DUTIES OF A BANK

The relationship between the banker and customer creates some obligations on the part
of a bank. The main obligations of the banker towards the customers are as follows:
1. Obligation to Honour Cheques: You know that a bank is the debtor of his customer.
The bank has a statutory obligation to honour the cheques of its customers up to the
amount standing to the credit of the customer’s account. If a bank wrongfully refuses to
honour the cheque of its customer, the bank shall be liable to compensate the customer.
This obligation is subject to some conditions, namely:

a) There must be sufficient funds of the customer in the hands of the bank.
b) The funds must be properly applicable for the payment of the customer’s cheque.
c) The cheque must be properly drawn Up i.e., it should be complete in all respects.
d) The cheque must be presented for payment within a reasonable time.
e) There must be no legal bar preventing the payment of such cheques. If the bank has
received any order from a court or any other competent authority prohibiting payment,
it is the duty of the bank to obey such orders.

2. Obligation to Maintain Secrecy: The relationship between the banker and customer
is of a nature. The bank must not disclose to any outsider the details concerning the
customer’s account; as such disclosures may adversely affect the credit and business of
the customer. However, a disclosure can be made under the following two situations:
(a) When the law requires such disclosures to be made, and (b) when the practices
amongst the banks permit such disclosure.

3. Obligation to Follow Customer’s Instructions: The banker is under a legal

obligation to follow the instructions of the customer. This is so because there is the
contractual relationship between the bank and the customer.

4. Obligation to Maintain Proper Records: The banker is under an obligation to

maintain accurate record of all the transactions of the customers made with the bank.

5. Obligation to give Notice before Closing the Account: If a bank wishes to close the
account of a customer, it must give a reasonable notice to this effect to the customer.
Thus, a bank cannot close the account of a customer on its own, because it may have
serious consequences to the customer.

6. Mandate: The account holder alone has the right to operate his account with the
bank. No person other than the account holder can order the bank to debit the account.
But the account holder can give mandate or a power of attorney to another person to
operate his account. A mandate is an authority given by the account holder in favour of
a third person. This is issued by an account holder with a direction to his banker
authorizing third person to operate the account. It is unstamped letter signed by the
customer.
A letter of mandate is generally issued for a short period as a temporary measure.
Mandate letter should not be accepted from the limited companies. A mandate will
automatically lapse, on death, insanity, insolvency and bankruptcy of the account
holder,
7. Power of Attorney: It is a document executed by the donor or principal in favour of
donee or agent to act on behalf of the former as per authority given in the document.
The following points must be taken into consideration by the banker while accepting
power of attorney issued by the customer.
There are two types of power of attorney.

1. Special Power, and

2. General Power.
While the special power of attorney is given for a specific purpose, the other one covers
many activities. Power to sign the cheque, stop payment, signing loan documents when
given to Power of Attorney holder, the donor is ultimately liable to pay the loan amount.
It is a stamped document. The original power of attorney should be perused and a copy
should be obtained and filed with the Bank. The donor can withdraw or cancel the
Power of Attorney at any time.

8. Circumstances Leading to Closure of Accounts: The relationship between the

banker and the customer is established by mutual agreement open and operate the
account. This relationship may be terminated at anytime by either party by closing the
accounts. In fact, the banker-customer relationship imposes an implied obligation on
the banker not to close the account of the customer except in extraordinary case
supported by indisputable reasons.
In other words, the banker should carefully examine the issue before closing the
customer’s account and unless there are justifiable reasons, it should not close the
accounts of the customer.

A bank may take initiative to close the account of an undesirable customer after giving
proper notice for the following reasons.

a. Frequent return of cheque for insufficient balance.

b. Forgery/malpractice committed by the customer.
However, a customer may close the account at any time.

9. Loans and Advances: As already said, the Bank deposits are used for lending or
investment or both. In addition, bank handles purchase and sale of foreign currencies
and also lends for import and export trade. The commercial banks lend money by way
of overdrafts, demand loans, cash credit, or by way of purchase or discounting of bills of
exchange or hundies, for the purpose of financing trade, commerce, industrial or any
other business activity. Lending by the banks is mostly against security such as goods,
book debts, land and buildings, livestock, share, securities etc. When the advance is
given against such security, it is termed as a secured advance and in cases where the
advance is not backed by any security, it is classified as unsecured or clean advance.
 RIGHTS OF A BANK

For fulfilling the obligations towards the customers, bankers enjoy the following rights:

1. Right of General Lien: One of the most important rights enjoyed by a bank is the
right of general lien. Lien is a right of a person to retain goods belonging to another;
until the demands of the person in possession are satisfied. Section 171 of the Indian
Contract Act confers the right of general lien on the bankers. General lien entitles the
banker in possession to retain goods and securities till all its claims against the
customer are satisfied. You should note that the banker can exercise his right of general
lien only as a banker and not as a bailee, Banker’s lien is an implied pledge in the sense
that if a default is made by the debtor, the banker can, after giving a reasonable notice to
the customer, sell the goods in his possession and recover the amount. If some valuables
are deposited with a bank for safe custody, then it is bailment and the bank cannot
exercise the right of general lien.

