BANKING OPERATIONS

Module-1

Author: Prof. Basavaraj S G

ORIGIN OF THE WORD ‘BANK’

The name bank is derived from the Italian word banco “desk/bench”, used during the
Renaissance by Florentine’s bankers. These bankers used to make their transactions above a desk
covered by a green tablecloth.

There are traces of banking activity even in ancient times. In fact, the word traces its origins back
to the ancient Roman Empire, where moneylenders would set up their stalls in the middle of
enclosed courtyards called macella on a long bench called a bancu. It is from here that the words
banco and bank are derived.

BANK:
Kinley’s definition, “A bank is an establishment which makes to individuals such advance of
money as may be required and safely made and to which individuals entrust money when not
required by them for use”.

The definition of R.S. Sayers, however, reveals the true character of a modern bank. In his
words, “Banks are institution whose debts usually referred to as bank deposits are commonly
accepted in final settlement of other people’s debts”.

BANKER:
Under British Law, “A banker is one who in the ordinary course of his business, honours
cheques drawn upon him by persons from and for whom he receives money on current
accounts”. (Dr. Herbert L. Hart)

CHARACTERISTICS OF BANKING / FEATURES OF INDIAN BANKING SYSTEM

From the meaning and nature of banks mentioned in earlier section, the characteristics/features
of a bank may be listed as follows:

1. Dealing in Money: Bank is a business activity which deals with other people’s money
i.e. getting money from depositors and lending the same to borrowers.
2. Banking Business: A bank is a financial institution which does banking activities of
selling financial services like home loans, business loans, lockers, fixed deposit etc. In
order to enable people to confirm that it is a bank and is dealing in money, for easy
identification, a bank should add the word “bank” as its last name.
3. Acceptance of Deposit: A bank accepts money from the people in the form of deposits
where there is an obligation to refund deposits on demand or after the expiry of a fixed
tenure as they feel it is a safest place to deposit money.
4. Lending Money: A bank provides advance money in the form of loans to needy persons
for promotion & development of business, purchase of home, car etc.
5. Easy Payment and Withdrawal Facility: Payment & Withdrawal of money can be
made through issuance of cheques & drafts, ATM, Online Fund Transfer without the
need for carrying money in hand. A bank provides easy payment and withdrawal facility
to its customers in the form of cheques, drafts, ATM’s and ETF.
6. Motive of Profit with Service Orientation: A Bank has a motive of employing funds
received as deposits from the public in a profitable manner with service oriented
approach.
7. Linking Bridge: Banks collect money from those who have surplus money and give the
same to those who are in need of money. It acts as a trust/custodian of funds of its
customers.
8. Ever increasing Functions: Banking is an evolutionary concept. There is continuous
expansion and diversification as regards the functions, services and activities of a bank.
9. Banking Business: A bank’s main activity should be to do business of banking which
should not be subsidiary to any other business.
10. Name Identity: A bank should always add the word “bank” to its name to enable people
to know that it is a bank and that it is dealing in money.

RELATIONSHIP BETWEEN BANKER & CUSTOMER

The Relationship between Banker and Customer is categorized as under
 General Relationship
 Specific Relationship

General Relationship between Banker and Customer

The opening of an account with a banker and the banker's acceptance for such opening of
account gives rise to a 'contractual relationship'. The relationship between a banker and a
customer is the foundation on which mutual duties, liabilities and privileges are being built.

1. Debtor-Creditor Relationship: When a customer deposits money with a bank, the

customer becomes a lender and the bank becomes borrower. As such, the relationship is
that of a debtor and creditor. It is a general relationship between banker and his customer.
Some important points to note in Debtor-Creditor Relationship are,
 When Customer Deposits money in Bank, Customer is the Creditor, & Banker is
a Debtor (When you Deposit Customer –Deposit Customer become Creditor
DCC)
 When a Banker lends money to the customer, Customer is a debtor and Banker is
a Creditor (When you take loan from Bank –Loans Customer becomes Debtor
LCD)
2. Banker as an agent: Generally, bankers render agency services for their customers. They
pay insurance premium, electricity bills, taxes, etc. They collect interest on investments,
dividends on shares, collect cheques, etc. Bankers act as per the 'Standing instructions' of
their customers. For these services, the banker charges a nominal commission from the
customer. The banker, by providing these services acts as an agent and the customer who
gives the standing instructions, acts as a principal.

3. Banker as a bailee: Bailee is one who possesses goods or articles on behalf of the owner
(called bailor) of the goods. According to the Sec. 148 of Indian Contract Act. a bailment
is the delivery of goods by one person to another for some purpose, upon a contract, that
they shall, when the purpose is accomplished, be returned or otherwise deposited off
according to the directions of the person delivering them.

In other words, when customer leaves with the banker some valuables for safe custody in
the safe deposit vaults or lockers, the banker performs the functions of the bailee and the
 Customer becomes bailor. The relationship between the banker and the customer in such
a case is that of a bailee and the bailor.

