1. Who is a Banker?
Banking Regulation Act, 1949 — Section 5(b): Banking means accepting deposits from public for the purpose of lending or investment, repayable on demand or otherwise, withdrawable by cheque, draft, order, etc.
Section 5(c): A banking company is one that does this business in India.
So a banker = institution doing 3 core functions: accepting deposits + lending + withdrawable by cheque.
2. Who is a Customer?
There’s no exact legal definition. Two important sources:
Sir John Paget’s view: A person becomes a customer only when there is some kind of account relationship (deposit/loan account).
Ladbroke vs Todd (1914) case: Customer relationship begins the moment the bank accepts the first cheque/money for opening an account — even before the account is formally opened. Duration is not important, frequency is not important.
Important: After KYC compliance, the person is officially a customer. Even casual users (buying DD without account) get some customer protections.
3. All Types of Banker-Customer Relationships
3.1 Debtor–Creditor (when customer deposits money)
- Bank = Debtor, Customer = Creditor
- Money becomes bank’s property; bank only owes equivalent amount back
- Money payable on demand (savings/current) or on maturity (FD/RD)
- Bank can use this money for lending — that’s how it earns
3.2 Creditor–Debtor (when bank gives loan)
- Bank = Creditor, Customer = Debtor
- Reverse of above
3.3 Bailor–Bailee (safe custody)
- Customer = Bailor, Bank = Bailee
- Governed by Section 148, Indian Contract Act, 1872
- Bank must take reasonable care (care a prudent person would take of own goods)
- Example: Sealed packet kept for safe custody
3.4 Lessor–Lessee (locker facility)
- Bank = Lessor, Customer = Lessee
- Bank does NOT know contents of locker → so bank is NOT a bailee for locker contents
- Bank’s liability is limited to 100 times the annual rent of the locker (per RBI guidelines, 2022) for losses due to bank’s negligence, fire, theft, building collapse
- Bank is NOT liable for natural calamities (earthquake, flood) if no negligence
3.5 Agent–Principal
- Bank = Agent, Customer = Principal
- Examples: collecting cheques, paying bills, standing instructions, tax payments, demat services
- Bank earns commission for these services
3.6 Trustee–Beneficiary
- Bank = Trustee, Customer = Beneficiary
- Money is NOT bank’s property (unlike debtor-creditor)
- If bank fails, trust money is safe — creditors of bank cannot claim it
- Examples: trust accounts, money received for specific purpose
3.7 Pledger–Pledgee (movable security)
- Customer = Pledger, Bank = Pledgee
- Movable goods like gold, shares
- Section 172, Indian Contract Act
3.8 Mortgagor–Mortgagee (immovable security)
- Customer = Mortgagor, Bank = Mortgagee
- Immovable property like house, land
- Transfer of Property Act, 1882
3.9 Indemnifier–Indemnified
- Customer gives indemnity bond
- Examples: duplicate FD, duplicate DD, lost cheque book
3.10 Hypothecator–Hypothecatee
- Movable security but possession stays with customer (unlike pledge)
- Example: Vehicle loan, stock financing
4. Rights of a Banker
4.1 Right of General Lien — Section 171, Indian Contract Act ⚠️
- Bank can retain customer’s securities until dues are paid
- Banker’s lien = implied pledge (Supreme Court ruling) — bank can also sell the goods after notice, not just retain
- Lien does NOT apply to:
- Articles in safe custody
- Securities given for a specific purpose
- Documents deposited by mistake
- Securities of a third party (not the borrower)
- Money in trust accounts
4.2 Right of Set-Off
A bank can combine accounts and adjust the credit balance against debit.
5 conditions for set-off:
- Debts must be certain in amount (not contingent)
- Debts must be in the same name and same right (e.g., individual account cannot be set off against partnership account)
- Debts must be due and payable (not future debts)
- No agreement preventing set-off
- Customer should be given notice (good practice)
Set-off NOT allowed:
- Joint account vs individual account (different right)
- Trust account vs personal debt
- After death/insolvency notice received without proper procedure
4.3 Right of Appropriation — Clayton’s Rule (1816)
Devaynes vs Noble (Clayton’s Case):
- In a running account (like overdraft), first item on debit side is discharged by first item on credit side (FIFO basis)
- Important when surety dies or guarantee is withdrawn — affects guarantor’s liability
Order of appropriation:
- Customer’s instruction (first priority)
- If no instruction, bank’s choice
- If neither, then Clayton’s Rule applies
4.4 Right to Charge Interest, Commission, Incidental Charges
- As per agreed terms
4.5 Right to Close Account
With proper notice — for dormant accounts, suspicious activity, etc.
