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Class 11 Finance Chapter 5 Different Types of Bank Accounts
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Special features or obligations of the relationship between the banker and customer:
Though the primary relationship between the banker and his customer is that of the debtor and a creditor or vice versa, the special features of this relationship, impose the following special obligations on the banker:
(i) Obligation to honour the cheques: The deposits accepted by a banker are his liabilities repayable on demand or otherwise. The banker is, therefore, under a statutory obligation to honour his customer’s cheques in the usual course provided:
(a) He has sufficient funds of the customer.
(b) The funds are properly applicable to the payment of such cheques.
(c) The banker has been duly required to pay.
(d) The cheque has been presented within the due period.
(e) No prohibitory order of the court or any other competent authority e.g. tax authority etc., is standing against the accounts of the customer.
(ii) Obligation to maintain secrecy of accounts: It is obligatory for the banker not to disclose the state of the customer’s account with it, since such disclosure may adversely affect the customer’s credit and business. This obligation continues even after the customer has closed his account with the banker.
However, the banker is exempted from the above obligation under the following circumstances:
(a) where such disclosure is a legal necessity;
(b) where such disclosure is permissible on account of banking practices, or
(c) where such disclosure is in public interest.
27. Describe the circumstances under which the banker customer relationship may be terminated?
Ans: The relationship between the banker and the customer is contractual and therefore both are bound by certain obligations. This leads to the fact that if one of the parties frees himself from such obligation, then the relationship between the two is terminated.
The following are the circumstances under which the relationship between the two is terminated:
(i) Closure of the account: The relationship between the banker and customer is established with the opening of an account and with the closure of the said account, the relationship is terminated. The customer is at will to close his account (except fixed account), by giving a written notice to the bank about it, without mentioning the reason thereof.
The banker also may offer for closure of the account, if an account remains unoperated is guilty of conducting his account in an unsatisfactory manner i.e. if the customer is convicted for forging cheques or bills etc.
(ii) Death, Insanity and / or Insolvency of the customer: If the customer dies or a confirmed and authentic news reaches the baker about the insanity of the customer or the customer is declared insolvent then the relationship between the two is terminated. The banker in his turn is not under any obligation to honour the cheques etc. issued by the customer even if they have been issued period to such occurrences. On the death of a customer, his legal heir inherits the rights on his account. Under insolvency, the credit balance of the customer’s account is transferred to the official receiver.
(iii) Assignment of account: The customer has a right to assign his account to someone. The implication of such an assignment is that the balances standing against the customer’s name in the bank account is transferred to the name of person in whose favour the assignment has been done. The moment such instructions are received by the banker, the relationship between him and the customer stands terminated. Obviously on transfer of assigned account the banker enters in a new relationship with his new (the assigned) customer.
(iv) Garnishee Order on the customer’s account: If a Garnishee order for the whole account is received, it implies that the whole amount in the customer’s account now has no be paid to the party in favour of whom the Garnishee order has been received or as the instructions contained therein.
The customer is then not allowed to withdraw from his account, placed under such an order. This automatically terminates the relationship on the plea that practically there exists no account of the customer. However, if the Garnishee order is for the part of the amount in balance, then, for the remaining amount in balance there exists a relationship between the two. The relationship between the banker and his customer is re-established after the Garnishee order is lifted by the court.
(v) Closure of the business: In case a firm is closed or a partnership is dissolved or a company is liquidated, on receiving the information about such dissolution or liquidation, the bank has to close the account of such firm or company. These accounts can be operated only under instruction of the official liquidator, appointed for the liquidation process.
28. What precautions should a bank take in opening and operating an account in the name of a school or college?
Ans: Schools and Colleges are non-trading organizations. However, they may also approach a bank for opening an account in their name. The banks should observe the following precautions while dealing with their accounts:
(i) Incorporation and registration: A institution gets legal recognition as an entity separate from its members, only after its incorporation under a proper act. An unregistered institution cannot be sued under law. A banker, before opening an account, must ensure that the institution is a properly incorporated body.
(ii) The rules and bye-laws of the institution: Apart from being governed by the provisions of the act under which the institution is registered, it may have its own constitution, charter or memorandum of association, rules and bye-laws, etc. A certified copy of the relevant rules should be on the record of the banker for proper observance.
(iii) Resolution of the Governing body: The Governing/special body of the institution must pass a resolution for opening a bank account which should state that –
(a) appointing the bank concerned as a banker of the institution;
(b) mentioning the name of the person, who is authorized to open the account; and
(c) giving any other directions for the operation of the said account. A copy of the resolution must be obtained by the bank for its own record.
