Chapter Five

Relationship between the Banker and Customer

Customer defined:

The term ‘Customer’ has not yet been statutorily defined. However, in general, the term ‘Customer’
means a person who has an account with the bank.

According to Sir John Paget, “to constitute a customer there must be some recognizable course of
dealing in the nature of regular banking business”. Thus, according to the above view, a person does not
become a customer simply by opening an account with the bank. He should be in the habit of dealing
with the bank, i.e. there should be some measure of continuity in his dealings with the bank. This is
popularly known as “Duration theory”.

Thus, in order to constitute as a customer, a person should satisfy two conditions;

a) He should have an account with the bank, whether fixed, savings or current.

b) The dealings should be of a banking nature. Dealings of banking nature have to be differentiated
from other dealings, which are of a casual nature. For e.g. occasionally getting a check encashed,
depositing valuables for safe custody.

The general relationship between banker and customer

The general relationship between a banker and customer can be studied under three heads;

1) Debtor - Creditor relationship.

2) Trustee - Beneficiary relationship.

3) Agent - Principal relationship.

1) Debtor - Creditor Relationship

On the opening of an account, the banker assumes the position of a debtor. The money
deposited by the customer with the banker is in legal terms, lent by the customer to the banker, who
makes use of the same according to his discretion. The creditor has the right to demand back his money
from the banker, and the banker is under an obligation to repay the debt as and when he is required to
do so.

A depositor remains a creditor of his banker so long as his account carries a credit balance. The
relationship will be reversed as soon as the customer’s account is over drawn. Though the relationship
between a banker and his customer is mainly like a debtor and creditor, this relationship differs from
similar relationship arising out of ordinary commercial debts in the following ways:

(i) The Creditor must demand payment:

 In case of ordinary commercial debt, the debtor pays the amount on the specified date or earlier
or whenever demanded by the creditor. But in case of a bank deposit, the debtor (banker) is not
required to repay the amount on his own. It is essential that the creditor (depositor) must make a
demand for the payment of the deposit in the proper manner. This difference is because a banker is not
an ordinary debtor; he is termed as a privileged debtor.

(ii) Proper Place and Time of Demand: -

The demand by the creditor must be made at the proper place and in proper time. His demand
for the repayment of the deposit must be made at the same branch of the bank, in which he has the
account. Otherwise, the banker is not bound to honor the checks.

It is also essential that the demand must be made during banking hours only on a working day of
the bank. If the banker makes payment after or before the banking hours, he might be held liable for the
same.

(iii) Demand must be made in Proper Manner: -

Demand for the refund of money deposited must be made through a check or an order. In other
words, the demand should not be made verbally or through a telephonic message.

2) Trustee – Beneficiary Relationship

In certain circumstances, the banker may acts as a trustee also. A trustee holds money or assets
and performs certain functions for the benefit of some other person called the beneficiary. For e.g. if the
customer deposits securities or other valuables with the banker for safe custody, the banker acts as a
trustee of his customer.

The legal position of the banker, as a trustee, therefore differs from that of a debtor of his
customer. The position of a banker as a trustee or as a debtor is determined according to the
circumstances of each case. For e.g. in case of a check sent for collection, the banker acts as a trustee till
the check is realized and credited to the customer’s account and thereafter he will be the debtor for the
same amount.

3) Agent –Principal Relationship

A banker acts as an agent of his customer and performs a number of agency services. For e.g.
the banker buys and sells securities on behalf of his customer, collects checks on behalf of his customer
and makes payment of various dues of his customer. Thus, the range of such agency functions has
become much wider and the banks are now rendering large number of agency services.

Right of a banker

Banker has the following rights:

 a. Right of general lien:

Lien means the right of creditor to retain the goods and services owned by the debtor until the debt due
from him is repaid. Here the creditor has the right to retain and not to sell. Lien may be either General
lien or Particular lien.

A person who has spent his time, labor and money on the goods retained can exercise a particular lien.
For e.g. a tailor had the right to retain the clothes made by him for his customers until his tailoring
charges are paid by the customer.

A general lien is applicable in respect of all amounts due from the debtor for the creditor. The right of
general lien is given to the banker.

The right of general lien is available to the banker only with following conditions;

I. The banker possesses the right of general lien on all the goods and services entrusted to him in
his capacity of a banker. Thus he cannot exercise his right of general lien if;

- the goods and securities have been received by the banker as a trustee or an agent.

- the goods of securities are required by the banker for some specific purpose.

II. The right of lien does not confer on the creditor, the
right of sale, but only the right to retain the goods till the loan is repaid. In case of pledge the
creditor enjoys the rights of sale. A bankers right of general lien, thus confers him the force to
sell the goods & securities in case of default by the customer. Such right resembles in pledge &
thus general lien is called as implied pledge.

