Banker-customer relationship

• Presentation

• by

• Paranjape

BankSection 5(b)-Banking Regulation Act 1949

• The term banking means accepting for the purpose of lending r investment of deposits of money received from the public repayable on demand or otherwise and withdrawable by cheque, draft , order or otherwise.

• The banker is engaged in the bussiness of accepting deposits from the public and utilising such deposits either for the purpose of lending or for the purpose of investment.

The essential to be called as a banker

• No individual, but only a firm or a company is permitted to act as a bank

• An individual is not allowed to act as a bank

• Indian money lenders are not bankers

• Accepting deposits of money from the public

• Acceptance for the purpose of lending or investment

• Deposits repayable to depositor on demand or otherwise.

• The deposits may be withdrawable by cheque, draft order or otherwise

Functions of the bank

• To accept deposits from public for the purpose of lending and investment

• Discounting of bills • Collections of cheques and bills • Remittances• Safe custody of articles• Hiring safe deposit lockers• Conducting foreign exchange transactions

• Conducting central/state government transactions• Issuing letters of credit and guarantees• There are various functions and services that are

provided by the banks to their customers and their relationship arises from their services rendered

Debtor-Creditor

• Bank is a debtor and customer creditor• When a customer deposits money with his bank,

the customer becomes a lender and bank becomes borrower. The money handed over to the bank is a debt.

• Demand of payment should be made by the customer

• Demand should be made at the branch where account exists

• The demand should be made in proper manner ie cheque, draft

• Customer does not call for any security from the bank]

• There is no law of limitation for demanding money by the customers

Creditor-Debtor

• Bank as a creditor and customer debtor• When bank lends money to the customer, the

customer is borrower and bank is lender, The relationship therefore is that of a creditor and debtor

Bank as a trustee

• If a customer keeps certain valuable or securities with the bank for safe keeping or deposit certain money for a specific purpose the banker besides becoming a bailee is also a trustee

Bailee- Bailor relationship

• When a customer deposits certain valuables, bonds, securities or other documents with the bank, for their safe custody, the bank besides becoming a trustee also becomes a bailee and the customer is the bailor

Agent-Principal

• one of the ancillary services rendered by the bank is remittance, collection of cheques, bills etc. on behalf of the customer. It further undertakes to pay regularly electricity bills, telephone bills insurance premium club fees In all such cases the bank acts a an agent his principal being the customer

Lessor and lessee

• Bank is a lessor and customer is a lessee• The bank provide safe deposit lockers to the

customers who hire them on lease basis. the relationship therefore, is that of lessor and lessee. In certain banks this relationship is termed as licensor and licensee.The bank leaseout the space for the use of clients. The bank is not responsible for any loss

Indemnfier and indemnified

• A contract by which one party promises to save the other from loss caused to him by the conduct of any person is called a contract or indemnify

• Eg. Issue of duplicate demand draft, fixed deposit receipt

Banker`s special relationship

Mandate

• A mandate is an authority given by the account holder in favour of a third person to do certain acts on his behalf. This is issued by an account holder with a direction to his/her banker authorising the person to operate the account on his behalf.

Power of Attorney

• It is a document executed by one person called donor principal(in favour of another person called donee agent) to act on behalf of the former as per authority given in the document.

Garnishee Orders

• It is a process of law in favour of judgement-creditor for a debt due from the judgement-debtor(bank customer) upon a third party for attachment. The order is issued under the Indian Civil Procdure Code, Order 21 Rule 46, of the Act. The only condition is that a debt to be attached must be actually due from the judgemet-

• Debtor/garnishee). This means an existing date, though payable at a future date, may be attached.

Banker’s Lien

• Lien is the right of the banker to retain possession of the goods and securities owned by the debtor until the debt due from latter is paid. The banker’s lien is an implied pledge. A banker acquires the right to sell the goods which came in to possession in the ordinary course of banking business, in case the debt is not Paid.

