Chapter – 6 Banker – Customer Relationship

• Banker and customer have a legal binding once they enter into an agreement. This binding arises from vast varieties of services provided by banks to depositors as well as borrowers. Each service provided calls for a contractual relationship. There are certain terms and conditions which are applicable to both parties- customer and banker.

• Such relationship is contractual in nature and based on the customs and usages of bankers. Courts in India have recognized some of these customs and usages. This makes the relationship as implied terms of contract.

• The very nature of contract between customer and banker revolves around three important aspects,(i) There is both implied and express terms in the agreement(ii) Duties owed by the bank towards the customer, and(iii) Duties owed by customer towards bank.

• Besides the above, bank may have certain common law duty of care. As such these duties may vary with the type of relationship between banker and customer and the nature of activities/services availed from bank or provided by bank from time to time.

• In practice besides legal relationship (financial relationship), bank enters into an emotional and social relationship with its customers.

• Such a relationship is normally long lasting but at the same time risk borne. Therefore, we should go into the details of the customer before engaging in this banker and customer relationship.

• Today’s business also demands that business of banking is to attract, acquire and retain right customers which makes it important that we should understand customer better and through Know Your Customer (KYC) guidelines find right and suitable customer for longer relationship.

• In order to understand the relationship, we have to understand the definition of customer and banker.


• Knowing banker customer relationship is necessary because this relates to society, emotional attachment and legal angles.

• Both serve the society to grow and the economy to expand.

Before we discuss the relationship between the banker and the customer, it is necessary that we understand who is bank, banker and customer.

• According to section 5(b) of the Banking Regulation Act, 1949 ‘Banking’ means “accepting for the purpose of lending or investment of deposits of money received from the public, repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise”. The person who is performing this function is called the ‘Banker’.

• The term Customer has not been defined in law in India. In practice and common usage, customer is one who has business dealings with bank and has an account with the bank. However, when a customer undertakes a “casual service” with bank like cashing a third party cheque, or deposits third party cheque or makes a draft for somebody etc. does not make him customer and the relationship between banker and customer is not established.


Banks perform many functions some of which are legally required while some arose out of business necessity. Important functions are:

• Acceptance of deposit of money for the purpose of lending or investments.

• Discounting of Bills

• Collection of Cheque and Bills

• Safe Custody of articles

• Conducting foreign exchange transactions

• Conducting foreign exchange transactions

• Conducting foreign exchange transactions

• Remittances

• Hiring of Safe Deposit Lockers

• Conducting Government Transactions.• Issuing Letters of Credit and Guarantees, etc.

• But now, as the competition increases,many newly opened banks/institutions have diversified their businesses and entered into areas of business, like Selling of Gold Coins, Credit Card business, third party products (TPP) selling, etc.


• Bank is under obligation under law and moral grounds to maintain the secrecy about customers’ bank dealings. Bank has to observe secrecy of customers account or any of his transactions or any other information related to the customers’ account. For any breach in secrecy aspects, bank is liable legally and morally.

• Banker’s duty of secrecy to its customer is an implied term of contract.

• Banker is justified in disclosing customers’ bank dealings and accounts under section-6 of bankers’ Book Evidence Act, 1891 on order of court, Section 26 of banking Regulation Act, 1949 and section 45 B of the Reserve bank of India Act, 1934.

• This obligation continues even after the closure of the account except under following circumstances.

Exception of Secrecy Disclosure

Under the following circumstances Bank is not undertaking any liability when information about the customers’ account/transactions is disclosed.

(a) Under compulsion of law: Bank is required to disclose the information when lawful orders received. For instance, if court order is received under Bankers Book Evidence Act, 1879 bank is duty bound to disclose information of the account.

(b) In the interest of Public (national interest): When bank has the knowledge that customers’ transactions are damaging to the public interest or national interest, then it can disclose the information on the account.

(c) In the interest of the Bank: When bank wants to sue a customer for non-payment of the dues on loans and advances etc. then bank can disclose the information.

(d) With the implied consent of the customer: When disclosure is made at the behest of the customer in writing.

(e) As per banking practices: Sometimes banking practices require that customers’ account or his dealings with the bank are shared confidentially with other counterparts. For example, if a borrower who deals with ‘X’ bank wants another loan from ‘Y’ bank, then ‘Y’ may ask for confidential report from ‘X’ bank. As such, ‘X’ bank as per banking practices can share this information confidentially with ‘Y’ bank.

(f) Guarantor seeking information: When in a loan account, any guarantor has guaranteed the account, he has right to seek information on the account of the borrower for whom he stood as guarantor.


• Bank’s foremost duty is to honour customer’s cheque provided it is drawn properly.As a paying banker, it is duty of the bank to ensure that cheque is in proper order, not forged and is being paid on the basis of the authority. Bank is duty bound to see that before paying money, the account of customer has sufficient funds in the account, there is no legal impediments in payment of money, etc.

