Bank Management

Chaper-1: Introduction

Origin of the word “BANK”: Generally it is assumed that the word “BANK” was probably
derived from the word “BENCH”. Because during the ancient time people used to do money-
lending business sitting on long bench. There are at least three schools of thought who give their
separate opinion about the origin of word “Bank”. Some of the economists believe that the word
bank originates from the German word BANC meaning a joint stock firm. The second school of
thought believes that the word bank has been derived from the Italian word ‘BANCO’ which
means heap or mound. There are another group of people who traces the origin of the word bank
to the Greek word “BENQUE” meaning a bench.
According to prof. chamber the word BANK came from the Italian word ‘Banco’ and French
word ‘Banque.

BANC/ BANCO BANQUE BANK

Finally we can say that with the passage of time the word Banco, Banc or Banque becomes
Bank.

Definition of Bank: Bank is a financial institution that collects surplus cash from society and
gives a part of that as a loan to investors for earning profit. More precisely bank is a financial
intermediary that accepts deposits and channels those deposits into lending activities, either
directly through by loaning or indirectly through capital market. That is, a bank established
relationship between the customer that have capital surplus and the customer that have capital
deficit.
According to American Institution of Bankers- “A bank provides service activity and acts as an
intermediary between creditor and lender.”
According to Dictionary of Banking and Finance “Bank is an institution that is registered by
central bank and mainly performs the following activities:
 Receives current deposits and give the withdrawal facilities to clients through cheque.
 Receive term deposits and pay interest on them.
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 Discounting notes, approving loans, and invest in government and other credit
instrument.
 Collect cheque, draft and note etc.
 Notification of depositor’s cheque.
 Acts as a trustee in accordance with government permission.

Bank Creditors
Depositors

Interest Interest

So at last we say that bank is a business/financial institution that receives surplus funds of
individual, trading or non-trading institution, government or private institution as deposits and
supply money with assurance of repayment against security in exchange of profit or interest to
trading or non-trading institution who has deficit fund and demand for money.

Origin and Historical Evaluation of Bank: Really it is very difficult to say about the origin and
historical evaluation of Bank. But it is sure that the development of bank is performed step by
step. Historical evaluations of bank are discussed below:

As early as 2000 B.C. Babylonians had developed a system for depositing their extra money
which was known as Bank. That is, the history of banking begins with the first proto type banks
of merchants of the ancient world which made grain loans to farmers and traders who carried
goods between two cities. This began around 2000B.C. in Babylonian.

In 1157 the bank of Venice was established which was the first public banking institution.
Originally it was not a bank in modern sense, rather an office for transferring public debt.

History shows the existence of a ‘Monte’ in Florence in 1336. The meaning of ‘Monte’ is given
in Italian dictionary as- a standing bank or mount of money, as they have in diverse cities of
Italy.
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As early as 1349 the business of the banking was carried on by the drapers of Barcelona. During
1401 a public bank was established in Barcelona. It used to exchange money, receive deposits
and discount bills of exchange both for citizens and foreigners.

In 1407 the bank of Genoa was established. It accepted all kinds of deposits which could be
drawn on demand or transferred from the account of one person to another. It is one of the
greatest banks of the century at that time.

The bank of England was established in 1694 in England but the development of modern
commercial banking institution was started only when banking act of 1833 was passed.

However it was only in 19th century when the modern joint stock commercial banking system
developed in most of the lending countries of the world.

In ancient India, the joint stock companies’ act 1850 was the first legislative enactment which
permitted the corporate sector to come into the banking business as per provisions of the act. The
first bank to be established under this act was the Oudh commercial bank in 1881 followed by
Punjab national bank in 1895 and People’s bank in 1901.

Banking History in Bangladesh: Banking in Bangladesh is as old as banking in other parts of

the world. Today’s banking system has evolved primarily from British banking through it has
undergone substantial changes in post-liberation period.

After the emergence of Bangladesh in 1971 Bangladesh Bank was established in 1972 which is
the successor bank of state bank of Pakistan. It is wholly government- owned bank managed by a
board appointed by the government.

Again after the achievement of victory against pak-occupation forces on 16 th December 1971,
there were 12 scheduled banks operating in Bangladesh. All these banks were established by
west Pakistanis and their head offices were in West Pakistan.

Nationalized Commercial Banks (NCBs) were established in Bangladesh in 1972 through

amalgamation of twelve commercial banks that were operating in pre-independent Bangladesh.

The Bangladesh government initially nationalized the entire domestic banking system and
proceeded to reorganize and rename the various banks. Foreign-owned banks were permitted to
continue doing business in Bangladesh.

The policy of the government regarding economic management has changed since 1976 from
which year private sector has been entrusted to play a bigger role in the economy than before.
Accordingly, to encourage private sector and to create competition in the banking sector,
government decided to allow setting-up of local private commercial banks in addition to
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nationalized commercial banks operating in the country. Few private commercial banks were
allowed to operate in the country in 1981.

In Bangladesh first private bank was incorporated in 1983. On that time govt. approved some
commercial bank to operate their activities which are IIBL, ABBL, NBL and IFIC bank.

After enactment of Banking Company act-1991, banking business becomes popular in

Bangladesh. In 1991 govt. again approved some commercial and specialized banks such as DBL,
NCCBL etc. In this way various political govt. in our country approved different banks in
different time. Now there are 66 banks in our country which have various natures.

 1981-1990, 9 private commercial banks

 1991-1996, 8 private commercial banks
 1996-2001, 13 private commercial banks
 2009 till today 14 private commercial banks

Nationalization of Bank: Immediately after the govt. of Bangladesh consolidated its authority,
it decided to adopt a socialistic pattern of society. This means a society with wealth distributed as
possible was adopted as the state policy of the government for newly created state of
Bangladesh. In order to implement the above mentioned state policy, the govt. of Bangladesh
decided to nationalize all the banks of the country. Accordingly on the 26 th March, 1972, the
Bangladesh Bank (Nationalization) order 1972, (president’s order no.26 of 1972) was
promulgated. All the existing 12 banks were nationalized and were taken over by the government
under the president’s order.

Under Article 4 of the nationalizing law, six new banks have been constituted with all the legal
characteristics of body corporate. Each of the new banks has common seal and perpetual
succession and subject to the prevision of the law each new bank is empowered to acquire, hold,
and dispose of the property, to contract and to sue and be sued in its own name. the undertakings
of existing banks specified below stand transferred to and vested in, the new banks mentioned
against them.