• Section 171 of the Indian Contract Act, 1872 gives to the banker an absolute right of General Lien on all goods and securities received by the banker

Where right can be exercised?

• To sell: Banker’s general lien gives the right to sell the debtor’s properties.

• To specific person: Right under section 171 is given not only to banker but also factors, wharfingers, attorneys of HighCourts and policy-brokers. As such no separate agreement is required.

• Against customer:The right can be exercised on the goods and securities of the customer only. The right cannot be exercised when the debtor has a joint account.

Where right cannot be exercised?

• (a)Safe Custody Articles: When a customer deposits securities, ornaments and other valuable for safe custody with a banker, the latter is to act as trustee/bailee, therefore cannot exercise the right of Lien unless by special agreement.

• (b) Documents/money deposited for

• Specific purposes; Documents/money deposited with specific purposes cannot be Liened.

• © Articles left negligently in bank premises: Such articles/securities do not fall under Lien’s arena

• (d) Immature debts: Lien cannot be exercised when the debt has yet matured.

• The bank discounts a 90 days bill for Rs.50,000 maturity on 17-11-04, it could not have lien over it before its maturity date, since due after date.

• (e) Stolen Goods:if the customer has stolen the goods/securities of the real owner, and delivers them to this bank, the bank cannot

• have lien over it though transaction has taken place in the ordinary course of business.

• (f) No simultaneous rights to bank: when right of set-off is available to bank, the banker’s lien right cannot be exercised. These two different rights cannot be exercised simultaneously at the same time.

Various types of customers

• Minor:- Minor means a person who is below 18 years of age and where the guardian is appointed by the court, then 21 years of age (S3 of Indian Minority Act.1875)

• Minor can open an account• S-26 of NI act provides that minor may draw,

endorse, deliver,and negotiate negotiable instrument

• Minor can draw a cheque

• Two minors cannot join to open the account• Father is the natural guardian for opening account

RBI has allowed mother also to sign as guardian except to muslim minors.

• In case of married minor girl, her husband shall be the natural guardian

Joint Account holder

• Joint account is an account opened by two or more persons

• Account opening form should be signed by all account holders.

• Operational instructions• Either or survivor• Both jointly• Former or survivor

Hindu Undivided Family (HUF)

• The members of the family are called coparceners. Eldest male child is the manager or KARTA

• All the adult members are to sign, karta would operate the account

• The coparceners are liable to the extent of their share in the family property and no personal liability

Partnership firm

• S.4 of the Indian partnership Act 1932 defines partnership as a relationship subsisting between the persons who have agreed to share the profit of a business carried on by them all or any of them acting for all. Regiastration of partnership is optional except in the state of Gujrat and Maharashtra.

• While opening an account partnership letter should be signed by all major partners stating the nature of business, names and addresses of al partners

• When there is an addition in to partnership the old account can be continued. If the balance in the account is credit but when debit balance is there old account should be closed and new account to be opened

• Death of partner dissolves the partnership firm automatically

• Retirement of a partner needs stoppage of bank account operations because the liability of the retiring partner toward bank and third party ceases if the public notice in local newspaper is given under s.34(2) in respect of all transactions undertaken subsequent to date of retirement

Limited Company

• Company is a legal person and can open account.• Public Ltd:- It has got min 7 members and

maximum unlimited members with minimum paid capital of 5 lakhs

• Private Ltd.:- It has got minimum 2 members and maximum 50 with paid capital of Rs. 1 lakh. For banking business, Max. No. allowed is 20

• Government Company:-Where 51% shares are held by the government

• Certified copies of memorandum and articles and certificate of incorporation

• Names of directors of the company• For public Ltd company certificate of

commencement of business issued by ROC• Specimen signatures of all authorised officials

Opening of Account for Trusts

A trust is an obligation annexed to the ownership of property, arising out of confidence reposed in and accepted by him for the benefit of another or of another and the owner. The person who, accepts the confidence is called the Trustee. The person for whose benefit the confidence is accepted is called the beneficiary. The instrument by which the trust is created is called the Trust Deed.