4. Banker as a Trustee : A trust is a relation between two persons by virtue of which one
of them (called trustee) holds property vested in him for the benefit of the other
(called beneficiary).
For example: if a customer deposits securities or other valuables with the banker for safe
custody, he acts as a trustee of 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
differs from that of a debtor of his customer. In the event of bank's liquidation, such trust
properties held by the banker are not available for the distribution to general creditors of
the bank.
5. Bank as an executor: Where a customer appoints a banker as his executor and leaves
property through a will, the banker has to administer the property according to the terms
of the will after the death of such customer. Where no will is written by the deceased, the
court may appoint the banker as administrator. In such a case the banker has to distribute
the property of the deceased according to the suggestion laws applicable.
6. Banker as an Attorney: The customer may grant a special power of attorney to his
banker to transact certain dealings on his behalf. The banker is the attorney of the
customer in such cases.
Note: Power of Attorney refers to the authority to act for another person in legal or
financial matters.
7. Banker has a right to combine accounts: If a customer has two or more accounts in his
or her name at the same branch and in the same capacity, a banker as a debtor can
exercise his right to combine those accounts into one.
8. A banker has no right to close the account: A banker as a debtor has no right to close
the account of its creditor (depositor-customer) at any time without the prior permission
from him / her.

Special relationships between banker and customer

The following are the special relationships between banker and customer:

1. Banker's obligation to honor the cheques.

2. Banker's lien.
3. Banker's duty to maintain secrecy of customer's accounts.
4. His right in respect of combining accounts.
5. Banker's Right to Set-off.

1. Obligation to honor Cheques : According to Sec. 31 of the Negotiable Instruments Act,

1881, every banker must honor the cheques drawn on it by a customer, provided :
 the customer has sufficient amount of balance to his account with the banker;
 the funds are properly applicable to the payment of such cheque;
 the banker has been duly required to pay;
 the cheque has been presented to the banker within a reasonable time (i.e., within six
months) after the apparent date and of its issue;
  No prohibition order of the court or any other competent authority (e.g., income tax) is
standing against the account of the customer.
2. Banker's Lien: A lien may be defined as the right to retain property belonging to a
debtor until he is discharged of his debt due to the retainer (creator) of the property. The
banker's lien refers to the right of banker over such of his customer's securities as may
come into his possession in the ordinary course of business. According to Sec.171 of the
Contract Act, a banker has a general lien on cash, cheques, bills of exchange and
securities deposited with him.

Conditions required for the banker to exercise general lien

1. The securities and goods must come to his hands in his capacity as a banker.
2. The banker should have obtained the possession of the securities and goods lawfully.
3. The goods or securities should not have been entrusted to the bank for a specific or
special purpose.
4. The goods and securities, held by the bank shall stand in the name of borrower only and
not jointly with others.
5. There must be no arrangement either express or implied that is inconsistent with the
banker's right to lien.
3. Secrecy of Customer's Accounts: It is an obligation on the part of a banker to maintain
secrecy about the customer's accounts. The banker must not disclose any information
pertaining to the customer to any one. But there are certain exceptions. They are,
 Where such disclosure is required by law
 Where such disclosure is in public interest to disclose
 Where the interest of the bank require such disclosure
 Where disclosure is made by the express or implied consent of the customer; and
 Where such disclosure is permissible on account of banking practices.
4. Banker's Right to Combine Accounts: The Banker has a right to combine several
accounts kept by the customer at the same branch or different branches of the bank
(Garnet V. Mc Kervan). The banker however, cannot combine the personal account of a
customer with a joint account of a customer and some other person. Customer has no
right to treat two accounts as one.

5. Banker's Right to Set-Off: The banker can adjust a debit balance to a customer's
account with any balance standing to the customer's credit. While doing so, the banker
gives due notice to the customer. To exercise the right of set-off the following conditions
should be fulfilled;
 The debts are certain and are due. The right cannot be exercised against future
debt / or contingent debts.
 The debit and credit balances are of the same person in the same capacity.
 There should not be any express or implied agreement to the contrary.
6. Banker's Right of Appropriation: As a part of ordinary banking business, the banker
receives deposits of money from his customer. The customer has the right to dictate as to
which account a particular amount is to be credited where he has more than one account
and / or loan account. In case the customer has not appropriated, i.e., not indicated his
account to which the said amount is to be credited; the creditor is at liberty to apply the
payment to any debt owed by the debtor including to a debt barred by limitation.
 7. Banker has a right to claim incidental charges: Every banker has a right to claim
incidental charges on un-remunerative accounts of a customer, e.g., collection charges,
remittance charges for drafts, etc.

Termination of Relationship between a Customer and a Banker

As a rule, as long as an account (either deposit or loan) exists, the relationship between a
banker and a customer would continue. The relationship would come to an end under the
following circumstances or conditions.
1. If the customer dies;
2. If the customer becomes an insolvent;
3. If the customer becomes an insane;
4. If the customer closes his account;
5. If the banker closes the customer's account
6. If the court orders the bank to close the customer's account

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