FirstRanker.com

MODULE 2

BANKER AND CUSTOMER

OUTLINE:

Banker and Customer

1. Types of relationship between banker and customer

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2. Bankers obligation to customers
3. Right of lien, set off, appropriation
4. Banker legal duty of disclosure and related matters

Customers accounts with banks

1. Opening- operation – KYC norms and operation

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2. Types of accounts and customers
3. Nomination
4. Settlement of death claims

The Negotiable Instrument Act 1881:

1. The paying Bank and The collecting Banker

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2. Negligence
3. Bills of Exchange and Promissory Note
4. Discharge of Negotiable Instrument and Hundis

WHO IS A BANKER?

Accepts deposits from the public (repayable on demand or otherwise)

Uses deposits for lending

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- As per section 5(b) of BR act 1949

WHO IS A CUSTOMER?

As for as banking transaction concerned,

- Customer is a person whose money has been accepted on the footing that the banker will honor drawings up to the amount standing to his credit irrespective of his connection being casual or long standing.

Types of relationship between banker and customer

• Commencement of primary general relationship

• The primary general relationship between banker and a customer starts from the time the customer opens a bank account by depositing money.

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RELATIONSHIP BETWEEN BANKER AND CUSTOMER

The primary relationship, which flows from the essential function of a bank is of debtor creditor or vice versa.

But depending on the other functions several other relationships may also exist.

They are:

1. Debtor and Creditor
2. Trustee and Beneficiary

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3. Agent and Principal
4. Bailee and Bailor
5. Lessor and Lessee

1) DEBTOR & CREDITOR

• When the bank accept the deposits, it becomes debtor and depositor a creditor irrespective of the fact the bank pays interest or not.

Some features:

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• The customer cannot claim the same notes or coins back.
• For repayment the creditor must raise demand.
• Demand must be made by the customer in a prescribed manner only at the branch at which the account is maintained and within normal business hours on working day only.
• When the customer over draws his account, the customer becomes debtor and banker becomes creditor.

2) TRUSTEE & BENEFICIARY

• Bank may also act as trustee.

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• The position of bank will be that of a trustee where
• 1) a person having no account with a bank, deposits money with instruction to retain it till further instruction.
• 2) the customer instruct a bank to debit his account and deposit an amount for utilising it for a specific purpose or for remitting to other branch.

• A banker becomes the trustee of his customer when he is entrusted with some trust work. For instance, when a customer deposits a certain sum of money with the banker with specific instructions to use the same for a specific purpose, the bankers becomes the trustee of the customer in respect of that money until the purpose is fulfilled.

3) AGENT & PRINCIPAL

• When a banker undertakes agency services such as collection cheques, drafts & bills, collection of interest and dividends on securities, payment of premium and subscriptions, purchase and sale of securities, etc, for a customer, he becomes the agent and the

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• customer becomes the principal.

AGENT AND PRINCIPAL

• As an agent the banker owes some duties to the customer they are:
• He is required to act in accordance with the instruction of the principal, i.e. the customer.
• He is bound to return to the customer all incomes which he earns as an agents for the customer.

4) BAILEE & BAILOR

• When the bank accepts article for safe custody, its position is that of bailee, who is duty bound to take utmost care of duty bailed to him.

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• Bailee has right of particular lien in terms of section Indian contract act, which says that bank has right over goods bailed until he receives remuneration for his services rendered in respect of them, unless there is no contract to the contrary.

In Simple words...

• When a banker accepts valuable documents form a customer for safe custody he becomes a bailee and the customer becomes a bailor.

Bailor And Bailee

As a bailee, the banker owes some duties and liabilities to customer. They are:

a) He is required to safeguard the safe custody deposits of customer in his hands with reasonable care.

b) It he fails to take reasonable care in the preservation of custody deposits and the customers suffers loss as a consequence becomes liable to compensate the customer for the loss. In this context, it should be noted that the banker is liable for the losses arising out of his negligence and not for those arising out of reasons beyond his control, such as fire, burglary this is because, a banker is only a bailee and not an insurer of safe custody deposits left with him.