Rules for Opening of Account and Operation

i) Copy of the trust-deed be examined and ascertained the powers and function of trustees.

ii)In case of two or more trustees, unless specifically stated in the trust-deed all the trustees jointly will operate the a/c.

iii) On the death of one or more trustees, the authority-wests in the remaining trustees. When all the trustees are dead or retired new trustees are appointed by the court

Contd.iv)The insolvency of the trustee is not the

insolvency of the trust.

v) Trustee cannot delegate their powers unless specifically authorised by the trust-deed.

vi)Charitable trusts are required in several states in India, to be registered with the charity Commissioner or such authority under the Public Trust Act.Copy of registration certificate should first be obtained before opening such account

Opening of Accounts of Cooperative societies

i) Rules and bye laws be examined whether there are any restriction on opening bank accounts with commercial banks.

ii)Some states have restrictions as to opening bank account other then the cooperative banks, without the permission from the Registrar of Cooperative Societies, with certain conditions. These conditions should be observed by bank like maximum balances, etc.

Contd..iii) Investment of funds can be made with any

bank or person carrying the business of banking - approved for this purpose by the Registrar (section 32) the Cooperative Societies Act, 1912).

iv) Resolution to open bank account with signatures of three persons, viz, President / secretary/ treasurer out of these three, signatures of president and one of the other are essential.

TYPES OF BORROWERS

PRESENTATION BYFaculty

DIFFERENT TYPE OF BORROWERS

1. Individual2. Joint Accounts3. Partnership

4. Trusts-Public Trusts, Pvt.Trusts

5. Limited companies6. Any other entity not covered

above

TYPES OF BORROWERSIndividual

- Account Holder himself- Power of attorney holder

- Specific Power of Attorney for all borrowing actions

TYPES OF BORROWERSDeath of Individual Borrower

- Legal heirs liable to extent of estate of the deceased

- If a will is there- executor in the will- Legal representative

TYPES OF BORROWERSDeath of Individual Borrower contd.

-Account broken- Debits to be stopped

- Credits allowed- Death certificate

- Legal heirs to identified- L 444 CC L444DD

TYPES OF BORROWERSDeath of Individual Borrower

- Account to be reviewed- Fresh account to legal heirs

- Fresh set of documents- New Account

TYPES OF BORROWERSJoint Accounts:

- All the account holders are jointly & severally liable

- all instructions jointly unless specific instruction

- Signed jointly.

TYPES OF BORROWERSDeath of Joint Debtor

- Account to be broken - stopped- Operation in fresh account

- A/c. to be reviewed- Fresh Sanction to be done

TYPES OF BORROWERSPARTNERSHIP FIRMS

- Not more than 10 persons- Registration under partnership

Act 1932- Partnership letter- Personal capacity

- On behalf of the firms

TYPES OF BORROWERS Death of a Partner

- Same as Joint Accounts- Retirement of Partner- Account to be broken

- Review of account

TYPES OF BORROWERS a) Limited company as partner

1) Charge to be registered with ROC

TYPES OF BORROWERS b) Trust as a partner

- Proper Trust deed - authorisation in the deed to enter

into partnership- Power for borrowing

- Power to carry on business

Trusts-Public & Private Trusts

- Verification of Trust Deeds- Charitable commissioner’s permission for public trust

