AGU, CBE, Department of Accounting and Finance 2014

CHAPTER FOUR

THE BANK - CUSTOMER RELASHINSHIP

INTRODUCTION

The relationship between the customer and the banker is vital. The relationship starts right
from the moment an account is opened and it ends immediately on closure of the account.
The relationship stands established as soon as the agreement or contract is entered into. The
nature of the relationship depends upon the state of the customer’s account. The relationship
between a banker and a customer depends on the activities; products or services provided by
bank to its customers or availed by the customer. Thus, the relationship between a banker and
customer is the transactional relationship. Bank’s business depends much on the strong
bondage with the customer. Trust” plays an important role in building healthy relationship
between a banker and customer.
Before we take up the relationship that exists between a banker and his customer, let us
understand the meaning of the terms ‘banker’ and ‘customer’.

Definition of Banker
“A banker or bank is a person or company carrying on the business of receiving money and
collecting drafts for customers subject to the obligation of honoring cheques drawn upon them
from time to time by the customer to the extent of the amount available on their current
accounts” (Dr. H.L.Hart).
H.L.Hart). Since a banker or a banking company undertakes banking related
activities as a body corporate that;-

a) Accepts deposits from public

b) Lends or

c) Invests the money so collected by way of deposits

d) Allows withdrawals of deposits on demand or by any other means

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Meaning of a Customer
An old definition
According to John Paget “To constitute a customer there must be some recognizable course or
habit of dealing in the nature of regular banking business.” This definition represents an old view
according to which duration of dealings of banking nature is the crucial test and is named
duration theory. According to this theory, in order to constitute a customer, the following two
conditions must be satisfied.

i. Duration of dealings: A person to be called a customer must be in the habit of dealing

with the bank. Therefore, a single transaction with the bank will not turn a person in to a
customer. Thus a person does not be came a customer as soon as he opens an account
with the bank.

ii. Dealings of banking nature:- Here money must be deposited in the customer’s account and
drawings should be made from this account. If a banker renders to a person services
incidental to but not peculiar to the business of banking, the person thereby does not
become a customer; Thus, if a person deposits valuables for safe custody without having
an account, he cannot be called a customer because this transaction is not of banking
nature.

Dealings of banking nature are borrowing, lending, issuing and paying cheques and collection
of cheques, but these transaction must be routed through the account with the bank,. However,
if a person who doesn’t have an account at the bank, but deposit a crossed cheque for payment
and the banker receives it for itself and pay the value at the counter, the banker will be liable for
the payment. This is because that the person is not the customer. Crossed cheques are paid only
to a customer. Thus, the issuer of the cheque can file a suit against the bank for the recovery of
money.

Modern Definition

The new concept lays down opening a bank account as a crucial test of banker- customer
relationship. Duration of relationship is not given any importance. A person becomes a customer

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as soon as he opens an account with a bank and the latter undertakes to honor the cheques drawn
by the former up to the amount deposited in the account. A single transaction is sufficient to
constitute a person a customer of the bank “so far as banking transactions concerned, a customer
is a person whose money has been accepted on the footing that the banker will honor up to the
amount standing to his credit, irrespective of his connection being of short or long standing.
“The dealing with the bank should be in the nature of regular banking business. Thus, to
constitute a customer the following essential requisites must be fulfilled:-

i) A bank account must be opened in his name by making necessary deposit of money,
and
ii) The dealing between the banker and the customer must be of the nature of banking
business. Occasionally getting a cheque or enchased, purchasing stamps or depositing
valuables for safe custody does not constitute a customer. A customer of a bank need not
necessarily be a person. A firm, Joint Stock Company, a society or any other legal entity
may be a customer of a bank.
The relationship starts right from the moment an account is opened and it comes to an end
immediately on closure of the account. This relationship is of two types
A. General relationship and B. Special relationship

A. General relationship:
The general relationship between banker and customer can be classified into two types, viz.,
1. Primary relationship, and
2. Secondary relationship
1. Primary Relationship
Primary relationship is in the form of a ‘Debtor’, which arises out of a contract between the
banker and customer. Banker is neither a bailee nor a trustee nor an agent but only a debtor.
Thus, the fundamental relationship is that of “Debtor and Creditor.” Sometime the banker
discharges agency functions like collection of bills, cheques etc., acts as a bailee by keeping
valuables in safe custody and acts as trustee by administering the property for the benefit of
defined beneficiary. Here the relationship is not that of ‘Debtor and Creditor’. The authorities on
banking law and many court decisions have said that primary relationship is that of ‘Debtor and
Creditor

