Banker and Customer Relationship in Banking Law: Complete Notes

Banking regulation decides which institutions may take the public's money. The law of the banker and customer relationship decides what happens between the bank and the individual who gives it. The relationship is contractual at its base, but the law has built around it a set of implied duties, statutory rights and regulatory standards that no contract may displace. This note brings the whole of it together: what the relationship is, how it begins, what each side may demand, who the difficult customers are, and how it ends.

Figure 1: The life of a banking relationship

1. The Nature of the Relationship

• Debtor and creditor: a deposit makes the bank the debtor and the customer the creditor, and the positions reverse on a loan or overdraft. Foley v. Hill, (1848) 2 HLC 28 settled that money paid in becomes the banker's own money, which he may employ as he pleases, and that he is answerable only for the amount because he has contracted.
• Why it matters: a debtor may lend the money out, which is what makes banking possible; a creditor ranks only as an unsecured claimant if the bank fails, which is what makes deposit insurance necessary.
• The peculiar debt: payable only on demand, at the branch where the account is kept, in proper form, with limitation running from the demand under Article 22 of the Limitation Act, 1963, and always subject to the banker's lien and set-off.
• Other capacities: trustee where money is paid for a specific purpose, agent in collection and payment, bailee under Section 148 of the Contract Act for articles in safe custody, lessor of a locker, pledgee under Sections 172 to 179, mortgagee, and guarantor on a bank guarantee or letter of credit.
• Lockers: Amitabha Dasgupta v. United Bank of India, 2021 SCC OnLine SC 124 held that a bank owes an independent duty of care over lockers and may not contract out of it. Under the Reserve Bank's later instructions, liability for loss from fire, theft, burglary, dacoity, building collapse or employee fraud is fixed at one hundred times the prevailing annual rent.

Figure 2: The four sources of the parties' obligations

2. Accounts and Identification

• Demand and time: savings and current balances are demand liabilities; fixed and recurring deposits are time liabilities. A current account pays no interest and may carry an overdraft; a savings account pays interest at a rate deregulated since 2011.
• Inclusion accounts: every bank must offer a basic savings bank deposit account with no minimum balance and no ceiling, and a small account for a person without an officially valid document, limited to a balance of ₹50,000, annual credits of ₹1,00,000 and monthly withdrawals of ₹10,000, valid for twelve months.
• The mandate: the account opening form records who may operate the account and how. Any payment outside it is at the bank's own risk.
• Nomination: under Sections 45ZA, 45ZC and 45ZE of the Banking Regulation Act, for deposits, safe custody and lockers, with up to four nominees permitted since 1 November 2025 under the Banking Laws (Amendment) Act, 2025. A nominee receives but does not own.
• Know your customer: the duty comes from Section 12 of the Prevention of Money-Laundering Act, 2002 and the Maintenance of Records Rules, 2005, and the operative text is the Reserve Bank's Master Direction issued under Section 35A. It requires a customer acceptance policy, identification procedures, transaction monitoring and risk management, the identification of beneficial owners, and record keeping for five years.
• Digital identification: Aadhaar may be used only with the customer's consent after the 2019 amendment, and video based customer identification has been permitted since January 2020.

3. The Rights of a Banker

Figure 3: What each side may demand of the other

• The general lien (Section 171, Indian Contract Act, 1872): bankers may, in the absence of a contract to the contrary, retain as security for a general balance of account any goods bailed to them. It is treated as an implied pledge, so the bank may sell after notice.
• Its limits: it does not reach property held for a specific purpose, property received otherwise than as a banker, property of a third person, the contents of a locker or money held in trust. A negative lien is not a lien at all but an undertaking not to encumber.
• Set-off: the right to combine accounts where the debts are mutual, in the same right and presently due. It becomes automatic on death, insolvency, winding up or a garnishee order, and good practice requires reasonable notice before it is exercised.
• Appropriation: Section 59 gives the choice to the debtor, Section 60 to the creditor, including as against a time barred debt, and Section 61 applies payments in order of time where neither chooses.
• Interest and charges: governed by the contract and by the Reserve Bank's directions under Sections 21 and 35A, with Section 21A barring a court from reopening a transaction on the ground that the rate is excessive, and the current instructions requiring penal charges rather than penal interest.

