collection of interest, dividend, etc.
 Transfer of funds through demand drafts, mail transfer, etc.
 Purchase and sale of foreign exchange.

Other vital functions of Commercial Bank

The functions of commercial banks are classified into two main categories
(a) Primary functions
 Accepts deposit
 Provides loans and Advances
 Credit Cash
(b) Secondary functions
 Discounting bills of exchange
 Overdraft Facility
 Purchasing and Selling of the Securities
 Locker Facilities
 Paying and Gather the Credit – It uses different instruments like a promissory notes,
cheques, and bills of exchange

1. Collection of Cheques, Dividends, Interests etc.: Collecting cheques, drafts, bill of exchange,
dividends, interests etc. on behalf of its customers and credit the amount in their account is
one of the most important agency services rendered by the banks. Banker accepts standing
instructions from the customers and arranges to collect dividend, interest, pension, salaries,
bills etc. on behalf of his customers.
2. Payment of Subscription, Rent, Insurance Premium etc.: Banks undertake the payment of
subscriptions, rent, insurance premium etc. on behalf of the customers and debit the account
with the amount. It accepts the standing instructions of the customer and arranges for.the
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payment of such expenses on their behalf. It charges a small amount by way of commission for
these services.
3. Conduct of Stock Exchange Transactions: Banks purchase and sell various securities such as
shares, debentures, bonds etc. of joint stock companies both private and Government on
behalf of their customers.
4. Acting as Executor, Trustees, Attorneys etc.: Banks act as executors of will, trustees,
attorneys and administrators. As an executor it preserves the “Wills” of the customers and
executes them after their death. As a trustee, it takes care of the funds of the customers. As an
attorney, it signs transfer forms and documents on behalf of the customer.
5. Preparation of Income Tax Returns: Banks prepare income tax returns for their customers
through their tax service departments.
6. Conducting Foreign Exchange Transactions: Commercial banks purchase and sell foreign
exchange for their customers.
7. Banker acts as an agent to the customer. When a customer deposits cheques, drafts, bills or
any other promissory notes, the banker collects them and on realization credits the account of
the customer. For this activity, the banker is given commission. Banks also act as a
correspondent, representative of their customers. Some banks may even get the travelers’
tickets, passport etc. for their customers.
8. As the customer has to pay certain periodical payments such as monthly, quarterly, half
yearly, the banker is informed by a standing instruction. Thus, club subscription, insurance
premium, road tax, electricity charges and telephone bills of the customers are paid by the
bank after debiting the customers’ account.
9. As the customer may be a shareholder or debenture holder of companies, he will be
receiving dividend warrants and interest warrants, which will be deposited by the customer in
the bank. The bank will collect the same and credit it to the account of respective customers.
10. When customers are left with huge amount of money in their account, they can be invested
in company securities for capital appreciation or for getting a good return. The banker will be
able to advise customers about various investment opportunities as he has the services of
experts.
11. When customers die suddenly leaving behind minor children, the court may appoint the
banker to act as executor of will. Similarly, in the case of certain companies, the bank may act
as trustee for their property in the interest of creditors of the company.
12. In certain business transactions, payments are made with the help of banks by transferring
funds to different centres. In the present days, these transfers could be made within few hours
through electronic media. We have electronic transfer with the help of computers.
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13. In the case of foreign transactions or even domestic transactions, the banks will undertake
collection of funds on behalf of customers.
14. Salary disbursement: In a huge factory, employing thousands of persons, salary
disbursement can be done through bank branches. The salary of the employee will be credited
to his individual account every month and he can either make cheque payment or even
withdraw cash.
15. On the basis of the credit worthiness of the customer, banks issue credit card. The
purchases made by customers by using the credit card are being settled by the banker and later
on the banker collects the amount from the customer. In rural areas, the farmers are given
green cards by which they are enabled to purchase agricultural inputs on credit. They will repay
amount to the bank after the harvest.

