Module 2

Banker and customer

 Banker and customer Types of relationship between
banker and customer
Bankers obligations to customers
AGENDA
Right of lien, setoff
AppropriationBankers legal duty of disclosure and
related matters
Customers` accounts with banks Opening- operation
KYC norms and operation
Types of accounts and customers
Nomination Settlement of death claims
Banking process and clearing house process [Practical]
Bank
Provide funds for business and individual
Encourage savings habit
Acts as an intermediary
Facilitates business transactions
Facilitate import and export
Help in national development
Help in improving standard of living
Banker
An individual / institution who advises his
clients with regard to financial matters.
Provide financial assistance to clients
according to needs
A banker is the one who gets into debts and creates debts.

H.L. HART the banker is one who receives money, collects cheques and
drafts, for customers, with an obligation to honour the cheques drawn by
customers from time to time subject to availability of amounts in the
account.

Section 3 of NI ACT 1881, and Section 2 of BILL OF EXCHANGE ACT

1882. state that the term banker includes person or corporation or a
company acting as banker.

Under Section 5 (1) of Banking Regulations of 1949, a banking company

is defined as any company which transacts banking business.

Under Section 5 (1) B , banking business means accepting for the purpose
of landing or investment, deposits of money from the public, repayable
on demand or otherwise withdrawable by cheque , draft or otherwise.
Responsibilities and duties
Daily routine duties
Assess financial state of clients and offer bank
schemes
Ensuring that bank complies with rules and
regulation of all laws
Help clients with financial questions & needs
Meetings with clients to meet their requests
Reviewing clients financial history
Dealing with various financial transactions
Keeping accurate
Sell financial instruments records
+ve traits a banker should possess
Preciseness
Good with people
Good mathematical mind
Determined
Professionalism
 A person who buys goods or services from a shop
or a business entity.
CUSTOMER
A person you deal with as a business entity.
There is no statutory definition.
A person/ company/entity who has an account
with a bank is a customer.
There is no unanimity as regards to the time
period of the dealings.
A casual transaction like encashment of a cheque
does not entail a person to be customer.
The duration of association of the customer with
the bank is of no essence.
A customer is one who has an account with the
bank and to whom the banks undertakes to extend
business of banking.
Duties of a customer
Communication of important information and
changes
Unambiguous information in orders and
instruction
Care in transmission of particular orders
Use of forms
Experss notification of any special instructions
Notification of time limits and dates
Complaints to be made immediately
Checking of confirmations of the bank
Liability arising from neglect of duty
BANKER AND
CUSTOMER TYPES OF
RELATIONSHIP
BETWEEN BANKER
AND CUSTOMER
RELATIONSHIP CREDITOR-DEBTOR
Relationship between the customer having a
deposit account and the banker.
Depositor is the lender and the banker is the
borrower.
Depositor is the creditor and the banker is the
debtor.
The money handed over to the bank is a debt.
The money once deposited in the bank
becomes the money of the bank and it is
prerogative of the bank to use that money as it
deems fit. The depositor remains a creditor
that too an unsecured creditor
 DEBTOR-CREDITOR

When the customer avails a loan or an advance

then his relationship with the banker
undergoes a change to what it is when he is a
deposit holder.
Since the funds are lent to the customer , he
becomes the borrower and the banker
becomes the lender.
The relation is the debtor- creditor relation,
the customer being a debtor and the banker a
creditor.
Relationship of Pledger and Pledgee
The relationship between customer and
banker can be that of Pledger and Pledgee.
This happens when customer pledges
(promises) certain assets or security with the
bank in order to get a loan. In this case, the
customer becomes the Pledger, and the bank
becomes the Pledgee. Under this agreement,
the assets or security will remain with the bank
until a customer repays the loan.
Relationship of Licensor and Licensee

The relationship between banker and

customer can be that of a Licensor and
Licensee.
This happens when the banker gives a safe
deposit locker to the customer. So, the banker
will become the Licensor, and the customer
will become the Licensee.
Relationship of Bailor and Bailee
The relationship between banker and customer can be
that of Bailor and Bailee.
Bailment is a contract for delivering goods by one
party to another to be held in trust for a specific period
and returned when the purpose is ended.
Bailor is the party that delivers property to another.
Bailee is the party to whom the property is delivered.
So, when a customer gives a sealed box to the bank for
safe keeping, the customer became the bailor, and the
bank became the bailee.
Relationship of Hypothecator and
Hypothecatee
The relationship between customer and
banker can be that of Hypothecator and
Hypothecatee.
This happens when the customer hypothecates
(pledges) certain movable or non-movable
property or assets with the banker in order to
get a loan. In this case, the customer became
the Hypothecator, and the Banker became the
Hypothecatee.
Relationship of Trustee and Beneficiary

