BANKING LAW

Relationship of Banker and Customer

 Before examining the relationship between a banker and a customer, it is important to first
understand the definitions of the terms "banker" and "customer." The business of banking and the
wide range of activities permissible for banks are governed by the Banking Regulation Act, 1949.
The nature of the relationship between a banker and a customer primarily depends on the type of
service provided by the bank.

Meaning of Banker

 According to H.L. Hart, a banker is a person who, in the ordinary course of business, honors
cheques drawn upon him by individuals from whom and for whom he receives money on current
accounts.

 Section 3 of the Negotiable Instruments Act, 1881 defines a "banker" to include any person
 As per Section 5(b) of the Banking Regulation Act, 1949, "banking" means 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.
 Section 5(c) defines a "banking company" as any company which transacts the business of banking
in India. The explanation to this section clarifies that any company engaged in manufacturing or
trading, which accepts deposits solely for financing its own business as a manufacturer or trader, is
not considered to be transacting the business of banking within the meaning of this clause.

Definition of Customer
 The term "customer" is not explicitly defined in law. Generally, any person who maintains an
account with a bank is regarded as its customer. However, banking experts and judicial
interpretations have often emphasized the period and nature of transactions between the banker and
the customer to qualify this status.
 According to Sir John Paget, "to constitute a customer, there must be some recognizable course
or habit of dealing in the nature of regular banking business." This view, often referred to as
the "Duration Theory," highlights the importance of an established pattern of transactions.

 Simply opening an account does not immediately confer the status of a customer; rather, there
must be an ongoing banking relationship.

 However, this theory was refuted by Mr. Justice Bailhache in the case of Ladbroke v. Todd,
where it was held that the relationship between banker and customer commences as soon as the
first cheque is deposited and accepted for collection, not merely when it is paid.

 This position was further confirmed in Commissioner of Taxation v. English Scottish and
Australian Bank. Thus, while the frequency of transactions is not essential for establishing the
banker-customer relationship, the arrangement must imply that such transactions are likely to
Relationship Between Banker and Customer

 The fundamental relationship between a banker and a customer is that of debtor and creditor,
which depends on the balance of the customer’s account—whether it is in credit or overdrawn.
However, this relationship also carries additional obligations that distinguish it from a typical
debtor-creditor relationship.

 Besides the core lending and deposit functions, a banker often renders various services to
customers, including acting as an agent or trustee when entrusted with specific tasks. In such
cases, a banker may simultaneously hold the position of debtor, agent, and trustee, depending
on the nature of the transaction.
Relationship as Debtor and Creditor

 When a customer opens an account, the banker assumes the role of a debtor. The banker is not
considered a trustee or a depository of the customer’s funds, as the money deposited becomes a debt
owed to the customer. In contrast, a depository holds items for safekeeping without using them,
whereas a banker is free to utilize the deposited funds at its discretion.

 The customer, as the creditor, has the right to demand repayment, and the banker is legally obligated to
fulfill this request. The risk associated with deposits has been minimized in India since 1962 with the
introduction of deposit insurance, under which the Deposit Insurance and Credit Guarantee
Corporation insures deposits up to a specified limit.

 When a customer overdraws their account, the roles reverse—the banker becomes the creditor and the
customer the debtor until the overdraft or loan is repaid. When loans are secured against tangible
assets, the banker becomes a secured creditor. Although the debtor-creditor relationship is a standard
1. The Creditor Must Demand Payment: In ordinary commercial debts, payment is usually made
on the agreed date or upon demand by the creditor. However, in banking, the banker is not
obliged to repay a deposit until the customer makes a formal demand. This is due to the
banker’s additional duty to honor the customer’s cheques. If the banker were to return the
deposit unilaterally, it could result in dishonored cheques and damage the customer's
reputation. Furthermore, by statutory definition, bank deposits are repayable "on demand or
otherwise," meaning a demand is an essential prerequisite for repayment.

2. Proper Place and Time of Demand: The demand for repayment must be made at the branch
where the account is maintained, unless the customer has arranged otherwise with the bank.
Though a bank may have multiple branches and be treated as a single entity, the contractual
relationship is branch-specific.
3. Demand Must Be Made in Proper Manner: The demand for repayment must follow banking custom,
typically through a cheque or written order. Verbal or telephonic requests are not recognized as valid
demands for repayment.

Banker as Trustee
 While a banker is usually a debtor in relation to customer deposits, certain circumstances may position the
banker as a trustee. A trustee holds money or assets for the benefit of another person—the beneficiary.

 If a customer deposits funds or securities with specific instructions for their use, the banker’s role will
depend on whether the bank credited the funds to the customer’s account or held them separately. For
example, if a customer instructs the bank to purchase securities from their deposited funds and the bank
fails before making the purchase, the bank remains a debtor, not a trustee, as the funds were not yet applied
for the specified purpose.

 Thus, the banker’s role as trustee or debtor depends on the specific instructions given by the customer and
the circumstances under which the funds are held.
Banker as Agent

 A banker often acts as an agent for the customer, performing various agency functions for their
convenience. These include buying or selling securities, collecting cheques, and making
payments such as insurance premiums on behalf of the customer.