5. Duties of a Banker
5.1 Duty to Honour Cheques — Section 31, Negotiable Instruments Act
Bank MUST pay if:
- Sufficient funds available
- Cheque properly drawn
- No legal bar (garnishee order, etc.)
Wrongful dishonour → bank liable for damages
5.2 Duty of Secrecy — Section 13, Banking Companies Act + Tournier vs National Provincial Bank (1924)
Tournier case established 4 exceptions to secrecy:
- Disclosure under compulsion of law (court orders, IT Act, RBI inspection)
- Disclosure in public interest (terrorism, crime)
- Disclosure in bank’s own interest (recovery suits)
- Disclosure with customer’s express/implied consent
Other modern exceptions:
- Credit Information Companies (CIC) Act — sharing with CIBIL
- FATCA reporting (for US persons)
- Income Tax Act Section 133
- Bankers Books Evidence Act
- Section 26, Banking Regulation Act (unclaimed deposits)
5.3 Other Duties
- Follow KYC/AML rules
- Provide statements
- Give correct advice (no mis-selling)
- Maintain proper records
6. Garnishee Order
A court order attaching the customer’s bank account at the request of the customer’s creditor (called the judgment creditor).
Two stages:
- Garnishee Order Nisi — first stage, asks bank to “show cause” why money shouldn’t be paid to creditor. Bank must freeze the account.
- Garnishee Order Absolute — final order, bank must pay the money to court/creditor.
Important rules:
- Order applies only to credit balance at the time of receiving the order, not future deposits
- Applies to accounts in the same name and same right
- Joint accounts: order on individual debt does NOT attach joint account
- Trust accounts: NOT attached
- Salary accounts: partial protection
- Funds received after the order are NOT covered
- Cheques presented but not yet paid before order: NOT attached
- Cheques sent for collection but not yet realized: NOT attached
Attachment Order
Issued by Income Tax authorities under Section 226(3) of Income Tax Act — similar to garnishee but for tax dues. Can attach future deposits also.
7. Special Types of Customers
7.1 Minors (below 18 years)
- Indian Contract Act — minor’s contract is void
- But minor can be a beneficiary
- RBI Guidelines: Minors above 10 years can independently open and operate savings/term deposit accounts (with limits)
- Below 10 years: through guardian
- On attaining majority, balance must be confirmed in writing by the now-major
- Minor can be admitted to benefits of partnership (not as full partner)
7.2 Joint Accounts
Operating instructions:
- Either or Survivor: Either can operate; on death of one, survivor gets balance
- Former or Survivor: Only “former” operates while alive; “survivor” gets it after death
- Anyone or Survivor: Multiple holders, any can operate
- Jointly: All must sign together
- Jointly or Survivor: All sign while alive, survivors after death
7.3 Partnership Firms — Indian Partnership Act, 1932
- Partnership deed required
- All partners must sign account opening form
- Implied authority of a partner: can borrow, draw cheques, endorse bills
- Partner CANNOT (without express authority): submit dispute to arbitration, open bank account in own name on firm’s behalf, transfer firm’s immovable property
- On death/retirement of partner: account operations may be stopped (Clayton’s Rule applies)
7.4 Companies — Companies Act, 2013
- Memorandum of Association (MoA): Defines company’s powers
- Articles of Association (AoA): Internal rules
- Doctrine of Ultra Vires: Acts beyond MoA are void
- Doctrine of Indoor Management (Turquand’s Rule): Outsiders can assume internal procedures are followed
- Need: Certificate of Incorporation, Board Resolution, MoA, AoA
7.5 HUF (Hindu Undivided Family)
- Karta (eldest male, or female after 2005 amendment) operates account
- All adult coparceners should sign account opening form
- Karta’s death → next senior member becomes Karta
7.6 Trusts
- Trust deed required
- Trustees act jointly unless deed says otherwise
- Bank should not allow personal use of trust funds
7.7 Clubs, Societies, Associations
