BANKER CUSTOMER RELATIONSHIP
A banker is the one who gets into debts and creates debts.
- L. HART – the banker is one who receives money, collects cheques and drafts, for customers, with an obligation to honour the cheques drawn by customers from time to time subject to availability of amounts in the account.
- Section 3 of NI ACT 1881, and Section 2 of BILL OF EXCHANGE ACT 1882. state that the term banker includes person or corporation or a company acting as banker.
- Under Section 5 (1) of Banking Regulations of 1949, a banking company is defined as any company which transacts banking business.
- Under Section 5 (1) B , banking business means accepting for the purpose of landing or investment, deposits of money from the public, repayable on demand or otherwise withdrawable by cheque , draft or otherwise.
- A person who buys goods or services from a shop or a business entity.
- A person you deal with as a business entity.
- There is no statutory definition.
- A person/ company/entity who has an account with a bank is a customer.
- There is no unanimity as regards to the time period of the dealings.
- A casual transaction like encashment of a cheque does not entail a person to be customer.
- The duration of association of the customer with the bank is of no essence.
- A customer is one who has an account with the bank and to whom the banks undertakes to extend business of banking.
- Relationship between the customer having a deposit account and the banker.
- Depositor is the lender and the banker is the borrower.
- Depositor is the creditor and the banker is the debtor.
- The money handed over to the bank is a debt.
- The money once deposited in the bank becomes the money of the bank and it is prerogative of the bank to use that money as it deems fit. The depositor remains a creditor that too an unsecured creditor
- When the customer avails a loan or an advance then his relationship with the banker undergoes a change to what it is when he is a deposit holder.
- Since the funds are lent to the customer , he becomes the borrower and the banker becomes the lender.
- The relation is the debtor- creditor relation, the customer being a debtor and the banker a creditor.
- If a customer keeps certain valuables or securities with the bank for safe-keeping or deposits a certain amount of money for a specific purpose, the banker, besides becoming a bailee, is also a trustee. The money or the securities so kept are not at the disposal of the bank. The banker cannot utilize those moneys or securities as he desires since the money does not belong to him.
- Here there is delivery of goods or securities from one person to the other which amounts to the bailment. As per section 148 of Indian Contract Act 1872, the delivery of goods from one person to the other for some purpose upon the contract that the goods will be returned when the purpose is accomplished.
- The customer is the bailer and the banker is the bailee.
- Banks provide ancillary services such as collection of cheques, bills etc.They also undertake to pay regularly the electricity bills, phone bills etc.
- The relationship arising out of these ancillary services is of principal-agent between the customer and the bank.
- The relationship seizes once the customer dies, becomes insane or becomes insolvent.
- The proceedes of the cheques sent for collection,which are in transit, not created to the customer account are not the moneys of the banker till such time as they are credited into the customer account.
- The banks provide safe deposit lockers to the customers who hire them on lease basis. The relationship therefore, is that of lessee and lessor. In certain banks, this relationship is termed as licensee and licensor. The bank leases out the space for the use of clients. The bank is not responsible for any loss that arises to the lessee in this form of transaction except due to negligence of that bank.
- The customer is indemnifier and the bank is indemnified.
- A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or the conduct of any other person is called a contract of indemnity – section 124 ( Indian Contract Act, 1872). In the case of banking, this relationship happens in transactions of issue of duplicate demand draft, fixed deposit receipt etc. The underlying point in these cases is that either party will compensate the other of any loss arising from the wrong/excess payment.
OBLIGATIONS OF THE BANK
Obligation to honour the cheque
- Under section 31 of NI Act 1881, the banker is obliged to make payment of the cheque ,with mandate, properly presented, provided there is balance in the account.
- However, when a garneshee order is served on the banker, the banker may seek refuse under order 21 of code of civil procedure 1908 and the banker may not pay the cheque when such order is served.If a debtor fails to pay the debt to the creditor, the latter may approach a court of law to issue a garneshee order on the banker of his debtor.
OBLIGATIONS OF THE BANK
Obligation to maintain secrecy
- Section 13 of banking companies Act 1970 stipulates the banks to maintain secrecy of their customers accounts and dealings with them.
- However there are exceptions.The exceptions are :
- When law requires
- When the practices and usages among bankers warrants exchange of information.
RIGHTS OF BANKER
- Right of general lien- Lien is the right of the creditor to retain the goods and securities owned by the debtor untill the debt due from him is paid.
- It conferes upon the creditor to retain the securities of the debtor.
- It does not confer the right to sell.
- There are two types of liens – General lien and particular lien.
- Section 171 of Indian contract Act 1872 conferes general lien on bankers.
- Bankers lien is tantamount to implied pledge. The reason being the banker is bestowed with a right even to sell securities without the intervention of the court.
- Pledge – Section 172 of Indian contract Act 1872- bailment of goods as security for payment of a debt or performance.
RIGHTS OF BANKER
- Right of set off – The mutual claims of a debtor and a creditor are adjusted together and only the remainder amount due is payable.
- Right of appropriation – If the customer has more than one loan account , the customer can direct the repayment of the loan as credit into any other accounts. If there is no specific directions from the customers the banker has a right to appropriate as per his choice.
- Right to charge interest- As a creditor the banker has right to charge interest on the funds he lends as per the norms and as per the contract.
BANKERS BOOKS EVIDENCE ACT
Despite the fact the banker has to maintain secrecy he has to disclose the accounts and an order from the court.
Earlier the books of accounts were required to be produced in court of law as evidence.
However on the advent of bankers books evidence act 1891.The banker can produce certified copies of the records of the accounts as evidence which are tenable as evidence in court of law.
SPECIAL TYPES OF CUSTOMERS
- LUNATICS- Under Indian Contract Act , a contract with or by a lunatic is void. The reason being the lunatic being of unsound mind is not competent to comprehend a contract.
