Unit – III

Chapter - V
TYPES OF CUSTOMERS AND THEIR ACCOUNTS

Objectives

 To know who are customers to

 To understand various types of individual customers
 To know the formalities to be carried out on opening a bank account in the name
of joint stock companies
 To know the procedure for opening a bank account in the name of Non Trading
associations

Definition of Customer:

According to John Paget, “a Customer constitutes a person who has an account with a
bank, whether fixed or savings, and has dealing of banking nature”. Dealings of banking nature
refer to those transactions of deposit and withdrawal of money at frequent intervals. The above
definition is popularly known as the ‘Duration Theory’.

A bank opens accounts for various types of customer’s like,

 Individual/s- either singly or jointly with other individuals

 Sole relationship
 Hindu Undivided Family
 Limited Liability Partnership firm
 Limited Company (Joint Stock Company)
 One – Person Company Ltd.,
 Club and Association, Institution, Society
 Trust
 Executor and Administrator
 Official Liquidator
 Co-operative Society
 While opening the accounts, the banker keeps in mind the various legal aspects and
practices involved in opening and conducting these accounts.

Who can open an account?

As the banker- customer relationship is a contractual relationship, all the essential

features of a valid contract must be present when a banker opens an account. Even though the
actual formalities will differ depending on the type of the customer, certain formalities are
common to all. The common formalities are:

The banker must ensure that the customer is competent to contract. For entering into a
valid contract, a person needs to fulfil the basic requirements of being a Major (18 years of age
or above) and possessing sound mental health (ie., not being a lunatic). A person who fulfils
these basic requirements, as also other requirements of the banks as mentioned below can open
an account.

However, minors (below 18 years of age) can also open SB accounts with certain
limitations. A person who wants to open a deposit account has to fill up and sign the prescribed
account opening application form and furnish:

 Acceptable proof of his/her identity and residential address,

 His/her photographs, and
 Initial deposit not less than the prescribed minimum (varies from bank to bank
according to the types of deposit accounts)

Introduction not Mandatory for opening accounts:

Introduction was obtained primarily by banks to get protection under Section 131 of the
Negotiable Instruments Act, 1881. The legal protection given to bankers in respect of cheques
collected “in good faith and without negligence” was available only if the account was opened
with proper introduction.

However, even though there was no legal responsibility on the part of the introducer, the
introducer is deemed to have connived with the account holder, for conversion (Collection of
instruments not legitimately owned by the customer).
 Now RBI has informed that introduction is not necessary for opening of accounts. Hence
banks should not insist on introduction of existing customer while opening a new account.

But the branches should clearly verify the identity of the customers through any one or more
of the various KYC identification documents.

Types of Customers:

1) Individuals

The banker should ensure that the initial credit in the account is made by cash. Only in
such a case the bank gets protection as a collecting banker for subsequent credits by way of
cheque / drafts collection.

Special Types of Individual Customers:

Certain persons lack the legal capacity to make valid agreement - Minors, Drunkards, etc.
The position of the banker in regard to these persons and the precautions to be taken in dealing
with this category of persons is given below:

1. Minors:

According to Section 3 of Indian Majority Act, a person attains majority at the age of 18,
except in cases where a guardian is appointed by a Court where the age of majority is 21.
According to the Indian Contract Act, a minor is not under a legal capacity to enter into a
contract and therefore any contract with a minor is void.

Thus, the minor has a guardian to maintain his / her property. Section 6(a) of Hindu
Minority and Guardianship Act, 1956 recognizes that either of the parents, father or mother, can
be the natural guardian. Normally, bankers do not open accounts in the name of the minor
individually, but open accounts in the joint name of the minor and the natural guardian.

