Bankers-Customer Relationship: An Overview

Bankers-Customer Relationship: An Overview

Dear bankers,

As we all know that  is Bankers-Customer Relationship for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are providing the Bankers-Customer Relationship (Unit-1), FUNCTIONS OF BANKS (Module B), Principle & Practice of Banking JAIIB Paper-1.

♣Banking

  • The term “Banking” has been comprehensively defined under the Banking Regulation Act 1949. According to Section 5(b) of the Banking Regulation Act, the term “Banking” means accepting for the purpose of lending or investment of deposits of money received from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.
  • An Individual is not allowed to act as a bank and he/she cannot use this term in the business. A firm consisting of not more than ten partners or a company incorporated under Indian Companies Act, 1956 can be bank, a banker or a banking company. Under section 5(c) of the Banking Regulation Act, “Banking Company” means any company that transacts the business of banking in India. Section 7(1) of the Banking Regulation Act prohibits use of the words ‘banker’ or ‘banking’ or ‘banking company’ by a company other than a banking company. Section 7(2)of the said Act further prohibits the use of such words by an individual or a group of individual or a firm.

Important Function of a Bank covered under Section 6 are:

  • Discounting of bills
  • Collection of cheques and bills
  • Remittances
  • Safe custody of articles
  • Hiring safe deposit lockers
  • Conducting foreign exchange transactions
  • Conducting (Central/State) government transactions
  • Issuing letters of credit and guarantees

♣Banker-Customer Relationship

  • Banker: According to Section 3 of the Negotiable Instrument act the term “banker” Includes any person acting as a Banker.
  • Customer: A person who has a bank account in his name and for whom the banker undertakes to provide the facilities as a banker is considered to be a customer.

To constitute a customer the following requirements must be fulfilled;

  • The bank account may be savings, current or fixed deposit must be operated in his name by making a necessary deposit of money.
  • The dealing between the banker and customer must be of the nature of the banking business. The general relationship between banker and customer.

2

Debtor- Creditor (Bank is a Debtor and Customer is a Creditor)

  • On the opening of an account, the banker assumes the position of a debtor. A depositor remains a creditor of his banker so long as his account carries a credit balance.
  • The relationship with the customer is reserved as soon as the customer account is overdrawn.
  • Banker becomes a creditor of the customer who has taken a loan from the banker and continues in that capacity fills the loan is repaid.
  • The demand should be made in a proper manner. The customer should demand payment not verbally or by a mere telephone call but by cheque, draft, withdrawal form, order or otherwise. Further, demand should be made during the working days and working hours under section 25 and 65 of Negotiable Instruments Act, 1881, respectively.

Creditor- Debtor (Bank is a creditor and Customer is a Debtor)

  • When the bank lends money to the customer, the customer is the borrower and the bank is the lender. The relationship between the banker and the customer is therefore that of a creditor and a debtor.

Banker as a Trustee

  • Ordinally a banker is a debtor of his customer in the report of the deposit made by the letter but in certain circumstances, he acts as trustee also.
  • A trustee hold holds money or asset and performs certain functions for the benefit of some other person called the beneficiary.
  • For example; If the customer deposits securities or other values with the banker for the safe custody, the letter acts as a trustee of his customer.

Bailee and Bailor Relationship (Bank- Bailee and Customer- Bailor)

  • As per the section 148 of the Indian Contract Act, 1872, a bailment is a contract where one person delivers goods to another person for some purpose. The person delivering the goods is the Bailor and the person receiving the goods is the Bailee. After the accomplishment of the purpose, the Bailee needs to return these goods to the Bailor or dispose of them according to the directions of the Bailor. Let us now discuss the duties of bailee and bailor.
  • The finder of lost goods (Section 71 Indian Contract Act) should return any increase in goods/animal to the true owner. Under section 164 (Indian Contract Act), The finder has to take care of such goods as an ordinary prudent man.

Banker as an Agent

  • A banker acts as an agent of his customer and performs a number of agency functions for the conveniences of his customer.
  • For example, he buys or sells securities on behalf of his customer, collects check/cheques on his behalf and makes payment of various dues of his customer.

Relationship of Lessor and Lessee (Bank as a Lessor and Customer as a Lessee)

  • Similarly, when a customer hires a safe deposit locker from the bank, the relation between the bank and the customer is lessor and lessee. The bank is the lessor (licensor) and the hirer of safe deposit locker is the lessee (licensee/tenant).