• Money deposited with bank is the absolute property of the bank and bank can use it the way it deems fit subject to the condition that as a debtor it pays back the money when demanded.

• Bank’s duty to pay money through cheque or otherwise may end when:

Cheque is countermanded (stop payment instructions received)
Notice to the bank that customer has expired, except in case of impersonal accounts, e.g. XYZ co. Ltd., ABC Corporation etc. drawn as representative of the company or firm.
Notice of customer’s insanity.
Receipt of court order.
When corporate customer starts winding up proceedings as per court’s orders.
Cheque is forged and bank has reasonable idea that presenter of cheque etc. is not entitled to it.
• Bank is supposed to issue, update pass book of the customer. In case bank opts for sending account statements by post or by internet, then bank is required to send such information on regular intervals.

• Duty to collect the cheques, Bills etc.

Rights of the banker : Banker has certain rights that can be exercised by him in case of need.

• Right to charge costs allowed legally.

• Right of General Lien

• Right of set-off

• Right of appropriation

• Right to act as per the mandate given by the customers.

Charge Costs: Bank has the right to charge ‘bank charges’ on certain transactions, either at the request of the customer or on the basis of banking customers and usages. For instance, when bank sends SMS about account status of his customer, then bank charges some amount. Similarly some banks charge some money on use of fresh leaflet in cash credit accounts etc. Bank also has the right to charge (debit) bank charges on return of cheque unpaid to the account of the customer.


• It is a right of the creditor to retain the possession of the goods and securities owned by the debtor until the debt due by the customer is paid.

• The banker’s lien is an implied pledge.

• A banker acquires the right to sell the goods,which came in to his possession in the ordinary course of banking business. This means that any specific transactions other than as defined under Banking are not subject to general lien. e.g, safe custody transactions, Locker transactions, money deposited for some specific purpose etc.

• Section 171 of the Indian Contract Act, 1872 gives a right of general lien to the banker.


• Right of set-off is the right of a banker to adjust a debit balance in a customer’s account, with any balance outstanding to his credit in the books of the banks.

• In other words, the banker has a right to mutually adjust the two accounts of the same customer with certain amount, one in debit and another in credit, which is called right of set-off.

• The set-off is applicable to debts due and payable on the date of set-off. The account must be in the same name and the same capacity.

• In case a customer has a fixed deposit in the bank and customer has also taken an overdraft facility from the bank, then bank can exercise right of set-off only after the maturity of the fixed deposit.

• For exercising right of set-off, bank does not normally need any separate document since it is implied contract.

For example, M/s Daulat Ram Tota Ram, a partnership firm has an overdraft facility from the bank to the tune of Rupees 9,500=00. As on 12.6.2014 the balance outstanding in the account is 12,575 = 50 p. However, the partners have a savings bank account in their name with the same branch. Despite repeated notices, nothing has been paid. Since the bank has a savings account in the same names and the balance is 15,565/=, the bank can exercise right of set-off by debiting savings bank account and crediting the overdraft amount by Rupees 12,575.50.

Points of Difference between Lien and Set-off

1. Lien is in relation to goods and security whereas set-off is in relation to money claims.

2. Lien is right to retain goods and security and set-off is right to combine and consolidate the accounts.

3. Lien is special relationship between customer and banker whereas set-off can be avoided by an agreement.

4. Lien precedes set-off whereas set-off comes after lien.


• Section 59 of Indian Contract Act, 1872 provides that if a customer owes many debts to the bank and makes payment that is not sufficient to satisfy all debts then he can ask bank to adjust particular accounts to discharge its debt.

• In simple words, right of appropriation means adjustment of monies of customers paid by him for liquidation of his debt.

• The customer, who deposits the amount, has a right to clarify the purpose and account against which the credit is to be given by the banker. It means it is the duty of the customer to specify the nature of the transactions. If he fails to mention the purpose, then banker has aright to adjust the credit against the any debit/ dues. This is called the right of appropriation.

• Section 60 of the Contract Act provides that where customer has omitted to intimate the bank to inform to which debt money deposited is to be appropriated, and there is no other ways or circumstances to show or indicate to which debt payment is to be applied, then bank as creditor has liberty to apply at his discretion to any lawful debt due and payable to bank.

• In case the customer or the banker fails to appropriate the amount paid to satisfy certain debt, then the payment so made can be appropriated towards the amount to debts ‘in order of time’. (section 61 of Contract Act)

• The right of set-off can be exercised by a banker as a statutory right that helps banker to adjust his debt by serving a reasonable notice to the customer. However, bank should ensure before set-off that there is no contract to the contrary to this effect.

