General and Special Features of Relationship

The opening of an account with a banker, and the banker’s acceptance for such opening of account gives rise to a ‘contractual relationship‘. The relationship between the banker and customer is, generally, like a ‘Commercial Transaction‘. The relationship between a banker and a customer is the foundation on which mutual duties, liabilities and privileges are being built. An understanding of these terms is essential.

Debtor-Creditor Relationship: When a customer (debtor) deposits money with a bank (creditor), the customer becomes a lender and the bank becomes borrower. As such, the relationship is that of a debtor and creditor. It is a general relationship between banker and his customer. Some important points to note in Debtor-Creditor Relationship are,

• The banker is the debtor of the customer with the obligation to honor his customer’s cheque drawn upon his balance.
• When the banker lends money to his customer, the customer becomes the debtor and the banker, the creditor.

Banker as an agent: Generally, bankers render agency services for their customers. They pay insurance premium, electricity bills, taxes, etc. They collect interest on investments, dividends on shares, collect cheques, etc. Bankers act as per the ‘Standing instructions’ of their customers. For these services, the banker charges a nominal commission from the customer. The banker, by providing these services acts as an agent and the customer who gives the standing instructions, acts as a principal. Hence, the relation of banker and customer is that of agent and principal as far as these services are concerned.

Creditor (i.e., customer) demanding payment:  Under a commercial debt, the liability of the debt arises only at the maturity of the debt i.e., on the due date. The debtor i.e., the banker is to pay the debt on the maturity date. The customer must demand in writing for repayment, only then, will the payment be made to the customer.

Banker as a bailee: Bailee is one who posses goods or articles on behalf of the owner (called bailor) of the goods. According to the Sec. 148 of Indian Contract Act. a bailment is the delivery of goods by one person to another for some purpose, upon a contract, that they shall, when the purpose is accomplished, be returned or otherwise deposited off according to the directions of the person delivering them. In other words, when customer leaves with the banker some valuables for safe custody in the safe deposit vaults or lockers, the banker performs the functions of the bailee and the relationship between the banker and the customer in such a case is that of a bailee and the bailor.

Banker as a Trustee: A trust is a relation between two persons by virtue of which one of them (called trustee) holds property vested in him for the benefit of the other (called beneficiary). For example. if a customer deposits securities or other valuables with the banker for safe custody, he acts as a trustee of his customer. The customer continues to be the owner of the valuables deposited with the banker. The legal position of the banker as a trustee differs from that of a debtor of his customer. In the event of bank’s liquidation, such trust properties held by the banker are not available for the distribution to general creditors of the bank.

Proper place and time of demand: The demand by the creditor (i.e., depositor) must be made at the proper place and in proper time. A commercial bank has a large number of branches. His / her demand for withdrawal of amount from the deposited funds must be made at the branch where the account has been opened in his / her name during the business hours.

Not time barred: The deposits with a bank are not time – barred on the expiry of three years as the case with ordinary debt. The Law of Limitation Act does not apply to a banking debt.

Bank as an executor: Where a customer appoints a banker as his executor and leaves property through a will, the banker has to administer the property according to the terms of the will after the death of such customer. Where no will is written by the deceased, the court may appoint the banker as administrator. In such a case the banker has to distribute the property of the deceased according to the suggestion laws applicable.

Banker as an Attorney: The customer may grant a special power of attorney to his banker to transact certain dealings on his behalf. The banker is the attorney of the customer in such cases.

Banker has a right to combine accounts: If a customer has two or more accounts in his / her name at the same branch and in the same capacity, a banker as a debtor can exercise his right to combine those accounts into one.

A banker has no right to close the account: A banker as a debtor has no right to close the account of its creditor (depositor-customer) at any time without the prior permission from him / her.

A banker as a creditor: If a banker disburses loan and overdraft, it assumes the role of a creditor and the customer assumes the role of a debtor.

The following are the special relationships between banker and customer :

• Banker’s obligation to honor the cheques,
• Banker’s lien
• Banker’s duty to maintain secrecy of customer’s accounts and
• His right in respect of combining accounts
• Banker’s Right to Set-off

Explanation

1. Obligation to honor cheques: According to Sec. 31 of the Negotiable Instruments Act, 1881, every banker must honor the cheques drawn on it by a customer, provided:

• The customer has sufficient amount of balance to his account with the banker
• the funds are properly applicable to the payment of such cheque
• the banker has been duly required to pay
• the cheque has been presented to the banker within a reasonable time (i.e., within six months) after the apparent date and of its issue
• no prohibition order of the court or any other competent authority (e.g., income tax) is standing against the account of the customer.

2. Banker’s Lien: A lien may be defined as the right to retain property belonging to a debtor until he is discharged of his debt due to the retainer (creator) of the property. The banker’s lien refers to the right of banker over such of his customer’s securities as may come into his possession in the ordinary course of business. According to Sec.171 of the Contract Act, a banker has a general lien on cash, cheques, bills of exchange and securities deposited with him.

Conditions required for the banker to exercise general lien

• The securities and goods must come to his hands in his capacity as a banker.
• The banker should have obtained the possession of the securities and goods lawfully.
• The goods or securities should not have been entrusted to the bank for a specific or special purpose.
• The goods and securities, held by the bank shall stand in the name of borrower only and not jointly with others.
• There must be no arrangement either express or implied that is inconsistent with the banker’s right to lien.

3. Secrecy of Customer’s Accounts: It is an obligation on the part of a banker to maintain secrecy about the customer’s accounts. The banker must not disclose any information pertaining to the customer to anyone. But there are certain exceptions. They are,

• Where such disclosure is required by law
• Where such disclosure is in public interest to disclose
• Where the interest of the bank require such disclosure
• Where disclosure is made by the express or implied consent of the customer; and
• Where such disclosure is permissible on account of banking practices.

4. Banker’s Right to Combine Accounts: The banker has a right to combine several accounts kept by the customer at the same branch or different branches of the bank (Garnet V. Mc Kervan). The banker however, cannot combine the personal account of a customer with a joint account of a customer and some other person. Customer has no right to treat two accounts as one.
5. Banker’s Right to Set-Off: The banker can adjust a debit balance to a customer’s account with any balance standing to the customer’s credit. While doing so, the banker gives due notice to the customer. To exercise the right of set-off the following conditions should be fulfilled;

• The debts are certain and are due. The right cannot be exercised against future debt / or contingent debts.
• The debit and credit balances are of the same person in the same capacity.
• There should not be any express or implied agreement to the contrary.

6. Banker’s Right of Appropriation: As a part of ordinary banking business, the banker receives deposits of money from his customer. The customer has the right to dictate as to which account a particular amount is to be credited where he has more than one account and / or loan account. In case the customer has not appropriated, i.e., not indicated his account to which the said amount is to be credited, the creditor is at liberty to apply the payment to any debt owed by the debtor including to a debt barred by limitation.
7. Banker has a right to claim incidental charges: Every banker has a right to claim incidental charges on unremunerative accounts of a customer, e.g., collection charges, remittance charges for drafts, etc.

The relationship would come to an end under the following circumstances or conditions.

• If the customer dies;
• If the customer becomes an insolvent;
• If the customer becomes an insane;
• If the customer closes his account;
• If the banker closes the customer’s account
• If the court orders the bank to close the customer’s account