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Relation of debtor and creditor

The true relationship between relation of banker and customer is primarily that of a debtor and
creditor, the respective positions being determined by the existing state of the account. Instead of
money being set apart in the safe room, it is replaced by a debt due from the banker. The money
deposited with him becomes his property and is absolutely at his disposal.” As long as the
customer’s account shows a credit balance, the banker would be a debtor and in case the
customer’s account shows a debit balance, the banker would be creditor.
1. The Creditor must Demand Payment: Although the banker is a debtor and the customer is
creditor, it is not at all necessary for the debtor to go to the creditor to pay the amount. This is
normally expected in case of commercial transactions where in there are two parties one a
debtor and the other a creditor i.e., ordinary debtor creditor relationship. But, here in case of
banker and customer relationship, though the banker is a debtor, he is not expected to
approach the creditor for settlement of dues. Here, the relationship is different and has a
special feature, namely, demand is necessary from the customer.
2. Proper Place and Time of Demand: The demand by the creditor must be made at the proper
place and in proper time. It means that the customer should present the cheque for payment at
that place of the bank where the customer’s account is maintained. It is quite clear that at other
places, the customer of the state of his account is not known. It is also essential that the
customers should demand payment on a working day i.e., not on a holiday or a day which is
closed for public. In addition, it must be presented during business hours i.e., it should not be
presented either before or after the business hours.
3. Demand must be made in Proper Form: The demand made by the customer must be in the
prescribed form as required by the bank. It means that the demand for the refund of money
deposited must be made through a cheque or an order as per the common usage amongst the
bankers. Otherwise, the banker has every right to refuse payment. There are other types of
relationship called secondary relationship.

2. Secondary Relationship
It will be in the form of
(a) Banker as agent

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(b) Banker as trustee

(c) Banker as bailee
(a) Banker as Agent: A banker acts as an agent of his customer and performs a number of
agency functions for the convenience of his customers. These are as follows:
(1) Purchasing or selling of securities.
(2) Collection of income
(3) Making periodical payments as instructed by his customers
(4) Collecting interest and dividend on securities lodged by his customers.
(5) Receiving safe custody valuables and securities lodged by his customers.

In this case, the banker and customer relationship is, in the form of an ‘Agent’ and ‘Principal
(b) Banker as Trustee: Ordinarily, a banker is a debtor of his customer in respect of the deposits
made by the latter, but in certain circumstances, he acts as a trustee also. The customer may
request the banker to keep his valuables in safe vaults or one may deposit some amount and can
request the bank to manage that fund for a specific purpose, which the bank does, or the bank
can become trustee for the bank collects the cheques, of the customers in the capacity of trustee.
Thus, there are wide varieties of trustee functions discharged by the banker.
(c) Banker as Bailee:- bailment as 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 disposed of according to the direction of the person delivering them.
As a bailee, the banker should protect the valuables in his custody with reasonable care. If the
customer suffered any loss due to the negligence of the banker in protecting the valuables,
banker is liable to pay such loss. If any loss is incurred due to the situation beyond the control of
the banker, he is not liable for penalty.
To conclude, the primary general relationship exists when customer with bank opens the
account. The relationship is that of debtor and creditor. When the bank acts as trustee or agent or
bailee for the valuables, he will be establishing the secondary general relationship.
B. Special relationship
The special relationship between banker and customer takes the form of rights which the banker
can exercise and the obligations which he owes to his customers.
Following are the rights enjoyed by the banker with regard to the customer’s account:

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1. Right of general lien

2. Right of set-off
3. Right to appropriate payments
4. Right to charge interest, incidental charges
5. Right to close accounts