• The right of set-off is exercisable only when the relationship is that of debtor and creditor.

• Debts due and determined can only be set-off by bank.


As mentioned earlier customer is one who has some financial dealings with the bank and has some account with the bank. However, “casual dealings” like cashing someone’s cheque or exchanging soiled notes etc. does not make a person a bank’s customer.

Among the various relationships arising out of business dealings between banker and customers, important ones are given below. The relationship may vary with the nature of the transaction / dealings with bank from time to time during the period of dealing.

For instance, a customer having a saving or current account with the bank and balance in the account remains in credit, the relationship remains that of creditor and debtor between customer and banker. But moment either the amount is overdrawn the relations turns to be that of debtor and creditors between customer and banker instead of creditor and debtor earlier. This relationship may change from time to time.

Under this relationship, bank undertakes to receive money from his customer and collect cheques etc. for his customer only. Bank agrees under this relationship to pay the money back to the customer only when demanded. Also bank will not cease to do business with customer except upon serving reasonable notice to his customer. However, customer undertakes to take reasonable care in drawing money from bank in writing. This relationship makes the bank under duty to pay customer’s money on demand if everything otherwise is normal.


In simple words when the customer deposits money into his account in the bank, the relationship between the customer and banker takes the shape of bank as debtor and depositor as creditor. Such relationship is established when depositor asks the bank to open an account and bank in turn handover the application form to be filled by the depositor and submit to the bank along with necessary documents. Moment the branch agrees to open an account a relationship between the depositor (customer) and banker is established that of creditor and debtor.


When the customer avails a loan or an advance, then his relationship with the banker undergoes a change. Since the funds are lent to the customer, he becomes the borrower and the banker becomes the lender. The relation becomes that of debtor- creditor since the customer becomes a debtor and the banker a creditor.


• Banks provide ancillary services such as collection of cheques, bills etc. They also undertake to pay regularly the electricity bills, phone bills etc. for and on behalf of the customer.

• The relationship arising out of these ancillary services is of principal-agent between the customer and the bank. The proceeds of the cheques sent for collection , and which are in transit, are not credited to the customer account till such time as they are collected (received) from the paying banker and credited into the customer account.

• Here the instruction of the customer to the banker is that of a Principal and Bank carries out the same as Agent.

• As a special facility to its customers, banks do not charge any commission for collecting local cheques/drafts but do charge for collection of outstation instruments (cheques, DD, Bills etc.). For instance, a customer in Delhi receives a cheque from his friend in Shimla. Since cheque is drawn on a bank and branch in Shimla, therefore customer in Delhi hand over the cheque to his bank in Delhi and requests to collect the proceeds (money) from Shimla. Delhi Bank sends the cheque through clearing to Shimla and gets the proceeds (money) for the customer. In turn banks charges it commission.


• An important ancillary service provided by the banks is that of safe deposit lockers or also called Vault facility, to the customers who hire them on lease basis.

• The relationship therefore, is that of lessee and lessor. Customer is lessee and bank is lessor.

• In certain banks, this relationship is termed as licensee and licensor. The bank leases out the space for the use of clients. The bank is not responsible for any loss that arises to the lessee in this form of transaction except due to negligence of that bank.

• Locker holder can keep any personal but safe goods in the locker without the knowledge of the banker.

• Lockers can be operated by double keys – one the master key held by banker and other locker key held by customer.

• Nomination facility is available in such accounts. Customer normally opens a savings bank account in the bank and keeps sufficient money to pay yearly rent for hiring a locker box.


The customer is indemnifier and the bank is indemnified. A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or the conduct of any other person is called a contract of indemnity – section 124 ( Indian Contract Act, 1872).In the case of banking, this relationship happens in transactions of issue of duplicate demand draft, fixed deposit receipt etc. The underlying point in these cases is that either party will compensate the other of any loss arising from the wrong/excess payment.


• A bailment is the delivery of goods in trust. A bank may accept the valuables of his customer such as jewellary, documents, securities for safe custody. In such a case the customer is the Bailer and the bank is bailee besides becoming a trustee. This situation is provided in section 148 of Indian Contract Act 1872, where it is made clear that the delivery of goods from one person to the other for some purpose upon the contract that the goods will be returned when the purpose is accomplished makes the relationship that of bailor and bailee.

• The money or the securities so kept are not at the disposal of the bank.

• The banker cannot utilize those moneys or securities as he desires since the money does not belong to him. He is holding the property in trust. Any violation of this contract is breach of trust.


• When a customer pledges goods and documents as security for an advance or any credit facility, then he becomes Pledgor and the bank becomes the Pledgee.

• The pledged goods are to be returned intact to the Pledgor after the debt is repaid by him.


• Mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan.

• When a customer pledges a specific immovable property with the bank as security for advance, the customer becomes mortgagor and banker is the mortgagee.


