BANKER-CUSTOMER RELATIONSHIP

SOUMENDRA ROYNIMS

INTRODUCTION• Banks and financial institutions (FIs) are in the

process of great change in the context of the ongoing financial sector reforms and the emerging competitive financial system within and outside the country.

• Banks are becoming increasingly complex organizations. Investors are finding it harder to understand the quality of financial performance and risk exposures of banks.

• Conscious efforts are made towards increasing the quality and quantity of disclosures in banks’ balance sheets

• Increasing competition among banks, emanating not only from peers, but also from new entrants and other intermediaries, has been exerting pressure on bank spreads.

• The technology-intensive new private and foreign banks are positioning themselves as ‘one-stop-shop’ financial services and providing customers greater convenience and high quality services backed by appropriate investments in technology and other infrastructure

• The future profitability of public sector banks would depend on their ability to generate greater non-interest income and control operating expenses.

INTRODUCTION

• The reforms-supported new environment is offering depositors and borrowers a wider range of opportunities to transact their business.

• Apart from the applicability of capital adequacy standards being in force

• New methods of measuring market risk such as value-at-risk and pre-commitment approaches are expected to provide a more standardized but tighter framework for the banking sector.

• Banking industry is undergoing a change driven by technological advancements

• Banks FIs are in the process of adjusting business relationship with their customer.

• The bank customer relationship is an emerging area that has attracted the attention of many stakeholders

INTRODUCTION

DEFINITION OF BANKER• The essential function of a banker is the acceptance

of deposits of funds withdrawable on demand• It can be defined as trading in money and

instruments of credit• According to section 7of the Banking Regulation

Act, 1949, “No company other than a banking company shall use as part of its name any of the words ‘bank’, ‘banker’ or ‘banking’ and no company shall carry on the business of banking in India unless it uses as part of its name at least one such.

• The functions of a banker are: - Accepting of deposits Lending of moneyUndertaking to honor cheques drawn upon it by

customers and To work in the capacity of an agent etc.

• Bank can be distinguished from any other commercial institutions of the basis of the following features: -Deposit AccountsCurrent AccountsCheque Facility

DEFINITION OF BANKER

MEANING OF A CUSTOMER• Law does not define the term ‘customer’ of a bank.

Ordinarily a person who has an account in a bank is considered its customer.

• In chambers dictionary, it is written, “A customer is one who is accomplished to frequent a certain place of business.”

• Therefore, neither the number of transactions nor the period during which business has been conducted between the parties is material in determining whether a person is a customer.

CONDITIONS TO BE A CUSTOMER• Duration not of essence: The duration of dealing is no of

essence. Even a single transaction can constitute a customer.

• Frequency anticipated: Although frequency of transactions is not essential to constitute a person as customer, still his position must be such that transactions are likely to become frequent.

• Dealings to be of banking nature: He should have dealing with the bank, which should be in the nature of regular banking business. That is, the person should have some type of account with the bank-either deposit, current or loan account. A person having dealings with the bank only in respect of its utility service viz. Safe deposit lockers, safe custody, remittances etc. does not constitute a customer.

• Introduction necessary: The banker must have taken due care to satisfy him about the bonfires and repeatability of the customers. This is necessary to institute the persons as customers for the purpose of protection of the banker under Negotiable Instruments Act.

• Commencement of relation of from first transaction: As soon as the banker accepts money from any person on the footing that he will honor his cheques upto the amount standing to his credit, the person becomes his customer. The money accepted can even be by way of cheque. The relation of banker and customer begins as soon as the first cheque is paid in and accepted for collection and not merely the it is paid

CONDITIONS TO BE A CUSTOMER

GENERAL RELATIONSHIP BETWEEN BANKER AND CUSTOMER• The relationship between a banker and his

customer is basically contractual. • It is regulated by:

The general rules of contract The rules of agency where applicable Banking practice.

