General Relationship, Special Relationship of Banker and Customer

The relationship between a banker and a customer is crucial for the smooth functioning of the banking system. Banks play a central role in the economic activities of a nation by providing financial services, while customers entrust banks with their money, expecting security, convenience, and a range of financial products. This relationship can be categorized into two broad types: general and special relationships.

General Relationship of Banker and Customer:

The general relationship between a banker and a customer is rooted in mutual trust, where the banker acts as a financial intermediary providing various services to the customer. This relationship is established when the customer opens an account with the bank and engages in normal banking transactions such as deposits, withdrawals, and the use of financial products like loans, credit, and investment services.

1. Contractual Relationship

The general relationship is primarily contractual. When a customer opens a bank account, they enter into an agreement with the bank. This agreement specifies the terms and conditions under which banking services will be provided, such as account maintenance fees, interest rates on deposits or loans, and the bank’s responsibilities toward the customer. Both the banker and the customer are legally bound by these terms, and any violation can lead to legal repercussions.

2. Debtor-Creditor Relationship

In most cases, the banker-customer relationship is described as that of a debtor and creditor. When the customer deposits money in the bank, the bank assumes the role of the debtor, owing money to the customer. This is particularly true for savings and current accounts where the bank is obligated to return the deposited funds upon request. The customer, on the other hand, becomes the creditor of the bank. When a customer takes out a loan, the relationship is reversed, with the customer becoming the debtor and the bank acting as the creditor.

3. Fiduciary Relationship

Fiduciary relationship arises when the bank manages the customer’s assets, such as through trust accounts or investment advisory services. In this situation, the bank has a duty to act in the best interest of the customer, placing the customer’s interests ahead of its own. This fiduciary duty is particularly important when dealing with sensitive financial matters, such as the management of retirement funds, insurance proceeds, or estate planning.

4. Duty of Confidentiality

The general relationship also includes a duty of confidentiality. Banks are required by law to protect their customers’ privacy and refrain from disclosing their financial information to unauthorized parties. This confidentiality is critical in fostering trust between the bank and its customers. The duty of confidentiality extends to all types of transactions, including deposits, withdrawals, and loans.

5. Right to Access Services

In the general relationship, customers have the right to access the services offered by the bank, including making deposits, withdrawing funds, transferring money, and utilizing digital banking services. The bank, in turn, has an obligation to ensure that these services are provided efficiently, securely, and in a timely manner.

Special Relationship of Banker and Customer:

The special relationship between a banker and a customer arises in specific circumstances where the bank’s role extends beyond general banking services. This relationship is governed by special terms and conditions, often dictated by the nature of the transaction or the financial product being offered. These special relationships involve higher degrees of responsibility, and in some cases, additional legal obligations.

1. Relationship as Bailee and Bailor (Safe Custody)

In a special relationship, the bank may act as a bailee (custodian) for the customer’s property, particularly in the case of safe deposit lockers. When a customer rents a locker at a bank, the bank assumes the role of a bailee, responsible for the safekeeping of the customer’s valuables. The customer, in this case, is the bailor who entrusts their property to the bank. The bank has an obligation to take reasonable care to protect the property from loss, theft, or damage, but it is not liable for events beyond its control, such as natural disasters.

2. Relationship as Trustee and Beneficiary (Trust Accounts)

A trustee-beneficiary relationship arises when a bank is entrusted with managing assets for the benefit of a third party. For instance, in a trust account, the bank holds the funds or assets in trust for a beneficiary (such as a minor child or a charitable organization). In this case, the bank must act in the best interest of the beneficiary, following the instructions outlined in the trust agreement. The relationship is governed by fiduciary duty, and the bank is held accountable for the proper management of the trust assets.

3. Relationship as Agent and Principal (Agency Services)

Banks also act as agents in certain circumstances. For example, a bank may provide services as an intermediary in transactions such as the collection of cheques or the purchase of securities on behalf of a customer. In such cases, the bank is the agent of the customer (the principal), and it is expected to act within the scope of authority granted by the customer. The customer may authorize the bank to carry out specific tasks, such as making payments, transferring funds, or buying financial products on their behalf.

4. Relationship as Lender and Borrower

In the case of loans, the special relationship between a banker and customer is that of lender and borrower. When a customer borrows money from a bank, they enter into a loan agreement that specifies the terms and conditions of repayment, including interest rates, installment amounts, and penalties for non-payment. The bank assumes the role of the lender, while the customer becomes the borrower. This relationship is governed by both contract law and banking regulations. The bank has the right to enforce the repayment terms, and the borrower has the obligation to repay the loan as per the agreed-upon schedule.

5. Relationship as Guarantor and Principal Debtor

Bank may act as a guarantor in certain cases, especially in business transactions involving loans. When a bank guarantees the repayment of a loan taken by a customer, it assumes the responsibility of paying off the loan if the customer defaults. In this case, the bank is bound by the terms of the guarantee agreement, and the customer remains the principal debtor. This special relationship is typically seen in the context of corporate or business banking, where the bank’s involvement provides assurance to creditors.

6. Relationship in Overdraft Facility

When a bank provides an overdraft facility, a special relationship is formed where the bank allows the customer to withdraw more than their available balance, up to a certain limit. In this case, the customer is required to repay the overdraft amount along with interest. The bank assumes the role of the creditor, and the customer is the debtor. The overdraft facility is usually offered based on the customer’s creditworthiness and the bank’s assessment of risk.

7. Relationship in the Case of Letters of Credit and Trade Finance

In international trade, banks act as intermediaries through mechanisms such as letters of credit (LC). A letter of credit is a document issued by a bank on behalf of a customer, guaranteeing that a seller will receive payment for goods or services upon fulfilling the terms of the contract. In this case, the relationship is that of a creditor (the bank) and an intermediary for the buyer and seller in the transaction. The bank’s role is to ensure that the contractual obligations of both parties are met before making payment.