The relationship seizes once:

• The customer wants to close the accounts

• The customer dies,

• The customer becomes insane or

• The customer becomes insolvent.

• Banker may himself close the a/c by serving notice to a/c holder on reasonable grounds



• A garnishee order is an attachment order issued by a competent court under section 60 of civil procedure code (Rule 46 of Order XXI of schedule) at the request of a creditor to attach his debtor’s funds in the hands of a Banker.

• A garnishee order is issued in two stages, first order Nisi and then an order Absolute

• Banker – Garnishee; Person approached the court – judgment creditor and person whose funds are to be attached – Judgment Debtor.



• Initial order of the court for attachment of funds requires bank to explain as to why the funds of the depositors should not be attached. Such order is called Nisi order.

• On receipt of order Nisi the bank is required to stop operation in the depositors account.

• Bank is supposed to inform the customer about the receipt of the order Nisi.


• After receipt of the explanation from the bank the court issues ‘Order Absolute’.

• On receipt of an Order Absolute, the bank is required to deposit the specified amount in the court.

• Production of pass Book/ Deposit receipt are not necessary for making such payment

• Many atimes Garnishee order does not specify the amount. In case, no amount is mentioned, the entire balance is to be attached. If issued for specific amount then only that specified amount is to be deposited or attached.


All banks in the country open accounts for its various types of customers. The list of customers varies from individual to corporate bodies. Important types of bank customers are: individuals including married women in her own right, minors, proprietorship concerns, partnership firms, limited partnership forms, limited companies, Hindu Undivided Families (HUF), Government Bodies etc.

Any individual who is not a minor and is competent to contract can be bank’s customer. Important point is selection of right customers. Bank is required to keep in mind legal aspects of customer dealing with bank. For this Reserve Bank of India in 2002 through Anti-Money Laundering Act of 2002 and subsequent RBI guidelines on this matter provide that for selection of right customer banks should develop a customer acceptance policy and ensure that before opening an account or developing abanker customer relationship, ‘Know Your Customer’ guidelines of RBI are adhered to. Banks have to deal with the following types of customers while opening their accounts. Important/salient features of each category of customers and precautions to be taken in opening their accounts are given below:


• Legally speaking, two or more individuals can come together to open a joint account in the name of two persons or more.

• While opening joint account all aspects taken care of in Individual account opening are to be satisfied here also. There is no restriction of number of joint holders of an account. However, bank needs to ensure that all KYC guidelines are adhered to and customers are having a purpose to open such account.

• A joint account can be operated by any one or all the joint account holder together. In the absence of any instruction (s) to the contrary all cheques should be signed by all joint account holders.


• A bank does open account of children who are below the age of 18 years. There is no risk involved in such accounts provided account remains in credit balance and all other legal aspects of opening minor’s account have been followed.

• Section 3 of Indian Majority Act, provides that a child who attains the age of 18 years, except in case where a guardian is appointed by a court, where the age of majority is 21 becomes major. Since a minor below 18 years (21 years under guardian) cannot enter into a contract and such contract if made by bank, is void. Since the banker customer relationship is contractual in nature, therefore care has to be taken to see that minor’s account is opened within the legal framework.

• A contract entered by minor with bank to open an account is valid to the extent that such contract help minor get necessaries of life and is for his/her benefit only. That is why banks open account of minor below 18 years so that his necessities of life are met with through savings.

Illiterate as Customer

• Under Indian laws, there is no bar on dealing with bank by an illiterate person. He/she can enter into a valid contract with the bank.

• Due to difficulty in obtaining signatures from the illiterate persons or taking his/her thumb impression, banks avoid giving cheque book facility. However, following precautions are to be taken while opening and maintaining such accounts:

• Clear thumb impression from customer should be taken on application form and specimen signature card. Take LTI of female and RTI of male.

• In case two illiterates join together to open an account with the bank, then the operation allowed should be jointly or survivor and not either or survivor.

• One illiterate and one literate person can open joint account. Some banks provide cheque book facility while some do not issue any cheque book.

• Recent photograph of the account holder is to be taken along with the application form. Introduction should also be preferred in such cases.


• Blind person can also open bank account of all nature like SB, CA, TD etc. Normally loan accounts or current account with overdraft facility are discouraged.

• Blind persons are competent to enter into contract. Account opening form mentions the customer is “Blind Person”.

• It is necessary that before opening the account, bank explains various risks factors involved in the operations of the account. It should be explained preferably in the presence of a bank customer or staff member.

• Bank also allows opening of Joint account with a relative.

• Make payments or receive cash from the customer in the presence of some witness, preferably, bank customer. Blind customer’s presence should be ensured for withdrawals.