Sometimes, the Court may appoint someone who is not a natural guardian as minor’s
guardian. In such cases the account should be in the name of the minor and the Court - appointed
guardian. Usually, the account should be operated by the guardian on behalf of the minor.
The account opening form should contain details,

 Name of the Minor

 Age of the Minor
 Date of birth of the Minor
 Date of attaining majority
 Name of the Guardian
 Signature of the Guardian

When the minor attains the age of majority, he/she alone can operate the account and the
guardian should not be allowed to operate the account.

Other Issues in Opening Account in the Minor’s Own Name :

a) A minor of any age can open a SB/FD/RD account through his /her natural or legally
appointed guardian.
b) Minors above the age of 10 years may be now allowed to open and operate savings bank
accounts independently, if they so desire. Keeping in view their risk management
systems, banks may fix limits in terms of age and amount up to which minors may be
allowed to operate the deposits account independently. Banker can also decide, in his
own discretion, as to what minimum documents are required for opening of accounts by
minors.
c) On attaining majority, the minor should confirm the balance in his account and if the
account is operated by the natural guardian / legal guardian, fresh operating instruction
and specimen signature of the minor should be obtained and kept on record for all
operational purposes.
2. Illiterate Persons
A person who cannot read or write is considered as an illiterate person. The banker while
opening an account in favour of an illiterate person, should adopt the following procedures:
 The illiterate person will have to be introduced by an existing literate account
holder of the branch.
 The left hand thumb impression has to be attested by a judicial officer or by any
witness who is also the account holder of the bank.
  The illiterate person should not be given cheque book.
 Three passport size photographs should be obtained. One will be affixed in the
passbook, the other in the ledger and the third in the account opening form.
 While withdrawing money from the account, the withdrawal slip should be
accompanied by the pass book.
 The left hand thumb impression affixed in the withdrawal slip should carry the
sign of a witness.
 While endorsing any cheque, the thumb impression should carry the signature of
witness.
 No bank employee should fill up the withdrawal slip for the illiterate customer
and he can be assisted by any other customer of the bank.
 In the account opening form the banker should obtain two identification marks
from the illiterate person.
 If the illiterate person is unable to come to the bank in person for withdrawal of
cash, he can send a messenger with an authorization letter which should contain
the signature of two witnesses authorising his left hand thumb impression.

Illiterate persons are the people who cannot either read or write, A banker can always
open an account in the name of the illiterate person. The banker however needs to observe
following precautions.

2.1 Thumb impression

As the illiterate person cannot sign, it is necessary for the banker to obtain the thumb
impression of such a customer. The thumb impression has to be compared with the thumb found
on the cheques drawn by him.

2.2 Photograph

The banker should obtain the photograph of the illiterate customer. The photograph will
help identify the illiterate easily.
2.3 Identification Mark

Besides the photograph, the banker should also obtain brief details of the physical
identification marks of the illiterate customer.

3. Married Woman:

An account can be opened in the name of a married woman. She has the power to draw
cheques and give discharge. But if a loan is given to a married woman, the banker will have no
remedy against her if she has no separate means. Bank must insist for the guarantee of her
husband, because the married woman can plead for and get validated that her debts to the bank
are void if the explicit written consent of the husband is not recorded by the lending bank. This is
possible by virtue of provisions in Married Women’s Property Act.

4. Lunatics:

Under Section 1 of the Indian Contract Act, persons of unsound mind are disqualified
from contracting. But the disqualification does not apply to contracts entered into during the
periods of sanity. However, no banker would knowingly open an account in the name of a person
of unsound mind because he then would have to face the difficulty of choosing whether cheque
was made during a period of sanity and pay it or it was made during a period when it was not and
so dishonour it.

If a banker receives notice and is sure that an account – holder has become a lunatic, he
should stop all operations in the account till such time the customer becomes normal. The banker
should obtain a Certificate of Sanity from a competent authority after which such a person is
allowed to operate on the account.

