F-204 Law and Practice of Banking

Topic 03
Banker-Customer Relationship

Course Instructors:
Md. Uzzal Hossain
Sumaiya Jahan
 Topics to be covered
• Banking
• Services by Banks
• Customer
• Special Types of Customer
• The Banker-Customer Relationship
 Definition of Banking

Banking means:
• the accepting of deposits of money from the public,
• for the purpose of lending or investment,
• repayable on demand or otherwise,
• and withdrawal by cheque, draft, order or otherwise

Features of this definition?

 Definition of Banking
Sir John Paget:

“No person or body, corporate or otherwise can be a banker who does not
• take deposit accounts,
• take current accounts,
• issue and pay cheques and
• collect cheques (crossed and uncrossed) for his customers.”
 Businesses PERMITTED for a Banking Company
A banking company may be engaged in forms of business:

(i) MAIN Functions:

1. The borrowing, raising or taking up money.
2. The lending or advancing of money either with or without security.
3. The drawing, making, accepting, discounting, buying, selling, collecting &
dealing in bills of exchange, promissory notes, coupons etc.
4. The granting & issuing of letters of credit, traveller’s cheques.
5. The buying & selling of foreign exchange.
6. Acquiring, holding, issuing securities & investments.
7. Negotiating of loans & advances.
8. Providing safe deposit vaults.
 Businesses PERMITTED for a Banking Company

A banking company may be engaged in other forms of business:

(ii) It may act as an agent of the govt., local authority, railway, but not
as an insurer.
(iii) It may contract & negotiate for public & private loans.
(iv) It may insure, guarantee, underwrite.
(v) It may undertake and execute trusts.
 Business PROHIBITED for a Banking Company

(i) Engaging directly or indirectly in buying, selling & bartering of goods

except when:
a) by way of realization of loans.
b) by any exchange (for collection/negotiation) any financial instrument.
c) undertaking administration of estates as executor, trustee etc.

[Goods: Every kind of movable property except actionable claims, stocks,

shares, money, and instruments.]

(iii) Holding any immovable property, except of own use for more than 7 years
 Services by Banks
Classified into:

(a) To Depositors & Borrowers (on behalf of them, banks):

• Collection of cheques, bills of exchange, promissory notes.
• Purchase of foreign & local currency.
• Issue L/C.
• Make regular payment of insurance premiums, subscriptions,
pension, taxes.
• Conduct indebtedness.
 Services by Banks
Classified into:
(b) Ancillary Services:

1. Performance of 5. Collection of interest on 10. Credit transfers.

financial securities / debentures. 11. Credit Cards.
guarantees. 6. Remittance of funds. 12. Traveller’s cheque.
2. Safe custody of Executor & Trustees. 13. Emergency vouchers.
deeds, securities. 7. Tax Assistance. 14. Sale of units of Unit
3. Safe deposit vaults.8. Guidance to investment, Trust.
4. Purchase & sale of Stock Exchange
securities. assistance.
 Customer
• The term ‘customer’ of a bank is not defined by law. In the ordinary
language, a person who has an account in a bank is considered its
customer.

• To constitute a customer the following essential requisites must be

fulfilled:
a. A bank account (savings, current, fixed) must be opened by making
necessary deposit of money
b. Dealings between bank and customer must be of the nature of
banking business (not casual dealings operating Safe Deposit
Locker or purchasing travellers cheques etc.)
c. Frequency of transactions is not quite necessary though
anticipated.
 Special Types of Customer
Special 1. Minor
Types of 2. Lunatic
Customer
3. Drunkard
4. Married Women
5. Insolvents
6. Illiterate
7. Agents
8. Joint stock companies
9. Clubs, Association & Educational Institute
10. Partnership Firm
11. Joint Account
12. Trustee
 Special Types of Customer
[Link]
• Contract with a minor?
• Implication for Bank:
a. Account opening [✓]
-- Age must be around 14 years old
-- Able to read and write
-- Have proper identity certificate
-- Fixed deposit can be opened (withdrawal restriction)
b. Guardianship
(i) Natural Guardian
(ii) Testamentary Guardian
(iii) Court-appointed Guardian
 Special Types of Customer
2. Lunatics
• Account opening
• Existing customer become lunatic→ Suspend operation until
court appoints an official receiver (assignee)
• Temporary Insanity

3. Drunkards
• Contract with drunkards?
• Account opening
• Withdrawal request from visibly drunken customer
 Special Types of Customer
4. Married Women
• Account opening
• Surname change → written request, Fresh specimen signature

5. Insolvents
• Declared Insolvent
• Court appoint→ Assignee
• Account balance legally handled by assignee
• Stop honoring any cheque drawn by the customer.