 Over time, the range of agency services offered by banks has expanded significantly to meet
diverse customer needs.
Banker’s Lien

What is Lien

 A lien is the right of a creditor, who is in possession of goods, securities, or any other assets belonging
to a debtor, to retain them until the associated debt is fully repaid—provided there is no express or
implied contract to the contrary.

 It is essentially a right to retain possession of specific goods, securities, or other movable property,
ownership of which remains with another person, until the owner fulfills the debt or obligation owed to
the possessor. In simple terms, it is a legal claim or attachment against property held as security for the
payment of a debt or obligation.

 As stated in Halsbury’s Laws of England: “Lien is, in its primary sense, a right in one person to retain
that which is in his possession belonging to another until certain demands of the person in possession
Meaning of Banker’s Lien

 A banker’s lien on negotiable securities has been judicially defined as "an implied pledge." In the
absence of an agreement to the contrary, a banker holds a lien on all bills received from a customer
in the ordinary course of banking business for any balance due from that customer.

 It is important to note that this lien applies only to negotiable instruments remitted to the banker for
the purpose of collection. Once the collection is completed, the proceeds may be appropriated by
the banker to reduce the customer’s debit balance, unless otherwise earmarked.

 When referring to the banker’s lien, it has been noted by a learned author that apart from any
specific security, a banker may rely on the general lien as protection against loss on loans,
overdrafts, or other credit facilities.

 The general lien of bankers is part of the law merchant and has been judicially recognized as such.
 As explained in chitty on Contracts “The lien is applicable to negotiable instruments which are
remitted to the banker from the customer for collection. When the collection has been made,
the proceeds may be used by the banker in reduction of the customer’s debit balance, unless
otherwise earmarked.”

Legal Requirements of Banker’s Lien:

 No special agreement, whether written or oral, is necessary to establish the right of lien, as it
arises by operation of law. Under Indian law, such a lien is implied by Section 171 of the
Indian Contract Act, 1872, unless expressly excluded by agreement. For the lien to arise, the
following conditions must be fulfilled:

1. The property must come into the hands of the banker in his capacity as a banker during the
ordinary course of business.
2. There should be no entrustment for a special purpose inconsistent with the lien.

3. The possession of the property must be lawfully obtained in the capacity of a banker.

4. There must be no agreement that is inconsistent with the lien.

 A banker’s lien is a general lien and is recognized by law as an implied pledge. The general lien of a
banker is considered to be more than an ordinary lien; it amounts to an implied pledge.

 This right, along with the rights under Section 43 of the Negotiable Instruments Act, 1881, allows the
banker to treat bills, notes, and cheques as though he were a holder for value, to the extent of the debt
owed, and to realize them when due.

 In the case of other negotiable instruments—such as bearer bonds, coupons, and share warrants to
bearer—that come into the banker's possession and are subject to the lien, the implied pledge entitles
the banker to sell them upon default.
 If the advance has a fixed repayment date, the banker may sell the securities upon default; if no
time is fixed, the banker must first request repayment and provide reasonable notice of
intention to sell, applying the sale proceeds toward the outstanding debt.

 The right of sale extends to all properties and securities held by the banker belonging to the
customer, except for title deeds of immovable property, which, due to their nature, cannot be
sold.

 The law explicitly grants a general lien to bankers, as recognized in the case of Lloyds Bank v.
Administrator General of Burma (AIR 1934 Rangoon 66).
 To claim a lien, the banker must be operating in the capacity of a banker as defined under Section 6 of the Banking
Regulation Act, as established in State Bank of Travancore v. Bhargavan (1969 Kerala 572). It is now well settled that
a banker’s lien confers upon a banker the right to retain securities in respect of the general balance of an account.

 The term "general balance" refers to all amounts currently due and payable by the customer, whether on loans,
overdrafts, or other credit facilities (Re European Bank (1872) 8 Ch App 41).

 In other words, the lien applies to all securities deposited that are not specifically entrusted for a particular purpose or
designated for appropriation.

 In Firm Jaikishen Dass Jinda Ram v. Central Bank of India Ltd. (AIR 1960 Punj 1), two partnership firms composed
of the same partners maintained separate accounts with the bank. The court held that the bank was entitled to
appropriate the funds belonging to one firm to pay the overdraft of the other.

 Although the accounts belonged to different firms, the legal position was that the two firms were not separate legal
entities distinct from their partners, and mutual demands existed between the bank and the partners. Hence, the bank
was entitled to exercise its lien.
Judicial Oversight on Banker’s Lien:

 The courts may intervene in the exercise of the banker’s lien. In Purewal & Associates and
another v. Punjab National Bank and others (AIR 1993 SC 954), the debtor failed to pay the
bank’s dues, which led the bank to deny him banking services.

 The Supreme Court directed the bank to allow the operation of one current account, free from
the incidence of the banker’s lien, to enable the debtor to conduct day-to-day business.

 The court also granted the bank liberty to initiate other legal proceedings for the recovery of its
dues.
 In State Bank of India v. Javed Akhtar Hussain, the court ruled that the bank’s unilateral action
of placing a lien over Term Deposit Receipts (TDR) and Recurring Deposit (RD) accounts was
high-handed and inappropriate for an institution of the State Bank of India’s standing.