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c) He is required to handover the safe custody deposits to depositor, whenever he demands them back.

5) LESSOR & LESSEE

• On hiring out of locker, bank becomes lessor and hirer a lessee and the relationship is that of land lord and tenant.
• The lessor is not responsible for any loss or theft suitable clause to the effect is also incorporated in the lease deed and hirers are advised, in their own interest, to insure their valuables deposited in locker.

OBLIGATIONS/DUTIES OF A BANKER

• Primary duty - Honour cheque of its customer subject to certain conditions (Under section 31 of NI act)
• An account cannot be closed unilaterally.

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• Erroneous credit.
• Pass book/statement of accounts.
• A banker is obliged to maintain the secrecy of the state of accounts after closure of the accounts, unless required to do so by,
  1. by law
  2. in bank's interest
  3. as per consent of the customer

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• The bank is responsible for the fraud committed by its employee.
• An instrument with the forged signature is no mandate at all and cannot debit its customer account in such case.
• While giving SI, the customer undertakes to maintain sufficient balance in account, if not the bank should inform customer and discontinue SI.

RIGHT OF BANKER:

• Bankers Lien

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• Right of Set Off
• Right of Appropriation
• Right to charge the interest
• Right to charge the service charges.

BANKERS LIEN:

• In term of section 171 of Indian Contract Act, a banker in the absence of a contract to the contrary, retain as security for general balance of account any goods bailed to them.

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• Lien means right to retain goods in possession (but not sell) until debit is discharged.
• Bankers right of general lien is applicable only over goods services received during normal course of business but not those goods received for a specific purpose as an agent or trustee etc..

LIEN

• 'Lien,' a right to keep in possession, the movable or immovable goods belonging to another person, till the time the amount of debt owed by that person is realized.
• It can be classified as the general lien and particular lien. When one party is entitled to retain the goods belonging to another party, until all the dues are discharged, is called general lien.
• In contrast, particular lien implies the right of retention of specific goods, until the claims relating to those goods are realized.

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RIGHT OF SET OFF:

• Banker has right to combine two or more accounts.
• If one of them is in the debt of customer and in the same name and same right.

• Account really belonging to same persons, but in different names can be combined. thus an account of sole proprietorship concern can be combined with that in his personal name.
• two accounts, of solicitor, one in his personal name and marked clients account cannot combined.
• Two accounts one belonging to an individual and other with someone, cannot be combined.

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• The right can be exercised only when debt is due.
• The right can be exercised only after giving due notice.
• The right may be exercised before the garnishee order becomes effective.

Right of Appropriation

• If a customer has more than one account and while making certain deposit does not instruct as to how the deposit be appropriated, the banker may appropriate the amount as per his discretion.
• Thus, a deposit without specifying the account to which is meant, may be created to an account of the customer showing debt balance.

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CLAYTON'S RULE

• In case of multiple debts, credit will be appropriated:

? To discharge of the particular debt as per the instructions of the debtor.

? If the debtor does not intimate or the circumstances do not indicate, as per the discretion of the banker.

? When neither party indicates, to discharge debts in order of time.

? First to discharge of interest and then principal in chronological order.

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Right to charge interest, service charges

• When a banker grants an advance to a customer, he becomes the creditor of the customer.
• When he is creditor of the customer, the banker has an implied right to charge interest on the customer by virtue of banking custom.

