UNIT-II

A FUNCTIONS OF BNKS

INTRODUCTION

The relationship between a banker and his customer depends upon the nature of service provided
by a banker. Accepting deposits and lending and/or investing are the core banking businesses of a
bank. In addition to its primary functions, it deals with various customers by providing other services
like safe custody services, safe deposit lockers, and assisting the clients by collecting their cheques
and other instruments as an agent and trustees for them. So, based on the above a banker customer
relationship can be classified as under:

From the above diagram it can be seen that different types of relationship exists between a
banker and customer.

MEANING OF A BANKING COMPANY

A banking company is defined as a company which transacts the business of banking in India . Section 5
(b) of The Banking Regulation Act, 1949 defines the term banking as “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.
Section -7 of this Act makes it essential for every company carrying on the business of banking in India to
use as part of its name at least one of the words – bank, banker, banking or banking company. Section
49A of the Act prohibits any institution other than a banking company to accept deposit money from public
withdrawable by cheque. The essence of banking business is the function of accepting deposits from
public with the facility of withdrawal of money by cheque. In other words, the combination of the functions
of acceptance of public deposits and withdrawal of the money by cheques by any institution cannot be
performed without the approval of Reserve Bank.

Features of Banking

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 The following are the basic characteristics to capture the essential features of Banking:
(i) Dealing in money: The banks accept deposits from the public and advance the same as loans
to the needy people. The deposits may be of different types - current, fixed, savings, etc. accounts.
The deposits are accepted on various terms and conditions.
(ii) Deposits must be withdrawable: The deposits (other than fixed deposits) made by the public
can be withdrawable by cheques, draft or otherwise, i.e., the bank issue and pay cheques. The
deposits are usually withdrawable on demand.

(iii) Dealing with credit: The banks are the institutions that can create credit i.e., creation of additional
money for lending. Thus, “creation of credit” is the unique feature of banking.
(iv) Commercial in nature: Since all the banking functions are carried on with the aim of making
profit, it is regarded as a commercial institution.
(v) Nature of agent: Besides the basic function of accepting deposits and lending money as loans,
bank possesses the character of an agent because of its various agency services.

WHO IS A CUSTOMER?

The term ‘customer’ of a bank is not defined by law. Ordinarily, a person who has an account in a bank is
considered is customer. Banking experts and the legal judgments in the past, however, used to qualify this
statement by laying emphasis on the period for which such account had actually been maintained with the
bank. In Sir John Paget’s view “to constitute a customer there must be some recognizable course or habit
of dealing in the nature of regular banking business.” This definition of a customer of a bank lays emphasis
on the duration of the dealings between the banker and the customer and is, therefore, called the ‘duration
theory’. According to this viewpoint a person does not become a customer of the banker on the opening of
an account; he must have been accustomed to deal with the banker before he is designated as a customer.
The above-mentioned emphasis on the duration of the bank account is now discarded. According to Dr.
Hart, “a customer is one who has an account with a banker or for whom a banker habitually undertakes to
act as such.” Supporting this viewpoint, the Kerala High Court observed in the case of Central Bank of India
Ltd. Bombay vs. V.Gopinathan Nair and others (A.I.R.,1979, Kerala 74) : “Broadly speaking, a customer is
a person who has the habit of resorting to the same place or person to do business. So far as banking
transactions are concerned he is a person whose money has been accepted on the footing that banker will
honour up to the amount standing to his credit, irrespective of his connection being of short or long
standing.”
For the purpose of KYC policy, a ‘Customer’ is defined as :
– a person or entity that maintains an account and/or has a business relationship with the bank;
– one on whose behalf the account is maintained (i.e. the beneficial owner);
– beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers,
Chartered Accountants, Solicitors etc. as permitted under the law, and
– any person or entity connected with a financial transaction which can pose significant reputational
or other risks to the bank, say, a wire transfer or issue of a high value demand draft as a single
transaction.
Thus, a person who has a bank account in his name and for whom the banker undertakes to provide the
facilities as a banker, is considered to be a customer. It is not essential that the account must have been
operated upon for some time. Even a single deposit in the account will be sufficient to designate a person
as customer of the banker. Though emphasis is not being laid on the habit of dealing with the banker in the
past but such habit may be expected to be developed and continued in figure. In other words, a customer
is expected to have regular dealings with his banker in future.

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An important consideration which determines a person’s status as a customer is the nature of his dealings
with a banker. It is evident from the above that his dealings with the banker must be relating to the business
of banking. A banker performs a number of agency functions and tenders various public utility services
besides performing essential functions as a banker. A person who does not deal with the banker in regard
to the essentials functions of the banker, i.e.. accepting of deposits and lending of money, but avails of any
of the services rendered by the banker, is not called a customer of the banker. For example, any person
without a bank account in his name may remit money through a bank draft, encash a cheque received by
him from others or deposit his valuables in the Safe Deposit Vaults in the bank or deposit cash in the bank
to be credited to the account of the Life Insurance
Corporation or any joint stock company issuing new shares. But he will not be called a customer of the
banker as his dealing with the banker is not in regard to the essential functions of the banker. Such dealings
are considered as casual dealings and are not in the nature of banking business.
Thus, to constitute a customer the following essential requisites must be fulfilled:
(i) a bank account – savings, current or fixed deposit – must be opened in his name by making
necessary deposit of money, and
(ii) the dealing between the banker and the customer must be of the nature of banking business.

A customer of a banker need not necessarily be a person. A firm, joint stock company, a society
or any separate legal entity may be a customer. Explanation to Section 45-Z of the Banking Regulation
Act, 1949, clarifies that section “customer” includes a Government department and a corporation
incorporated by or under any law.
Since the banker-customer relationship is contractual, a bank follows that any person who is
competent to contract can open a deposit account with a bank branch of his/her choice and
convenience. For entering intoa valid contract, a person needs to fulfill the basic requirements of being
a major (18 years of age or above)and possessing sound mental health (i.e. not being a lunatic). A
person who fulfils these basic requirements,as also other requirements of the banks as mentioned
below, can open a bank account. However, minors (below 18 years of age) can also open savings
account with certain restrictions. Though any person may applyfor opening an account in his name but
the banker reserves the right to do so on being satisfied about the identity of the customer.
By opening an account with the banker, a customer enters into relationship with a banker. The special
featuresof this relationship impose several obligations on the banker. He should, therefore, be careful
in opening anaccount in his name but the banker reserves the right to do so on being satisfied about
the identity of the customer. Prior to the introduction of “Know Your Customer (KYC)” guidelines by the
RBI, it was the practice amongst banks to get a new customer introduced by a person who has already
one satisfactory bank accountwith the Bank or by a staff member who knows him properly. Most of the
banks preferred introduction to be given by a current account holder. Different practices of various banks
were causing confusion and sometimes loss to the bank on not opening “properly” introduced account
when any fraud took place in the account. A new customer was also facing difficulty in opening an account
if he was a new resident of that area. To overcome allthese problems and streamline the system of
knowing a customer, RBI has directed all banks to adopt KYCguidelines.

RELATIONSHIP AS DEBTOR AND CREDITOR

On the opening of an account the banker assumes the position of a debtor. He is not a depository or trustee
of the customer’s money because the money over to the banker becomes a debt due from him to the
customer. A banker does not accept the depositors’ money on such condition. The money deposited by the

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customer with the banker is, in legal terms, lent by the customer to the banker, who makes use of the
same according to his discretion. The creditor has the right to demand back his money from the banker,
and the banker is under and obligation to repay the debt as and when he is required to do so. But it is
not necessary that the repayment is made in terms of the same currency notes and coins. The payment,
of course, must be made in terms of legal tender currency of the country.
A depositor remains a creditor of his banker so long as his account carries a credit balance. But he does
not get any charge over the assets of his debtor/banker and remains an unsecured creditor of the banker.
Since the introduction of deposit insurance in India in 1962, the element of risk to the depositor is minimized
as the Deposit Insurance and Credit Guarantee Corporation undertakes to insure the deposits up to a
specified amount.

Banker’s relationship with the customer is reversed as soon as the customer’s account is overdrawn.
Banker becomes creditor of the customer who has taken a loan from the banker and continues in that
capacity till the loan is repaid. As the loans and advances granted by a banker are usually secured by
the tangible assets of the borrower, the banker becomes a secured creditor of his customer.
Though the relationship between a banker and his customer is mainly that of a debtor and a creditor, this
relationship differs from similar relationship arising out of ordinary commercial debts in following respects:
(i) The creditor must demand payment. In case of ordinary commercial debt, the debtor pays the
amount on the specified date or earlier or whenever demanded by the creditor as per the terms of
the contract. But in case of deposit in the bank, the debtor/ banker is not required to repay the
amount on his own accord. It is essential that the depositor (creditor) must make a demand for
the payment of the deposit in the proper manner. This difference is due to the fact that a banker
is not an ordinary debtor; he accepts the deposits with an additional obligation to honour his
customer’s cheques. If he returns the deposited amount on his own accord by closing the
account, some of the cheques issued by the depositor might be dishonoured and his reputation
might be adversely affected. Moreover, according to the statutory definition of banking, the deposits
are repayable on demand or otherwise. The depositor makes the deposit for his convenience,
apart from his motives to earn an income (except current account). Demand by the creditor is,
therefore, essential for the refund of the deposited money. Thus the deposit made by a customer
with his banker differs substantially from an ordinary debt.
(ii) Proper place and time of demand. The demand by the creditor must be made at the proper place
and in proper time as prescribed by a bank. For example, in case of bank drafts, travellers’
cheques, etc., the branch receiving the money undertakes to repay it at a specified branch or
at any branch of the bank.
(iii) Demand must be made in proper manner. According to the statutory definition of banking,
deposits are withdrawable by cheque, draft, order or otherwise. It means that the demand for the
refund of money deposited must be made through a cheque or an order as per the common usage
amongst the bankers. In other words, the demand should not be made verbally or through a
telephonic message or in any such manner.

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. A trustee holds money or assets and performs certain
functions forthe benefit of some other person called the beneficiary. For example, if the customer
deposits securities orother valuables with the banker for safe custody, the latter acts as a trustee of

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his customer. The customer continues to be the owner of the valuables deposited with the banker.
The legal position of the banker as a trustee, therefore, differs from that of a debtor of his customer.
In the former case the money or documentsheld by him are not treated as his own and are not available
for distribution amongst his general creditors in case of liquidation.
The position of a banker as a trustee or as a debtor is determined according to the circumstances to the
each case. If he does something in the ordinary course of his business, without any specific direction from
the customer, he acts as a debtor (or creditor). In case of money or bills, etc., deposited with the bank for
specific purpose, the bankers’ position will be determined by ascertaining whether the amount was actually
debited or credited to the customer’s account or not. For example, in case of a cheque sent for collection
from another banker, the banker acts as a trustee till the cheques is realized and credited to his customer’s
account and thereafter he will be the debtor for the same account. If the collecting banks fails before the
payment of the cheque is actually received by it from the paying bank, the money so realized after the failure
of the bank will belong to the customer and will not be available for distribution amongst the general
creditors of the bank

On the other hand, if a customer instructs his bank to purchase certain securities out of his deposit with the
latter, but the bank fails before making such purchase, the bank will continue to be a debtor of his customer
(and not a trustee) in respect of amount which was not withdrawn from or debited to his account to carry
out his specific instruction.
The relationship between the banker and his customer as a trustee and beneficiary depends upon the
specific instructions given by the latter to the farmer regarding the purpose of use of the money or
documents entrusted to the banker. In New Bank of India Ltd. vs. Pearey Lal ( A.I.R. 1962, Supreme court
1003), the Supreme Court observed in the absence of other evidence a person paying into a bank,
whether he is a constituent of the bank or not, may be presumed to have paid the money to be held as banker
ordinarily held the money of their constituent. If no specific instructions are given at the time of payment
or thereafter and even if the money is held in a Suspense Account the bank does not thereby become
a trustee for the amount paid.
In case the borrower transfers to the banker certain shares in a company as a collateral security and the
transfer is duly registered in the books of the issuing company, no trust is created in respect of such shares
and the banks’ position remains that of a pledge rather than as trustee. Pronouncing the above verdict, in
New Bank of India vs. Union of India (1981) 51 Company Case p. 378, the Delhi High Court observed
that a trustee is generally not entitled to dispose of or appropriate trust property for his benefit. “In the
present case the banker was entitled to dispose of the shares and utilize the amount thereof for adjustment
to the loan amount if the debtor defaults. The banker’s obligation to transfer back the shares can arise only
when the debtor clears dues of the bank was not considered as trustee.