Indemnifier and Indemnified (Bank is Indemnified or Indemnity holder and Customer is Indemnifier)

  • A contract by which one party promises to save the other from loss caused to hum by the conduct of the promisor or the conduct of any other person is called a contact of indemnity –Section 124 (Indian Contract Act 1872). In the case of banking, this relationship happens in transactions of issue of duplicate demand draft, fixed deposit receipt etc.

Banker Customer Relationship can be Sumarized for Diferent Types of Transactions as under

Transaction Bank Customer
Deposit in the bank Debtor Creditor
Loan form bank Creditor Debtor
Safe custody Bailee Bailor
Locker Lessor Lessee
Collection Of cheque Agent Principal
Purchase of a Draft Debtor Creditor
Payee of a Draft Trustee Beneficiary
Pledge Pawner(Pledgee) Pawnee (Pledger)
Mortgage Mortgagee Martgagor
Standing instruction Agent Principal
Sale/Purchase of securities on behalf of a customer Agent Principal
Money deposited but instructions not given for its disposal Trustee Beneficiary
Articles left by mistake Trustee Beneficiary
Shares given for sale Agent Principal
Hypothecation Hypothecatee Hypothecator

 

♣Different Deposit Products or Services

Deposit Products

  • The major functions of a bank are to mobilise deposit from the Pubic and to invest are lend these deposits to individuals, firms and corporate institutions.

Types of Deposits

  • Demand Deposits
  • Time Deposits
Demand Deposits Time Deposits
Payable on Demand Rapid after expiry of the Deposit Period
Low interest rates or no Interest High Interest rates, which vary according to period
It includes current, saving, overdue deposits and Unclaimed Deposits Time Deposits from 7 days to 120 months period with or without reinvestment plans.
Interests is paid on half yearly basis in saving accounts Interest is generally paid every quarter.

Feature of Demand Deposits

  • Savings Bank Account: As the name suggests this type of account is suitable for people who have a definite income and are looking to save money. For example, the people who get salaries or the people who work as laborers. This type of account can be opened with a minimum initial deposit that varies from bank to bank. Money can be deposited at any time in this account.
  • Withdrawals can be made either by signing a withdrawal form or by issuing a cheque or by using an ATM card. Normally banks put some restriction on the number of withdrawal from this account. Interest is allowed on the balance of deposit in the account. The rate of interest on savings bank account varies from bank to bank and also changes from time to time. A minimum balance has to be maintained in the account as prescribed by the bank.
  • Current Deposit Account: Big businessmen, companies, and institutions such as schools, colleges, and hospitals have to make payment through their bank accounts. Since there are restrictions on the number of withdrawals from a savings bank account, that type of account is not suitable for them. They need to have an account from which withdrawal can be made any number of times.
  • Banks open a current account for them. Like a savings bank account, this account also requires a certain minimum amount of deposit while opening the account. On this deposit, the bank does not pay any interest on the balances. Rather the account holder pays a certain amount each year as an operational charge.

Feature of Time/ Term Deposits

  • Fixed Deposit Account: Some bank customers may like to put away money for a longer time. Such deposits offer a higher interest rate. If money is deposited in a savings bank account, banks allow a lower rate of interest. Therefore, money is deposited in a fixed deposit account to earn interest at a higher rate.
  • Note: This period of deposit may range from 15 days to three years or more during which no withdrawal is allowed.
  • Recurring Deposit Account: While opening the account a person has to agree to deposit a fixed amount once in a month for a certain period. The total deposit along with the interest therein is payable on maturity. However, the depositor can also be allowed to close the account before its maturity and get back the money along with the interest till that period.
  • The account can be opened by a person individually, or jointly with another, or by the guardian in the name of a minor. The rate of interest allowed on the deposits is higher than that on a savings bank deposit but lower than the rate allowed on a fixed deposit for the same period.