BANKERS LEGAL DUTY OF DISCLOSURE

• Bankers books evidence act 1891
• Code of civil/criminal procedure
• Company act 1956

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• Tax laws
• RBI Act

(Refer Introduction to Banking By Vijayaraghavan Iyengar Page no: 76)

CUSTOMERS ACCOUNT WITH BANK

GENERL PRECAUTIONS TO OPEN AN ACCOUNT

• Application Form
• Specimen Signature

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• Letter Of Introduction
• Interview
• Account in cash
• Mandate in writing
• Verification of documents

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• Conversant with the provisions of special acts
• Pay-in-slip, cheque book and pass book
• Passport size photograph
• KYC

Different types of Account

• Savings Bank Account

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• Current Deposit Account
• Fixed Deposit Account
• Recurring Deposit Account

Different types of Customer

1. Hindu undivided family
2. Married women

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3. Pardanshin lady
4. Illiterate persons
5. Blind persons
6. Insolvent persons
7. Insane person

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8. Intoxicated
9. Executors and administrators
10. Liquidator, receiver/assignee
11. Trusts
12. Societies and clubs

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13. Minors
14. Agent/attorney
15. Joint accounts
16. Partnership firms
17. Joint stock companies

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ACCOUNTS OF SINGLE INDIVIDUAL

• This is purely a personal account in the name of an individual and is normally operated upon by the individual account holder itself.
• He may authorise the another person to operate by giving power of attorney.
• And in order to avoid legal complications after the death it is desirable to obtain proper nomination.
• Individual should be major.
• Should be of sound mind.

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JOINT ACCOUNTS OF AN INDIVIDUAL

• Joint accounts of more than one individual is opened for operational convenience or to avoid legal complication after death one of the joint account holders.

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MODE OF OPERATIONS OF THE JOINT ACCOUNT

KYC

KNOW YOUR CUSTOMER

MEANING:

• It is a process by which banks obtain information about the identity and address of the customers.
• This process helps to ensure that bank services are not misused.
• The KYC procedure is to be completed by banks while opening accounts and periodically update the same.

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• Reserve Bank of India has advised banks to make the KYC procedures mandatory while opening and operating the accounts and has issued the KYC guidelines under section 35A of the Banking Regulations Act, 1949
• RBI introduced KYC guidelines for all banks in 2002.

WHAT KYC MEANS?

• CUSTOMER: One who maintains an account and establishes business relationship.
• YOU: who should know? Branch Manager, Audit Officer, Monitoring officials.
• KNOW: What you should know? True identity, registered and administrative address, source of funds, nature of business.

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WHEN DOES KYC APPLY?

• Opening a new account
• In respect of account where documents as per current KYC standards have not been submitted while opening the initial account.
• Opening a locker facility where these documents are available.
• When the bank feels it is necessary to obtain additional information.
• When there are changes to signatories, mandates, beneficial owners etc.

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ADVANTAGES OF KYC

• Safety and soundness of banks
• Help to protect bank reputation and the integrity
• Essential part of sound risk management

KEY ELEMENTS OF KYC POLICY

• Customer Acceptance policy
• Customer Identification Procedure

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• Monitoring of Transactions
• Risk Management

CUSTOMER ACCPTANCE POLICY

• No accounts is opened in anonymous
• Parameters are risk perception are clearly defined
• Documentation requirements and other information to be collected

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• Circumstances, in which a customer is permitted to act on behalf of another person should be clearly spelt out.

CUSTOMER ACCPTANCE POLICY

• The Bank will:

? Classify customers into various risk categories.

? Accept customer after verifying their identity as laid down in Customer Identification procedure.

? Not open an account in the name of anonymous/fictitious/benami persons.

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CUSTOMER IDENTIFICATION PROCEDURE

• The policy approved by the Board of Directors should clearly spell out the customer identification Procedure to be carried out at different stages:
• While establishing a banking relationship
• Carrying out a financial transaction
• When bank has doubt about the authenticity of the adequacy of the previously obtained customer identification data.

