JAIIB PPB Module A Unit 1 : Banker-Customer Relationship

JAIIB Paper 2 (PPB) Module A Unit 1: Banker-Customer Relationship (New Syllabus) 

IIBF has released the New Syllabus & Exam Pattern for JAIIB Exam 2023. Following the format of the current exam, JAIIB 2023 will have now four papers. The JAIIB Paper 2 (Principles & Practices of Banking) includes an important topic called “Banker Customer Relationships”. Every candidate who are appearing for the JAIIB Certification Examination 2023 must understand each unit included in the syllabus. In this article, we are going to cover all the necessary details of JAIIB Paper 2 (PPB) Module A Unit 1: Banker Customer Relationship.
Aspirants must go through this article to better understand the topic, Banker Customer Relationship and practice using our Online Mock Test Series to strengthen their knowledge of Banker Customer Relationship.

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.

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

When a customer deposits money with his bank, the customer becomes a lender and the bank becomes  a borrower. The money handed over to the bank is a debt. The relationship between the banker and the  customer is that of a debtor and a creditor. The main features of this relationship are: 

(a) The bank is free to use the money in a way most beneficial to it.

(b) The customer should make a demand of payment. The banker is not required to pay voluntarily.

(c) The demand should be made in specified manner, in writing by cheque, draft, withdrawal form, order  or otherwise, during working hours.

(d) The creditor (customer) does not have any security from the debtor (bank).

(e) The law of limitation does not begin to run until a demand has been made for repayment, in case of  both demand and fixed deposits.

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.

Bank As A Trustee 

A trustee is a person or firm that holds and administers property or assets for the benefit of a third  party. Trustees are required to make decisions in the beneficiary’s best interests and have a fiduciary  responsibility to them, meaning they act in the best interests of the beneficiaries to manage their assets.  If a customer keeps certain valuables or securities with the bank for safe-keeping or deposits a certain  amount of money for a specific purpose, the banker, besides becoming a bailee, is also a trustee.

In the  case of Subramanyan Pillai and Others vs. Palai Central Bank Ltd. (AIR 1962 Ker. 210), certain persons  deposited `2,000 each in the bank as guarantee money to purchase cars. The bank failed before they  could get the vehicle. The court was of the view that the bank acted as a trustee and the money should  be refunded as preferential debts.

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 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.

Remittance Services 

For facilitating funds transfers between two persons, banks were providing services in the form of Demand  Drafts (DD), Banker’s Cheques (BC)/ Pay Orders (PO), Mail Transfers (MT) and Telegraphic Transfers  (TT). With adoption of core banking system for bank operations, these products have become redundant.  Transfer products have become technology as stated below:

  • National Electronic Funds Transfer (NEFT)
  • Real Time Gross Settlement (RTGS)
  • Immediate Payment Service (IMPS)
  • Unified Payment Interface (UPI) Transfers
  • Aadhaar Enabled Payment System (AePS)
  • National Automated Clearing House (NACH)

Government Schemes 

Banks also serve as the distribution points for several Government Schemes that are aimed at financial  inclusion and also providing safe avenues of investment to the common man. Some of the prominent  schemes are mentioned below. These products provide commission income to banks, apart from facilitating  them to cater to various needs of their customers under one roof.

  • Public Provident Fund (PPF)
  • National Pension Scheme (NPS)
  • Capital Gains Account Scheme 1988 (CGAS)
  • Senior Citizens Savings Scheme (SCSS)
  • Sukanya Samriddhi Account Scheme, 2019
  • RBI Bonds
  • Gold Monetisation Scheme, 2015
  • Sovereign Gold Bond Scheme (SGB)
  • Nominated Agency for Gold Imports
  • Atal Pension Yojana
  • Pradhan Mantri Vaya Vandana Yojana (PMVVY)
  • Pradhan Mantri Suraksha Bima

Third Party Products Sale 

With a view to providing one-stop-services to their customers, banks have tapped the opportunity made  available through regulatory relaxations for banks to sell third party financial products pertaining mainly  to the capital market and insurance sectors. For banks, it is an additional source of revenue. Customers,  get financial services at one place. For capital market and insurance sector, it adds to their depth. Some  of the major third party products are:

  • Demat Accounts: Tie-up with a Depository Participant (DP). Some banks register as a DP.
  • Trading Account: Tie-up with a Stock Broker.
  • Three-in-One Account: Linked Demat Account – Trading Account – Savings/ Current Account.
  • Mutal Funds: Tie-up with various mutual fund companies.
  • Life Insurance Policy: Tie-up with a life insurance company.
  • Health Insurance Policy: Tie-up with a health insurance company.
  • Vehicle Insurance, House Insurance, etc.: Tie-up with a general insurance company.

Safe Custody or Trusteeship Services 

Banks and bankers enjoy tremendous public trust. Banks have therefore offered certain services that  leverages on this public confidence. Certain services that banks provide in this context are as follows:

  • Safe Custody of articles, documents, etc.: Valuable articles/ documents are left in the custody of banks for safekeeping.
  • Hiring out safe deposit lockers: Banks hire out safe deposit lockers for safe keeping of valuables (ornaments, gold, documents, etc).
  • Escrow account: Such accounts are used when a party wants to exercise some control on the use of the funds received in the account in the name of another party.
  • Escrow services for document: There are situations when certain parties to a transaction want to have joint control of a document until certain conditions are fulfilled.
  • Trusteeship: Banks offer trusteeship services for handling of certain funds or assets.
  • Executorship: Banks offer the services of executorship for the wills made by their customers.
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