DEBTOR AND CREDITOR RELATIONSHIP• The usual debtor-creditor relationship between a

banker and a customer is governed by the following conditions, which are not applicable to similar commercial debts:

1. Demand for Payment: A bank is not an ordinary debtor in the sense that it is under no obligation to refund the customer’s deposits unless demand is made

2. Proper place and time: The obligation to repay the amount deposited is limited to the branches where the account is kept. The customer can issue cheques only on the branch of the bank where the account is kept.

• Demand in proper manner: The demand for payment should be made in proper manner as allowed by the law or custom. The demand should not be made verbally or through a telephonic message.

• No time bar: The depositor with a bank does not become time barred on the expiry of three years as in the case of other commercial debts.

DEBTOR AND CREDITOR RELATIONSHIP

BANKER AS A TRUSTEE• The bankers assumes the position of trustee when they accepts

securities or valuables from the customer for safe custody. • The articles deposited with the bank for safe custody continue to

be owned by the customer. • The banker is to deal with the articles as per the instructions of

the customer. • The banker is a trustee of the customer in respect of cheques and

bills deposited buy the customer for collection till they are collected.

• He becomes the debtor once it is collected and credited to the account of the customer.

• If the bank is liquidated before the cheques is realized the bank remains a trustee of the customer.

• The customer can claim back the cheque or the proceeds of the cheque in full.

BANKER AS AGENT

• A banker acts as an agent of his customer and performs a number agency function for the convenience of his customer.

• For example: some banks have established tax service departments to take up the tax problems of their customers

BAILEE AND BAILOR• Another relation between the banker and the

customer is that of bailee and bailor. • The bank functions as bailee when • it keeps valuable articles, diamond, gold, securities

and other documents • of its customers. The bank works, as the custodian

of these things and it • is implied responsibility of the bank to return these

things safely. Thus • the bank is a bailee and the customer is a bailor or

beneficiary.

SPECIAL RELATIONSHIP BETWEEN BANKER AND CUSTOMER• Banker has an obligation to honor the cheques of the customer up to

the amount standing to the credit of the customer’s account. • The banker has to maintain the secrecy of his customer’s account. • The banker can charge interest all compound rates for defaults in

payments of loan by the customer or for overdrawn amounts. • Banker is allowed to produce certified copies of the entries made in

the original books of account as proof of transaction in legal proceedings under certain circumstances and cases in accordance with the provisions of banker’s book evidence act, 1891.

• A banker is under the obligation of law to suspend the operation of accounts by the customer in case of receipt of garnishee order from the court.

OBLIGATIONS OF A BANKER• Obligation to honor the cheques: Section 31 of

Negotiable Instrument act, 1881 imposes upon bank the obligation to honor the cheques.

• Time and Place of Payment: The demand of payment by the creditor must be made to the debtor at the proper palace and in proper time.

• Demand made in proper order: The statutory definition of banking system explains that deposits are withdrawal by cheque, drafts, order or otherwise.

CASES IN WHICH THE BANKER REFUSES CUSTOMER’S CHEQUES (A) When may a banker refuse to honour a customer’s cheque? When the balance to the credit of the customer not

sufficient to meet the cheque. When money deposited by the customer cannot be

withdrawn on demand e.g., fixed deposits. When the cheque is state i.e. it has become older than

six months and has not been presented for payment with in reasonable time of the date of the issue.

When the account is in joint names and all the persons have not signed the cheque.

(B) When the banker must reuse to honour customer’s cheques:

When the customer has stopped the payment of the cheque.

When the banker is served with “garnishee order” or a prohibitory order by any court.

When the bank comes to know of the defect in the title of the person presenting the cheque before the bank.

When the holder of the cheque gives a notice of its loss to the bank.

When the cheque is post-dated and is presented for payment before its ostensible date.

CASES IN WHICH THE BANKER REFUSES CUSTOMER’S CHEQUES

GARNISHEE ORDER• A garnishee order INS an order issued by the court under

order 21 rules 46 of the code of civil Procedure, 1908, generally served on banks.

• Such order prohibits a banker from making payments from a particular a particular account named therein.

• When a debtor does not repay the debt owed by him to his creditor, the latter may apply to the court for the issue of a Garnishee Order on the banker of his debtor.