1. Right of General Lien: One of the important rights enjoyed by a banker is that of general
lien. A lien may be defined as the right to retain property belonging to a debtor until he has
discharged a debt due to the retainer of the property. In case lien is exercised by a trader on
his customer’s goods, he has no right to use the goods nor any right to sell them. All that he
can do is to retain the goods until the obligations are cleared. Once the obligations are cleared
by the customer, it is an obligation on the part of the trader to return back his goods
immediately.
2. Right of Set-off: The right of set-off is a statutory right, which enables a debtor to take into
account a debt owed to him by a creditor, before the latter could recover the debt due to him
from the debtor. In other words, the mutual claims of debtor and creditor are adjusted together
and only the remainder amount is payable by the debtor. A banker, like other debtors, possesses
this right of set-off which enables him to combine two accounts in the name of the same
customer and to adjust the debit balance in one account with the credit balance in the other. For
example, Mr X has taken an overdraft from his banker to the extent of Br. 10,000 and he has a
credit balance of Br. 5,000 in his savings bank account, the banker can combine both of these
accounts and claim the remainder amount of Rs. 5,000 only. The banker can exercise this right
of set-off if there is no agreement - express or implied contrary to this right and after a notice is
served on the customer intimating the latter about the former’s intention to exercise the right of
set-off. To be on the safer side the banker takes a letter of set-off from the customer authorizing
the banker to exercise the right of set-off without giving him any notice.
3. Right to Appropriate Payments: Whenever the customer deposits funds into his account in
the bank, it is, his duty to inform the bank to which account they are to be credited (provided
the customer have more than one account at the same bank). Once the customer gives
specific directions regarding appropriation, the banker has no right to alter them. It is his
bounden duty to carry out the instructions of the customer. This right of appropriation is to be

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exercised by the customer at the time of depositing funds and not later. In case the customer
is silent or fails to give instructions, the banker has every right to appropriate in his own way.
4. Right to Charge Interest: As a creditor, a banker has the implied right to charge interest on
the advances granted to the customer. The rate of interest is now a day levied as per the
directions of central bank. It is charged on half yearly or quarterly basis and generally
compound interest is used. The interest is directly debited, i.e., charged to the customer’s
account and then the interest is calculated on the principal with interest.
5. Right not to Produce Books of Accounts:- the banker need not produce the original books
of accounts as evidence in the cases in which the banker is not a party. He can issue only an
attested copy of the required portion of the account, which can be utilized as evidence before
the court. When the court is not satisfied with the certified copy, the court can summon the
original books. But when a banker is a party to the suit, the court can force the banker to
produce the original records in support of his claim.
6. Right to Close Accounts:- Banker also enjoys the right to close his customer’s account and
discontinue operations. This process terminates the relationship between banker and
customer. This is done only in situations where the continuation of relationship seems
unprofitable to the banker. These are the rights enjoyed by the banker with regard to the
customer’s account.

Obligations of Bankers
Bankers are under the obligations to fulfill certain duties while dealing with customers. Such
obligations are as under:
1. Obligation to honor the customer’s cheques
2. Obligation to maintain secrecy of customer’s account
3. Obligation to receive the cheques and other instruments for collection
4. Obligation to honor the cheques of customers across the counter
5. Obligation to give reasonable notice before closing the customer’s accounts

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1. Obligation to Honor the Customer’s Cheques

It is a statutory obligation upon the banker to honor the cheques of his customer drawn against
his current account so long as his balance is sufficient to allow the banker to do so, provided the
cheques are presented within a reasonable time after their ostensible (supposed) date of issue.
The drawee of a cheque having sufficient funds of the drawer in his hands, properly applicable to
the payment of such cheque, must pay the cheque when duly required so to do and in default of
such payment, must compensate the drawer for any loss or damage, caused by such default.”
This provision clearly indicates that the banker should honor the customers demand for payment
by cheque on certain conditions, which are stated below.
(a) Sufficient Balance: There must be sufficient funds in the account of the drawer. The cheques
sent for collection by the customer are not treated as cash in the hands of the banker until the
same are realized. The banker credits the amount of such cheques to the account of the
customer on their realization. If the customer draws a cheque on the unrealized amounts, the
banker is justified in dishonoring the cheque with the remark “effects not cleared.”
(b) Application of the Funds: The funds must be capable of being properly applied to the
payment of customer’s cheque. This means, the funds maintained for a specific purpose or
trust funds or the funds assigned in the name of some other person cannot be applied for
honoring the cheques. Thus, the funds so sought by the customer by cheque should be
unencumbered and must be capable of being properly applied.
(c) Duly Required to Pay:- The banker is bound to honour the cheques only when he is duly
required to pay. This means that the cheque, is complete and in order, must be presented
before the banker at the proper time. Ordinarily a period of six months is considered
sufficient within which a cheque must be presented for payment. On the expiry of this period,
the cheque is treated as state and the banker dishonors the cheque. Similarly, the banker also
dishonor a post-dated cheque because the order of the drawer becomes effective only on the
date given in the cheque.
(d) The instrument used for drawing the amount should be properly written and fulfill and legal
obligations
(e) The banker should have reasonable time to collect the bill or cheque.
Thus, the banker should be very careful while honoring a cheque drawn by a customer.