- Registration certificate
- Bye-laws
- Resolution authorizing account operation
7.8 Illiterate Persons
- Cannot issue cheques (generally)
- Thumb impression in presence of bank official
- Photo of customer pasted on AOF
- Withdrawal in person only
7.9 Blind/Visually Impaired
- Earlier restricted; now full banking services including cheque book, ATM, net banking (RBI directive)
- Witnessed by independent person for first transaction
7.10 Lunatics/Persons of Unsound Mind
- Contract is void
- Account frozen on getting notice
- Operated only by court-appointed guardian
7.11 Insolvents
- On adjudication as insolvent, account is frozen
- Official Assignee/Receiver takes over
7.12 Drunkards
- If person is drunk at time of transaction → contract voidable
- Bank should not allow transactions by clearly intoxicated persons
7.13 Married Women
- Equal rights, separate accounts allowed
- Husband not liable for wife’s debts (except for necessities)
7.14 Pardanashin Women
- Bank takes extra care, prefers witnessed transactions
8. Death of Account Holder
Nomination — Section 45ZA, Banking Regulation Act ⚠️
- Available for deposit accounts, safe custody, lockers
- Only one nominee per account (except lockers — joint hirers can have separate nominees)
- Minor can be nominee (with appointed person)
- Nominee is only a trustee/receiver — legal heirs are real owners
Without nomination:
- Up to a certain limit (varies by bank, usually ₹5 lakh): paid to legal heirs with indemnity
- Above limit: succession certificate / probate required
Either or Survivor account:
- On death of one holder, survivor gets balance (subject to nomination)
9. Important Case Laws
| Case | What it established |
|---|---|
| Tournier vs National Provincial Bank (1924) | Duty of secrecy + 4 exceptions |
| Joachimson vs Swiss Bank Corp (1921) | Bank’s debt is payable only on demand at the branch where account is kept |
| Ladbroke vs Todd (1914) | Customer relationship starts from first transaction |
| Devaynes vs Noble / Clayton’s Case (1816) | First in, first out rule for appropriation |
| Foley vs Hill (1848) | Bank-customer = debtor-creditor, NOT trustee |
| Great Western Railway vs London & County Bank | Definition of customer |
10. Quick Revision Cheat Sheet
✅ Deposit → Bank = Debtor ✅ Loan → Bank = Creditor ✅ Safe custody → Bailee ✅ Locker → Lessor (NOT bailee) ✅ Cheque collection → Agent ✅ Trust money → Trustee ✅ Gold loan → Pledgee ✅ Home loan → Mortgagee ✅ Vehicle loan → Hypothecatee
✅ Lien = Section 171, Contract Act = Implied Pledge ✅ Set-off conditions = 5 (certain, same name/right, due, no contrary agreement, notice) ✅ Clayton’s Rule = First in, First out ✅ Tournier = 4 exceptions to secrecy ✅ Garnishee = Court order (Nisi → Absolute); only existing balance, same name/right ✅ Attachment Order = IT Section 226(3); covers future deposits also ✅ Locker liability = 100 times annual rent (RBI 2022) ✅ Minor 10+ years = can self-operate per RBI ✅ Nomination = Section 45ZA, BR Act; one nominee only
Important MCQs — Banker-Customer Relationship
Q1. When a customer deposits money in his savings account, the relationship between bank and customer is: a) Trustee–Beneficiary b) Debtor–Creditor c) Creditor–Debtor d) Bailor–Bailee
Q2. The legal definition of “Banking” is given under which section? a) Section 5(b) of Banking Regulation Act, 1949 b) Section 6 of Banking Regulation Act, 1949 c) Section 45 of RBI Act, 1934 d) Section 138 of Negotiable Instruments Act
Q3. The case which established the principle “duty of secrecy of customer’s account” is: a) Joachimson vs Swiss Bank b) Foley vs Hill c) Tournier vs National Provincial Bank d) Ladbroke vs Todd
Q4. As per Tournier’s case, exceptions to duty of secrecy are: a) 3 b) 4 c) 5 d) 6
Q5. When a customer hires a locker from the bank, the relationship is: a) Bailor–Bailee b) Trustee–Beneficiary c) Lessor–Lessee d) Agent–Principal
Q6. Banker’s right of general lien is governed by which section? a) Section 148, Indian Contract Act b) Section 171, Indian Contract Act c) Section 172, Indian Contract Act d) Section 176, Indian Contract Act
