S.y. banking ch 2

As per VNSGU Syllabus 2017-18

1. Semester-Sem-III
Subject: Banking Law & Practice

2. Introduction
Therelationshipbetweenacustomerandabankerarisesoutofacontractualagreement.
Thecontractiscompletedwhentheprospectivecustomersignstheaccount-openingformand
thebankeracceptsthesameforopeningtheaccount.
Inthisway,thebanker-customerrelationshipcomesintoexistencebythemutualagreement
betweenthem.
Ifoneofthepartieswishestoterminatethisrelationship,thenhehastoserveanoticetothe
otherpartyorundercertainsituationsunderlegalprovisionsthisrelationshipcanbe
terminated.
Tounderstandtheterminationofbanker-customerrelationship,itisnecessarytounderstandthe
followingtwoterms:
i.Stoppinganaccount,and
ii.Closinganaccount
Intheviewofthebanker,boththesetermsaresynonymous.Butforacustomer“Stopping
anaccount”meansthereisatimebeinghaltinthebanker-customerrelationshipanditmay
restartaftersometime,while“Closinganaccount”meanstheendofthebanker-customer
relationshipforever.

3. Whenabankerfindsthatthecustomerisundesirableorunwantedcustomerthenabankercan
prefertoclosedownhisaccount,andcanbringanendto(oraterminationof)banker-customer
relationship.
UndesirableCustomer
Intheviewofabanker,thecustomerisconsideredtobeanundesirable(orunwanted)customer
underthefollowingcircumstances:
i.Whenagarnisheeorderfromacourtisservedfrequentlyonhisaccount.
ii.Whentheholderofbank’saccountisdeclaredoffenderbyforgedsignaturesonchequesand
billofexchanges.
iii.Whenhedoesnotmaintainminimumrequiredbalanceinhisaccount.
iv.Whenthereisnosufficientbalanceandheissuesthechequesfrequently.
v.Whenheissuesthechequewithoutseekingtheoverdraftfacilityonhisaccount.
vi.Whenheissuespost-datedchequesfrequently.
vii.Whenheissuestheinstructionstothebankfrequentlyforstoppaymentofthechequesissued
totheparties.
Naturally,abankercanprefertoclosesuchanaccountofundesirablecustomer.Butthebanker
cannotclosetheaccountofacustomerasperhisdiscretion,asthebanker-customerrelationshipisa
contractualone.BankhastofollowtheprocedureasperIndianContractAct,1872.

4. ProceduretoClosesuchanUndesirableCustomer
Account
1)Thebankerisrequiredtoserveanoticetosuchanundesirablecustomertoclosehisaccountin
thebank,withinacertaintimelimit.
2)Butifacustomerdoesnotrespondtoclosehisaccountevenafterthenoticeperiodisover,then
thebankcancollecttheblankchequesissuedtohimandcanclosedownhisbankaccount.The
bankershouldinformthecustomerthatbankingtransactionwillnotbeentertainedaftera
particulardateunderintimationi.e.Nocreditonsuchaccountwillbeentertainedandshould
alsoinformthecustomertowithdrawhisbalanceimmediately.Stillthenifacustomerdrawsa
chequethenitisnecessarilyrequiredtobehonouredbythebankuptothelimitofbalanceinhis
account.

5. TerminationofBanker-CustomerRelationshipor
ClosingtheAccount
Thestartingofthebanker-customerrelationshipmakesitclearthatboththepartiesareboundto
followuptheirdutiesandareexpectedtoenjoytheirproperrights.Therelationshipbetweena
bankerandacustomeristerminatedbythefollowingmethods:
Methods of
Termination
Mutual
Agreement
Giving
Notice to the
Other
Party
Death of the
Customer
Insanity of
the Customer
Insolvency of
the Customer
Closure of a
Business by a
Banker or his
Customer
Assignment
of Balance in
the
Customer’s
Account
Garnishee
Order on
Customer’s
Account

6. 1)Termination by mutual agreement
(A) Termination by a customer:
•If a customer wants to terminate the relationship with a banker, he gives
written notice to the banker about it.
•If he has a current account or a savings bank account with the banker, it can
be closed immediately; but if he has a fixed deposit account, it can be closed
on the expiry period of the fixed deposit.
•In case of the termination of relationship by a customer with the banker, the
banker has to collect all unused chequesfrom him and they are to be
destroyed to avoid the mischief of fraud played by some other person.
•A customer may think of terminating its relationship with the banker due to
many reasons like (i) a customer finds his convenience of banking
transactions with some other banker, nearer to his residence; (ii) A customer
may want some special services which the banker may not be willing to give
due to placement of himself in risky position.
(B) Termination by a banker:
•A customer can terminate the banker-customer relationship very easily. But a banker cannot
terminate the banker-customer relationship easily.
•In case a banker wants to close a customer’s account he sends a written notice to him about it.

