Legal Character of Contract Between Bank and Customer

Legal Character of Contract Between Bank and Customer

The relationship between a banker and his customer depends upon the nature of service provided by a banker. Accepting deposits and lending and/or investing are the core banking businesses of a bank. In addition to its primary functions, it deals with various customers by providing other services like safe custody services, safe deposit lockers, and assisting the clients by collecting their cheques and other instruments as an agent and trustees for them

Relationship as Debtor and Creditor:

On the opening of an account the banker assumes the position of a debtor. He is not a depository or trustee of the customer’s money because the money over to the banker becomes a debt due from him to the customer. A banker does not accept the depositors’ money on such condition. The money deposited by the customer with the banker is, in legal terms, lent by the customer to the banker, who makes use of the same according to his discretion. The creditor has the right to demand back his money from the banker, and the banker is under and obligation to repay the debt as and when he is required to do so. But it is not necessary that the repayment is made in terms of the same currency notes and coins. The payment, of course, must be made in terms of legal tender currency of the country

Banker as Trustee:

Ordinarily, a banker is a debtor of his customer in respect of the deposits made by the latter, but in certain circumstances he acts as a trustee also. A trustee holds money or assets and performs certain functions for the benefit of some other person called the beneficiary. For example, if the customer deposits securities or other valuables with the banker for safe custody, the latter 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, therefore, differs from that of a debtor of his customer. In the former case the money or documents held by him are not treated as his own and are not available for distribution amongst his general creditors in case of liquidation.

Banker as Bailor/Bailee:

Section 148 of Indian Contract Act,1872, defines bailment, bailor, and bailee. A bailment is the delivery of goods by one person to another for some purpose upon a contract. As per the contract, the goods should when the purpose is accomplished, be returned or disposed off as per the directions of the person delivering the goods. The person delivering the goods is called the bailer and the person to whom the goods are delivered is called the bailee. Banks secure their loans and advances by obtaining tangible securities. In certain cases banks hold the physical possession of secured goods (pledge) – cash credit against inventories; valuables – gold jewels (gold loans); bonds and shares (loans against shares and financial instruments) In such loans and advances, the collateral securities are held by banks and the relationship between banks and customers are that of bailee (bank) and bailer.(borrowing customer)

Banker as Lessor/Leasee 

Section 105 of ‘Transfer & Property Act’ deals with lease, lesser, lessee. In case of safe deposit locker accounts, the banker and customer relationship of lesser/lessee is applicable. Banks lease the safe deposit lockers (bank’s immovable property) to the clients on hire basis. Banks allow their locker account holders the right to enjoy (make use of ) the property for a specific period against payment of rent. 

Banker as Agent

A banker acts as an agent of his customer and performs a number of agency functions for the convenience of his customers. For example, he buys or sells securities on behalf of his customer, collects cheques on his behalf and makes payment of various dues of his customers, e.g.. insurance premium, etc. The range of such agency functions has become much wider and the banks are now rendering large number of agency services of diverse nature. For example, some banks have established Tax Services Departments to take up the tax problems of their customers.