 The court referred to Union Bank of India v. K.V. Venugopalan, where it was held that money
placed in a Fixed Deposit is a loan to the bank, making the bank the debtor. The depositor
ceases to own the deposited money, which becomes the property of the bank, albeit subject to
repayment on maturity.

 The court further held that since the bank is a debtor in respect of the Fixed Deposit, it cannot
apply the doctrine of banker’s lien to such deposits.
 In State Bank of India Kanpur v. Deepak Malviya (AIR 1996 All 165), it was held that Section
174 of the Indian Contract Act provides that in the absence of a contract to the contrary, a
pawnee is obligated to return the pledged goods once the debt has been repaid.
Principles Governing Banker’s Lien

 In Chettinad Mercantile Bank Ltd. v. P.L.A. Pichammai Achi, AIR 1945 Mad. 445, it was held
that a banker’s lien is the right to retain possession of goods delivered to the banker in the
course of business, so long as the customer, who owned or had the power to dispose of them at
the time of delivery, remains indebted to the bank on the balance of their account. However,
this right is subject to the condition that the circumstances under which the banker took
possession do not imply an agreement that the lien would be excluded. A banker’s lien properly
arises in respect of securities held by the bank, allowing the bank to hold these securities
against the amount due from the customer.

 It is essential that ownership of the goods held by the bank must lie with the customer and that
the bank holds them as security. Otherwise, the bank cannot exercise its right of lien. This
 A bank generally cannot exercise a lien over money deposited by a customer since, upon deposit, the bank
becomes the owner of the money. However, the bank still holds the right to adjust such amounts against debts
owed by the customer. In these cases, the purpose of lien is fulfilled through the principle of set-off (AIR 1945
Mad. 447).

 The banker’s lien is always subject to any contract to the contrary. The party asserting such a contract must prove
its existence. In City Union Bank Ltd. v. Thangarajan, (2003) 46 SCL 237 (Mad), certain key principles regarding
a banker’s lien were discussed:

a) A bank holds a general lien over all securities of a customer, including negotiable instruments and Fixed Deposit
Receipts (FDRs), but only up to the extent of the customer’s liabilities.

b) If the bank fails to return the balance and the customer suffers a loss, the bank is liable for damages. The Court,
in this case, emphasized that to invoke a banker’s lien, there must be mutuality between the bank and the
customer — meaning both must exist as the same parties and in the same capacity. Retaining a customer’s
property beyond their liability is unauthorized and will render the bank liable for damages.
When is Lien Not Permissible?

A banker's lien is not permissible in the following circumstances:

 Existence of an Express Contract: Where there is an express agreement—such as a counter-

guarantee providing for reimbursement—the bank cannot claim a lien. Case Reference:
Krishna Kishore Kar v. United Commercial Bank, AIR 1982 Cal 62.

 Absence of Mutual Demands: Lien is not permitted when there are no mutual debts or
demands between the banker and the customer firm. Case Reference: Jaikishan Dass Jinda
Ram v. Central Bank of India, AIR 1960 Punj 1.

 Valuables Held for Safe Custody: When articles or valuables are received by the banker
strictly for safe custody, no lien arises. Case References: Cuthbert v. Roberts (1909) 2 Ch. 226
(CA) Bank of Africa v. Cohen (1902) 2 Ch. 129
 Specific Purpose Entrustment: If documents of title to goods are entrusted to a banker for a
specific stated purpose, no lien can be claimed over such documents. Case Reference:
Greenhalgh v. Union Bank of Manchester (1924) 2 K.B. 153.

 Deposits Made for a Specific Purpose: When a deposit is made with a specific purpose and
the banker has actual or constructive notice of that purpose, lien cannot be exercised.

 Inadvertent Custody: If valuables or documents are left with the bank inadvertently, the bank
cannot claim a lien over them.

 Contingent Debt: A lien cannot be exercised where the banker has only a contingent debt, i.e.,
where no amount is actually due at the time the bank seeks to enforce the lien.

 Trust Accounts: No lien can be exercised over accounts that are held in trust.
Lien and Joint Term Deposits

 A banker’s lien cannot be exercised over a Term Deposit Receipt (TDR) held jointly, where the debt
is due only from one of the depositors.

Case Law: State Bank of India v. Javed Akhtar Hussain, AIR 1993 Bom 87

 In this case, the appellant bank obtained a decree against the applicant and a co-applicant who stood
as a surety. Following the decree, the co-applicant deposited ₹32,793 in a TDR (No. 856671) jointly
with his wife in another branch of the same bank.

 They also held a recurring deposit (RD) account. The bank exercised a lien over both accounts
without exhausting remedies against the principal debtor and without giving notice to the depositors.

 The Court held the bank’s action to be unilateral and high-handed. It emphasized that the bank
should have sought appropriate directions from the court concerning the lien over the deposits.
General Lien Upheld by Supreme Court

Case Law: Syndicate Bank v. Vijay Kumar & Others, AIR 1992 SC 1066

The Supreme Court upheld the right of a bank to exercise general lien and the right of set-off, stating that
these are recognized mercantile customs.

Facts of the Case:

 The bank, at the request of the judgment debtor, agreed to provide a bank guarantee to the Delhi High
Court on the condition that the entire amount of ₹90,000 be deposited with the Registrar of the Court.