SPECIAL TYPES OF CUSTOMERS

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When a banker agrees to

open an account for a
customer he enters into a
contract with the customer.
To make a valid contract,
both parties must be
competent to enter into a
contract. The capacity of
certain persons to make valid
agreements is subject to will
recognised restrictions as in
the case with minors,
lunatics, drunkards, marked
women, undischarged
badkrups, agent of all kinds,
Banking Unit 3

trustees, executors
administrators etc. So the
position of the banker with
regard to
these special types of
customers is to be studied
and also he should take
precautions in his dealings with
them
When a banker opens an account in the name of a customer, there is an agreement between
the two parties. This contract will be a valid contract when both parties are eligible to enter into
contracts. The ability of a particular class to make a valid agreement is subject to certain legal
restrictions, such as minors, lunatics, alcoholics, married women, insolvents, trustees, Executors
and administrators.
The banker also needs extra care when dealing with consumers such as public officials,
societies, joint stock companies and partner firms. Since the banker has to deal with different
types of people with different legal status, he should be very careful about the competency of
the customers. Any kind of negligence on the part of the banker can get him into trouble.
Therefore, different types of customers need different treatment at the hands of the banker.

 Minor:
A minor is a person who has not attained the age of 18. If a guardian is appointed by a court
before an individual has attained the age of 18 years, he remains minor until he attains the age
of 21 years. A minor is ineligible to enter into an agreement under Section 11 of the Contract
Act but Section 26 of the Negotiable Instruments Act allows a minor to draw, endorse, deliver
and negotiate a negotiable instrument.
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A minor can refuse a promise or consent. Therefore, a banker should be very careful in dealing
with a minor.

Risks in a contract with minor

 If a contract has been made or any money has been offered to the minor, the other
party runs the following risks :
 Any money offered to a minor cannot be recovered by force because the contract with
the minor is void. This also happens in the case of a minor who falsely presents himself
as an adult.
 Since the contract with a minor is null and void from the outset, any amount o lend to
him when he was a minor cannot be recovered after he attains majority.
 Even if a guarantee is given for the money obtained by a minor, this guarantee cannot
be sued in court if the principal debtor, who is a minor, refuses to repay the loan.
 Even a minor cannot pledge or mortgage the property. Therefore, securities held in the
form of a pledge or mortgage by a creditor will not give the original title and cannot be
availed in case a minor debtor refuses to repay the loan.
 Even a third party security that is a minor, offered by the minor against the loan on its
own capacity, cannot be enforced.

A banker should be very careful in dealing with a minor and take the following precautions.
The banker can open a savings bank account in the name of a minor in any of the following
ways.
 In the name of the minor, it should be operated by the minor’s natural guardian or
guardian appointed by the court. An account can also be opened in the joint names of
two or more minors, which are operated by the guardian.
 In the name of the minor, if he himself has reached the age of 12, he should perform the
operation himself. Two such minors can jointly open such an account, to be operated
upon by them jointly.
 The date of birth of the minor is recorded in the banks as given by the minor or his
guardian . On attaining majority, the minor’s account should be closed in the name of
the guardian and the balance paid to the minor (then major) Or be transferred to a new
account in his/her name.
 In case of death of minor ,the balance in the account is allowed to be withdrawn by the
guardian.
 If an advance is given to a minor on a third party guarantee, such advance cannot be
recovered from the guarantor as the contract of guarantee is invalid on the ground that
the creditor and the principal debtor (minor) itself is a void contract.
 .A minor may draw, endorse or negotiate a cheque or bill but cannot be held
responsible for such a cheque or bill. He cannot be sued in connection with a bill passed
by him during his minority. The banker must be very careful when dealing with a
negotiable instrument, to which a minor is a party.

 Lunatics And illiterate persons

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Lunatics:– A person with an unsound mind cannot make a reasonable deal. Therefore, the bank
should not open an account in the name of an unsound person. But after opening an account
with the bank, a customer may become lunatic.