• Such order attaches the debts not secured by a negotiable instrument.

• The important features of a garnishee order are as under the order attaches either the entire deposit or a specified sum

RIGHTS OF BANKER• Right of “Set off or the right to combine accounts”:

A banker can combine two or more accounts of a customer and shoe the net balance as the amount due to from him.

• Banker’s General Lien: The banker has a right of general lien against the customer; the right to retain as security for a general balances of accounts any goods and securities bailee to him.

• Right of Application: Where customer has not directed the bank to appropriate a deposit against a particular debt, it is the bank’s right to appropriate the Payment to any debt.

• Law of Limitation: Under article 22 of part 2 of the schedule to the limitation act 1963 the period of limitation for the refund of bank deposits is there years from the date the customer demand repayment.

RIGHTS OF BANKER

TERMINATION OF RELATIONSHIP• Mutual Agreement: This is clear enough. The

balance at the credit of the customer will have to be paid off and the overdraft, if any cleared.

• Notice to Terminate: In case of a current account, no such notice appears necessary. But if it’s a deposit account, the banker could insist on the notice period specified on the fixed deposit.

• Death of Customer: This is an obvious method of terminating the relationship. But it is the notice of death, which revokes the banker’s authority to pay cheques.

• Lunacy of Customer: The lunacy of a customer automatically terminates relationships though here again the banker’s authority to pay cheques is revoked by notice of insanity.

• Bankruptcy: Bankruptcy or winding up is a sufficient ground for terminating the relationship.

TERMINATION OF RELATIONSHIP

Functions of RBI ( The India's Central Bank ) • As a central bank, the Reserve Bank has significant powers

and duties to perform. • For smooth and speedy progress of the Indian Financial

System, it has to perform some important tasks. • Among others it includes maintaining monetary and

financial stability, to develop and maintain stable payment system, to promote and develop financial infrastructure and to regulate or control the financial institutions.

• For simplification, the functions of the Reserve Bank are classified into the traditional functions, the development functions and supervisory functions.

Traditional Functions of RBI • Issue of Currency Notes : The RBI has the sole right or authority or monopoly of issuing

currency notes except one rupee note and coins of smaller denomination.

These currency notes are legal tender issued by the RBI. Currently it is in denominations of Rs. 2, 5, 10, 20, 50, 100, 500, and 1,000.

The RBI has powers not only to issue and withdraw but even to exchange these currency notes for other denominations.

It issues these notes against the security of gold bullion, foreign securities, rupee coins, exchange bills and promissory notes and government of India bonds.

Traditional Functions of RBI • Banker to other Banks : The RBI being an apex monitory institution has obligatory

powers to guide, help and direct other commercial banks in the country.

The RBI can control the volumes of banks reserves and allow other banks to create credit in that proportion.

Every commercial bank has to maintain a part of their reserves with its parent's viz. the RBI.

Similarly in need or in urgency these banks approach the RBI for fund. Thus it is called as the lender of the last resort.

Traditional Functions of RBI • Banker to the Government : The RBI being the apex monitory body has to work as an agent of the

central and state governments. It performs various banking function such as to accept deposits, taxes

and make payments on behalf of the government. It works as a representative of the government even at the

international level. It maintains government accounts, provides financial advice to the

government. It manages government public debts and maintains foreign exchange

reserves on behalf of the government. It provides overdraft facility to the government when it faces financial

crunch.

Traditional Functions of RBI • Exchange Rate Management : It is an essential function of the RBI. In order to maintain stability in the external

value of rupee, it has to prepare domestic policies in that direction. Also it needs to prepare and implement the foreign exchange rate policy which will

help in attaining the exchange rate stability. In order to maintain the exchange rate stability it has to bring demand and supply

of the foreign currency (U.S Dollar) close to each other.• Credit Control Function : Commercial bank in the country creates credit according to the demand in the

economy. But if this credit creation is unchecked or unregulated then it leads the economy

into inflationary cycles. On the other credit creation is below the required limit then it harms the growth of

the economy. As a central bank of the nation the RBI has to look for growth with price stability. Thus it regulates the credit creation capacity of commercial banks by using various

credit control tools.