• A sole proprietorship concern has many features that make it unique. These are:

It is easy to form and run.
Oldest form of business organization.
One man organization easy to control and manage.
No registration is essential in sole-proprietorship concerns.
• But a license specific to the line of business from the local administration is required.

• It is mostly self-financed out of savings or borrowings from relatives and friends.

• Outside interference is avoided and owner is fully on its own as far as planning, organizing, decision making, marketing etc. are concerned. Profits need not be shared with anyone.

• Owner and firm have the same standing and there is no legal existence of concern separate from its owner. As such the liability of the proprietor is unlimited. It can be more than the capital invested by the proprietor.

• Shortcomings: Major shortcoming of a proprietorship concern is its lack of continuity. Since the business is one man show, as on businessman’s indisposition, death etc. business operations are affected and so is income.


• Partnership is a group of people coming together to jointly do a business and share profits of the business.

• Partnership is legal entity formed by the business relationship of 10 person in case of banking business and 20 in case of non-banking business. It can be formed either by a written document called ‘partnership deed’ or orally.

• The firm may be a trading firm doing the business of sale and purchase of goods or it may be manufacturing, processing etc. It may also be professional partnership firm like that of chartered accountants, lawyers, Doctors, etc.

• A partnership may be registered or unregistered. An unregistered firm however have disadvantage that it cannot sue other debtors who have defaulted in the performance of a function to prefer its claim on them. In case of registration of partnership deed, it is registered with Registrar of Firms.

• It is important to note that in the absence of the agreement to the contrary in the partnership deed, any partner can bind the acts of other partner for the acts done on behalf of the firm.

• The account should be opened in the name of the firm. The account opening form should be signed by all the partners. Mandate in the name of any partner to operate the account and take banking decision should be signed by all partners. Any change in such mandate should also be signed by all partners.

• Liability of partners is unlimited. In other words every partner is liable for the firm’s activities fully. They are jointly and severally liable.

• A letter of partnership duly signed by all the partners should be obtained. When a minor is admitted as partner in the firm, a letter of restrictive operations should be obtained. Minor is admissible for the profits or benefits from the firm but not for any liability.

• Payment of the cheque drawn by any partner can be stooped by any other partner.

• Precaution is required to be taken that in the event of the death or insolvency or lunacy of any partner, the operations in the account are stopped and a fresh partnership deed should be taken from the remaining partners.


• Limited Liability Partnership is a body corporate having separate legal existence having mixed characteristics of Partnership firm and Companies. It is separate from its partners, cannot own assets in the name, sue and be sued. It has perpetual succession. Every partner is an agent of the LLP.

• It is to be registered with Registrar of Company. The incorporation document shall contain the name of LLP, proposed business, address of the registered office and name & address of each partner. Name to contain ‘Limited Liability Partnership’ or ‘LLP’ as suffix.

• Incorporation Document is not required to contain State in which incorporated. Thus, registered office can be changed to any place in India just by informing ROC subject to prescribed conditions.


Joint stock Companies are governed by the Companies Act, 1956. A Company is incorporated under the Companies Act. The Company is a separate entity from its members.

There are three types of the companies:

(1) Public Limited Company

(2) Private Limited Company

(3) Government Company

Documents Required in Case of Company Accounts

• List of the present directors.

• Certified copy of Certificate of Incorporation is taken while opening account.

• Certified copy of Certificate of Commencement of Business in case of public limited Company is required.

• Copy of Memorandum of Article of Association (MOA)

• Board Resolution to open an account with the bank and operational instructions.


A trust is an obligation arising out of a confidence reposed in and accepted by owner for the benefit of another person or owner. It is fiduciary relationship with respect to property, subjecting the trustee to equitable duties to deal with the property for the benefit of another person.

• In simple words when an individual or an Association has property in his possession but there is no ownership of property available, then arrangement by which such property is managed or run is called “Trust”. The individuals or Associations holding and managing the property are called “Trustees”.

• Trust may be established by two important ways:

By voluntary coming together of interested parties/persons.
By court order.
• The nature and extent of trustee’s authority is determined by an agreement of trustees or by the order of the Court.

• Other special features of a Trust are:

Trust is an obligation annexed to the ownership of property.
Trust arises out of a confidence reposed in or accepted by the owner.
Trust property is held by trustee for the benefit of the beneficiaries.
Relationship of confidentiality exists in the contract of trust.
• Normally two types of trusts are common in India. One is Public Trust and second is Private Trust.

• Trust could be created for lawful purposes.

• Trust can be created by person competent to contract.

• Trustees are those persons who command the confidence.

“Trust Deed” is a document that describes the creation of a trust and the purpose etc. for which it is being established.


• A person to whom the execution of a will is entrusted by the deceased (testator) is called the executor of the will.

• The executor is supposed to obtain a probate from the court.

