Banker and Customer Definitions & Functions

• Banker and Customer

Definition of Banking

• Defined in the Banking Regulation Act, 1949, section 5(b) as accepting deposits of money from the public for lending or investment, repayable on demand or otherwise, and withdrawable by cheque, draft, order, or otherwise.

Definition of Banker (Sir John Paget's Definition)

• An entity that takes deposit accounts, current accounts, issues and pays cheques, and collects cheques for customers.

Definition of a Customer (Dr. Hart)

• Someone who has an account with a banker or for whom a banker habitually acts.
• Requires opening a bank account (savings, current, or fixed deposit) and banking business dealings.

Principal Functions of a Banker

• Receiving deposits via various accounts: savings, current, fixed, and recurring.
• Granting credit to customers, secured or unsecured.
• Collecting cheques, demand drafts, and bills of exchange.
• Transferring funds nationally and internationally.
• Paying cheques, demand drafts, and instruments from customer accounts.
• Issuing letters of introduction or credit, both inland and foreign.
• Managing public issues, acting as bankers for issues, paying interest or dividends, and underwriting or syndicating loans.

Subsidiary Functions of a Banker

• Issuing credit cards, debit cards, gift cards, and traveler's cheques.
• Selling mutual funds, insurance plans, and bonds.
• Providing investment facilities like merchant banking services and investments in stocks and securities.
• Issuing guarantees and indemnities.
• Acting as executor and trustee.
• Providing factoring services and personal investment services.
• Offering safe deposit vaults and safe custody facilities.
• Providing tax assistance services.
• Collecting taxes for government authorities.
• Executing standing instructions for debit and credit for customers.

Statutory Liquidity Ratio (SLR)

• Minimum percentage of deposits commercial banks must maintain in gold, cash, or other securities.
• Banks maintain these deposits themselves, not with the RBI.
• Current SLR in India: 18.00%.

Cash Reserve Ratio (CRR)

• The minimum amount of total customer deposits that commercial banks must maintain as a reserve in cash or deposits with the RBI.
• Current CRR: 4.00%.

Relationship Between Banker and Customer

• General relationship can be primary or secondary
• Includes special relationships

General Relationships

• Debtor and Creditor
• Customer deposits money = bank becomes debtor, customer becomes creditor.
• Banker's Obligations: Creditor must demand payment at the proper place and time, and in the proper manner (e.g., cheques, drafts, orders).

Secondary Relationships

• Banker as Trustee: Banker acts as a trustee when the customer deposits securities or valuables for safe custody.
• Banker as Agent: Modern bankers act as agents for customers, buying/selling securities, collecting cheques, and paying bills, governed by principal-agent law.
• Banker as Bailee: Banks act as bailees when they take physical possession of securities, valuables, etc., for safekeeping.
• Banker as Mortgagee: Relationship formed when a customer pledges valuable assets as loan security.

Special Relationships

• Rights the banker can exercise and obligations owed to customers.

Banker's Rights Regarding Customer Accounts

• Right of General Lien: Right to retain debtor's property until the debt is discharged. Applies to securities placed in the banker's hands as a banker, not specifically appropriated.
• Right of Set-off: Statutory right enabling a debtor to consider a debt owed by a creditor before the creditor recovers debt. Only the remainder is payable.
• Right to Appropriate Payments: Banker's ability to allocate deposits if the customer doesn't provide instructions. Governed by Clayton's case rule (first in, first out).
• Right to Charge Interest and Commission: Implied right to charge reasonable commission and interest on loans. Ceases upon death or insolvency of the customer.
• Right Under Garnishee Order: An order from the court to prevent the release of funds
• Right to Close the Account: Banks can close problematic accounts with written notice.

Banker's Obligations

• Obligation to Honor Cheques: Must honor cheques if the customer has sufficient balance, funds are properly applicable, and there is no prohibition order.

Banker's Duty to Maintain Secrecy

• Obligated to maintain secrecy about customer accounts with exceptions.
  • Disclosure of Information Required by Law: Required under various acts like Income-tax Act, Companies Act, RBI Act, etc.
  • Duty to the Public to Disclose: Justifiable to disclose information in the public interest.
  • Disclosure in His Own Interest: Justified when recovering money due or when a debt is guaranteed.
  • With Express or Implied Consent of the Customer: Justified with customer's consent.
  • Other scenarios: crime commission by a government official, customer involved in activities prejudicial to the country, or contravening laws.