 Accordingly, the partner of the debtor firm deposited two FDRs of ₹65,000 and ₹25,000 respectively
and discharged them by signing on their reverse sides. Covering letters signed on the bank's printed
forms authorized the bank to adjust the proceeds from these deposits to any outstanding dues of the
firm.
 The Court held that the bank held a general lien over all securities deposited in the ordinary course of
business.

 Unless expressly excluded by agreement, such lien includes the right to adjust the proceeds towards any
outstanding debts. The judgment clarified that even where a bank guarantee was issued, the bank did
not hold merely a specific lien but a general lien over the deposits.
When Does a General Lien Take Effect?

A general lien arises from a series of transactions in the ordinary course of business, rather than
from a single, specific transaction. It is typically held by professionals such as bankers,
attorneys, and factors to secure unpaid services:

 Attorneys may retain documents or personal property of clients until fees are paid.

 Bankers may retain stocks, bonds, or other customer securities for general outstanding
balances.

 Factors or commission merchants may retain goods entrusted for sale until all dues are cleared.
If goods are sold to enforce the lien, any excess must be returned to the owner.

 General liens are less common than specific liens and are generally applied in professional or
Protection of Bankers

 The legal protection available to bankers depends on whether they are acting as paying bankers
or collecting bankers. Often, a single bank performs both functions. Each role involves specific
duties, liabilities, and statutory protections which are evaluated independently.

Types of Bank Accounts

1. Current Account:

Designed primarily for commercial and industrial customers, current accounts support frequent
transactions. The bank does not pay interest on current accounts (as per RBI regulations), but may
levy incidental charges. Since withdrawals through cheques are unlimited, banks must maintain
adequate funds to honor them.
2. Fixed Deposit Account:

In a fixed deposit (FD), the bank assumes the role of a debtor. The legal relationship continues even after the
deposit matures, until it is discharged. Withdrawals are subject to RBI directives. FDRs are not negotiable
instruments (as held in Abdul Rahaman v. Central Bank) but can be assigned with proper notice to the bank.
They may also be attached under garnishee orders in cases of judgment-debtor debts or by Income Tax
Authorities under assessment notices. FDRs can be made payable to "either or survivor" or "former or
survivor," making nomination optional.

3. Savings Bank Account (SB Account):

Initially neglected, SB accounts have grown in importance as banking services expanded and savings
became a social movement. These accounts earn interest as per bank policy. Customers are expected to
maintain a minimum balance and may withdraw via cheques or forms. Banks often offer additional services,
including lockers, to SB account holders. These accounts are cost-effective for banks and encourage long-
Closing of Account or Stoppage of Operation

The relationship between a banker and a customer is not merely contractual, arising from a
creditor-debtor relationship, but also statutory in nature, governed by the Negotiable
Instruments Act and other relevant laws. Accordingly, there are established legal principles
regarding the closure of accounts or the suspension of account operations by banks. A bank
may close or suspend operations on an account under the following circumstances:

 Upon notice from the customer requesting account closure;

 Upon the death of the customer;

 Upon proof of the customer's insanity;

 Upon the customer's insolvency;

 Upon receiving a Garnishee order from a court;

 Upon receipt of a notice of assignment of the credit balance by the customer.

A customer has the right to close their account for various reasons, which may include
dissatisfaction with bank services, interest rates, incidental charges, lack of facilities, or loss of
trust in the bank. Conversely, a bank may choose to close an account if the customer is deemed
“undesirable” or has been convicted of criminal acts such as forgery.
(i) Notice Requirement:

While a customer is not legally bound to provide notice before closing an account, the bank must
give adequate notice before doing so. In Prosperity Ltd. v. Lloyd Bank Ltd. (the "Snowball
Scheme" case), it was held that the bank, aware of the widespread nature of the customer’s
operations, violated the contract by providing only one month's notice, which was deemed
insufficient. Hence, closing an account without adequate notice contravenes banking norms.
Generally, a notice period of one month is considered adequate.

(ii) Death of Customer:

Upon the death of a customer, and once the bank has notice or knowledge of it, the account may
be closed. In Union Bank of India v. Devi, the Supreme Court ruled that notice to one branch does
not constitute constructive notice to all other branches.
(iii) Insanity of Customer:

Banks generally presume that a customer is sane unless there is conclusive evidence to the
contrary. Upon notice of insanity, the bank is justified in halting account operations (Young v.
Toynbee).

(iv) Insolvency:

For an individual customer, upon receiving notice of insolvency, the bank must suspend account
operations and cease honoring cheques. In the case of a company, once winding-up proceedings
commence and a liquidator is appointed, the bank must transfer the account balance to the
liquidator.
(v) Garnishee Order:

When a court issues a Garnishee order, the bank must comply. If the order specifies an amount,
that amount must be earmarked accordingly, and the remainder may be used to honor the
customer's cheques. If the entire account is garnished, the bank must suspend all payments.

(vi) Assignment:

Upon receiving notice of the assignment of the account balance, the bank must recognize the
assignee’s rights. The original account holder (assignor) loses entitlement to the funds, and the
bank may close the account.
Special Types of Customers

Opening a bank account establishes a contractual relationship between the bank and the customer.
Any individual legally competent to contract may open an account. However, certain
categories of persons—such as minors, persons of unsound mind, intoxicated individuals,
married women, undischarged insolvents, trustees, executors, and administrators—are subject
to specific legal considerations. Additionally, banks must exercise greater caution when dealing
with accounts held by public authorities, societies, joint stock companies, and partnership
firms.