BANKER AS A BAILOR / BAILEE

Section 148 of Indian Contract Act,1872, defines bailment, bailor, and bailee. A bailment is the delivery of
goods by one person to another for some purpose upon a contract. As per the contract, the goods should
when the purpose is accomplished, be returned or disposed off as per the directions of the person
delivering the goods. The person delivering the goods is called the bailer and the person to whom the goods
are delivered is called the bailee.
Banks secure their loans and advances by obtaining tangible securities. In certain cases banks hold the
physical possession of secured goods (pledge) – cash credit against inventories; valuables – gold jewels
(gold loans); bonds and shares (loans against shares and financial instruments) In such loans and
advances, the collateral securities are held by banks and the relationship between banks and customers

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are that of bailee (bank) and bailer.(borrowing customer)

BANKER AS A LESSER / LESSEE

Section 105 of ‘Transfer & Property Act’ deals with lease, lesser, lessee. In case of safe deposit locker
accounts, the banker and customer relationship of lesser/lessee is applicable. Banks lease the safe deposit
lockers (bank’s immovable property) to the clients on hire basis. Banks allow their locker account holders
the right to enjoy (make use of ) the property for a specific period against payment of rent.

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. For example, he buys or sells securities on behalf of his customer, collects cheques on
his behalf and makes payment of various dues of his customers, e.g.. insurance premium, etc. The
range of such agency functions has become much wider and the banks are now rendering large number
of agency services of diverse nature. For example, some banks have established Tax Services
Departments to take up the tax problems of their customers.

OBLIGATIONS OF A BANKER
Though the primary relationship between a banker and his customer is that of a debtor and creditor or vice
versa, the special features of this relationship, impose the following additional obligations on the banker:

Obligations to honour the cheques

The deposits accepted by a banker are his liabilities repayable on demand or otherwise. The banker is,
therefore, under a statutory obligation to honour his customer’s cheques in the usual course. Section 31
of the Negotiable Instruments Act, 1881, lays down that:
“The drawee of a cheque having sufficient funds of the drawer in his hands, properly applicable to the
payment must compensate the drawer for any loss or damage caused by such default.”

Obligation to maintain Secrecy of Account

The account of the customer in the books of the banker records all of his financial dealings with the latter
and the depicts the true state of his financial position. If any of these facts is made known to others,
the customer’s reputation may suffer and he may incur losses also. The banker is, therefore, under an
obligation to take utmost care in keeping secrecy about the accounts of his customers. By keeping
secrecy is meant that the account books of the bank will not be thrown open to the public or
Government officials and the banker will take all necessary precautions to ensure that the state of affairs
of a customer’s account is not made known to others by any means. The banker is thus under an obligation
not to disclose—deliberately or intentionally—any information regarding his customer’s accounts to a third
party and also to take all necessary precautions and care to ensure that no such information leaks out of
the account books.
The nationalized banks in India are also required to fulfill this obligation. Section 13 of the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1970, specially requires them to “observe,
except as otherwise required by law, the practices and usages customary amongst bankers and in
particular not to divulge any information relating to the affairs of the constituents except in circumstances
in which they are, in accordance with law or practices and usages or appropriate for them to divulge such
information.”
Thus, the general rule about the secrecy of customer’s accounts may be dispensed with in the following

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circumstances:
I. When the law requires such disclosure to be made; and
II. When practices and usages amongst the bankers permit such disclosure.
Abanker will be justified in disclosing information about his customer’s account on reasonable and proper
occasions only as stated below:
(a) Disclosure of Information required by Law. A banker is under statutory obligation to disclose
the information relating to his customer’s account when the law specially requires him to do so.
The banker would, therefore, be justified in disclosing information to meet statutory requirements:
(i) Under the Income- Tax Act, 1961. According to Section 131, the income tax authorities
possess the same powers as are vested in a Court under the Code of Civil Procedure, 1908,
for enforcing the attendance of any person including any offer of banking company or any
offer thereof, to furnish information in relation to such points or matters, as in the opinion of the
income-tax authorities will be useful for or relevant to any proceedings under the Act. The
income –tax authorities are thus authorized to call for necessary information from the banker for
the purpose of assessment of the bank customers.
Section 285 of the Income- tax Act, 1961, requires the banks to furnish to the Income-tax
Officers the names and addresses of all persons to whom they have paid interest exceeding
` 400 mentioning the actual amount of interest paid by them

(ii) Under the Companies Act, 1956. When the Central Government appoints an Inspector or to
investigate the affairs of any joint stock company under Section 235 or 237 of the Companies
Act, 1956, it shall be the duty of all officers and other employees and agents (including the
bankers ) of the company to-
(a) produce all books and papers of, or relating to, the company, which are in their custody or
power, and
(b) otherwise to give the Inspector all assistance in connection with investigation which
they are reasonably able to give (Section 240).
Thus the banker is under an obligation to disclose all information regarding the company but
no of any other customer for the purpose of such investigation (Section 251).
(iii) By order of the Court under the Banker’s Books Evidence Act, 1891. When the court orders
the banker to disclose information relating to a customer’s account, the banker is bound to
do so. In order to avoid the inconvenience likely to be caused to the bankers from attending
the Courts and producing their account books as evidence, the Banker’s Books Evidence
Act, 1891, provides that certified copies of the entries in the banker’s book are to be treated
as sufficient evidence and production of the books in the Courts cannot be forced upon the
bankers. According to Section 4 of the Act, “ a certified copy of any entry in a banker’s book
shall in all legal proceedings be received as prima facie evidence of the matters, transitions
and accounts therein recorded in every case where, and to the same extent, as the original entry
itself is now by law admissible, but not further or otherwise.” Thus if a banker is not a party to a
suit, certified copy of the entries in his book will be sufficient evidence. The Court is also
empowered to allow any party to legal proceedings to inspect or copy from the books of the
banker for the purpose of such proceedings.
(iv) Under the Reserve Bank of IndiaAct,1934. The Reserve Bank of India collects credit

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 information from the banking companies and also furnishes consolidated credit information
from the banking company. Every banking company is under a statutory obligation under
Section 45-B of the Reserve Bank. The Act, however, provides that the Credit information
supplied by the Reserve Bank to the banking companies shall be kept confidential. After
the enactment of the Reserve Bank of India (Amendment) Act, 1974, the banks are
granted statutory protection to exchange freely credit information mutually among
themselves.
(v) Under the Banking Regulation Act, 1949. Under Section 26, every banking company is
requires to submit a return annually of all such accounts in India which have not been
operated upon for 10 years. Banks are required to give particulars of the deposits standing
to the credit of each such account.
(vi) Under the Gift Tax Act, 1958. Section 36 of the Gifts Tax Act, 1958, confers on the Gift Tax
authorities powers similar to those conferred on Income- Tax authorities under Section 131
of the Income Tax Act [discussed above (i).]
(vii) Disclosure to Police. Under Section 94 (3) of the Criminal Procedure Code, the banker is not
exempted from producing the account books before the police. The police officers conducting
an investigation may also inspect the banker’s books for the purpose of such investigations
(section 5. Banker’s Books Evidence Act).
(viii) Under the Foreign Exchange Management Act, 1999, under section 10. Banking companies
dealing in foreign exchange business are designated as ‘authorized persons’ in foreign
exchange. Section 36, 37 and 38 of this Act empowers the officer of the Directorate of
Enforcement and the Reserve Bank to investigate any contravention under the Act..

(ix) Under the Industrial Development Bank of India Act, 1964. After the insertion of sub-section 1A
in Section 29 of this Act in 1975, the Industrial Development Bank of India is authorized to collect
from or furnish to the Central Government, the State Bank, any subsidiary bank, nationalized
bank or other scheduled bank, State Co-operative Bank, State Financial Corporation credit
information or other information as it may consider useful for the purpose of efficient discharge of
its functions. The term ‘credit information’ shall have the same meaning as under the Reserve Bank
of India Act,1934.
(b) Disclosure permitted by the Banker’s Practices and Usages. The practices and usages
customary amongst bankers permit the disclosure of certain information under the following
circumstances:
(i) With Express or Implied Consent of the Customer. The banker will be will be justified in disclosing
any information relating to his customer’s account with the latter’s consent. In fact the implied term
of the contract between the banker and his customer is that the former enters into a qualified
obligation with the latter to abstain from disclosing information as to his affairs without his consent
(Tourniers vs. National Provincial and Union Bank of India). The consent of the customer may be
expressed or implied. Express consent exists in case the customer directs the banker in writing
to intimate the balance in his account or any other information to his agent, employee or
consultant. The banker would be justified in furnishing to such person only the required
information and no more. It is to be noted that the banker must be very careful in disclosing the
required information to the customer or his authorized representative. For example, if an oral enquiry
is made at the counter, the bank employee should not speak in louder voice so as to be heard by
other customers. Similarly, the pass-book must be sent tot the customer through the messenger

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 in a closed cover. A banker generally does not disclose such information to the customer over
the telephone unless he can recognize the voice of his customer; otherwise he bears the risk
inherent in such disclosure.
In certain circumstances, the implied consent of the customer permits the banker to disclose
necessary information. For example, if the banker sanctions a loan to a customer on the
guarantee of a third person and the latter asks the banker certain questions relating to the
customer’s account. The banker is authorized to do so because by furnishing the name of the
guarantor, the customer is presumed to have given his implied consent for such disclosure. The
banker should give the relevant information correctly and in good faith.
Similarly, if the customer furnishes the name of the banker to a third party for the purpose of a trade
reference, not only an express consent of the customer exists for the discloser of relevant
information but the banker is directed to do so, the non – compliance of which will adversely affect
the reputation of the customer.
Implied consent should not be taken for granted in all cases even where the customer and
the enquirer happen to be very closely related. For example, the banker should not disclose the
state of a lady’s account to her husband without the express consent of the customer.
(ii) The banker may disclose the state of his customer’s account in order to legally protect his
own interest. For example, if the banker has to recover the dues from the customer or the
guarantor, disclosure of necessary facts to the guarantor or the solicitor becomes necessary and is
quite justified.
(iii) Banker’s Reference. Banker follows the practice of making necessary enquires about the
customers, their sureties or the acceptors of the bills from other bankers. This is an established
practice amongst the bankers and is justified on the ground that an implied consent of the
customer is presumed to exist. By custom and practice necessary information or opinion about
the customer is furnished by the banker confidentially. However, the banker should be very careful
in replying to such enquiries.
Precautions to be taken by the banker. The banker should observe the following precautions while
giving replies about the status and financial standing of a customer

(i) The banker should disclose his opinion based on the exact position of the customer as is
evident from his account. He should not take into account any rumour about his customer’s
creditworthiness. He is also not expected to make further enquiries in order to furnish the
information. The basis of his opinion should be the record of the customer’s dealings with
banker.
(ii) He should give a general statement of the customer’s account or his financial position
without disclosing the actual figures. In expressing his general opinion he should be very
cautious—he should neither speak too low about the customer nor too high. In the former case
he injures the reputation of the customer; in the latter, he might mislead the enquirer. In case
unsatisfactory opinion is to be given, the banker should give his opinion in general terms so
that it does not amount to a derogatory remark. It should give a caution to the enquirer who
should derive his own conclusions by inference and make further enquiries, if he feels the
necessity.
(iii) He should furnish the required information honestly without bias or prejudice and should
not misrepresent a fact deliberately. In such cases he incurs liability not only to his own

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 customer but also to the enquirer.
(c) Duty to the public to disclose : Banker may justifiably disclose any information relating to his
customer’s account when it is his duty to the public to disclose such information. In practice this
qualification has remained vague and placed the banks in difficult situations. The Banking
Commission, therefore,recommended a statutory provision clarifying the circumstances when
banks should disclose in public interest information specific cases cited below:
(i) when a bank asked for information by a government official concerning the commission of a
crime and the bank has reasonable cause to believe that a crime has been committed and that the
information in the bank’s possession may lead to the apprehension of the culprit,
(ii) where the bank considers that the customer’s is involved in activities prejudicial to the interests
of the country.
(iii) where the bank’s books reveal that the customer is contravening the provisions of any
law, and (iv)where sizable funds are received from foreign countries by a constituent.
Risks of Unwarranted and Unjustifiable Disclosure. The obligation of the banker to keep secrecy
of his customer’s accounts – except in circumstances noted above – continue even after the account is
closed. If a banker discloses information unjustifiably, he shall be liable to his customer and the third party
as follows:
(a) Liabilities to the customer. The customer may sue the banker for the damages suffered by him as a
result of such disclosure. Substantial amount may be claimed if the customer has suffered material
damages. Such damages may be suffered as a result of unjustifiable disclosure of any
information or extremely unfavourable opinion about the customer being expressed by the
banker.
(b) Liabilities to third parties. The banker is responsible to the third parties also to whom such
information is given, if –
(i) the banker furnishes such information with the knowledge that it is false, and
(ii) Such party relies on the information and suffers losses.
Such third party may require the banker to compensate him for the losses suffered by him for relying on
such information. But the banker shall be liable only if it is proved that it furnished the wrong or exaggerated
information deliberately and intentionally. Thus he will be liable to the third party on the charge of fraud
but not for innocent misrepresentation. Mere negligence on his part will not make him liable to a third party.
The general principles in this regard are as follows

(1) A banker answering a reference from another banker on behalf of the latter’s constituent owes a
duty of honesty to the said constituent.
(2) If a banker gives a reference in the form of a brief expression of opinion in regard to
creditworthiness, it does not accept and there is not expected of it any higher duty than that of
giving an honest answer.
(3) If the banker stipulates in its reply that it is without responsibility, it cannot be held liable for
negligence in respect of the reference.

