THE BANKER & CUSTOMER RELATIONSHIP

Dr. Prashant S. Desai,

Assistant Professor of Law,
NLSIU

Introduction to banker and customer

relationship
the essence, in short, of banker & customer
relation is based on mutual trust and faith
but the relation begins with trust and in
many cases ends-up with litigations
this module dissects the ever fascinating
relationship of banker and customer from
the legal perspective

Term Deposits

Retail Loans

Cheques

Drafts

Other agency functions

LENDING

Securities

Collateral securities

Other agency functions

CUSTOMER

BORROWING

Loans (others)
BANKER

CUSTOMER

Demand Deposits

Thebanker
No specific definition for banker but
banking is defined [Sec. 5(b)]
banking means 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, cash or otherwise
Banking company means any company
which transacts business of banking in India
[Sec. 5(d)]
Hence, banker is one who involves in the
business of banking

 US Federal Law
any bank, banking association, trust
company, savings bank (other than
mutual savings bank) or other banking
institution which is engaged in the
business of receiving deposits and which is
incorporated under the laws of any state
Italy
The acceptance of deposits from the
public in any form and the granting of
credit are activities of public interest
governed by Banking Law of 1936

 In Japan
Banks are institutions conducting commercial
banking business under Banking Law of 1927
The banks in Japan are classified as
Ordinary banks;
Long term credit banks; and
Trust banks
The law of 1927 defines banks as institutions
which carry on operations of giving as well as
receiving credit

 Switzerland
The Swiss law defines banks as institutions,
which appeal to the public for deposit
The Banking Law of 1934
Regards banks in the strict sense
Private banks organized as
individuals; firms or industrial
partnerships, savings banks and
finance companies similar to bank
which publicly solicit deposits

Customer defined
No legal definition available
In both English and Indian law
Hence, Sir John Paget relied upon the time
factor to determine the customer of a bank
By this analogy a person who had just
opened an account is not a customer of
the bank

 The time tested elements

Some recognizable course or habit of
dealing between him and the bank
The transaction should be in the nature of
regular banking business

Second view point

Of Heber L. Hart
According to him more than time it is the
account which determines the customer
Generally it may be stated that
a customer is any person, who has some sort of
an account with a bank and that relationship
normally commences as soon as the account is
opened

 Commissioners of Taxation v English Scottish

& Australian Bank, [(1920) AC 683]
Word customer signifies a relationship in
which duration is not of essence
A customer whose money has been
accepted by the bank on the footing that
they undertake to honour cheques up to
the amount standing to his credit is, in
view of their Lordships, a customer of the
bank

 Bank of India v Gopinathan Nair, AIR 1970

Kerala 74
So far as the banking transactions are
concerned, the customer is one whose
money has been accepted on the
understanding that the bank will honour
transactions to the amount standing to his
credit, irrespective of his connection
being of short or long standing
Thus the element of time is not important

The final point

1. To make a man a customer of the bank there must
either a current or deposit account or some similar
relations
2. Relationship of banker and customer begins as
soon as a sum of money or a cheque is paid in
and the bank accepts it and is prepared to open
an account
3. The word customer signifies the relationship in
which the duration is not an essence

 For the purpose of KYC policy, a customer is defined

as:
A person or entity that maintains an account and /
or has a business relationship with the bank;
One on whose behalf the account is maintained
(i.e. the beneficial owner);
Beneficiaries of transactions conducted by
professional intermediaries, such as Stock Brokers,
Chartered Accountants, Solicitors etc. as permitted
under the law, and
Any person or entity connected with a financial
transactions 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.

Nature of relationship (between banker and customer)

introduction
It is essentially the contract that exists
between banker and customer
But this is regulated further by
Specific banking related laws; and
Customary practices as developed (and
crystallized) over a period of time

Classifying the transactions

SERVICES

LOAN TRANSACTIONS

DEPOSIT TRANSACTIONS

Deposit transaction
Banks have been used by the general
public as a repository to keep their surplus
funds
P Segment accounts are those which
are personal segment deposits
Others are accounts maintained
Proprietary concerns,
Partnerships
Limited companies
Trusts etc.,

P segment accounts
Generally SB Accounts
They are of two types viz.
bank account from which money can be
withdrawn by cheque (This is called checking
or cheque book facility account)
These accounts can be operated in single names
or in joint names.
In the case of joint accounts
there can again be either or survivor or former
or survivor
Again these accounts can be operated either
jointly or individually.