CUSTOMER IDENTIFICATION PROCEDURE

• Photograph

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• Risk perception
• High risk category
• Medium risk category
• Low risk category
• Negligible risk category/ applicability of reduced KYC procedure

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MONITORING OF TRANSACTIONS

• Monitoring of transactions will be conducted taking into consideration the risk profile of the account.
• Special attention will be paid to all complex, unusually transactions.
• Which have no apparent logical or visible lawful purpose.
• Branches would be maintaining a close watch on cash transactions of Rs.10 lakhs and above.

RISK MANAGEMENT

• Internal audit shall specifically check and verify the application of KYC procedures at the branches and comment on the lapses observed will be put up before the Audit committee of the Board at quaterly intervals.

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NOMINATION

MEANING

• Nomination is a facility that enables a depositor(s) account holder(s) (individual or sole proprietor) or safe deposit locker holder(s) to nominate an individual, who can claim the proceeds of the deposit account(s) or contents of the safe deposit locker(s), post the demise of the original depositor(s) or locker holder(s).

NOMINATION ARE AVAILABLE FOR

• Nomination is available to safe custody articles, bank deposits, bank safe locker facilities.
• There can be one nominee for the deposit account held whether singly or jointly.
• There can be two nominees for jointly hired lockers.

• The nomination facility enables the bank to make payment to the nominee of a deceased depositor of the amount standing credit of the depositor.

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I. Return to the nominee, the articles left in the bank's custody by a deceased person.

II. Release to the nominee of the hirer, the contents of a safe deposit locker in the event of the death of the hirer.

BOI Staff Training College, Bhopal

NOMINATION FORM

SILENT FEATURES OF NOMINATION

• Nomination is made only in favour of individuals not in favour of trust or societies.
• Nomination can be made in favour one person only.

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• It can be made in existing or new account and can be cancelled or changed subsequently by the depositor.
• Government deposit schemes allows more than one nominee in their accounts, such as PPF, samruddi scheme , PF, Gratuity etc..

WHO CAN NOMINATE?

• Bank account holders having deposit accounts in their names or in joint names of two or more individuals can nominee to their accounts.

A sole proprietor can appoint a nominee to the sole proprietor account with the bank.

• In the case of a deposit account in the name of a minor, shall be made by a person lawfully entitled to act on behalf of minor in respect of a deposit account.

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• Safe deposit locker holder(s) can appoint nominee(s) or deposit locker(s).
• A nomination can be made only in respect of a deposit account is held in the individual capacity of the depositor, and not in representative capacity such as the holder of an office like a Company, Secretary of an Association, partner of a firm or an HUF.

HOW TO NOMINATE?

• Specific forms are provided for availing nomination facility.
• The account holder will have to fill the relevant form.
• The bank will acknowledge in writing to the concerned account holder the receipt of the nomination form.

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• And the nomination will be registered in the books of bank.

FEATURES OF THE NOMINATION FACILITY

• Nomination facility is available to a/c holders having current/ savings account and all types of term deposits.
• Nomination can be made in favor of one person only.
• The depositor has the option to execute mandate authorizing to indicate the name of the person in the pass book.
• Nomination favoring the minor is permitted on the condition a/c holder, while making the nomination, appoints another person, not being minor, to receive the amount of the deposit on behalf of nominee, in the event of the death of the depositor.

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• A nomination will continue to be in force even on renewal of deposit unless specially cancelled or changed.
• In case of joint accounts, on the death of one depositor, the other depositor can change or cancel the nomination.

LEGAL STATUS OF NOMINEE

• The nominee cannot be the absolute owner of the amount received by him.
• The nomination indicated that the hand which is authorized to receive the amount.
• On the payment of which the banker will get a valid discharge of his liability.

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CLOSURE OF A BANK ACCOUNT

1. Mutual agreement
2. Notice by the customer to the bank
3. Notice by the banker to the customer
4. Death / insolvency of the customer
5. Garnishee order by the court

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SETTLEMENT OF DEATH CLAIMS

INTRODUCTION

Banks are advised to settle the claims in respect of deceased depositors and release payments to survivor(s) / nominee(s) within a period from the date of receipt of the claim subject to production of proof of death of the depositor and suitable identification of the claim(s).

