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BANKING AND ITS RELATION BETWEEN THEIR CUSTOMERS
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BANKING AND
ITS RELATION BETWEEN THEIR CUSTOMERS
AUTHORED BY - RAVIRAJ S DUDHGAONKAR
Roll No 25
Savitribai Phule Pune University
Pes Modern Law College
Introduction
The relationship between banker and
customer is a legal relationship that starts after the formation of a contract.
When a person opens a bank account in the bank and the banker gives his
acceptance for the account, it binds the banker and customer in the contractual
relationship. The person who holds a bank account in the bank and uses its
services is called a bank customer. The contractual relationship between bank
and customer creates more types of banker and customer relationships. The bank
and customer are two di erent terms that are related to the bank. The person
doing the banking business is called a banker and the person who is connected
with the bank, either depositing his money or taking a loan from the bank is
called a bank customer. The relationship between banker and customer can be of
various types because it totally depends upon the activities, products and
services provided by the banker to the customer. Although the relationship is
totally based on contact, trust is an important part of the relationship
between bankers and customers[1].
Section 5 (b) of the Banking
Regulations Act 1949 de nes the bank as a nancial institution. According to the
section “The bank accepts, lending money or invest the money from the public
repayable on demand or otherwise and withdraw through online, cheques, drafts
or any other way.” It is a licensed institution to receive deposits of its
costumer and make the loan. The main work of the bank is depositing and lending
money. The bank encourages people to save their money into the bank accounts to
earn some interest on the money. The bank uses this money to give loans to
needy people with an interest rate. In simple words, the bank works as the
intermediary between two people where one wants to save his money and others
need money. This process also helps the bank to gain some pro t and make
the relationship between banker and customer. This process creates di errant
rights and duties of bankers against the customer and rights and duties of
customers against the bank which make the banker and customer relationship
stronger.
Table of Contents
Relationship between banker and
customer
1. The general relationship between
banker and customer
2. Relationship as Debtor and Creditor
3. Relationship as Trustee and Beneficiary
4. Relationship as principal and Agent
5. Relationship as Lesser and Lessee
6. Relationship as Pledger and Pledgee
7. Relationship as Bailor and Bailee
8. Relationship as Advisor and Client
9. Relationship as Mortgagor and
Mortgagee
10. Relationship as Indemnity holder and
Indemnity er
11. Relationship as Hypothecator and
Hypothecate
Termination of Relationship between
the Banker and the Customer
1.
Liquidation of the company
2.
Death or lunacy of a customer
3.
Completion of contract
4.
Closing the account after bank notice
5.
Voluntary Closure of Account
6.
Involuntary Closure of Account
7.
Termination by the Bank due to Risk Assessment
8.
Non-compliance with KYC or AML regulations
9.
Bankruptcy or Insolvency of the Customer
10. Merger or
Acquisition of the Bank
Relationship
Between Banker And Customer
The banker and customer relationship
are based on trust. This relationship is divided into two important parts to
understand clearly: The general relationship between banker and customer The
special relationship between banker and customer The General Relationship
Between Banker And Customer The services provided by a banker to its customer
comes under a general relationship between banker and customer. The general
relationships between banker and customer are: Relationship As Debtor And
Creditor The opening of a bank account in the bank of a banker by the person
who has the capacity to contract is the basis of the debtor and creditor
relationship between banker and customer. By filling the form for opening a
bank account bind the banker and customer in the written contract. The customer
when deposits his money into his bank account, becomes a creditor because he is
giving his money to the bank indirectly[2].
This relationship gets opposite at
the time when a bank customer takes the loan from the bank, the bank becomes
the creditor and the customer becomes a debtor. It means the debtor and
creditor relationship works both ways depending on the condition of the
transfer of money. The bank usually takes the money of customers to use it to
provide loans for other bank customers and it is the most important activity of
a bank.
Relationship
As Trustee And Beneficiary
The bank performs the relationship as
a trustee with his customer when the bank customer deposited his property or
other assets. In this case, the bank holds the property of other documents of
bank customers in exchange for the loan provided by the bank. The person who is
depositing the property or other documents is known as the beneficiary.
It can be done in two conditions:
When a person deposited his important
document in the bank locker.
The person took the loan and
deposited his property document as security.
This relationship is based on trust.
The document deposited in the bank is a secured document and the bank never
share these documents with any other person. Also, the ownership of the
property will remain with the person, not the bank. In the situation of bank
liquidation, the property secured in the bank by the beneficiary is not subject
to distribution to the general creditors of the bank[3].