Further
There are some restrictions like
a minimum balance of certain sum of money to
be maintained in the account and
there shall not be more than 50 withdrawals in
the account in a calendar year
There will be interest paid at some minimal rate of
interest
about 4 to 5% on the minimum balance standing
on the credit of the account between 10th and
30th of the calendar month

Precautions to be taken (by banker)

Proper reference (about the prospective
customer)
The banker should obtain reference from
respectable parties about the proposed
customer's integrity and respectability

 Hence, bankers (as a matter of customary

practice) insist
For an introduction by an existing
customer of the branch before opening a
new account
They also insist on the PAN supplied by the
Income Tax Department (wherever
applicable) and
Two copies of passport size photographs
of the new customer

Term deposits (or fixed deposits)

This is yet another method of taking money
as deposits
Those generally who have surplus money will
invest in these type of deposits
Individuals, firms, companies and all legal
entities are entitled to open fixed deposit
accounts
The banks pay higher rates of interest for
such deposits

 When person deposits money with the banker on a

fixed deposit
a deposit receipt is given to him by way of
acknowledgement for the amount deposited
This document is usually marked not negotiable,
which means that it cannot be transferred by
mere endorsement and delivery.
It was held in Evans v National Provincial Bank of
England
that payment to a person wrongfully dealing
with even a singed deposit receipt was no
discharge to the bank, unless the depositor
was estopped by his conduct from disputing
such payment.

 The amount is repayable only after the

maturity period
However, the banks at their discretion
grant loans up to 75% of the amount in FD
These loans carry an interest at the rate
which will be 2% higher than the rate at
which the banks receive the money from
the depositor

 There is also a facility to withdraw the money

prematurely i.e. before the expiry of the
period for which the amount has been
deposited
However the depositors are penalized by
the bank by paying interest at a rate lower
than that rate for which the term deposit
has run.

Recurring deposit scheme

Deposits on daily (or some other recognized
period) basis
All monies deposited will be returned (as a
lump sum) with interest calculated on a
compounded basis (at the end of the
period on the date of maturity)

Current account
Can be stated as non P segment account
Are generally opened and operated by
individuals or organizations
Who issue cheques in larger numbers
Examples are firms, traders,
manufacturers, limited companies, trusts
etc.,

 Salient features
Stipulation of minimum balance to be
maintained
Rs.500 to 5000 generally
Exercise of option to close the account if
there is non-maintenance of minimum
balance
Cheque book/s facilities

 No restriction on the number of

withdrawals in any given period of time
No interest is paid on the minimum
balance maintained at the account
Letter of introduction is compulsory

 Current Account & Companies

Certified copies of
Memorandum of Association
Articles of Association
Certificate of Incorporation
Certificate of Commencement of Business
Board resolution (regarding the opening of
account)
Such situation no need of introductory reference

 Other procedures
Specimen signatures of authorized
signatories (or those who are authorized
to operate the account ) are taken
Periodically a statement of accounts
are sent to the customers for their
verification

Before we proceed further

Indian Banks Association
It is an association of all the scheduled
commercial banks in India
It has codified standard formats for the use of
banks in India
Now we have standardized
Account opening forms
Pay-in-slips
Cheque formats etc.,

Introductory reference & its significance

Introduction
There is no legal requirement to obtain any
introductory reference
But the banking custom and practice insist
that introductory reference is essential
during opening of a new account
Many internal rules of banking practice
stipulate for it

The objective
to identify the prospective customers of the
bank
Also to ensure that, the new customer will
not use his account for fraudulent purposes
It is established law that the introducer will
not run into any legal problems only for
having introduced an account holder

the modern banking requires that a constituent

should either be known to the banker or should be
properly introduced. The bank owed a duty to
make enquiries directed to discover whether a new
constituent might use the account for any
fraudulent purposes. The underlying object of the
bank insisting on producing reliable reference is only
to find out, if possible, whether the new constituent
is a genuine party or an impersonator or a
fraudulent rogue however the burden of
establishing good faith and absence of negligence
is on the defendant. The bank has to establish that
they acted without negligence not only in the
receipt of the payment of the cheque amount but
even earlier at the time of opening the account
-- Union of India v National Overseas and Grindlays
Bank (1978)

