In India, the history of banking had started long before India got independence from the British in 1947. The first phase of the banking sector was initiated during 1786 with the establishment of India’s first bank “bank of Hindustan” (which collapsed in 1832) and ended in 1947. From there till now there have been major changes in the banking system and management over the years with the advancement in technology and considering the needs of people. In India, the banking sector forms the base of the economic development of the country. Trust helps in building a healthy relationship between a banker and a customer. Their relationship comes to existence once the banker agrees to open an account in the name of a customer.
Definition of Bank
The definition for banking is given by Section 5 (b) of the Banking Regulations Act 1949, “Banking means accepting, for lending or investment, of deposits of money from the public repayable on demand or otherwise and withdraws by cheque, draft, and order or otherwise”. To be precise a bank is a lawful institution that acts as deposit and lending. They promote people who have excess money (saver) to deposit and earn an interest rate and on the other hand, they promote loans for people who need money (borrower) at an interest rate. So, the bank functions as an intermediary between the saver and the borrower. Certain features of banking are:
1. A bank should conduct the major function of acceptance of deposits and lending.
2. They should collect the deposits from stakeholders.
3. They are bounded to repay the deposited amount at any time via any mode.
Definition of a Banker
It is stated under Section 3 of the Negotiable Instruments Act 1881, that the term banker includes any person acting as a banker. The banker is an individual who is a dealer of capital or a money dealer. Sir john Paget stated that “no person or body, corporate or otherwise, can be a banker who does not:
1. Take deposit accounts.
2. Take current account.
3. Collect, issue, and paycheques, crossed and uncrossed for his customers.
Duties of a Banker
The duties of a Banker are –
1. It is the responsibility of the banker not to disclose the personal information given by the customer.
2. A banker should follow the guidelines of the customer. If the banker isn’t provided with any guidelines they can follow the rules and regulations.
3. A banker is obliged to maintain all the details of transactions made by the customer.
4. The banker is obliged to honour the cheques of its customers up to the amount standing to the credit of the customer’s account. If the banker is wrongly refusing to honour the cheque, he or she is liable to pay the compensation to the customer.
5. A banker is responsible to withdraw and deposit funds with attention and accuracy.
6. A banker should gather financial information from new and existing clients to prepare their accounts, loans and determine their creditworthiness.
7. The banker is obliged to advise, assist, and guide the client to meet their financial goals.
Rights of a Banker
1. Right of Lien
This is one of the rights that are enjoyed by the banker. Under this right, a banker can keep the goods or properties which are under the possession of the debtor until the loan is repaid by the same. The right of general lien is referred to under Section 171 of the Indian Contracts Act, 1872. A banker is only supposed to maintain the collateral but not allowed to sell it. But, the banker can sell the collateral after issuing a reasonable notice to the debtor who has defaulted.
2. Right of Set-off
Under this right, the banker has the right to merge two or more accounts of the customer under the same name in a bank and set off the debt balance in one account and the credit balance in other, provided the funds belong to the customer.
3. Right of Appropriation
This right is used when a customer who has taken many loans from the bank, deposits some money without any instructions. In such cases, the banker can use his right to appropriate the deposited amount to any loan, even to a time-barred- debit after informing the customer about the appropriation.
4. Right to charge interest and commission
Every bank in India has the right to charge interest on the loans they provided to their customers. The interests are charged monthly, quarterly, semi-annually or annually. Along with interests, the banks also have the right to levy commissions for the services they are rendering for their customers like SMS notification service, multi-city cheque service, retail banking etc.
5. Right to close the Account
After sending a written intimation to the customer, the banker has the right to close an account if it is found to be not operated properly.
Definition of a Customer
A customer is a person or a company who has an account in the bank. And the activities anticipated by the customer should be valid and lawful. The term “customer” is not defined under any law.
Qualifications of a Customer under the guidelines of RBI:
1. A person or entity that maintains an account and/or has a business relationship with the bank.
2. Any person or entity connected with a financial transaction can pose significant reputation or other risks to the bank, say, wire transfer or issue of a high-value demand draft as a single transaction.
3. One on whose behalf the account is maintained.
4. Beneficiaries of transactions conducted by professional intermediaries, such as stockbrokers, chartered accountants, solicitors, etc. as permitted under the law.
Obligations of the Customer
1. The customer should read the most important terms and conditions of the bank.
2. They should ensure that they have repaid their dues on time.
3. Customers should provide authentic information in the records of the bank.
4. If the customer found any forgery in the cheque, they should inform the bank immediately.
5. The customer should inform the bank if they lost their cheque.
6. The customer should fill their cheque properly.
7. The customer should only present their negotiable instruments during business hours.
8. Customers should inform the bank in case of any disagreement in the bank statement.
Rights of the Customer
1. Right to grievance redressal and compensation
The customer has the right to a grievance redressal system if the bank fails to adhere to its basic norms. If the complaint isn’t resolved by the bank, the customer can go to the banking ombudsman.