Illiterate Persons : A person who cannot sign his name. When it is necessary to open an
account for such a person, the banker should obtain:
(1) Left thumb impression on the account opening form and specimen signature card in the
presence of an authorized bank official.
(2) Details of identification must be noted on the account opening form and specimen
signature card.
(3) At least two copies of the photographs attested by any account holder or authorized bank
official.

 Married women
A banker can open an account in the name of a married woman. Like any other user, she has
the power to run her own account and the bonafide dealing with the account cannot be
questioned .She can acquire, keep or dispose off any property in her name. If she takes an
overdraft from the bank or raises some loan, her own property will be available to the bank
and not her husband’s property.

 Partnership firms
Partnership firms may also have a joint bank account with the names of all the partners. A
banker should study the precautions when opening an account in the name of a firm. The
banker should carefully study the partnership deed as it is the firm’s charter.

Precautions to be taken while opening an account in the name of partnership firm:

1. Number of partners : The bank should pay close attention to checking the number of
partners. The number of partners does not exceed the legal limit. A firm must have at least two
partners. The maximum number of partners is 10 members for carrying on banking and 20
members for the purpose of running other business.
2. Name of the firm : The bank account should be opened in the name of the firm, not in the
individual name of the partner / partners. The banker should ensure that all the partners of the
firm have signed the account opening application form, the application for opening the account
has been made by one of the partners
3. No delegation of authority: No authorized partner may delegate authority to operate the
firm’s account to another person without the written consent of all partners.
4. New account at the time of reconstruction: The banker should close the firm’s account and
start a new account in case the firm is restructured due to the entry, death, retirement or
insolvency of a partner.

 Joint Stock company

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A company is a voluntary association of business persons with a common capital that is divided
into transferable shares of a fixed value , with limited liability, common seal and permanent
succession features.
Banker must take following precautions while opening an account in the name of company:
1. Study the documents: The banker should study important documents properly and carefully
such as certificate of incorporation and business commencement certificate, MOA , AOA and
prospectus. The banker should also get printed and certified copies of all these important
documents for his record.
2. Borrowing power of company: companies have to take money to carry out their business
activities. The borrowing capacity of a company is limited by MOA.

 Local Authorities
They usually dispose of large funds thus banks are happy to have them as customers. It
is necessary for the banks to refer to the special acts constituting such bodies. It is very
difficult to assess their borrowing powers and also some bodies may have statutory
powers to borrow.

 Joint Hindu Families

 Joint Accounts
 Clubs, societies, charities and religious institutions, libraries, schools, colleges, etc.,
which are not involved in commercial activities, maintain their bank accounts

Q. Banker’s 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. It is a legal claim by one person
on the property of another as security for payment to a debt. A legal claim or attachment against
property as securitv for pavment of an obligation.

Meaning of the Banker's Lien:

"A bankers' lien on negotiable securities has been judicially defined as 'an implied pledge'. A
banker has, in the absence of agreement to the contrary a lien on all bills received from a
customer in the ordinary course of banking business in respect of any balance that mav be due
from such customer." it should be noted that the lien extends only to negotiable instruments
which are remitted to the banker from the customer for the purpose of collection .When
collection has been made the process may be used by the banker in reduction of the customer's
debit balance unless otherwise earmarked. where speaking about the Banker's lien the learned
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author has stated that apart from any specific security the banker can look to his general lien as a
protection against loss on loan or overdraft or other credit facility.

So far as the legal requirements are concerned there is no need of any special agreement, written
or oral to create the right of lien, but it arises only by operation of law for, under the Indian Law,
such an agreement is implied by the terms of Section 171 of the Indian Contract Act, 1872 so
long as the same is not expressly excluded in order that the lien should arise the following
requirements are to be fulfilled:
 the property must come into the hands of the banker in his capacity as a banker in the
ordinary course of business;
 there should be no entrustment for a special purpose inconsistent with the lien
 the possession of the property must be lawfully obtained in his capacity as a banker; and
 There should be no agreement inconsistent with the lien. Lien an implied pledge
Banker's lien is a general lien recognized by law.