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GARNISHEE ORDER AND ATTACHMENT ORDER

Garnishee Order
The obligation of a banker to honour his customer’s cheques is extinguished on receipt of an order of the
Court, known as the Garnishee order, issued under Order 21, Rule 46 of the code of Civil Procedure, 1908.
If a debtor fails to pay the debt owed by to his creditor, the latter may apply to the Court for the issue of a
Garnishee Order on the banker of his debtor. Such order attaches the debts not secured by a negotiable
instrument, by prohibiting the creditor the creditor from recovering the debt and the debtor from the making
payment thereof. The account of the customer with the banker, thus, becomes suspended and the banker
is under an obligation not to make any payment from the account concerned after the receipt of the
Garnishee Order. The creditor at whose request the order is issued is called the judgement- creditor, the
debtor whose money is frozen is called judgement- debtor and the banker who is the debtor of the
judgement debtor is called the Garnishee.
The Garnishee Order is issued in two parts. First, the Court directs the banker to stop payment out of the
account of the judgement- debtor. Such order, called Order Nisi, also seeks explanation from the banker as
to why the funds in the said account should not be utilized for the judgement- creditor’s claim. The banker is
prohibited from paying the amount due to his customer on the date of receipt of the Order Nisi. He should,
therefore, immediately inform the customer so that dishonour of any cheque issued by him may be avoided.
After the banker files his explanation, if any, the Court may issue the financial order, called Order Absolute
where the entire balance in the account or a specified amount is attached to be handed over to the
judgement- creditor. On receipt of such an order to the banker is bound to pay the garnished funds to the
judgement- creditor. Thereafter, the banker liabilities towards his customer are discharged to that extent. The
suspended account may be revived after payment has been made to the judgement- creditor as per the
directions of the Court. The following points are to be noted in this connection:
II. The amount attached by the order. A garnishee order may attach either the amount of the judgement
debtor with the banker irrespective of the amount which the judgement- debtor owes to the creditor
or a specified amount only which is sufficient to meet the creditor’ claim from the judgement-debtor. In the
first case, the entire in the account of the customer in the bank is garnished or attached and if banker
pays any amount out of the same which is in excess of the amount of the debt of the creditor plus cost of
the legal proceedings, he will render himself liable for such payment. For example, the entire to the
credit of X, the principal debtor, ` 10,000 is attached by the Court while the debt owed by him to his
creditor Y is only ` 6,000. If the banker honours the cheque of the customer X to the extent of ` 5,000 and
thus reducing the balance to ` 5,000 he will be liable for defying the order of the Court. On the other hand,
if he dishonours all cheques, subsequent to the receipt of the Garnishee Order, he will not be liable to the
customer for dishonouring his cheques.
It is to be noted that the Garnishee Order does not apply to the amount of the cheque marked by a bank as a
good for payment because the banker undertakes upon himself the liability to pay the amount of the
cheque. On the other hand, if the judgement debtor gives to the bank a notice to withdraw, it does not
amount withdrawal, but merely his intention to withdraw. The Garnishee Order will be applicable to such
funds. In the second case, only the amount specified in the order is attached and the amount is excess of
that may be paid to the customer by the banker.

For example, X is customer of SBI and his current account shows a credit balance of ` 10,000. He is
indebted to Y for ` 5,000. the latter applies to the Court for the issue of a Garnishee Order specifies the
amount (` 5,000) which is being attached, the banker will be justified in making payment after this amount,
i.e., the balance in the customer’s account should not be reduced below ` 5,000. Usually in such cases, the

11
attached amount is transferred to a suspense account and the account of the customer is permitted to
be operated upon with the remaining balance.
III. The order of the Court restrains the banker from paying the debts due or accruing due. The word
‘accruing due’ mean the debts which are not payable but for the payment of which an obligation exists.
If the account is overdrawn, the banker owes no money to the customer and hence the Court Order ceases
to be effective. A bank is not a garnishee with respect to the unutilized portion of the overdraft or cash
credit facility sanctioned to its customer and such utilized portion of cash credit or overdraft facility cannot
be said to be an amount due from the bank of its customer. The above decision was given by the Karnataka
High Court in Canara Bank vs. Regional Provident Fund Commissioner. In his case the Regional
Provident Fund Commissioner wanted to recover the arrears of provident fund contribution from the
defaulters’ bankers out of the utilized portion of the cash credit facility. Rejecting this claim, the High Court
held that the bank cannot be termed as a Garnishee of such unutilized portion of cash credit, as the
banker’s position is that of creditor. For example, PNB allows it as customer to overdraw to the extent
of ` 5,000. The customer has actually drawn (` 3,000) cannot be attached by a Garnishee Order as this is
not a debt due from the banker. It merely indicates the extent to which the customer may be the debtor of
the bank.
The banker, of course, has the right to set off any debt owed by the customer before the amount to which
the Garnishee Order applies is determined. But it is essential that debt due from the customer is actual
and not merely contingent. For example, if there is an unsecured loan account in the name of the
judgement-debtor with a balance of ` 5,000 at the time of receipt of Garnishee Order, such account can
be set off against the credit balance in the other account. But if the debt due from the judgement- debtor
is not actual, i.e., has not actually become due, but is merely contingent, such set off is not permissible.
For example, if A, the judgement- debtor, has discounted a bill of exchange with the bank, there is
contingent liability of A towards the bank, if the acceptor does not honour the bill on the due date. Similarly,
if A has guaranteed a loan taken from the bank by B, his liability as surety does not arise until and unless B
actually makes default in repaying the amount of the loan.
The banker is also entitled to combine two accounts in the name of the customer in the same right. If one
account shows a debit balance and the other a credit one, net balance is arrived at by deducting the former
from the latter.
IV. The Garnishee Order attachés the balance standing to the credit of the principal debtor at the time the
order is served on the banker. The following points are to be noted in this connection:
(a) The Garnishee Order does not apply to: (1) the amounts of cheques, drafts, bills, etc.., sent for
collection by the customer, which remain uncleared at the time of the receipt of the order, (2) the
sale proceedsof the customer’s securities, e.g., stocks and shares in the process of sale,
which have not beenreceived by the banker. In such cases, the banker acts as the agent for the
customer for the collectionof the cheques or for the sale of the securities and the amounts in
respect of the same are not debtsdue by the banker to the customer, until they are actually
received by the banker and credited to thecustomer’s account. But if the amount of such
uncleared cheque, etc., is credited to the customer’s account, the position of the banker
changes and the garnishee order is applicable to the amount of such uncleared cheques.
Similarly, if one branch of a bank sends its customer’s cheque for realization to its another branch
and the latter collects the same from the paying banker before the receipt of theGarnishee Order
by the first branch, the amount so realized shall also be subject to Garnishee Order,even though
the required advice about realization of cheque is received after the receipt of the Garnishee Order.
Giving this judgement in Gerald C.S. Lobo vs. Canara Bank (1997) 71 Comp. Cases 290, the
Karnataka high Court held that the branch which collects money on behalf of another branch is

12
 to betreated as agent of the latter and consequently the moment a cheque sent for collection by
the ot
branch has been realized by the former, the realization must be treated as having accrued to the
principal branch.
(b) The Garnishee Order cannot attach the amounts deposited into the customer’s account after the
Garnishee Order has been served on the banker. A Garnishee Order applies to the current
balance at the time the order is served, it has no prospective operation. Bankers usually open a
new account on the name of customer for such purpose.
(c) The Garnishee Order is not effective in the payments already made by the banker before the
order is served upon him. But if a cheque is presented to the banker for payment and its actual
payment has not yet been made by the banker and in the meanwhile a Garnishee Order is served
upon him, the latter must stop payment of the said cheque, even if it is passed for payment
for payment. Similarly, if a customer asks the banker to transfer an amount from his account
and the banker has already made necessary entries of such transfer in his books, but before
the intimation could be sent to the other account-holder, a Garnishee Order is received by the
banker, it shall be applicable to the amount so transferred by mere book entries, because such
transfer has no effect without proper communication to the person concerned.
(d) In case of cheques presented to the paying banker through the clearing house, the effectiveness
of the Garnishee Order depends upon the fact whether time for returning the dishonoured
cheques to the collecting banker has expired or not. Every drawee bank is given specified time
within which it has to return the unpaid cheques, if any, to the collecting bank. If such time has not
expired and in the meanwhile the bank receives a Garnishee Order, it may return the cheque
dishonoured. But if the order is received after such time over, the payment is deemed to have been
made by the paying banker and the order shall not be applicable to such amount.
(e) The Garnishee Order is not applicable to:
(i) Money held abroad by the judgement- debtor ; and
(ii) Securities held in the safe custody of the banker,
(f) The Garnishee Order may be served on the Head Office of the bank concerned and it will be
treated as sufficient notice to all of its branches. However, the Head Office is given reasonable
time to intimate all concerned branches. If the branch office makes payment out of the
customer’s account before the receipt of such intimation, the banker will not be held responsible
for such payment.

Application of the Garnishee Order to Various Types of Account

(a) Joint Accounts :
A joint account is opened in the names of two or more persons. If only one of them is a judgement –
debtor, the joint account cannot be attached. But, if both or all the joint account- holders are joint
judgement- debtors in any legal proceedings, the joint account can be attached. For example, if A owes a
debt of ` 1,000 to B in his personal capacity, the latter cannot pray for the attachment of a joint account in
the names of A and C. But if A and C are jointly responsible for the debt, their joint account may be attached.
But the reverse is possible, i.e., in the case of a debt jointly taken by two or more joint judgement-holders,
their individuals accounts with the banks may be attached because each one of them is jointly and
severally liable for the loans jointly taken by them.

13
(b) Partnership Account:
In case of debt taken by a partnership firm, the personal accounts of the partners can also be attached in
addition to the account in the name of the firm because the liability of partners is both joint and several. But
the reverse is not possible. If a partner is a judgement-debtor, only his individual account may be attached
and not that of the firm or those of other partners

(c) Trust Accounts:

A trustee hold the funds or property of some else for the benefit of the beneficiary. An account opened in
the personal name of the Trustee, in his capacity as such, cannot be utilized for paying his personal
liabilities. The banker should, therefore, inform the court that the account is a Trust account and in the
meanwhile stop payments from the account and instruct the Trustee.

Rights of the Attaching Creditor

When the garnishee deposits the attached amount in the Court, the attaching creditor ( or judgement-
creditor) becomes a secured creditor. In Rikhabchand Mohanlal Surana vs. The Sholapur Spinning and
Weaving Co. Ltd. (76 Bombay Law Reporter 748) the High Court held that –
“While the attachment is only by a prohibitory order then the attaching creditor has no rights in the
property attached, but once the property or moneys come into the possession of the Court for the
attaching creditor. The Court does not hold the money for the debtor more so when the garnishee obtains
complete discharge by making payment in Court.”

Attachment Order Issued by Income- Tax Authorities

The credit balance in the account of a customer of a banker may be attached by the Income-Tax authorities,
if the former defaults in making payment of the tax due from him. Section 226 (3) of the Indian Income- Tax
Act, 1961, authorizes the Income- Tax Act, 1961, authorities the Income Tax Officer “to require by notice in
writing any person from whom money is due or may become due the assessee or any person who holds
or may subsequently hold money for a or account of the assessee, to pay to the Income-Tax Officer an amount
equal to or less than the amount of such arrears.” Thus, the order of the Income-Tax Officer may attach (i) any
debts due and payable, (ii) debts due but not payable on the date of the receipt of the notice, and (iii) any amount
received subsequently. Balances lying in a joint account may also be attached even though the notice is issued
on a single account. The share of the joint holders in such account shall be presumed, until contrary in proved,
to be equal. Thus the amount to the credit of a joint account may be attached pro rata irrespective of the fact
that the joint account is payable to ‘either or survivor’ or otherwise.
This section makes it obligatory for every person to whom such notice is issued to comply with such
notice. In case of a banking company, it shall not be necessary for any pass book or deposit receipt or any
other document to be produced for the purpose of any entry, endorsement, etc., before payment is made.
After making payment as required under this section, the banker shall be fully discharged from his liability
to the assessee to the extent of the discharged from his liability to the assessee to the extent of the
amount so paid. But if he fails to make payment, he shall be deemed to be an assessee in default in
respect of the amount specified in the notice and further proceedings may be taken against him for the
realization of such amount. The banker should, therefore, comply with such order. His obligation towards
his customer is reduced to that extent.