(iv) Death or resignation: In case the person, authorized to operate the account on behalf of an institution dies or resigns, the banker should stop operation of the account till intimation of fresh details of operation.
(v) Care in case of personal accounts: The officials of the institution may also have their personal accounts with the same bank. The banker is under lawful obligation to ensure that the funds of the institution are not credited to the personal accounts of officials, otherwise he will be guilty of negligence under section 131 of the Negotiable Instruments Act.
29. State the formalities to be completed and precautions to be taken while opening and operating the accounts in the names of – (a) Executors and Administrators (b) Trustees.
Ans: (a) Executor: The Executor is one who is appointed by the deceased (testator) through his will, to manage, operate, appropriate and achieve the purpose of the will, the property etc. The executor has to get a certification of the will by the court which is called a probate.
Administrator: The ‘Administrator’ is appointed by court in those cases where the deceased has not given the name of Executor in his will or person named as executor has died or refused to act, under a ‘letter of administration’.
The Banker should observe the following precautions while dealing with Executors or Administrators:
(i) The moment a customer’s death comes to the knowledge of the banker he should stop operation of the account of the deceased without fail.
(ii) The bank should obtain the ‘Letter of Probate’ (i.e. official confirmation of the will) in case of Executors and ‘Letter of Administration’ in case of Administrators in original, to acquaint itself with the powers and functions of the executors and administrators.
(iii) An account in the following style may be opened in the name of executors or administrators “ABC executors (or administrators) of the estate or, the deceased”.
(iv) In case of joint executors or administrators, the banker should get a letter of authority signed by all of them, stating the name/ names of the persons who will operate the account. Any of the executors/administrators is competent to countermand the payment of cheque issued by any other executor/administrators.
(v) If the executor requires an overdraft or a loan before he obtains the probate in order to make necessary payment, the banker usually advances such a loan on the personal security of the executor, so that he can recover the same in case the probate is not granted. The executors are made jointly and individually liable for such loans.
(vi) After the court grants probate or issues a letter of Administration, the executor or the administrator may pledge specific assets of the testator to obtain an overdraft from the banker, unless the will or the letters forbids
(vii) No credit meant for the estate of the deceased should be credited to the personal accounts of executor/administrator.
(b) Trustees: According to the Indian Trusts Act, 1882, a trust is an obligation annexed to the ownership of property and arising out of confidence reposed in and accepted by the owner, or declared and accepted by him for the benefit of another or of another and the owner (section 3). The document creating the trust is called the ‘trust deed’.
There are three parties to a Trust:
(i) The author of a trust. The person who reposes the confidence is called the author of the trust. He is owner of the property, which is the subject matter of the trust.
(ii) Trustee is the person in whom the confidence is reposed.
(iii) The beneficiary is the person for whose benefits the trust has been formed.
The bank take the following precautions while accepting a trustee as its customers:
(i) Examining the trust deed: The banker should thoroughly examine the trust deed appointing the applicant as the trustees. The trust deed contains the names of the trustee, their powers, the details of the trust property and other terms and conditions. It may be remembered that the trustees are authorized to act jointly and unless the trust deed authorizes them to do, they are not competent to delegate their powers.
(ii) In case of several trustees, all trustees must act jointly unless the trust deed provides for delegation of power to some of the trustees.
(iii) In case an account is opened for two or more trustees, the bank should obtain clear instructions as regards the person or persons who shall sign the cheques or other instruments. In the absence of such instructions, all trustees must sign on each occasion.
(iv) Normally, a trust deed will provide as to the authority of the remaining trustees, when one or more trustees dies. In case all the trustees are dead, the matter has to be decided by a court of law.
(v) Insolvency of a trustee affects him personally but does not affect the trust property. The creditors of the trustee are not allowed to touch the trust property.
(vi) A banker should never allow transfer of trust money to the personal accounts of a trustee which is already overdrawn. This amount will have to be refunded to the trust.
(vii) A banker is placed in the same position in which the trustee is, as far as the use of trust money is involved. If he has a knowledge of misuse of trust money, he shall be held liable. The banker should, therefore, take all possible precautions to safeguard the interests of the beneficiaries of the trust.
(viii) The trustees do not have implied borrowing powers. They can borrow money and charge the trust property only if the trust deed specifically authorized them to do so.
30. What are the types of accounts a customer can open with a bank? Explain briefly.
Ans: Bank is an institution which attracts money or deposits for the purpose of lending to trade, industry etc. Receiving deposits from the public is an important function of a commercial bank. A bank provides the facility to open different kinds of deposit accounts with various facilities to suit the needs of various customers or depositors. There are three main types of accounts which a person can open with a bank, namely –
(i) Fixed or Time Deposit Account.