The Recurring Deposit Accounts may be of the following types:

  • Home Safe Account or Money Box Scheme
  • Cumulative-cum-Sickness deposit Account
  • Home Construction deposit Scheme/Saving Account

 

  • CASA Deposit Account:CASA is the acronym for Current and Savings account, which is commonly used in the banking industry across West Asia and South-East Asia. Banks usually receive the majority of their funds from various kinds of deposit schemes like current accounts, Savings Accounts and term deposits.
  • CASA deposit is the amount of money that gets deposited in the Current and Savings Accounts of bank customers. The bank pays very low or no interest for deposits in current accounts whereas the deposits in Savings Accounts receives slightly higher interest rates. It is the cheapest and major source of funds for banks. This fund source is in turn used to distribute Home Loans, Personal Loans etc.
  • Reinvestment Deposit Account:This is special term deposits. This plan helps you to earn interest on interest, thus giving you a two-fold income. You deposit your money with us for any period between six months to 10 years, and we pay you interest on your deposited money plus on the interest you earn.
  • Hybrid deposits or flexi deposits: Hybrid deposits or flexi deposits which combine the features of demand and term deposits. These deposits are introduced in recent times by some banks to meet customers’ financial needs and convenience and are known by different names in different banks.

Different Between NRE and NRO account

Basis NRE Account NRO Account
Acronym Non Resident External Account Non Resident Ordinary Account
Meaning It is an account of an NRI to transfer foreign earnings to India It is an account of an NRI to manage the income earned in India
Taxability Interest earned is tax free Interest earned is taxable
Repatriability Can repatriate Can repatriate the interest amount, the principle amount can be repatriated within the set limits
Joint Account Can be opened by two NRIs Can be opened by an NRI along with an Indian citizen or another NRI
Deposits and Withdrawals Can deposit in foreign currency, and withdraw in Indian currency Can deposit in foreign as well as Indian currency, and withdraw in Indian currency
Exchange Rate Risk Prone to risk Not prone to risk

♣Service to Customers and Investors

  • Merchant Banking: Merchant banking can be defined as a skill-oriented professional service provided by merchant banks to their clients, concerning their financial needs, for adequate consideration, in the form of fee.

Services offered by Merchant Banks

Merchant Banks offers a range of financial and consultancy services, to the customers, which are related to:

  • Marketing and underwriting of the new issue.
  • Merger and acquisition related services.
  • Advisory services, for raising funds.
  • Management of customer security.
  • Project promotion and project finance.
  • Investment banking
  • Portfolio Services
  • Insurance Services.

Merchant banking helps in reinforcing the economic development of the country, by acting as a source of funds and information to the business entities.

Merchant Banker

  • Any person, indulged in issue management business by making arrangements with respect to trade and subscription of securities or by playing the role of manager/consultant or by providing advisory services, is known as a merchant banker. The activities carried out by merchant bankers are:
  • Private placement of securities.
  • Managing public issue of securities
  • Satellite dealership of government securities
  • Management of international offerings like Depository Receipts, bonds, etc.
  • Syndication of rupee term loans
  • Stock broking
  • International financial advisory services.
  • In India, the functions of the merchant bankers are governed by the Securities and Exchange Board of India (SEBI) Regulations, 1992.

Lease financing

  • Lease financing is the source of payment which comes when the owner of assets (lesser) ready to provide their assets to another person in exchange of that lessor provides some agreed payment. In this way, the lessor leases the assets for a period of time on rent and lesser gets funds from the lessor. The periodical payment made by the lessee to the lessor is called the lease rental.
  • Under lease financing, the lessee is given the right to use the asset but the ownership lies with the lessor and at the end of the lease contract, the asset is returned to the lessor or an option is given to the lessee either to purchase the asset or to renew the lease agreement.

Advantages of lease financing

To the Lessor:

  • Assured regular income: the lessor get lease rental by leasing an asset during the period of the lease which is an assured regular income.
  • The benefit of tax: as ownership lies with the lessor, the tax benefit is enjoyed by the lessor by way of depreciation of respect of the leased asset.

To the lessee:

  • Tax benefits: a company is able to enjoy the tax advantage on lease payments as payments can be deducted as a business expense.
  • Cheaper: leasing is a source of financing which is cheaper than almost all sources of all the source of financing.

Disadvantages of lease financing

To the Lessor:

  • Double taxation: sales tax may be charged twice; first at the time of purchase of assets and second at the time of leasing the asset.
  • Unprofitable in case of inflation: lessor gets a fixed amount of lease rental every year and they cannot increase this even if the cost of the asset goes up.

To the Lessee:

  • Ownership: the lessee will not become the owner of the asset at the end of lease agreement unless he decides to purchase it.
  • Compulsion: finance lease is non-cancellable and even if a company does not want to use the asset, the lessee is required to pay the lease rentals.