14
RIGHTS OF A BANKER

Right of Appropriation
In case of his usual business, a banker receives payments from his customer. If the latter has more than
one account or has taken more than one loan from the banker, the question of the appropriation of
the money subsequently deposited by him naturally arises. Section 59 to 61 of the Indian Contract Act, 1872
contains provisions regarding the right of appropriation of payments in such cases. According to Section 59
such right of appropriation is vested in the debtor, who makes a payment to his creditor to whom he owes
several debts. He can appropriate the payment by (i). an express intimation or (ii) under circumstances
implying that the payment is to be applied to the discharge of some particular debt. If the creditor accepts
such payment, it must be applied accordingly. For example, A owes B several debts, including ` 1,000
upon a promissory note which falls due on 1st December, 1986. He owes B no other debt of that amount.
On 1-12-1986 A pays B ` 1,000. The payment is to be applied to the discharge of the promissory note

If the debtor does not intimate or there is no other circumstances indicating to which debt the payment
is to be applied, the right of appropriation is vested in the creditor. He may apply it as his discretion to
any lawful debt actually due and payable to him from the debtor (Section 60) Further, where neither party
makes any appropriation, the payment shall be applied in discharge of each proportionately (Section 61).
In M/s. Kharavela Industries Pvt. Ltd. v. Orissa State Financial Corporation and Others [AIR 1985 Orissa
153 (A)], the question arose whether the payment made by the debtor was to be adjusted first towards
the principal or interest in the absence of any stipulation regarding appropriation of payments in the loan
agreement. The Court held that in case of a debt due with interest, any payment made by the debtor is in
the first instance to be applied towards satisfaction of interest and thereafter toward the principal unless
there is an agreement to the contrary.
In case a customer has a single account and he deposits and withdraws money from it frequently, the
order in which the credit entry will set off the debit entry is the chronological order, as decided in the
famous Clayton’s Case. Thus the first item on the debit side will be the item to be discharged or reduced
by a subsequent item on the credit side. The credit entries in the account adjust or set-off the debit entries
in the chronological order. The rule derived from the Clayton’s case is of great practical significance to the
bankers. In a case of death, retirement or insolvency of a partner of a firm, the then existing debt due from
the firm is adjusted or set-off by subsequent credit made in the account. The banker thus loses his right
to claim such debt from the assets of the deceases, retired or insolvent partner and may ultimately suffer
the loss if the debt cannot be recovered from the remaining partners. Therefore, to avoid the operation
of the rule given in the Clayton’s case the banker closes the old account of the firm and opens a new
one in the name of the reconstituted firm. Thus the liability of the deceased, retired or insolvent partner, as
the case may be, at the time of his death, retirement or insolvency is determined and he may be held
liable for the same. Subsequent deposits made by surviving/ solvent partners will not be applicable to
discharge the same.

Right of General Lien

One of the important rights enjoyed by a banker is the right of general lien. Lien means the right of the
creditor to retain the goods and securities owned by the debtor until the debt due from him is repaid. It
confers upon the creditor the right to retain the security of the debtor and not the right to sell it . Such right
can be exercised by the creditor in respect of goods and securities entrusted to him by the debtor with the
intention to be retained by him as security for a debt due by him (debtor).

15
Lien may be either (i) a general lien or, (ii) a particular lien. A particular lien can be exercised by a craftsman
or a person who has spent his time, labour and money on the goods retained. In such cases goods are
retained for a particular debt only. For example, a tailor has the right to retain the clothes made by him for
his customer until his tailoring charges area paid by the customer. So is the case with public carriers and
the repair shops.
A general lien, on the other hand, is applicable in respect of all amounts due from the debtor to the
creditor. Section 171 of the Indian Contract Act, 1872, confers the right of general lien on the bankers as
follows:
“Bankers… may, in the absence of a contract to the contrary, retain as a security for a general
balance of account, any goods bailed to them.”
Special Features of a Banker’s Right of General Lien
(i) The banker possesses the right of general lien on all goods and securities entrusted to him in his
capacity as a banker and in the absence of a contract inconsistent with the right of lien. Thus, he cannot
exercise his right of general lien if –
(a) the goods and securities have been entrusted to the banker as a trustee or an agent of the
customer; and
(b) a contract – express or implied – exists between the customer and the banker which is inconsistent
with the banker’s right of general lien. In other words, if the goods or securities are entrusted for
some specific purpose, the banker cannot have a lien over them. These exceptional cases are
discussed later on.

(ii) A banker’s lien is tantamount to an implied pledge: As noted above the right of lien does not confer
on the creditor the right of sale but only the right to retain the goods till the loan is repaid. In case of pledge8
the creditor enjoys the right of sale. A banker’s right of lien is more than a general lien. It confers upon him
the power to sell the goods and securities in case of default by the customer. Such right of lien thus
resembles a pledge and is usually called an ‘ implied pledge’. The banker thus enjoys the privileges of
a pledge and can dispose of the securities after giving proper notice to the customer.
(iii) The right of lien is conferred upon the banker by the Indian Contract Act: No separate
agreement or contract is, therefore, necessary for this purpose. However, to be on the safe side, the banker
takes a letter of lien from the customer mentioning that the goods are entrusted to the banker as security
for a loan—existing or future—taken from the banker and that the latter can exercise his right of lien
over them. The banker is also authorized to sell the goods in case of default on the part of the customer.
The latter thus spells out the object of entrusting the goods to the banker so that the same may not be
denied by the customer later on.
(iv). The right of lien can be exercised on goods or other securities standing in the name of the
borrower and not jointly with others. For example, in case the securities are held in the joint names of two
or more persons the banker cannot exercise his right of general lien in respect of a debt due from a single
person.
(v) The banker can exercise his right of lien on the securities remaining in his possession after the
loan, for which they are lodged, is repaid by the customer, if no contract to contrary exists. In such cases it
is an implied presumption that the customer has re-offered the same securities as a cover for any other
advance outstanding on that date or taken subsequently. The banker is also entitled to exercise the right
of general lien in respect of a customer’s obligation as a surety and to retain the security offered by him
for a loan obtained by him for his personal use and which has been repaid. In Stephen Manager North

16
Malabar Gramin Bank vs. ChandraMohan and State of Kerala, the loan agreement authorized the bank to
treat the ornaments not only as a security for that loan transaction, but also for any other transaction or
liability existing or to be incurred in future. As the liability of the surety is joint and several with that of the
principal debtor, such liability also came within the ambit of the above provision of the agreement.
Section 171 of the Contract Act entitles a banker to retain the goods bailed to him for any other debt due
to him, i.e., any debt taken prior to the debt for which the goods were entrusted as security.
But in a lien there should be a right of possession because, lien is a right of one man to retain that which is
in his possession belonging to another. Possession of the goods by the person claiming right of lien, is
anterior to the exercise of that right and for which possession whether actual or conductive is a must.
(Syndicate Bank Vs. Davander Karkare (A.I.R. 1994 Karnataka 1)

Exceptions to the Right of General Lien

As already noted the right of lien can be exercised by a banker on the commodities entrusted to him
in his capacity as a banker and without any contract contrary to such right. Thus the right of lien cannot be
exercised in the following circumstances:
(a) Safe custody deposits. When a customer deposits his valuables – securities, ornaments,
documents, etc. – with the banker for safe custody, he entrusts them to the banker s a bailee
or trustee with the purpose to ensure their safety from theft, fire, etc. A contract inconsistent with
the right of lien is presumed to exist. For example, if he directs the banker to collect the proceeds
of a bill of exchange on its maturity and utilize the same for honouring a bill of exchange on his
behalf, the amount so realized will not be subject to the right of general lien.
Similarly, if a customer hands over to the banker some shares with the instruction to sell them at or
above a certain price and the same are lying unsold with the banker, the latter cannot exercise his
right of lien on the same, because the shares have been entrusted for a specific purpose and hence a
contract inconsistent with the right of lien comes into existence

But if no specific purpose is mentioned by the customer, the banker can have lien on bills or
cheques sent for collection or dividend warrants, etc. If the security comes into the possession of
the banker in the ordinary course of business, he can exercise his right of general lien.
(c) Right of General Lien becomes that of Particular Lien. Banker’s right of general lien is
displaced by circumstances which show an implied agreement inconsistent with the right of general
lien. In Vijay Kumar
v. M/s. Jullundur Body Builders, Delhi, and Others (A.I.R. 1981, Delhi 126), the Syndicate Bank
furnished a bank guarantee for ` 90,000 on behalf of its customer. The customer deposited with it as
security two fixed deposit receipts, duly discharged, with a covering letter stating that the said
deposits would remain with the bank so long on any amount was due to the Bank from the customer.
Bank made an entry on the reverse of Receipt as “Lien to BG 11/80.” When the bank guarantee
was discharged, the bank claimed its right of general lien on the fixed deposit receipt, which was
opposed on the ground that the entry on the reverse of the letter resulted in the right of a particular
lien, i.e., only in respect of bank guarantee.
The Delhi High Court rejected the claim of the bank and held that the letter of the customer was
on the usual printed form while” the words written by the officer of the bank on the reverse of the
deposit receipt were specific and explicit. They are the controlling words, which unambiguously
tell us what was in the minds of the parties of the time. Thus the written word which prevail over
the printed “word”. The right of the banker was deemed that of particular lien rather than of general

17
 lien.
(d) Securities left with the banker negligently. The banker does not possess the right of lien on the
documents or valuables left in his possession by the customer by mistake or by negligence.
(e) The banker cannot exercise his right of lien over the securities lodged with him for securing a loan,
before such loan is actually granted to him.
(f) Securities held in Trust. The banker cannot exercise his right of general lien over the securities
deposited by the customer as a trustee in respect of his personal loan. But if the banker is unaware
of the fact that the negotiable securities do not belong to the customer, his right of general lien is
not affected.
(g) Banker possesses right of set-off and not lien on money deposited. The banker’s right of lien
extends over goods and securities handed over to the banker. Money deposited in the bank and the
credit balance in the accounts does not fall in the category of goods and securities. The banker may,
therefore, exercise his right of set –off rather the right of lien in respect of the money deposited
with him. The Madras High Court expressed this view clearly as follows:
The lien under Section 171 can be exercised only over the property of someone else and not own property.
Thus when goods are deposited with or securities are placed in the custody of a bank, it would be correct
to speak of right of the bank over the securities or the goods as a lien because the ownership of the goods
or securities would continue to remain in the customer. But when moneys are deposited in a bank as a
fixed deposit, the ownership of the moneys passes to the bank and the right of the bank over the money
lodged with it would not be really lien at all. It would be more correct speak of it as a right to set-off or
adjustment.” (Brahammaya vs. K.P. Thangavelu Nadar, AIR (1956), Madras 570)

Right of set- off

The right of set-off is a statutory right which enables a debtor to take into account a debt owed to him by a
creditor, before the latter could recover the debt due to him from the debtor. In other words, the mutual
claims of debtor and creditor are adjusted together and only the remainder amount is payable by 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, A has taken an overdraft from his banker to the extent of ` 5,000 and he
has a credit balance of ` 2,000 in his savings bank account, the banker can combine both of these accounts
and claim the remainder amount of ` 3,000 only. This right of set-off can be exercised by the banker if there
is no agreement—express or implied—contrary to this right and after a notice is served on the customer
intimating the latter about the former’s intention to exercise the right of set-off. To be on the safer side,
the banker takes a letter of set-off from the customer authorizing the banker to exercise the right of set-
off without giving him any notice. The right of set-off can be exercised subject to the fulfillment of the
following conditions:
(i) The accounts must be in the same name and in the same right. The first and the most important
condition for the application of the right of set-off is that the accounts with the banker must not only
be in the same name but also in the same right. By the words ‘the same right’ meant that the
capacity of the account- holder in both or call the accounts must be the same, i.e., the funds
available in one account are held by him in the same right or capacity in which a debit balance
stands in another account. The underlying principle involved in this rule is that funds belonging to
someone else, but standing in the same name of the account – holder, should not be made
available to satisfy his personal debts. The following examples, make this point clear:
(a) In case of a sole trader the account in his personal name and that in the firm’s name are

18
 deemed to be in the same right and hence the right of set-off can be exercised in case either of
the two accounts is having debit balance.
(b) In case the partners of a firm have their individual accounts as well as the account of the firm
with the same bank, the latter cannot set-off the debt due from the firm against the personal
accounts of the partners. But if the partners have specially undertaken to be jointly and
severally liable for the firm’s debt due to the banker, the latter can set-off such amount of debt
against the credit balances in the personal accounts of the partners.
(c) An account in the name of a person in his capacity as a guardian for a minor is not be treated
in the same right as his own account with the banker.
(d) The funds held in Trust account are deemed to be in different rights. If a customer opens a
separate account with definite instructions as regards the purpose of such account, the latter should
not be deemed to be in the same right. The case of Barclays Bank Ltd. v. Quistclose Investment
Limited may be cited as an illustration. Rolls Rozer Ltd .borrowed an amount from Quistclose
Investment Ltd. with the specific purpose of paying the dividend to the shareholders and deposited
the same in a separate account ‘OrdinaryDividend No. 4 Account with Barclays Bank Ltd. and the
latter was also informed about the purpose of this deposit. The company went into liquidation
before the intended dividend could be paid and the banker combined all the accounts of the
company, including the above one. Quistclose Investment Ltd., the creditors of the company,
claimed the repayment of the balance in the above account which the bank refused. It was finally
decided that by opening an account for the specific purpose of paying the dividend a trust arose in
favour of the shareholders. If the latter could not get the funds, the benefit was to go to the
Quistclose Investment Ltd. and to the bank. The banker was thus not entitled to set-off the debit
balance in the company’s account against the credit balance in the above account against the credit
balance in the above account. The balance held in the clients’ account of an advocate is not
deemed to be held in the same capacity in which the amount is held in his personal account.
(e) In case of a joint account, a debt due from one of the joint account- holders in his individual
capacity cannot be set-off against an amount due to him by the bank in the joint account. But
the position may appear to be different if the joint account is payable to ‘ former or survivor’.
Such an account is deemed to be primarily payable to the former and only after his death
to the survivor. Thus the former’s debt can be set-off against the balance in the joint account.
(ii) The right can be exercised in respect of debts due and not in respect of future debts or contingent
debts. For example, a banker can set-off a credit balance in the account of customer towards the
payment of a bill which is already due but not in respect of a bill which will mature in future. If a loan
given to a customer is repayable on demand or at a future date, the debt becomes due only
when the banker makes a demand or on the specified date and not earlier.

