CHAPTER-4

BANKER AND THE CUSTOMER

4.1. INTRODUCTION
Banking industry occupies an important place in a nation’s economy. A bank is
an indispensable institution in a modern society. One cannot think of the
development of any nation without the active assistance rendered by financial
institutions. Banks, in fact, do finance trade, industry and commerce. The
modern business and the entrepreneur cannot carry on the commercial activities
without the different methods of financing done by the banks. Gone are the days
when borrowing was criticised and objected to and the borrower was looked
down upon. But today, the time and circumstances have changed. It is natural
that every businessman has to change according to the new challenges. Right
from small businessman, up to the biggest business tycoon, they invariably
depend upon finances of different types given by the banks. Therefore, one has
to accept that the banking industry play a vital role in every field and at every
juncture of the business.
This chapter deals with the relationship that exists between the banker and
customer. All the legal aspects associated with these two vital organs of the
banking operations are discussed. The relationship between the customer and
the banker is vital. The relationship starts right from the moment an account is
opened and it comes to an end immediately on closure of the account. The
relationship stands established as soon as the agreement or contract is entered
into. The nature of the relationship depends upon the state of the customer’s
account. Before we take up the relationship that exists between a banker and his
customer, let us understand the meaning of the terms ‘banker’ and ‘customer’.
4.2. Meaning and Definition of a Banker
The term ‘banker’ refers to a person or company carrying on the business of
receiving moneys, and collecting drafts, for customers subject to the obligation

1
of honouring checks drawn upon them from time to time by the customers to the
extent of the amounts available on their current accounts.
A banker or bank is a person or company carrying on the business of receiving
moneys, and collecting drafts, for customers subject to the obligation of
honouring cheques drawn upon them from time to time by the customers to the
extent of the amounts available on their current accounts.

Meaning and Definition of a Customer

The term ‘customer’ of a bank is not defined by law. In the ordinary language, a
person who has an account in a bank is considered its customer. In order to
constitute a person as a customer, he must satisfy the following conditions:
1. He must have an account with the bank – i.e., saving bank account,
current deposit account, or fixed deposit account.
2. Even a single transaction may constitute him as a customer.
3. The transactions between the banker and the customer should be of
banking nature i.e., a person who approaches the banker for operating
Safe Deposit Locker or purchasing travellers cheques is not a customer
of the bank since such transactions do not come under the orbit of
banking transactions.
4. Frequency of transactions is not quite necessary though anticipated.
4.3. The Banker-Customer Relationship
The relationship between the banker and the customer arises out of the
contract entered in between them. This contract is created by mutual
consent. This relationship is of two types:
A. General relationship,
B. Special relationship.
A. General relationship:

2
 The general relationship between banker and customer can be classified
into two types, viz.,
1. Primary relationship, and
2. Secondary relationship.
1. Primary Relationship
Primary relationship is in the form of a ‘Debtor’ which arises out of a
contract between the banker and customer. ‘. The authorities on banking law
and many court decisions have said that primary relationship is that of
‘Debtor and Creditor’. The true relationship between a banker and his
customer is that of a debtor and a creditor. The money deposited with him
becomes his property and is absolutely at his disposal.” As long as the
customer’s account shows a credit balance, the banker would be a debtor and
in case the customer’s account shows a debit balance, the banker would be
creditor.
2. Secondary Relationship
It will be in the form of:
A. Banker as agent(ወክል)
B. Banker as trustee(ባለአደራ)
C. Banker as bail(ዋስትና)
A. Banker as agent: A banker acts as an agent of his customer and
performs a number of agency functions for the convenience of his
customers. These are as follows:
i. Purchasing or selling of securities.
ii. Collection of income
iii. Making periodical payments as instructed by his customers.
iv. Collecting interest and dividend on securities lodged by his
customers.

3
 v. Receiving safe custody valuables and securities lodged by
his customers.
vi. Collecting cheques, drafts of the customers.
In this case, the banker and customer relationship is, in the form of an
‘Agent’ and ‘Principal’.
B. Banker as Trustee: Ordinarily, a banker is a debtor of his customer in
respect of the deposits made by the latter, but in certain circumstances he
acts as a trustee also.
1. The customer may request the banker to keep his valuables in
safe vaults, the banker becomes a trustee.
2. When check is given for collection, till the proceeds are
collected, the banker acts as trustee.
3. When customer deposits money and till the purpose is fulfilled
the banker is regarded as trustee.
C. Banker as Bail: As a bail, the banker should protect the valuables in his
custody with reasonable care. If the customer suffered any loss due to the
negligence of the banker in protecting the valuables, banker is liable to pay
such loss. If any loss is incurred due to the situation beyond the control of
the banker, he is not liable for penalty.
To conclude, the primary general relationship exists when the account is
opened by customer with bank. The relationship is that of debtor and
creditor. When the bank acts as trustee or agent or bail for the valuables,
he will be establishing the secondary general relationship.
B. Special relationship:
The special relationship between banker and customer takes the form of
rights which the banker can exercise and the obligations which he owes to
his customers.
Following are the rights enjoyed by the banker with regard to the
customer’s account:

4
 1. Right of general lien
2. Right of set-off
3. Right to appropriate payments
4. Right to charge interest, incidental charges
5. Right to close accounts
1. Right of General Lien:
One of the important rights enjoyed by a banker is that of general lien. A lien
may be defined as the right to retain property belonging to a debtor until he has
discharged a debt due to the retainer of the property. Banker’s general lien is
upon the right to retain the securities in respect of the balance due from the
customers. A banker can exercise the lien only if the following conditions are
satisfied.
1. There must be an agreement consistent with the general lien.
2. Property must come to the hands of the banker in his capacity as a
banker
3. Possession should be lawfully obtained.
2. Right of Set-off:
The right of set-off is a statutory right which enables a debtor to take in to
account a debt owed to him by a creditor, before the latter could recover the
debt due to him from the debtor. A banker, like other debtors, possesses this
right of set-off which enables him to combine two accounts in the name of the
same customer and to adjust the debit balance in one account with the credit
balance in the other. For example Mr. A has taken an overdraft from his banker
to the extent of Br 10,000 and he has a credit balance of Br.5, 000 in his savings
bank account, the banker can combine both of these accounts and claim the
remainder amount of Br. 5,000 only. To be on the safer side the banker takes a
letter of set-off from the customer authorising the banker to exercise the right of
set-off.
3. Right to Appropriate Payments:

5
Whenever the customer deposits funds into his account in the bank, it is his duty
to inform the bank to which account they are to be credited (provided the
customer has more than one account at the same bank).Once the customer gives
specific directions regarding appropriation, the banker has no right to alter
them. It is his bounden duty to carry out the instructions of the customer. This
right of appropriation is to be exercised by the customer at the time of
depositing funds and not later. In case the customer is silent or fails to give
instructions, the banker has every right to appropriate in his own way.
4. Right to Charge Interest:
As a creditor, a banker has the implied right to charge interest on the advances
granted to the customer. The rate of interest is nowadays levied as per the
directions of Central bank. It is charged on half yearly or quarterly basis and
generally compound interest is used. The interest is directly debited, i.e.,
charged to the customer’s account and then the interest is calculated on the
principal with interest.
5. Right to Close Accounts:
Banker also enjoys the right to close his customer’s account and discontinue
operations. This process terminates the relationship between banker and
customer. This is done only in situations where the continuation of relationship
seems unprofitable to the banker.
These are the rights enjoyed by the banker with regard to the customer’s
account.
Obligations of Bankers
Bankers are under the obligations to fulfil certain duties while dealing with
customers. Such obligations are as under:
1. Obligation to honour the customer’s cheques.
2. Obligation to maintain secrecy of customer’s account.
3. Obligation to receive the cheques and other instruments for collection.
4. Obligation to honour the cheques of customers across the counter.

6
 5. Obligation to give reasonable notice before closing the customer’s
accounts.
1. Obligation to Honour the Customer’s Cheques
This is a statutory obligation upon the banker to honour the cheques of his
customer drawn against his current account so long as his balance is sufficient
to allow the banker to do so, provided the cheques are presented within a
reasonable time. The bank honours checks if there is:
a. Sufficient funds in the account.
b. Presented in reasonable time.
C. check is properly filled.
d. No material alteration.
e. There is no court order- Garnishee Order (which is an order from the
court to a bank prohibiting the bank from making payments.

2. Obligation to Maintain Secrecy of Customer’s Account

Bank’s profession demands that he should maintain the particulars of his
customer’s accounts in secret. The banker has an implied obligation to maintain
secrecy of the customer’s account. He should not disclose matters relating to the
customer’s financial position since it may adversely affect the customer’s credit
and business. If it was no done, the bank is held liable to pay compensation for
the loss suffered by the customer. A bank can disclose the information
regarding its customer’s account on the following circumstances.
A. To protect his Own Interest: Whenever the banker is required to protect his
own\interest, if he discloses the details of a customer’s account, it must be a
reasonable and proper occasion. For example, if the banker is to recover his
own money from a particular customer, he may give the details to his lawyers.

7
B. Disclosure at the will of Customer: The banker can disclose the state of
affairs of the customer’s account when the customer gives his consent to
disclose the accounts.
C. To Protect Public Interest: When banks are required to give out information
regarding their customers in the interest of the public, the information should
relate to financial aspect of the customers. For example, When the Government
calls upon the bank to give information regarding a particular customer and
when the bank feels that a particular customer has committed an offence.
D. When compelled by the law: The banker is required to give out information
regarding his customers to the Income Tax Department. Similarly, whenever the
court needs any information regarding the customers, the banker is required to
give the information.
3. Obligation to Receive Cheques and Other Instruments for Collection:
Whenever a banker is entrusted with the job of collection of cheques, they must
be collected as speedily as possible through the accepted channels. Failure to
exercise proper care and employ the recognised route for collection may make
the bank liable for any loss which the customer may sustain.
4. Obligation to Give Reasonable Notice before Closing the Account: It is not
so simple between a banker and a customer for the obvious reason that the
banker is under an obligation to honour his customer’s cheques. If this
obligation could be terminated by the banker without notice, the customer might
be faced with an embarrassing situation. Reasonable time must be granted to
enable him to make alternative arrangements. Where any customer becomes a
nuisance through overdrawing without arrangement, it is advisable to close his
account. But reasonable time has to be given to enable him to make.