MODULE II: BANKER

AND CUSTOMER

RELATIONSHIP
Comprehensive & Extended Study Notes

An in-depth analysis of banking definitions, statutory obligations, rights,

duties, and the legal framework governing financial relationships.

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 1. Definition and Evolution of Banker &
Customer

1.1 Understanding the "Banker"

The term "Banker" and "Banking" form the cornerstone of the financial
system. Under Indian law, Section 5(b) of the Banking Regulation Act, 1949
defines banking comprehensively. It states that banking is the accepting, for
the purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdrawable by cheque, draft, order
or otherwise [cite: 672]. Furthermore, Section 5(c) of the same Act defines a
banking company [cite: 92]. The common approach understands that
whosoever engages in the core business of banking is recognized as a bank or
banker [cite: 93]. Additionally, Section 3 of the Negotiable Instruments Act,
1881, interprets the term to include any person acting as a banker and any
post office savings bank [cite: 1607, 1608].

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1.2 Understanding the "Customer"

Interestingly, the term 'Customer' lacks a strict statutory definition in the Acts
of India or England [cite: 1609]. To determine who qualifies as a customer,
legal jurisprudence relies on two dominant theories [cite: 1611]:

• The Old Theory (The Duration Theory): Propounded by Sir John

Paget, this traditional view posited that "To constitute a customer, there
must be some recognizable course or habit of dealing in the nature of
regular banking business" [cite: 98, 1612]. This implied that merely
opening an account was insufficient; there had to be a measure of
continuity and custom [cite: 104, 1613].

• The Modern Theory (The Duration Theory Exploded): The modern

legal landscape has drastically shifted. A single transaction can now
constitute a customer, establishing the banker-customer relationship
instantly [cite: 1615]. In Ladbroke v. Todd, it was observed that the
relation begins as soon as the first cheque is paid in and accepted for
collection [cite: 108]. Similarly, in Commissioner of Taxation v. English
Scottish and Australian Bank, Lord Dunedin established that duration is
not of the essence [cite: 110].

To summarize, the essential requisites for constituting a customer are that a

bank account (saving, current, or fixed) must be opened, and the dealings
must be of the nature of banking business [cite: 177, 178].

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 2. Special Features of the Relationship

The opening of an account creates a complex, multi-faceted contractual

relationship between the bank and the individual. This relationship adapts
based on the nature of the transaction being conducted [cite: 289].

2.1 Debtor and Creditor

The primary relationship between a banker and a customer is that of debtor

and creditor [cite: 306]. When a customer deposits money, the bank becomes
the debtor, and the customer is the creditor. As Lord Brougham stated, the
bank uses the money "as if it were his own becoming debtor to the person
who has lent or deposited" [cite: 318]. In the Supreme Court case of Shanti
Prasad Jain v. Director of Enforcement, it was confirmed that the relationship
regarding deposited money is strictly debtor-creditor [cite: 319, 320]. The
bank is a "favoured or privileged debtor" because the money is only payable
when demanded by the customer at the proper place and during working
hours [cite: 382, 400, 442, 444].

2.2 Trustee and Beneficiary

When a customer deposits valuables, securities, or money with explicit

specific instructions, the bank acts as a trustee, and the customer is the
beneficiary (cestui que trust) [cite: 516, 523, 534]. For example, if money is

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paid to a bank for the specific purpose of remitting it to a third party, it is
impressed with a trust [cite: 536]. In First National Bank Ltd. v. Pioneer
Commercial Bank, it was held that if drafts are not issued as directed after

collecting bills, the amount is claimed as trust money [cite: 537].

2.3 Principal and Agent

A banker often performs agency functions for the customer's convenience,

such as buying or selling securities, collecting dividend warrants, or paying
insurance premiums [cite: 599, 600, 626, 627, 628]. In such scenarios, the
provisions of the Indian Contract Act relating to agency apply [cite: 644].

2.4 Bailor and Bailee (Safe Deposit Lockers)

When goods are entrusted for safe custody, such as in lockers, a relationship
of bailment arises. Section 148 of the Indian Contract Act states that bailment
is the delivery of goods for a purpose [cite: 784]. However, the Supreme
Court in Amitabh Dasgupta v. United Bank of India held that mere hiring of a
locker does not constitute bailment unless exclusive possession of the

property is given to the bank [cite: 873, 874]. Irrespective of bailment laws,
the bank owes a duty of care to ensure safety [cite: 888].

