banker and customer relationship

Banker and Customer Relationship

Definition of a ‘BANKER’

• The Banking Regulations Act (B R Act) 1949 does not define the term ‘banker’ but defines what banking is?

• As per Sec.5 (b) of the B R Act “Banking' means accepting, for the purpose of lending or investment, of deposits of money from the public repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise."

Who is a ‘Customer’?• The term Customer has not been defined by any

act. • The word ‘customer’ has been derived from the

word ‘custom’, which means a ‘habit or tendency’ to-do certain things in a regular or a particular manner’s.

• The term 'customer' is used only with respect to the branch, where the account is maintained. He cannot be treated as a ‘customer' for other branches of the same bank.

Bank customers can be categorized in to four broad categories

• Those who maintain account relationship with banks i.e. Existing customers.

• Those who had account relationship with bank i.e. Former Customers

• Those who do not maintain any account relationship with the bank but frequently visit branch of a bank for availing banking facilities such as for purchasing a draft, en-cashing a cheque, etc. Technically they are not customers, as they do not maintain any account with the bank branch.

• Prospective/ Potential customers

Banker and a Customer Relationship

• The relationship between a banker and a customer depends on the type of transaction.

• These relationships confer certain rights and obligations both on the part of the banker and on the customer.

Classification of Relationship

• General Relationship• Special Relationship

General Relationship

• Debtor-Creditor• Creditor–Debtor

Special Relationship

• Bank as a Trustee– As per Sec. 3 of Indian Trust Act, 1882: A "trust" is

an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner.’

– Thus trustee is the holder of property on behalf of a beneficiary.

• Bailee – Bailor– Sec.148 of Indian Contract Act, 1872: 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 disposed of according to the directions of the person delivering them.

– The person delivering the goods is called the "bailor".

– The person to whom they are delivered is called, the "bailee".

– Banks secure their advances by obtaining tangible securities. In some cases physical possession of securities goods (Pledge), valuables, bonds etc., are taken.


• Lessor and Lessee

– Sec.105 of Transfer of property Act 1882: A lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms.

– Safe deposit lockers


• Agent and Principal– Sec.182 of ‘The Indian Contract Act, 1872’ defines

“an agent” as a person employed to do any act for another or to represent another in dealings with third persons.

– The person for whom such act is done or who is so represented is called “the Principal”.

– Banks collect cheques, bills, and makes payment to various authorities viz., rent, telephone bills, insurance premium etc., on behalf of customers


• As a Custodian– A custodian is a person who acts as a caretaker of

some thing. – Banks take legal responsibility for a customer’s

securities. – While opening a Dmat account bank becomes a

custodian.


• As a Guarantor– Banks give guarantee on behalf of their customers

and enter in to their shoes.– Guarantee is a contingent (conditional) contract. – As per sec 31, of Indian contract Act, guarantee is

a “contingent contract ."


Termination of relationship between a banker and a customer

• The death, insolvency, lunacy of the customer. • The customer closing the account i.e.

Voluntary termination. • Liquidation of the company. • The closing of the account by the bank after

giving due notice. • The completion of the contract or the specific

transaction.

Duties of a bankera) Duty to maintain secrecy/confidentiality of customers' accounts.

b) Duty to honour cheques drawn by customers on their accounts and collect cheque, bills on his behalf.

c) Duty to pay bills etc., as per standing instructions of the customer.

d) Duty to provide proper services.

e) Duty to act as per the directions given by the customer. If directions are not given the banker has to act according to how he is expected to act.

f) Duty to submit periodical statements i.e. informing customers of the state of the account

g) Articles/items kept should not be released to a third party without due authorization by the customer

Types of Bank Accounts in India

• Current deposits / accounts• Saving bank / saving fund deposits / accounts• Recurring deposits / accounts• Fixed deposits / accounts or term deposits

• Traditionally banks in India have four types of deposit accounts, namely Current Accounts, Saving Banking Accounts, Recurring Deposits and, Fixed Deposits.

• However, in recent years, due to ever increasing competition, some banks have introduced new products, which combine the features of above two or more types of deposit accounts.

• These are known by different names in different banks, e.g 2-in-1 deposits, Smart Deposits, Power Saving Deposits, Automatic Sweep Deposits etc.

• However, these have not been very popular among the public.

Types of Bank Accounts in India

Current Account(Who uses current accounts?)

• Current Accounts are basically meant for businessmen and are never used for the purpose of investment or savings.

• These deposits are the most liquid deposits and there are no limits for number of transactions or the amount of transactions in a day.

• Most of the current account are opened in the names of firm / company accounts.

• Cheque book facility is provided and the account holder can deposit all types of the cheques and drafts in their name or endorsed in their favour by third parties.

• No interest is paid by banks on these accounts.

• On the other hand, banks charges certain service charges, on such accounts.

• These deposits accounts are for individual accounts.

• These accounts not only provide cheque facility but also have lot of flexibility for deposits and withdrawal of funds from the account.

• Most of the banks have rules for the maximum number of withdrawals in a period and the maximum amount of withdrawal, but hardly any bank enforces these.

• However, banks have every right to enforce such restrictions if it is felt that the account is being misused as a current account.

• Till 24/10/2011, the interest on Saving Bank Accounts was regulared by RBI and it was fixed at 4.00% on daily balance basis.

• However, wef 25th October, 2011, RBI has deregulated Saving Fund account interest rates and now banks are free to decide the same within certain conditions imposed by RBI.