Nationalized Banks Amalgamated and rename after

nationalization
 National Bank of Pakistan Sonali Bank
 Bank of Bahawalpur Limited
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 Premier Bank Limited

 United Bank Limited Janata Bank
 Union Bank Limited
 Habib Bank Limited Agrani Bank
 Commerce Bank Limited
 Muslim commercial Bank Limited Rupali Bank
 Standard Bank Limited
 Australasia Bank Limited
Eastern Mercantile Bank Limited Pubali Bank
Eastern Banking corporation Limited Uttara Bank

Objectives of Nationalization: Objectives of nationalizing commercial banks are outline below:

 To ensure that banking system serves a much wider section of the community by
dispensing credit to the poorest and weaker sections of the society.
 Remove the regional disparities.
 Help in development of backward areas.
 Serve better the needs of development of the economy in conformity with national policy
and objectives formulated by govt.
 Improving our rural economy for socio-economic upliftment by boosting up production
activities in the rural sectors so as to raise the income level and living standard of the
rural inhabitants.

Banks in Bangladesh

Banks After the independence, banking industry in Bangladesh started its journey with
6 Nationalized commercialized banks, 3 State owned Specialized banks and 9 Foreign
Banks. In the 1980's banking industry achieved significant expansion with the entrance
of private banks. Now, banks in Bangladesh are primarily of two types:

 Scheduled Banks:
The banks that remain in the list of banks maintained under the Bangladesh Bank
Order, 1972.
 Non-Scheduled Banks:
The banks which are established for special and definite objective and operate
under any act but are not Scheduled Banks. These banks cannot perform all
functions of scheduled banks.

There are 62 scheduled banks in Bangladesh who operate under full control and
supervision of Bangladesh Bank which is empowered to do so through Bangladesh Bank
Order, 1972 and Bank Company Act, 1991. Scheduled Banks are classified into following
types:

1. State Owned Commercial Banks (SOCBs): There are 6 SOCBs which are fully or
majorly owned by the Government of Bangladesh.
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2. Specialized Banks (SDBs): 3 specialized banks are now operating which were
established for specific objectives like agricultural or industrial development.
These banks are also fully or majorly owned by the Government of Bangladesh.
3. Private Commercial Banks (PCBs): There are 43 private commercial
banks which are majorly owned by individuals/the private entities. PCBs can be
categorized into two groups:
1. Conventional PCBs: 33 conventional PCBs are now operating in the
industry. They perform the banking functions in conventional fashion i.e
interest based operations.
2. Islami Shariah based PCBs: There are 10 Islami Shariah based PCBs in
Bangladesh and they execute banking activities according to Islami
Shariah based principles i.e. Profit-Loss Sharing (PLS) mode.
4. Digital Commercial Banks: There is 1 digital commercial bank [yet not granted
permission for Commercial Operation] which is owned by individuals/private
entities. It is a digital bank with no branches.
5. Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh as the
branches of the banks which are incorporated in abroad.

There are now 5 non-scheduled banks in Bangladesh which are:

1. Ansar VDP Unnayan Bank,

2. Karmashangosthan Bank,
3. Grameen Bank,
4. Jubilee Bank,
5. Palli Sanchay Bank

Banks versus Finance Companies

FCs
Finance Companies (FCs) are those types of financial institutions which are licensed
under the ফাইন্যান্স কোম্পানী আইন, ২০২৩ (the Finance Company Act, 2023) and
regulated and supervised by the Bangladesh Bank. At present, 35 FCs are operating in
Bangladesh while the first one was established in 1981. Out of the total, 2 is fully
government owned, 1 is subsidiary of a state-owned commercial bank, 2 are jointly
owned by the government and foreign government entities, 19 are established by
private domestic entrepreneurs and 11 are joint ventures of domestic and foreign
entrepreneurs. Major sources of funds of FCs are Term Deposits (at least three months
tenure), Credit Facility from Banks and other FCs, Call Money as well as Bond and
Securitization.

The major difference between banks and FCs are as follows:

1. FCs cannot issue cheques, pay-orders or demand drafts.
2. FCs cannot receive demand deposits,
3. FCs cannot be involved in foreign exchange financing,
FCs can conduct their business operations with diversified financing modes like
syndicated financing, bridge financing, lease financing, securitized instruments, private
placement of debt and equity etc.
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Bangladesh Bank:
Bangladesh Bank is the central bank of Bangladesh. It was established on 16 th December 1971
under the Bangladesh Bank (temporary) order1971n (Subsequently substituted by the
presidential order no. 127 of 1972). The powers and functions of Bangladesh Bank are governed
by Bangladesh Bank order 1972 and Banking companies’ act 1991.
The bank is run according to the direction of the government. The chief executive, the governor
and his deputies as well as the bank’s policy making body board of directors are all appointed by
the government. Bangladesh Bank has 10 branches. 2 branch office in Dhaka (one in Motijheel
and another is in Sadarghat) and other branches in Barishal, Chittagong, Rangpur, Sylhet, Bogra,
Khulna, Rajshahi and Mymnsynha.
With the recommendation of World Bank /IMF, govt. in 2003 provided some degree of
autonomy to the bank to carry out its responsibilities without undue interference of the
government and a new body called co-ordination council headed by ministry for finance with
ministry of commerce , governor of Bangladesh Bank, secretary of finance divisions, secretary of
international resource division, member of planning commission as the member has been set up
to oversee the Bangladesh Bank’s fiscal, monetary and exchange rate policies.

Functions of Bangladesh Bank:

The Bank which builds up banking system and money market is a central bank.
Bangladesh bank is the central bank in our country which functions are briefly
outlined below:

 Formulation and implementation of monetary and credit policies.

 Regulation and supervision of banks and non-bank financial institutions,
promotion and development of domestic financial markets.
 Management of the country's international reserves.
 Issuance of currency notes.
 Regulation and supervision of the payment system.
 Acting as banker to the government.
 Money Laundering Prevention.
 Collection and furnishing of credit information.
 Implementation of the Foreign exchange regulation Act.
 Managing a Deposit Insurance Scheme .
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Methods of Credit Control used by Central

Bank

The two categories are: I. Quantitative or General

Methods II. Qualitative or Selective Methods.

Category # I. Quantitative or General Methods:

1. Bank Rate Policy:

The bank rate is the rate at which the Central Bank of a

country is prepared to re-discount the first class securities.

It means the bank is prepared to advance loans on

approved securities to its member banks.

As the Central Bank is only the lender of the last resort the
bank rate is normally higher than the market rate.

For example:
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If the Central Bank wants to control credit, it will raise the

bank rate. As a result, the market rate and other lending
rates in the money-market will go up. Borrowing will be
discouraged. The raising of bank rate will lead to
contraction of credit.

