Scheduled Bank

As per Sec 2 (e) of RBI Act, a scheduled bank

means a bank whose name is included in the
second schedule of RBI Act 1934.
 Banker & Customer Relationship
Banker – As per the Banking Regulation Act, 1949
(Sec 5 c), a banker is a person undertaking business
of banking.
Banking - As per the Banking Regulation Act, 1949
(Sec 6), banking means accepting deposits from
public, for the purpose of lending, repayable of
demand or otherwise withdrawable by cheque,
draft, order or otherwise.

Customer - A person who opens account with bank

 Negotiable Instruments Act, 1881
Passed in 1881
Came into effect from March 01, 1882
As per section 13, an NI means and includes
promissory note, bill of exchange, demand draft
and cheque.
Under section 137 of Transfer of Property Act,
the following documents of Title to goods are
negotiable:
(i) Bill of lading
(ii) Railway receipts
(iii) Dock warrant
(iv) Warehouse receipt
Certain other instruments are also negotiable on
the basis of usage, practice and various court
judgments, e.g., govt. promissory note,
certificate of deposits, commercial paper.
General Relationship between Banker
and Customer
1. Debtor and Creditor (When customer
deposits money or takes credit)
2. Trustee and Beneficiary (when a bank
receives valuales for safe custody)
3. Banker as agent (when a bank buys or sells
securities on behalf oh customers)
 Banker’s Obligations
Duties of the bank
i. Duty to honour cheques of customers (as per
NI Act)
ii. Duty to maintain secrecy of accounts
Duty to honour cheques of customers
• Section 31 of the Negotiable Instruments Act,
1881 imposes a statutory obligation upon the
banker to honour the cheques of the
customers
 Duty to maintain secrecy of accounts
• Section 13 of the Banking Companies Act, 1970,
requires a banker not to divulge any information
relating to the affairs of the customers, except in
special circumstances
• Banker’s duty of secrecy is legal
• It is extended to all transactions that go through the
account and securities offered in that respect
• Duty is not discontinued even when customer is dead
or account is disclosed
• Obligation is extended to the information obtained
from various sources (regarding customer’s account /
financial position)
 Rights of Bankers
i. Right of lien
ii. Right of set-off
iii. Right of appropriation
iv. Right to charge Interest and Commission
 Right of lien
• A lien is the right to retain the property belonging
to a debtor until he has discharged a debt due to
the retainer of the property
• A general lien confers a right to retain goods not
only in respect of debts incurred in connection
with a particular transaction but also in respect of
any general balance arising out of the general
dealing. (u/s 171 of Indian Contract Act)
• In case of particular lien (u/s 170 of Indian
Contract Act), the creditor gets the right to retain
possession only of goods or securities for which
the dues have arisen and not for other dues.
 Features of Banker’s General Lien
i. Banker has a right of general lien
ii. Lien is not available on deposits, since deposits are
neither goods nor securities
iii. Implied pledge and right of sale
iv. When the banker exercises his right of general lien, he
gets protection from section 409 or 420 of Indian Penal
Code
v. Lien can be used by giving a reasonable notice period
vi. The right is available for goods and securities that are in
the name of the borrower or in the name of guarantor
vii. The right can be exercised when the goods and securities
are entrusted to the bank in the capacity of a debtor-
creditor
 Right of set-off
• Set-off refers to ‘combining to two or more
accounts for final settlement of accounts’
• E.g. an overdraft and a fixed deposit
• The essential condition is that one of such
accounts must show a debit balance and the
other a credit balance
 Conditions for set-off
• The relationship should be that of debtor-
creditor and creditor-debtor simultaneously
• Right can be exercised only after sending a
prior notice to the depositor
• The loan should be certain, determined and
due and the customer has defaulted.
• The account must be in the same name and
capacity
 Right of appropriation
• Applicable when a debtor has several debts
with a creditor (bank)
• Under the Indian Contract Act, 1872
i) u/s 59, Express instruction by debtor
ii) u/s 60, Omission by debtor to intimate (bank
at its discretion can apply the payment to
any lawful debt due)
iii) u/s 61, payment shall be applied in order of
time
 Right to charge Interest and
Commission
• Bank is entitled to charge interest on loans
• Also entitle to charge commission for services
rendered to his customer
 Garnishee order
• An order issued by a court, on the request of a
judgement creditor for attachment of funds of
the judgement debtor available with his bank.
• The bank’s obligation to pay cheques is
suspended temporarily if the balance is less
than the amount of order
Stages of Implementation of Garnishee
order
I) Order Nisi – on receipt of order Nisi, bank
stops honouring customer’s cheque and the
customer is informed. At this stage the bank
recovers its own dues first and subsequently
informs the court about remaining balance
II) Order Absolute – on receipt of this order,
bank remits funds to the court, without
production of passbook or issuing any
receipt.
 Applicability of Garnishee order
i) Relationship should be of debtor and
creditor
ii) Accounts should be held in the same
capacity in which the order is issued
iii) All accounts are attached including saving,
current, credit balance in cashcredit or
overdraft, FDRs due or not due.
 Attachment order
• Issued by Govt. authorities for recovery of
Govt. dues (e.g. income tax attachment order)
• Applicable for all accounts where garnishee
order is applicable
• On receipt of order, the informs the
customers, recovers its own dues and
payment is made to authorities