Relationship
As Principal And Agent
The bankers provide agent services to
their customers. The agent is defined under section 182 of the Indian contract
act as the agent is the person who is employed by a person by giving him the
power of attorney to work or deal on his behalf. The banker pay taxes,
electricity bills, insurance premium etc. at the command of the bank customer
who acts as principal. The bank usually charges for these services provided by
the bank to its customer. In the banking industry, the relationship between a
banker and a customer can be considered as a principal-agent relationship. In
this type of relationship, the customer (the principal) entrusts the bank or
the banker (the agent) with their money and other financial assets, and the
bank or the banker acts on the customer’s behalf to manage and invest those
assets.
Limitation
Act, 1963
The Limitation
Act, 1963 provides
for the prescribed time period within which any suit, appeal or application can
be made. The “prescribed period” means the period of limitation computed in
accordance with the provisions of the Limitation Act. A banker is allowed to
file a suit, appeal, or an application for recovery of the loan only when the
document is within the period of limitation. Therefore, the bank should be careful
that all the legal loan documents are within the time limit and are held as
valid[4].
Revival of the document
·
Acknowledgement
Debt
As per Section 18 of the Limitation Act,
acknowledgement of the debt in writing by the borrower on the requisite stamp
paper before the expiration of expiration period can extend the limitation
period.
·
Part
Payment
When the part repayment is made by
the borrower himself or by his authorised agent before the expiry of the
document, evidence of such payment has to be taken in writing and duly signed
by the borrower.
·
Fresh
set of Documents
When the fresh set of documents are
received by the bank before the expiry of the original document, then the fresh
period of limitation starts. The revival of the time-barred debt is governed
under Section 25(3) of the Indian Contract Act,
1872.
Recovery of debts due to banks and
financial Institutions Act, 1993 (DRT Act)
This Act came into operation on 24th June, 1993. Recovery
of dues of the loan of the banks and financial institution through court became
tough. There was a huge backlog of cases. To overcome this problem and speed up
loan recovery, this legislation was enacted.
Important things in the legislation
·
This Act constituted the “Debt Recovery Tribunal” for
the speedy recovery of the loans.
·
This Act is applicable for the debt due to any bank or
any financial institution or any consortium of them, for the recovery of the
debt above 10 lakhs.
·
The term “Debt” cover the following types of debts:
1. Any
liability inclusive of interest, whether secured or unsecured.
2. Any
liability payable under a decree or order of any Civil Court or any kind of the
arbitration award.
3. Any
liability payable under the mortgage or subsisting upon or legally enforceable
and recoverable on the date of the application.
Recovery of debts due to banks and
financial Institutions Act, 1993 (DRT Act)
This Act came into operation on 24th June, 1993. Recovery
of dues of the loan of the banks and financial institution through court became
tough. There was a huge backlog of cases. To overcome this problem and speed up
loan recovery, this legislation was enacted.
Important things in the legislation
·
This Act constituted the “Debt Recovery Tribunal” for
the speedy recovery of the loans.
·
This Act is applicable for the debt due to any bank or
any financial institution or any consortium of them, for the recovery of the
debt above 10 lakhs.
·
The term “Debt” cover the following types of debts:
1. Any
liability inclusive of interest, whether secured or unsecured.
2. Any
liability payable under a decree or order of any Civil Court or any kind of the
arbitration award.
3. Any
liability payable under the mortgage or subsisting upon or legally enforceable
and recoverable on the date of the application.
Lok Adalat
Act
Lok Adalat’s are organised under the Legal Services
Authorities Act, 1987. They are intended for the settlement of a dispute or potential
dispute out of the courts. Lok Adalat derives by the consent of the parties or
when the court is satisfied that the dispute can be settled by the Lok Adalat.
They must decide the matter based on the principle of equity, justice and good
conscience. In case of a settlement, the award shall be binding on both the
parties. No appeal should lie in any court against the award.
SARFAESI
Act, 2002
This Act empowers the bank and other financial
institutions to recover their dues in Non-Performing Assets, without the
intervention of the court. It also empowers the bank to issue a notice to the
defaulting borrowers or guarantors to discharge their dues within 60 days.
Securitization
Securitization is the process in
which the financial asset is bought by the securitization or reconstruction
company from the lender (bank or financial institution). The Securitization or
reconstruction company raises the fund by the qualified and institutional
buyers by issuing security receipt to them. The security receipt represents an
undivided interest in the financial asset.
Asset
Reconstruction
Asset reconstruction role is to take
over the loans or advances from the bank of the financial assets for the
purpose of the recovery. On acquisition of the financial asset, the asset
reconstruction company becomes the owner of the property. The asset
reconstruction company steps in the shoes of the bank. The securitization
company is governed by the Companies Act,
1956. The regulatory
authority for all the securitization company is the Reserve Bank of India.