A trustee holds property for the beneficiary,

and the profit earned from this property
belongs to the beneficiary.
If the customer deposits securities or valuables
with the banker for safe custody, banker
becomes a trustee of his customer. The
customer is the beneficiary so the ownership
remains with the customer.
Relationship of Agent and Principal
The banker acts as an agent of the customer (principal)
by providing the following agency services:
Buying and selling securities on his behalf,
Collection of cheques, dividends, bills or promissory
notes on his behalf, and
Acting as a trustee, attorney, executor, correspondent or
representative of a customer.
Banker as an agent performs many other functions such
as payment of insurance premium, electricity and gas
bills, handling tax problems, etc.
Relationship of Advisor and Client
When a customer invests in securities, the
banker acts as an advisor.
The advice can be given officially or
unofficially. While giving advice the banker
has to take maximum care and caution. Here,
the banker is an Advisor, and the customer is a
Client.
Bankers obligation to
customer
OTHER RELATIONSHIPS
1. Statutory obligation to honour cheques
2. Banker's Lien
3. A bankers's duty to maintain secrecy of
customer'saccounts
4. Right to claim incidental charges
Statutory obligation to honor cheques
The availability of money in the account of the
customer
The correctness of the cheque
Proper drawing of the cheque
Proper application of the funds
Proper presentation
Reasonable time for collection
Existence of legal bar
1. Statutory obligation to honour cheques
2. Banker's Lien
3. A bankers's duty to maintain secrecy of
customer'saccounts
4. Right to claim incidental charges
 What is lien?
A lien is the right of a creditor in possession of goods,
securities or any other assets belonging to the debtor to
retain them until the debt is repaid, provided that there
is no contract express or implied, to the contrary.
It is a right to retain possession of specific goods or
securities or other movables of which the ownership
vests in some other person and the possession can be
retained till the owner discharges the debt or obligation
to the possessor.
It is a legal claim by one person on the property of
another as security for payment of a debt.
A legal claim or attachment against property as security
(right) for payment of an obligation.
Bankers Lien
Right to retain the goods

Circumstances for exercising lien

Lien cannot go beyond agreement
A banker's lien is an implied pledge
No general lien on safe custody deposits
No lien on documents entrusted for a specific purpose
No lien on articles left by mistake
No lien until the due date of a loan
No lien on deposits
1. Statutory obligation to honour cheques
2. Banker's Lien
3. A bankers's duty to maintain secrecy of
customer's accounts
4. Right to claim incidental charges
Bankers duty to maintain secrecy of
customers accounts
Disclosure under the compulsion of law
Disclosure in the interest of the public
Disclosure in the interest of bank
Disclosure under the express or implied
consent of customer
4. Right to claim incidental charges
Intimation of charges levied through
sms/mail/ letter
Notify new charges month before
 What is set-off?
The right of set off is also known as
the right of combination of
accounts .A bank has a right to set
off a debt owing to a customer
against a debt due from him.
 Set-off means- that the bank can adjust the
credit balance in a customer's account against
a debit balance in another account maintained
by the same customer.
In an on going, situation, the right of set-off
can be exercised by a banker- by serving a
reasonable notice on the customer.
The right of set-off can be exercised by the
banker only when the relationship between the
customer and the banker is that of- Debtor and
Creditor.
The banker can exercised the right of set-off
only in respect of- debts due and determined.
 The following condition are required to be
fulfilled before a banker can exercise the right
of set-off-
(a)The debt must be a sum certain and due
immediately,
(b) The debt must be due by and to the same
parties and the in the same right,
(c) There should be no agreement to the
contrary.
 The right to set-off
account arise immediately in the
following cases- (a) On the death, metal
incapacity or insolvency of a customer,
(b) On the insolvency of a firm, or on
the liquidation of a company, (c) On the
receipt of garnishee order
 For exercising the right of set-off- no
document is required to be obtained from the
customer.
Relationship Between Lien And Set-Off

