Banker and Customer

Module 2
In this Module

 Types of relationship between banker

and customer
 Bankers obligations to customers
 Right of lien, setoff, appropriation
 Bankers legal duty of disclosure
 Customers` accounts with banks
Types of relationship between
banker and customer
I. General Relationship
II. Special Relationship
I. General Relationship
 Not a Depository
 Banker as a Bailee- gold ornaments,
documents- safe custody
 Not a Trustee- holding property for
the benefit of someone
 Not an Agent
 Debtor- Creditor relationship
 Fire outbreak- Punjab National Bank
 Robbery- Central Bank of India- UP
 Indian Overseas Bank- Chennai
 Banks- beyond reasonable control
II. Special Relationship
1. Statutory Obligation to Honour Cheques
2. Banker’s Lien
3. Secrecy of customer’s account
4. Right to claim Incidental charges
5. Right to charge Compound Interest
6. Right to set-of
7. Right to close an account
8. Right to appropriate payments
1. Statutory Obligation to Honour
Cheques

However this depends on:-

a. The availability of money in the
account of the customer
b. Correctness
c. Proper drawing
d. Proper application of the funds
e. Proper presentation
f. Reasonable time for collection
g. Legal bar
2. Banker’s Lien
 Lien may be either:-
(i) Right of General Lien
(ii) Right of Particular Lien
2(i) Special Features of a Banker’s
Right of General Lien

a. On all goods and securities

b. Implied pledge
c. Indian contract Act
d. Borrower only and jointly with others
e. Right of lien on the securities
Exceptions to the Right of General Lien

a. Safe custody deposits

b. Documents deposited for special
purpose- bill of exchange or shares
c. Negligence
d. Securities held in Trust
e. Lien on money deposited- lien is
extended only to goods and
securities- money- setoff
3. Secrecy of customer’s account

 The account of the customer in the

books of the banker reflects his
financial position
 Banks are under an obligation to
maintain utmost secrecy of the
customers’ account
 4. Right to claim Incidental
charges
 Charges on the current account to meet
the incidental expenses on such accounts-
unremunerative accounts
 Incidental charges may take the form of
 Service charges- standing instruction
charges
 Processing fees- loans
 Ledger folio charges
 Appraisal charges
 Penal charges- balance is below the
minimum amount- current account
 Handling/collection charges- cheques that
[Link] to charge Compound
Interest
 The banker has the right to charge
interest on the advance granted to
the customer
 6. Right to set-of

 This is the right to combine two or

more accounts of a customer
 Conditions:-
 Two or more accounts should be in
the name of the same customer
 Same capacity
 Same bank, though different
branches
 Debt must be mutual
 Amount of debt should be certain
7. Right to close an account
a. Customer’s intention
b. Banker’s intention
c. Customer’s death, insanity or
insolvency
d. Upon receipt of garnishee order
e. Upon the receipt of notice of
assignment
8. Right to appropriate payments
 To appropriate the money deposited
by a customer to any one of the loan
accounts due by him
Bankers legal duty of disclosure
 Disclosure of information required by
Law
 Disclosure permitted by the banker’s
practices and usages:-
a. With express or implied consent of
the customer
b. To protect his own interest
c. Banker’s reference
d. Duty to the public to disclose
KYC Norms
 Banks were advised to follow certain customer
identification procedure
 At the time of opening of accounts and monitoring
transactions of a suspicious nature for the purpose
of reporting it to appropriate authority.
 The objective of KYC/AML(Anti-Money
Laundering/CFT(Combating of Financing of
Terrorism) guidelines is to prevent banks from
being used, intentionally or unintentionally, by
criminal elements for money laundering or
terrorist financing activities.
KYC Policy
 Sec 35 (A) of Banking Regulation Act
1949
 Banks should frame their KYC policies
incorporating the following four key
elements:
1. Customer Acceptance Policy;
2. Customer Identification Procedures;
3. Monitoring of Transactions; and
4. Risk Management.
1. Customer Acceptance Policy
 Ensure- no account is opened in
anonymous or fictitious/benami
names
 Customers are categorised based on
risk perceptions:-
 Nature of business activity
 Location of customer
 Mode of payment
 Volume of turnover
 Social and financial status
2. Customer Identification
Procedures

Customer identification is done at the

time of:-
a. Establishing a banking relationship
b. Carrying out a financial transaction
c. Doubt- previous data
Customer Identification
Documents

Name proof photo identification

1. Passport
2. Voters Identity card
3. PAN card
4. Driving license
5. Government/defence id card
6. ID cards of reputed employers
7. Letter from a recognised public
authority or public servant
Documents to be submitted towards address
proof

