Session : 2015-17

Submitted to:Dr. Sujata Parwani

Submitted By:Ishwar Shree M (Ft2k15-19)Priyanka Saluja (FT2k15-34)Sahir Kingrani (FT2k15-44)Shruti Soni (FT2k15-48)

Bank-Customer Relationship

• Today banks constitute an important segment of the economy banks have become a part and parcel of our life.

• The two important persons connected with a bank are the “Banker and the Customer”.

BankerBanking regulation act 1949 (section 5c) defines banker as a person undertaking business of banking. No person or corporate body or otherwise can be a banker, who does not :1. Take deposits accounts2. Take current accounts3. Issue and pay cheques4. Collect cheques, crossed, and uncrossed for his

customers5. Further, the banker must profess himself to be a

fulltime banker6. The public must accept him as such7. His main business must be that of banking from which

he should be able to earn his living

Customer

To constitute a person as a customer, the following conditions must be fulfilled :

1. He must have some sort of an account with the bank

2. Frequency of transactions is not essential, but anticipated

3. Even a single transaction can constitute him as a customer

4. The dealing must be of a banking nature

Forms of Bank-Customer Relationship

1. Bank as Debtor

2. Bank as Creditor

3. Bank as Trustee

4. Bank as Agent

5. Bank as Bailee

Bank as Debtor

• 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.

Bank as 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.

Bank as Trustee

• This relationship arises when a customer deposits securities and valuables with the bank, for safe custody.

• The customer continues to be the owner and the bank is supposed to only deal with them as per the customer’s instructions.

• Similarly when a bank is appointed as a Receiver of an estate, the money realized by the bank and deposited in its own account would not become assets of the bank, but would only be held by its as a trustee for the estate.

Bank as Agent

• The (agent-principal) relationship of bank-customer arises when a bank collects cheques/bills of exchange or other instruments of behalf of its customer, or buys/sells securities on its behalf, it is acting as an agent of its customer.

• In such cases bank is bound to conduct’s its principal’s business as per the latter’s directions and in the absence of such directions, as per the customary practice for such business at that place.

Bank as Bailee

• A bank acts as a bailee when it accepts a sealed box item for safe custody from a person.

• As a bailee the bank is bound to take as much care of the goods bailed to it as a man of ordinary prudence would do under similar circumstances.

Types of Customers and their accounts

1. Individuals

2. Illiterate persons

3. Hindu Undivided Family (HUF)

4. Firms

5. Companies

6. Trusts

7. Clubs

8. Local Authorities

9. Cooperative societies

Individuals

• Accounts of individuals form a major chunk of the deposit accounts in the Personal segment of most of the banks.

• Individuals who are major (18 years of age and above) and of sound mind can open a bank account.

• Savings or fixed deposit accounts for the benefit of minor child can also be opened and operated by the father / mother / guardian in one of the following modes :

i. In the single name of child through the father / mother / guardian, or

ii. In the joint names of the father / mother / guardian and the child (payable to either or survivor)

Illiterate persons• Illiterate persons who cannot sign are allowed to open only a

savings account (without cheque facility) or fixed deposit account.

• They are generally not permitted to open a Current account

• Following additional requirements need to be met while opening accounts for such persons:

i. The depositor’s thumb impression (in lieu of signature) is obtained on the account opening form in the presence who are known to the bank and who certify that they know the depositor

ii. The depositor’s photograph is affixed to the ledger account and also to the savings pass book for identification.

• Withdrawals can be made from the account when the passbook is furnished, the thumb impression is verified and a proper identification of the account holder is obtained.

Hindu Undivided Family (HUF)

• HUF is a unique entity recognized under the Hindu customary law as comprising a ‘Karta’ (seniormostmale member of the joint family), his sons and grand sons or even great grandsons in a lineal descending order, who are ‘coparceners’ (who have undivied share in the estate of the HUF).

• The right to manage to manage the HUF and its business vests only in the hands of Karta and he acts on behalf of all the coparceners.

• The Karta and other coparceners may possess self acquired properties other than the HUF, but these cannot be clubbed together for the HUF dues.

Hindu Undivided Family (HUF) contd

• The following special requirements are to be fulfilled by the banks, for opening and conducting HUF accounts :

i. The account is opened in the name of the Karta or in the name of the HUF business.

ii. A declaration signed by the Karta and all coparceners, affirms the composition of the HUF, its Karta and names and relationships of all the coparceners, including minor sons and their date of birth.

iii. The account is operated by the Karta or the authorized coparceners.

iv. In determining the security of the family property for purposes of borrowing, the self-acquired properties of the coparceners are excluded.

v. On the death of a coparcener, his share may be handed over to his wife, daughters and other female relatives as per Hindu Succesionact, 1956

Firms• The term ‘Firm’ indicated either a sole proprietary firm or a

partnership firm.• A sole proprietary firm is wholly owned by a single person whereas

a partnership firm has two or more partners.• The sole proprietary firm’s account can be opened in the owner’s

name or in the firm’s name.• A partnership is defined as the relationship between persons who

have agreed to share the profits of business carried on by all or any of them acting for all.

• In view of partnership firm, bankers comply with the following requirements while opening its account :i. The account is opened in the name of the firm and the account

opening form is signed by all the partners.ii. Partnership deed executed by all the partners is recorded in the

bank’s books.iii. Partnership letter signed by all the partners is obtained to ensure

their several and joint liabilities.