(iii) The amount of debts must be certain. It is essential that the amount of debts due from both the
parties to each other must be certain. If liability of any one of them is not determined exactly, the
right of set- off cannot be exercised. For example, if A stands as guarantor for a loan of ` 50,000
given by a bank to B, his liability as guarantor will arise only after B defaults in making payment.
The banker cannot set-off the credit balance in his account till his liability as a guarantor is
determined. For this purpose it isessential that the banker must first demand payment from his
debtor. If the latter defaults in making payment of his payment of his debt, only then the liability
of the guarantor arises and the banker can exercise his right of set-off against the credit
balance in the account of the guarantor. The bankercannot exercise this right as and when
he realizes that the amount of debt has becomes sticky, i.e., irrecoverable.

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 (iv) The right may be exercised in the absence of an agreement to the contrary. If there is
agreement— express or implied—inconsistent with the right of set-off, the banker cannot exercise
such right. If there is an express contract between the customer and the banker creating a lien on
security, it would exclude operation of the statutory general lien under Section 171 of the Indian
Contract Act, 1872. In Krishna Kishore Karv. Untitled Commercial Bank and Another (AIR 1982
Calcutta 62), the UCO Bank, on the request of its customer K.K. Kar, issued guarantee for `
2 lakhs in favour of the suppliers of coal guaranteeing payment for coal supplied to him. The
customer executed a counter- guarantee in favour of the Bank and also paid margin money ` 1.83
lakhs to the Bank. After fulfilling its obligations under the guarantee, the Bank adjusted ` 76,527
due from the customer under different accounts against the margin money deposited by the
customer in exercise of its lien (or alternatively the right of set-off). The High Court held that the
bank was not entitled to appropriate or adjust its claims under Section 171 of the Contract Act in
view of the existence of the counter- guarantee, which constituted a contract contrary to the right
of general lien.
(v) The Banker may exercise this right at his discretion. For the purpose of exercising this right of all
branches of a bank constitute one entity and the bank can combine two or more accounts in the
name of the same customer at more than one branch. The customer, however, cannot compel
or pursue the banker to exercise the right and to pay the credit balance at any other branch.
(vi) The banker has right to exercise this right before the garnishee order is made effective. In case a
banker receives a garnishee order in respect of the funds belonging to his customer, he has the
right first to exercise his right of set-off and thereafter to surrender only the remainder amount
to the judgement- creditor.

Right to charge Interest and Incidental Charges, etc.

As a creditor, a banker has the implied right to charge interest on the advances granted to the customer.
Bankers usually follow the practice of debiting the customer’s account periodically with the amount of
interest due from the customer. The agreement between the banker and the customer may, on the other
hand, stipulate that interest may be charged at compound rate also. In Konakolla Venkata Satyanarayana
& Others vs. State Bank of India (AIR, 1975 A.P. 113) the agreement provided that “interest….. shall be
calculated on the daily balance of such amount and shall be charged to such account on the last working
day of each month.” For several years the customer availed the overdraft facilities and periodical
statements of accounts were being sent to the customer showing that interest was being charged and
debited at compound rate and no objection was raised at any time. The High Court, therefore, held that
there was no doubt that the customer had agreed to the compound rate of interest being charged and
debited to his account. The customer need not pat the amount of interest in cash. After making a debit
entry in the account of the customer, the amount of interest is also deemed as a debt due from the
customer to the banker and interest accrues on the same in the next period. The same practice is
followed in allowing interest on the savings accounts. Banks also charge incidental charges on the current
accounts to meet the incidental expenses on such accounts

VARIOUS TYPES OF CUSTOMERS

Individuals
Accounts of individuals form a major chunk of the deposit accounts in the personal segment of most
banks. Individuals who are major and of sound mind can open a bank account.

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(a) Minors:
In case of minor, a banker would open a joint account with the natural guardian. However to encourage the
habit of savings, banks open minor accounts in the name of a minor and allows single operations by the
minor himself/ herself. Such accounts are opened subject to certain conditions like (i) the minor should
be of some minimum age say 12 or 13 years or above (ii) should be literate (iii) No overdraft is allowed in
such accounts (iv) Two minors cannot open a joint account. (v) The father is the natural guardian for
opening a minor account, but RBI has authorized mother also to sign as a guardian (except in case of
Muslim minors)
(b) Joint Account Holders:
A joint account is an account by two or more persons. At the time of opening the account all the persons
should sign the account opening documents. Operating instructions may vary, depending upon the
total number of account holders. In case of two persons it may be (i) jointly by both account holders (ii)
either or survivor (iii) former or survivor In case no specific instructions is given, then the operations will
be by all the account holders jointly, The instructions for operations in the account would come to an end in
cases of insanity, insolvency, death of any of the joint holders and operations in the account will be stopped.
(c) Illiterate Persons
Illiterate persons who cannot sign are allowed to open only a savings account (without cheque facility)
or fixed deposit account. They are generally not permitted to open a current account. The following additional
requirements need to be met while opening accounts for such persons:
– The depositor’s thumb impression (in lieu of signature) is obtained on the account opening form
in the presence of preferably two persons who are known to the bank and who have to certify that
they know the depositor.
– The depositor’s photograph is affixed to the ledger account and also to the savings passbook
for identification.
Withdrawals can be made from the account when the passbook is furnished, the thumb impression is
verified and a proper identification of the account holder is obtained

Hindu Undivided Family (HUF)

HUF is a unique entity recognized under the Hindu customary law as comprising of a ‘Karta’ (senior-most
male member of the joint family), his sons and grandsons or even great grandsons in a lineal descending
order, who are ‘coparceners’ (who have an undivided share in the estate of the HUF). The right to manage
the HUF and its business vests only in the Karta and he acts on behalf of all the coparceners such that his
actions are binding on each of them to the extent of their shares in the HUF property. The Karta and other
coparceners may possess self-acquired properties other than the HUF property but these cannot be
clubbed together for the HUF dues.
HUF business is quite distinct from partnership business which is governed by Indian Partnership Act,
1932. In partnership, all partners are individually and collectively liable to outsiders for the dues of the
partnership and all their individual assets, apart from the assets of the partnership, would be liable for
attachment for partnership dues. Contrarily, in HUF business, the individual properties of the coparceners
are spared from attachment for HUF dues
Firms
The concept of ‘Firm’ indicates either a sole proprietary firm or a partner- ship firm. A sole proprietary firm is
wholly owned by a single person, whereas a partnership firm has two or more partners. The sole-

21
proprietary firm’s account can be opened in the owner’s name or in the firm’s name. A partnership is defined
under section 4 of the Indian Partnership Act, 1932, as the relationship between persons who have agreed to
share the profits of business carried on by all or any of them acting for all. It can be created by an oral as
well as written agreement among the partners. The Partner- ship Act does not provide for the compulsory
registration of a firm. While an unregistered firm cannot sue others for any cause relating to the firm’s
business, it can be sued by the outsiders irrespective of its registration. In view of the features of a
partnership firm, bankers have to ensure that the following requirements are complied with while opening
its account:

Companies
A company is a legal entity, distinct from its shareholders or managers, as it can sue and be sued in its own
name. It is a perpetual entity until dissolved. Its operations are governed by the provisions of the
Companies Act, 1956. A company can be of three types:
– Private Limited company: Having 2 to 51 shareholders.
– Public company: Having 7 or more shareholders.
– Government company: Having at least 51per cent shareholdings of Government (Central or
State).
The following requirements are to be met while opening an account in the name of a company:
– The account opening form meant for company accounts should be filled and specimen
signatures of the authorized directors of the company should be obtained.
– Certified up-to-date copies of the Memorandum and Articles of Association should be obtained.
The powers of the directors need to be perused and recorded to guard against ‘ultra vires’ acts of the
company and of the directors in future.
– Certificate of Incorporation (in original) should be perused and its copy retained on record.
– In the case of Public company, certificate of commencement of business should be obtained and
a copy of the same should be recorded. A list of directors duly signed by the Chairman should
also be obtained.
– Certified copy of the resolution of the Board of Directors of the company regarding the opening,
execution of the documents and conduct of the account should be obtained and recorded.

Trusts
A trust is a relationship where a person (trustee) holds property for the benefit of another person (beneficiary) or
some object in such a way that the real benefit of the property accrues to the beneficiary or serves the object
of the trust. A trust is generally created by a trust deed and all concerned matters are governed by the Indian
Trusts Act, 1882.
The trust deed is carefully examined and its relevant provisions, noted. A banker should exercise extreme
care while conducting the trust accounts, to avoid committing breach of trust:
– A trustee cannot delegate his powers to other trustees, nor can all trustees by common consent
delegate their powers to outsiders.
– The funds in the name of the trust cannot be used for crediting in the trustee’s account, nor for
liquidating the debts standing in the name of the trustee.

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 – The trustee cannot raise loan without the permission of the court, unless permitted by the trust
deed.

Clubs
Account of a proprietary club can be opened like an individual account. However, clubs that are
collectively owned by several members and are not registered under Societies Registration Act, 1860, or
under any other Act, are treated like an unregistered firm. While opening and conducting the account of
such clubs, the following requirements are to be met:
– Certified copy of the rules of the club is to be submitted.
– Resolution of the managing committee or general body, appointing the bank as their banker and
specifying the mode of operation of the account has to be submitted,
– The person operating the club account should not credit the cheques drawn favouring the club,
to his personal account.

Local Authorities
Municipal Corporation, Panchayat Boards are local authorities created by specific Acts of the state
legislature. Their constitution, functions, powers, etc. are governed by those Acts. Bankers should ensure
that accounts of such bodies are opened and conducted strictly as per the provisions of the relevant Act
and regulations framed there under. The precautions applicable for company or trust accounts are also
applicable in the case of these accounts, in order to guard against ultra vires acts by the officers of the
local authority operating the account.

Co-operative societies
Co-operative societies are required to open accounts only with these banks which are recognized for
this purpose (under the Co-operative Society Act). The following documents should be obtained while
opening their account:
– Certificate of registration of the society under the Co-operative Society Act.
– Certified copy of the bye-laws of the society.
– Resolution of the managing committee of the society prescribing the conditions for the conduct
of the account.
– List of the members of the managing committee with the copy of the resolution electing them
as the committee members.

CLOSING OF A BANK ACCOUNT - TERMINATION OF BANKER-CUSTOMER RELATIONSHIP

Banker-customer relationship is a contractual relationship between two parties and it may be terminated by
either party on voluntary basis or involuntarily by the process of law. These two modes of termination are
described below.
1. Voluntary Termination: The customer has a right to close his demand deposit account
because of change of residence or dissatisfaction with the service of the banker or for any other
reason, and the banker is bound to comply with this request. The banker also may decide to close
an account, due to an unsatisfactory conduct of the account or because it finds the customer
undesirable for certain reasons. However, a banker can close an account only after giving a
reasonable notice to the customer. However, such cases of closure of an account at the

23
 instance of the banker are quite rare, since the cost of securing and opening a new account is
much higher than the cost of closing an account. If a customer directs the banker in writing to
close his account, the banker is bound to comply with such direction. The latter need not ask the
reasons for the former’s direction. The account must be closed with immediate effect and the
customer be required to return the unused cheques.
2. If the Bank desires to close the account: If an account remains un-operated for a very long
period, the banker may request the customer to withdraw the money. Such step is taken on the
presumptions that the customer no longer needs the account. If the customer could not be traced
after reasonable effort, the banker usually transfers the balance to an “Unclaimed Deposit
Account”, and the account is closed. The balance is paid to the customers as and when he is
traced.
The banker is also competent to terminate his relationship with the customer, if he finds that the
latteris no more a desirable customer. The banker takes this extreme step in circumstances
when the customer is guilty of conducting his account in an unsatisfactory manner, i.e. if the
customer is convicted for forging cheques or bills or if he issues cheques without sufficient
funds or does not fulfil his commitment to pay back the loans or overdrafts, etc. The banker
should take the following steps forclosing such an account.
(a) The banker should give to the customer due notice of his intention to close the account and
request