You should note that the right of general lien cannot be exercised in the following
cases:
1. The banker cannot exercise the right of lien lien on valuables entrusted to the banker as a
bailee or trustee.
2. Right of lien is not applicable on documents deposited for a special purpose or with
specific instruction that the earnings are to be utilized for a specific purpose.
3.The banker’s general lien is displaced by circumstances that show an implied agreement
contradictory to the right of general lien.
4. The banker has no right of lien on securities left with the banker negligently or
unintentionally.
5. The banker doesn’t have the right of lien on securities deposited as a trustee in respect of
his personal loan.
6. The banker’s right of lien extends over goods and securities handed over to him. Money
deposited in the bank and credit balance in his/her account does not fall in the category of
goods and securities. Therefore the banker can use his right of setoff as opposed to lien with
regard to money deposited with him.
7. The right can be exercised only on the customer’s property and not on joint accounts the
customer.
8.The banker cannot have the right to exercise the lien when the debt has not matured.
9. The banker cannot exercise the lien when he can exercise set off.

2. The Right of Set-off: Right of set-off is the right of a debtor to adjust the amount due
to him from a creditor against the amount payable by him to the creditor to determine
the net balance payable by one to another, Like any other debtor, a bank also has a right
of set- off. When a customer has two or more accounts in the same name and capacity in
a bank, the bank has the right to adjust the amount standing to the credit of the
 customer against the debit balance in the other account. The bank has a right to
combine the two accounts. For example, Mr X has overdrawn his current account to the
extent of Rs. 10,000 and he has a credit balance of Rs.8,000 in his savings account. The
bank can combine these two accounts and claim the balance of Rs.2,000 after adjusting
the credit balance of savings account against the debit balance of current account,

Automatic right of set off: Sometimes the set off will happen automatically, it depends
on the situation. In automatic set off there is no need of permission from the customer.
The cases in which automatic set off can exercise are as follows :

 In case of the death of the customer.

 When the customer becomes insolvent.
 If a Garnishee order is issued on the customer’s account by court.
 When a notice of assignment of credit balance to someone else is given by the
customer to the banker.
 When a bank receives the notice of second mortgage on the securities already charged
to the bank.
Conditions while exercising right of Set - Off :

 The accounts must be in the same name and same right. The account should be in the
sole name of the customer
 Funds held in trust accounts are not allowed to set off.
 The right cannot be exercised in respect of future or contingent debts.
 The amount of debts must be certain and measurable.
 The banker might exercise this right at his judgment.
 The banker has the right to exercise this right before a garnishee order is issued.
 There should not be any agreement to the contrary.

3. Right of Appropriation: A customer may owe several distinct debts to the bank.
When the customer deposits some money in the bank without specific instructions and
the amount is not sufficient to discharge all debts, then the problem arises as towards
which debt this amount should be adjusted. In the absence of any specific instructions,
the bank has the right to appropriate the deposited amount to any loan, even to a time
barred debt. But the banker must inform the customer about the appropriation.

In the normal course of business, a banker accepts payments from customers. If the
customers have more than one account or he/she has taken more than one loan, the
customer has the right to direct his banker against which debt the payment should be
appropriated/settled. If the customer does not direct the banker and there is more than one
debt outstanding in his/her name, the bank can exercise its right of appropriation and apply
it in payment of any debt. The banker can apply it against time barred debts also. Once an
appropriation has been made it cannot be reversed.

Section 59 of the Indian Contract Act states that the right of appropriation is vested in the
hands of debtor. He/she can appropriate the payment by an express intimation. Money
received will first be set off against interest.

Section 60 of the Indian Contract Act states that if the debtor does not intimate or there is
no circumstance of indicating how the payment is to be used, the right of appropriation is
vested in the creditor.

Section 61 of the Indian Contract Act states that where neither party makes any
appropriation, the payment shall be used in discharge of the debts in order of time. If the
debts are of equal standing, the payment should be applied in discharge of each
proportionately. Any payment made by a debtor should be applied in the first instance
towards fulfillment of interest and thereafter towards principal unless there is an
agreement to the contrary. If a customer has only one account and he deposits and
withdraws money from it regularly, the order in which the credit entry will set off the debit
entry is in the chronological order, this is known as Clayton’s rule

4. Right to Charge Interest and Commission: The bank has the implied right to charge
interest on loans and advances, and also to charge commission for services rendered by
the bank. The bank can debit such charges to the customer’s account.

5. Right to Close the Account: If the bank is of the opinion that an account is not being
operated properly, it may close the account by sending a written intimation to the
customer.