The banker–customer relationship is the foundation of banking business. Every service provided by a bank—deposit acceptance, lending, remittance, agency services, and advisory functions—depends on this relationship. In law and banking practice, this relationship defines the rights, duties, and liabilities of both the banker and the customer. Understanding this concept is extremely important for the JAIIB and CAIIB examinations, as many questions are framed from legal, operational, and ethical perspectives.
A banker–customer relationship begins when a person opens an account with a bank and continues as long as the account remains in operation. However, depending on the nature of transactions, the relationship may take different legal forms such as debtor–creditor, trustee–beneficiary, agent–principal, and bailor–bailee.
Who is a Banker and Who is a Customer?
Banker
A banker is a person or institution that accepts deposits from the public for the purpose of lending or investment and allows withdrawals on demand or otherwise. Banks are governed by laws such as the Banking Regulation Act, 1949, and are expected to follow RBI guidelines.
Customer
A customer is a person who has an account or banking relationship with a bank. A single transaction is usually not enough to create a banker–customer relationship; there must be some degree of continuity or intention to maintain an account.
In modern banking, customers include:
- Individuals
- Firms and companies
- Government bodies
- Trusts and institutions
Types of Banker–Customer Relationship
1. Debtor–Creditor Relationship
This is the primary and most common relationship between a banker and a customer.
When a customer deposits money in a bank, the bank becomes the debtor and the customer becomes the creditor. The deposited money becomes the bank’s property, and the bank can use it for lending and investment. The bank is not required to return the same notes or coins, but only an equivalent amount on demand or as per account terms.
Key points for exam:
- Bank must repay money only on demand at the correct branch
- Bank must honour cheques if funds are sufficient
- No interest is payable unless agreed
When a bank gives a loan to a customer, the relationship reverses:
- The customer becomes the debtor
- The bank becomes the creditor
2. Trustee–Beneficiary Relationship
In certain situations, the banker acts as a trustee.
This relationship arises when the bank:
- Keeps securities or valuables in safe custody
- Holds funds for a specific purpose (e.g., dividend account, escrow account)
In such cases, the bank:
- Cannot use the money for its own purpose
- Must deal with the funds strictly as per instructions
This relationship is different from a normal deposit account because the bank does not become the owner of the funds.
3. Agent–Principal Relationship
A banker acts as an agent of the customer when performing certain services on the customer’s behalf.
Examples include:
- Collection of cheques, bills, and dividends
- Payment of insurance premiums or utility bills
- Buying and selling securities
- Standing instructions execution
Here, the customer is the principal and the bank is the agent. The bank earns commission for such services and must act with due care and skill.
4. Bailor–Bailee Relationship
This relationship arises when a customer deposits goods or valuables with the bank for safe custody.
Examples:
- Jewellery kept in bank lockers
- Documents kept for safe custody
The customer is the bailor and the bank is the bailee. The bank must take reasonable care of the goods but is not responsible for loss due to events like natural disasters unless negligence is proved.
5. Mortgagor–Mortgagee Relationship
When a customer gives immovable property as security for a loan, the relationship becomes that of:
- Customer = Mortgagor
- Bank = Mortgagee
This relationship is governed by the Transfer of Property Act, 1882.
6. Pledgor–Pledgee Relationship
When movable goods are pledged as security:
- Customer = Pledgor
- Bank = Pledgee
This relationship is governed by the Indian Contract Act, 1872.
Rights of a Banker
A banker enjoys certain rights to protect its interest:
- Right to charge interest and service charges
- Right of general lien
- Right of set-off
- Right to close account after giving due notice
- Right to appropriate payments
These rights are frequently tested in JAIIB and CAIIB exams.
Duties of a Banker
Banks also have important legal duties towards customers:
- Duty to honour cheques when funds are sufficient
- Duty to maintain secrecy of customer accounts
- Duty to act according to customer’s mandate
- Duty to provide accurate statements
- Duty to exercise reasonable care
Failure to perform these duties can result in legal liability for the bank.
Termination of Banker–Customer Relationship
The relationship can be terminated by:
- Closure of account by customer
- Death, insolvency, or insanity of customer
- Order of court or government authority
- Completion of purpose (in case of trust or agency)
- Bank closing the account after due notice