The Banker and Customer Relationship (Section 31)

Cheques cannot be understood without the relationship that lies behind them: the relationship between a bank and its customer. The Negotiable Instruments Act deals with only a small part of it, chiefly the bank's duty to honour cheques in Section 31. The rest comes from contract law, banking statutes, Reserve Bank directions and a body of common law cases that Indian courts have long followed. This note sets out who is a banker and a customer, the nature of their relationship, and their principal duties and rights.

1. Banker and Customer

• Banker (Section 3, NI Act): includes any person acting as a banker and any post office savings bank.
• Banking (Section 5(b), Banking Regulation Act, 1949): accepting, for the purpose of lending or investment, deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.
• Customer: the Act does not define the term. Courts treat a person as a customer once he has an account with the bank, or the bank has agreed to open one; duration of the dealing is not essential (Commissioners of Taxation v. English, Scottish and Australian Bank, Privy Council, 1920). A person who merely cashes a cheque over the counter is not a customer.

2. Nature of the Relationship

• Debtor and creditor: money deposited becomes the bank's money; the bank owes the customer a debt (Foley v. Hill, House of Lords, 1848). The bank is not a trustee of ordinary deposits and need not account for how it uses them.
• Repayable on demand: the debt is repayable when the customer demands it at the branch where the account is kept, ordinarily by cheque (Joachimson v. Swiss Bank Corporation, 1921). This matters for limitation, which runs from demand.
• Creditor and debtor: when the bank lends, the roles reverse.
• Other capacities: the bank acts as agent when it collects cheques or pays standing instructions, as bailee for articles in safe custody, as lessor of safe deposit lockers, and as trustee of money given for a specific purpose.

3. The Duty to Honour Cheques (Section 31)

• Sufficient funds: a credit balance, or an agreed overdraft limit, covering the whole cheque. A bank is not bound to pay part.
• Properly applicable: not subject to the bank's lien or set-off, a garnishee or attachment order, a freeze by a court or authority, or a dispute over the account.
• Duly required: a cheque in proper form, properly signed, presented within its validity, at the right branch, during banking hours, and not countermanded.
• Duty owed to the customer: the holder has no claim against the bank; only the drawer can sue for wrongful dishonour (Topic 37).

4. Other Duties of the Bank

• To follow the mandate: to pay only on the customer's genuine signature and in accordance with his instructions. A forged cheque is no mandate (Canara Bank v. Canara Sales Corporation, 1987; Topic 20).
• Secrecy: to keep the customer's affairs confidential, subject to four exceptions: disclosure under compulsion of law, a duty to the public, the bank's own interest, and the customer's express or implied consent (Tournier v. National Provincial and Union Bank of England, Court of Appeal, 1924). Statutes such as tax, anti-money-laundering and credit information laws create many disclosures by compulsion of law.
• Reasonable care: to act with care and skill in collecting, paying and advising.
• Statements and records: to provide statements of account and maintain records.

5. Rights of the Bank

• General lien (Section 171, Contract Act): bankers may retain, as security for a general balance of account, any goods or securities bailed to them, unless there is a contract to the contrary.
• Set-off: to combine accounts of the same customer in the same right, after notice where required, to recover a debt due.
• Appropriation of payments: under Sections 59 to 61 of the Contract Act, payments are appropriated as the debtor directs, failing which as the creditor chooses, and failing both, in order of time.
• Interest and charges: as agreed and as permitted by RBI directions.

6. When the Bank's Authority to Pay Ends

• Countermand: the customer's stop payment instruction.
• Death: on receiving notice of the customer's death.
• Insanity: on notice of the customer's unsound mind.
• Insolvency: on notice of an insolvency petition or adjudication, or the commencement of insolvency proceedings for a company.
• Garnishee and attachment orders: under Order XXI, Rule 46 of the Code of Civil Procedure and tax and other statutes.
• Closure of the account by either party, on notice.

Customers' complaints against banks may be taken to the bank's grievance machinery, the Reserve Bank Integrated Ombudsman Scheme, 2021, and consumer fora under the Consumer Protection Act, 2019, since banking is a "service".

7. Related Topics and Provisions

• Cheque (Topic 8)
• Paying banker (Topic 35)
• Collecting banker (Topic 36)
• Wrongful dishonour (Topic 37)