Enforcement of Security Interest
The enforcement of security interest
is important for the recovery of the bank’s loan. The enforcement of the
security feature is accomplished without any interference from the court. The
bank has to serve the notice to the borrower before 60 days with a request to
discharge the liability of the loan. If the borrower fails to pay the amount
within the stipulated time then the secured creditor can take the possession of
the secured asset[5].
Security
Interest
Any right, title or interest of any
kind of property created in favour of the secured creditor is called the
security interest. Whenever any lender takes any property from any borrower
then a lender gets security in that property. When the bank or any lender is
taking possession of the property then precaution must be taken and, if
required, the help of the metropolitan magistrate or chief judicial magistrate
can be taken.
Lender
liability Act
After the recommendation by the
committee constituted by the government of India for limited liability laws,
the Lender
Liability Act came
into force. It has devised certain fair practice code for the lenders which was
adopted by all the banks.
The act explicitly laid down the
criteria by which the lenders must comply for granting loans. The lenders
should dispose of any loan application within a reasonable time. It must
consider the welfare of the borrower. If the application is from any borrower
who belongs to the pivotal sector of the economy, then he must be dealt on a
priority basis. The creditworthiness should be checked according to rules and
regulation provided by the Reserve Bank of India. The margin and security
stipulation should not be used as the due diligence along with other terms and
conditions for granting the loan[6].
Banking
Ombudsman
Banking Ombudsman Scheme is a grievance redressal system. If a customer
is dissatisfied with the service of the bank, then he can approach the banking
ombudsman for further action. It is introduced under Section 35A of the Banking
Regulations Act, 1949.
Important features of the Banking
Ombudsman Scheme
·
Deficiency in service, non-acceptance of note of notes
of small denominations without sufficient cause.
·
Delayed or non-payment of inward remittance or delayed
issuance of the draft.
·
Non-adherence to prescribed working hours.
·
Refusal to open a banking account without any valid
reason.
·
Levying of charges without any prior notice to the
customer.
·
Forced closure of deposit account without notice or
sufficient reason.
·
Refusal to close or delay closing accounts.
·
Non-adherence to the fair procedure adopted by the
bank or non-adherence to the fair procedure and function for customers laid
down by the Banking Codes and Standard Board of India.
·
Non-observance of Reserve Bank guidelines on
engagement of recovery agents by banks.
·
Non-observance of the Reserve Bank guidelines on
interest rates.
Case laws
In the case of Motigavri vs. Naranjidwarkadas, the Bombay High Court held that the
relationship between banker and banker is that of a lender and borrower.
In the case of Canara Bank
vs. Canara Sale Corporation and others, a wider approach was taken into consideration and it was held that
a relationship between the customer of a bank and a customer is that of a
debtor and creditor.
In the case of Surender S/O
Laxman Nikos vs. Chief Manager and authorised officer, State bank of India, it was held by the Bombay high
court that once the relationship between the banker and customer ends, it
waives off every right including the right of lien.
Conclusion
With the advancement of the internet
and different online mechanisms, the world has become a global village. People
keep their savings and valuables in banks for better returns. At times we have
seen that people have seen instances of online fraud. The regulation should be
made in ensuring complete protection and also should satisfy the consumer. The
arbitrary action of granting loans to people with brand value should be curbed
and the account must be fixed if anyone is found responsible for the inaction
or impropriety. The rising non-performing assets have become a concern for
everyone in the country. It directly or indirectly affects common people of the
country. So, we should understand the need of the hour and make regulations in
that direction.
[1] https://www.lawteacher.net/free-law-essays/commercial-law/general-legal-relationship-between-bank-and-customer-commercial-law-essay.php#:~:text=The%20general%20legal%20relationship%20between,a%20debtor%20of%20the%20customer.
[2] chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.bdu.ac.in/cde/SLM/B.Com.%20Bank%20Management/Banking%20Theory%20Law%20&%20Practice/lession%201%20relationship.pdf
[3] https://bankopedia.co.in/2023/10/11/banker-customer-relationship-comprehensive-guide/
[4] https://blog.ipleaders.in/relationship-between-banker-customer
[5] http://lawtimesjournal.in/customer-banker-relationship/
[6] https://www.lawteacher.net/free-law-essays/commercial-law/general-legal-relationship-between-bank-and-customer-commercial-law-essay.php
Article Information
BANKING AND ITS RELATION BETWEEN THEIR CUSTOMERS
Authors: RAVIRAJ S DUDHGAONKAR
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/03/14
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
- Access Open Access
- License CC 4.0
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