Banker and customer: who they are and the legal character of the relationship

1. Who is a banker

For the Banking Regulation Act a banker is a banking company that accepts deposits from the public for lending or investment, withdrawable by cheque or otherwise (s.5(b), (c)). For the Negotiable Instruments Act a banker includes any person acting as a banker and any post office savings bank (s.3). Paget's test, accepted in United Dominions Trust Ltd. v. Kirkwood (Court of Appeal, 1966), is that a banker takes current accounts, pays cheques drawn on itself and collects cheques for its customers. Details are in the Unit I note on the definition of bank.

2. Who is a customer

Neither Act defines “customer”. The courts have settled three points.

• An account is necessary. A person who merely cashes a cheque at the counter, or uses the bank occasionally for a service, is not a customer: Great Western Railway Co. v. London and County Banking Co. (House of Lords, 1901).
• Duration is not necessary. A person becomes a customer as soon as the bank accepts his money to open an account, even before he draws on it: Commissioners of Taxation v. English, Scottish and Australian Bank (Privy Council, 1920); Ladbroke & Co. v. Todd (1914). The “duration theory”, that a habit of dealing is required, has been rejected.
• The account must be in his name. An agent who operates an account for a principal does not become a customer; the principal does.

The definition matters because the statutory protection of a collecting banker under s.131 of the Negotiable Instruments Act is available only when it collects for a customer, and the duties of secrecy and to honour cheques are owed to customers.

3. The contract between banker and customer

The relationship is contractual. It begins with the opening of an account on the bank's account opening form, which incorporates the bank's terms, the RBI's directions (for example on KYC), and the usages of bankers. Its terms are mostly implied. The classic statement is that of Atkin L.J. in Joachimson v. Swiss Bank Corporation (Court of Appeal, 1921): the bank undertakes to receive money and collect bills for the customer's account; the proceeds are not held in trust but borrowed by the bank, which undertakes to repay them; the bank promises to repay at the branch where the account is kept, during banking hours, against the customer's written order; and the bank will not cease to do business with the customer without reasonable notice. The customer in turn undertakes to take reasonable care in drawing cheques so as not to mislead the bank or facilitate forgery.

4. General relationship: debtor and creditor

When a customer deposits money, the money becomes the bank's. The bank may use it as it likes; it owes the customer an equivalent sum. In Foley v. Hill (House of Lords, 1848) Lord Cottenham said the money placed with a banker ceases altogether to be the money of the principal; it is the money of the banker, who is bound to return an equivalent when demanded. The customer is the creditor and the banker the debtor. When the account is overdrawn, the positions reverse.

Three features distinguish this from an ordinary debt.

• Demand is necessary. An ordinary debtor must seek out his creditor and pay. A banker is not bound to repay until the customer demands, at the branch, by a proper order (Joachimson). Limitation therefore runs from the demand: Article 22 of the Limitation Act, 1963 gives three years from the date of demand for money deposited payable on demand, including money of a customer in the hands of his banker.
• The banker is a privileged debtor. It does not have to give security, and it can use the deposit freely.
• The banker must honour the customer's orders. Section 31 of the Negotiable Instruments Act obliges the drawee banker, having sufficient funds, to pay the cheque.

The Supreme Court has accepted this characterisation while adding a qualification. In Canara Bank v. Canara Sales Corporation, 1987 INSC 125, (1987) 2 SCC 666, the bank had paid a large number of cheques on which the signature of the company's managing director had been forged by its own accountant. The Court held that the relationship is that of debtor and creditor, but that when a customer signs a cheque and hands it over, there is a mandate to the bank to pay, and an element of trust between the bank and its customer. A forged cheque carries no mandate, so the bank that pays it pays out of its own money and cannot debit the customer. The bank's plea that the customer was negligent in not checking the pass book or the statements of account was rejected: there is no duty on a customer to examine his pass book and point out discrepancies, and English authority to the same effect was followed.

5. Special relationships

• Trustee. Where money or securities are handed over for a specific purpose (to buy particular shares, to pay a particular bill), the bank holds them in trust for that purpose until it is carried out, and cannot use them for its own debt. Money deposited in an ordinary account is not held in trust.
• Agent. In collecting cheques, bills and dividends, buying and selling securities, paying insurance premia on standing instructions or remitting money, the bank acts as the customer's agent and owes the agent's duties of care and accounting.
• Bailee. When the customer leaves valuables or documents in safe custody, the bank is a bailee under ss.148–151 of the Indian Contract Act, 1872 and must take the care a man of ordinary prudence would take of his own goods. It has no lien over goods left for safe custody (see the next note).
• Lessor and lessee. A safe deposit locker is a lease of space, and the bank does not know the contents. The RBI's locker directions, issued after Amitabha Dasgupta v. United Bank of India, 2021 INSC 104, where the Supreme Court held that banks cannot disclaim responsibility for lockers and directed the RBI to frame rules, now regulate the bank's liability, and s.45ZE of the Banking Regulation Act (as amended in 2025) allows up to four successive nominees for locker contents.
• Creditor and secured creditor. On a loan the bank is creditor and the customer debtor; where security is given, the bank is pledgee, mortgagee or hypothecatee under the relevant law.
• Adviser. A bank that gives investment advice may be liable for negligent advice.

6. Termination

The relationship ends by the customer closing the account; by the bank closing it on reasonable notice; on the customer's death, insanity or insolvency (which also end the bank's authority to pay cheques, as death or insanity of the principal ends an agency under s.201 of the Contract Act); on a garnishee or attachment order to the extent of the sum attached; or on the winding up of the bank. On the death of a depositor the bank pays the nominee under s.45ZA of the Banking Regulation Act, who gets the exclusive right to receive the money, but the money remains part of the deceased's estate and passes by the law of succession: Ram Chander Talwar v. Devender Kumar Talwar, 2010 INSC 677.

How this is examined

One of the standard essays: “Who is a banker? Explain the general relationship of banker and customer” (August 2024), “Explain the general relationship between banker and customer” (February 2025). Begin with the definitions of banker and customer and the cases on customer, then debtor and creditor with Foley v. Hill, Joachimson and the three special features, then Canara Sales, then the special relationships. Short notes on “different kinds of customers” belong to the note on accounts and special customers.