BANKER-CUSTOMER

RELATIONSHIP
SOUMENDRA ROY
NIMS

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

INTRODUCTION
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-stopshop 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 valueat-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

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

DEFINITION OF BANKER
The functions of a banker are: Accepting of deposits
Lending of money
Undertaking 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 Accounts
Current Accounts
Cheque Facility

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 bankeither 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.

CONDITIONS TO BE 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

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 customers
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.

DEBTOR AND CREDITOR

RELATIONSHIP

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.

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
customers account.
The banker has to maintain the secrecy of his
customers 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 bankers book evidence act, 1891.
A banker is under the obligation of law to suspend the

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

CUSTOMERS CHEQUES
(A)When may a banker refuse to honour a customers
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.

CASES IN WHICH THE BANKER REFUSES

CUSTOMERS CHEQUES
(B) When the banker must reuse to honour
customers 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.

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.
Bankers 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.

RIGHTS OF BANKER
Right of Application: Where customer
has not directed the bank to appropriate
a deposit against a particular debt, it is
the banks 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.

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 its 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

TERMINATION OF
RELATIONSHIP

Lunacy of Customer: The lunacy of a

customer
automatically
terminates
relationships though here again the
bankers authority to pay cheques is
revoked by notice of insanity.
Bankruptcy: Bankruptcy or winding up is
a sufficient ground for terminating the
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

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

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.

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

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 nonbanking 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

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

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

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 ExportImport 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

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

The Reserve BankPolicy
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

SPECIAL FEATURES OF RBI

Watermark
The Mahatma Gandhi Series of banknotes
contain the Mahatma Gandhi watermark
with a light and shade effect and multidirectional lines in the watermark
window.

SPECIAL FEATURES OF RBI

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-

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
Gandhis portrait contains a
latent
image
showing
the
respective denominational value
in numeral.
The latent image is visible only
when the note is held horizontally

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

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

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.