 Telephone bill
 Bank account statement
 Income/ wealth tax assessment order
 Credit card statement
 Electricity bill
 Ration card
 Letter from employer
3. Monitoring of
Transactions
 KYC can be effective by regular
monitoring of transaction and
identifying abnormal or unusual
transactions
 Keeping a watch on higher risk group
of account
4. Risk Management
 Managing internal work to reduce the
risk of any unwanted activity
Types of Accounts
 Traditionally banks in India have
four types of deposit accounts:-
1. Fixed Deposits
2. Saving Banking Accounts
3. Recurring Deposits
4. Current Accounts
New products
 2-in-1 deposits
 Smart Deposits- puts the excess cash to
work, effortlessly, seamlessly integrating
with your existing auto-deposits
 Power Saving Deposits- blend of
savings and fixed deposits
 Automatic Sweep Deposits-amount in the
bank above a limit is automatically transferred
to Fixed deposits and earns a higher rate of
interest.
 Fixed Deposit Accounts

 All Banks in India (including SBI, PNB, BoB, BoI, Canara Bank,
ICICI Bank, Yes Bank etc.)  offer fixed deposits schemes with a
wide range of tenures for periods from 7 days to 10 years.  
 These are also popularly known as FD accounts.   However, in
some other countries these are known as "Term Deposits" or
even called "Bond".   
 The term "fixed" in Fixed Deposits (FD) denotes the period of
maturity or tenor.
 Therefore, the depositors  are supposed to continue such
Fixed Deposits for the  length of time for which the depositor
decides to keep the money with the bank. 
Fixed Deposit Accounts
 However, in case of need,  the depositor can ask for closing (or
breaking) the fixed deposit prematurely by paying paying a
penalty (usually of 1%, but some banks either charge less or
no penalty).  
  However, now a days small banks are forced to offer higher
rate of interest to attract more deposits.  
 Usually a bank FD is paid in lump sum on the date of maturity. 
 However, most of the banks have also facility to pay/ credit
interest in saving account at the end of every quarter. 
 If one desires to get interest paid every month, then  the
interest paid will  be at a marginal discounted rate. 
 In the changed computerized environment, now the Interest
payable on Fixed Deposit can also be easily transferred on due
dates to Savings Bank or Current Account of the customer.
Importance of Fixed Deposit
Account
 Beneficial both to the banker as well as
the depositor
 Definite period- repayment time is known
 Bank- invest- long term securities-higher
returns
 Depositor also earns higher interest rate
 Cheque system is not allowed
 Average- 60% of deposit liability of
commercial banks
 Opening of FD Account
 Can be opened by any person
 Minor
 Firm
 Company
 Minimum amount Rs.1000
 Application form:-

a. Name and address

b. Name and address of legal heir
c. Amount & Date of deposit
d. Period
e. Specimen signature
f. Instruction- payment of interest
 Issue of FDR-not transferrable- can be paid to third

party-authorised letter
Interest Payment
 Term deposit rate- 7.0% to 7.5%
 Usually paid along with principal
 Monthly, half- yearly option
Repayment of Deposits

a. Payment on maturity
b. Payment before maturity
c. Renewal
Loans and advance against FD
 Temporary period
 Security- FDR
 Interest charged will be 2 % higher
than the interest given on deposit
 Margin 25%
Savings Bank Account
 most popular deposits
 Minimum balance is Rs.5
 cheque facility –minimum balance will
vary from bank to bank- have  lot of
flexibility for deposits and withdrawal of
funds from the account. 
 Passbook facility 
 Most of the banks have rules for the
maximum number of withdrawals in a
period and the maximum amount of
withdrawal, but hardly any bank
enforces these.  
Savings Bank Account
 Till 24/10/2011, the interest on Saving Bank Accounts was
regularised by RBI and it was fixed at 4.00% on daily
balance basis.  
 However, wef  25th October, 2011, RBI has deregulated
Saving Fund  
 directions of RBI, banks are also required to open no frill
accounts (this term is used for accounts which do not have
any minimum balance requirements). 
 Although Public Sector Banks still pay only 4% rate of
interest, some private banks like Kotak Bank and Yes Bank
pay between 6% and 7% on such deposits. 
 From the FY 2012-13, interest earned upto Rs 10,000 in a
financial year  on Saving Bank accounts is exempted from
tax. 
 Recurring Deposit Accounts 

 Combination of savings accounts and Fixed deposit accounts

 12,24,36,48 or 60 months tenure
 Compound interest
 These are popularly known as RD accounts and are special
kind of Term Deposits and are suitable for people who do
not have lump sum amount of savings, but are ready to
save a small amount every month.   
 Normally, such deposits earn interest on the amount already
deposited (through monthly installments) at the same rates
as are applicable for Fixed Deposits / Term Deposits.   
Recurring Deposit Accounts 
 Under these type of deposits, the person has to usually
deposit a fixed amount of money every month (usually a
minimum of Rs.100/- p.m.).  
 Any default in payment within the month attracts a small
penalty.   
 However, some Banks besides offering a fixed installment
RD, have also introduced a flexible / variable  RD.
 Under these flexible RDs the person is allowed to deposit
even higher amount of installments, with an upper limit
fixed for the same e.g. 10 times of the minimum amount
agreed upon.
  By giving Standing Instructions - from the saving bank of
the customer (as per his mandate), and the same is
credited to RD account.
Current Account
 Businessmen- not for investment or savings. 
 Public institutions, corporate bodies
 These deposits are the most liquid deposits and
there are no limits for number of transactions or
the amount of transactions in a day. 
 Most of the current account are opened in the
names of firm / company accounts.  
 Cheque book facility is provided and the
account holder can deposit all types of the
cheques and drafts in their name or endorsed in
their favour by third parties. 
Current Account
 No interest is paid by banks  on these
accounts. 
 On the other hand, banks charges
certain  service charges, on such
accounts.   
 Running account
 No limit on deposit and number of
withdrawals
 Repayable on demand
Privileges of opening Current Account

