BANKER-CUSTOMER RELATIONSHIP

A Project Submitted To -

ARMY INSTITUTE OF LAW, Mohali

By-

Bhavika Mehta (2064)

Under The Guidance

Of

Ms. Upagya Sharma

In The Partial Fulfillment of Requirement for the Award of

Degree of B.A. LLB

Punjabi University, Patiala, Punjab

Submission on: 26th October 2023

Banker-Customer Relationship

ACKNOWLEDGMENT

This project consumed huge amount of work, research and dedication. Still, implementation
would not have been possible if I did not have a support of many individuals and
organisations. Therefore, I would like to extend my sincere gratitude to all of them.

Ms. Upagya Sharma, our Land Law teacher for provision of her expertise, and technical
support in the implementation. Without her superior knowledge and experience, the Project
would lack in quality of outcomes, and thus her support has been essential.

I would like to express my sincere thanks towards all who devoted their time and knowledge
in the implementation of this project.

Nevertheless, I express my gratitude toward my family and colleagues for their kind co-
operation and encouragement which help me in completion of this project.

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TABLE OF CONTENTS
Introduction ................................................................................................................................ 3
Definition of Banking ................................................................................................................ 3
Definition of Customer .............................................................................................................. 3
Banker Customer Relationship .................................................................................................. 4
Classification of Relationship .................................................................................................... 5
A. General Relationship ......................................................................................................... 5
B. Special Relationship .......................................................................................................... 5
Debtor and Creditor Relationship ....................................................................................... 5
Trustee and Beneficiary (Bank as a Trustee and Customer as a Beneficiary): .................. 7
Agent and Principal Relationship ....................................................................................... 8
Bailor and Bailee ................................................................................................................ 9
Guarantor and Beneficiary................................................................................................ 10
Case Laws ................................................................................................................................ 11
Termination of the Relationship Between a Banker and a Customer: ..................................... 11
Conclusion ............................................................................................................................... 12

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INTRODUCTION

The relationship between a banker and a customer comes into existence when the banker agrees
to open an account in the name of the customer. The relationship between a banker and a
customer depends on the activities, products, or services provided by the bank to its customers
or availed by the customer. Thus, the relationship between a banker and customer is the
transaction relationship. Bank’s business depends much on the strong bondage with the
customer. Trust plays an important role in building a healthy relationship between a banker and
a customer.

DEFINITION OF BANKING

The Banking Regulations Act 1949, Sec.5 (b) defines the term banking as “Banking means
accepting, for lending or investment, of deposits of money from the public repayable on
demand or otherwise and withdraw by cheque, draft, and order or otherwise.”

Sec.5(c) of the Banking Regulation Act defines a “banking company” as a company that
transacts the business of banking in India. Since a banker or a banking company undertakes
banking-related activities we can derive the meaning of banker or a banking company from
Sec 5(b) as a body corporate that:

(a) Accepts deposits from the public.

(b) Allows withdrawals of deposits on-demand or by any other means.

Accepting deposits from the ‘public’ means that a bank accepts deposits from anyone who
offers money for the purpose. Unless a person has an account with the bank, it does not accept
the deposit. For depositing or borrowing money there has to be an account relationship with
the bank. A bank can refuse to open an account for undesirable persons. It is the bank’s right
to open an account. Reserve Bank of India has stipulated certain norms for instance, “Know
Your Customer” (KYC) guidelines for opening accounts and banks have to strictly follow
them. In addition to the activities mentioned in Sec.5 (b) of the Banking Regulations Act, banks
can also carry out activities mentioned in Sec. 6 of the Act.

DEFINITION OF CUSTOMER
In simple words, a customer is such a person to whom you extend your services in return for
consideration. A customer is a person who maintains an account with the bank without taking
into consideration the duration and frequency of operation of his account. To be a customer for
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any bank the individual should have an account with the bank. The individual should deal with
the bank in its nature of regular banking business.

Those who do not maintain any account relationship with the bank but frequently visit a branch
of a bank to availing banking facilities such as for purchasing a draft, encashing a cheque, etc.
technically they are not customers, as they do not maintain an account with the bank branch.
The term ‘customer’ is used only concerning the branch, where the account is maintained. He
cannot be treated as a ‘customer’ for other branches of the same bank. However, with the
implementation of’ ‘Core Banking Solution’ the customer is the customer of the bank and not
of a particular branch as he can operate his account from any branch of the bank and from
anywhere. In the event of arising any cause of action, the customer is required to approach the
branch with which it had opened an account and not with any other branch.

