Relationship between Banker and Customer

What is a Banker?
• According to Section 3 of the Negotiable Instruments Act the term ‘banker’ includes any
person acting as a banker.
• According to Halsbury’s Laws of England a banker as “an individual, partnership or
corporation whose sole predominating business is banking, that is the receipt of money
on current account or deposit account and the payment of cheques drawn by and the
collection of cheques paid in by the customer.”
• A banker is one who in the ordinary course of his business, honors cheques drawn upon
him by persons from and for whom he receives money on their account.
• No person or body corporate can be a banker who does not take deposit accounts and
current accounts, issue and pay cheques and collect cheques crossed and uncrossed for its
customers.
• One claiming to be a banker must acknowledge himself to be one, and the public must
accept him as such; his main business must be that of banking from which normally he
should be able to earn his livelihood.
Relationship between Banker and Customer
What is a Customer?
• A customer is a person who has some kind of account, such as deposit or current
with a bank and from this it follows that any person may
• Become a customer by opening a deposit or current account or having some similar
relation with a bank.”
• To constitute a customer, there must be some identifiable course or habit of dealing
in the nature of regular banking business. it is difficult to
• Settle the idea of a single transaction with that of a customer. a customer is a person;
he should have some kind of an account with the bank.
• The initial transaction in opening an account will not create the relation of a banker
and customer. according to the ‘duration theory’ the relation of a banker and
customer begins as soon as the first cheque is paid in and accepted for collection in
simple words a customer can be any person for whom the bank agrees to conduct an
account.
Relationship between Banker and Customer
Legal Requirements to be qualified as Customer:

Customer should be a major

Customer be of sound mind
He should not be debarred under any law
There must be an offer and acceptance of the proposal

Things to be noted:

A single transaction can constitute a customer

Every customer should have an account
There should be some frequency in transactions
All the dealing must be of banking nature
The customer can be a person, a company, a society or a legal entity.
Relationship between Banker and Customer
Debtor – Creditor
Creditor – Debtor
Principal – Agent
Bailor – Bailee
Trustor – Trustee
Pledger – Pledgee
Mortgagor – Mortgagee
Relationship between Banker and Customer
Debtor and Creditor Relationship

When customer deposits money with a bank the relationship of debtor and creditor will be
established, in this case Banker is the Debtor and Customer is the Creditor. It is the basic
rule of banking law that in the case of a general deposit of money in the bank, the moment
the money is deposited it becomes the property of bank; here the bank and the depositor
assume the legal relation of debtor and creditor.

Creditor and Debtor

When a bank grants loan and other credit facilities to the customer, the relationship
between the banker and customer is reversed, that is Customer is Debtor and Banker is
Creditor. In such cases banker doesn’t carry/ hold the money of the customer but it is the
money of the bank
Relationship between Banker and Customer
Debtor and Creditor Relationship

When customer deposits money with a bank the relationship of debtor and creditor will be
established, in this case Banker is the Debtor and Customer is the Creditor. It is the basic
rule of banking law that in the case of a general deposit of money in the bank, the moment
the money is deposited it becomes the property of bank; here the bank and the depositor
assume the legal relation of debtor and creditor.

Creditor and Debtor

When a bank grants loan and other credit facilities to the customer, the relationship
between the banker and customer is reversed, that is Customer is Debtor and Banker is
Creditor. In such cases banker doesn’t carry/ hold the money of the customer but it is the
money of the bank
Relationship between Banker and Customer
Principal and Agent

• In some situations, the banker serves as agent of the customer (principal).