Precautions Before Opening an Account:

 Proper Introduction: The bank must ensure the customer is a person of integrity and qualifies
as a "desirable customer." This helps prevent fraud.
 Verification: The bank manager should verify references and make reasonable inquiries to
confirm the customer's bona fides. Excessive scrutiny is not required.

 Protection Under Law: If due diligence is observed, the bank is protected under Section 131 of
the Negotiable Instruments Act.
1. Minors:

General Rule:

A minor lacks legal capacity to enter into a contract. Therefore, a minor generally cannot open a bank
account independently. However, a legally recognized guardian (usually the father, or mother upon his
demise, or a court-appointed guardian) may open and operate an account on the minor’s behalf. The
guardian's authority ceases once the minor attains majority.

Practical Practice:

Banks often allow minors above the age of 12 to open accounts in their own names and operate them,
including issuing cheques, as per Section 26(a) of the Negotiable Instruments Act. These accounts can
continue after the minor turns 18 (or 21 if under the Court of Wards). However, no overdraft facility may
be extended, as minors cannot legally enter into such contracts. A minor may, under Section 30 of the
2. Lunatics:

Persons of unsound mind cannot form valid contracts. Thus, banks must not open accounts in
their names. If a customer becomes mentally incapacitated after opening an account,
operations must cease upon notice.

3. Illiterate Persons:

Illiterate individuals (unable to sign their names) may open bank accounts, but the bank must:

 Obtain a left thumb impression in the presence of an authorized official;

 Record identifying marks;

 Keep at least two attested photographs (by an authorized official or another account holder).
4. Married Women:

A Hindu married woman over 18 has contractual capacity and can manage her "Stridhana" property.
Proper due diligence, including spousal details, is essential while opening such accounts. She may
operate her account and issue cheques. However, if loans or overdrafts are involved, the bank must
assess her personal assets and creditworthiness. The husband is not liable for her debts unless
incurred for "necessaries." Caution is warranted, as she might claim undue influence or lack of
understanding of the transaction.

5. Pardanashin Women:

Pardanashin women observe seclusion, typically under religious or cultural customs. While opening
such an account, the bank must confirm her identity and free will. A known person should ideally
attest her signature, and such attestation may also be required for withdrawals to ensure security.
6. Executors and Administrators:

Executors and administrators may open accounts in their official capacity. All necessary legal
formalities must be followed to ensure proper account handling.

7. Trustees:

As trustees manage public or fiduciary funds, banks must carefully scrutinize the trust deed and
exercise caution while opening and operating trust accounts.

8. Joint Accounts:

 All joint account holders must sign the application form and provide clear instructions regarding
operation and survivorship. Joint accounts are often made payable to “either or survivor,”
entitling the surviving account holder to the balance. A joint nomination may also be made.
In Marshall v. Crutwell, Foley v. Foley, and Panikar v. TWQ Bank Ltd., it was held that if the
deceased account holder did not intend to make a gift to the survivor, the balance forms part of
their estate, and heirs may claim it. The onus of proving intent lies on the surviving account
holder.

9. Partnership Firms:

Banks may open accounts for partnership firms upon application signed by all partners and
submission of the partnership deed. The bank must:

 Verify the nature of the business and authority of partners;

 Obtain an authority letter for cheque signing, bill endorsements, mortgages, etc.;

 Note that implied authority under the Partnership Act permits acts done in the usual course of
Legal Provisions:

 Section 4: Partnership is a relation between persons who agree to share profits of a business
carried on by all or any acting for all.

 Section 69: Non-registered firms cannot sue third parties; however, third parties may sue them.

In Abbas Bros. v. Chetandas, it was held that only acts clearly done on behalf of the firm bind
the partnership. Transfer of funds from a partner’s personal account to the firm is permitted, but
not vice versa. On a partner’s retirement, their liability continues until proper notice is given.
Banks may close and reopen the account under the new constitution to avoid issues arising from
Clayton’s Case.
10. Joint Stock Companies (Public and Private Limited Companies):

While opening a current account, banks must obtain the following:

 Certified copy of the Memorandum of Association;

 Certified copy of the Articles of Association;

 Certificate of Incorporation (also serves as the certificate of commencement for private

companies);

 Certificate of Commencement of Business (for public companies);

 Board resolution authorizing the account opening and naming authorized signatories;

 A list of current directors with addresses;

 Audited balance sheets for the past three years (if not a new company).
The bank must ensure the company has commenced business, has borrowing powers, and is financially
stable. The Royal British Bank v. Turquand case established that parties dealing with a company are
presumed to be aware of its charter documents (MoA and AoA). Loan applications must be accompanied
by board resolutions specifying terms, amount, and authority.

Pass Book

Meaning of Bank Pass Book

 A pass book or bank statement is essentially a copy of the customer’s account as maintained in the
bank’s records. When a customer deposits cash or cheques or makes withdrawals, these transactions
are immediately recorded in the bank column of the customer’s cashbook.