Debtor & creditor relationship

introduction
The primary relationship between a banker and
customer is that of a debtor and creditor
But banker is a privileged debtor
One of the terms implied in that contract is that,
money lent to the banker is not payable except
on demand
Of course in accordance with other formalities

the relationship of banker and customer is primarily

of debtor and creditor; the respective positions
being determined by the existing state of account,
instead of the money being set apart in a safe room,
it is replaced by a debt due from the banker. The
money deposited with him becomes his property
and is absolutely at the disposal of the bank
-- Sir John Paget

It is fundamental rule of banking law that, in case of

a general deposit of money in a bank, the moment
money is deposited it becomes the property of the
bank, and the bank and the depositor assume the
relationship of debtor and creditor. The legal effect
of the transaction is that of a loan to the bank upon
the promise and obligation, usually implied by bank,
to pay or repay the amount deposited usually upon
demand
-- Section 444 of Seven American Jurisprudence

Finally
The banker customer contract is an
exception to the rule that a debtor should
find his creditor
In Delhi Cloth General Mills Co. Ltd., v
Harnam Singh [AIR 1955 SC 590]

Agency Relation
The following are the agency functions
Collection of customers cheques
Collection of bills & other instruments
Dividend warrants
Interest warrants
Pension bills etc.,

 Some additions in the recent times

Buying and selling of stocks and shares on behalf
of the customer
Acting as executor and trustee of customer
Acting as representative of customer
Filing of IT returns
Other bills etc.

Bailor and bailee relation

When banker receives things
For safe custody

Other services

Issuing of traveler's cheques

Rendering credit information
Issue of letters of credit
Providing letters of comfort
Providing training facilities
Technical advices, project appraisals
Credit cards
Advisor to customer for personal investment

Special customers

Special customers
Limited companies
Different format of account opening form
Certified copy of Memorandum of Association
and Articles of Association
A Certificate of incorporation or certificate of
commencement of business (in case a public
limited company)
A certified copy of the resolution to open the
bank account from the board (with other related
information)

 Partnership firms
Certified copy of the partnership deed
Authorized signatory for operating account

 Some matters of consideration

Any partner has the implied authority to draw the
cheque (unless relinquished)
There is no implied authority to open a separate
individual account in firms name
Banks do not accept for credit of the personal
account of a partner, cheques payable to his
firm
One partner has the authority to stop the
payment of a cheque drawn in the name of the
firm by another partner
The death or insolvency of a partner
automatically dissolves the firm

 Accounts by HUFs
A proper letter of introduction
The opening form is signed by the Karta and all
adult coparceners
If there are minors the other adult coparceners
should sign for self and as guardian of the
minor/minors
The karta is given the authority to operate the
account by all the coparceners

 Minors
Minor can open and operate a bank account
The bank should not permit the minor to
overdraw his account
Should exercise caution while credit for large
sums and debits for large sums are transacted in
the minors account
The age of majority of a non-domiciled minor is
decided by the law of the minors country where
the minor is domiciled

 Velji Lakshamsey & Co. v Dr. Banarjee [(1955) 25

Comp. Cases 395]
The Bombay High Court, held that the
relationship between them is of creditor and
debtor
Also held that, the customer cant claim any
amount due from the banker as a preferential
creditor if the bank is wound up

Duty of secrecy

introduction
banker is a privileged creditor in some special
sense the customer is also privileged in some sense
The banker is obligated to maintain the secrecy of
the customers accounts
the duty to maintain secrecy is an added
obligation or an exception to the general rule that
the relationship between a banker and the
customer is that of a debtor and creditor

The origin
May be it has woven in to the banking
tradition from time immemorial
All employees and officers of the bank have
to sign and submit a declaration of fidelity
and secrecy at the time of their joining
service

the duty of maintaining secrecy is a legal one,

arising out of contracts, not merely a moral one.
Breach of it, therefore gives a claim for nominal
damages, or for substantial damages if injury has
resulted from the breach. It is however, not an
official duty, as has been contended, but qualified,
being subject to certain, if not essential exceptions.
The obligation to secrecy does not end even with
the closure of the customers account
-- Banks L.J, in Tournier v National Provincial and
Union Bank of England [(1924) 1 K B 461]

Grounds of disclosure
1. Where the disclosure is under compulsion of law;
2. Where there is a duty to the public to disclose;
3. Where the interests of the bank require disclosure;
and
4. Where the disclosure is made with the express or
implied consent of the customer.