• For a person who dies without leaving a will (intestate), the court appoints a person to look after the property is called the administrator.


• Hindu Undivided Family unit is recognized in India by Hindu Law. Hindu Law is in fact, a compendium of Hindu practices and customs accepted and practiced for many decades.

• HUF is governed by two schools of law: one Dayabhag, in which son does not acquire any right in the ancestral property so long as father is alive, and second is Mitakshara, which propagates the thought that in a joint family governed by Hindu Law, all members acquire right in ancestral property by birth. In most of the States in India, Mitakshara system is prevalent except in West Bengal and Assam where Dayabhag system prevails.

• Normally the affairs and property of the Joint Hindu Family is managed by the eldest male member (adult) of the family, who is called KARTA of family. The other members (male as well as female except widow) of the family are called ‘Coparceners’.

• HUF cannot be admitted as a partner in the partnership firm.


• Societies maintain accounts with the banks. Following points should be kept in mind while opening accounts of societies/clubs etc.

• Society must be registered under the Society Registration Act 1960 for which certified copy of the registration Documents is to be obtained.

• Copy of bye laws, rules and regulations should be obtained and read carefully for any restrictive clause (s). A list of the members of the managing committee should be drawn.

• Copy of resolution of the Managing Committee/Governing Body etc. should be kept on record. This is necessary before opening an account since this resolution provides what the Managing Committee/Governing Body has passed for opening an account.

• Borrowing Power, if any, should be known to the bank.


• Local Authorities include Municipal Corporations, Zilla Boards, Local Development Authorities, etc.

• Bank must obtain copy of such statute and find out the provisions as to who would authorize opening of the account.

• Generally these authorities have managing committees, with president, vice-president and treasurer and the treasurer is given powers to open and operate the account.

• Normally loans and advances are discouraged to bodies but can be advanced with permission from competent authority.


• Copy of the government notification should be obtained authorizing the concerned department (person in the department) to open and operate the account.

• Certified copy of rules and regulations framed by the department for opening and operations of such accounts should be obtained and compliance must be as per rules without any deviation/s.


Reserve Bank of India (RBI) on AML/ KYC States

• “The objective of KYC/AML guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities.

Under KYC Policy, a “Customer” is defined as:

• A person or entity that maintains an account and/ or has a business relationship with the Bank;

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

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

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

• KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently”.

• The necessity of knowing your customer is to (i) check financial frauds (ii) identify money laundering and other suspicious activities, (iii) scrutiny and monitoring of large value transactions and, (iv) check opening of benami accounts.

• Before establishing any banking relationship Bank will carry out due diligence as required under “Know Your Customer” (KYC) guidelines issued by the Reserve Bank of India (RBI) and/or such other norms or procedures adopted by the Bank.

• What is Due Diligence?

• Due diligence basically means that bank takes reasonable efforts to verify the customer’s antecedents and understand his purpose of opening account with the bank.

• The due diligence process that the Bank follows, includes obtaining recent photographs, verifying identity, verifying address, and other information on occupation or business and source of fund for the person opening the account.

• As part of the due diligence process the Bank may also require an introduction from a person acceptable to the Bank if they so deem necessary.

• Objective of KYC framework is to ensure appropriate customer identification and monitor transactions of suspicious nature.

• Different means to identify customer’s antecedents could be from documents like passport, driving license and verification from exiting account holders including the introduction of accounts by bank customer.

• Valid introduction can be obtained from documents like PAN card, Income Tax Authority, Election ID, Adharar Card etc.

• Proof of residence and verification could be done through personal visits, ration cards, utility bills etc.

• Reserve Bank of India has stipulated that issuance of Demand Draft, Traveller’s Cheques, Mail Transfers or Telegraphic Transfers (last two are no more in use due to technology improvement in banks), beyond Rupees 50,000 and above it should be done only through the debit to the account or through cheque deposit and not against cash.

• Information collected from the customer under KYC requirements while opening account is to be kept confidential, cannot divulge information with any outsider, cannot use for cross-selling or any other purpose and should be used for bank’s internal purposes.

• KYC information normally cannot be part of the account opening form. It could be collected on voluntary basis only from customers.


• Money Laundering refers to the conversion or “Laundering” of money which is illegally obtained, so as to make it appear to originate from a legitimate source.

• Money Laundering is being employed by launderers to conceal criminal activity or against the law enforced in India.


• Hawala : Hawala is an alternative or parallel remittance system.

• Structuring Deposits : This method entails breaking up large amounts of money into smaller parts.

• Third-Party Cheques : Utilizing cheques or banker’s drafts drawn on different institutions and clearing them via various third-party accounts.