6. Illiterate Person
• Thumb impression in presence of two witnesses
• Have to be present in-person for every withdrawal
 Special Types of Customer
7. Agent
• Power of Attorney/ written authorization (check validity and
extent of power)
• In case of death, insanity, or bankruptcy of the principal.

8. Joint Stock Companies

• Documents required (Memorandum of association, Articles of
association, certificate of incorporation, certificate of
commence business, Board resolution to open account,
Specimen signature etc.)
 Special Types of Customer
9. Clubs, Association & Educational Institute
• Non-trading organization

10. Partnership Business

• Partnership deed
• Ensure firm funds are not mixed with personal funds

11. Joint Account

• 2/ more Holder
• Written authorization → who will operate
• Stop operation
• Overdraft requires consent of all holder.
 The Banker-Customer Relationship

There are two kinds of relationships:

General Special
 General Relationship
General Relationship
General relationship can be subdivided into two:

Primary Secondary
Relationship Relationship

• Primary relationship is in the form of debtor and creditor

• Money is not in the safe but in the safe hands of the banker.
• Customer's account shows credit balance = the banker is debtor
• Unique characteristics of such banker-customer relationship:
o The creditor must demand payment
o Proper place and time of demand
o Demand must be made in proper form
 General Relationship
• Secondary relationship is in the form of:

Banker as an agent

Banker as a trustee

Banker as a bailee
 General Relationship
• Banker as an agent
o Collection and payment of credit instruments
o Purchase and sale of securities
o Collection of dividends/interest
o Execution of standing orders
o Acts as correspondent
o Income tax consultancy
• Banker as a trustee
o Safe keeping of money, securities and valuables
• Banker as a bailee
o Protect valuables in his custody with reasonable care
o Damage to items = penalty [only if the damage was controllable]
 Special Relationship
The special relationship between banker and customer takes the form of rights
which the banker can exercise and the obligation which it owes to the
customer.
RIGHTS OBLIGATIONS
1. Right of lien 1. Obligation to honor cheques
2. Right of set off 2. Obligation to receive cheques for
3. Right to charge collection
4. Right to appropriate 3. Obligation to maintain secrecy
payments 4. Obligation to provide statements
5. Right under garnishee order 5. Obligation to give reasonable notice
6. Right to close account (before closing account)
 Special Relationship
Right of General Lien
• Lien is the right to retain the property belonging to a debtor until the due debt
has been repaid.
• Particular lien is the right to retain possession of goods until charges for a
specific service (labour or skill) performed on those goods are paid. (tailor on
cloths)
• General lien arises out of general balance. (only by banks, court etc. can
exercise)
Banker can exercise his power of lien on: Banker cannot exercise his power of lien on:
● Bonds and coupons for collection ● Safe deposit locker
● Security for covering loan ● Any balance for specific purpose
● Security leftover after paying the loan ● Trust accounts and joint accounts
● Documents for getting loan
● Properties without customer’s title
● Not in the same rights
 Special Relationship
Right to set-off
• Mutual claims of debtor and creditor are adjusted and only remainder
amount is payable.
• Abrar has O/D of 10000 tk. and a credit balance of 15000 tk. Payable =
5000 tk.
When the right to set off is applicable When the right to set off not applicable
I. Same name + same right I. Not in the same right
II. Reasonable notice to customer II. Until reasonable notice is given
III. For certain amount III. Future contingent debt
IV. Before garnishee order IV. Uncertain amount
V. Absence of an agreement to the V. Trust account and joint account
contrary
 Special Relationship
Right to set-off

The conditions when the right to set off is automatic:

1. Death, insolvency or insanity
2. Insolvency of a partner
3. Receipt of garnishee order
4. Winding up of a company
5. Notice of second mortgage (bank first charge)
6. Assignment of credit balance
 Special Relationship
Right under Garnishee Order
Garnishee order is a direction given by the court to a bank not to make any
payment to the customer until the court gives a verdict.

Order Nisi Order Absolute

o Before hearing, when judgment debtor is o After hearing of both parties
requested to appear before court o court specifies how much amount to keep
o not to make any payment to a particular separated
customer until further orders are issued o rest is available for transaction
 Special Relationship
Right under Garnishee Order

Garnishee order not be applicable:

1. Joint account holder

2. Trust account holder
3. Doubtful identity
4. Previous official assignment of balance
5. Debit balance (overdraft)
 Special Relationship
Right under Garnishee Order

Obligation to maintain secrecy:

Disclosure is justified in the following cases:

1. Statutory requirement (by act; to court + BB)
2. Common Courtesy (among bankers)
3. Customer order (for guarantee; 3rd party)
4. Protect own interest (to his lawyer)
5. Protect public interest (terrorist, money laundering, illegal)
THANK YOU