(ii) Saving Bank Deposit Account.
(iii) Current Deposit Account or Current Account.
(i) Fixed or Time Deposit Account: Fixed deposit account is one wherein money is deposited for a fixed period and cannot be withdrawn before the expiry of the said period. The said period usually varies from three months to five years. The rate of interest allowed on such accounts increases with the period of deposit. This is also called “Term Deposit Account.”
The bank prefers these types of deposits since it does not have to maintain cash reserves against these deposits and, therefore, the bank offers higher not rates of interest on such deposits. On the other hand, this account attracts those customers who have money on invest for a longer period but do want to take much of the risk. Generally the customer cannot withdraw the amount before a fixed period, but he/she has the option to take a loan against the deposit at a higher rate of interest than the deposit. But if one insists to withdraw the money before the due date, he forgoes much of interest accrued on such deposit.
(ii) Savings Bank Deposit Account: This is an account into which small savings are deposited into the bank by the customers. This account is meant for the benefit of middle class and low income group people. A Savings Bank Deposit Account can be opened by any person with a minimum deposit of five rupees. The special feature of this account is that deposits can be made in this account any number of times in a week but withdrawals can be made only once or twice a week.
Restrictions on withdrawals are imposed by banks to discourage the habit of frequent withdrawals. At present 50 withdrawals are permitted in a half year by most of the banks. The rate of interest payable by the banks on such deposits is very low as compared to fixed deposit accounts which ranges from 3.5% to 5% p.a.
(iii) Current Deposit Account or Current Account: Current Accounts, sometimes also called ‘Open Account’ is one in which money can be deposited can withdrawn at any time during working hours on all working days. This account may be defined as running account between a banker and a customer. Since customers can deposit money into or withdraw money from a current account whenever they like, businessmen like to keep money with a bank rather than in their own cash box from where it can be lost or stolen.
Current Accounts suit the requirements of businessmen, companies, corporations, institutions, firms etc.
31. Discuss the different types of customers of a Bank.
Ans: The different types of customers of a Bank are:
(i) Individual customer: All competent major persons, irrespective of caste, creed, religion etc. by opening an account with the Bank become a customer of the Bank. At the time of opening account with the bank they make a contract in between Banker and Customer. So the prospective customer must be competent enough to perform the contract. But Bank may not allow to open Bank account of thief, robber, fraudulent persons etc.
(ii) Minor: According to sec. 3 of the Indian Majority Act, 1875, a ‘minor’ is a person who has not completed the age of 18 years, unless before the completion of his 18 years of age, a guardian of his person or property is appointed by court, Majority is attained at the age of 21 years. According to the Indian Contract Act 1872 a minor is not capable of entering into a valid contract and a contract entered into by a minor is void. But a minor can open an account with the Bank.
(iii) Married woman: A married woman can open a current as well as savings account with the Bank. She can enter into a contract in her own name. A married woman enjoys the same power and capacity as a man or a single lady. According to the Indian Contract Act, “a married woman can enter into contracts, acquire and sell property and lend or borrow money.”
A married woman has power to draw cheques and give a sufficient discharge. But in the case of an overdraft, granted to a married woman, the banker will have no remedy against her, if she has no separate estate. The husband will not be responsible for any transaction or debit account of his wife in case. (a) She acts as the agent of the husband and (b) The debt has been taken by the wife for purchasing certain articles of her necessities.
(iv) Lunatics: Under the Indian Act 1872 lunatic is a person of an unsound mind and is incompetent to enter into a valid contract. Any person who is unable to make any judgement about what is good or bad may have an unsound mind and any contract entered into by him is void. In case a lunatic person applies to the bank for opening an account, the bank must refuse to open an account with him.
Precaution: Before opening the account, the banker should take the following precautions.
(a) If a person who has an account with the bank and has become lunatic or insane, the bank can suspend the operation of his account on receiving notice of customer’s insanity.
(b) The bank is entitled to debit the account of the lunatic person against all the cheques honoured by the former before getting the notice.
(c) If the bank receives sufficient proof of the lunacy of the person, it can stop the operation of the account of any customer on the ground of Lunacy.
(d) On receiving the information of a customer’s lunacy, the banker has the right to return all cheques on the customer’s account with the words refer to ‘drawer’ and not by remark ‘customer insane’.