2. Right to privacy
The bank is obliged to respect the privacy of the customer by keeping the personal information of the customer confidential. Bankers can only disclose such information in matters of law or with the permission of the customer.
3. Right to the suitability
Under this right, the banks should always sell the products by taking into consideration the needs of the customer.
4. Right of transparent, fair and honest dealing
The contract between the bank and the customer should be easily understood by the common man. The bank should make the customer aware of the major aspects like interest rates and risk involved etc. It is the responsibility of the bank not to hide anything from the customer before signing the agreement.
5. Right to fair treatment
The customers have the right to not be discriminated against based on caste, creed, gender, sex, religion, etc. by the bank. But, the bank can offer schemes which are designated for a particular set of people.
Relationship between Banker and Customer
The relationship between the banker and the customer varies according to the type of customer and the service he/she demand. There are two main relationships between the banker and customer, they are:
1. General relationship: it consists of the possible services the banker provides to the customer.
2. Special relationship: it consists of duties and instructions to the banker.
General Relationship between Banker and Customer
The general relationship between a banker and customer is:
1. Debtor and Creditor relationship
When a customer fills and signs the account opening form he/she enters into a contract with the bank. And when the customer deposits money in their account, the customer becomes a creditor and the bank becomes a debtor. The bank can utilise the amount in the way they want. They aren’t bound to inform the creditor about the utilization and aren’t bound to give any security to the depositor. The banks are liable to give the amount back when the depositor demands.
Lending money by providing loans is one of the major aspects of banks. They provide loans by charging a particular amount of interest by utilizing the resources mobilized by them. In this case, the bank becomes a creditor and the customer becomes a debtor. But here, the bank requires security and documents for providing loans.
2. Trustee and Beneficiary relationship
Section 3 of the Indian Trust Act, 1882 describes trust as: “an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner’.
Here the relationship between the bank and the customer is based on trust. When the bank receives a valuable asset or document for security in exchange for the loan provided by the bank, the bank is considered to be a trustee and the customer is considered to be a beneficiary.
3. Principal and Agent
An agent is a person who acts as the one who is employed to do any act for another or to represent another in dealings with the third person. The person for whom the work is done or to whom it is represented is called the principal.
Bank carry payments to various authorities by collecting cheques, bills on the behalf of the customers. Here bank acts according to the guidelines of the customer and charges for the services rendered to them.
4. Lesser and Lessee
Section 105 of the Transfer of Property Act 1882 had defined the term lease as: “a lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specific occasions to the transferor by the transferee, who accepts the transfer on such terms”. The important term that comes under Section 105 is:
- Lessor: the person who transfers the immovable property.
- Lessee: the person to whom the property is transferred.
- Premium: to obtain a lease of an immovable property a price called “premium” is paid.
- Rent: the service or money that is rendered is known as rent.
5. Bailor and Bailee
A bailment is a contract where the customer provides a valuable asset or any specific good for a specific period of time to the banker. The customer who entrusts the asset to the banker is a bailer. And the banker to whom the asset is entrusted for a specific time is called a bailee. Bankers also charge a particular amount for bailment.
6. Advisor and Client
The banker acts as an advisor when a customer invests in securities. Here the customer is the client. The banker should be cautious while giving advice officially or unofficially.
Special Relationship between Banker and Customer
The special relationship that exists between banker and customer is:
1. The obligation of bankers to maintain records
The banker should maintain the records of transactions, deposits, loans and investments done by a customer. The records should be clear and genuine. Any irregularity in records might leads to legal trouble for the banker and customer.
2. The obligation of banker to maintain confidentiality
The bank is responsible to keep all the information and details of the customers safe and secure. Even though the information is confidential, the information can be disclosed to government officials in terms of any legal issues.
3. The obligation of the banker to honour checks
The banker is responsible to provide the cheque of the customer equivalent to the sum of money present in their account. The conditions that needed to be fulfilled while honoring the cheque of the customer under Section 31 of the Negotiable Instruments Act, 1881:
- Proper design of the cheque.
- The check should be properly presented.
- The cheque should be collected only on banking hours.
- The correctness of the cheque should be noticed.
- Availability of sufficient funds of the customer.
Termination of Relationship between the Banker and the Customer
The relationship between the banker and the customer terminates on:
2. The death, lunacy or insolvency of the customer.
3. The completion of the term of contract or specific transaction.
4. Voluntary termination of the relationship by the customer by closing the account.
5. Closing of the account by the bank after the issue of notice.
As time evolves major changes occur in different sectors of society. One such sector which has got evolved with time is banking. The history of banking in India shows that with time and according to the necessities of people, major developments had occurred in the field of banking. And also due to the invasion of the internet, the opportunities for easy and convenient banking have got widened. As in the future, we can witness new changes each day in the banking sector for the betterment of the economic growth of the country.
This article has been written by Nourien Nizar 1st Year B.com LLB student at Government Law College, Ernakulam
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