The banker only obtains a lien over pledged goods for the recovery of his dues and is liable to
sell those goods to reimburse himself. A banker's general lien will not be extended to securities
that are deposited with him for a specific purpose inconsistent with the lien. Therefore, the
following situations are not covered by the banker's
 It does not extend to securities that do not belong to the customer of the banker.
 The articles and goods that are deposited by the owner for safe custody.
 The securities or valuables that are lying in safe deposit locker.
 The securities that are deposited for sale, the collection of interest, dividend etc. Although
he will not be able to exercise his right of lien on Government promissory notes and
shares, he is entitled to do so for any interest that is earned and the dividend is collected.
 A banker has no lien for fully paid-up shares except for partly-paid shares.
 A banker has no lien on an insurance policy that is pledged as a security for a loan post
the repayment of debt.
 A banker has no lien on the current account balance on any bill discounts made by him.
 Conveyance of land is not subject to such lien but title deeds that are left without a
memorandum of deposit are subject to such lien.
 Fixed deposit for the collection of interest from another bank will not come under the
right of lien.
 The securities that are deposited upon a particular trust.
 Any security that is left in the banker's hands to cover a proposed advance which will be
subsequently declined.
 A banker cannot forfeit share in the satisfaction of a debt due to a shareholder.
 A bank does not have a lien over the credit balance lying in a customer's account. The
banker's right, in this case, is a right of 'set-off'.

The court can interfere in the exercise of the Bank's lien In the matter of Purewa & Associates
and another v/s Punjab National Bank and others where the debtor failed to pay dues of the
bank which resulted in denial of bank's services to him, the Supreme Court of India ordered that
the bank shall allow the operation of one current account which will be tree from the incidence
of the Banker's lien claimed bv the bank so as to enable the debtor to carrv on its day to day
Banking Unit 3

business transactions etc. and the liberty was given to bank to institute other proceedings for the
recovery of its dues

Q. Explain the banker’s duty to honor the customer’s cheques?

The obligation of banker to Honour Cheques:

Banker accepts the deposits from the customer with an obligation to repay it to him by way of
honouring the cheques drawn upon the banker. This obligation on the banker is imposed by
Section 31 of the Negotiable Instruments Act, 1881 which reads as " The drawee of a cheque
having sufficient funds of the drawer in his hands properly applicable to the payment of such
cheque must pay the cheque when duly required so to do, and, in default of such payment, must
compensate the drawer for any loss or damage caused by such default".

Conditions to honour the cheque:-

Banker is under an obligation to honour the cheque if the following conditions are fulfilled:- •

 Sufficient Balance: There must be sufficient balance in the drawer (customer) account
that too equal to the amount mentioned in the cheque. Basically the banker has a
sufficient amount of drawer. In the case of the current accounts situation is different
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because there is implied or expressed agreement between the bank and the current
account holder of overdraft. The Overdraft allows the customer to borrow the funds from
the bank in case of zero balance in their account.
In Indian Overseas Bank, Madras v. Maran Prasad Govindlal Patel, Ahmedabad It has been
held that overdraft is an express and implied agreement between the bank and its customer.
Banker is bound to honour the cheque as the overdraft arrangement between the bank and a
customer is a contract and it cannot be terminated by the bank unilaterally.

 Presentation of the cheque within working hours of business

The presentation of a cheque must be within the usual hours of business and if at all then
the banking hours.

 Presentation of the cheque within a reasonable time

The cheque must be presented within a reasonable time after the ostensible date of its
issue. If the cheques are presented after six months after the ostensible date of issue it
will be considered as stale cheque. A cheque must contain the date and banker is not
bound to honour the undated, post dated or a stale cheque.

 The cheque must be presented at the branch where the account is kept.

 Signature of the customer: The signature on the cheque should be totally the same taken
at the time of opening of the account. Banker is not bound to encash the forged cheque

In Keptigalla Rubber Estate Ltd. V National Bank of India Itd. It was held the banker
is liable to pay compensation to the customer if he neglects to verify the signature a paid
the amount on forged signatures.