(1) Hybrid deposits or flexi deposits combine the features of demand and term deposits. These
deposits have been lately introduced in by some banks to better meet customers’ financial needs
and convenience and are known by different names in different banks.
The demand and time deposits of a bank constitute its demand and time liabilities that the bank reports
every week (on every Friday) to the RBI.
him to withdraw the balance standing to his credit. This notice should give sufficient time
to the customer to make alternative arrangements. The banker should not, on his own, close
the account without such notice or transfer the same to any other branch.
(b) If the customer does not close the account on receipt of the aforesaid notice, the banker should
give another notice intimating the exact date by which the account be closed otherwise the
banker himself will close the account. During this notice period the banker can safely refuse to
accept further credits from the customer and can also refuse to issue fresh cheque book to
him. Such steps will not make him liable to the customer and will be in consonance with the
intention of the notice to close account by a specified date.
The banker should, however, not refuse to honour the cheques issued by the customer, so long
as his account has a credit balance that will suffice to pay the cheque. If the banker dishonours
any cheque without sufficient reasons, he will be held liable to pay damages to his customer under
Section 31 of the Negotiable Instruments Act, 1881. In case of default by the customer to close
the account, the banker should close the account and send the money by draft to the customer. He
will not be liable for dishonouring cheques presented for payment subsequently.
3. Termination by Law: The relationship of a banker-customer can also be terminated by the
process of law and by the occurrence of the following events:
(a) Death of customer: On receiving notice or information of the death of a customer, the bank

24
 stops all debit transactions in the account. However, credits to the account can be permitted.
The balance in the account is given to the legal representative of the deceased after
obtaining the letters of administration, or succession certificate, or indemnity bond as per
the prescribed procedure, and only then, the account is closed.
(b) Bankruptcy of customer: An individual customer may be declared bankrupt, or a company
may be wound up under the provisions of law. In such an event, no drawings would be
permitted in the account of the individual/company. The balance is given to the Receiver or
Liquidator or the Official Assignee and the account is closed thereafter.
(c) Garnishee Order: After receiving a garnishee order from a court or attachment order from
income tax authority, the account can be closed as one of the options after taking the required
steps.
(d) Insanity of the customer: A lunatic/person of unsound mind is not competent to contract
under Section 11 of the Indian Contract Act, 1872. Since banker-customer relationship is
contractual, the bank will not honour cheques and can close the account after receiving notice
about the insanity of the customer and receiving a confirmation about it through medical
reports.

VARIOUS DEPOSIT SCHEMES

Deposits - General
Deposits of banks are classified into three categories:
(2) Demand deposits are repayable on customers’ demand. These comprise of:
– Current account deposits
– Savings bank deposits
– Call deposits
(3) Term deposits are repayable on maturity dates as agreed between the customers and the banker.
These comprise

– Fixed deposits
– Recurring deposits

Demand Deposits
(a) Current account:
A current account is a running and active account that may be operated upon any number of times during a
working day. There is no restriction on the number and the amount of withdrawals from a current account.
Current accounts can be opened by individuals, business entities (firms, company), institutions,
Government bodies / departments, societies, liquidators, receivers, trusts, etc. The other main features of
current account are as under:
– Current accounts are non-interest bearing and banks are not allowed to pay any interest or
brokerage to the current account holders.
– Overdraft facility for a short period or on a regular basis up to specified limits – are permitted in
current accounts. Regular overdraft facility is granted as per prior arrangements made by the
account holder with the bank. In such cases, the bank would honour cheques drawn in excess of

25
 the credit balance but not exceeding the overdraft limit. Prescribed interest is charged on overdraft
portion of drawings.
– Cheques/ bills collection and purchase facilities may also be granted to the current account
holders.
– The account holder periodically receives statement of accounts from the Bank.
– Normally, banks levy charges for handling such account in the shape of “Ledger Folio charges”.
Some banks make no charge for maintenance of current account provided the balance maintained
is sufficient to compensate the Bank for the work involved.
– Third party cheques and cheques with endorsements may be deposited in the current account for
collection and credit.
(b) Current Deposits Premium Scheme:
This is a deposit product which combines Current & Short deposit account with ‘ sweep-in’ and ‘sweep-out’
facility to take care of withdrawals, if any. Besides containing all features of a current account, the product
is aimed at offering current account customers convenient opportunity to earn extra returns on surplus funds
lying in account which may not normally be utilized in the near future or are likely to remain unutilized. The
automated nature of facility for “Sweep In or Sweep Out” of more than a specified limit of balance to be
maintained and creating fixed deposits for desired period, would save lot of operational hassles and add-
on value in such accounts. Thus, with this facility the customer shall be able to deploy his funds which in
ordinary current account were not attracting any interest.
Sweep out from current to short deposits may be automatically when balance in the account is more
than a specified limit or weekly or on specific days which may be on 1st & 16th of every month or once within
a month as prescribed by an individual bank.
(c) Savings Account
Savings bank accounts are meant for individuals and a group of persons like Clubs, Trusts, Associations,
Self Help Groups (SHGs) to keep their savings for meeting their future monetary needs and intend to
earn income from their savings. Banks give interest on these accounts with a view to encourage saving
habits. Everyone wants to save for something in the future and their savings should be safe and
accessible anytime, anyplace to help meet their needs. This account helps an individual to plan and save
for his future financial requirements. In this account savings are completely liquid.
Main features of savings bank accounts are as follows:
– Withdrawals are permitted to the account-holder on demand, on presentation of cheques or
withdrawal form/letter. However, cash withdrawals in excess of the specified amount per
transaction/day (the amount varies from bank to bank) require prior notice to the bank branch.
– Banks put certain restrictions on the number of withdrawals per month/quarter, amount of
withdrawal per day, minimum balance to be maintained in the account on all days, etc. A fee/penalty
is levied if these are violated. These rules differ from bank to bank, as decided by their Boards. The
rationale of these restrictions is that the Savings Bank account should not be used like a current
account since it is primarily intended for attracting and accumulating savings.
– The Bank pays interest on the products of balances outstanding on daily basis. Rate of interest is
decided by bank from time to time.
– No overdraft in excess of the credit balance in savings bank account is permitted as there cannot
be any debit balance in savings account.

26
 – Most banks provide a passbook to the account-holder wherein date-wise debit credit transactions
and credit balances are shown as per the customer’s ledger account maintained by the Bank.
– Cheque Book Facility Accounts in which withdrawals are permitted by cheques drawn in favour of
self or other parties. The payees of the cheque can receive payment in cash at the drawee
bank branch or through their bank account via clearing or collection. The account holder may
also withdraw cash by submitting a withdrawal form along with Pass Book, if issued.
– Non-cheque Book Facility accounts where account holders are permitted to withdraw only at the
drawee bank branch by submitting a withdrawal form or a letter accompanied with the account
passbook requesting permission for withdrawal. In such cases third parties cannot receive
payments.
– Almost all banks which provide ATM facility, give ATM cards to their accounts holder, so that they
avail withdrawal facility 24 hours and all days at any place.
(d) Basic Savings Bank Deposit Account
With a view to making the basic banking facilities available in a more uniform manner across banking
system, RBI has modified the guidelines on opening of basic banking ‘no-frills’ accounts’. Such accounts
are now known as “Basic Savings Bank Deposit” Account which offers the minimum common facilities as
under:-
– The account should be considered as a normal banking service available to all;
– No requirement of minimum balance;
– Facilitate deposit and withdrawal of cash at bank branch as well as ATMs;
– Receipt/credit of money through electronic payment channels or by means of cheques/
collection of cheques drawn by Central/State Government Agencies and departments;
– Account holders are permitted a maximum of four withdrawals in a month including ATM
withdrawals;
– Facility of ATM card or ATM-cum Debit Card
– Facilities are free of charge and no charge would be levied for non-operation/activation of in-
operative ‘Basic Savings Bank Deposit Account’;

– Holders of ‘Basic Savings Bank Deposit Account’ are not eligible for opening of any other savings
bank accounts and existing such accounts should be closed down within a period of 30 days from
the date of opening of ‘Basic Savings Bank Deposit Account’.
– Existing ‘no frills’ accounts can be converted to ‘Basic Savings Bank Deposit Account’
(e) Premium or Savings Bank Plus Account:
Premium Savings Account provides an enriched version of Savings Bank account consisting of various
concessions and add-ons. It is suitable for High Net worth Individual/ Mass Affluent customers. The
account will be linked to Multi Option Deposit (MOD) account, for auto sweep, for issue of Term Deposits
and unitized break-up facilities. Any surplus funds in the account exceeding the threshold limit, for a
minimum amount of `10,000/- and in multiple of `1000/- in any one instance, are transferred as Term
Deposit and earns interest as applicable to Term Deposits. The account is useful to those persons who
have surplus funds for an uncertain period and by keeping the fund in this Savings Bank account, they
may get interest of term deposit. This account provides a customer the convenience of a Savings Bank

27
Account along with higher return of Term Deposit.
(f) Deposit at Call Accounts:
Call deposits or deposit at call accounts are maintained by fellow banks with another bank which are
payable on demand only. Some banks have put restriction of giving advance notice of a week or less than
that when depositor requires payment of call deposits. These accounts may or may not fetch interest, as
per the rules framed by the RBI or Indian Banks Association (IBA) from time- to-time.

Term Deposits
(a) Recurring Deposits or Cumulative Deposits :
In Recurring Deposits accounts, a certain amount of savings are required to be compulsorily deposited at
specified intervals for a specific period. These are intended to inculcate regular and compulsory savings
habit among the low/middle income group of people for meeting their specific future needs e.g. higher
education or marriage of children, purchase of vehicles etc. The main features of these deposits are:
– The customer deposits a fixed sum in the account at pre-fixed frequency (generally
monthly/quarterly) for a specific period (12 months to 120 months).
– The interest rate payable on recurring deposit is normally the applicable rate of fixed deposits
for the same period.
– The total amount deposited is repaid along with interest on the date of maturity.
– The depositor can take advance against the deposits up to 75% of the balance in the account as
on the date of advance or have the deposits pre-paid before the maturity, for meeting emergent
expenses. In the case of pre-mature withdrawals, the rate of interest would be lower than the
contracted rate and some penalty would also be charged. Similarly, interest is charged on
advance against the deposits, which is normally one or two per cent higher than the applicable
rate of interest on deposits.
(b) Monthly-Plus Deposit Scheme / Recurring Deposit Premium account
It is a recurring deposit scheme with flexibility of “Step-up and Step-down” options of monthly instalments.
The scheme is available to individuals, institutions, corporate, proprietorship or partnership firms, trusts,
HUF, etc. Under the scheme, the customer selects the “core amount” at the time of opening the account
and deposits the same initially. Minimum core amount may be `100 and maximum `1,00,000. Period of
deposit will be pre-decided by the customer himself. The depositor can deposit instalment in excess of
the minimum core amount (but not exceeding ten times of the core amount) in the multiples of `100 in any
month. Like stepping up the instalment amount, a customer can also reduce the same (Step-down) in
any subsequent months but no below the core

amount. The interest on this scheme will be as per the term deposit rate applicable for the fixed period.
Interest will be calculated on the monthly product basis, for the minimum balance between the 10th and the
last day of the month and will be credited quarterly.
(c) Fixed Deposits
Fixed deposits are repayable on the fixed maturity date along with the principal and agreed interest rate
for the period and no operations are allowed to be performed by the customer against the deposit, as is
permitted in demand deposits. The depositor foregoes liquidity on the deposit and the bank can freely
deploy such funds for loans/advances and earn interest.

28
Hence, banks pay higher interest rates on fixed deposits as compared to savings bank deposits from
which he can withdraw, requiring banks to keep some portion of deposits always at the disposal of the
depositors. Another reason for banks paying higher interest on fixed deposits is that the administrative
cost in the maintenance of these accounts is very small as compared to savings bank accounts where
several transactions take place in cash, transfer or clearing, thus increasing the administrative cost. Main
Features of Fixed Deposits are as follows:
– Fixed deposits are accepted for specific periods at specified interest rates as mutually agreed
between the depositor and the banker at the time of opening the account. Since the interest rate
on the deposit is contractual, it cannot be altered even if the interest rate fluctuates - upward or
downward - during the period of the deposit.
– The interest rates on fixed deposits, which were earlier regulated by the RBI, have been
deregulated and banks offer varying interest rates for different maturities as decided by their
boards. The maturity- wise interest rates in a bank will, however, be uniform for all customers
subject to two exceptions - high value deposits above certain cut-off value and deposits of
senior citizens (above the specified age normally 60 years); these may be offered higher
interest rate as per specified Basis Points. However, specific directions are issued by the
bank’s board with regard to the differential rate and the authority vested to allow such
differential rate of interest, to prevent discrimination and misuse at branch level.
– Minimum period of fixed deposit is 7 days, as per the directive of the RBI. The maximum
term and band of term maturities are deter- mined by each bank along with the respective
interest rates for each band.
– A deposit receipt is issued by the bank branch accepting the fixed deposit- mentioning the
depositor’s name, principal amount, maturity period and interest rate, dates of the deposit
and its maturity etc. The deposit receipt is not a negotiable instrument, nor is it transferable,
like a cheque. However, a term deposit receipt evidences contract for the deposit on the
specified terms.
– On maturity of a deposit, the principal and interest can be renewed for another term at an
interest rate prevalent at that time and a fresh deposit receipt is issued to the customer,
evidencing a fresh contract. Alternatively, the deposit can be paid up by obtaining the
discharge of the depositor on the reverse of the receipt.
– Many banks prepay fixed deposits, at their discretion, to accommodate customers’ request for
meeting emergent expenses. In such cases, interest is paid for the period actually elapsed
and at a rate generally1 per cent lower than that applicable to the period elapsed. Banks also
may grant overdraft/ loan against the security of their fixed deposits to meet emergent
liquidity requirements of the customers. The interest on such facility will be 1 per cent - 2 per
cent higher than the interest rate on the fixed deposit.
(d) Special Term Deposits
Special Term Deposit carries all features of Fixed Deposit. In addition to these, interest gets compounded
every quarter resulting higher returns to the depositors. Now-a-days, 80% of the term deposits in banks is
under this scheme.
Higher Interest payable to Senior Citizens:
Persons who have attained the age of 60 years are “Senior Citizens” in regard to the payment of higher
interest not exceeding 1% over and above the normal rates of term deposits. Each bank has prepared its
own scheme of term deposits for senior citizens.