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Consequences of Wrongful Dishonor of Cheque

A cheque may be dishonured by a banker by mistake or by negligence on the part of any of his
employees. Even though there is sufficient balance, and the cheque has been drawn in a proper
manner. The banker will be held responsible for wrongful dishonor of a cheque because of loss
or damage to the customer.
3. Obligation to Maintain Secrecy of Customer’s Account
In every profession, there are certain things to be maintained absolutely in secret; for example, a
doctor is not expected to disclose the details of his patients to others. The profession demands
from him that he must maintain those matters in strict confidence. Similarly, a bank’s profession
also demands that he should maintain the particulars of his customer’s accounts in secret.
The banker has an implied obligation to maintain secrecy of the customer’s account. He should
not disclose matters relating to the customer’s financial position since it may adversely affect the
customer’s credit and business. This obligation continues even after the account of the customer
is closed.
Only in the following circumstances, disclosure is justified:
(a) To Satisfy Statutory Requirements: According to the Income Tax Act, the banker is required
to give out information regarding his customers to the Income Tax Department. Similarly,
whenever the court needs any information regarding the customers, the banker is required to
give the information. According to the Banking Regulation Act, all banks are required to give
in the prescribed forms detailed information regarding the customers to the central Bank.
(b) As a Common Courtesy: In this case, it is a common practice followed among bankers to
exchange information regarding their customers, accounts etc., as a matter of common
courtesy. Whenever the banker is called upon to give information regarding his customers, he
can do so without any difficulty. As far as possible, he should furnish bare facts while
expressing his opinion. He should be very careful while expressing his opinion. He should not
exaggerate nor underestimate the financial standing of his customers.
C) Disclosure at the will of Customer: The banker can disclose the state of affairs of the
customer’s account when the customer gives his consent to disclose the accounts. The auditor of
the organization can fully examine the customer’s account when an express consent is given by
him. Similarly, when a customer gives the name of a guarantor, the guarantor can examine the

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accounts of the customer, which the banker should furnish. When banker acts as a reference, he
can disclose the accounts of the customer.
D) To protect his Own Interest: Whenever the banker is required to protect his own interest, if
he discloses the details of a customer’s account, it must be a reasonable and proper occasion. For
example, if the banker is to recover his own money from a particular customer, he may give the
details to his lawyers.
E) To Protect Public Interest
When banks are required to give out information regarding their customers in the interest of the
public, the information should relate to financial aspect of the customers. When the Government
calls upon the bank to give information regarding a particular customer and when the bank feels
that a particular customer has committed an offence.
4. Obligation to Receive Cheques and Other Instruments for Collection Basically, the business
of banking, as it is known today, comprises acceptance of money on deposit account and
payment of cheques. It also includes collection of cheques. It may rightly be contended that
anyone who does not perform these essential services is not a banker. Whenever a banker is
entrusted with the job of collection of cheques, they must be collected as speedily as possible
through the accepted channels. Failure to exercise proper care and employ the recognised route
for collection may make the bank liable for any loss
which the customer may sustain.
5. Obligation to Give Reasonable Notice before Closing the Account
According to law, a debtor and a creditor may terminate the relationship without notice – by the
debtor paying off the balance or the creditor recalling the debt. It is not so simple between a
banker and a customer for the obvious reason that the banker is under an obligation to honour his
customer’s cheques. If this obligation could be terminated by the banker without notice, the
customer might be faced with an embarrassing situation. Reasonable time must be granted to
enable him to make alternative arrangements. Where any customer becomes a nuisance through
overdrawing without arrangement or issuing post-dated cheques etc., it is advisable to close his
account. But reasonable time has to be given to enable him to make alternative arrangements if
he so desires. If a bank abruptly closes the customer’s account, it might affect his credit, giving
cause for an action against the bank for damages.
Obligations of Customers

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Customers are under the obligations to fulfill certain duties while dealing with banks. Such
obligations are as under:
(a) Not to draw cheques without sufficient balance
(b) To draw cheques in such a manner to avoid any change of alternation.
(c) To pay reasonable charges for services rendered.
(d) To make a demand on the banker for repayment of deposit

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