Lunatics are the people who are unsound in mind. They are incapable of entering into
valid contracts. Hence, a banker cannot open an account in the name of lunatic. In the same
manner, a customer who subsequently becomes a lunatic loses his capacity to contract and
therefore cannot continue to be the customer of the bank. In such a situation where a banker
honors the cheque issued by a customer who subsequently becomes lunatic cannot be held liable
unless it is proved that the banker had knowledge of the unsound mind of the customer.
 The banker has to take the following precautions on coming to know of the insanity of the
customer.

4.1 Return Cheques

On coming to know of the unsound nature of mind of the customer, the banker must
immediately return all the cheques drawn by him with the remark ‘refer to drawer’.

4.2 Lunacy Order

The order of lunacy on being received from the Court should be entered in the proper
records of the banker.

4.3 Account operation

The banker may allow the operation of the account of the lunatic customer only on the
basis of the guidance of the Court Of Law. The customer should not be allowed to operate the
account in any manner.

5. Drunkards

Generally, drunkenness does not affect a person’s capacity to contract. However, no one
should take advantage of a person who is drunk. The drunkard may evade responsibility for an
instrument if the Court is satisfied that he was compelled to sign the instrument when he was
under influence or liquor. If a customer tenders a self cheque for cash payment when he is drunk,
it is prudent for the banker to secure witness to the signature and the payment.

2) Joint Accounts

A Joint Account is an account opened by two or more persons.

Opening of Joint Account

The Account Opening Forms should be signed by all the joint account holders. The
names, addressed and other details of all of them should be obtained on the Account Opening
Form. The account – holders should also indicates how the account is to be operated the banker
should obtain specific directions as to one or more of them will operate on the account. When a
joint account is in the name of two persons, the operations may be by,

a. both survivor
b. both jointly
c. Either or survivor
d. Former or survivor
e. Latter or survivor

In case the account is a term deposit, upon death of any one of the joint holder, balance can paid
to survivor in the following cases.

 Either or survivor
 Former or survivor
 Latter or survivor

A joint account in the name of more than two persons may be payable to,

a) All of them or survivors

b) Any one or more of them or survivor or survivors.

In the absence of such explicit instructions, the operations will be by all the persons
jointly. Since all the instructions are given by the account – holders jointly at the time of opening
the account, they cannot be revoked by any one of them singly. All fresh instructions and
changes in the existing instructions must be given in writing signed by all the account holders.
However, any one of them can stop payment of a cheque issued by any other joint account
holder. Any request for granting of an advance should be made by all parties jointly.

Insanity of a joint account holder

The instructions for operations in the account will stand countermanded and the
operations in the account should be stopped till the banker receives instructions from the same
account holder and a competent authority in regard to his sanity.
Insolvency of the joint account holder

Insolvency puts an end to the mandate and the operations on the account will be stopped.
Payments from the account should be made on the joint instructions of the trustee of the
insolvent and the solvent joint account holders. However, while returning the cheques of the
solvent account holders a suitable reason has to be given so that their credit – worthiness is not
affected.

3) Limited Company (Joint Stock Company)

Limited Companies (also known as Joint Stock Companies) are governed by the
Companies Act 1956. While a company is normally incorporated under the Companies Act, a
company can also be brought into existence by means of a statue by the Parliament or the State
Legislature. While the company consists of share- holders, its entity is separate from that of the
share- holders. For all practical purposes, the company is just like a person and can sue or be
sued in its own name.

In the case of a limited company, the liability of a share – holder is limited to the amount
remaining unpaid on the shares held by him. The word “limited” is required to be part of the
name of the company, unless it is a government company licensed under Section 25 of the Act.