Traditional Functions of RBI • Supervisory Function : The RBI has been endowed with vast powers for

supervising the banking system in the country. It has powers to issue license for setting up new

banks, to open new braches, to decide minimum reserves, to inspect functioning of commercial banks in India and abroad, and to guide and direct the commercial banks in India.

It can have periodical inspections an audit of the commercial banks in India.

Development Functions of RBI • Development of the Financial System: The financial system comprises

the financial institutions, financial markets and financial instruments. The sound and efficient financial system is a precondition of the rapid economic development of the nation. The RBI has encouraged establishment of main banking and non-banking institutions to cater to the credit requirements of diverse sectors of the economy.

• Development of Agriculture: In an agrarian economy like ours, the RBI has to provide special attention for the credit need of agriculture and allied activities. It has successfully rendered service in this direction by increasing the flow of credit to this sector. It has earlier the Agriculture Refinance and Development Corporation (ARDC) to look after the credit, National Bank for Agriculture and Rural Development (NABARD) and Regional Rural Banks (RRBs).

Development Functions of RBI • Provision of Industrial Finance : Rapid industrial growth is the key to

faster economic development. In this regard, the adequate and timely availability of credit to small, medium and large industry is very significant. In this regard the RBI has always been instrumental in setting up special financial institutions such as ICICI Ltd. IDBI, SIDBI and EXIM BANK etc.

• Provisions of Training : The RBI has always tried to provide essential training to the staff of the banking industry. The RBI has set up the bankers' training colleges at several places. National Institute of Bank Management i.e NIBM, Bankers Staff College i.e BSC and College of Agriculture Banking i.e CAB are few to mention.

• Collection of Data : Being the apex monetary authority of the country, the RBI collects process and disseminates statistical data on several topics. It includes interest rate, inflation, savings and investments etc. This data proves to be quite useful for researchers and policy makers.

Development Functions of RBI • Publication of the Reports : The Reserve Bank has its separate

publication division. This division collects and publishes data on several sectors of the economy. The reports and bulletins are regularly published by the RBI. It includes RBI weekly reports, RBI Annual Report, Report on Trend and Progress of Commercial Banks India., etc. This information is made available to the public also at cheaper rates.

• Promotion of Banking Habits : As an apex organization, the RBI always tries to promote the banking habits in the country. It institutionalizes savings and takes measures for an expansion of the banking network. It has set up many institutions such as the Deposit Insurance Corporation-1962, UTI-1964, IDBI-1964, NABARD-1982, NHB-1988, etc. These organizations develop and promote banking habits among the people. During economic reforms it has taken many initiatives for encouraging and promoting banking in India.

Development Functions of RBI • Promotion of Export through Refinance : The RBI always tries to

encourage the facilities for providing finance for foreign trade especially exports from India. The Export-Import Bank of India (EXIM Bank India) and the Export Credit Guarantee Corporation of India (ECGC) are supported by refinancing their lending for export purpose.

Supervisory Functions of RBI • Granting license to banks : The RBI grants license to banks

for carrying its business. License is also given for opening extension counters, new branches, even to close down existing branches.

• Bank Inspection : The RBI grants license to banks working as per the directives and in a prudent manner without undue risk. In addition to this it can ask for periodical information from banks on various components of assets and liabilities.

• Control over NBFIs : The Non-Bank Financial Institutions are not influenced by the working of a monitory policy. However RBI has a right to issue directives to the NBFIs from time to time regarding their functioning. Through periodic inspection, it can control the NBFIs.

Supervisory Functions of RBI • Implementation of the Deposit Insurance Scheme : The RBI

has set up the Deposit Insurance Guarantee Corporation in order to protect the deposits of small depositors. All bank deposits below Rs. One lakh are insured with this corporation. The RBI work to implement the Deposit Insurance Scheme in case of a bank failure.