There is a distinction between a bankers lien and the

banks right to set-off.
A lien is confined to securities and property in banks
custody.
Set-off is in relation to money and may arise from a
contract or from mercantile usage or by operation of
law.
DEPOSIT ACCOUNTS
TYPES
Savings bank account
Current deposit account
Fixed deposit account
Recurring deposit account
Salary account
Steps to open a SB account
Filling up the application form
Proper introduction
Speciman signature
Nomination
Issue of passbook
Issue of cheque book
Steps to open a deposit account
Deposit in the account
Withdrawal from deposit account
Issue of passbook
Issue of cheque book
Procedure for closure of accounts
Reasons for closure
Premature closure
Transfer of accounts
 Types of account holders
Individual Joint stock company
Joint account holders Clubs, associations and societies
Illiterates Trusts
Minors Executors and administrators
Married women Government departments
Non resident account Local authorities
Joint hindu family Payment of pension
Sole proprietorship Certificate of deposits
Partnership firms
 Introduction
Know Your Customer (KYC) Norms/Anti-Money
Laundering (AML) Measures/Combating of
Financing of Terrorism (CFT)/ Obligations of
banks under PMLA, 2002.
The objective of KYC/AML/CFT guidelines is to
prevent banks from being used, intentionally or
unintentionally, by criminal elements for money
laundering or terrorist financing activities. KYC
procedures also enable banks to
know/understand their custom ers and their
financial dealings better which in turn help them
manage their risks prudently.
KYC Policy
Banks should frame their KYC policies
incorporating the following four key
elements:
a) Customer Acceptance Policy;
b) Customer Identification Procedures;
c) Monitoring of Transactions; and
d) Risk Management
Customer Acceptance Policy (CAP)
Every bank should develop a clear Customer Acceptance Policy
laying down explicit criteria for acceptance of customers. The
A] Customer Acceptance Policy must ensure that
explicit guidelines are in place on the following
aspects of customer relationship in the bank.
1. No account is opened in anonymous or
fictitious/benami name.
2. Categorisation of customers into low, medium and high
risk. Customers requiring very high level of monitoring.
3. Documentation requirements and other information to
be collected in respect of different categories of
customers depending on perceived risk
3. Not to open an account or close an existing account where
the bank is unable to apply appropriate customer due diligence
measures, i.e,bank is unable to verify the identity and /or
obtain documents required as per the risk categorisation due to
non cooperation of the customer or non reliability of the
data/information furnished to the bank.

4. Necessary checks before opening a new account so as to

ensure that the identity of the customer does not match with
any person with known criminal background or with banned
entities such as individual terrorists or terrorist organisations
etc.
B] Banks should prepare a profile for each new customer
based on risk categorisation. The customer profile
may contain information relating to customers identity,
social/financial status, nature of business activity,
information about his clients business and their location etc

C] For the purpose of risk Categorisation , individuals (other

than High Net Worth) and entities whose identities and
sources of wealth can be easily identified and transactions in
whose accounts by and large conform to the known profile,
may be categorised as low risk.

D] Banks/FIs should have policies, controls and procedures,

duly approved by their boards, in place to effectively manage
and mitigate their risk adopting a risk-based approach.
 Customer Identification Procedure (CIP)
The policy approved by the Board of banks 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 the bank has a doubt about the
authenticity/veracity or the adequacy of the previously
obtained customer identification data.

Customer identification means identifying the customer and

verifying his/her identity by using reliable, independent
source documents, data or information.
Customer Identification Requirements
Indicative Guidelines
Walk-in Customers
In case of transactions carried out by a non-account based customer, that is
a walk-in customer, where the amount of transaction is equal to or exceeds
rupees fifty thousand, whether conducted as a single transaction or several
transactions that appear to be connected, the customer's identity and
address should be verified.
Salaried Employees
In case of salaried employees, it is clarified that with a view to containing
the risk of fraud, banks should rely on certificate/letter of identity and/or
address issued only from corporate and other entities of repute and should
be aware of the competent authority designated by the concerned employer
to issue such certificate/letter.
Trust/Nominee Accounts
While opening an account for a trust, banks should take
reasonable precautions to verify the identity of the
trustees and the settlors of trust (including any person
settling assets into the trust), grantors, protectors,
beneficiaries and signatories.

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.
Monitoring of Transactions

Ongoing monitoring is an essential element of effective KYC

procedures.
Banks can effectively control and reduce their risk only if they
have an understanding of the normal and reasonable activity of
the customer so that they have the means of identifying
transactions that fall outside the regular pattern of activity.
However, the extent of monitoring will depend on the risk
sensitivity of the account. Banks should pay special attention to
all complex, unusually large transactions and all unusual
patterns which have no apparent economic or visible lawful
purpose.
Risk Management

It should cover proper management oversight, systems and controls,

segregation of duties, training and other related matters.
Responsibility should be explicitly allocated within the bank for ensuring
that the banks policies and procedures are implemented effectively.
Banks should, in consultation with their boards, devise procedures for
creating risk profiles of their existing and new customers, assess risk in
dealing with various countries, geographical areas and also the risk of
various products, services, transactions, delivery channels, etc.
Banks policies should address effectively managing and mitigating these
risks adopting a risk-based approach
Closure of accounts
Where the bank is unable to apply appropriate KYC
measures due to non-furnishing of information and /or
non-cooperation by the customer, the bank should consider
closing the account or terminating the banking/business
relationship after issuing due notice to the customer
explaining the reasons for taking such a decision. Such
decisions need to be taken at a reasonably senior level.