- If the banker without knowing that the person is lunatic opens an account and enters into a contract acting in good faith is protected. But when once he gets a notice of lunacy of a person, he should not entertain any contract either existing or new.
- DRUNKARDS- Under section 12 of Indian contract act 1872, a sane man who is delirious from favour or who is drunk that he cannot understand the contract, or form rational judgement cannot enter into contract while such delirium or drunkedness lasts.
When a customer who is drunk presents a cheque across a counter the payment must be witnessed.
- MINORS- Any person under the age of 18 yrs is a minor.
If a court appoints a guardian and the minor is below 18 yrs the minority extends upto 21 yrs.
A minor is not competent to enter into a contract and all the contracts entered in by him are void.
The banker can open an account but he has to be careful that the account will never be allowed to be overdrawn.
The minor can be a partner but cannot be held liable for the liabilities of the partnership.
- PARTNERSHIP – Section 4 of the Indian Partnership Act 1932, defines partnership as a relationship subsisting between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
While opening an account the partnership letter should be signed by all the partners.
The purpose of the business address, names and other details should be clearly obtained.
The partnership letter and the deed should contain as regards to instructions pertaining to opening a bank account and the operations.
In case of any internal dispute among partners, if any of them gives notice of stoppage of operations, then the account would only be operative by all partners jointly.
Death of the partner deserves the partnership. In order to determine the liability of deceased partner the banker should close the account.
- COMPANIES – Company is a legal entity and the formation of the company is governed by Companies Act 1956.
While opening an account on company’s name the banker has to ask for:
- Certifies copies of memorandum and articles of association and certificate of incorporation.
- Names of the directors
- Certificate of commencement of business.
- Copy of resolution appointing the bank as companies bank. And the names of the persons authorized to operate that account along with the signatures.
- Death of authorized signatories does not demand the stopping of payments since the company is in existence.
TRUSTES- According to Indian Trust Act 1882, trust is an obligation annexed to the ownership of a property, arising out of confidence reposed in and accepted by the person for the benefit of another person.
The person who reposes are declares confidence is called the author of the trust.
The person who accepts the confidence is the trustee. The person for whose benefit the confidence is accepted is
The instrument by which the trust is created is the trust deed. Bank has to study the trust deed as regards to the opening and operations of the account.
HINDU UNDIVIDED FAMILY- Where a hindu dies leaving a business, the business is passed onto the legal heads. It becomes HUF property. The members of the family are called Coparceners and eldest male child is the manager or the karta.
The karta has the employed authority to avail loan and execute necessary documents. It binds all the members.
The other members of the family are also required to sign the documents as a precautionary measure even though legally they are bound by the actions of the karta.
JOINT ACCOUNT HOLDERS- A joint account is an account opened by two or more persons , while opening an account the account opening form should be signed by all the account holders.
Instructions for opening an account may be any of the following:
- Either or survivor
- Former or survivor
- Both jointly
Any of them can stop payment of the cheque issued by any bother joint account holder.
The instructions for operations in the account will stand countermanded in case of insanity, insolvency, death of any of the joint holders and the operations in the account will be stopped.
PRINCIPLES OF LENDING
- DIVERSIFICATION OF RISK
THE REPAYMENT DEPENDS UPON :
- CAPACITY TO PAY
- WILLINGNESS TO PAY
- INCOME GENERATION
THE THREE ‘C’s ARE CHARACTER, CAPACITY AND CAPITAL
THE THREE ‘R’s ARE RELIABLITY,RESPONSIBILITY AND RESOURCES
70% OF THE DEPOSITS ARE DEPOSITS REPAYABLE WITHIN ONE YEAR.SO THE AMOUNT LENT IS TO BE AVAILABLE FOR REPAYMENT OF DEPOSITS.
LIQUIDITY IS THE NATURE OF THE ASSEST TO GET COVERTED INTO CASH.
IN ORDER TO CASRRY ON THE OPERATIONS, TO RUN THWE MACHINERY OF BUSINESS AND AT THE END TO EARN SOMETHING OUT OF THE BUSINESS ACTIVITY IN RETURN FOR THE EFFORTS PUT IN PROFIT IS AIMED AT.
IN VIEW OF VARIOUS LENDING ACTIVITIES AND VARIOUS OBLIGATIONS , A CLEAR CUT PATH IS ENVISIGED KEEPING IN VIEW THE PROFIT FACTOR.
WHILE LENDING THE PURPOSE OF THE ACTIVITY FOR WHICH THE LOAN IS EXTENDED IS TO BE GIVEN PRIORITY. LOANS FOR UNDESIREABLE AND SPECULATIVE PURPOSES CANNOT BE GRANTED.
DIVERSIFICATION OF RISK
SHOULD NOT LAY ALL THE EGGS IN ONE BASKET. THE LOAN PORTFOLIO SHOULD BE DISTRUBUTED TO DIFFERENT SECTORS, DIFFERENT GEOGRAPHICAL AREAS AND DIFFERENT SPECTRUM OF PEOPLE.
SINCE THE FUNDS THAT ARE LENT TO PUBLIC ARE THE BORROWED FUNDS AND SINCE THEY ARE TO BE PAID ON DEMAND OR OTHERWISE, THE MAIN PRIORITY OF THE BANKER IS THE RELISABILITY OF THE FUNDS LENT. IN ORDER TO SECURE THE FUNDS, IN CASE OF ANY EVENTUALITY, CERTAIN PRECAUTIONS AS REGARDS TO SECURITY ARE TAKEN. THEY ARE KEEP IN MARGIN, RELISABILITY OF SECURITY, ADEQUACY OF THE SECURITY AND FREE FROM ANY ENCUMBERENCE.