As per ‘Know Your Customer’ guidelines issued by Reserve Bank of India, customer has
been defined as:

1. A person or entity that maintains an account and/or has a business relationship with the
bank;
2. One on whose behalf the account is maintained (i.e., the beneficial owner);
3. Beneficiaries of transactions conducted by professional intermediaries, such as Stock
Brokers, Chartered Accountants, Solicitors, etc. as permitted under the law, and
4. Any person or entity connected with a financial transaction, which can pose significant
reputation or other risks to the bank, say, a wire transfer or issue of a high-value demand
draft as a single transaction.

BANKER CUSTOMER RELATIONSHIP

There are numerous kinds of relationships between the bank and the customer. The relationship
between a banker and a customer depends on the type of transaction. Thus, the relationship is
based on contract, and certain terms and conditions.

These relationships confer certain rights and obligations both on the part of the banker and on
the customer. However, the personal relationship between the bank and its customers is long-
lasting. Some banks even say that they have a generation-to-generation banking relationship
with their customers.

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CLASSIFICATION OF RELATIONSHIP

The relationship between banker and customer is of utmost importance. The relationship
between a bank and its customers can be broadly categorized into General relationships and
Special relationships.

A. GENERAL RELATIONSHIP

It is notable that the relationship between the banker and the customer arises out of the contract
between them and cannot be created except by mutual consent. The contractual relationship
which exists between banker and customer is a complex one, founded originally upon the
customs and usages of the bankers. Many of these customs and usages have been recognised
by the courts and to the extent that they have been so recognised, they must be regarded as
implied terms of the contract between the banker and the customer. Thus, the general
relationship between banker and customer is that of a contractual nature.

In Vimal Chand Grover v. Bank of India, it was held that a client becomes customer when Bank
issues Bank draft in his favour.

B. SPECIAL RELATIONSHIP

Generally, we can compare the banker and customer relationships with the other relations in
commercial transactions. There are mainly five types of special relationships.

1. Debtor and creditor relationship,

2. Trustee and beneficiary relationship,

3. Agent and Principal relationship.

4. Bailor and Bailee

5. Guarantor and Beneficiary

DEBTOR AND CREDITOR RELATIONSHIP

The fundamental relationship between the banker and the customer is that of debtor and
creditor. It is of two types

1. When Banker is DEBTOR

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When a ‘customer’ opens an account with a bank, he fills in and signs the account
opening form. By signing the form, he agrees/contracts with the bank. When a customer
deposits money in his account the bank becomes a debtor of the customer and the
customer a creditor. The money so deposited by the customer becomes the bank’s
property and the bank has a right to use the money as it likes. The bank is not bound to
inform the depositor of the manner of utilization of funds deposited by him. Bank does
not give any security to the depositor i.e. debtor. The bank has borrowed money and it
is only when the depositor demands, the banker pays. Bank’s position is quite different
from normal debtors.
While issuing Demand Draft, Mail / Telegraphic Transfer, the bank becomes a debtor
as it owes money to the payee/ beneficiary.

2. When Banker is CREDITOR

Lending money is the most important activity of a bank. The resources mobilized by
banks are utilized for lending operations. Customer who borrows money from the bank
owes money to the bank. In the case of any loan/advances account, the banker is the
creditor and the customer is the debtor. The relationship in the first case when a person
deposits money with the bank reverses when he borrows money from the bank.
Borrower executes documents and offers security to the bank before utilizing the credit
facility.

The debtor and creditor relationship between banker and customer differs from similar
relationship arising out of ordinary commercial debts in the following respects:

1. Demand is necessary in case of debt due from banker

In case of ordinary debt, the debtor pays the amounts on the specified date or earlier or
whenever creditor demands. But in case of deposit in the bank, the debtor (bank) is not
bound to pay on his own account because the banker is not an ordinary debtor; he
accepts the deposits with an additional obligation to pay only when it is demanded.
Hence a banker is considered to be Privileged debtor.

Case law: Joachinson vs. Swiss Banking Corporation.

Held: Atkins, L.J., has held that an express demand by a customer (credit) in writing is
essential to get back the deposit money.

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2. Proper place to demand

A commercial bank having number of branches is considered to be one unit. The

locality was an essential part of a debt due by the banker to the customer and the
banker’s obligation to repay the debt was confined to the place where the account was
kept.
Case law: Joachinson vs Swiss Banking Corporation.