29
(e) Certificate of Deposit:
Banks also offer deposits to attract funds from corporate companies and banks and other institutions. One
such important deposit product offered by banks is called as Certificate of Deposit (CD) . Special features of
a Certificate of Deposit (CD):
1. Certificate of Deposit is issued at a discount to mature for the face value at maturity
2. Minimum amount for a CD is ` 100,000.00 (` One lakh only) and multiples thereof
3. Minimum and maximum period a CD with banks are 7 days and 365 days respectively
4. CDs differs from Banks’ Fixed Deposits (FDs) in respect of (i) prepayment and (ii) loans. While
banks allows the fixed deposit holder the facility to withdraw before maturity (prepayment) and if
required allows the fixed deposit holder to avail of a loan, both of them are not permissible in
case of certificate of deposits. i.e., In case of Certificate of Deposits prepayment of CDs and
loans against CDs are not allowed.

Hybrid Deposits or Flexi Deposits or MULTI OPTION DEPOSIT SCHEME (MODS)

These deposits are a combination of demand and fixed deposits, invented for meeting customer’s
financial needs in a flexible manner. Many banks had introduced this new deposit product some years
ago to attract the bulk deposits from individuals with high net- worth. The increasing competition and
computerization of banking has facilitated the proliferation of this product in several other banks in the
recent past. Banks have given their own brand names to such deposits e.g. Quantum Deposit Scheme of
ICICI Bank, Multi Option Deposit Scheme (MODS) of SBI.
The flexi deposits show a fusion of demand and fixed deposits as reflected from the following features
of the product:
– Only one savings/current account (Current Premium account or Savings Bank Premium a/c as
already discussed above) is opened and the term deposits issued under the scheme are
recorded only on the bank’s books as no term deposit receipts are issued to the customer. However,
the term deposits issuance and payment particulars would be reflected in the statement of the
savings/current account for customer’s information/record.
– Once the quantum of deposits in savings/current account crosses a pre-agreed level, such
surplus amount is automatically transferred to the term deposit account of a pre-determined
maturity (usually one- year) in the customer’s name for increasing the interest earning.
– In the event of a shortfall in the current/savings account, the cheques drawn on the account are
honoured by automatically transferring back the required amount to the savings/current account
from the fixed deposit account (reverse sweep). In such a case, the term deposit is broken
and the amount of the reverse sweep earns lower interest rate due to the pre-mature payment of
that portion of the term deposit. However, the remaining amount of the term deposit continues to
earn the original interest rate.

Main Advantages of Flexi-Deposits to a Customer Are:

– Advantage of Convenience: The customer opens only one account (savings or current) under the
scheme and need not come to the bank branch each time for opening term deposit accounts or
for pre- paying/ breaking term deposit for meeting the shortfall in the savings /current account.

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 – Advantage of Higher Interest Earning: The customer earns higher interest on his surplus funds
than is possible when he opens two separate accounts: savings and term deposits.
– Withdrawals through ATMs can also be conveniently made.
Exclusive Features:
– Complete Liquidity.
– Convenience of Overdraft.
– Earns a higher rate of interest on deposit, without the dilemma of locking it for a long period.
– At the time of need for funds, withdrawals can be made in units of `1,000/- from the Deposits by
issuing a cheque from Savings Bank Account or through overdraft facility from Current account.
– Flexibility in period of Term Deposit from 1 year to 5 years.

Tailor-made Deposit Schemes

Almost all banks have designed different schemes with different names which have a combination of two or
three deposit schemes as mentioned above. These schemes are prepared as per the requirements of a
particular customer. For example: One person approaches the bank and says that yesterday he has been
blessed with a girl/boy baby and he wants to save for his/her educational and marriage expenses. Looking
to the amount required for education and marriage after a certain period as per the normal age of marriage,
the Bank will suggest him a scheme of Recurring Deposit plus Special Term Deposit. A few schemes are
enumerated below:
(a) Advantage Deposit
Advantage Deposit is a combination of fixed deposit and mutual fund investment, offering you the safety of
a fixed deposit and the returns of an equity fund. Advantage Deposit counters equity-market fluctuations
through Systematic Investment Plans
– Combination of a Fixed Deposit (with monthly interest payout) and Systematic Investment Plan
(SIP) of a Mutual Fund.
– Re-investment of monthly interest payout of Fixed Deposit into systematic investment plan of
Mutual Fund.
– Automatic debits to account through Standing Instruction / ECS debit mandate
(b) Child Education Plan
“Child Education Plan”, is a unique way to save for child’s future.
To fulfill child’s dream & aspirations, begin by making small investments in a Recurring Deposit for a short
tenure and receive regular payouts for the rest of the tenure in child’s school/college life.
If a child is in kindergarten, a person can invest regularly for the next 5 years and this investment plan
will take care of his primary education.
If a child is in secondary school, just invest ` 3,500 (per month) for the first 6 years, in a plan of 10
years’ tenure. Get an annual payout of more than `1 lac (depending upon the prevailing interest rates)
for the next 4 years and fulfill the dream of seeing the child graduate from a great college

Eligibility
Child Education Plan can be opened for only minors (1 day to 18 years) under a Guardian (natural /

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court appointed). The minor needs to have a Savings Account with a bank
(c) Insurance-linked Deposit Schemes
Some banks have designed certain schemes which provide personal accidental insurance to the savings
bank depositors free of cost or at a nominal rate under group insurance scheme. These marketing
strategies are adopted for a limited period during a special deposit mobilization campaign so as to have
an edge over in the competitive position. This gives an attraction to the new depositors and a few people
tend to shift their accounts from one bank to another. For example : HDFC is giving free personal accidental
insurance to its depositors with certain conditions. One Regional Rural Bank is providing free accidental
insurance to a new depositor during the first year and, thereafter, the bank charges `5 for `50000 personal
accident insurance. Recently, Standard Chartered Bank launched a savings account with cricket as the
theme. Account-holders will score ‘runs’ for the transactions, which can then be redeemed for gifts such as
tickets for cricket matches played in India, autographed cricketing merchandise or sporting equipment
from Nike.
(d) Deposit Schemes for a particular type of Segment clients:
Banks have special deposit schemes for senior citizens, school going children and women. Some banks
pay more interest if the term deposit is in the name of a woman. Some concessions in regard to minimum
balance requirements and service charges are given to a particular segment client like salaried persons,
army personnel.

Special Schemes for Non-Resident Indians (NRIs)

Non-resident deposits are mobilized from the persons of Indian nationality, or Indian origin living abroad
(NRIs) and Overseas’ Corporate Bodies (OCBs) predominantly owned by such persons.
1. Non-Resident Indians (NRIs) These fall into two categories:
(a) Indian citizens who stay abroad for employment/business/ vacation or for any other purpose
in the circumstances indicating an intention to stay abroad for an uncertain period. Income Tax Act
has prescribed minimum residence period abroad in a year or block of years for determining
income tax liability of such persons in India.
(b) Persons of Indian Origin (PIOs) other than Pakistan or Bangladesh, who had held Indian Passport at
any time, or whose parents or grand- parents were citizens of India, or the person is a spouse of an
Indian citizen.
2. Overseas Corporate Bodies (OCBs): These refer to a company, partnership firm, society or other
corporate body owned directly or indirectly to the extent of at least 60 per cent by NRIs.
NRIs can maintain the following types of accounts with banks in India, which are designated as
Authorized Dealers (ADs) by the RBI.
(NRI accounts are exempt from income tax, wealth tax, gift tax. Loans against the security of these deposits
can also be granted by banks in India.)
(a) Ordinary Non-Resident (NRO)
NRIs can open Non-Resident Ordinary (NRO) deposit accounts for collecting their funds from local bona
fide transactions. NRO accounts being Rupee accounts, the exchange rate risk on such deposits is
borne by the depositors themselves. When a resident becomes a NRI, his existing Rupee accounts are
designated as NRO. Such accounts also serve the requirements of foreign nationals resident in India. NRO
accounts can be maintained as current, saving, recurring or term deposits. While the principal of NRO

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deposits is non-repatriable, current income and interest earning is repatriable. Further NRI/PIO may remit
an amount, not exceeding US $ 1 million per financial year, out of the balances held in NRO accounts/
sale proceeds of assets /the assets in India acquired by him by way of inheritance/legacy, on production
of documentary evidence in support of acquisition, inheritance or legacy of assets by the remitter, and an
undertaking by the remitter and certificate by a Chartered Accountant in the formats prescribed by the
Central Board of Direct Taxes vide their Circular No. 10/2002 dated October 9, 2002.
(b) Non-Resident (External) (NRE) Accounts
The Non-Resident (External) Rupee Account NR(E)RA scheme, also known as the NRE scheme, was
introduced in 1970. Any NRI can open an NRE account with funds remitted to India through a bank
abroad. This is a repatriable account and transfer from another NRE account or FCNR(B) account is also
permitted. A NRE rupee account may be opened as current, savings or term deposit. Local payments
can be freely made from NRE accounts. Since this account is maintained in Rupees, the depositor is
exposed to exchange risk. NRIs / PIOs have the option to credit the current income to their Non-
Resident (External) Rupee accounts, provided the authorized dealer is satisfied that the credit represents
current income of the non-resident account holders and income tax thereon has been deducted / provided
for.
(c) FCNR (B) Scheme
Non-Resident Indians can open accounts under this scheme. The account should be opened by the non-
resident account holder himself and not by the holder of power of attorney in India.
– These deposits can be maintained in any fully convertible currency.
– These accounts can only be maintained in the form of term deposits for maturities of minimum 1
year to maximum 5 years.
– These deposits can be opened with funds remitted from abroad in convertible foreign currency
through normal banking channel, which are of repatriable nature in terms of general or special
permission granted by Reserve Bank of India.
– These accounts can be maintained with branches, of banks which are authorized for handling
foreign exchange business/nominated for accepting FCNR(B) deposits..
– Funds for opening accounts under Global Foreign Currency Deposit Scheme or for credit to such
accounts should be received from: -
– Remittance from outside India or
– Traveller Cheques/Currency Notes tendered on visit to India. International Postal Orders
cannot be accepted for opening or credit to FCNR accounts.
– Transfer of funds from existing NRE/FCNR accounts.
– Rupee balances in the existing NRE accounts can also be converted into one of the
designated currencies at the prevailing TT selling rate of that currency for opening of account
or for credit to such accounts.
Advantages of FCNR (B) Deposits
– Principal along with interest freely repatriable in the currency of the choice of the depositor.
– No Exchange Risk as the deposit is maintained in foreign currency.
Loans/overdrafts in rupees can be availed by NRI depositors or 3rd parties against the security of

33
 these deposits. However, loans in foreign currency against FCNR (B) deposits in India can be
availed outside India through correspondent Banks.
– No Wealth Tax & Income Tax is applicable on these deposits.
– Gifts made to close resident relatives are free from Gift Tax.

‘KNOW YOUR CUSTOMER’ (KYC) GUIDELINES OF THE RBI

KYC establishes the identity and residential address of the customers by specified documentary evidences.
One of the main objectives of KYC procedure is to prevent misuse of the banking system for money
laundering and financing of terrorist activities. The ‘KYC’ guidelines also reinforce the existing practices
of some banks and make them compulsory, to be adhered to by all the banks with regard to all their
customers who maintain domestic or non-resident rupee or foreign currency accounts with them. All
religious trust accounts and non-religious trust accounts are also subjected to KYC procedure. RBI had
advised banks that :
(a) No account is opened in anonymous or fictitious/benami name (s)
(b) Bank will not open an account or close an existing account if the bank is unable to verify the
identity or obtain documents required by it due to non-cooperation of the customer

Customer Identification Procedure

Customer identification means identifying the customer and verifying his/her identity by using reliable,
independent source documents, data or information. Banks need to obtain sufficient information
necessary to establish, to their satisfaction, the identity of each new customer, whether regular or
occasional, and the purpose of the intended nature of banking relationship. Being satisfied means that the
bank must be able to satisfy the competent authorities that due diligence was observed based on the risk
profile of the customer in compliance with the extant guidelines in place. Such risk based approach is
considered necessary to avoid disproportionate cost to banks and a burdensome regime for the customers.
Besides risk perception, the nature of information/documents required would also depend on the type of
customer (individual, corporate etc.). For customers that are natural persons, the banks should obtain
sufficient identification data to verify the identity of the customer, his address/ location, and also his recent
photograph. For customers that are legal persons or entities, the bank should (i) verify the legal status of
the legal person/entity through proper and relevant documents; (ii) verify that any person purporting to act
on behalf of the legal person/entity is so authorized and identify and verify the identity of that person; (iii)
understand the ownership and control structure of the customer and determine who are the natural
persons who ultimately control the legal person.