Companies can be broadly divided into three categories:

i) Public Limited Company: Should have a minimum of at least 7 members (Share holders),
but there is no maximum limit.

ii) Private Limited Company: Must have at least 2 members (share holders), but not more than
200 members excluding those who are in the employment of the company at the time of share
allotment.

iii) Government Company: These are companies where at least 51% of the total number of
shares are held by the Government.
Opening of Accounts of Limited Companies:

a. The banker should obtain Certificate of Incorporation, Certificate of commencement of

business, Memorandum of Association and Articles of Association as amended up to
date. These documents govern the working of the company. The Memorandum of
Association lays down the objects of the company and limits the scope of its operations
to specific areas.
The Articles of Association deals with the rules and regulations governing the internal
management of the company- it defines the powers of the directors, officials and share
holders. These documents can be amended or altered by passing a resolution at a general
meeting of the share holders and having it confirmed by the Company Law Board.
b. The directors of a company have to function within the limits of the power conferred by
the Articles of Association and when they do so, these acts are binding on the company.
If the directors act in excess of the power conferred, but within the purview of the
objectives and functions laid down in the Memorandum of Association, such acts can be
ratified by a general meeting of the share – holders. But, if the acts are outside the scope
laid down in the Memorandum of Association, they will be ultra virus of the company
and will not be binding on the company. The directors will be personally liable for such
acts.
c. A company comes into business only after the issue of the certificate of incorporation by
the Registrar of Companies. The banker should also verify the original of this certificate.
In the case of Public Limited Companies, the banker, should also obtain a copy of the
certificate of commencement of business issued by the Registrar of Companies (this is
not necessary in the case of private companies). If the account is opened before the issue
of this certificate, the banker should not issue the cheque book and should not permit
withdrawals until it is obtained . Deposits into account can, however, be accepted.
d. Proof of Identity(POI) and proof of Address not only for the limited company, but also
for every authorized signatory are to be obtained.
e. The banker should also obtain a certified copy of the resolution passed by the board of
Directors authorizing the opening of the account, execution of documents and conduct of
the accounts.The copy of the resolution should be under common seal of the company
 and duly attested as per requirements in Articles of Association. In case there is a change
of such authorized signatories, a fresh resolution has to be passed. A resolution will
remain in force until it is revoked by a fresh resolution.
f. The account opening form should be filled in and signed by the authorized signatories.
g. The POI and POA besides specimen signature of the directors and the authorized
signatories should be obtained.
h. A list of directors is to be obtained. The list should be signed by the chairman and
updated.
i. Every limited company is expected to maintain, at its register office, the following
registers promptly updated. a) Register of Charges b) Register of Guarantees c) Register
of Resolution d) Register of Directors.

Operations in the Accounts of Limited Companies

i. Issue of cheques by the company- If the company is to be bound by a negotiable

instrument, it should show , on the face of it, that it has been drawn, made, accepted or
endorsed by the company. This may be done either by showing the name of the company
itself or by the statement of the person signing the instrument that he is doing so on
behalf of the company.
ii. Death of a Director

As the company has an existence separate from that of the share holders/ directors, the
death of a director does not affect the operations in the account. Even if a cheque signed by an
authorized director who is dead, is presented after his death, the banker cannot return the cheque
for this reason.

iii. A cheque payable to the company should never be deposited in the personal account of
directors, as it would amount to conversion under Section 131 of the Negotiable
Instruments act.
iv. Advances to Companies
a. The purpose of the advance should be within the scope of the memorandum of
Association of the company- if it is not, advance will not be binding on the company.
 b. The /memorandum of Association should specifically empower the company to
borrow.
c. Board of Directors of a Public company shall not borrow limits in excess of the
company and its free reserves. If such amounts are to be borrowed, it should be only
after getting consent of the share- holders in a general meeting.
d. All charges created on a company’s assets (except pledge) have to be registered with
the Registrar of Companies within 30 days of creation of the charge. Otherwise, the
charge is void. The following charges need to be registered.
i. Securing any issue of debenture;
ii. Uncalled share capital;
iii. any immovable property and interest therein;
iv. any movable property and interest therein;
v. book debts;
vi. movable property other than pledge;
vii. floating charge on any undertaking or any property including stock in trade on
call made , but not paid;
viii. Ship or any share in a ship;
ix. Goodwill, patient or license under a patent, trademark copyright or licence
under a copy right. While a charge may be registered even after 30 days,
Subject to Certain formalities, a duly registered subsequent charge will get
priority over the earlier charge which has been created.
e. A banking company cannot grant advances to any of its directors or to any company in
which any of its directors are interested as per Section 20 of the Banking Regulation act.
f. In the case of winding up of a company all the powers of the directors will cease from the
commencement of the winding – up except to the extent sanctioned by the liquidators.
The bank should not honour cheques drawn by directors after it has received the notice of
resolution for winding up of company.