 The proper form of cheque: The cheque will be honoured if it fulfils all the conditions
required by law. It must be drawn on a printed form supplied by the banker and it should
not contain 'request' to pay the amount

 Mutilated cheque: The cheque must not be torn, mutilated or cancelled. If a cheque is
turned and does not affect any printed or written matter of cheque, the drawer should
certify on it with the words "This cheque accidentally torn by me" and should sign
underneath the statement.

 The correctness of amounts in words and figures. The banker should verify the
amount mentioned in the cheque. If he finds the difference between words and figures,
then he can refuse to honour it. Section 18 of the Negotiable Instrument Act 1881 says
the amount written in words must be taken into consideration if the amount mentioned in
words and figures does not match. And if the cheque contains the amount in words but
there is no mentioning of the amount written in figures then banker should return it but
not vice versa.
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 Material Alteration - The banker should not accept a cheque materially altered. He
should verify it to the drawer. If a cheque is altered by the drawer he should consent the
alteration and if the cheque is altered by the third party then the bank should refuse it.

 Proper Application of the funds - The banker will honour a cheque when the funds
meant for its payment. For e.g.,if the funds are withdrawn for private use, the banker will
not honour it.

 Existence of legal bar - The banker will not honour the cheque if there will be any legal
bar on the holder of the cheque. The bank should note instruction of attachment by
courts, income-tax officers immediately in the accounts ledger and concerned records.

 Death, insolvency, etc. of customer - The banker should stop payment on cheques after
receiving the information about the customer's death, insolvency, etc.

 Cheques of partnership firm, company accounts - The banker should verify the
signature of the partners on the cheque and seal of the company before honouring the
cheque.

Q. Bankers duty to secrecy is not absolute. Explain when disclosure of account is

justified?

BANKERS DUTY OF SECRECY: INTRODUCTION:

It is of utmost important that the bank ensures all banking records of the customers are protected
and are not available to any other party or organisation with the customer's consent. Section 13
of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, specially
requires them to "observe, except as otherwise required by law, the practices and usages
customary amongst bankers and in particular not to divulge any information relating to the
affairs of the constituents except in circumstances in which they are, in accordance with law or
practices and usages or appropriate for them to divulge such information."

circumstances where there are provisions to access the details to one's account:
(a) Disclosure of Information required by Law
Banking Unit 3

A banker is under statutory obligation to disclose the information relating to his customer's
account when the law specially requires him to do so.
The provisions are:
(i) Under the Income- Tax Act, 1961. According to Section 131, the income tax
authorities possess the same powers as are vested in a court under the Code of
Civil Procedure, 1908, for enforcing the attendance of any person including
any offer of banking company or any offer thereof, to furnish information in
relation to such points or matters, as in the opinion of the income-tax
authorities will be useful for or relevant to any proceedings under the Act. The
income -tax authorities are thus authorized to call for necessary information
from the banker for the purpose of assessment of the bank customers. Section
285 of the Income- tax Act, 1961, requires the banks to furnish to the Income-
tax Officers the names and addresses of all persons to whom they have paid
interest, mentioning the actual amount of interest paid by them.

