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4 Commercial Banks, Types of Accounts and Their Legal Aspects, Banker and Customer - Special Types of Customers, KYC Norms » Class Note
Jan 29, 2016
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knowledge skills technology innoventures
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Before We Start…
It is assumed that after going through the earlier session you are now able to:
State the definition of endorsement
List the different types of endorsements
State the definition of paying and collecting banker
Explain the duty of a Paying Banker and Collecting Banker
Explain material alteration
State the statutory protection for both the paying and the collecting banker
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Session 4
Banking & Insurance Management
Topics to be covered in this session:
Deposits
Different types of accounts
Banker and Customer – Special Types of Customers
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Session Learning Objectives…
At the end of this session you should be able to:
Understand the various types of deposits and accounts
Explain the Banker and Customer Relationship along with Special Customers
Understand the obligations of a Banker
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Demand Deposits
Fixed or time deposits
Deposits
The banker takes deposits from the public from various walks of life, engaged in numerous economic activities and having different financial status. The banks therefore have different types of accounts with various facilities and privileges. The different types of deposit accounts are as follows:
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Current Accounts
Savings Accounts
Demand Deposits
These are the deposits where the money deposited is available to the depositor on demand. Two types of demand deposits are as follows:
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Current Accounts
A current account is a running and active account which may be operated upon any number of times during a working day. There is no restriction on the number and the amount of withdrawals from a current account. As the banker is under an obligation to repay these deposits on demand, the banker has to keep sufficient cash reserves against such deposits. Current accounts are meant for big businessmen, joint stock companies, institutions, public authorities etc. whose banking transactions are numerous on a particular working day.
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As per the advice of RBI, banks have to incorporate a certificate in the account opening form confirming the identity, occupation and address of the prospective customer signed by the introducer.
If the account is not properly introduced and opened, the banker cannot avail the statutory protection under Section 131 of the Negotiable Instruments Act.
Opening of a Current Account
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Account holder(s) should write to the bank stating their intent to close the account.
All unused cheques should be submitted to the bank after cancelling the same.
Incorporated entities and associations should also submit a copy of the resolution wherein it was agreed upon that the account should be closed.
The bank can also request the customer to close the account if:
The customer is no longer a desirable person
The account has not been operated for a long time.
Closing of a Current Account
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Savings Accounts
A savings bank account is meant for the people who wish to save a part of their current incomes to meet their future needs and also intend to earn an income from their savings. The banks, therefore, impose certain restrictions on savings accounts and also offer a reasonable rate of interest. The need of keeping cash reserves against such deposits is comparatively larger than that required for Fixed Deposits and smaller than that of current account.
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Another account holder who has been subject to full Know Your Customer (KYC) procedure can introduce somebody to open a savings account. The introducer’s account must be at least 6 months old and satisfactorily operated.
Photograph and address of the person opening the account must be certified by the introducer or there must be some other acceptable evidence of identity and address.
Opening a Savings Account
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All account holders should write to the bank their intent to close the account. All the unused cheques should be submitted to the bank at the time of closure.
The bank can also request the customer to close his account if:
The customer is no longer a desirable person.
The account has not been operated for a long time.
Closing of a Savings Account
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Recurring Deposit
This account is intended to inculcate the habit of savings on a regular basis. This is an inducement as it gives a slightly higher rate of interest. A depositor is required to deposit a certain amount at a certain interval of time selected by him. The period of recurring deposit varies from bank to bank. However, if the depositor closes his account within three months no interest is paid.
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Fixed Deposits are the deposits with the bank for a fixed period of time which is specified at the time of making the deposit. It is repayable only on the expiry of that period. The rates on these are higher than that of savings accounts.
The rates and other terms and conditions on which the banks accept such deposits are regulated by RBI.
RBI has also permitted the banks to formulate schemes for senior citizens on which higher rates are offered compared to normal deposits.
Fixed Deposit Account
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An application form has to be filled up mentioning the amount and period of the deposit along with the specimen signature.
A Fixed Deposit Receipt is issued thereafter acknowledging the receipt of the sum of money specified to be repaid at the time of expiry of the period mentioned by the depositor along with the interest rate.
Opening a Fixed Deposit Account
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Dr. Herbert Hart, in his book says, “a banker is one who in the ordinary course of his business, honours cheques drawn upon him by persons from and for whom he receives money on current account.”
