Law Relating To

Banker and
Customer
By
Group No 5
Meaning and Definition
of Banker and
Customer:
 Meaning of Banker
• The term banking is defined as “accepting
for the purpose, of lending or
investments of deposit of money from the
public, repayable on demand or otherwise,
and withdrawable by cheque,draft, order
or otherwise”.
 Definition of Banker
• Sec.5(c) defines the term ‘Banking’ has
“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.”

• The Negotiable Instruments Act defines a ‘Banker’

as including any person acting as a banker.

• The Banking Regulation Act, 1949 defines a

‘Banking Company’ as “a company which
transacts a business of banking”.
 Meaning of customer

• The term customer of banking is not

defined by law. Ordinarily, a person who
has an account in a bank is considered to
be customer of the bank.
 Definition of Customer:

• The term ‘customer’ is also not defined in

any of the statutes. A Person becomes a
customer of a bank when the latter agrees
to open an account of the former.
Law relating to bank and
customer
Law relating to banker and customer

The Law regulating the relations

between bankers and their customers
and between the bankers and the
outside world

The Law regulating the organizational

aspect of banking
 Legal relationship between
Banker and Customer
A Relationship between a banker and his customer is essentially contractual.

It is fundamentally a relationship of a debtor (the banker) and a creditor

(customer)

with the modification that the banker is only liable to repay the customer and
the customer demands payment.

This happens when the banker lends money to the customer.

The relationship between a banker and his customers also partakes

many aspects of the relationship of agent and principal.
with regard to
Rights &
Obligations of
Banker
 Obligation to honor cheques

A banker having sufficient funds of

the customer, properly applicable to
the payment of cheques, is duty
bound to honor his customer’s
cheques. If he refuses to honor these
cheques, he is liable to the customer
in damages.
 Obligation to keep a proper
record of transactions

The banker must keep a proper and

accurate record of all the
transactions of the customer.
 Obligation to abide by the instructions
given by the customer

The banker must abide by any express

instructions of the customer provided
these are within the scope of the
relationship between the banker and the
customer. The relationship is subject to
the terms of the contract between the
bankers and the customers and the rules
laid down in the Negotiable Instruments
Act.
 General lien of banker

According to Sec 171 of the Indian

Contract Act, 1872, the banker may,
in the absence of a contract to the
contrary, retain, as a security for a
general balance of account, any
goods and securities bailed to him.
 Obligation not to disclose the
state of his customer’s account
or affairs

The banker must take utmost care

not to disclose the state of account
of his customer’s affairs as this may
result in considerable harm to the
credit and business of the customer.
If he fails in this duty, he is liable in
his damages.
 Incidental charges and interest

The Banker has the right to claim

from the customer incidental charges
and interest on money lent to the
customer as per the rules and
regulations communicated to him at
the time when the account is
opened.
 Right to set-off

Where the banker has two accounts

of the customer, one showing a
credit balance and the other a debit
balance, the banker has the right to
combine the two accounts and set
off the balance of against the other.
But to exercise such a right, the
debit and credit balances of two
accounts must be due by and to the
customer in the same right.
Bankers Obligation to Maintain
Secrecy of Customers Accounts
A Banker is expected to maintain secrecy of his
customer’s account. The banker should not
disclose his customer’s financial position and
the nature and the details of his account.
This secrecy should be maintained even after
the account is closed and even after death of
the customer.
 It extends to all transactions that go
through the account.
If a customer suffers any loss on account
of the unwanted disclosure of his
account, the banker will be compelled
to compensate for the loss suffered by
his customer.
Disclosure of Accounts

Disclosure under the compulsion of

law
• Under sec.4 of the Bankers Book
Evidence Act, 1891, a banker may be
asked to produce a certified copy of
his customer’s account in his ledger.
• Under sec.45B of Reserve Bank of
India Act, the Reserve Bank is
empowered to collect credit information
from banking companies relating to
their customers.
• Under sec .36 of the Gift Tax Act, 1947, the gift
tax Officer can examine a banker on oath and
compel him to produce the books of accounts.
• When a Garnishee order nisi is received, the
banker must disclose the nature of the account
of a customer to the court.
Disclosure in the interest
of the public

• Disclosure of the account where money

is kept for extreme political purpose.
• Disclosure of the account of an unlawful
association.
• Disclosure of the account of a
revolutionary body to avert danger to
the state.
• Disclosure of the account of an enemy
in the times of war.
Disclosure of the
Accounts of customer
DISCLOSURE OF THE
INTEREST OF THE BANK

When his own position is at stake,

a banker may be compelled to
ignore his oath of secrecy. Any
prudent banker will safeguard his
position before fulfilling his
obligations.
 Disclosure of the account of the
customer who has failed to repay
the loan to the guarantor.
 Disclosure to fellow banker
DISCLOSURE UNDER THE EXPRESS
OR IMPLIED CONSENT OF
CUSTOMER