Customer Identification Requirements

(i) Trust/Nominee or Fiduciary Accounts
There exists the possibility that trust/nominee or fiduciary accounts can be used to circumvent the
customer identification procedures. Banks should determine whether the customer is acting on behalf of
another person as trustee/nominee or any other intermediary. If so, banks should insist on receipt of
satisfactory evidence of the identity of the intermediaries and of the persons on whose behalf they are
acting, as also obtain details of the nature of the trust or other arrangements in place. While opening
an account for a trust, banks should take reasonable precautions to verify the identity of the trustees and
the settlers of trust (including any person settling assets into the trust), grantors, protectors, beneficiaries
and signatories. Beneficiaries should be identified when they are defined. In the case of a ‘foundation’,
steps should be taken to verify the founder managers/ directors and the beneficiaries, if defined.

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(ii) Accounts of companies and firms
Banks need to be vigilant against business entities being used by individuals as a ‘front’ for maintaining
accounts with banks. Banks should examine the control structure of the entity, determine the source of
funds and identify the natural persons who have a controlling interest and who comprise the
management. These requirements may be moderated according to the risk perception e.g. in the case of
a public company it will not be necessary to identify all the shareholders.

(iii) Client accounts opened by professional intermediaries

When the bank has knowledge or reason to believe that the client account opened by a professional
intermediary is on behalf of a single client, that client must be identified. Banks may hold ‘pooled’
accounts managed by professional intermediaries on behalf of entities like mutual funds, pension funds
or other types of funds. Banks also maintain ‘pooled’ accounts managed by lawyers/chartered
accountants or stockbrokers for funds held ‘on deposit’ or ‘in escrow’ for a range of clients. Where funds
held by the intermediaries are not co-mingled at the bank and there are ‘sub-accounts’, each of them
attributable to a beneficial owner, all the beneficial owners must be identified. Where such funds are co-
mingled at the bank, the bank should still look through to the beneficial owners. Where the banks rely on
the ‘customer due diligence’ (CDD) done by an intermediary, they should satisfy
themselves that the intermediary is regulated and supervised and has adequate systems in place to comply
with the KYC requirements. It should be understood that the ultimate responsibility for knowing the
customer lies with the bank.
(iv) Accounts of Politically Exposed Persons (PEPs) resident outside India
Politically exposed persons are individuals who are or have been entrusted with prominent public functions
in a foreign country, e.g., Heads of States or of Governments, senior politicians, senior
government/judicial/military officers, senior executives of state-owned corporations, important political
party officials, etc. Banks should gather sufficient information on any person/customer of this category
intending to establish a relationship and check all the information available on the person in the public
domain. Banks should verify the identity of the person and seek information about the sources of funds
before accepting the PEP as a customer. The decision to open an account for a PEP should be taken at
a senior level which should be clearly spelt out in Customer Acceptance Policy. Banks should also subject
such accounts to enhanced monitoring on an ongoing basis. The above norms may also be applied to the
accounts of the family members or close relatives of PEPs.
(v) Accounts of non-face-to-face customers
With the introduction of telephone and electronic banking, increasingly accounts are being opened by
banks for customers without the need for the customer to visit the bank branch. In the case of non-face-to-
face customers, apart from applying the usual customer identification procedures, there must be specific and
adequate procedures to mitigate the higher risk involved. Certification of all the documents presented
should be insisted upon and, if necessary, additional documents may be called for. In such cases, banks
may also require the first payment to be effected through the customer’s account with another bank which,
in turn, adheres to similar KYC standards. In the case of cross-border customers, there is the
additional difficulty of matching the customer with the documentation and the bank may have to rely
on third party certification/introduction. In such cases, it must be ensured that the third party is a regulated
and supervised entity and has adequate KYC systems in place.

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(vi) Basic Savings Bank Deposit Accounts (No-Frills Savings Bank accounts)
(i) Persons those belonging to low income group both in urban and rural areas are not able to produce
such documents to satisfy the bank about their identity and address. This may lead to their inability
to access the banking services and result in their financial exclusion. Accordingly, the KYC
procedure also provides for opening accounts for those persons who intend to keep balances not
exceeding Rupees Fifty Thousand (` 50,000/-) in all their accounts taken together and the total credit
in all the accounts taken together is not expected to exceed Rupees One Lakh (` 1,00,000/-) in a
year. In such cases, if a person who wants to open an account and is not able to produce
documents mentioned as mentioned in the chart below, banks should open an account for him,
subject to:
Introduction from another account holder who has been subjected to full KYC procedure. The
introducer’s account with the bank should be at least six months old and should show
satisfactory transactions. Photograph of the customer who proposes to open the account and also
his address need to be certified by the introducer,
Or any other evidence as to the identity and address of the customer to the satisfaction of the bank.
(ii) While opening accounts as described above, the customer should be made aware that if at any
point of time, the balances in all his/her accounts with the bank (taken together) exceeds Rupees
Fifty Thousand (` 50,000/-) or total credit in the account exceeds Rupees One Lakh (` 1,00,000/-
) in a year, no further transactions will be permitted until the full KYC procedure is completed. In
order not to inconvenience the customer, the bank must notify the customer when the balance
reaches Rupees Forty Thousand (` 40,000/-) or the total credit in a year reaches Rupees
Eighty thousand (` 80,000/-) that appropriate documents for conducting the KYC must be
submitted otherwise operations in the account will be stopped.

36
 List of documents to be obtained by banks for opening an account

Features to be verified and documents that may be obtained from customers Features Documents

Accounts of (i) Passport (ii) PAN card (iii) Voter’s Identity Card/ Aadhar Card
individuals
(iv) Driving licence (v) Identity card (subject to the bank’s
- Legal name and any other satisfaction) (vi) Letter from a recognized public authority or public
names used servant verifying the identity and residence of the customer to the
satisfaction of bank (i) Telephone bill (ii) Bank account statement
- Correct permanent
(iii) Letter from any recognized public authority (iv) Electricity bill (v)
address
Ration card (vi) Letter from employer (subject to satisfaction of the
bank) (any one document which provides customer information to
the satisfaction of the bank will suffice)

Accounts of (i) Certificate of incorporation and Memorandum & Articles of

companies Association (ii) Resolution of the Board of Directors to open an
account and identification of those who have authority to operate
- Name of the company
the account (iii) Power of Attorney granted to its managers, officers
- Principal place of business or employees to transact business on its behalf (iv) Copy of PAN
allotment letter (v) Copy of the telephone bill
- Mailing address of the
company
Accounts of (i) Registration certificate, if registered (ii) Partnership deed (iii)
- Telephone/Fax
partnershipNumber
firms Power of Attorney granted to a partner or an employee of the firm
to transact business on its behalf (iv) Any officially valid document
- Legal name
identifying the partners and the persons holding the Power of
- Address Attorney and their addresses (v) Telephone bill in the name of
firm/partners
- Names of all partners and
their Accounts
addresses of trusts & (i) Certificate of registration, if registered (ii) Power of Attorney
foundations granted to transact business on its behalf (iii) Any officially valid
- Telephone numbers of the document to identify the trustees, settlors, beneficiaries and those
- Names
firm andofpartners
trustees, settlers,
holding Power of Attorney, founders/managers/ directors and their
beneficiaries and
addresses (iv) Resolution of the managing body of the
signatories
foundation/association (v) Telephone bill
- Names and addresses of
the founder, the
managers/directors and the
Specimen signature
beneficiaries

- Specimen signature
Telephone/fax of the customer is obtained on the account opening form in the presence of the bank
numbers
staff and it is attested by an authorized bank officer on the form itself. A customer is recognized mainly
by his/her signature on the cheques/vouchers and these are compared with the specimen signature on
record to verify the genuineness of the customer’s signature

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Power of Attorney
A power of Attorney is a document duly stamped as per Stamp Act and given by a customer to his
banker, authorizing his attorney or agent named therein to operate the account. The banker should
ensure that the document:
– gives specific authority to the named person to operate the named account on behalf of the
customer,
– is properly stamped and notarized,
– is valid and not time barred,
– does not contain conditions or limitations on the authority of the attorney,
– binds the principal for all the transactions done by the attorney.
The Power of Attorney is then registered in the branch’s documents and the attorney’s signature is
recorded in the account for its operation.
A ‘Mandate’, which is a simpler and a general purpose version of the Power of attorney, is a simple authority
given in writing to the banker by a customer, authorizing a named person to operate the account
temporarily for a specified period.

CLOSING OF A BANK ACCOUNT - TERMINATION OF BANKER-CUSTOMER RELATIONSHIP

Banker-customer relationship is a contractual relationship between two parties and it may be terminated by
either party on voluntary basis or involuntarily by the process of law. These two modes of termination are
described below.
A. Voluntary Termination: The customer has a right to close his demand deposit account
because of change of residence or dissatisfaction with the service of the banker or for any other
reason, and the banker is bound to comply with this request. The banker also may decide to close
an account, due to an unsatisfactory conduct of the account or because it finds the customer
undesirable for certain reasons. However, a banker can close an account only after giving a
reasonable notice to the customer. However, such cases of closure of an account at the
instance of the banker are quite rare, since the cost of securing and opening a new account is
much higher than the cost of closing an account. If a customer directs the banker in writing to
close his account, the banker is bound to comply with such direction. The latter need not ask the
reasons for the former’s direction. The account must be closed with immediate effect and the
customer be required to return the unused cheques.
B. If the Bank desires to close the account: If an account remains un-operated for a very long
period, the banker may request the customer to withdraw the money. Such step is taken on the
presumptions that the customer no longer needs the account. If the customer could not be traced
after reasonable effort, the banker usually transfers the balance to an “Unclaimed Deposit
Account”, and the account is closed. The balance is paid to the customers as and when he is
traced.
The banker is also competent to terminate his relationship with the customer, if he finds that the latter is no
more a desirable customer. The banker takes this extreme step in circumstances when the customer
is guilty of conducting his account in an unsatisfactory manner, i.e. if the customer is convicted for forging
cheques or bills or if he issues cheques without sufficient funds or does not fulfill his commitment to
pay back the loans or overdrafts, etc. The banker should take the following steps for closing such an
account:

38
 (a) The banker should give to the customer due notice of his intention to close the account and request
him to withdraw the balance standing to his credit. This notice should give sufficient time to the
customer to make alternative arrangements. The banker should not, on his own, close the
account without such notice or transfer the same to any other branch.
(b) If the customer does not close the account on receipt of the aforesaid notice, the banker should
give another notice intimating the exact date by which the account be closed otherwise the banker
himself will close the account. During this notice period the banker can safely refuse to accept
further credits from the customer and can also refuse to issue fresh cheque book to him. Such
steps will not make him liable to the customer and will be in consonance with the intention of the
notice to close account by a specified date.
The banker should, however, not refuse to honour the cheques issued by the customer, so long as his
account has a credit balance that will suffice to pay the cheque. If the banker dishonours any cheque
without sufficient reasons, he will be held liable to pay damages to his customer under Section 31 of the
Negotiable Instruments Act, 1881. In case of default by the customer to close the account, the banker
should close the account and send the money by draft to the customer. He will not be liable for
dishonouring cheques presented for payment subsequently.
C. Termination by Law: The relationship of a banker-customer can also be terminated by the process of
law and by the occurrence of the following events:
(a) Death of customer: On receiving notice or information of the death of a customer, the bank
stops all debit transactions in the account. However, credits to the account can be permitted. The
balance in the account is given to the legal representative of the deceased after obtaining the
letters of administration, or succession certificate, or indemnity bond as per the prescribed
procedure, and only then, the account is closed.
(b) Bankruptcy of customer: An individual customer may be declared bankrupt, or a company may
be wound up under the provisions of law. In such an event, no drawings would be permitted in the
account of the individual/company. The balance is given to the Receiver or Liquidator or the Official
Assignee and the account is closed thereafter.
(c) Garnishee Order: We have already discussed in paragraph 3.4.3. that after receiving a garnishee
order from a court or attachment order from income tax authority, the account can be closed as
one of the options after taking the required steps.
(d) Insanity of the customer: A lunatic/person of unsound mind is not competent to contract under
Section 11 of the Indian Contract Act, 1872. Since banker-customer relationship is contractual,
the bank will not honour cheques and can close the account after receiving notice about the
insanity of the customer and receiving a confirmation about it through medical reports.

39