Similarly, a fall in bank rate mil lowers the lending rates in

the money market which in turn will stimulate commercial
and industrial activity, for which more credit will be
required from the banks. Thus, there will be expansion of
the volume of bank Credit.
2. Open Market Operations:

This method of credit control is used in two senses:

(i) In the narrow sense, and

(ii) In broad sense.

In narrow sense—the Central Bank starts the purchase and

sale of Government securities in the money market. But in
the Broad Sense—the Central Bank purchases and sale not
only Government securities but also of other proper and
eligible securities like bills and securities of private
concerns. When the banks and the private individuals
purchase these securities they have to make payments for
these securities to the Central Bank.

This gives result in the fall in the cash reserves of the

Commercial Banks, which in turn reduces the ability of
create credit. Through this way of working the Central
Bank is able to exercise a check on the expansion of credit.

Further, if there is deflationary situation and the

Commercial Banks are not creating as much credit as is
desirable in the interest of the economy. Then in such
situation the Central Bank will start purchasing securities
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in the open market from Commercial Banks and private

individuals.

With this activity the cash will now move from the Central
Bank to the Commercial Banks. With this increased cash
reserves the Commercial Banks will be in a position to
create more credit with the result that the volume of bank
credit will expand in the economy.
3. Variable Cash Reserve Ratio:

Under this system the Central Bank controls credit by

changing the Cash Reserves Ratio. For example—If the
Commercial Banks have excessive cash reserves on the
basis of which they are creating too much of credit which
is harmful for the larger interest of the economy. So it will
raise the cash reserve ratio which the Commercial Banks
are required to maintain with the Central Bank.

This activity of the Central Bank will force the Commercial

Banks to curtail the creation of credit in the economy. In
this way by raising the cash reserve ratio of the
Commercial Banks the Central Bank will be able to put an
effective check on the inflationary expansion of credit in
the economy.

Similarly, when the Central Bank desires that the

Commercial Banks should increase the volume of credit in
order to bring about an economic revival in the country.
The Central Bank will lower down the Cash Reserve ratio
with a view to expand the cash reserves of the Commercial
Banks.

With this, the Commercial Banks will now be in a position

to create more credit than what they were doing before.
Thus, by varying the cash reserve ratio, the Central Bank
can influence the creation of credit.
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Which is Superior?

Either variable cash reserve ratio or open market

operations:

From the analysis and discussions made above of these

two methods of credit, it can be said that the variable cash
reserve ratio method is superior to open market operations
on the following grounds:

(1) Open market operations is time consuming procedure

while cash reserves ratio produces immediate effect in the
economy.

(2) Open market operations can work successfully only

where securities market in a country are well organised
and well developed.

While Cash Reserve Ratio does not require such type of

securities market for the successful implementation.

(3) Open market operations will be successful where

marginal adjustments in cash reserve are required.

But the variable cash reserve ratio method is more

effective when the commercial banks happen to have
excessive cash reserves with them.

These two methods are not rival, but they are

complementary to each other.

Category # II. Qualitative or Selective Method of

Credit Control:

The qualitative or the selective methods are directed

towards the diversion of credit into particular uses or
channels in the economy. Their objective is mainly to
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control and regulate the flow of credit into particular

industries or businesses.

The following are the important methods of credit

control under selective method:

1. Rationing of Credit.

2. Direct Action.

3. Moral Persuasion.

4. Method of Publicity.

5. Regulation of Consumer’s Credit.

6. Regulating the Marginal Requirements on Security

Loans.
1. Rationing of Credit:

Under this method the credit is rationed by limiting the

amount available to each applicant. The Central Bank puts
restrictions on demands for accommodations made upon it
during times of monetary stringency.

In this the Central Bank discourages the granting of loans

to stock exchanges by refusing to re-discount the papers of
the bank which have extended liberal loans to the
speculators. This is an important method of credit control
and this policy has been adopted by a number of countries
like Russia and Germany.
2. Direct Action:

Under this method if the Commercial Banks do not follow

the policy of the Central Bank, then the Central Bank has
the only recourse to direct action. This method can be
used to enforce both quantitatively and qualitatively credit
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controls by the Central Banks. This method is not used in

isolation; it is used as a supplement to other methods of
credit control.

Direct action may take the form either of a refusal on the

part of the Central Bank to re-discount for banks whose
credit policy is regarded as being inconsistent with the
maintenance of sound credit conditions. Even then the
Commercial Banks do not fall in line, the Central Bank has
the constitutional power to order for their closure.

This method can be successful only when the Central Bank

is powerful enough and has cordial relations with the
Commercial Banks. Mostly such circumstances are rare
when the Central Bank is forced to resist to such
measures.
3. Moral Persuasion:

This method is frequently adopted by the Central Bank to

exercise control over the Commercial Banks. Under this
method Central Bank gives advice, then request and
persuasion to the Commercial Banks to co-operate with the
Central Bank is implementing its credit policies.

If the Commercial Banks do not follow or do not abide by

the advice or request of the Central Bank no gross action
is taken against them. The Central Bank merely was its
moral influence and pressure with the Commercial Banks
to prevail upon them to accept and follow the policies.
4. Method of Publicity:

In modern times, Central Bank in order to make their

policies successful, take the course of the medium of
publicity. A policy can be effectively successful only when
an effective public opinion is created in its favour.
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Its officials through news-papers, journals, conferences

and seminar’s present a correct picture of the economic
conditions of the country before the public and give a
prospective economic policies. In developed countries
Commercial Banks automatically change their credit
creation policy. But in developing countries Commercial
Banks being lured by regional gains. Even the Bangladesh
Bank follows this policy.
5. Regulation of Consumer’s Credit:

Under this method consumers are given credit in a little

quantity and this period is fixed for 18 months;
consequently credit creation expanded within the limit.
This method was originally adopted by the U.S.A. as a
protective and defensive measure, there after it has been
used and adopted by various other countries.
6. Changes in the Marginal Requirements on Security Loans:

This system is mostly followed in U.S.A. Under this system,

the Board of Governors of the Federal Reserve System has
been given the power to prescribe margin requirements
for the purpose of preventing an excessive use of credit for
stock exchange speculation.

This system is specially intended to help the Central Bank

in controlling the volume of credit used for speculation in
securities under the Securities Exchange Act, 1934.
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Chapter-2: Commercial Bank

Commercial Bank: Generally the bank which collects deposits according to the nature of
accounts & gives loan from the deposits and gain profit or interest is called commercial bank.
That is, commercial bank is a financial institution which is authorized by law to receive money
from business & individuals and lend money to them. Commercial banks are open to the public
and serve individuals, institutions and business. The inception of modern banking is the outcome
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commercial bank. The main element of commercial bank is money and its main objective is to
earn profit. Commercial bank is called “The mother of modern bank”.