A banker is justified in disclosing

the state of his customer’s
account to a third party, when
there is an express and implied
consent of the customer for such
disclosure
Sunderland Vs. Barclays Bank
A cheque for a small amount drawn by Mrs.
Sunderland on Barclays bank in favour of a
dress maker was dishonoured. Mrs.
Sunderland telephoned to the banker at the
instance of her husband to know the reason
for the dishonour of her cheque. During the
course of her conversations with the
banker, her husband took the phone from
her and expressed to the banker his
dissatisfaction at the banker’s
action. The banker then disclosed to the
husband the position of Mrs. Sunderland’s
account and her habit of issuing cheques in
favor of book makers. Mrs. Sunderland then
sued the banker for violating the obligation
of secrecy. But it was held by the court
that her giving phone to her husband, to
talk with banker indicated her implied
consent to the disclosure of the state of
her account to her husband. Besides,
there were supposed to be no secrets
between a husband and wife.
Precautions to be taken by a banker
in answering an enquiry
He should not be negligent in
giving information
The information should be given
confidentially & Honestly
The banker should depend only on
facts as disclosed by the customer’s
account, and not on rumours
Contd…….

He should not make any statement which

may make him liable for fraudulent
representation
Whenever possible, he should get the
express consent of the customer before
giving the information.
To be on the safer side, it is advisable for
the banker to specify in his reply that he
does not undertake any responsibility for
the information provided by him.
  Banker’s obligation to honour his
customer’s cheques.
 Nature of banker’s obligation to
honour cheques

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 Banker’s obligation to honour his customer’s
cheques
When a current account is opened by a banker
in the name of a customer, there is an obligation
on the banker to honour the customer’s cheques
as long as there are sufficient funds available in
the customer’s account for meeting the cheques.
In other words of Jones, “The banker’s primary
contract is to repay the moneys received for his
customer’s account usually by honouring his
cheques.”

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 Nature of banker’s obligation to honour
cheques
1. The current deposits accepted by a banker from a
customer are the debts due from the banker to
the customer. These debts are repayable by the
banker to the customer on demand as per the
contract entered into between them. So,
whenever the customer demands the repayment
of his deposits by issuing cheques, there is a
contractual obligation on the banker to honour
his customer’s cheques and repay his deposits.

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 2. The obligation of the banker to honour the
cheques of his customer is also provided by
statue. section 31 of the Indian Negotiable
Instruments Act of 1881 provides, the drawee
of a cheques having sufficient funds of the
drawer in his hands, properly applicable to the
payment of such cheques, must pay the
cheques when duly required to do so, and in
default of such payment, must compensate the
drawer for any loss or damage caused by such
a default.”

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Banker’s obligation to honour
cheques
 Banker’s obligation to honour cheques is
subject to certain conditions:
• Sufficient funds must be available
• Funds must be properly applicable to
the payment of the cheques
• Banker must be duly required to pay
the cheques
• There must be no legal bar preventing
the payment of the cheque
Banker’s obligation to honour his customer’s
cheques extends even to cheques drawn
against overdraft.

Banker’s obligation to honour cheques does

not apply to domiciled bills of exchange.

Dishonour of customer’s cheques.

 Banker’s obligation to honour his
customer’s cheques extends even to
cheques drawn against overdraft:

The obligation of a banker to honour his

customer’s cheques applies not only to
cheques drawn against the customer’s credit
balance for deposits, but also to cheques
drawn against the amount of overdraft
agreed upon.
 Banker’s obligation to honour
cheques does not apply to domiciled
bills of exchange:

The obligation of a banker to honour

the cheques of his customer does not
apply to domiciled bills of exchange.
Dishonour of customer’s cheques:

Though a banker is obliged to honour his customer’s

cheques, he can dishonour the cheques issued by the
customer under certain circumstances, such as
insufficiency of funds in the customer’s account,
irregularity in the cheques, presentation of after it
becomes stale, presentation of a post-dated cheque
before its due date, attachment of the funds in the
customer’s account by a garnishee order, etc.
WHEN MAY A BANKER DISHONOUR
A CUSTOMERS CHEQUE?
WHEN MAY A BANKER DISHONOUR A
CUSTOMERS CHEQUE?

Where the banker does not have sufficient

funds to the credit of the customer.

Where the funds to the credit of the customer

are not applicable to the payment of the
cheque.

Where the cheque is ambiguous or of doubtful

legality.

Where the cheque is mutilated (torn so as to

make it imperfect).INTENTIONAL MUTILATION
OR ACCIDENTAL MUTILATION
Where the cheque is irregular or
materially altered.

Where the cheque is not duly presented.

Where the customer’s signature does

not agree with his specimen signatures.

Where the cheque is post-dated.

A customer gave a cheque on may 10th to
airtel amounted Rs.1000 and airtel
withdrew it 0n 5th ,another cheque
forwarded by customer dated 6th to
electricity board amounted Rs.800.if this
cheque is not able to be honoured by the
banker due to deficiency of fund the banker
is liable to bear the damages.
If banker honours a cheque before
prescibed date,the customer has the right
to question it and he can demand the
damages.
Where the cheque has become stale (i.e., has not
been presented for payment for six months from the
date of its issue).