The Prevention of Money Laundering Act, 2002

The Prevention of Money Laundering Act, 2002 (PMLA) forms the core of the legal framework put in place by India to combat money laundering. PMLA and the Rules notified there under came into force with effect from July 1, 2005. Director, FIU-IND and Director (Enforcement) have been conferred with exclusive and concurrent powers under relevant sections of the Act to implement the provisions of the Act. The PMLA and rules notified thereunder impose obligation on banking companies, financial institutions and intermediaries to verify, identity of clients, maintain records and furnish information to FIU-IND. PMLA defines money laundering offence and provides for the freezing, seizure and confiscation of the proceeds of crime.


• Banking Ombudsman Scheme was announced by Reserve Bank of India in 2006. However, it was revised, amended in 2007 and 2009 to provide this office a wider role in the field of customer complaints and to adjudicate. It came into force on January, 1. 2006.

• Banking Ombudsman Scheme, 2006 is applicable to all commercial banks, all regional rural banks, and all scheduled primary cooperative banks in the country. This scheme extends to the whole of India.

• Any executive of the rank of General Manager or Chief General Manager or other person suitable for the job can be appointed as Banking Ombudsman.

• The period of office of Ombudsman is 3 years.


• The complainant should have made written representation to the Bank and that complaint has been rejected or complainant has not received any reply within a period of one month after the bank has received his representation or he is not satisfied with the reply given.

• The complaint is not made later than one year after the complainant has received the reply of the bank on his complaint.

• The complaint does not pertain to the same subject matter for which suit proceedings are pending before any Court, Tribunal or Arbitrator etc. or decree or award or order has already been passed by such authorities.

• Compensation is limited to Rs.10.00 lakhs.

• The complaint should not be frivolous and filled with bad intentions.


Common grounds of service deficiency in banking that can be entertained under the banking Ombudsman scheme are:

• Non-payment or inordinate delay in payment and collection of cheques, bills etc.

• Non-acceptance of small denomination notes and coins without sufficient cause.

• Refusal to open deposit account or close the account or delay in closing accounts without reason for refusal or delay.

• Failure to follow the Banking Codes & Standard Board of India’s guidelines and non-adherence to the fair practices code as adopted by the bank.

• Failure to issue or delay in issue of drafts, pay orders or banker’s cheques etc.

• Non-adherence to follow prescribed working hours.

• Failure to honour guarantee or letter of credit commitments.

• Delay or failure to credit the proceeds to the parties account or non-observance of RBI guidelines.

• Any other matter relating to the violation of the directives issued by the RBI in relation to banking or other services.

• Complaints from NRIs having accounts in India in relation to their remittances from abroad, deposits or other bank related matters.

• Forced closure of accounts without due notice or sufficient reasons.

• In case of loans and advances, failure to follow RBI directives on interest rates etc. and also delay in sanction of credit facility without reason can be ground for filing complaint.

• Non-acceptance of application for credit facility is sufficient ground for filing complaint.


• Complaint should be filed in writing and signed by the complainant or his/her authorized representative stating clearly, name and address of the complainant, name and address of the bank’s branch or office against which the complaint is being filed, facts of the case, documentary proof, if any, along with the nature and extent of loss to the complainant be given and the relief sought.

OTHER MATTERS – prescribed by RBI from time to time

• Levying of charges without adequate prior notice to the customer.

• Non-adherence by the bank or its subsidiaries to the instructions of RBI on ATM/Debit card operations or credit card operations.

• Non-disbursement / delay in disbursement of pension [to the extent the grievance can be attributed to the action on the part of the bank concerned, but not with regard to its employees].

• Refusal to accept or delay in accepting payment towards taxes, as required by RBI / Govt.

• Refusal to issue or delay in issuing or failure to service or delay in servicing or redemption of govt. securities.

• The bank shall within one month – comply and intimate the compliance to ombudsman.

• Appeal before appellate authority: Within 45 days of date of receipt of award, any person aggrieved may prefer an appeal against the award. Appellate authority may grant further period of 30 days.

• Banks to display salient features of scheme for common knowledge of public.


Banking Ombudsman has following powers:

• Call any additional information from the Bank against which complaint is filed or any other bank concerned with the complaint.

• Call for certified copies of any document relating to the complaint.

• Maintaining confidentiality of any information or document that may come to his knowledge or possession.

• Nature of the proceedings before Banking Ombudsman is “summary in nature”.

• Appellate Authority in the Scheme of Banking Ombudsman is Deputy Governor –in-charge of the Department of RBI which is implementing the scheme.

Rejection of Complaints

Banking Ombudsman can reject the complaint in case where ;

• The complaint is frivolous, malafide etc;

• The complaint is without sufficient cause or beyond pecuniary jurisdiction (Clause 12 (5))

• Complaint is not pursued by complainant with reasonable diligence,

• In the opinion of the banking Ombudsman there is no loss or damage or inconvenience caused to the complainant.