(ii) Under the Companies Act, 1956. When the Central Government appoints an
Inspector or to investigate the affairs of any joint stock company under
Section 235 or 237 of the Companies Act, 1956, it shall be the duty of all
officers and other employees and agents (including the bankers) of the
company to-
(a) produce all books and papers of, or relating to, the company, which are in
their custody or power, and
(b) otherwise to give the Inspector all assistance in connection with
investigation which they are reasonably able to give (Section 240). Thus the
banker is under an obligation to disclose all information regarding the
company but no of any other customer for the purpose of such investigation
(Section 251).
33
(iii) By order of the court: under the Banker's Books Evidence Act, 1891. When
the court orders the banker to disclose information relating to a customer's
account, the banker is bound to do so. In order to avoid the inconvenience
likely to be caused to the bankers from attending the Courts and producing
their account books as evidence, the Banker's Books Evidence Act, 1891,
provides that certified copies of the entries in the banker's book are to be
treated as sufficient evidence and production of the books in the Courts cannot
be forced upon the bankers. According to Section 4 of the Act, "a certified
copy of any entry in a banker's book shall in all legal proceedings be received
as prima facie evidence of the matters, transitions and accounts therein
recorded in every case where, and to the same extent, as the original entry
itself is now by law admissible, but not further or otherwise." Thus if a banker
is not a party to a suit, certified copy of the entries in his book will be
sufficient evidence. The Court is also empowered to allow any party to legal
proceedings to inspect or copy from the books of the banker for the purpose of
such proceedings.
(iv) Under the Reserve Bank of India Act, 1934. The Reserve Bank of India
collects credit information from the banking companies and also furnishes
Banking Unit 3

consolidated credit information from the banking company. Every banking

company is under a statutory obligation under Section 45-B of the Reserve
Bank. The Act, however, provides that the Credit information supplied by the
Reserve Bank to the banking companies shall be kept confidential. After the
enactment of the Reserve Bank of India (Amendment) Act, 1974, the banks
are granted statutory protection to exchange freely credit information mutually
among themselves.
(v) Under the Banking Regulation Act, 1949. Under Section 26, every banking
company is required to submit a return annually of all such accounts in India
which have not been operated upon for 10 years. Banks are required to give
particulars of the deposits standing to the credit of each such account.
(vi) Under the Gift Tax Act, 1958. Section 36 of the Gifts Tax Act, 1958, confers
on the Gift Tax authorities powers similar to those conferred on Income- Tax
authorities under Section 131 of the Income Tax Act.
(vii) Disclosure to Police. Under Section 94 (3) of the Criminal Procedure Code,
the banker is not exempted from producing the account books before the
police. The police officers conducting an investigation may also inspect the
banker's books for the purpose of such investigations (section 5 Banker's
Books Evidence Act).
(viii) Under the Foreign Exchange Management Act, 1999, under section 10.
Banking companies dealing in foreign exchange business are designated as
'authorized persons' in foreign exchange. Section 36, 37 and 38 of this Act
empowers the officer of the Directorate of Enforcement and the Reserve Bank
to investigate any contravention under the Act
(ix) With Express or Implied Consent of the Customer. The banker will be will
be justified in disclosing any information relating to his customer's account
with the latter's consent. In fact, the implied term of the contract between the
banker and his customer is that the former enters into a qualified obligation
with the latter to abstain from disclosing information as to his affairs without
his consent.
(x) The banker may disclose the state of his customer's account in order to
legally protect his own interest. For example, if the banker has to recover the
dues from the customer or the guarantor, disclosure of necessary facts to the
guarantor or the solicitor becomes necessary and is quite justified.
(xi) Banker's Reference. Banker follows the practice of making necessary
enquires about the customers, their sureties or the acceptors of the bills from
other bankers. This is an established practice amongst the bankers and is
justified on the ground that an implied consent of the customer is presumed to
exist. By custom and practice necessary information or opinion about the
customer is furnished by the banker confidentially. However, the banker
should be very careful in replying to such enquiries. Precautions to be taken
by the banker.
The banker should observe the following precautions while giving replies
about the status and financial standing of a customer:
(i)The banker should disclose his opinion based on the exact position of the
customer as is evident from his account. He should not take into account any
Banking Unit 3

rumour about his customer's creditworthiness. He is also not expected to make

further enquiries in order to furnish the information. The basis of his opinion
should be the record of the customer's dealings with banker.
(ii) He should give a general statement of the customer's account or his
financial position without disclosing the actual figures. In expressing his
general opinion, he should be very cautious-he should neither speak too low
about the customer nor too high. In the former case he injures the reputation
of the customer; in the latter, he might mislead the enquirer. In case
unsatisfactory opinion is to be given, the banker should give his opinion in
general terms so that it does not amount to a derogatory remark. It should give
a caution to the enquirer who should derive his own conclusions by inference
and make further enquiries, if he feels the necessity.
(iii) He should furnish the required information honestly without bias or
prejudice and should not misrepresent a fact deliberately. In such cases he
incurs liability not only to his own customer but also to the enquirer.