According to prof. Roger, “The bank which deals with money and money’s worth with a view to
earn profit is known as commercial bank”.

According to prof. Ashutoshnath, “commercial bank is an intermediary profit making

institution.”

So at last we say that Commercial bank

 Is an intermediary institution of capital and money market

 By various accounts it collects deposits on small rate of interest.

 Gives short-term loan to others on higher rate of interest.

 Main objective is to earn profit.

Inflow and Outflow of Commercial Bank’s Funds:

Inflows of bank funds:

 Increase in deposits

 Increase in borrowing

 Undistributed profit

 Loan recovery

 Return of invested funds on maturity

 Sales proceeds of other assets: if any.

Outflows of bank funds:

 Increase in loans and advances

 Increase in investment

 Increase in the cash in hand

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 Withdrawal of deposits

 Repayment of borrowing

 Payment of dividends

 Increase in other assets

Comparison of different sources of bank funds: Deposits is the principal source of fund for
bank. In addition to deposits, a bank has many other sources of funds. The major sources of bank
funds are discussed below:

Paid-up-capital:

Reserve and retained earnings: Reserves and retained earnings are created out of profits earned
by banks. Unless profits can be increased by maximizing business, rising of reserve base is
particularly impossible.

Call money: Usually this source is utilized by banks to meet emergency needs. Banks which
have excess liquidity usually lend in call money market and banks having shortage of liquidity
borrow. As a source it is neither stable nor desirable from the view point of liquidity and
profitability. Continuous borrowing from call money market gives a wrong signal to other banks
about the bank borrowing such fund. On the other hand, rate of interest in call money market
also many times tend to be very higher.

Inter-bank deposits: Banks do not keep their funds idle for long time. But some banks might
have excess liquidity for the time being. It is possible that they may, under the circumstances,
keep fund with other banks for a shorter period. However, this is not a dependable source of fund
since it may be withdrawn at the will of the depositing bank.

Loan from central bank: This is another ground window of getting funds. Central bank
sometimes provides finance to commercial banks through rediscounting of bills of commercial
banks and counter-finance for specified items. But this source is subject to many limitations and
restrictions. This is not always a welcome method of generating fund.

Deposits: Deposit is the most important and major source of funds of a bank. There is no limit up
to which a bank may raise its deposit level. Sometimes because of operation of restrictive
measures pursued by the central bank, deposit rising may be subject to limits.
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Functions of Commercial Bank:

Principal functions:

Accepting deposits: The first and foremost function of commercial bank is to receive or collect
deposit from the individuals, business houses, public authorities. Generally deposits are collected
through various accounts e.g. current, savings, term deposits accounts. No interest is charged in
the current accounts, lower rate of interest charged in the savings account and comparatively
higher interest rates given in fixed deposits. In this way commercial banks are able to collect
fund and thereby developing customers’ network.

Lending of money: A major portion of the deposits received by a bank is lent by it. This is the
main source of income of a bank. The business of lending is usually done in the form of loans,
overdraft, cash credit, purchase and discounting bill of exchange, financing foreign trade etc.

 Loan: When an advance is made in a lump sum repayable either in fixed monthly
installments’ or in lump sum by way of interest, incidental charges etc. it is called a loan.

 Overdraft: When a customer requires temporary accommodation, he may be allowed to

overdraw on his current account, usually against collateral security and pay interest on
the amount actually used by him.

 Cash credit: A cash credit is an arrangement by which a banker allows his customer to
borrow money against pledge of goods, either in bank’s go down under effective control.
This type of facility is more freely grand by banks than any other advances.

 Purchase and discounting of bill of exchange: Purchase and discounting of bill of

exchange is another way employing the bank’s funds. These bills of exchange are
classified into demand bills and usance bills. Where a bill is payable on demand then it is
called demand bill. If the bill matures for payment after a certain period of time it is
called usance bill.

 Financing of foreign trade: Commercial banks have been playing an important role in
providing adequate financing facilities to both exporters and importers in order to place
our economy in sound footing. Besides commercial banks also undertake to issue
guarantees of various types on behalf of their customers to support trading transactions
both in inland and foreign trade.
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Subsidiary Services by Commercial Bank: Besides performing the two essential functions of
accepting deposits and lending & investing its funds modern commercial banks cover a wide
range of financial and non-financial services to their customers and general public. The services
and facilities provided by modern banker may be classified as:

 Agency services.

 General utility or miscellaneous services.

Agency services: Following are the agency services provided by commercial banks to their
customer:

 Collection and payment: Commercial bank collects and pays values of cheque, bill of
exchange, promissory notes, pension, dividends, insurance premium, and interest on
behalf of the clients.

 Purchase and sale of share & securities: Banks undertake to purchase and sell of shares
and debentures of joint stock Company on behalf of its customer only whenever the
customers delegate the work, the bankers should get clear and precisely instruction for
this purpose. In executing the sale or purchase, the bankers act as an agent of the
customer.

 Execution of standing instructions: A customer may leave standing instructions with

his banker for the payments of sums to various persons or institutions against his account.
Such orders may usually be given in respect of payment of insurance premium,
subscription of club/ society, payment of rent and salaries and similar payments of a
regular recurring nature. The bank may charge small fee for rendering such services.

 Maintenance of secrecy: Maintenance of secrecy is one of the most important functions

of commercial bank. That is, commercial banks do not disclose information about
customer without his consent.

 Act as a trustee: Commercial banks act as a trustee on behalf of the customers.

 As executor and administrator:

 Remittance of funds: In this competitive world all commercial banks have a network of
branches thought the country. With this facility banks can conveniently provide the
service of transferring funds from one place to another. Important methods of transferring
funds are:

 Mail Transfer (M T): Banks provide the facility of sending money through mail transfer
to any at any place where the bank has a branch and the person has an account in any
other branch of the same bank.
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 Telegraphic Transfers (T T): if the money is to be sent urgently, the bank may be
requested for telegraphic transfer on payment of a nominal charge and telegraphic
charges. Such facility is available at selected branches.

 Demand draft (D D): Demand draft is an order from one branch to another branch of the
same bank to pay a specified sum of money to a person named therein or his order. The
draft is payable on demand.

General utility or miscellaneous services: Commercial banks also provide a variety of general
utility services which are briefly discussed below:

Letter of credit: This is a non-fund facility provided by banks to its customers. It is generally
used in international trade.