- Legal opinion- Delegation

Limited Company

- Registered office- Certificate of Incorporation

- Certificate of commencement of

Business- Memorandum and articles of

association- Board Resolution

BANK OF INDIAMANAGEMENT DEVELOPMENT

INSTITUTE

TYPES AND CREATION OF CHARGES

TYPES OF CREATION OF CHARGES

Charge is a right on tangible assets

It is a cover for an advance

The securities must be good

Method of charging should be legal & perfect

The Banker does not become the absolute owner of assets

He has only certain defined rights

The purpose of charge is to reduce risk & ensure safety

• Charge may be fixed, floating, Paripasu

• It is by the act of parties or

• It is by the operation of low

• Easy marketability

• Capable of easy ascertainment of value

• Has stability of value

• storability is easy / convenient

• Is transportable

• Is durable

Types of Securities

• Personal

• Tangible

• Primary

• Collateral

Methods for creation of charge

• Pledge

• Hypothecation

• Lien

• Set off

• Appropriation

• Assignment

• Mortgage

Lien

It is a right to retain all securities of the customer in respect of general balance due from him. The ownership of such securities is not transferred to the Bank. The Bank gets right to retain the securities handed over to it in its capacity as Banker

Particular lien - S170 of Contract Act

Where the bailee has in accordance with the purpose of bailment rendered any service involving exercise of labour or skill in respect of goods bailed, he has in the absence of a contract to the contrary, a right to retain such goods until he receives due remuneration for the service he has rendered in respect of them.

Particular lien - S170 of Contract Act

A right to retention of goods till debt due is paid off

Does not require any specific agreement

Arises in the ordinary course of business

possession acquired in ordinary course of business

The owner has a lawful debt or an obligation to discharge

General lien - S 171 of the Indian Contract Act

Bankers, Attorneys of High court and policy brokers may in absence of a contract to the contrary retain a security for general balance of account any goods bailed to them.

Extends to general balance of accounts

Also extends to prior transactions

Extends to properties / securities which a banker has come in possession of in ordinary course of business

Negative lien

The Banker does not have any right to retain any assets of the Borrower. The borrower gives a declaration that the assets are free from any charge, encumbrance, agreeable to undertake not to create any charge over the assets or to dispose them off without Bank’s permission

Set off

A set off is a right which, in absence of any agreement in contrary, enables a creditor to adjust wholly or partially a debit balance in the debtor’s account with any credit balance laying in his favour.

It means a total or partial merging of claim of one person against another in a counter claim by the latter against the former

Set off

It means a total or partial merging of claim of one person against another in a counter claim by the latter against the former

Claims should be for known amounts

Claims should be for known amounts

Claims should be in the same rights

Debts are due immediately

No agreements to the contrary

Appropriation:S 59, 60,61 of Contract Act

S59 - deals with cases where the borrower indicates his intentions expressly or by implication

S60 - deals with cases where the borrower has not intimated his intentions either expressly or by implications

S61 - deals with cases where neither party makes and appropriation

In practice a banker would not arbitrarily and without notice, exercise his right of set off unless he had an agreement to that effect with the customer.

Assignment:It means transfer of a right, property or a debt- existing or

future to another person.

Transferor - Assignor

Transferee - Assignee

In banking usual subject of assignment is actionable claims

(other than debt secured by mortgage, hypothecation, pledge)

Assignment:

The borrower may assign the banker

The book debts

Money due from Govt.Dept. or Semi Government organisation

Life Insurance policies

Legal Assignment

Absolute transfer of actionable claim & it must be in writing. Signed by the assignor who informs the debtor in writing intimating the assignee’s name & address. The assignee also serves a notice on the debtor of the assignor & seeks a confirmation of the balance so assigned.

Legal Assignment

Equitable assignment:

If all these requirements are not fulfilled the assignment is called equitable assignment

Pledge: S 172 of Indian \Contract Act

Bailment of goods as security for payment of a debt or performance of a promise. The ownership lies with the borrower but the possession is with the Bank

Bailment ( S 148) means delivery - physical & constructive

Pledge: S 172 of Indian Contract Act

Objective is to hold the goods as security for payment of debt or performance of a promise.

Pledge may be in respect of goods, stocks, shares, documents of title to goods or any other movable property.

Who can pledge the goods

• The owner of the goods himself

• The mercantile agent of the owner

• Joint owner with the consent from other co-owners

•Thank you