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 3. The Banker's Duty of Secrecy

3.1 Rationale and Legal Framework

The duty of confidentiality is defined as a bank's obligation to protect its

customers' information and keep financial data private and secure [cite: 1769].
Individuals voluntarily divulge personal and sensitive information primarily
because of this trust [cite: 1751]. Without it, customers could be prejudiced by
the disclosure of their financial positions to business rivals [cite: 1755, 1845].
The landmark English case of Tournier v National Provincial & Union Bank
of England firmly placed this legal obligation on banks, ruling that a bank
owes a legal duty not to disclose information to third parties, and a breach
gives rise to damages [cite: 1800, 1840]. The court ruled that this duty
continues even beyond the time when the account is closed [cite: 1841].

3.2 Exceptions to the Duty of Secrecy

The duty of secrecy is not absolute and is subject to the following four
qualifications laid out in the Tournier case [cite: 1865, 1867]:

1. Compulsion by Law: Banks may be legally compelled to disclose

information in cases involving fraud, money laundering, or corruption,
as seen under the Proceeds of Crime Act. In these instances, the bank
cannot "tip-off" the customer [cite: 1947, 1951, 1952].

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2. Interest of the Public: Disclosure is permitted when it is in the public's
interest, such as preventing tax evasion or tracing terrorist financing
[cite: 1899, 1902, 1903]. In United States v Miller, it was held that banks

have no duty to protect privacy from the government if there is a

legitimate interest [cite: 1905, 1913].

3. Interest of the Bank: The bank may disclose information to protect its
own interests, such as when suing a customer for an unpaid overdraft or
ceding debt [cite: 1870, 1871]. In Densam (Pty) Ltd v Cywilnat (Pty)
Ltd, the court held the bank is absolved from secrecy when recovering a
debt by way of cession [cite: 1892].

4. Consent of the Customer: Disclosure is permitted with express or

implied consent [cite: 1921]. For example, in Lee Gleeson Pty Ltd v
Sterling Estates, implied consent allowed the bank to inform a builder
about a customer's mandate status [cite: 1923, 1927].

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 4. The Banker's Duty to Honor Cheques

Under Section 31 of the Negotiable Instruments Act, 1881, the drawee of a

cheque having sufficient funds of the drawer, properly applicable to the
payment, must pay the cheque when duly required, and in default must
compensate the drawer for any loss [cite: 1125].

To successfully honor a cheque, the following prerequisites must exist:

• Sufficient Funds: The banker must have funds at least equal to the
cheque amount [cite: 1140]. Uncleared cheques sent for collection are
not treated as cash until realized [cite: 1142].

• Properly Applicable Funds: The funds must reside in an account

against which a cheque can be drawn. A customer cannot draw a cheque
against a fixed deposit that has a specific maturity period [cite: 1172].

• Duly Required to Pay: The cheque must be presented within a

reasonable time (usually six months) and must not be post-dated or stale
[cite: 1179, 1181, 1182, 1183].

• Working Hours & Proper Branch: Presentation must occur during

banking hours under Section 65 of the NI Act [cite: 1186]. Furthermore,
in Delhi Cloth and General Mills Co. Ltd. v. Harnam Singh, the
obligation primarily rests on the branch at which the account is kept
[cite: 1232].

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 5. The Banker's Rights: Lien and Set-Off

5.1 Right of General Lien

A lien is a creditor's right to retain goods until a debt is paid [cite: 1355].
Section 171 of the Indian Contract Act, 1872, confers a general lien on
bankers [cite: 1364]. A unique aspect of a banker's lien is that it is considered
an "implied pledge," giving the bank not just the right to retain, but the right
to sell the securities in case of default [cite: 1383, 1385].

Exceptions to the right of lien include:

• Safe custody deposits (acting as bailee) [cite: 1410].

• Documents deposited for a special, explicit purpose [cite: 1412].

• Securities left negligently or by mistake [cite: 1420].

• Securities held in trust for someone else [cite: 1422].

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5.2 Right of Set-Off

The right of set-off enables a bank to combine two or more accounts of the
same customer to adjust a debit balance in one with a credit balance in the
other [cite: 1475, 1477]. The conditions for valid set-off include:

• Same Name and Right: Accounts must be held in the exact same legal
capacity [cite: 1496, 1497, 1498]. For instance, a personal debt cannot
be set off against a trust account [cite: 1505].