Q7. Banker’s lien is considered as: a) Particular lien b) Implied pledge c) Mortgage d) Hypothecation
Q8. Which of the following is NOT subject to banker’s lien? a) Securities given as collateral for a loan b) Articles in safe custody c) Fixed deposit receipts of borrower d) Shares pledged for overdraft
Q9. Clayton’s Rule (Devaynes vs Noble) applies to: a) Term loans b) Running accounts (current/overdraft) c) Fixed deposits d) Savings accounts only
Q10. As per Clayton’s Rule, the first item on the debit side is discharged by: a) Last item on credit side b) First item on credit side c) Largest credit amount d) Smallest credit amount
Q11. A garnishee order is issued by: a) Reserve Bank of India b) Income Tax Department c) Court of Law d) Banking Ombudsman
Q12. Garnishee Order Nisi means: a) Final order to pay b) Order to show cause c) Order to freeze account permanently d) Order to close account
Q13. A garnishee order attaches: a) Only existing credit balance b) Both existing and future balance c) Only future deposits d) Loan accounts only
Q14. Attachment order under Section 226(3) is issued by: a) Civil Court b) Income Tax Authority c) RBI d) SEBI
Q15. Unlike garnishee order, an attachment order: a) Does not freeze account b) Covers future deposits also c) Cannot attach savings account d) Requires customer’s consent
Q16. A minor can independently open and operate a savings account if his/her age is at least: a) 7 years b) 10 years c) 14 years d) 18 years
Q17. A minor’s contract is: a) Valid b) Voidable c) Void d) Enforceable with guardian’s consent
Q18. In a partnership firm, a partner CANNOT do which of the following without express authority? a) Draw cheques on firm’s account b) Borrow money for firm c) Submit dispute to arbitration d) Endorse bills of exchange
Q19. “Either or Survivor” account — on death of one holder, the balance is paid to: a) Legal heirs of deceased b) Surviving account holder c) Court d) Nominee only
Q20. Nomination facility in bank deposits is governed by: a) Section 45Z of Banking Regulation Act b) Section 45ZA of Banking Regulation Act c) Section 26 of Banking Regulation Act d) Section 21 of Banking Regulation Act
Q21. A nominee in a deposit account is: a) The owner of the deposit b) A trustee/receiver on behalf of legal heirs c) Joint holder d) Beneficiary with full rights
Q22. Doctrine of Indoor Management is also known as: a) Doctrine of Ultra Vires b) Turquand’s Rule c) Clayton’s Rule d) Foss vs Harbottle Rule
Q23. In HUF account, who is authorized to operate the account? a) Eldest member b) Karta c) All coparceners jointly d) Any major coparcener
Q24. Bank as a bailee must take: a) Highest possible care b) No care c) Reasonable care as a prudent person would d) Care only as per agreement
Q25. Which case established that bank-customer relationship is debtor-creditor and NOT trustee? a) Tournier’s case b) Joachimson’s case c) Foley vs Hill d) Ladbroke vs Todd
Q26. As per Joachimson’s case, the deposit money is payable: a) Anywhere, anytime b) On demand at the branch where account is maintained c) Only at head office d) On notice of 7 days
Q27. For right of set-off to apply, debts must be: a) Of any amount, any time b) Certain, due, in same name and same right c) Above ₹10,000 only d) From the same branch only
Q28. Bank CANNOT exercise right of set-off in which case? a) Two savings accounts of same person b) Loan account vs savings account of same person c) Joint account vs individual loan of one holder d) Current account vs overdraft of same customer
Q29. Locker liability of bank as per RBI 2022 guidelines is limited to: a) 50 times annual rent b) 100 times annual rent c) 200 times annual rent d) Unlimited
Q30. When a customer pledges gold for loan, the relationship is: a) Mortgagor–Mortgagee b) Pledger–Pledgee c) Hypothecator–Hypothecatee d) Bailor–Bailee
Q31. The pledge of movable goods is governed by: a) Section 148, Contract Act b) Section 171, Contract Act c) Section 172, Contract Act d) Transfer of Property Act