 Correspondingly, the bank records these entries in its books under the customer’s account, and they
are then copied into the pass book, which is given to the customer. With banking operations becoming
computerized, many banks now issue periodic bank statements instead of traditional pass books.
 Thus, a pass book is a record of the customer's transactions with the bank. All entries made by
the customer in the bank column of the cashbook should match the entries in the pass book.
Therefore, the balances in both the cashbook and the pass book should match, though they will
be opposite in nature—for example, a debit balance of Rs. 5,000 in the cashbook corresponds
to a credit balance of Rs. 5,000 in the pass book, and vice versa. However, in practice, these
balances often differ due to various reasons.

Causes for Disagreement

The main cause of disagreement is when certain transactions are recorded in only one of the two
books—either the cashbook or the pass book. These discrepancies arise when specific debits or
credits are made in one book but omitted from the other. Common causes include:
 Cheques Deposited but Not Yet Collected: When a customer deposits a cheque, it is
immediately recorded in the cashbook. However, the bank will credit the customer’s account in
the pass book only after the cheque is realized. This results in the cashbook showing a higher
balance than the pass book.

 Cheques Issued but Not Yet Presented: When a customer issues a cheque, it is recorded as a
credit in the cashbook. The bank, however, will debit the customer's account only when the
cheque is actually presented for payment. This leads to a higher balance in the cashbook than
in the pass book.

 Bank Charges and Overdraft Interest: These are debited by the bank first in the pass book
and are later recorded by the customer in the cashbook. This again causes the cashbook balance
to be higher.
 Interest, Dividends, and Other Credits: Items like interest on bank balances, dividends, or
proceeds from bills collected by the bank are first credited in the pass book and later in the
cashbook. This causes the pass book balance to be higher.

 Direct Debits by the Bank: Payments made by the bank on the customer’s behalf (as per
standing instructions) or dishonoured bills are debited in the pass book first and recorded later
in the cashbook. This results in a higher cashbook balance.

 Errors in Either Book: Mistakes like omissions, incorrect entries, errors in carrying forward
or balancing—whether in the pass book or cashbook—also cause discrepancies.

 Entries in the Pass Book: The legal status of entries in a pass book is not absolute. If a pass
book is issued and the customer does not raise any objection, it may be treated as an “account
stated” or a “settled account” between the banker and the customer.
Sir John Paget, citing Daveyness vs. Noble, supports the view that a pass book should be considered a
conclusive record of transactions. In this case, it was observed that if a customer receives a pass book and
does not object to its contents, it is treated as confirmation of the correctness of the entries. A similar view
was upheld in Vagliana Brothers vs. Bank of England, where the court held that the return of a balanced
pass book without comments constitutes a settled account.

However, the legal position in both England and India is now more nuanced. According to more recent
judgments, pass book entries are not conclusive proof of accuracy. Customers have the right to examine,
question, and verify any entries and request corrections when discrepancies are found. Mistakes—whether
benefiting the customer or the banker—can and should be rectified.

In Keptigulla Rubber Estates Co. vs. National Bank of India, it was held that a pass book returned without
objection does not amount to a final settlement and is not binding on either party. Similarly, in Mowji vs.
Registrar of Cooperative Societies, Madras, the court stated that pass book entries are only prima facie
evidence, not conclusive proof. Therefore, entries can be altered based on actual facts.
Rights and Duties of Banker and Customer

Duties of the Customer

 Observe Banking Hours: Customers should present cheques for payment and collection
during official banking hours.

 Avoid Outdated Cheques: Cheques should be presented before they become stale.

 Secure Cheque Books: Customers must keep cheque books safe to prevent unauthorized
access.

 Report Forgery Suspicion: If a customer suspects forgery of their signature on a cheque, they
must promptly inform the bank.

 Draw Cheques Carefully: Cheques should be drawn clearly and correctly to prevent
Rights of the Customer

 Right to Fair Treatment: Banks must not discriminate based on gender, age, religion, caste,
or disability. However, banks may offer tailored products to specific groups.

 Right to Transparent and Honest Dealings: Banking terms and conditions should be clearly
explained. The customer should be informed of risks, interest rates, and other essential details
in simple language.

 Right to Product Suitability: Customers should be offered products that suit their needs—not
ones that benefit agents or bank staff through higher commissions.

 Right to Privacy: Customer information must be kept confidential. Disclosure is allowed only
when legally required or with the customer's consent.
 Right to Grievance Redressal and Compensation: Banks are accountable for resolving
customer complaints promptly. If unresolved, customers can approach the Banking
Ombudsman. This applies to both the bank’s own products and third-party services like
insurance.

 Right to Draw a Cheque: A customer can draw cheques against their credit balance or as per
an agreed overdraft facility.

 Right to Receive Pass Book or Statement of Account: Customers have the right to be
regularly informed about their account status.

 Right to Correction: Customers can demand correction of any erroneous debit or credit.

 Right to Sue: Customers may take legal action if the bank breaches account confidentiality or
dishonours a cheque by mistake.
 Right to Withdraw Deposits: Customers can withdraw deposited funds, including from fixed
deposits, unless restricted by the account’s terms.

 Right to Earn Interest/Profit: Customers are entitled to earn interest or profit on deposits
according to agreed terms.
Duties of a Banker

Secrecy

It is the duty of a banker to maintain confidentiality regarding all information and transactions related to
a customer. Failure to do so may make the banker liable for any loss incurred by the customer due to
such disclosure.