Compulsion of law
Where evidence has to be given by the banker in a
court of law
Bankers Book of Evidence Act, 1891 allows
certified copies of the entries of the books to be
produced
Banker is not supposed to disclose to
investigating authority without the order of the
court (or the authority must have power under
some special law)
Furnishing the information to RBI

 Shankarala Agarwalla v SBI, AIR 1987 Cal. 29

Customer tendered 261 notes of Rs.1000 to SBI
This information was forwarded to the Income
Tax Dept. the account was further attached
by the IT Dept.
The disclosure was made under directions from
RBI and Finance Ministry
Held this disclosure by the bank in this case falls
within the exception to the general rule

 Disclosure under BR Act, 1949

The bank shall submit a return of unclaimed
money to RBI within 30 days of the close of the
year (accounts which are not operated for ten
years)
When Inspectors are appointed to investigate
into the matters of the company under
Companies Act, 1956

Duty to disclose in the interest of public

This scenario arises rarely
For example during war time the bank should
disclose information of such accounts which
have some dealing with enemy country
The banking Commission recommended a
statutory provision clarifying the circumstances
when banks should disclose in public interest

i.

When a bank asked for information by a govt

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 banks possession may lead to
the apprehension of the culprit,
ii. Where the bank considers that the customer is
involved in activities prejudicial to the interests of
the country
iii. Where the banks 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.

Disclosure in the interest of the bank

Very rare instance
Arose in sole English case of Sutherland v
Barclays Bank
Customer a woman issued a cheque to her dress
maker, which was dishonoured for insufficiency
of funds
The bank knew of the customers bookmaking
transactions and did not wish to allow overdraft
She wanted to protest and take up the matter
with banker over phone (as she was advised by
her husband to do so)

 While she was in conversation with the banker

her husband took the phone to add his protest
over the matter
And during this conversation the banker
disclosed her habit of drawing the cheques in
favour of bookmakers
Then the action was brought but held, that the
banker is justified in such disclosure
Firstly as there is implied consent by the
women and
It was justified in the interest of the bank

Express or implied consent of the

customer
Customer may advise the banker expressly for
various needs
Implied consent will also protect the banker

Pass book

Introduction
Pass book is issued to banks customer, who
generally keeps savings account
In case of current accounts it is issued only upon
demand by the customer
Pass book is replica of the ledger at the bank
branch
In case of current accounts statement of their
accounts are given to them periodically (daily,
weekly, fortnightly etc.)

Contents of the passbook

Name & address of the customer and the nature of
his account
The account number and related details
The ledger number
Mode of operation
Either or survivor
Former or survivor
Any one
Date of opening of the account
Signature of the manager of the bank

Entries made in the passbook & its

finality
Two prominent thoughts
Once the passbook entry is made and passed on
the customer he shall verify and raise objection
if any afterwards the entries made in the
passbook shall be treated as final
Passbook entries are for general convenience
hence, the entries can be questioned any time
by the parties

position of the passbook in law is unsatisfactory from

the standpoint of the banker. Saving, negligence,
or reckless disregard on the part of either banker or
customer, its proper function is to constitute a
conclusive unquestionable record of the
transactions between them, and it should be
recognized as such. After full opportunity of
examination on the part of the customer, all entries,
at least to his debit, ought to be final and not liable
to be reopened later at any rate to the detriment
to the banker. Such is however, definitely not the
effect of the passbook
-- Sir John Paget