Traveler’s cheques: Traveler’s cheques, a sort of cash substitute, are universally accepted
method of payment for overseas travelers. It is very useful to persons who frequently travel
abroad. It can be purchased by any one. He needs not be a customer of the bank.

Safe custody of valuables: A bank undertakes the safe custody of a client’s valuables and
important documents against theft and fire. There are two ways through which a banker ensures
safety of its customers’ valuables:

 Safe custody

 Safe deposits vaults (lockers)

When a bank takes care of important documents or other valuable possessions for someone, in
return for a regular charge then it is called safe custody.

An area, usually found in a bank or other financial institution, which is a safe and secure place
for storing items of value. Vaults are usually used to store cash, as well as customers' safe
deposit boxes.

Bank giro: A method of transferring money by instructing a bank to directly transfer funds from
one bank account to another without the use of checks. Giro transfers have become a more
accepted payment method than checks because they provide security when lost or stolen, and
they can be processed more quickly than a standard check.

Credit card: Credit cards are issued by the banks to good customers having current and savings
accounts, free of charge. The cards enable a customer to purchase goods or services from certain
retail and service establishments up to a certain limit without making immediate payment
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Debit card:

Acting as a referee: A bank sometimes acts as a referee as to the responsibility and financial
standing of his customers. This is very valuable service to businessmen.

Information and other services: As a part of their comprehensive banking services, many
banks act as a major source of information on overseas trade in all aspects. Some banks produce
regular bulletin on trade and economic conditions at home and abroad, their special reports on
commodities and markets.

Consultancy service:

Sound Banking Principles: A successful and ideal commercial bank follows some principles in
order to ensure smooth running of banking business. To cope with the prevailing competition, to
provide better services to the clients and to gain competitive advantages commercial banks have
to be careful about their services. The important sound principles of commercial bank are as
follows-

 Principles of liquidity: Deposits are the life blood of the commercial bank. Deposits are
repayable of demand or after expiry of a certain period. Everyday depositors either
deposits or withdraw cash. To meet the demand for cash all commercial banks have to
keep certain amount of cash in their custody.

 Principles of profitability: The driving force of commercial enterprise is to generate

profit. So it is true in case of commercial banks.

 Principles of solvency: Commercial banks should have financially sound and maintain a
required capital for running the business.

 Principles of safety: While investing the fund, banks are to be cautious because bank’s
money is the depositor’s money. Unless the money lent out is safe, the banks can’t pay
depositors money back. So banks must greatest care and vigilance in the matter of
investing the funds received from public in the form of deposits.

 Loan and investment policy: The main earning sources of commercial banks are lending
and investing money to the viable projects. So commercial bank always tries to earn
profit through sound investment.

 Principles of Economy: Commercial banks never go for any unnecessary expenditure.

They always try to maintain their functions with economy that increase their yearly
profit.
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 Principles of Secrecy: Commercial bank maintains and keeps the clients accounts
secretly. Nobody except the legitimized person is allowed to see the accounts of the
clients.

 Principles of Modernization: It is the age of science and technology. So to cope up with

the advance world the commercial bank has to adopt modern technical services like
online banking, credit card etc.

 Principles of Specialization:

 Principles of Publicity: If commercial banks would like to earn more money, they have
to give more advertisement through various media. In that case, commercial banks follow
this kind of principle to increase their customer.

Factors and trends influencing determination of cash balances: Some of the important factors
and trends which influence the determination of the amount of cash balances maintained by a
banker are as follows:

 Banking habits: The need to maintain large amount of liquid cash will not be there if the
customers are highly banking mined. In advance countries where people have cheque
habit, the use of cash is very much reduced. All transactions are settled through cheques.

 Local business and economic conditions:

 Nature of the account: Average size of deposits also determine amount of cash reserve.
If the accounts are of a fluctuating nature, a higher cash reserve may be required.

 Nature of advances: The nature of different types of advances made by the banker and
the refinancing facilities provided by Bangladesh Bank also affect the cash reserve. The
Bangladesh Bank provides advances and rediscounting facilities to banks. A banker may
employ more funds in discounting of bills and rediscounting the same bills from
Bangladesh Bank and thereby keep less cash reserve.

 Statutory cash reserve with Bangladesh Bank:

 Level of operation:

 Efficiency of clearing house

 Location of the bank

Clearing House System: Generally clearing house is an establishment maintained by banks for
settling mutual claims and accounts. More especially clearing house a bankers' establishment
where cheques and bills from member banks are exchanged, so that only the balances need be
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paid in cash. That is, clearing house is an arrangement for the banks to mutually settle their claim
over each other arising out of deposit transfer from one bank to another by their respective
customers. For the purpose of collection of cheques and drafts bank have devised a system called
clearing house where all banks have their accounts. That is, clearing house is an organization of
banks which settles inter-bank liabilities due to transfer of deposits by customers from one bank
to another. In Bangladesh, BB performs the functions of clearing house wherever is has its
offices. At places where the BB does not have its offices, the Sonali bank manages the business
of clearing houses.

The mechanisms of clearing house are as follows:

 Each member bank of the clearing house prepares a bank wise list of cheques and drafts
received from its customers and drawn on different banks.

 Representative of each bank visits the clearing house with the cheques and their list in the
morning and delivers the cheques and drafts to the representatives of the respective
banks. Similarly he also receives the same things from others.

 The representative returns to their respective banks to meet again in the afternoon.

 The representative of each bank computes the final balance payable or receivable his
bank from other banks after taking into account the various amounts of receipts and
payments.

 The final settlement is affected by the supervisor of the clearing house by debiting or
crediting the accounts of the respective banks.

RTGS: The term real-time gross settlement (RTGS) refers to a funds transfer system that allows
for the instantaneous transfer of money and/or securities. RTGS is the continuous process of
settling payments on an individual order basis without netting debits with credits across the
books of a central bank. Once completed, real-time gross settlement payments are final and
irrevocable. In most countries, the systems are managed and run by their central banks. RTGS is
one of the fund transfer systems which facilitate the real-time transfer of funds. RTGS is
considered to be the fastest fund transfer method offered by the banks. RTGS system is an
electronic way of transferring funds and does not need any exchange of money physically. The
RTGS is suited for high-value transactions that require immediate clearing. It is an instant
transfer and the bank that is supposed to receive the funds from the remitting bank, has it
remitted in seconds. It is expected of the bank to deposit the funds within 30 minutes of the
transfer message. RTGS also allows setting up the transfer at a later point in time. The value date
of the transaction shall be analysed and the transfer is made from the queue.