• Any dispute between the customer of the bank and the bank or may be amongst banks is received by the Banking Ombudsman for arbitration. It means Banking Ombudsman acts as a arbitrator.

• Banking Ombudsman assume the role of arbitrator once the dispute is referred to him by the parties and gets the consent of the parties to do so by way of an affidavit of understanding, duly stamped and notarized.

• At any stage after assuming the charge of arbitrator, if Banking Ombudsman feels that he is unable to perform his given role independently, then he can refuse to continue to be an arbitrator.

• Generally speaking, Banking Ombudsman follows the rules and procedures laid down in the Arbitration & Conciliation Act, 1996.

• If the dispute is for an amount less than Rupees 10 lakh and parties to dispute agree for arbitration in writing, then Banking Ombudsman can himself act as arbitrator.


• Consumer Protection Act (COPRA) was enacted in 1986 Act 68 of 1986) and implemented w.e.f April 15, 1987

• This Act was amended comprehensively in 2002 (specifically on 17.12.2002) and amended Act was implemented from 15.03.2003.

• Consumer Protection Act applies to services and goods and among services fall the banking services.


Consumer Protection Act was enacted to promote and protect the important rights of consumers. Some important objectives are:

• Right to be protected against marketing of goods which are hazardous to life and property.

• Right to be informed about quality, quantity, potency, purity, standard price of goods and services to protect the consumer against unfair trade practices or unscrupulous exploitation of consumers and provide consumer education.

• Right to be assured wherever possible, access to an authority of goods at competitive price.

• Right to be heard and assured that consumer interest will receive due consideration.

Central Councils

• Government of India has established Central Consumer Protection Council (CCPC), for hearing the complaints of consumers or complainants. In short form, CCPC is also called ‘Central Council’.

• The Chairman of the Central Council is normally Minister of Consumer Affairs in Central Government.

• Consumer interest under Consumer Protection Act will be protected by Consumer Protection Councils.

• At the State level also Consumer Protection Councils are in existence and State’s Minister of Consumer Affairs is the Chairman.

Objectives of Councils

• Protect right of consumer against marketing of goods and services which dangerous to the life and property of consumer.

• Right to be informed about quality, purity, quantity, price etc of the product and services.

• Right to have access to various goods and services at competitive price.

• Assure consumer that his interest is being watched by council.

• Consumer’s right to be heard is what the council is meant for.• State or Central Government can establish various redressal agencies to hear and solve consumer complaints.

• Central Consumer Protection Council consists of around 150 members drawn from government, non-official members, other officials as members etc.

• Under the consumer protection act, the redressal of dispute is done through following three Forum/Commissions:

District Consumer Disputes Redressal Forum (also called District Forum) to hear disputes district level. Jurisdiction of handling disputes up to Rupees 20 lakh falls within District Forum.
State Consumer Dispute Redressal Commission (also called State Commission). It can handle disputes with claims between Rupees 20 lakh and 100 lakh.
National Consumer Redressal Commission (also called national Commission). It can handle disputes above Rupees 100 lakh.


• Competitive forces alone do not ensure expected fair treatment, quality, justifiable price and transparency of banks services to customers. Statutory regulatory measures set out in letter but not carried out in spirit.

• For addressing these issues along with other issues related to customer service, RBI setup a committee under the chairmanship of S S Tarapore, which suggested setting up of BCSBI as an independent watchdog for ensuring promised level of service by the bankers.


• Set up in 2006 as a Trust• Collaborative effort of RBI, IBA and banks

• Managed by Governing Council

• Membership Voluntary

• On becoming member, bank bound by Codes


• Registered as a separate society under the Societies Registration Act, 1860.

• An independent banking industry watch dog to ensure that the consumer of banking services get what they are promised by the banks.

• Reserve Bank to lend financial support for a limited period of five years.

• To ensure that the Board really functions as an autonomous and independent watchdog of the industry, the Reserve Bank extends financial support to the Board by way of meeting its full expenses for the first five years.


• Combine the best of both self-regulation and statutory regulation.

• Evolve comprehensive codes and standards for fair treatment of customers.

• Act as a watchdog to ensure that banks deliver services in accordance with promises made in the codes.

• Promote self regulation among banks.

• Collaborative approach.


• The BCSBI does not deal with individual cases of complaints. However, in case complaints point to any serious failing in complying with the code, the BCSBI may investigate and initiate appropriate action. The BCSBI is interested in cases where member banks appear to have breached the Code.


• The Code covers the products and services offered by banks to individual customers. It mainly relates to

Deposit accounts
Safe deposit lockers
Settlement of accounts of deceased account holders
Foreign exchange services
Remittances within India
Loans and advances and guarantees
Credit cards
Internet Banking