SETTLEMENT OF DEATH CLAIMS

• An announcement of death , production of death certificate or a report from a reliable source will be sufficient notice to the Bank about the death of the Account Holder.
• As soon as the Branch becomes aware of the death of the A/C Holder, it will record the fact in the relevant account in the system and stop operation in the A/C.

SETTLEMENT OF DEATH CLAIMS

• On receipt of notice of the death of the customer, the banker must stop the operation of the account because the authority of the customer terminates as soon as he dies.

Intimation to the Nominee, if any

• If the deceased A/C holder had appointed a nominee, a letter will be issued to the nominee informing him/her about the death of the account holder.

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Further operation in the Account

• a) Individual A/Cs:
• No further cheques should be paid even though they be dated prior to the date of death of the A/C holder.

b) Joint A/Cs:

• If the balance is payable to the survivor(s), but it is preferable that survivor(s) is/are advised to open a new a/c and transfer the balance to a new a/c in his/her/their name(s).

c) Proprietary A/Cs:

• No further cheques should be paid even though they be dated prior to the date of death of the A/C holder.

d) Partnership A/Cs:

• The surviving partner(s) can, however, operate the a/c for the purpose; and any cheques drawn by the surviving partner(s) can be paid.

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• Cheques drawn by the deceased partner and presented after his death, should not be paid.
• The branches should request the surviving partners to close the a/c by drawing a cheque signed by all of them and open a new a/c through which all future transactions may be passed.

e) Joint Hindu Family Firm A/c:-

• After the death of karta, if there is no male member, the wife of karta not becomes the karta.
• If a Karta, leaving behind his widow and a minor son, even then, wife is not permitted to become a karta.

f) Trust A/cs.:-

• The Trustees have to act jointly unless there is any provision to the contrary in the Trust Deed.

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• In case of death of any, trustee, the operation on the a/c should be stopped unless the, relative Trust Deed express powers on the surviving trustee to act.
• In the absence of any specific provision in the Trust Deed, it is not safe for the Bank to assume that the surviving trustees possess full powers to deal with the A/C.
• Branches should, therefore, not allow the surviving trustees to operate on the a/c or withdraw the balance. In case of death of sole trustee, operation on the A/C should be immediately stopped.

g) Executor's and Administrator's A/C: -

• On the death of an executor or administrator, unless otherwise provided for the in the Will or Probate of Administration, all the powers of the office bearer are vested in the surviving executors or administrators.
• The a/c should be allowed to be operated by co-executor but the cheques signed by the deceased executor/ administrator and presented after notice of his death should not be paid in the a/c.

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• In case of death of a sole Executor or Administrator, it will be necessary to obtain fresh order of the court appointing a new Administrator.

h) Limited Company's A/Cs:

• Where notice of death is received in respect of a person who is authorized to operate an A/C of a Limited Co., outstanding cheques drawn by the deceased person of the Company can still be paid.
• The Board resolution submitted by the Company regarding the operation of its A/C should be examined by the branch to see whether any amendment or new resolution is necessary.

i) Association, Society, club A/c.:

• The instructions given in respect of Limited Company's A/Cs shall also apply to A/Cs of Association, Society, Club etc.

j) Accounts operated by a holder of Power of Attorney or Letter of Mandate:

• Upon the death of the principal, the authority of Attorney or Mandate holder stands cancelled.

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• The operation on the a/c should be immediately stopped and no cheques signed by Attorney/ Mandate holder should be paid after receipt of notice of death of the Principal.

ASSIGNMENT 2:

• Explain briefly the Settlement of Death Claims.
• Briefly explain different types of Customer accounts with banks.
• Explain the types of relationship between banker and customer. June/July 2016 (10 marks)
• Discuss special types of Banker's Customer (5marks)

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• Explain the Know Your Customer. June/July 2016 (7 marks)