Non-Trading Institutions

A banker is expected to observe the following precautions while dealing with the societies and
other non-trading institutions.
 a) The banker must ensure whether or not the society seeking to open an account is
incorporated or not under the Societies Registration Act, or the Companies Act.
b) The banker should obtain the copies of Memorandum of Association and Article of
Association.
c) The banker must also obtain a copy of the resolution of ‘Managing Committee’
authorizing the opening account.
d) The banker must ascertain the names of person who are authorized to sign cheques or
borrow.
e) It is important for the banker to ensure that he does not mix the personal account of the
official with that of the society account.

4) Club and Association

Clubs and Associations, Committees, Funds etc. are non – trading organizations. They
have no legal entity, unless they are incorporated under the Companies act. As they have no
contractual powers, they cannot be used. The individual members of such organizations are not
liable for any overdraft as long as the members are signing the cheques in their representative
capacity and not in their personal capacity.

Opening of Accounts in the name of Clubs & Associations:

i. If the society or club is registered under the Societies Registration Act 1960 or
Companies Act, a copy of the Registration Certificate or the Certificate of Incorporation
should be obtained.
ii. The bank should obtain a certified copy of the by-laws, rules and regulations.
iii. A list of the members of the Managing committee is to be obtained.
iv. A certified copy of the resolution passed by the committee to open a bank account
together with the details of authorized signatories and instruction regarding the operation
of the account should be obtained.
v. The account must be properly introduced.
vi. POI+ POA not only for the constituent but also for every authorized signatory are to be
obtained.
Operations in the Accounts in the name of Clubs & Associations

i. No advance, not even a temporary overdraft should be permitted.

ii. If the person authorized to operate the account has his personal account also in the bank, the
banker has to ensure that no cheque payable to the club/ association is credited to the signatory’s
account and no transfer of funds takes place from the club/association account to the signatory’s
account.
iii. Only clubs/associations etc. meant for charitable purposes, registered under the Societies
Registration Act and that have submitted Income Tax exemption Certificate from IT department
are eligible for interest on savings bank accounts.
iv. In the case of death or registration of an authorized signatory, the operations in the account
should be stopped until the receipt of the fresh resolution , appointing new signatories.

5) Societies

These entities are established under Co-operative Societies Act in various States. They
are governed by their respective rules and by- laws. Before opening the accounts, these rules
have to be scrutinized to see if there are any restrictions on opening of bank accounts. In some
states , the co-c-operative Societies cannot open the accounts with commercial banks without
prior permission from the Registrar of Co-operative Societies and the Registrar may also impose
certain conditions like maximum balances. All such conditions should be observed while
opening the accounts.

CONCLUSION

As the banker has to entertain various types of account for various types of customers he
has to follow the legal formalities as well as the right practices of banking business then and
there. He should also exercise due diligence in opening and operating the bank accounts.
 EXERCISES

Short Answers Questions

1. Define a Minor.
2. Who is an Illiterate Person?
3. Define a Joint Stock Company.
4. What is a Non – Trading Association?

Big Answers Questions

1. What are the precautions to be taken by a banker to open an SB Account in the name of
an Illiterate Person?
2. What are steps to be taken by a banker on knowing about the lunacy of a bank
customer?
3. What are the documents to be verified while opening a current account in the name of a
Joint Stock Company?
4. How can a Registered Club open a bank account?