• Some of the agency activities of a banker are specified below:

• Collecting cheques on behalf of the customer

• Collecting dividends and Bills of exchange
• Acting as an attorney, representative or executor of a customer
• Buying and selling securities on behalf of his customer.
Relationship between Banker and Customer
• Duties of the Agent (Banker):

• To follow the instructions given by principal

• To show required skill and carefulness
• Duty to provide proper accounts
• Duty to pass on any benefits derived from agency

• Duties of Principal (customer):

• The principal should pay remuneration to the agent

• The principal should not prevent his agent from performing the duties/ acts assigned to
him under the contract and for which remuneration is payable.
• Any lawful expenses which have been incurred by the agent in the course of
performance of his duties are to be indemnified by the principal.
Relationship between Banker and Customer
• Bailor and Bailee Relationship:

• Bailment is the delivery of goods by one person to another for some purpose, upon a
contract that they shall, when the purpose is fulfilled, bereturned or disposed of
according to the directions of the person delivering them. The person delivering the
goods is called the “bailor” and theperson to whom these are delivered is called the
“bailee”.
• Bailment is also an important type of relations between the banker and customer

• It may arise in the following situations:

• Availing safe custody services (lockers)

• Pledge of
• stocks
• as security for availing credit from bank
Relationship between Banker and Customer
• Pledger and Pledgee Relationship
• Pledge means the bailment of goods as security for payment of a debt or performance of a
promise. When credit facility is provided by a bank to its customers against collateral security
of movable property, the Relationship of Pledger and Pledgee is established.
• In this case customer is the Pledger and banker is the pledgee.

• Mortgagor and Mortgagee Relationship

• Mortgage means the transfer of an interest in specific immoveable property for the purpose of
getting the payment of money advanced or to beadvanced by way of loan, an existing or future
debt, or the performance of an engagement which may give rise to a financial liability.
• When credit facility is provided by the bank to a customer against the security of immovable
property, the relationship of Mortgagor andMortgagee is established.
• In this situation:
• Mortgagor— Customer
• Mortgagee— Bank
Rights of Bankers
Right of general lien:
• Lien is a right to keep possession of a property belonging to someone else until that person
discharges the debt they owe you. As such, lien gives the banker a right to retain assets,
securities or goods, pledged as securities/collateral belonging to the clients/borrower until the
borrower repays the loan/debt.
• The right of general lien is conferred on the bankers by Section 171 of the Indian Contract Act.
• A banker should exercise his right of general lien only as a banker not as a bailee. Also, the
banker can sell or realize the collateral/security only after giving a reasonable notice to the
customer who has defaulted. Banks cannot realize valuables deposited with them for safe
custody. This is a case of bailment. Hence, the bank cannot exercise the right of general lien in
case of bailments.
• A banker cannot exercise the right of general lien in the following cases:
• a. If valuables are deposited for safe custody
• b. If money or documents are deposited for specific purposes
• c. If there is an express agreement that the bank shall not exercise this right.
Rights of Bankers
The Right of Set-off
• Right of set-off gives the banker the power to adjust the amounts due to them from a customer,
against the amount payable by the customer to the banker. This helps in determining the net
balance payable by one party to another. If a customer has two or more accounts by the same
name in a bank, the banker has the right to set-off the amounts in both the accounts. In other
words, the banker has a right to combine two accounts.

Right of Appropriation
• A customer may owe several distinct debts to the bank. When the customer deposits some
money in the bank without specific instructions andthe amount is not sufficient to discharge all
debts, then the problem arises as towards which debt this amount should be adjusted. In
theabsence of any specific instructions, the bank has the right to appropriate the deposited
amount to any loan, even to a time barred-debt. Butthe banker must inform the customer about
the appropriation.
Duties of Bankers
The most important duty of a banker is to help their clients with all their financial queries and
needs. The banker may do so by meeting their clients in person or speaking with them over the
phone.

Review client’s history

The banker must review their clients’ financial history and current financial position.

Advise clients
Reviewing a client’s history helps the banker learn about the customer’s desired financial
needs. The banker should assist and guide them to meet their financial goals.

Keep records
The banker has to maintain complete and check records of the bank’s transactions on a daily
basis. Documents such as loan applications, bank statements and so on, must be reviewed and
filed by the banker.
Duties of Bankers
Gather financial information

A banker should gather financial information from both new and existing clients. A banker
should speak with the clients and use the informationgathered to prepare accounts, loans and
determine their creditworthiness.

Disbursal of funds

A banker must withdraw and deposit funds. This requires a lot of attention and accuracy.
Any Questions