Exceptions to this duty include:

 Disclosure compelled by law

 Disclosure in the interest of the public

 Disclosure in the interest of the bank

 Disclosure in response to inquiries by fellow bankers

Obligation to Honour Cheques

A banker is obligated to honour a customer’s cheque provided it complies with the customer's instructions.

Conditions for honouring a cheque include:

 Sufficient funds in the account

 Presentation during banking hours
 Presentation within a reasonable period
 Presentment at the correct bank branch
 Valid customer signature
 Consistency between the amount written in words and figures
 Proper use of funds

Collection of Instruments

 When collecting instruments such as bills, salaries, or dividends, the banker must exercise due
diligence to protect the customer’s interests.

Acting as a Trustee

 When acting in the capacity of a trustee, a banker must strictly adhere to the terms and
conditions laid out in the Trust Deed.

Purchase and Sale of Securities

 When handling the purchase or sale of securities on behalf of a customer, the banker must act
strictly in accordance with the customer’s instructions.
Opening Letters of Credit

 The issuing banker must comply with all the terms and conditions specified in the application for opening a letter
of credit. Any negligence may forfeit the bank’s right to claim indemnity from the customer.

Safe Custody Services

 A banker must take the same degree of care in handling safe custody items as a prudent person
would with their own valuables.

Dealing in Foreign Exchange

 While dealing in foreign exchange, a banker must comply with Exchange Control Regulations
and the instructions issued by the Reserve Bank of India.
Rights of a Banker

Right to Charge Compound Interest

 A banker has the right to charge compound interest on overdrafts, typically calculated on a half-yearly
basis. This may be modified based on mutual agreement between the bank and the customer.

Right to Claim Service Charges

 A bank is entitled to claim service charges and commissions for services rendered, such as cheque
collection, processing of bills of exchange, and dividend collection.

Right of Lien

 A banker holds a general lien on the customer’s goods and securities until dues are paid. The bank may
sell such goods after issuing proper notice, but this lien does not extend to items held in safe custody or
under a trust.
Right to Adjust Debit Balances

 A bank has the legal right to offset a customer’s debit balance against their credit balance in
another account held by the same borrower.

Right to Charge Interest

 Banks in India have the right to levy interest on loans and advances granted to customers.
Interest may be charged monthly, quarterly, semi-annually, or annually.

Right to Levy Commission and Service Charges

 Banks are entitled to levy commission and service charges for various services such as SMS
alerts, retail banking, etc., and may debit such charges directly from the customer's account.
Ancillary Services

Banks offer not only primary services (like accepting deposits and issuing loans) but also various
ancillary services to support customer needs. These include:

1. Remittance Services

Facilitates fund transfer within the same bank or between different banks.

Methods include Bankers' Cheque (BC), Demand Drafts (DD), Telegraphic Transfers (TT), Mail
Transfers (MT), NEFT, and RTGS.

Customers must provide full details such as:

 Type of remittance
 Destination branch

 Remitter’s name, address, and account details

2. Custodial Services

 Known as Safe Deposit Locker services.

 Allows customers to store valuables and documents securely.

 Lockers can be hired by individuals (excluding minors), firms, companies, associations, and
societies.

 Rent is charged annually based on locker size—small, medium, large, or extra-large.

 Nomination facilities are available.

 Overdue rent may attract penalties.

3. Forex Services

 Provides foreign currency for international travel or purchases.

 Only authorised bank branches handle these transactions.

 Foreign currency received from abroad can be deposited in banks.

 Transactions must comply with the Foreign Exchange Management Act (FEMA), 1999 and
other central bank regulations.

4. Card Services

Includes credit and debit cards.

 Credit cards allow purchases with repayment typically due in 30–40 days, along with interest.


5. E-Banking Services

 Also known as online banking or internet banking.

 Allows services like fund transfers, fixed deposit creation, and online shopping without
visiting the bank.

 Accessible using login credentials (ID and password) provided by the bank.

6. Insurance Services (Bancassurance)

 Banks partner with insurance companies to sell insurance products covering life, health,
vehicles, and cards.

 This model benefits both banks (through added revenue) and insurance companies (through
expanded customer base).
 Examples: ICICI Prudential, Bajaj Allianz.

 Banks may also offer portfolio or investment advisory services, particularly to corporate clients
or interested individuals.
Consumer Protection

 The need for consumer protection is rapidly growing, particularly in the Indian banking sector. Numerous
instances have arisen where consumers have been misled due to the operational failures of banks, leading to
financial insecurity among unsuspecting customers.

 A recent example is the Punjab and Maharashtra Co-operative Bank crisis, wherein the Reserve Bank of
India (RBI), under Section 35(A) of the Banking Regulation Act, 1949, imposed regulatory and withdrawal
restrictions on the bank following the disclosure of irregularities. This significantly impacted innocent
customers.

 As the custodian of the Indian banking system, the RBI bears the primary responsibility of maintaining
robust and effective oversight over all banks to ensure a transparent banking environment for the public.