♣Plastic Money

  • Plastic Money: Plastic money is a term used to represent the hard plastic cards used in day to day life in place of actual banknotes. They come in several forms such as debit cards, credit cards, store cards and pre-paid cash cards. The plastic cards began to be used widely after 1970 when the specific standards were set for a magnetic strip. In 1981, the concept of Credit cards was introduced in India and was on the verge of an exceptional boom.
  • Today the domestic card industry is applied with different types of cards from gold, silver, global, smart to secure, co-branded credit cards, etc. the list is endless. There is enormous growth potential in the domestic card industry.

Types Of Plastic Money

  • Charge Card: A charge card has similar features of credit cards. However, after using a charge card, it is necessary to pay the whole amount of bill till the due date. If the person defaults to pay the amount of the charge card, then he has to pay the late payment charges.
  • Visa & MasterCard: Visa & MasterCard are international non-profit organizations. They are dedicated to promoting the growth of the business of cards across the globe. They have designed a wide network of merchant institutions by keeping in mind that the customers might use their credit cards to make several transactions worldwide.
  • Debit Cards: The debit card is an encoded plastic card which is issued by banks and has replaced with the cheques. It allows the customers to pay in exchange for goods and services without carrying cash. It is a multipurpose card, as it can be used as an ATM to withdraw the money and check the balance of the bank account. It is issued by bank free of cost with the savings or current account. It is one of the best online-payment tools where the amount of purchase is immediately subtracted from the account of the customer and credited to the merchant’s account. It has overcome the delay in the payment process.

There are presently two ways in which debit cards transactions are processed:
i)Online debit (also known as a PIN)
ii)Offline debit (also known as signature debit)

  • ATM Cards: These cards are typically used at ATMs to withdraw money, transfer funds and make deposits. ATM cards are used by inserting the card into a machine and enter a PIN or personal number for security purpose. The system checks the account for sufficient funds before allowing any transaction.

Advantages Of Plastic Money

  • Convenience: Plastic money provides an easy way to make financial transactions without carrying cash. It also provides the benefits of anywhere and anytime banking.
  • Check Counterfeiting: The proposed plastic currency notes will reduce the chances of counterfeiting.
  • Long life of Plastic Currency Notes: The proposed plastic currency notes will have the life of five years as against one-year life of paper currency notes.
  • Check on Black Money: It is possible to trace the financial transactions done through cards. Developing a culture of plastic money will make it easy for the government to trace black suspected black money sources.
  • Supports Growth of E-commerce: The use of cards has supported the growth of e-commerce. Growth of e-commerce enhances cost-effectiveness and alternative channels to improve economic growth.
  • Power of Purchasing: Debit or Credit cards made it easier to buy things. Now we do not have any need to carry money in a large amount. Plastic money is accepted at any time and everywhere.
  • Time-Saving: one can purchase anything from any place through a credit card or debit card without spending money on fare or cash transaction. You have to provide your card details to seller store or corporations and settle your order. It saves time in the transaction by debit and credit card.
  • Safety: In case, if an individual loses the cards, then he/she may contact the bank or financial institution, which provide the cards. The financial institution or bank will block the account and no-one can draw a single penny without your permission.

Disadvantages Of Plastic Money

  • Shops using other Vendors: Numerous shops accept credit cards of a specific company only. In this situation, money is the only mode of payment for those who use a credit card of another company.
  • Less Availability: There are several cases where the firms do not let their cards to be utilized in specific areas wherever they have a regional dispute.
  • An issue with Magnetic Strip: The Credit card consists of the magnetic strip that can get worn out due to extensive use of it. If it happens while travelling, and credit card is the only form of money with the person, then he/she must wait till the time they receive a new card. The new card may take a minimum of forty-eight hours to get active.
  • Increased Debt and rates of high-interest: Credit Card from Corporations and financial institutions charge high-interest rate on more money if the person fails to pay off till the fixed date of the particular month. These interests are the earnings, for which they provide the additional shopping for limits then the money. It is not a good idea to owe loan on high-interest rates and spend it in necessary things or purchasing.
  • Fraud: In the case of stolen credit cards, the thief may use it directly to get the information. In today’s world, it is possible to get a clone of any debit or credit card, which works like original and can be a substantial loss. Thus be aware of the frauds of credit cards.

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