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Banking and Insurance

Notes of the same according to his discretion. The creditor has the right to demand back his money
from the banker, and the banker is under an obligation to repay the debt as and when he is
required to do so.
A depositor remains a creditor of his banker so long as his account carries a credit balance. But
he does not get any charge over the assets of his debtor/banker and remains an unsecured
creditor of the banker. Since the introduction of deposit insurance in India in 1962 the element of
risk of the depositor is minimized as Deposit Insurance and Credit Guarantee Corporation
undertakes to insure the deposits upto a specified amount.
Banker’s relation with the customer is reversed as soon as the customer’s account is overdrawn.
Banker becomes creditor of the customer who has taken a loan from the banker and continues in
that capacity till the loan is repaid. As the loans and advances granted by a banker are usually
secured by the tangible assets of the borrower, the baker becomes a secured creditor of his
customer.

Various Legal Relationships of Banker and Customer

Agent and Principal: Sec.182 of ‘the Indian Contract Act, 1872’ defines “an agent” as a person
employed to do any act for another or to represent another in dealings with third persons. The
person for whom such act is done or who is so represented is called “the Principal”.
One of the important relationships between a banker and customer is that of an agent and
principal. The banker performs various services of the customer, where he acts as the agent:
Buying and selling securities of customer

Collection of cheques, bills of exchange, promissory notes on behalf of customer
Acting a trustee, executor or representative of a customer
Payment of insurance premium, telephone bills etc.
Trustee and beneficiary: Section 3 of the Trusts Act defines a trustee as one to whom property is
entrusted to be administered for the benefit of another called the beneficiary. A banker becomes
a trustee under special circumstances. When a customer deposits securities or other valuables in
bank for safe custody, the banker acts as trustee of customer.
Bailee and bailor: During certain circumstances banker becomes Bailee. When he receives gold
ornaments and important documents for safe custody he takes charge of it as Bailee and not
trustee or agent. He cannot make use of them as he is bound to return the identical articles on
demand.

Pawnee and pawner: Pawn is a sort of bailment in which the goods are delivered to another as
a pawn, to be a security for money borrowed. Thus a banker acts as a Pawnee where a customer
delivers the goods to him to be kept as security till the debt is discharged. The banker can retain
the goods pledged till the debt is paid.
Mortgagee and mortgagor: The relation between a banker as mortgagee and his customer as
mortgagor arises when the latter executes a mortgage deed in respect of his immovable property
in favour of the bank or deposits the title deeds of his property with the bank to create an
equitable mortgage as security for an advance.
Lessee and lessor: When a customer hires a locker in the bank’s safe deposit vault, the bank
undertakes to take necessary precaution for the safety of the articles in the locker. The relation
between the parties is that of a lessor and lessee.
Guarantor and guarantee: a bank as guarantor gives guarantee to its customer by issuing a
‘letter of credit’. It is a kind of credit facility to its customer to facilitate international trade. A

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