Q32. Hypothecation differs from pledge in that: a) Possession remains with the borrower b) Only immovable property is involved c) No documentation needed d) Bank takes physical possession
Q33. Bank acts as a trustee in which of the following? a) Saving deposit b) Money received for a specific purpose not yet appropriated c) Locker rentals d) Cheque collection
Q34. Which of the following is NOT an exception to duty of secrecy under Tournier’s case? a) Compulsion of law b) Public interest c) Bank’s interest d) Customer’s request to share with friends
Q35. As per Banking Regulation Act, unclaimed deposits are governed by: a) Section 23 b) Section 26 c) Section 45 d) Section 49
Q36. When the bank lends money to a customer, the bank’s role is: a) Debtor b) Creditor c) Trustee d) Agent
Q37. The case “Ladbroke vs Todd” deals with: a) Definition of customer b) Secrecy of accounts c) Garnishee order d) Banker’s lien
Q38. A Garnishee Order applies to which of the following accounts? a) Joint account when only one holder is a judgment debtor b) Trust account c) Individual account in same name and same right d) Minor’s account
Q39. Which of these CANNOT be attached by a garnishee order? a) Savings account in customer’s name b) Current account in customer’s name c) Cheques sent for collection but not yet realized d) Fixed deposit in customer’s name
Q40. A bank is liable for wrongful dishonour of cheque under: a) Section 31 of Negotiable Instruments Act b) Section 138 of Negotiable Instruments Act c) Section 5 of Banking Regulation Act d) Section 26 of Banking Regulation Act
Q41. When account opening cheque is presented for the first time, customer relationship begins as per: a) Tournier’s case b) Ladbroke vs Todd c) Foley vs Hill d) Great Western Railway case
Q42. Which of these is correctly matched? a) Locker — Bailor-Bailee b) Safe custody — Lessor-Lessee c) Standing instruction — Agent-Principal d) Loan — Trustee-Beneficiary
Q43. A blind person, as per RBI guidelines, can: a) Open only joint accounts b) Avail full banking services including cheque book, ATM c) Cannot use net banking d) Only operate through guardian
Q44. On insolvency of a customer, the bank should: a) Continue normal operations b) Stop operations and freeze the account c) Close the account immediately d) Transfer balance to government
Q45. Right of appropriation when customer has not given any instruction is exercised by: a) Customer’s family b) The bank c) Court d) RBI
Q46. Memorandum of Association (MoA) of a company defines: a) Internal management rules b) Powers and objects of the company c) Share allotment procedure d) Directors’ appointment process
Q47. Doctrine of Ultra Vires means: a) Acts beyond the powers given in MoA are void b) Internal procedures are presumed followed c) Directors are personally liable d) Company cannot be sued
Q48. The relationship between bank and customer when bank issues a demand draft on customer’s request: a) Debtor-Creditor b) Trustee-Beneficiary c) Agent-Principal d) Bailor-Bailee
Q49. A pardanashin woman’s account requires: a) No special precaution b) Extra care, witnessed transactions preferred c) Joint operation only d) Cannot be opened
Q50. Which of the following statements about garnishee order is CORRECT? a) It applies to balance both before and after order is received b) It applies only to balance existing at the time of receipt of order c) It can attach loan accounts also d) It is issued by RBI
Answer Key
| Q | Ans | Q | Ans | Q | Ans | Q | Ans | Q | Ans |
|---|---|---|---|---|---|---|---|---|---|
| 1 | b | 11 | c | 21 | b | 31 | c | 41 | b |
| 2 | a | 12 | b | 22 | b | 32 | a | 42 | c |
| 3 | c | 13 | a | 23 | b | 33 | b | 43 | b |
| 4 | b | 14 | b | 24 | c | 34 | d | 44 | b |
| 5 | c | 15 | b | 25 | c | 35 | b | 45 | b |
| 6 | b | 16 | b | 26 | b | 36 | b | 46 | b |
| 7 | b | 17 | c | 27 | b | 37 | a | 47 | a |
| 8 | b | 18 | c | 28 | c | 38 | c | 48 | c |
| 9 | b | 19 | b | 29 | b | 39 | c | 49 | b |
| 10 | b | 20 | b | 30 | b | 40 | a | 50 | b |