Electronic Fund transfer system (EFTN/S): Transferring money from one bank account to
another in an electronic mode is called Electronic Fund Transfer. The bank accounts may belong
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to the same or different banks. It is a computer-based transaction that is done in an electronic

fashion. Electronic banking is the other name for EFT transactions. EFT creates a paper-free
environment and also most sought by the people for its ease and convenience. Electronic Fund
Transfer is also done through the ACH network. Electronic Funds Transfer is considered secured
because of the usage of PIN (Personal Identification Number) and the login details which are
known only to the customer. The money is transferred faster through EFT and the cost involved
also is less. Ideally, this method helps save cost and effort in printing cheque leaves. Normally,
cannot stop an EFT payment after initiating it, in case need to stop payment or refund amount
then it’s between you and the person paid. However, we might able to stop scheduled payment
such utility bills, recurring by notifying the financial institution to before 3 business working
days.

RTGS VS Electronic Fund transfer system (EFTS):

 The main difference between EFT and RTGS is that EFT is based on net-settlement,
meaning that the transactions are completed in batches at specific times; all transfers
will be held up until a specific time. While RTGS is real-time and happens
individually.

 EFT usually involves smaller value transactions and the maximum amount can be 2
Lakhs INR for the transactions. Whereas RTGS’ minimum value for transaction starts
from 2 Lakhs INR.

 The process of EFTN is one working day, while RTGS processes in real-time (‘push’
transfer) EFT is slower, fewer transaction charges compared to RTGS.

 EFT is best for small value transactions and RTGS which is appropriate for a large
amount of transactions.

 EFT takes time to transfer funds and it depends on the bank’s transaction timelines,
but RTGS is an instant fund transfer mechanism.

Non-Performing Assets: Generally, non-performing assets refers to an asset which is not

producing income. That is, non-performing assets means an assets which has ceased to generated
income for the bank. Assets become non-performing when the interest or installment of principal
is delayed and not received before the stipulated time. Banks usually classify as nonperforming
assets any commercial loans which are more than 90 days overdue and any consumer loans
which are more than 180 days overdue. Non-performing assets are problematic for financial
institutions since they depend on interest payments for income as well as inevitable burden on
the banking industry. Accumulation of non-performing assets is the direct result of deterioration
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in the quality of loan portfolio. Today the success of the bank depends upon the method of
managing NPAs and keeping them within a tolerable level.

Factors contributed to non-performing assets: Following are the factors which contribute to
non-performing assets:

Internal factors: Internal factors may be

 Diversion of funds for other purposes like expansion/modernization or for taking up new
projects rather than the purpose for which it was borrowed.

 Diversion of funds for assisting or promoting other associate concerns.

 Time or cost overrun during the project implementation stage.

 Defective lending process.

 Improper SWOT analysis.

 Inadequate credit appraisal system.

 Absence of regular industry visit and monitoring.

 Business failures due to product failure, failure in marketing etc.

 Inefficiency in management.

 Alleged corruption.

 Inadequate network and linkage.

 Deficiency in re-loaning process.

External factors:

 Recession in the economy as a whole.

 Input or power shortage.

 Price escalation of inputs.

 Exchange rate fluctuation.

 Accidents and natural calamities.

 Changes in the govt. policies relating to excise and imports duties, pollution control
orders etc.

 Govt. loan waiver scheme.

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 Alleged political interference.

 Ineffective legal framework and weak recovery tribunal.

Others:

 Liberalization of economy like reduction of tariff, removal of restriction etc.

 Sudden crashing of capital markets and failure to raise adequate funds.

 Granting of loan to certain sectors on the basis of govt.’s directives rather than
commercial imperatives.

 Mismatch of funding i.e. using loans granted for short terms for long term transactions.

 High leverage and high cost of borrowing.

 Willful defaults sensing that the legal recourse available to collect debts is very slow.

Roles of Commercial Bank in the economy of Bangladesh:

1. Mobilizing Saving for Capital Formation: The commercial banks help in mobilizing
savings through network of branch banking. People in developing countries have low
incomes but the banks induce them to save by introducing variety of deposit schemes to
suit the needs of individual depositors. By mobilizing savings, the banks channelize
them into productive investments. Thus they help in the capital formation of a developing
country.

2. Financing Industry: Commercial banks finance the industrial sector in a number of

ways. They provide short-term, medium-term and long-term loans to industry. In
Bangladesh, the commercial banks undertake short-term and medium-term financing of
small scale industries, and also provide hire- purchase finance. Besides, they underwrite
the shares and debentures of large scale industries.

3. Financing Trade: Commercial banks help to finance both internal and external trades.
The banks provide loans to retailers and wholesalers to stock goods in which they deal.
They also help in the movement of goods from one place to another by providing all
types of facilities such as discounting and accepting bills of exchange, providing
overdraft facilities, issuing drafts, etc. Moreover, they finance both exports and imports
of developing countries by providing foreign exchange facilities to importers and
exporters of goods.

4. Financing Employment Generating Activities: Commercial banks provide financing

facilities to employment generating activities in developing countries like Bangladesh.
They provide loans for the education of young person’s studying in engineering, medical
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and other vocational institutes of higher learning. They advance loans to young
entrepreneurs, medical and engineering graduates, and other technically trained persons
in establishing their own business. Such loan facilities are being provided by a number of
commercial banks in Bangladesh. Thus the banks not only help inhuman capital
formation but also in increasing entrepreneurial activities in developing countries.

5. Help in Monetary Policy: The commercial banks help the economic development of a
country by faithfully following the monetary policy of the central bank. In fact, the
central bank depends upon the commercial banks for the success of its policy of monetary
management in keeping with requirements of a developing economy.

6. Assistance in transfer of money: Commercial bank transfers money from one place to
another. It reduces the risk of carrying money & makes the transaction easy and
comfortable that expands the business.

7. Maintaining economic stability: To maintain the economic stability commercial bank

follows the credit control method of central bank.

Chapter-3: Relationship between Banker and Customer

Meaning of Banker: Generally banker is a dealer in money and capital money market. That is,
the term ‘banker’ refers to a person or company carrying on the business of receiving moneys,
and collecting drafts, for customers subject to the obligation of honoring cheques drawn upon
them from time to time by the customers to the extent of the amounts available on their current
accounts. Banker is an intermediary party between the borrower and lender. He borrows of one
party and lends to another party.

G. Crowther: “A banker is a dealer in debt, his own and other people.”

Prof. Hart “A banker is one who in the ordinary course of his business, receives money which
he repays by honoring checks of person from whom or on whose account he receives it.”