• Debt Must Be Certain and Due: The amount must be liquidated and
currently due, not future or contingent [cite: 1539, 1553].

In the notable case of Anumati v. Punjab National Bank, the Supreme Court
ruled that a fixed deposit in joint names cannot be unilaterally pledged or set
off against the personal loan of just one account holder without the other's
consent [cite: 1587, 1588, 1589].

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 6. Garnishee Orders and Executions

A Garnishee Order is an execution mechanism issued by a court under Order

21 Rules 46 to 52 of the Code of Civil Procedure, 1908 [cite: 1681]. It directs
a third party (the Garnishee—often a bank) who owes money to a Judgment
Debtor, to instead pay that money to the Decree Holder through the court
[cite: 1659].

There are two types of orders:

1. Garnishee Order Nisi: A temporary order that freezes the account and
gives the bank a chance to appear and explain if they owe money [cite:
1706].

2. Garnishee Order Absolute: A final order directing the bank to pay the
creditor [cite: 1706].

The order only attaches to the current balance at the time it is served. It does
not apply to uncleared cheques or deposits made after the service [cite: 1302,
1305]. Additionally, if the account is already overdrawn, the order is
ineffective because the bank owes no money to the customer [cite: 1270]. In
State Bank of India v. National Institute of Information Technology (NIIT), the
Delhi High Court confirmed a bank can be treated as a garnishee to pay from
a customer's account [cite: 1708].

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 7. Customer's Obligations Towards the Banker

The relationship is reciprocal. Customers owe specific duties to their bankers:

• Drawing Cheques with Care: A customer must exercise utmost care to

avoid misleading the banker or facilitating alterations [cite: 1633]. In
Young v. Grote, the customer negligently left gaps between figures and
words; the court held the bank was not liable for the resulting altered
payout [cite: 1636, 1638, 1639].

• Sufficient Funds: Customers must draw cheques within their available

balance or make prior overdraft arrangements [cite: 1629, 1630].

• Repay Overdrawing: If a bank honors an overdraft to protect the

customer's reputation, the customer is bound to repay it [cite: 1642,
1643].

• Inform of Forgery: Customers must immediately notify the bank of

forged cheques or lost cheque books to prevent further unauthorized
transactions [cite: 1649, 1650].

• Pay Reasonable Charges: Customers are bound to pay for incidental

services like lockers, drafts, and cards [cite: 1646].

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 8. Credit Cards, Debit Cards, and Stock
Investments

8.1 Debit vs. Credit Cards

While both provide electronic transaction capabilities, their financial

mechanics differ vastly. A Debit Card allows a customer to spend money
they already possess; funds are instantly deducted from their checking or
savings account [cite: 1717, 1718]. It prevents debt and typically incurs no
interest charges [cite: 1722].

Conversely, a Credit Card represents a short-term loan where the bank

allows borrowing up to a pre-set limit [cite: 1719, 1720]. Credit cards offer a
grace period (often 50 days) [cite: 1724]. If unpaid, high interest rates
(approx. 40% annually) apply [cite: 1726]. Withdrawing cash from an ATM
via a credit card is termed a "Cash Advance," immediately triggering high
fees and steep interest without a grace period [cite: 1730, 1731]. However,
credit cards provide superior fraud protection for online shopping, making
chargebacks easier [cite: 1737].

8.2 Basics of Stock Investments

Stocks (equities) represent fractional ownership of a company, issued to raise

operating capital or fund growth [cite: 2064, 2066]. Investors benefit from

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capital gains (price appreciation) and dividends (profit distributions) [cite:
2068, 2069].

• Common Stock: Offers voting rights but carries higher risk in

bankruptcy scenarios [cite: 2079, 2081].

• Preferred Stock: Offers priority claims on assets and dividends but

usually lacks voting rights [cite: 2084, 2085, 2086]. Sub-types include
Callable, Convertible, Cumulative, and Participatory preferred stocks
[cite: 2087].

Investment styles divide stocks into Growth, Income, Value, and Blue-Chip
categories based on earnings, dividends, and market stability [cite: 2092,
2093, 2095, 2096, 2098]. Understanding IPOs (Initial Public Offerings) and
broad stock sectors is integral to a modern financial investor's portfolio [cite:
2105, 2108].

--- End of Comprehensive Notes ---

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