Types of Relationship Between Banker and Customer

The relationship between a banker and a customer forms the foundation of the banking system. Banking is not limited to accepting deposits and providing loans. Modern banks perform several additional functions such as safe custody of valuables, lockers, collection of cheques, sale of securities, advisory services, guarantees, and many more. Each of these functions gives rise to a distinct legal relationship governed by various laws, including the Banking Regulation Act, 1949, the Indian Contract Act, 1872, the Transfer of Property Act, 1882, and the Indian Trusts Act, 1882.

Broadly, the relationship between a banker and a customer can be classified into two categories:

1. General Relationship, arising mainly from accepting deposits and granting loans.
2. Special Relationship, arising from additional banking services and specific transactions.

Understanding these classifications helps in identifying the rights, duties, responsibilities and legal implications attached to each type of interaction.

General Relationship Between Banker and Customer

According to Section 5(b) of the Banking Regulation Act, banking means accepting deposits of money from the public for the purpose of lending or investment. Therefore, the relationships arising from deposit and lending activities form the general relationship between a banker and a customer.

Debtor and Creditor Relationship

This is the primary relationship that starts as soon as a customer opens an account and deposits money.

• When money is deposited, 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 as required for lending or investment.
• The bank is liable to repay the amount to the customer upon demand, subject to the terms of the account.
• The bank is not required to inform the customer about how the deposited money has been used.

This relationship also exists when the bank issues instruments such as demand drafts, mail transfers or telegraphic transfers, where the bank owes money to the payee or beneficiary.

Creditor and Debtor Relationship

This relationship arises when the bank lends money to the customer.

• The bank becomes the creditor, and the customer becomes the debtor.
• The customer borrows funds based on agreed terms and conditions.
• The customer executes loan documents and offers security, if required, before using the credit facility.
• The debtor is legally bound to repay the loan with interest as per the agreement.

Thus, the role of debtor–creditor reverses depending on whether the customer deposits money or borrows money.

Special Relationship Between Banker and Customer

Apart from deposits and loans, banks provide several additional services such as safekeeping of securities, locker facilities, collection of cheques, issue of guarantees, custodial services and advisory functions. These give rise to special types of legal relationships.

Trustee and Beneficiary

Section 3 of the Indian Trusts Act, 1882 defines a trust as an obligation attached to property ownership arising out of confidence placed in and accepted by the owner for the benefit of another person.

Banks act as trustees in situations where:

• Customers deposit valuables for safe custody.
• Money is deposited for specific purposes, such as escrow accounts or trust accounts.
• Securities or documents are handed over for safekeeping.

The bank must protect and return these items when required. It cannot use the entrusted property for its own benefit.

Bailee and Bailor

Section 148 of the Indian Contract Act, 1872 defines bailment as delivery of goods for a specific purpose under an agreement that the goods will be returned after the purpose is achieved.

This relationship arises when:

• The bank takes physical possession of goods or securities as part of a pledge.
• Articles or valuables are kept in safe custody, though locker contents are not treated as bailment.
• Customers deposit tangible securities as part of loan arrangements.

The bank, as bailee, must take reasonable care of the goods and return them in the same condition.

Lessor and Lessee (Locker Relationship)

Section 105 of the Transfer of Property Act, 1882 defines a lease as transfer of a right to enjoy immovable property for consideration.

When banks provide safe deposit lockers:

• The bank becomes the lessor and the customer is the lessee.
• A “memorandum of letting” is executed, detailing terms and conditions.
• Customers pay rent for using the locker.
• Banks are not responsible for the contents placed inside the locker, unless negligence is proven.
• The bank can break open the locker if rent is unpaid or rules are violated.

This is an ancillary banking service but plays a major role in establishing a lessor–lessee relationship.

Agent and Principal

Section 182 of the Indian Contract Act, 1872 defines an agent as a person who acts for another in dealings with third parties.

Banks act as agents when they:

• Collect cheques, bills or dividends.
• Pay rent, insurance premiums, telephone bills etc., on standing instructions.
• Transfer funds or make payments on behalf of customers.
• Purchase or sell securities for customers.

In all these transactions, the customer is the principal, and the bank is the agent. The bank is entitled to receive charges for such services.

Indemnity Holder and Indemnifier

Section 124 of the Indian Contract Act, 1872 defines indemnity as a contract where one party promises to save another from loss.

This relationship arises in cases such as:

• Issue of duplicate demand drafts, fixed deposit receipts or term deposit certificates.
• Settlement of deceased customer accounts, where indemnity bonds may be required.
• Payments made based on representations where risks of future claims exist.

In such cases:

• The bank is the indemnity holder (promisee).
• The customer is the indemnifier (promisor).

If the bank suffers loss due to reliance on the indemnity, the indemnifier must compensate.

Hypothecator and Hypothecatee

In hypothecation:

• The customer hypothecates movable or immovable property as security for a loan.
• The customer remains in possession of the property.
• The bank, as hypothecatee, has the right to take possession and sell the property if the customer defaults.

This relationship is common in vehicle loans, inventory financing and other credit facilities where possession is not transferred.

Pledger and Pledgee

Section 172 of the Indian Contract Act, 1872 defines pledge as bailment of goods as security for repayment of a debt.

• The customer becomes the pledger, and the bank becomes the pledgee.
• Possession of the property is transferred to the bank, unlike hypothecation.
• The bank can sell the pledged asset after giving due notice if repayment terms are not met.

Gold loans and loans against securities often involve pledge arrangements.

Mortgagor and Mortgagee

Section 58 of the Transfer of Property Act, 1882 defines mortgage as transfer of an interest in specific immovable property to secure payment of money advanced.

• The customer becomes the mortgagor, offering immovable property as security.
• The bank becomes the mortgagee, holding an interest until repayment.
• Ownership remains with the customer, but the bank can enforce its security in case of default.

Home loans and property-backed loans typically create this relationship.

Custodian

Banks act as custodians when:

• They hold securities in Demat accounts.
• They safeguard financial instruments under custodial agreements.
• They manage settlement or clearing of securities on behalf of investors.

As custodians, banks have legal responsibility for the safety and proper handling of the securities.

Guarantor

Banks also act as guarantors in transactions such as:

• Bank guarantees issued in favour of third parties.
• Performance guarantees, bid bonds and financial guarantees.
• Undertakings in international trade.

A guarantee is a contingent contract under Section 31 of the Indian Contract Act, 1872. The bank becomes liable if the customer fails to fulfil the underlying obligation.

Advisor and Client

Banks may offer advisory services, such as:

• Investment advice
• Wealth management suggestions
• Portfolio recommendations
• Financial planning inputs

The bank assumes the role of an advisor, while the customer becomes the client. Such advice must be given with due care, especially if offered officially.

Summary Table of Banker–Customer Relationships

Conclusion

The relationship between a banker and a customer is multifaceted and dynamic. It changes depending on the nature of the transaction, the services availed, and the legal principles governing each activity. While the general relationship is built on debtor–creditor interactions, several special relationships arise from additional services such as bailment, agency, trust, mortgage, pledge and advisory functions.