b) Duty to the public to disclose: Banker may justifiably disclose any information relating to
his customer's account when it is his duty to the public to disclose such information. In practice
this qualification has remained vague and placed the banks in difficult situations.
The Banking Commission, therefore, recommended a statutory provision clarifying the
circumstances when banks should disclose in public interest information specific cases cited
below:
(i) when a bank asked for information by a government official concerning the
commission of a crime and the bank has reasonable cause to believe that a
crime has been committed and that the information in the bank's possession
may lead to the apprehension of the culprit.
(ii) where the bank considers that the customer's is involved in activities
prejudicial to the interests of the country.
(iii) where the bank's books reveal that the customer is contravening the
provisions of any law, and
(iv) where sizable funds are received from foreign countries by a constituent.

Risks of Unwarranted and Unjustifiable Disclosure. The obligation of the banker to keep secrecy
of his customer's accounts - except in circumstances noted above - continue even after the
account is closed.

If a banker discloses information unjustifiably, he shall be liable to his customer and the
third party as follows:
(a) Liabilities to the customer. The customer may sue the banker for the damages suffered by
him as a result of such disclosure. Substantial amount may be claimed if the customer has
suffered material damages. Such damages may be suffered as a result of unjustifiable disclosure
of any information or extremely unfavourable opinion about the customer being expressed by the
banker.

(b) Liabilities to third parties. The banker is responsible to the third parties also to whom such
information is given, if –
Banking Unit 3

(i) the banker furnishes such information with the knowledge that it is false, and
(ii) Such party relies on the information and suffers losses.

Such third party may require the banker to compensate him for the losses suffered by him for
relying on such information. But the banker shall be liable only if it is proved that it furnished
the wrong or exaggerated information deliberately and intentionally. Thus he will be liable to the
third party on the charge of fraud but not for innocent misrepresentation. Mere negligence on his
part will not make him liable to a third party.
The general principles in this regard are as follows:
(1) A banker answering a reference from another banker on behalf of the latter's constituent owes
a duty of honesty to the said constituent.
(2) If a banker gives a reference in the form of a brief expression of opinion in regard to
creditworthiness, it does not accept and there is not expected of it any higher duty than that of
giving an honest answer.
(3) If the banker stipulates in its reply that it is without responsibility, it cannot be held liable for
negligence in respect of the reference.

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
Banking Unit 3

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. It is a legal claim by
one person
on the property of another as
security for payment of a debt.
Banking Unit 3

A legal claim or attachment

against
property as security for
payment of an obligation
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
Banking Unit 3

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. It is a legal claim by
one person
on the property of another as
security for payment of a debt.
A legal claim or attachment
against
Banking Unit 3

property as security for

payment of an obligation
When a banker agrees to
open an account for a
customer he enters into a
contract with the customer.
To make a valid contract,
both parties must be
competent to enter into a
contract. The capacity of
certain persons to make valid
agreements is subject to will
recognised restrictions as in
the case with minors,
Banking Unit 3

lunatics, drunkards, marked

women, undischarged
badkrups, agent of all kinds,
trustees, executors
administrators etc. So the
position of the banker with
regard to
these special types of
customers is to be studied
and also he should take
precautions in his dealings with
them
When a banker agrees to
open an account for a
customer he enters into a
Banking Unit 3

contract with the customer.

To make a valid contract,
both parties must be
competent to enter into a
contract. The capacity of
certain persons to make valid
agreements is subject to will
recognised restrictions as in
the case with minors,
lunatics, drunkards, marked
women, undischarged
badkrups, agent of all kinds,
trustees, executors
administrators etc. So the
Banking Unit 3

position of the banker with

regard to
these special types of
customers is to be studied
and also he should take
precautions in his dealings with
the