 Cheques, drafts, bills- collection,

endorsement
 OD facility- only to current account
holders
 Loans and advances- credited to the
account
Precautions- opening of Current
Account

 Proper introduction
 Specimen Signature
 Necessary particulars
 Mandate- anyone else wants to
operate the account
 Types of customers- IIBF Pg220
Personal Accounts:-
a. Accounts of individuals
b. Joint account holders
c. Accounts of minor
Accounts of other customer
d. HUF
e. Partnership Firm Account
f. Limited Companies
g. Trusts
h. Executor and administrator
i. Co-operative societies
j. Government and Public Bodies
Nomination Facility
 Name of the nominee- included:-
a. Savings Bank
b. Current Deposit
c. Term Deposit Receipt
 In case nominee- minor- another person should be

appointed to receive the money on behalf of the

minor
 Joint accounts- survivor- superior right- compared

to nominee
 There should be only one nominee per deposit

receipt
 Deposit accounts, safe deposits, safe vault lockers
Nomination Facility
 Nomination – individuals- and not
associations, societies, trusts or any
organisation or their office bearers
 Nomination is available for all types
of deposit account including pension
 Nomination may be varied or
cancelled by the depositor
 Opening of accounts based on
Aadhaar Card- officially valid
document
 e-KYC procedure
 e- Aadhaar letter- from UIDAI portal
 Settlement of Death Claims

1. ACCESS TO BALANCE IN DEPOSIT ACCOUNTS

(A) Accounts with survivor/nominee clause- proof
(B) Accounts without the survivor/nominee clause-
legal heir
2. Premature Termination of term deposit accounts-
clause in the application form
3. Treatment of flows in the name of the deceased
depositor
4. Access to the safe deposit lockers / safe custody
articles- survivors/nominees
5. Time limit for settlement of claims- 15 days-
submission of death certificate
Paying Banker
Precautions before honouring a
cheque:-
1. Presentation of the cheque
2. Type of cheque
3. Sufficient balance
4. Signature of the drawer
5. Endorsement
6. Legal bar
7. Minor precautions
Presentation of the cheque
a. Type of cheque
b. Branch
c. Account
d. Banking hours
e. Mutilation
2. Form of cheque
a. Printed form
b. Unconditional order
c. Date
d. Amount
e. Material alteration
Circumstances for dishonour of
cheques
 Countermanding
 Notice of death of customer
 Notice of insolvency
 Notice of insanity
 Notice of Garnishee order
 Notice of assignment
 Breach of trust
 Defective title
 Other grounds
Collecting Banker
 One who undertakes to collect the
amount of a cheque
 On behalf of his customer
Negligence- Types
1. Gross negligence
2. Negligence connected with
immediate collection of cheque
3. Negligence under remote grounds
4. Contributory negligence
Negligence
 June 2, 2107- Consumer Forum slaps
Rs. 12000 fine on ICICI Bank, Nagpur-
wrongful claim of dishonour- rejecting
request to submit NOC

[Link]
y/nagpur/consumer-forum-slaps-rs-
12000-fine-on-icici-
bank/articleshow/[Link]
Endorsement
 The maker or holder of a negotiable
instrument signs the same- at the
back
 Types
 Blank endorsement
 Special endorsement
 Restrictive endorsement
 Conditional endorsement
Parties who can endorse
 Complimentary and courtesy title
 Correct or incorrect spelling
 Endorsement by Women
 Endorsement by Illiterate person
 Endorsement by Firms
 Endorsement by Companies
 Endorsement by clubs etc
 Endorsement by executors or trustees
 Endorsement by joint payees
 Endorsement by public authorities
 Questions
1. Discuss the KYC guidelines issued by RBI
2. What is a negotiable instrument?
3. Distinguish between particular lien & general lien
4. “Banker and the customer enjoys a unique relationship”.
Discuss the various relationships that exist between the
banker and the customer.
5. Differentiate between a cheque and bill of exchange
6. What is ‘Dishonour of negotiable instrument’? How can a
negotiable instrument be dishonoured by non-acceptance?
7. Explain briefly the settlement of death claims
8. Who can endorse a negotiable instrument?
9. Discuss the duties and responsibilities of a collecting
banker
10. Explain the various types of accounts that can be opened
with a bank
11. Write a note on Nomination facility provided by banks