Where the cheque is presented at a branch other than

the one where the customer has the account.

Where an account is in joint name of a few persons,

but they have not all signed the cheque.

Where the banker has a claim for a set-off on the

funds of the customer and the cheque is for an
amount in excess of the balance above the claim.
WHEN MUST A BANKER
DISHONOUR A
CUSTOMER’S CHEQUE?
When must a banker dishonour a
customer’s cheque?
• A banker must dishonour a customer’s cheque in the following
cases:
• When the customer becomes insolvent or an order of adjudication
has been made against him.
• When the customer countermands payment (i.e., orders the banker
not to honour a cheque).
• When the banker receives notice of the customer’s death. But if he
pays a cheque before he receives notice, the payment is valid.
• When the banker receives notice of customer’s insanity.
Contd…
• When a garnishee or other legal order attaching or
otherwise dealing with money in banker’s hands is
received by the banker.
• When the customer gives notice to the banker to close the
account.
• When the customer gives notice of assignment of the
credit balance of his account.
• When the banker suspects, or has reason to believe, that
the title of the person presenting the cheque is defective.
• When the holder gives a notice of loss of a cheque to the
banker. The banker, may, however, insist that he holder
should obtain a countermand from the drawer.
Consequences of wrongful
dishonour of cheques
Consequences of dishonour of the
cheques
However, under the following circumstances, the
payment of a cheque must be refused:

1.Countermanding
2.Upon the receipt of notice of death of a customer
3.Upon the receipt of notice of insolvency
4.Upon the receipt of notice of insanity
 Countermanding
Countermanding is the instruction given
by the customer of a bank requesting the
bank not to honour a particular cheque
issued by him. When such an order is
received, the banker must refuse to pay
the cheque.
 Countermanding, in order to be
really effective
• must be in writing
• The written mandate should contain all the details
of the cheque, viz., date, number of the cheque,
name of the payee and the amount.
• The mandate must be signed by the customer. In
the case of a company, any director can stop
payment of a cheque.
• So also, any partner or any one of the joint
account holders can stop the payment of a cheque.
• In Westminster Bank vs. Hilton, the
customer had instructed his banker
not to pay his cheque No.117283
instead of 117285. The cheque
No.117285, therefore, was paid. It
was held that the banker was not
liable
• If a customer informs by telephone or
telegram regarding the stopping payment
of a cheque, the banker should
diplomatically delay the payment, till
written instructions are received.
• If the situation is very critical, he can
return the cheque by giving a suitable
answer like ‘payment countermanded by
telegram and postponed pending
confirmation.’
• The drawer alone has the right to
countermand the payment of a cheque.
• In case a cheque is lost by a holder, he
should stop payment of that cheque only
through its drawer.
• It is so because; a banker is always
answerable only to the drawer, in the case
of dishonour of a cheque.
• If a cheque is covered by a ‘cheque card,’
then, that cheque can not be countermanded.
• A cheque card is a document issued by a
bank which enables the holder to encash
cheques, upto a stated maximum, at any
branch of the issuing bank.
• Since it contains an undertaking by the
issuing bank to pay it, it is readily acceptable
to all parties particularly to third parties.
Hence, it can not be countermanded.
 If a banker, by mistake, honours a
countermanded cheque:

• The payment does not amount to payment in

due course,
• He will have to answer for having disobeyed
his customer’s mandate,
• He has no right to debit his customer’s
account with the amount of the
countermanded cheque,
• He may have to dishonour the customer’s
subsequent cheques for want of funds in the
account.
 WHAT BANKER CAN DO

• countermanding instructions, once

received must be kept as a constant
record. A ‘stopped payment’ register may
be maintained for ready reference.
• It is advisable that a slip, giving the
details of the cheque to be
countermanded, is pasted on the
customer’s account.
• Alternatively, a red ink mark may be made
against the customer’s account, so that,
the clerk concerned with posting of
cheques may be careful.
• When a banker dishonours a
countermanded cheque, it would be
advisable to give answers like ‘orders not
to play’ rather than “payment stopped”
because the latter can be interpreted in
any way.
2.Upon the receipt of notice of death
of a customer
3.Upon the receipt of notice of
insolvency
4.Upon the receipt of notice of insanity
5. Upon the receipt of notice of Garnishee
Order

6. Upon the receipt of notice of assignment

7. When a breach of trust is intended

8. Defective title
9. Other Grounds
- A conditional one
-Drawn on an ordinary piece of paper
-A stale one
-A post-dated one
-Mutilated
-Drawn on another branch where the
account is not kept
-Presented during non-banking hours
-If the words and figures differ
-If there is no sufficient funds
-If the signature of the customer is forged
-If a crossed cheque is presented at the
counter