Savings Bank Account(Who uses Saving Bank Accounts?)

Savings Bank Account(Who uses Saving Bank Accounts?)

• Under directions of RBI, now banks are also required to open no frill accounts (this term is used for accounts which do not have any minimum balance requirements).

• Although Public Sector Banks still pay only 4% rate of interest, some private banks like Kotak Bank and Yes Bank pay between 6% and 7% on such deposits.

• From the FY 2012-13, interest earned upto Rs 10,000 in a financial year on Saving Bank accounts is exempted from tax.

Fixed Deposit Accounts or Term Deposits

• All Banks offer fixed deposits schemes with a wide range of tenures for periods from 7 days to 10 years.

• In case of need, the depositor can ask for closing (or breaking) the fixed deposit prematurely by paying a penalty (usually of 1%, but some banks either charge less or no penalty).

• Variable interest fixed deposits, the rate of interest on such deposits keeps on varying with the prevalent market rates i.e. it will go up if market interest rates goes and it will come down if the market rates fall.

Recurring Deposit Accounts(Who use Recurring Deposit Accounts?)

• Suitable for people who do not have lump sum amount of savings, but are ready to save a small amount every month.

• Normally, such deposits earn interest on the amount already deposited (through monthly installments) at the same rates as are applicable for Fixed Deposits / Term Deposits.

• Some Banks besides offering a fixed installment RD, have also introduced a flexible / variable RD.

• Under these flexible RDs the person is allowed to deposit even higher amount of installments, with an upper limit fixed for the same e.g. 10 times of the minimum amount agreed upon.

• Recurring Deposit accounts are normally allowed for maturities ranging from 6 months to 120 months.

DEPOSITS

Single/Joint

• Deposit accounts can be opened by an individual in his own name (status : known as account in single name) or by more than one individual in their own names (status: known as Joint Account).

Minor• Minor accounts can be opened under the

guardianship of mother/father/legal guardian.

• No loan be allowed even against sufficient security.

• Under NIA can bind all other except for himself.

• Minor can be admitted only to the benefits of a partnership.

• Minor can be appointed as an agent but shall not be personally responsible to his principal who shall be responsible for the acts of the minor agent.

Minor

• Savings Bank Account can also be opened by a minor jointly with natural guardian or with mother as the guardian (Status: known as Minor's Account).

• Minors above the age of 10 will also be allowed to open and operate saving bank account independently.

Partnership Firms• Max no of partners 20 (10 in banking)• Registration is not mandatory, but only registered

firms can file suits to enforce a contract.• Minor can be admitted only to the benefits.• A partner can bind the firm by doing usual

business on behalf of the firm.• A partnership is not treated as a separate entity

from the partners.• Death of a partner/admission of a partner

dissolves the partnership firm.

Joint Stock Companies• Private Limited Companies

– Min. 2 and Max. 50 shareholders.

– Directors; min.2 and Max. 7

– Name must end with “Private Limited”

• Public Limited Companies– Min. Directors – 3; Shareholders: Min-7 and Max – No

limit

– Name must end with “Limited”

• Government Companies– 51% or more share held by the Govt.

Documents required for opening an account

• Memorandum of association

• Articles of association

• Certificate of incorporation

• Certificate of commencement of business

Sleeping Accounts

• Accounts which are not operated for a considerable period of time will be transferred to a separate dormant / inoperative account status in the interest of the depositor as well as the Bank.

• The depositor will be informed of charges, if any, which the Bank will levy on dormant / inoperative accounts.

• The depositor can request the Bank to activate the account for operating it.

‘Know Your Customer’As per ‘Know Your Customer’ guidelines issued by Reserve Bank of India,

customer has been defined as:

1. A person or entity that maintains an account and/or has a business relationship with the bank;

2. One on whose behalf the account is maintained (i.e. the beneficial owner);

3. Beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, Chartered Accountants, Solicitors etc. as permitted under the law, and

4. Any person or entity connected with a financial transaction, which can pose significant reputational or other risks to the bank, say, a wire transfer or issue of a high value demand draft as a single transaction.

Money laundering

• It is the process of concealing the source of large amounts of money that have been gained through illegitimate means.

• Money evidently gained through crime is "dirty" money, and money that has been "laundered" to appear as if it came from a legitimate source is "clean" money.

• Money can be laundered by many methods, which vary in complexity and sophistication.

Customer Acceptance Policy (CAP)

• Every bank should develop a clear Customer Acceptance Policy laying down explicit criteria for acceptance of customers.– No account is opened in anonymous or fictitious /

benami name(s);– The customers are categorized as per their risk

perception based on their profile– Documentation requirements and other information

to be collected in respect of different categories of customers depending on perceived risk

Customer Acceptance Policy (CAP)• Not to open an account or close an existing account where the bank is unable to

apply appropriate customer due diligence measures.

• Circumstances, in which a customer is permitted to act on behalf of another

person/entity, should be clearly spelt out in conformity with the established law

and practice of banking as there could be occasions when an account is

operated by a mandate holder or where an account is opened by an

intermediary in fiduciary capacity.

• 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.

What is Customer Due Diligence?

• Customer Due Diligence (CDD) can be defined as any measure undertaken by a financial institution to collect and verify information and positively establish the identity of a customer.

When should a bank apply CDD?

• establishes a business relationship;• carries out an occasional transaction;• suspects money laundering or terrorist

financing; or• doubts the reality of documents, data or

information previously obtained for the purpose of identification or verification

banker and customer relationship

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