Reserve Bank of India's Credit Policy • The Reserve Bank of India has a credit policy which aims at

pursuing higher growth with price stability. • Higher economic growth means to produce more quantity of

goods and services in different sectors of an economy; Price stability however does not mean no change in the general price level but to control the inflation.

• The credit policy aims at increasing finance for the agriculture and industrial activities.

• When credit policy is implemented, the role of other commercial banks is very important.

• Commercial banks flow of credit to different sectors of the economy depends on the actual cost of credit and arability of funds in the economy.

SPECIAL FEATURES OF RBI

Watermark

The Mahatma Gandhi Series of banknotes contain the Mahatma Gandhi watermark with a light and shade effect and multi-directional lines in the watermark window.

• Security Thread• Rs.1000 notes introduced in October 2000 contain a readable,

windowed security thread alternately visible on the obverse with the inscriptions ‘Bharat’ (in Hindi), ‘1000’ and ‘RBI’, but totally embedded on the reverse.

• The Rs.500 and Rs.100 notes have a security thread with similar visible features and inscription ‘Bharat’ (in Hindi), and ‘RBI’. When held against the light, the security thread on Rs.1000, Rs.500 and Rs.100 can be seen as one continuous line.

SPECIAL FEATURES OF RBI

• The Rs.5, Rs.10, Rs.20 and Rs.50 notes contain a readable, fully embedded windowed security thread with the inscription ‘Bharat’ (in Hindi), and ‘RBI’.

• The security thread appears to the left of the Mahatma's portrait. Notes issued prior to the introduction of the Mahatma Gandhi Series have a plain, non-readable fully embedded security thread.

SPECIAL FEATURES OF RBI

• Latent Image• On the obverse side of Rs.1000, Rs.500,

Rs.100, Rs.50 and Rs.20 notes, a vertical band on the right side of the Mahatma Gandhi’s portrait contains a latent image showing the respective denominational value in numeral.

• The latent image is visible only when the note is held horizontally at eye level.

SPECIAL FEATURES OF RBI

• Microlettering• This feature appears between the

vertical band and Mahatma Gandhi portrait.

• It contains the word ‘RBI’ in Rs.5 and Rs.10.

• The notes of Rs.20 and above also contain the denominational value of the notes in microletters.

• This feature can be seen better under a magnifying glass.

SPECIAL FEATURES OF RBI

• Intaglio Printing• The portrait of Mahatma Gandhi, the Reserve Bank seal,

guarantee and promise clause, Ashoka Pillar Emblem on the left, RBI Governor's signature are printed in intaglio i.e. in raised prints, which can be felt by touch, in Rs.20, Rs.50, Rs.100, Rs.500 and Rs.1000 notes.

• Identification Mark• A special feature in intaglio has been introduced on the left

of the watermark window on all notes except Rs.10/- note. • This feature is in different shapes for various denominations

(Rs. 20-Vertical Rectangle, Rs.50-Square, Rs.100-Triangle, Rs.500-Circle, Rs.1000-Diamond) and helps the visually impaired to identify the denomination.

SPECIAL FEATURES OF RBI

• Fluorescence• Number panels of the notes are printed in fluorescent ink. The

notes also have optical fibres. • Both can be seen when the notes are exposed to ultra-violet lamp. • Optically Variable Ink• This is a new security feature incorporated in the Rs.1000 and

Rs.500 notes with revised colour scheme introduced in November 2000.

• The numeral 1000 and 500 on the obverse of Rs.1000 and Rs.500 notes respectively is printed in optically variable ink viz., a colour-shifting ink.

• The colour of the numeral 1000/500 appears green when the note is held flat but would change to blue when the note is held at an angle.

SPECIAL FEATURES OF RBI

• See through Register• The small floral design printed both on the front (hollow)

and back (filled up) of the note in the middle of the vertical band next to the Watermark has an accurate back to back registration.

• The design will appear as one floral design when seen against the light.

• Legal provisions against counterfeiting• Printing and circulation of forged notes are offences under

Sections 489A to 489E of the Indian Penal Code and are punishable in the courts of law by fine or imprisonment or both.

SPECIAL FEATURES OF RBI