Chapter Notes: Duties & Rights of a Banker and Customer Rights

Duties and Rights of a Banker and Customer Rights

Nature of the Banker-Customer Relationship

The relationship between a banker and a customer is principally contractual and also bears elements of a debtor-creditor, agent-principal and trustee-bailee relationship depending on the service provided. Because of this special relationship, banks owe certain duties to customers and enjoy specific rights. These duties and rights arise from contract, statute, banking custom and established case law.

Duty of Secrecy and Confidentiality

Duty of secrecy requires the bank to keep the affairs of its customers confidential. This duty is both contractual and legal: a bank cannot disclose a customer's information except under specified circumstances. Disclosure by the bank is permissible only when there is a lawful or justified ground to do so, for example:

• Where disclosure is made under compulsion of law.
• Where there is a duty to the public to disclose (public interest).
• Where the interest of the bank requires disclosure (self-interest or to protect its position).
• Where the customer has given express or implied consent to disclosure.

Disclosure under Compulsion of Law

Examples of legal compulsion include:

• Bankers' Books Evidence Act, 1891 - Sections 4 and 6 permit certified copies of bank entries to be produced in legal proceedings; such copies are prima facie evidence of entries in the bank's books.
• Summons by Civil or Criminal Courts - Courts have power to summon banks to produce documents or give evidence.
• Income-tax Act, 1961 - Officers empowered under the Act (for example under Section 133) may call for books and documents that are considered necessary for tax proceedings.
• Other statutes that may require disclosure include the Companies Act, 2013, the Reserve Bank of India Act, 1934, the Foreign Exchange Management Act and similar laws where disclosure is specifically authorised.

Disclosure in Public Interest

Disclosure may be justified where the customer is involved in serious criminal or anti-national activities (for example, terrorism, drug trafficking, smuggling) and disclosure is necessary to protect public interest or for law enforcement.

Disclosure in the Interest of the Bank

A bank may disclose information where it is necessary to protect its own legal or financial interest. Typical situations include:

• Providing information about a borrower's account to guarantors or their authorised representatives for the purpose of recovery.
• Exchanging general information about loan accounts with other banks or co-bankers as a prudent credit practice for assessing and managing credit risk.
• Complying with the Credit Information Companies (Regulation) Act, 2005 (for example, Section 15(1) requires credit institutions to become members of at least one Credit Information Company and provide credit data in the prescribed format).

Disclosure with Customer Consent

Banks may disclose customer information at the explicit request or instruction of the customer. Consent may also be implied from the course of dealings where the customer authorises disclosure.

Duty of Reasonable Care

Banks must exercise due diligence and reasonable care when acting as agent, bailee or trustee for customers. If negligence or improper care by the bank causes loss to the customer, the customer may claim damages. Reasonable care covers safe custody of documents and instruments, correct execution of instructions, prudent handling of collections and proper operation of account services.

Garnishee and Attachment Orders

When a bank receives a garnishee order from a court or an attachment order from tax authorities (for example under provisions of the Income-tax Act), it must act promptly and in accordance with law. Typical obligations are:

• Immediately stop debits from the attached account to the extent specified by the order.
• Intimate the customer about the attachment and the consequent stoppage of operations.
• Follow any procedural requirements in the order and seek legal guidance where required to protect both the bank's and the customer's rights.

Rights of the Bank

Banks possess certain rights arising from contracts with customers, banking custom and law. The principal rights are:

• Banker's lien
• Right of set-off (combination of accounts)
• Right of appropriation
• Right to charge interest and commission
• Right to terminate the banker-customer relationship

Banker's Lien

Lien is the right of the bank to retain possession of a customer's goods, securities or documents until the customer discharges the debt owed to the bank. There are two common types:

• Particular lien - applies to specific goods or documents in the bank's possession for which a debt relating to those items is unpaid.
• General lien - allows the bank to retain all goods, securities or documents in its possession for any general balance due from the customer.

Limitations: the bank's lien does not normally apply to items held under a contract to return them unchanged (for example, items deposited for safe custody where the bank undertakes to return them unchanged) or to negotiable instruments belonging to a customer that were deposited for collection and not as security, unless there is a clear agreement to the contrary.

Right to Set-off

Set-off (or combination of accounts) permits a bank to combine a customer's accounts (where permissible) and debit one account with the credit balance of another to satisfy a debt owed to the bank by the customer. Key points:

• Set-off ordinarily applies to accounts of the same customer held with the same bank. There may be restrictions for accounts held at different branches unless contract or law permits.
• Set-off cannot prejudice a third party's interest in the funds (for example, funds subject to a pledge or distinct legal claim).
• The bank should normally notify the customer before exercising set-off unless immediate action is required by law or contract.

Right of Appropriation

When a customer owes multiple debts to a bank and makes a payment without specifying which debt is to be discharged, the bank has the right to appropriate the payment towards any particular debt. If the customer specifies appropriation, the bank must follow that direction. If neither party specifies, appropriation is governed by the bank's established practice or applicable law; the bank should communicate appropriation decisions to the customer when necessary.