4. The Duties of a Banker

• To honour cheques (Section 31, Negotiable Instruments Act, 1881): the drawee having sufficient funds properly applicable must pay when duly required, and on default must compensate the drawer. The duty is owed to the drawer alone, and the payee has no claim against the drawee bank.
• When the duty is displaced: countermand, notice of death, insolvency or insanity, a garnishee or attachment order, or a defect in the instrument such as a material alteration, a stale or post dated cheque, or a signature differing from the specimen.
• Wrongful dishonour: a trader recovers substantial damages without proof of actual loss, because injury to commercial credit is presumed; a non trader recovers nominal damages unless special loss is shown. The words on the return memorandum may found a separate claim in defamation.
• Secrecy: an implied term of the banking contract, established in Tournier v. National Provincial and Union Bank of England, [1924] 1 KB 461, with four exceptions: compulsion of law, duty to the public, interest of the bank, and consent of the customer. The duty extends to everything learned by reason of the relationship and survives the closing of the account.
• Statutory qualifications: the Credit Information Companies (Regulation) Act, 2005 compels sharing with credit bureaux, Section 13 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 states the obligation for nationalised banks, and the Digital Personal Data Protection Act, 2023 adds a statutory layer above the contractual duty, brought into force in phases by the Digital Personal Data Protection Rules, 2025.
• Reasonable care: in paying (signature, alteration, mandate), in collecting (proper enquiry, suspicious credits), in advising, and in electronic banking, where the Reserve Bank's framework on unauthorised transactions limits customer liability and places the burden of proving customer negligence on the bank.

5. Special Customers

• Minors: incompetent to contract under Section 11 and Mohori Bibee v. Dharmodas Ghose, (1903) 30 IA 114, so a bank may take a deposit but must never lend, and a guarantee of a minor's debt is of doubtful value, since High Courts have differed on the surety's liability. Section 26 of the Negotiable Instruments Act lets a minor bind all parties except himself. The Reserve Bank permits a minor above ten to operate an account independently within limits.
• Unsound mind and illiterate persons: on notice of unsoundness the account is stopped; an illiterate customer signs by thumb impression with a witness and photographs.
• Joint accounts: the mandate governs, as either or survivor, former or survivor or jointly. Any one holder may countermand. Survivorship gives the bank a discharge but does not decide ownership.
• Partnership firms: opened on the deed and a letter of authority signed by all partners, with Section 19 of the Indian Partnership Act, 1932 defining implied authority, which does not extend to arbitration or to transferring immovable property. The account is broken when a partner dies, retires or is adjudged insolvent.
• Companies, trusts and families: a company account rests on the memorandum, articles and board resolution; a trust account on the trust deed, with trustees acting jointly and trust money never available for set-off; a Hindu undivided family account on the karta's authority.
• Non-residents: NRE (rupee, repatriable, tax free), NRO (Indian income, repatriation capped, taxable) and FCNR (foreign currency term deposit), all under the Foreign Exchange Management Act, 1999.

6. How the Relationship Ends

• Garnishee order: under Order XXI, Rule 46 of the Code of Civil Procedure, 1908, with notice under Rule 46A, an order under Rule 46B or a trial under Rule 46C, and discharge on payment under Rule 46F. It reaches a sole account and a term deposit, the latter payable only on maturity, but not a joint account for a sole debt, a trust account or an unutilised overdraft limit, and the bank's set-off operates first.
• Revenue attachment: Section 416(5) of the Income-tax Act, 2025, which replaced Section 226(3) of the 1961 Act from 1 April 2026, and the equivalents under other fiscal and enforcement statutes, where compliance gives the bank a full discharge and default makes it an assessee in default.
• Death, insolvency and insanity: the authority to pay ends on notice, and the balance passes to the nominee under Section 45ZA, to the assignee, or to the guardian appointed.
• Closure: by the customer at any time, and by the bank on reasonable notice, fairly and after allowing time for cheques already issued.
• Dormancy: an account with no customer induced transaction for two years is inoperative, and after ten years the balance goes to the Depositor Education and Awareness Fund under Section 26A without extinguishing the claim.
• Proving the record: the Bankers' Books Evidence Act, 1891 allows proof by certified copy (Sections 2(8) and 4), protects the bank's officer where the bank is not a party (Section 5), and permits inspection by court order served on the bank three clear days in advance (Section 6).