Sir John Paget: “No person or body corporate or otherwise can be a banker who does not take
deposit accounts, take current accounts, issue and pay cheques and collect cheques crossed and
uncrossed for his customers.”
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Meaning of Customer: A person who has an account in a bank is considered its customer. In
broader sense a person who has a bank account in his name and for whom the banker undertakes
to provide facilities as a banker, is considered to be a customer. A customer of a bank need not
be a person. A firm, joint stock Company a society or any separate legal entity may be a
customer.

Prof. Hart “A customer is one who has an account with a banker or for whom a banker habitually
undertakes to act as such.”

Thus to constitute a customer the following essential requisites must be fulfilled:

 A bank account- savings, current, fixed deposits must be opened in his name by making
necessary deposit of money.

 The dealing between the banker and the customer must be of the nature of banking
business.

General relationship between banker and customer:

Debtor-creditor relationship: When a customer deposits money with his bank, the customer
becomes a lender and the bank becomes borrowers. The money handed over to the bank is a
debt. The relationship is that of a debtor and creditor.

Creditor and debtor relationship: when the bank lends money to the customer, the customer is
the borrower and the bank is the lender. The relationship therefore is that of a creditor and
debtor.

Banker as Agent & principal: A banker acts as an agent of his customer and performs a number
of agency functions for the convenience of his customers. These are as follows:

 Purchasing or selling of securities

 Collection of income

 Making periodical payments as instructed by his customers.

 Collecting interest and dividend on securities lodged by his customers.

 Receiving safe custody valuables and securities lodged by his customers.

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 Collecting cheques, drafts of the customers

Banker as Trustee: Ordinarily, a banker is a debtor of his customer in respect of the deposits
made by the latter, but in certain circumstances he acts as a trustee also. The customer may
request the banker to keep his valuables in safe vaults or one may deposit some amount and can
request the bank to manage that fund for a specific purpose, which the bank does, or in case of
corporate debentures, the bank can become trustee for debenture holders or the bank collects the
cheques hundies of the customers in the capacity of trustee. Thus, there are wide varieties of
trustee functions discharged by the banker.

Banker as Bailee: As a bailee, the banker should protect the valuables in his custody with
reasonable care. If the customer suffered any loss due to the negligence of the banker in
protecting the valuables, banker is liable to pay such loss. If any loss is incurred due to the
situation beyond the control of the banker, he is not liable for penalty.

Adviser of customer: Bankers also advise customers on their investments in shares and
debentures of joint stock companies and other securities. In performing this function, they act as
advisers to customers.

Obligations of Banker:

Bankers are under the obligations to fulfill certain duties while dealing with customers. Such
obligations are as under:

 Obligation to honor the customer’s cheques

 Obligation to maintain secrecy of customer’s account

 Obligation to receive the cheques and other instruments for collection

 Obligation to honour the cheques of customers across the counter

 Obligation to give reasonable notice before closing the customer’s accounts

 Obligation to provide information with respect to running the account.

Obligation to honor the customer’s cheques: A banker must honour customers’ cheque drawn
on him provided:(a) The banker has sufficient funds of the customer,(b)The funds are properly
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applicable to the payment of such cheque, (c)The banker has been duly required to pay.(d)The
cheque has been presented within a reasonable time after the apparent date of its issue;(e)No
prohibitory order of the court or any other competent authority e.g. tax authority, is standing
against the accounts of the customer.

Obligation to maintain secrecy of customer’s account: When a person opens an account in a

bank he/she is entitled to a reasonable assurance that information regarding the account remains
a matter of knowledge only between the banker and the account holder. This is because; it is one
of the principal duties of the banker to maintain complete secrecy of the status of the customer’s
account. This obligation of the Bank to maintain secrecy continues even after the customer’s
account is closed. If the banker makes an unwarranted disclosure of the status of account of the
bank’s customer, the banker becomes liable to compensate the customer. There are certain
circumstances in which the banker is entitled or required to make disclosures about a customer’s
account:

 Under law

 Under express or implied consent of the customer

 Common courtesy among bankers

 Disclosure in the bank’s interest

 Disclosure in Public/National interest

Obligation to receive the cheques and other instruments for collection: Basically, the business
of banking, as it is known today, comprises acceptance of money on deposit account and
payment of cheques. It also includes collection of cheques. It may rightly be contended that
rightly be contended that services is not a banker. Whenever a banker is entrusted with the job of
collection of cheques, they must be collected as speedily as possible through the accepted
channels. Failure to exercise proper care and employ the recognised route for collection may
make the bank liable for any loss which the customer may sustain.

Obligation to give reasonable Notice before Closing the Account: According to law, a debtor
and a creditor may terminate the relationship without notice by the debtor paying off the balance
or the creditor recalling the debt. It is not so simple between a banker and a customer for the
obvious reason that the banker is under an obligation to honour his customer’s cheques. If this
obligation could be terminated by the banker without notice, the customer might be faced with an
embarrassing situation. Reasonable time must be granted to enable him to make alternative
arrangements. Where any customer becomes a nuisance through overdrawing without
arrangement or issuing post-dated cheques etc, it is advisable to close his account. But
reasonable time has to be given to enable him to make alternative arrangements if he so desires.
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If a bank abruptly closes the customer’s account, it might affect his credit, giving cause for an
action against the bank for damages.

Garnishee order: Generally a court order, making a garnishee pay money not to the debtor, but
to a third party is called garnishee order. More especially garnishee order is a court order
instructing a garnishee (a bank) that funds held on behalf of a debtor (the judgment debtor)
should not be released until directed by the court. The order may also instruct the bank to pay a
given sum to the judgment creditor (the person to whom a debt is owed by the judgment debtor)
from these funds. Garnishments are typically used for debts. Garnishments can have a negative
impact on one's credit rating.

The garnishee order is issued by court in two parts:

Order Nisi: By the order of the court:

 Directs the banker to freeze the debtor’s account.

 Seeks the banker to explain why the funds in the account, so freeze should not be used for
payment to the judgment creditor.

On receipts of such an order the banker should immediately inform the customer (judgment
debtor) so that he may make the necessary arrangements for payment of the debts due by him.
No fund is payable by the banker on receipts of order nisi from the court until the order is made
absolute by the court.

Order absolute: This order directs the banker to pay either the whole or a part of the funds lying
in the account against which “order nisi” has been issued to the judgment creditor.

In the following circumstances the Garnishee order would not be applicable:

 Where the account of the judgement debtor is a joint account holder with another person;

 Where the identity of the judgement debtor is doubtful;

 Where the account of the judgement debtor is held by him in the capacity of a trustee;

 Where the judgement debtor has previously made an official assignment of his balance in
favor of a third party and the banker is informed about it in writing;

 Where the account of the judgement debtor reveals a debit balance.