Right to Charge Interest and Commission

Banks may charge interest, fees and commissions for services rendered, subject to the terms agreed with the customer and applicable laws and regulations. All charges should be disclosed clearly in account terms and conditions, tariff schedules and other customer communications.

Termination of Banker-Customer Relationship

The banker-customer relationship can end by agreement or by operation of law. Common modes of termination include:

• Voluntary termination - either party may normally close or withdraw from the relationship by giving notice as required by contract or prevailing practice.
• Termination by law - events that automatically terminate or suspend the relationship include:
  • Death of the customer (personal accounts),
  • Bankruptcy or insolvency of the customer (or liquidation of a corporate customer),
  • Receipt of a garnishee or attachment order affecting the account,
  • Insanity or legal incapacity of the customer.

Banking Codes and Standards

Committee and Establishment of BCSBI

In November 2003, the Reserve Bank constituted the Committee on Procedures and Performance Audit of Public Services under the chairmanship of Shri S.S. Tarapore (former Deputy Governor) to address issues relating to availability and quality of banking services. The Committee recommended setting up a self-regulatory body on the lines of international practice.

Following this recommendation, the Banking Codes and Standards Board of India (BCSBI) was registered as a society on 18 February 2006. The BCSBI worked with banks and industry bodies to prepare codes of conduct for customer service.

Codes Issued by BCSBI

BCSBI, in collaboration with banks, evolved and issued two principal codes:

• Code of Bank's Commitment to Customers - issued on 1 July 2006 and subsequently revised (for example, revisions were carried out in 2009 and 2014) to improve transparency and customer service standards. The Code sets minimum standards for products and services such as deposit accounts, safe deposit lockers, settlement of accounts of deceased account holders, foreign exchange services, remittances, loans and advances, credit cards and internet banking.
• Code of Bank's Commitment to Micro and Small Enterprises (MSE Code) - released on 31 May 2008 and reviewed in 2012 and 2015. This Code addresses the special needs of Micro and Small Enterprises (as defined in the MSMED Act, 2006) and includes provisions on loan products, bills, factoring services, merchant services and Letters of Credit.

BCSBI discontinued operations related to its primary objects with effect from 1 April 2019. Thereafter, the Reserve Bank strengthened statutory consumer protection arrangements by setting up the Consumer Education and Protection Department (CEPD), issuing the Charter of Customer Rights and enhancing the banking ombudsman mechanism.

Key Commitments under the Codes

Banks that adopted the Codes committed to standards such as:

• Acting fairly and reasonably in all dealings with customers.
• Helping customers understand how financial products and services work.
• Assisting customers to use their accounts and services effectively.
• Dealing quickly and sympathetically when things go wrong.
• Treating personal information as private and confidential (subject to lawful exceptions).
• Publicising the Code and making it accessible to customers.
• Adopting and practising a non-discrimination policy.
• Maintaining proper grievance redressal and escalation mechanisms.

Obligations of Customers

While the Codes were voluntary on banks and do not impose obligations on customers directly, certain duties are expected of customers to ensure secure and efficient banking operations. Important customer responsibilities include:

• Provide required documents and accurate information for KYC and other regulatory requirements.
• Keep passbooks, cheque books and debit/credit cards safe and confidential.
• Safeguard User IDs, passwords, PINs and OTPs; do not share them with anyone.
• Inform the bank promptly of any unauthorised or suspicious transactions.
• Do not allow third parties to use one's account for their transactions.
• Avoid responding to unsolicited calls, emails or SMS that request account details; do not click on links from unknown sources to access banking websites.
• Sign cheques, mandates and other documents in accordance with the specimen signature lodged with the bank.
• Use non-home branches only for permitted transactions and when necessary; follow the bank's procedures for such transactions.
• Register a valid mobile number and e-mail with the bank to receive transaction alerts.
• Do not store important banking data insecurely on devices; use verified, secure websites and trusted devices for online banking.
• Use ATMs and merchant services authorised by the bank; block and report lost or stolen cards immediately.
• Change online banking passwords and PINs periodically and follow good security practices.

Practical Examples and Applications

Example 1: If the Income-tax department issues a notice requesting bank records relevant to an assessment, the bank may be required to produce the records under law. The bank should ensure the request is valid, comply with legal formalities for disclosure and inform the customer if appropriate and permitted.

Example 2: A customer with multiple accounts does not specify how a payment should be appropriated. The bank may apply the payment towards outstanding debts according to its appropriation practice but should record the appropriation and inform the customer on request.

Example 3: If the bank receives a garnishee order attaching a customer's account, the bank must freeze the attached amount and notify the customer about the attachment and any suspension of debits as required by the order.

Concluding Notes

Understanding the duties and rights of banks and customers helps maintain trust, protects legal interests and promotes fair banking practices. Banks must balance confidentiality, customer service and compliance with legal obligations. Customers must follow prudent security and disclosure practices and promptly communicate with their bank when problems arise. Statutory measures, self-regulatory codes and strengthened grievance mechanisms together aim to protect customer interests while ensuring banks can manage risk and comply with law.