3. Proper time to demand

Customer can withdraw the money only during the business hours of the Bank.

Case Law: Arrab Bank v. Barclays Bank

Held: It was held that a banker is liable to honour a cheque provided it is provided
during the banking hours so also as to withdrawal.

4. Proper manner to demand

According to section 5 (b) definition for the banker, the demand for refund of money
must be made through proper method followed by custom or usage amongst bankers,
i.e., either by cheques or drafts or orders otherwise. It should not be oral.

5. Partly demand:- The customer is not allowed to withdraw the entire amount of the
deposit unless he closes his account. The demand by the customer can only be a part of
his debt or deposit.
6. Banker and the law of limitation

According to Article 22 of the limitation Act 1963 the period of limitation to the deposit
is three years, which starts from the date of demand by the customer and not from the
date of deposit and for a fixed deposit, it applies from the date of maturity. But in case
of ordinary commercial debts the period of limitation starts from the date of debt. So,
this is also a peculiar feature of banker and customer relationship.

TRUSTEE AND BENEFICIARY (BANK AS A TRUSTEE AND CUSTOMER AS A BENEFICIARY):

As per Sec. 3 of Indian Trust Act 1882, a “trust” is an obligation annexed to the ownership of
property, and arising out of a confidence reposed in and accepted by the owner, or declared
and accepted by him, for the benefit of another, or of another and the owner. Thus, the trustee
is the holder of property on behalf of a beneficiary.

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In the case of a trust, a banker customer relationship is a special contract. When a person
entrusts valuable items to another person with the intention that such items would be returned
on demand to the keeper the relationship becomes of a trustee and trustier. Customers keep
certain valuables or securities with the bank for safekeeping or deposits certain money for a
specific purpose (Escrow accounts) the banker in such cases acts as a trustee. Banks charge
fees for safekeeping valuables.

Case Laws: Canara Bank v. Canara Sales Corporation

Held: The supreme court held that, there is always an element of trust between the bank and
its customer. The bank’s business depends upon this trust.

Case Laws: Official Assignee of Madras v. Rajaram Aiyyar

Held: It was held that, when the bank holds money for the specific purpose of sending it to
somebody the money is impressed with trust.

AGENT AND PRINCIPAL RELATIONSHIP

One of the important relationships between the banker and the customer is the relationship
of agent and principal. Section 182 of Indian Contract Act 1872 defines Agent and Principal.
An Agent is a person employed to do any act for another or to represent another in dealings
with third persons. The person for whom such act is done or who is represented is called the
Principal. Sections from 182 to 238 of Indian Contract Act 1872 deal with “Law of Agency”.
All these provisions are applicable in case of the relationship of the Banker (agent) and
Customer (principal). The banker acts as an agent for the customer – principal in the following
circumstances.

1. Collection of cheques, dividends, bills or promissory notes on behalf of the customer.

2. Buying and selling securities on behalf of the customer.

3. Acting as a trustee, attorney, executor, correspondent or representative of a customer.

4. Payment of insurance premiums, telephone bills water bills, amount for shares etc.

In the above circumstances the banker acts as an agent for his principal customer. The law of
Agency applies to both the parties in such circumstances. The banker as an agent is bound to
conduct the business of the agency with reasonable diligence. It is the duty of the agent to
communicate with his principal in cases of difficulty, to use all reasonable diligence and to

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obtain his instructions. It is to be noted that bank acts as an agent of the customer but it cannot
provide service without the authority/ consent of the customer.

Case Law: Bank of India v. The Official Liquidator

Held: It was held that when a customer sends cheques for collection, to the banker, his (banker)
role becomes as an agent of the customer.

Case: Velji Lakhamsay & Co. v. Dr. Banaji

Held: The Bombay High Court has thrown further light on the relationship between banker
and customer. It is that of a debtor and creditor. But a customer may give certain specific
directions to the bank, then bank will be an agent of the customer.

BAILOR AND BAILEE

In certain occasions, a customer may entrust his valuables to his banker for the safe custody.
In such cases the banker becomes Bailee and the customer as Bailor. The provisions of chapter
in (sections 148 – 181) of the Indian Contract Act, 1872 shall apply to the banker bailee and
the customer bailor.

Duties of Banker as Bailee

1. Duty of reasonable care: Section 151 of Indian Contract Act lays that it is the duty of
the bailee to take reasonable care in handling the goods, which are entrusted to him.
Section 152 provides that the bailee is not liable for loss destruction or deterioration of
the things bailed, if he has taken the amount of care of them.