III. The right of lien can be exercised on goods and securities standing in the name of the borrower
only and not jointly with other.

IV. The banker can exercise his right of lien on the securities remaining in his possession after the
customer repays the loan. In such cases, it is an implied presumption that the customer has re-
offered the same securities as a cover for any other-advance outstanding on that date.

Exception to the right of general lien:

The right of general lien cannot be exercised y the banker in the following circumstances.

1) Safe custody of valuables: A customer deposits his valuables such as securities, documents,
ornaments etc. with the bank. He entrusts them to the banker as a bailee or transfee in order to
ensure the safety from theft fire etc., thus the banker cannot exercise his right of general lien
over such valuables.

2) Documents deposited for special purpose: -If a customer sends any document with the specific
instruction for utilizing its proceeds for any specific purpose, the right of general lien does not
exist. Similarly, if a customer hands over some shares to the banker with some instruction to sell
 them at certain price, and the same are lying unsold with the banker, here also the banker
cannot exercise the right of lien. However, if the security comes into the possession of the
banker in the ordinary course of business, he can exercise his right of general lien.

3) Securities left with the bank negligently: - The banker does not possess the right of lien on the
documents or valuables left in his possession by the customer by mistake or by negligence.

4) Securities held in trust: The banker cannot exercise his right of general lien over the securities
deposited by the customer us a trustee in respect of his personal loan.

5) The bankers’ right of lien extends over goods and securities handed over to the banker. Money
deposited in the bank and the credit balances in the accounts do not fall in the category of
goods & securities. Therefore, the banker may exercise his right of set-off rather than the right
of general lien.

6) The banker cannot exercise his right of general lien over the securities given to him for securing
a loan, before such loan is actually granted to him.

(2) Right of set-off:

A banker possesses the 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 with the credit balance in the other. For example,
Mr. A has taken an overdraft from his banker to the extent of Br.10000, and he has a balance of Br.5000
in his SB account. Hence, the banker can combine both of these accounts and claim the remaining
amount of Br.5000 only. This right of set-off can be exercised by the banker after a notice is served on
the customer intimating the decision of the banker of set-off.

The right of set-off can be exercised subject to the fulfillment of the following conditions;

a) The accounts must be in the same name and in the same right: - Here the account with the
banker must not only be in the same name but also in the same right. “The same right” means
that the capacity of the account holder in both the accounts must be the same. Thus the funds
belonging to someone else, but standing in the same name of the account holder, should not be
made available for satisfy his personal debts. (E.g.) The personal account of the trustee cannot
be set-off with the trust account money.

b) The right can be exercised in respect of debts due and not in respect of future debts. For e.g., a
banker can set-off a credit balance in the account of a customer towards the payment of a bill
which is already due, but not in respect of a bill which will mature in future.

c) The amount of debts must be certain: - It is essential that the amount of debts due from both
the parties to each other must be certain. If liability of anyone of them is not determined
exactly, the right of set-off cannot be exercised. For e.g., if Mr.A is a guarantor for a loan of
Br.100,000 given by a bank to Mr.B, his liability as guarantor will arise only after Mr. B delays in
making payment. The banker cannot set-off the credit balance of the guarantor till his liability as
 a guarantor is determined. For this purpose, the banker must first demand payment from his
debtor. If the debtor defaults in making payment of his debt, only then the liability of the
guarantor arises and the banker can exercise his right of set-off against the credit balance in the
account of the guarantor.

d) The right may be exercised in the absence of an agreement to the contrary. If there is an
agreement express or implied, the banker cannot exercise the right.

e) For the purpose of exercising this right, all the branches of a bank constitute one entity and the
bank can combine two or more accounts in the name of the same customer at more than one
branch.

f) The banker has the right to exercise this right before his garnishee order is made effective. In
case a banker receiving a garnishee order in respect of the funds belonging for his customer, he
has the right first to exercise his right of set-off & thereafter to surrender only the remainder
amount to the judgment creditor.

(3) Right of appropriation

When money is paid by the customer, or when the banker receives money from third parties for credit
to the customer. The customer has the right to say that it should be placed to a particular account or
should be applied in payment of a particular debt or in meeting certain cheques or bills. The banker is
bound to appropriate it accordingly, irrespective of the state of accounts between them. However, if the
customer does not make any specific appropriation, the banker can appropriate it.

(4) Right to charge interest & commission

A banker is entitled to charge interest on loans, by express agreement either by right of custom or usage
of trade. The banker is also entitled to charge commission for services rendered to his customer.

(5) Right to close an account

A customer can close the account at any time he feels like without assigning any reasons, though the
usual reasons could be that he:

a) does not agree with the terms and conditions of the bank

b) feels unhappy with the quality of services.

c) otherwise loses confidence on the bank.