Companies• A company is a legal entity, distinct from its shareholders or

managers, as it can sue and be sued in its own name.• A company can be of 3 types :

i. Private Limited Company : having 2 to 51 shareholders.ii. Public company : having 7 or more shareholders.iii. Government company: having at least 51% share holdings of

Government (Central or State)

• Following requirements are to be met while opening an account in the name of a company :

i. The account opening form meant for company accounts should be filled and specimen signatures of the authorized directors of the company should be obtained.

ii. Certified up-to-date copies of MOA and AOA should be obtained.iii. Certificate of Incorporation (in original) should be perused and its

copy retained on record.iv. In case of a public company, certificate of commencement and a

copy of the same should be obtained and recorded respectivelyv. Certified copy of the resolution of the Board of Directors of the

company regarding the opening, execution of the documents and conduct of the account should be obtained and recorded.

Trusts

• A trust is a relationship where a person (trustee) holds property for the benefit of another person (beneficiary) or some object in a way such that the real benefit of the property accrues to the beneficiary or the object of the trust

• The trust deed is carefully examined and its relevant provisions, noted. A banker should exercise extreme care, as follows, while conducting the trust accounts, to avoid committing breach of trust :i. A trustee cannot delegate his powers to other trustees.ii. Funds in the name of the trust cannot be used for

crediting in the trustee’s account.iii. The trustee cannot raise loan without permission of the

court, unless permitted by the trust deed

Clubs

• Account of a proprietary club can be opened like an individual account.

• Clubs are collectively owned by several members and are not registered under any act.

• While opening and conducting the account of clubs, following requirements are to be met :i. Certified copy of the rules of the club is to be submitted.

ii. Resolution of the Managing committee or General Body, appointing the bank as their banker and specifying the mode of operation of the account has to be submitted.

iii. The person operating the club account should not credit cheques drawn favouring the club, in his personal account.

Local Authorities

• Municipal corporation and Panchayat Board are local authorities created by specific Acts of the State legislature.

• Bankers should ensure that accounts of such bodies are opened and conducted strictly as per provisions of the relevant Act and regulations framed thereunder.

• Precautions applicable for company or trust accounts are also applicable in case of these accounts.

Cooperative societies• Cooperative societies are required to open

accounts only with the banks that are recognized for the purpose .

• Following documents should be obtained while opening their accounts :i. Certificate of registration of the society under the

Cooperative Society Act.ii. Certified copy of the by-laws of the Society.iii. Resolution of the managing committee of the

Society prescribing the conditions for the conduct of the account.

iv. List of the members of the managing committee with the copy of the resolution electing them as the committee members.

Duties of Bank

1. Duty of secrecy

2. Duty Of Reasonable Care

3. Garnishee or Attachment Order

Duty of secrecy

• The bank owes a contractual duty not to disclose the customer’s affairs without his consent. It must be secret and confidential.

• However the obligation of secrecy is not considered essential on the following occasions:

i. Disclosure under compulsion of law.

ii. Duty to disclose in public interest.

iii. Disclosure with implied consent of the customer.

iv. Disclosure in interest of bank itself.

Duty Of Reasonable Care

• If a customer suffers loss due to improper care or negligence of the bank, he may claim specific damages from the bank for making good the loss.

• To honor a customer’s cheque and make sure that there is no wrongful dishonor of cheques when there is sufficient balance in the customers account.

Garnishee or Attachment Order

• Debtor who owes money is called “garnishee”

• It is the duty of the banker to abide by the order of the court (garnishee order) and attach the funds of the customer to the creditors who has obtained the order in his favor.

Rights of Bank

1. Right to Lien

2. Right of set-off

3. Right of appropriation of accounts

4. Right to charge interest/commission

Right to Lien• Lien refers to the right of a creditor (bank) to retain the

property belonging to the customer until the debt has been discharged (paid).

• Lien is of two kinds :i. General Lien : banks may in the absence of a contract to the

contrary retain as security for general balance of account any goods bailed to them.

ii. Particular Lien : the right to retain possession only of the goods in respect of which the charges or dues have arisen.

• The following conditions should be satisfied under bank’s lien:i. The possession of the goods by the bank must be in the same

rights as the account of the customer.ii. There should be no entrustment for special purpose.iii. There should be no contract-expressed or implied-to exclude

the lien.

Right of set-off

• It is a right of the banker to adjust his outstanding loans in the name of the customer from his credit balance of any of the accounts he is maintaining with the bank.

• By adjusting the debit balance in one account with the credit balance in other account the bank has right to set off between two or more accounts maintained by a customer.

• This right can be exercised in following conditions:i. The funds must in the same right and must prima facie

belong to the customer.ii. There should be no agreement between the bank and the

customer to exclude the right to set off.iii. The right to combine accounts can only be exercised in

respect of debts that are due and crystallised.

Right of appropriation of accounts

• The bank has the right of appropriation when there are two or more debts owing from a borrower and the latter makes a payment to the bank.

Right to charge interest/commission

• It is the right of the banker to charge interest commission etc according to the rates for the services the banker has rendered to the customer as agent, trustee etc

• Normally rate of interest on loans/overdraft, and of commission for collection of instruments or other services is chargeable by a bank as per terms agreed by the customer while granting the facilities.