2. Duty not to make unauthorized use: Goods must be used by the bailee strictly for the
purpose for which they have been bailed. Section 154 provides that the bailee is liable
to make compensation to the bailor, if he uses unauthorizedly.

3. Duty not to mix: Sections 155 to 157 imposes the duty that the bailee should not mix
the goods of the bailor with others.

4. Duty to Return: Section 160 provides that it is the duty of the bailee to return goods
or deliver according to the bailor’s directions after expiry of the bailment.

Knowledge of the Contents of the Lockers

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Generally, the bank has no knowledge of the contents of the Customers lockers. But there are
some cases where he has knowledge of the and such knowledge will make him a bailee. They
are:

1. In case of the of death: When the customer dies and his legal representative with
special authority asks the bank to take an inventory of the contents. In such cases bank
has to make inventory of the articles kept in lockers. So is also in the case of insolvency
or legal dispute among heirs of the user.
2. In case of Search and Seizure: In cases of search and seizure duly authorised under
law, inventory of the articles is prepared and again remain in the custody of the banker.
For example, search and seizure by Income Tax authority or vigilance department or a
police officer.
3. By order of the Court: Where inventory of the articles of lockers are made by the
order of the Court.
In case of lockers the bankers must maintain following registers:

(i) Locker user register

The banker must maintain a register of locker users containing the entries of the date,
time of entering and time of leaving and the signature of the user. The user of the locker
whenever uses locker should fill in columns of the register.

(ii) Safe Custody register

The banker must maintain a register wherein he enters particulars of the items deposited
before him with all other aspects.

(ii) Withdrawal of articles register

The article deposited with the banker can be withdrawn by the customer after
surrendering the receipt. If banker receives mandate that item should be released only
when all persons sign on the book when it is deposited by more than two persons then
it should be released in the manner so required.

GUARANTOR AND BENEFICIARY

Now-a-days bank guarantee has become very common. Guarantor is one who gives a promise
to answer for the payment of some debt or the performance of some duty in the case of failure
of another person, who, in the first, instance, is liable to such payment or performance. A bank

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issues letter of credit for its customers. It is a kind of credit facility to its customer; hence
customer’s position remains as a beneficiary. The extent of the liability of the guarantor is
determined by the terms of the agreement or contract of guarantee. Such relation is governed
under Sections 124 to 147 of the Contract Act, 1872.

In Hindustan Steel Works Construction Ltd. v. Tarapore and Co., it was held that bank
guarantee is an independent and distinct contract between the bank and the beneficiary and is
not qualified by the underlying transactions and the primary contract is between the person at
whose instance the bank guarantee is given and the beneficiary.

CASE LAWS:

In the case of Motigavri vs. Naranjidwarkadas 1, the Bombay High Court held that the
relationship between banker and banker is that of a lender and borrower.

In the case of Canara Bank vs. Canara Sale Corporation and others 2, a wider approach was
taken into consideration and it was held that a relationship between the customer of a bank and
a customer is that of a debtor and creditor.

In the case of Surender S/O Laxman Nikose vs. Chief Manager and authorised officer 3, State
bank of India, it was held by the Bombay high court that once the relationship between the
banker and customer ends, it waives off every right including the right of lien.

TERMINATION OF THE RELATIONSHIP BETWEEN A BANKER AND

A CUSTOMER:

It would thus be observed that the banker customer relationship is a transaction relationship.
The relationship between a bank and a customer ceases on:

(a) The death, insolvency, lunacy of the customer;

(b) The customer closing the account i.e., Voluntary termination;
(c) Liquidation of the company;
(d) The closing of the account by the bank after giving due notice;
(e) The completion of the contract or the specific transaction;

1
(1927) 29 BOMLR 423
2
1987 AIR 1603
3
2010 AIR SCW 5935
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CONCLUSION
With the advancement of the internet and different online mechanisms, the world has become
a global village. People keep their savings and valuables in banks for better returns. At times
we have seen that people have seen instances of online fraud. The regulation should be made
in ensuring complete protection and also should satisfy the consumer. The arbitrary action of
granting loans to people with brand value should be curbed and the account must be fixed if
anyone is found responsible for the inaction or impropriety. The rising non-performing assets
have become a concern for everyone in the country. It directly or indirectly affects common
people of the country. Thus, it has become important to make regulations in that direction.

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