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Rights of a Banker to customer:

 Right of general lien

 Right of set-off

 Right to appropriate payments

 Right to charge interest, incidental charges

 Right not to produce books of accounts

 Right to close accounts

Right of general lien: A banker has the right of general lien in respect of the dues to him by the
customer. Lien is the right to retain property belonging to another until a debt due from the latter
is paid. In other words, it is the right of the creditor to retain the goods and securities in his
possession, belonging to the debtor, until his debt due is paid. Lien, however, does not give right
to sell unless such right is expressly conferred by statue or by custom or usage. The right of lien
may be Particular and General.

Right of Set-off: The right of set-off is a statutory right which enables a debtor to take into
account a debt owed to him by a creditor, before the latter could recover the debt due to him
from the debtor. In other words, the mutual claims of debtor and creditor are adjusted together
and only the remainder amount is payable by the debtor. A banker, like other debtors, possesses
this right of set-off which enables him to combine two accounts in the name of the same
customer and to adjust the debit balance in one account with the credit balance in the other. This
right of set-off can be exercised by the banker if there is no agreement - express or implied
contrary to this right and after a notice is served on the customer intimating the latter about the
former’s intention to exercise the right of set-off. To be on the safer side the banker takes a letter
of set-off from the customer authorizing the banker to exercise the right of set-off without giving
him any notice.

Saving A/C = 250,000

Cash credit = -300,000

Conditions Necessary for Exercising the Right of Set-off:

 The accounts must be in the same name and in the same right.
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 By giving notice to customer of banker’s intention to combine accounts.

 The right can be exercised in respect of debts due and not in respect of future debts or
contingent debts.

 The amount of debts must be certain.

 If there is letter of set-off given by customer.

 The right may be exercised in the absence of an agreement to the contrary.

 The banker has the right to exercise this right before the Garnishee order is made
effective.

Conditions under which the Right cannot be exercised:

 If the accounts are not in the same right.

 The right of set off cannot be extended to a future contingent debt e.g. a bill which will
mature in future.

 If the amounts of debts are uncertain.

 Trust account in which personal account of the customer cannot be combined.

 The account balance of an individual cannot be set-off against a joint account balance in
which he is one of the account holders.

Right of Appropriation: In case of several debts outstanding by the debtor (customer) to the
bank, question arises as to which of the debts is to be discharged when payment is made by the
debtor and the amount is not sufficient to discharge all the debts. The general rule in such a case
is that the debtor has first choice and can appropriate the payment to any debt he likes. If the
debtor makes no instructions about appropriation the banker may make the appropriation of
payment to any debt according to his discretion. Where, however the right of appropriation is not
exercised either by the debtors or creditors, rules laid down in Claytons’ case is applicable:

 Where the account goes into credit, the first credit into the account is extinguished by the
first debit and so on and so forth.

 Where the account goes into debit, the first debit into the account is repaid by the first
credit and so on and so forth.
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Right to charge interest, incidental charges: As a creditor, a banker has the implied right to
charge interest on the credit provide to the customer. The rate of interest is nowadays levied as
per the directions of Bangladesh Bank. It is charged on half yearly or quarterly basis and
generally compound interest is used. The interest is directly debited, i.e., charged to the
customer’s account and then the interest is calculated on the principal with interest. Interest may
also be fixed by the banker and customer by mutual consent. It may not however be beyond he
prescribed limits of Bangladesh Bank. Banks also charge incidental charges on the current
accounts to meet the incidental expenses on such accounts.

Right not to produce books of accounts: According to the provisions of the Bankers Book
Evidence Act, the banker need not produce the original books of accounts as evidence in the
cases in which the banker is not a party. He can issue only an attested copy of the required
portion of the account which can be utilized as evidence before the court. When the court is not
satisfied with the certified copy, the court can summon the original books. But when a banker is
a party to the suit, the court can force the banker to produce the original records in support of his
claim.

Right to Close Accounts: Banker also enjoys the right to close his customer’s account and
discontinue operations. This process terminates the relationship between banker and customer.
This is done only in situations where the continuation of relationship seems unprofitable to the
banker.

Lien: Generally lien refers an official order that allows someone to keep the property of a person
who owes them money until it has been paid. More specifically, Lien means the right of the
creditor to retain the goods and securities owned by the debtor until the debt due is paid. That is,
a lien is an encumbrance on one person's property to secure a debt the property owner owes to
another person.

It confers upon the creditor the right to retain the security of the debtor and not the right to sell
it. Such right can be exercised by the creditor in respect of goods and securities entrusted to him
by the debtor with the intention to be retained by him as security for a debt due from him
(debtor).

According law “A right given to another by the owner of property to secure a debt, or one
created by law in favor of certain creditors.”

So we say that a lien is a right of one person to retain property or goods which are in his
possession, belonging to another person until the promise or the liability is discharged.
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Type of lien: Lien may be either (a) a general lien or (b) a particular lien

General lien: A general lien is a right of one person to retain any property or goods which are in
his possession belonging to another person until the promise or liability is discharged. It is a right
to retain the property belonging to another for a general balance of account. General lien is
applicable in respect of all amounts due from the debtor to the creditor. That is, general lien will
entitle a person in possession of the goods to retain them until all claims of account arising out of
the general dealing between the two parties are satisfied. A banker has a general lien on all
securities deposited with him by a customer unless there is an express contract, or unless there
are circumstances showing an implied contract inconsistent with the lien. General lien gives right
to retain any goods belonging to another person for any amount due from him. For example, A
has two accounts in a bank. In savings bank account, he has a credit balance of Rs. 500. In
current account, he has an overdraft of Rs. 1,000. Bank can exercise right of lien on the savings
account for the amount due on the current account. It should be noted that right of lien will not
apply to properties deposited for safe custody or for a specific purpose.

Particular lien: A particular lien confers a right to retain the goods in respect of a particular debt
involved in connection with a particular transaction. A particular lien is attached to some specific
goods. That is, particular lien gives right to retain only such goods in respect of which charges
due remain unpaid. Particular lien is enjoyed by craftsmen like tailors, goldsmiths and bailees
like repairers and public carriers. For example, a tailor has the right to retain the clothes made by
him for his customer until his tailoring charges are paid by the customer or goldsmith can retain
the jewelry till the making charges are paid.

Following condition must be fulfilled for applying the right of general lien:

 The property has come into the procession of the banker in his capacity as banker.

 The property has not been entrusted for a special purpose which is inconsistent with the
lien.

 The banker should have lawfully obtained the possession of the property.

 There is no agreement contrary to the lien.

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