According to Dr. Hart, “ a customer is one who has an account with a banker or for whom a banker habitually undertakes to act as such.”
Definition of a Banker and a Customer
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A single transaction with the bank will constitute a customer.
The customer has to have an account.
Some frequency in banking transactions is also expected.
The dealing should be in the nature of banking activity.
The customer may not be an individual. It could be a company, a society or other legal entity.
Requisites for a Bank Customer
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Relationship as Debtor and Creditor – On opening an account, the banker assumes the position of a debtor and a depositor remains a creditor. Banker’s relationship with the customer gets reversed as soon as the customer’s account is overdrawn.
Banker as Trustee – A trustee holds money or assets and performs certain functions for the benefit of some other person called beneficiary. Hence, if the customer deposits securities or other valuables with the banker for safe custody, the latter acts as a trustee of his customer.
General relationship - A Banker and a Customer
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Banker as an Agent - The banker is an agent of the customer for remittances, collections of cheques and making payments on his behalf.
Banker as a Lessor – the banker is a lessor when he leases safe deposit lockers to the customers.
Banker as a Consultant – the banker is a consultant when he advises the customers on banking and investment-related issues.
General relationship - A Banker and a Customer
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Obligation to honour cheques – Banks are obliged to honour cheques drawn on it, provided the customer has sufficient funds. It is also obliged to honour cheques upto the overdraft limit of the customer. However this obligation is extinguished by a Garnishee Order, issued under Order 21, Rule 46 of the Code of Civil Procedure, 1908.
Obligations of a Banker
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Obligation to maintain secrecy of customer’s account – A banker has a record of all the financial dealings of a customer. If any of these facts is made known to others, the customer’s reputation may suffer. However, the banker can give information in the following situations:
When statutorily required
With express or implied consent from the customer
To other banks but only general statements can be made
If it is in the bank’s interest
If the disclosure is in public/national interest
Obligations of a Banker
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Minors – Savings account can be opened in the name of a minor to be operated by the guardian if the minor is 12 years old or more.
Married Woman – A married woman is competent to enter into a valid contract.
Pardanashin Woman – As the identity of such a woman cannot be ascertained, the banker generally refuses to open an account in her name.
Illiterate persons – Illiterate persons can open a bank account using their thumb impressions and a photograph attested by an approved witness.
Special Type of Bank Customers
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Lunatics – According to the Indian Contract Act, 1872, a person of unsound mind is not competent to enter into a valid contract.
Trustee – Bankers should examine the trust deed thoroughly and determine the powers vested in the trustees before opening their account.
Executors and Administrators – These are the people who are appointed to conduct the affairs of a person after his death. The executor is
allowed to operate the account of a deceased account holder after he gets the probated will. The administrator can operate the account after receipt of letter of administration.
Special Type of Bank Customers….contd.
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Customer’s Attorney – a customer may appoint an attorney to deal with his bank account. It is a general notice and an authority.
Joint Account – a Joint Account is usually in the name of more than one person. A joint account can be operated in any of the following modes:
All the depositors jointly
Either or Survivor
Former or Survivor
Special Type of Bank Customers….contd.
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Proprietorship – In Proprietorship, even though it is the account of an individual, it is treated as if the account is for a commercial purpose. He can authorize others also to use this account.
Hindu Undivided Family – A bank account is opened in the name of the karta or in the name of the HUF business. The account is either operated by the karta himself or by his authorized coparceners.
Partnership – An account is opened in the name of the partnership firm and not in the names of individual partners.
Special Type of Bank Customers….contd.
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Joint Stock Companies – Banks can open accounts of Joint Stock companies after examining their Memorandum and Articles of Association, Certificate of Incorporation/Certificate of Commencement. A certified copy of the Board Resolution and how the account needs to be operated and by whom along with the application needs to be furnished to the bank to open an account.
Clubs, Societies and Charitable Institutions – When clubs, societies and charitable institutions open bank accounts, it should be ensured that they are properly incorporated.
Special Type of Bank Customers….contd.
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Before We End…
It is assumed that after going through the earlier session you are now able to:
Understand the various types of deposits and accounts
Explain the Banker and Customer Relationship along with Special Customers
Understand the obligations of a Banker
THANK YOU…
All information, including graphical representations, etc provided in this presentation is for exclusive use of current GBS students and faculty. No part of the document may be reproduced in any form or by any means, electronic or otherwise, without written permission of the owner.
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