He may close the account merely by presenting a cheque for the balance in his favor though it is
common to inform the banker of his intention and return unused cheques with him.

The banker can also decide to close an account, which has been unsatisfactorily conducted by sending a
written intimation to the customer. He may state there in that he will not receive any further credits and
may additionally request the customer to withdraw his balance. Else, he may inform that he will honor
the cheques only until the balance is exhausted. The overriding condition, however is that the banker
must give sufficient time before the account is closed.

Duties of a Banker

The obligations of a banker can be studied under two categories:

(I) Obligation to honor the checks.

(II) Obligation to maintain secrecy of accounts.

I. Obligation to Honor the Checks:

The deposits accepted by a banker are his liabilities repayable on demand. Therefore the banker
is under a statutory obligation to honor his customer’s checks in the usual course.

“The drawee of a check having sufficient funds of the drawer in his hands properly applicable to the
payment of such check, must pay the check. When duly required to do so and in default of such
payment must compensate the drawer for any loss or damage caused by such default.”

Thus according to the above, the banker is bound to honor his customer’s checks provided the
following conditions are fulfilled;

 There must be sufficient funds of the drawer in the hands of the drawee.

Sufficient funds means, the funds at least equal to the amount of the check presented. Generally checks
sent for collection by the customer are not treated as cash in hands of the banker until the same are
realized. Further, the credit balances in other accounts of the customer at other branches need not be
taken into account in computing sufficiency of funds for his purpose. The funds in the hands of the
drawee banker must be equal to or more than the amount of the check presented for payment. The
banker is directed by the drawer to pay a specified sum of money to the payee, and if such sum is not in
the hands of the banker at the time of presentation of the check, the banker is under no obligation to
make part payment of the check. If the payee of the check makes a deposit in the account of the drawer
to make in such deficiency and then presents the check for payment, the banker will be insisted in
making such payment.

 The funds must be properly applicable to the payment of the check:

A customer might be having several bank accounts, but it is essential that the account on which
a check is drawn must have sufficient finds. Similarly, a depositor having a debit balance in his current
account cannot draw a check on the basis of his fixed deposit with the banker. If there is an agreement
between the banker and the customer, where by the banker agrees to sanction an overdraft, the
banker’s obligation to honor the customer’s checks is extended up to the amount of overdraft
sanctioned by him.

 The banker must be duly required to pay:

 The banker is bound to honor the checks only when he is duly required to pay. This means that
the check, complete in order must be presented before the banker at the proper time, ordinarily, a
check will have validity for a period of six months. On the expiry of this period, the check is treated as
stale and the banker can dishonor the check. Similarly a post-dated check is also dishonored by the
banker because the order of the drawer becomes effective only on the date given in the check.

II. Obligation to Maintain Secrecy of Accounts

The banker is under an obligation to take utmost care in keeping secrecy about the accounts of his
customer. If the facts about customer’s account are made known to others the customer’s reputation
may suffer and he may incur losses also.

Thus, the banker is under an obligation not to disclose deliberately or intentionally any information
regarding his customer’s accounts to third party and also takes all necessary precautions and care to
ensure that no such information lends out of the account books.

i) When the law requires such disclosure to be made.

ii) When the practices and usages among the banker permit such disclosure.

Thus, a banker will be justified in disclosing information about his customer account on reasonable and
proper occasions only as stated below:

 Disclosure permitted as per law:

If the government departments such as Federal Inland Revenue Authority, police department,
Customs, etc. are in need of information about bank balances maintained by a person who has a bank
account, the banker is under obligation to provide information to them.

 Disclosure Permitted by the Banker’s Practices and Usages:

1) With express or implied consent of the customer:

The banker will be justified in disclosing any information relating to his customer’s account with the
consent of the customer, which may be express or implied. Express consent exists in case the customer
directs the banker in writing to institute the balance in his account to his agent. In certain circumstances,
the implied consent of the customer permits the banker to disclose necessary information. For e.g. if the
banker sanctions a loan to a customer on the guarantee of a third person and the guarantor asks the
banker certain questions relating to the customers’ account. Here the bank is justified in disclosing the
facts to the guarantor, as there is an implied consent of the customer.

2) Disclosure in Public Interest:

If a customer holds an illegal account, which is against the interest of the nation, the banker should
disclose the account to proper authorities.

3) Disclosure in the Interest of the Banks:

The banker in his own interest can disclose the account of the customer. If the customer fails to clear
the debt, the banker will approach the guarantor and the guarantor can ask for the disclosure of the
borrower’s account, which the banker does and he is insisted in doing so. Thus the banker is justified in
providing the details about customer’s account.