Introduction
The relationship between a banker and a customer is foundational to the banking sector and is primarily governed by common law principles, banking customs, and statutory regulations such as the Banking Regulation Act, 1949, and the Negotiable Instruments Act, 1881. The term “banker” generally refers to a person or entity licensed to accept deposits and provide credit, while a “customer” is any individual or institution that maintains an account or engages in banking transactions with the bank.
The core of this relationship is contractual and can be categorized into multiple facets, depending on the type of transactions involved. However, the most prominent and legally significant among these is the debtor-creditor relationship.
Nature of the Banker-Customer Relationship
The relationship between a banker and customer is contractual in nature, governed by offer, acceptance, consideration, and intention to create legal obligations. It evolves with different banking transactions such as deposits, withdrawals, loans, guarantees, and remittances. These roles change based on the services offered and utilized.
The general types of relationships between a banker and a customer include:
- Debtor and Creditor
- Creditor and Debtor
- Agent and Principal
- Bailor and Bailee
- Trustee and Beneficiary
- Lessor and Lessee (in case of locker services)
Among all, the debtor-creditor relationship remains the most crucial and commonly observed form.
Debtor and Creditor Relationship: Explained
1. When the Banker is a Debtor and the Customer is a Creditor
- When a customer deposits money into their bank account (savings, current, fixed, etc.), the bank assumes the role of a debtor, and the customer becomes the creditor.
- The bank does not hold the money in trust but rather borrows it from the customer, using it for lending and investment.
- However, the debtor (bank) is not under an obligation to repay the money until the creditor (customer) makes a demand through instruments like a cheque or withdrawal slip.
- This implies that the banker’s obligation is to repay on demand, and only at the branch where the account is maintained.
Key Legal Cases:
- Foley v. Hill (1848): Established that the relationship between banker and customer is one of debtor and creditor.
- Joachimson v. Swiss Bank Corporation (1921): Affirmed that the debt becomes due only when demanded.
2. When the Banker is a Creditor and the Customer is a Debtor
- This relationship arises when the bank lends money to the customer through loans, overdrafts, credit facilities, etc.
- In this case, the bank becomes a creditor, and the customer a debtor.
- The debtor (customer) is legally bound to repay the loan along with agreed interest within the stipulated time.
Rights of the Banker as a Creditor:
- Right to charge interest
- Right to set-off
- Right to lien
- Right to general suit for recovery
Essential Features of Debtor-Creditor Relationship
| Feature | Description |
|---|---|
| Legal Character | Based on contract, not on trust |
| Repayment on Demand | Bank must repay only on valid demand by the customer |
| No Fiduciary Obligation | Bank uses the deposit in its own name and for its own profit |
| Place of Repayment | Only at the branch where the account is held |
| Nature of Deposit | Not a trust deposit, but a loan to the bank |
| Customer’s Obligation | If a loan is taken, customer must repay with interest |
Other Aspects of Banker-Customer Relationship
Although the debtor-creditor relationship is central, the following also exist:
1. Trustee and Beneficiary
When a bank receives money for a specific purpose (e.g., payment to third parties), it acts as a trustee.
2. Agent and Principal
Banks often pay bills, collect cheques, and act on standing instructions, thus becoming an agent of the customer.
3. Bailee and Bailor
In locker services, the customer is a bailor, and the bank a bailee under the Indian Contract Act, 1872.
4. Pledger and Pledgee
In case of loans secured with collateral, the customer pledges property, creating a pledger-pledgee relationship.
Legal Duties of a Banker
- To Honor Cheques: Subject to sufficient balance and proper documentation.
- To Maintain Confidentiality: Unless compelled by law or public duty.
- To Provide Account Statements: On regular intervals or as requested.
- To Follow Customer Instructions: Unless unlawful or contrary to banking norms.
Legal Rights of a Banker
- Right of Lien: To retain goods until debt is paid.
- Right of Set-Off: To adjust one account against another.
- Right to Charge Interest and Commission: As agreed in the contract.
- Right of Appropriation: To apply payments received against any outstanding debts.
Statutory Provisions Governing Banker-Customer Relationship
- Banking Regulation Act, 1949
- Negotiable Instruments Act, 1881
- Indian Contract Act, 1872
- Reserve Bank of India Act, 1934
- Payment and Settlement Systems Act, 2007