7. •If the customer does not close the account after receipt of the notice, the banker will
send him a chequefor the full amount in his account.
•In case, the customer does not encashthe cheque, the banker will continue to honour
the chequedrawn on the account till the funds last, but will not accept any deposits in
the account.
2) Termination by giving notice to the party
•Generally, a banker cannot close the customer’s account as per his discretion. But he can close if
the account is dormant and has no transactions and profitable to a customer.
•So when the banker desires to close such account, the banker has to write a letter showing the final
balance and clears the point that the customer should draw the balance at a time and should return
the unused cheques, pay-in slips and a passbook to the banker.
•In spite of such efforts of a banker, if the customer does not approach for response then the banker
can close the account and keeps the account in tact which the banker cannot use and pays as soon
as he finds out the true owner.
3) Termination on the death of a customer
•As soon as the banker receives information about the death of a customer, his account should be
closed and no payment should be made from such account.
•Even chequewritten before his death but presented after drawer’s death should not be honoured.
•After the death of the customer, his legal heirs inherits the right of his account and the banker has
to act in accordance with his instructions after the legal heir has obtained a succession certificte
from a competent court.

8. •Thesuccessorcanopenhisaccountasperdesireonlyafterproducingsuccessioncertificateorcan
withdrawamountfromtheaccount.
•Theaccountofdeceasedcannotbecontinuedafterhisdeathunderanycircumstances.
4)Closingtheaccountduetoinsanityofcustomer
•Thebankershouldcloseacustomer’saccountassoonashehearsabouthisinsanity(i.e.unsound
mind).
•Butthiscanbereopenedwhenheisdeclaredtobenormalbyacompetentauthority.Thebanker,
however,hastobeverycautiousbecauseitisverydifficulttoascertainwhetherapersonisreally
insane.
•Becausewhenthecustomerstopstheoperationofaccountmerelyonthebaseofrumours,itis
illegalandbankisresponsibleforsuchtypeofdealings.
•Sonormallythebankerstransactthebusinesswiththecustomersthinkingthemofsoundmind.
5)Closingtheaccountduetoinsolvencyofcustomer
•Whenthecustomerisdeclaredasinsolventthenbankcanrefusepaymentofchequeashisright.
•Theaccountofacustomershouldbeclosedassoonashisbankergetsinformationabouthis
insolvency.
•Thegovernmentappointsaliquidatortomanagetheassetsandpropertyofsuchinsolventperson.
•Afterclosingtheaccount,thesaidaccountcanbeoperatedonlyundertheinstructionofliquidator
appointedbythehonourablecourt,tohandletheaffairsoftheinsolventcustomer.

9. 6) Termination of relationship due to winding up of business
•Incaseapartnershipfirmisdissolvedoracompanyisliquidated,thebankeronreceiving
informationaboutsuchdissolutionorliquidation,hastoclosetheiraccount.
•Theseaccountscanbeoperatedonlyunderinstructionsoftheofficialliquidatorappointedforthe
liquidationprocess.
•Ontheotherhand,whenbankterminatesitsbusiness,thentherelationsbetweencustomerand
bankeralsoend.
•Whenonebankmergeswithanother,thentheaccountsofcustomersaretransferredtothenew
bankandhebecomesthecustomerofanewbank.
•Inthiscase,acustomerremainsthesamebutthebankchanges.
7)Terminationofrelationshipduetoassignmentofbalancein
customer’saccount
•Insomecases,thecustomermayassignthecreditbalanceinhisaccounttosomeotherperson
asignee)andmaygivenoticeofsuchassignmenttothebanker.
•Afterreceiptofsuchnotice,thebankerwillnothonourthechequesreceivedonthecreditbalance
assignedoruptotheextentofbalanceassigned.Bankerisresponsibletopaybalanceofaccounts
toathirdparty.
•Inthiscase,bankerremainsthesamebutthecustomerhasbeenchanged.
•Incasewhereapartofthecreditbalanceisassigned,therelationshipbetweenthebankerand
customerisnotterminatedandthebankermayhonourthechequesontheremainingpartofthe
creditbalanceinthecustomer’saccount.

10. 8) Termination of bank-customer relation due to Garnishee order
on customer’s account
•Ifabankreceivesanorderfromacourttostoppaymentfromacustomer’saccount(i.e.Garnishee
order),thebankermustnothonourchequesdrawnbythecustomeronsuchaccount.
•Iftheorderistoattachthewholebalanceintheaccount,thebankercannothonouranychequeof
thecustomer,i.e.thebanker-customerrelationshipistemporarilyrestricted.
•Ifontheotherhand,theGarnisheeorderattachesapartofthebalance,chequesmaybehonoured
onlyuptotheamountthatwouldremainaftertheGarnisheeorderhasbeenimplemented.
•TherelationshipbetweenthebankerandhiscustomeriscontinuedaftertheGarnisheeorderis
liftedbythecourt.