a secretary of the company, by going to the bank on

his own purpose in order to prevent the discovery of
his own fraud and without knowledge on the part of
any of the directors and getting the passbook, can
bind the company for all purposes. Clearly, an
officer of a company cannot bind the company by
approving the balance shown in the companys
passbook. In the case of forged cheques, the
primary cause of the loss is the negligence of the
bank in honouring the forgery and the forger may
be in a position to suppress the evidence in the
passbook form his employers
-- Bray J, in Kepatigalla Rubber Estates Ltd., National
Bank Ltd., [(1909) 2 KB 1010]

banks do business for their benefit. Customers also

get some benefit. If the banks are to insist upon
extreme care by the customers in minutely looking
into the pass book and the statements sent by them,
no bank perhaps can do profitable business. It is
common knowledge that the entries in the pass
books and the statements of account sent often by
the bank are not readable, decipherable or legible.
There is always an element of trust between bank
and its customer. The banks business depends
upon this trust. Whenever a cheque purporting to
be by a customer is presented before a bank, it
carries a mandate to the bank to pay

if a cheque is forged there is no such mandate.

The bank can escape liability only if it can establish
knowledge to the customer of forgery in the
cheques. Inaction for continuously long period
cannot by itself afford a satisfactory ground for the
bank to escape the liability..
-- Supreme Court in Canara Bank v Canara Sales
Corporation & Others [(1987) 62 Com. Cases 280]

Entries in the passbook

If there is 100% correctness in the entries made no
legal hassles
Although bankers take adequate care mistakes
do creep in
There are two situations
Entries favouring the customer; and
Entries favouring the banker

Entries favouring the customer

the passbook belongs the customer and the
entries made in it by the bank are statements on
which the customer is entitled to act In Atlantic
Mines Ltd., v Economic Bank [(1904) 2 KB 471]
If the position of the customer has not been
adversely affected, by relying upon the passbook,
the banker may rectify it (within reasonable time)

 What is affecting adversely? is question of fact

to be determined depending upon the
circumstances of each case
In determining this question of fact, a great deal
depends upon whether the customer was led
through the erroneous entry to act in a manner in
which he would otherwise not have done and
whether such action has been to his detriment

 A fictitious entry made by a bank employee cannot

be relied upon by a customer
Example State Bank of India v Shyma Devi, AIR
1978 SC 1263

Entries favourable to the bank

The proposition of law is extremely difficult to make
in this regard
Therefore the following few points in this regard are
to be taken into account (all these points arise out
of decisional law from time to time)

 Where the customer has so acted, as to render the

entries of the settled or stated account, and is guilty
of negligence in regard to them and as a result, the
banker s position is affected in a manner
disadvantageous to him, probably the customer will
not be allowed to dispute the correctness of the
entry

 The customer is not bound to examine the entries in

his passbook and the banker, upon receipt of the
passbook from the customer without any objection
from time to time, is not entitled to infer that the
latter has accepted the entries as correct
The above proposition was laid down in Chatterton
v London and County Bank (1891)

Vigliano bros. v Bank of England,

(1891)23 QBD 243

the plaintiff from time to time received from the bank his
passbook, with entries debiting the payments made, for
which the bank sent bills as vouchers, which were retained by
the plaintiff when he returned without objection, the
passbook. It was contended that this was a settlement of
account between him and the bank, and that he had been
guilty of such negligence with respect to the examination of
the vouchers as would have prevented him from being
relieved from the settlement of account. But there was no
evidence to show that, as between a customer and his
banker, is an implied contract as to the settlement of the
account by such a dealing between the banker and his
customer, the plaintiff had done anything which can be
considered a neglect of his duty to the bank or negligence
on his part

 Essa Ismail v Indian Bank Ltd., [(1963) 1 Comp. L.J.

194]
(Kerala) High Court held that, unless there is
evidence to show that the practice or custom
indicated or stated a settled account, the
customer is not precluded from questioning the
debit entries in the passbook

Balance confirmation letters

These are letters confirming the balance of the
account to the customers
With a request to return the same to the bank
For loan account this can be used as
acknowledgment of debt
The balance confirmation letters are sent by the
bank at half yearly or yearly intervals

 having confirmed the balance by returning the

confirmation letter duly signed to the bank, whether
the customer can object to any debit entry
preceding the balance, is a question not free from
doubt