 To achieve this objective, banks must collaborate efficiently with the RBI through various initiatives and
departments such as customer service, customer education, consumer protection, and the Banking
Role of RBI in Fostering Consumer Protection in the Indian Banking Sector

 Over the past few decades, the RBI has worked extensively to strengthen the fiduciary
relationship between banks and their customers, given its responsibility for maintaining
financial stability within the sector. It also plays a key role in building public confidence by
ensuring safety and security in the Indian banking system.

 One notable initiative by the RBI is the introduction of the Banking Ombudsman Scheme,
2006, an Alternative Dispute Resolution Mechanism for resolving customer-bank disputes.

 Currently, there are 20 Banking Ombudsman offices across India. However, the sector faces
numerous known and unknown risks such as cyber security breaches, phishing and vishing
frauds, data theft, privacy violations, and malware attacks
 Although the existence of such risks is acknowledged, their form, timing, and severity remain
unpredictable. Consequently, the role of the Banking Ombudsman has become increasingly
challenging, especially given the growing number, complexity, and dynamic nature of complaints.

 In recent years, the RBI has undertaken several initiatives to enhance consumer education and
protection. One such initiative is the formulation of the 'Charter of Customer Rights,' which outlines
five fundamental rights of banking customers:

• Right to Fair Treatment

• Right to Transparency, Fair and Honest Dealing

• Right to Suitability

• Right to Privacy

• Right to Grievance Redress and Compensation

 Furthermore, the RBI established the Customer Service Department in 2006 as the central
department for addressing complaints from the public.

 This was later renamed the Consumer Education and Protection Department (CEPD), which
continues to work towards creating a level playing field between financial service providers and
consumers by addressing information gaps, lack of disclosures, and unfair treatment.

 A significant development in grievance redress was the institutionalization of the Internal

Ombudsman (IO) mechanism in 2015 across all public sector banks, selected private and foreign
banks.

 This mechanism is now extended to all scheduled commercial banks (excluding Regional Rural
Banks) with 10 or more banking outlets. The IO system ensures independent review of unresolved
or partially resolved complaints before customers escalate them to the Banking Ombudsman.
 In another key initiative, on 24 June 2019, the RBI launched a Complaint Management System (CMS)
software to support the Banking Ombudsman framework. Through the CMS portal, available on the
RBI’s website, consumers can lodge complaints against any RBI-regulated entity. This has enabled the
digital processing of complaints received by Banking Ombudsman offices and Consumer Education
and Protection Cells (CEPCs) of the RBI.

Role of Banking Services in Consumer Protection

Banks must ensure transparent disclosure across all aspects of their operations and proactively educate
customers on available products, operational procedures, associated risks, and redressal mechanisms.
Transparency in pricing, service charges, fees, and penalties is crucial. To create a secure environment
for consumers, banks must:

 Limit customer liability in unauthorized electronic banking transactions

 Emphasize consumer education through campaigns against fictitious offers and cybercrime
coordination

 Raise awareness of the Banking Ombudsman in rural and semi-urban areas

 Improve internal grievance redress mechanisms for timely and effective responses

 Train front-line bank staff on the significance of customer service

 Conduct root cause analyses of complaints for systemic improvements

 Review the Banking Ombudsman Scheme in light of emerging developments

 Conduct thematic studies and surveys

 Monitor the implementation of the Charter of Customer Rights

Banks Held Liable for Deficiency in Service

In numerous cases, Consumer Courts have held banks liable for service deficiencies and awarded
compensation to the affected customers. Some significant cases include:

a) Wrongful dishonour of Bank Draft – SBI vs. N. Raveendran Nair

The bank refused to honour a demand draft citing a missing signature of one of its officials. The State
Commission held the bank liable for service deficiency and awarded Rs. 19,500/- for the inconvenience
and mental agony caused. The National Commission upheld this decision.

b) Non-credit of cheque – Sovintorg (India) Ltd. vs. SBI

The complainant’s cheque proceeds, though collected by the bank, were not credited. The State Commission
awarded 12% interest. The National Commission upheld this, and on further appeal, the Supreme Court
increased the interest rate to 15% but denied additional compensation, stating that negligence was not
c) Non-issuance of proper receipt – Jila Sahakari Kendriya Bank vs. Sarda Ram Nayak

The bank failed to record a repaid loan and did not issue a receipt. The Chhattisgarh State
Commission upheld the District Forum's award of compensation for service deficiency.

d) Payment of lower interest rate – Abha Bhanthia vs. SBI

The bank paid 10.5% interest instead of 11.25% on a fixed deposit. While the District Forum sided
with the bank citing RBI guidelines, the State Commission ruled that the bank must honour the
agreed interest rate, regardless of employee error.

e) Default by bank’s agent – UCO Bank vs. Surendra Kumar Bara

Under the Laghu Bachat Yojana, a bank agent misappropriated customer deposits. The Orissa State
Commission directed the bank to refund the amount with interest and pay compensation for mental
f) Interest not paid on excess PPF deposit – SBI vs. P.S. Krishnan

The complainant deposited Rs. 8,50,000/- in his PPF account, exceeding the Rs. 60,000/- limit.
The bank returned the excess amount without interest. The Tamil Nadu State Commission held
that the bank, as a bailee of public funds, acted unfairly by retaining the money without interest
for nearly a year. The Commission ruled that this constituted unfair trade practice under the
Consumer Protection Act, stressing the bank’s ethical obligation to protect depositor rights.
THANK YOU