(v) Joint account (2009): When an account is opened by two or more persons jointly in their names, it is called a joint account. A banker should not open a joint account, except upon the receipt of an application by persons interested in the account. The joint account holders enter into contract with the bank jointly and individually, so that each of them has a right against the bank, and the banker has right to honour all the cheques or transactions as are signed by all those in whose names the joint account has been opened.
(vi) Partnership firm: Sec 4 of the Indian Partnership Act defines partnership as “the relations between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.” The term ‘firm’ is merely a commercial notion. A firm can not become a member of another partnership firm though its partners can join any other firm as partners can join any other firm as partners. A banker should take the following precautions while opening an account in the name of a partnership firm.
(a) Number of partners.
(b) Title of the firm’s account.
(c) Opening of an account.
(d) The partnership letter or mandate.
(e) Revocation of authority to operate the account.
(vii) Company: A company means a company formed and registered under the Company Act 1956. It is an artificial person created by law to achieve certain objectives. A company is considered as a separate legal entity. According to Lord Justice Lindley “a company is an association of many persons who contribute money or money ‘s worth to a common stock and employ it for a common purpose.” A company can open an account with the Bank. But before opening an account in the name of the company, a banker should examine the following precautions carefully.
(a) Memorandum of Association.
(b) Articles of association.
(c) Certificate of incorporation.
(d) Copies of annual account etc.
(viii) Clubs, schools and colleges: Non trading institutions like clubs, schools, colleges, charitable institutions etc. maintain their accounts with some bank. At the time of opening such accounts the bank should take the following precautions.
(a) The society must be incorporated.
(b) Copies of memorandum, articles of association and other necessary documents must be produced.
(c) Resolution of the managing committee.
(d) Power to borrow.
(e) No mixing of personal accounts with the society.
(f) Death or resignation, etc.
(ix) Executors and Administrators: Executors and Administrators, both are persons appointed to settle the accounts of a person after his death. The Executor is appointed by the deceased himself, before his death. The person appointing him is called ‘testator’. The executor has to act according to the directions given in the ‘will’. He must get the official confirmation of the will, technically called a ‘probate’ from the court.
The administrator is appointed by court in those cases where the deceased has not given the name of executor in his ‘will’ or person named as executor has died or refuses to act. He disposes of the assets and makes payment of the liabilities of the deceased as per the directions given in the will or in its absence in the-letter of administration issued by the court appointing him as administrator.
The Bank should take the following precautions:
(a) The bank should examine the ‘Letter of probate’ in case of executor and letter of administration in case of administrator.
(b) An account in the following style may be opened in the name of executor or administrator. ‘ABC executors or Administrator of the estate of ‘X’, the deceased.’
(c) In case of joint executors or administrators, the banker should get clear instruction regarding the operation of the account.
(x) Liquidators (2009): Bankers should be very careful while dealing with persons appointed to wind up the affairs of companies. A liquidators business is to realize the company’s assets and to collect such amounts as may be due to the company from its shareholders and debtors. He has to apply the funds thus collected in payment of the company’s debt and distribute the balance, if any, among its shareholders. He has the power to borrow money against the security of the company’s assets and to draw, accept, make and endorse bills and notes, in the name and on behalf of the company.
(xi) Illiterate person: An illiterate person may open an account with a bank. The banker should take the following steps.
(a) Thumb impression: The left hand thumb impression of the depositor should be obtained on the account opening form and the specimen signature sheet in the presence of an authorized supervising official.
(b) Identification mark: Brief details of one or two identification marks of the depositor should be noted at the time of opening the account.
(c) Photograph: Two copies of the passport photograph of the depositor should be obtained and get renewed every three years.
(d) General: Implications and conditions for operation of the account should be explained to the depositor by an authorized official. The Deposit can be made through any person but at the time of withdrawal from the account should generally be allowed only when the person comes physically and produces his or her pass book.
(xii) Trustees: According to sec 3 of the Indian Trust Act 1882, “Trust is an obligation annexed to the ownership of property and arising out of a confidence reposed in and accepted by the owner or declared and accepted by him for the benefit of another and the owner.” A trustee is a person in whom a confidence is reposed.
The Banker should take the following precaution in opening the account of a trustee.
(a) Before opening an account in the name of trust, a banker should examine carefully the ‘trust deed’.
(b) In case of more than one trustee, all trustees must act jointly or the delegation of powers to some of the trustees.
(c) After getting a notice of the insanity of a trustee the bank may suspend the operation of the trustee’s account.
(d) In case of granting loans to trustees, the banker should thoroughly examine their borrowing powers as per the ‘trust deed.’
(e) In the event of death or retirement of all the trustees, the new trustees may be appointed by the court etc.