7. How the Parts Fit Together

The relationship is a contract at its base, which is why Foley v. Hill controls what the bank may do with the money and why the mandate controls what it may do on the customer's instructions. On to that contract the law grafts implied terms, of secrecy and of reasonable care, which the parties do not negotiate and which a standard form cannot exclude without clear words. Above both sits statute, in Section 31 of the Negotiable Instruments Act and Section 171 of the Contract Act, and above that regulation, in the Master Directions, the fair practices code and the ombudsman scheme, which supply the standards that an individual customer could never bargain for.

The practical consequence is that a question in this area should be answered in that order. Ask first what the contract and the mandate say; then whether an implied duty has been broken; then whether a statutory provision applies; and last whether a regulatory standard has been breached, which may give a remedy before the ombudsman or a consumer commission even where the contract has been complied with.

8. Quick Revision

9. Frequently Asked Questions

What is the legal relationship between a bank and its customer?

Primarily that of debtor and creditor, settled by Foley v. Hill, (1848) 2 HLC 28, under which money paid in becomes the bank's own and the bank owes only an equivalent sum. The positions reverse on a loan. Depending on the transaction the bank may also be a trustee, agent, bailee, lessor, pledgee, mortgagee or guarantor.

What is the banker's lien and what does it not cover?

The right under Section 171 of the Indian Contract Act, 1872 to retain, as security for a general balance of account, goods bailed to the banker, in the absence of a contract to the contrary. It does not extend to property held for a specific purpose, property received otherwise than as a banker, property of a third person, the contents of a safe deposit locker, or money held in a trust or client account.

What are the exceptions to the duty of secrecy?

The four in Tournier v. National Provincial and Union Bank of England, [1924] 1 KB 461: compulsion of law, duty to the public, interest of the bank, and the customer's express or implied consent. The duty covers everything learned by reason of the relationship and survives the closing of the account.

What damages follow a wrongful dishonour of a cheque?

Section 31 of the Negotiable Instruments Act, 1881 requires the bank to compensate the drawer for loss or damage. A trader recovers substantial damages without proving actual loss, since injury to commercial credit is presumed; a non trader recovers nominal damages unless he proves special loss. The words on the return memorandum may also be defamatory.

Can a bank account be attached by a court?

Yes, by a garnishee order under Order XXI, Rule 46 of the Code of Civil Procedure, 1908, in execution of a money decree. The bank must stop payment out of the attached balance. The order reaches a sole account presently due, but not a joint account for the sole debt of one holder, a trust account or an unutilised overdraft limit. A term deposit is caught but paid only on maturity, and the bank's set-off is exercised first.

How does a bank prove its records in a legal proceeding?

By a certified copy under the Bankers' Books Evidence Act, 1891. Section 4 makes it prima facie evidence of the existence of the entry, admissible to the same extent as the original and no further. Section 5 protects the bank's officer from being compelled to attend where the bank is not a party, and Section 6 permits inspection by court order, which must be served on the bank three clear days before it is to be obeyed.

Does the duty of secrecy bind a bank after the account is closed?

Yes. Tournier treats the duty as covering information acquired by reason of the relationship, and it does not end when the account does. What narrows after closure is only the scope of the consent and interest of the bank exceptions, since there is no longer a live relationship to protect.

What is the practical order in which a question in this area should be answered?

Four steps. First, what do the contract and the mandate provide, since the relationship is contractual at its base. Second, has an implied duty of secrecy or reasonable care been broken. Third, does a statutory provision apply, such as Section 31 of the Negotiable Instruments Act or Section 171 of the Contract Act. Fourth, has a regulatory standard been breached, which may give a remedy before the ombudsman or a consumer commission even where the contract itself has been performed.

What single question decides most banker and customer disputes?

In what capacity the bank held the money. If it was received as a deposit, the relationship is debtor and creditor, the money is the bank's to use, the customer is an unsecured creditor for the balance, and the bank's lien and right of set-off are available against it. If it was received for a designated purpose, the bank holds it in a fiduciary character, cannot apply the lien or the set-off, and must return it if the purpose fails. If it was received for safe custody, the bank is a bailee and owes the duty of care that bailment imports. Almost every question in these notes, from the garnishee order to the banker's lien to the duty of secrecy, turns on which of those three characters the bank was in when the money or the article came to it.

10. Related Topics and Provisions

• Paying banker and collecting banker
• Cheques, crossing and endorsement
• Electronic banking and customer liability
• The Reserve Bank Integrated Ombudsman Scheme
• Deposit insurance
• Accounts, audit, returns and disclosure