Abstract
The connection between a banker and a customer is the foundation of Indian banking regulations, which are mostly based on the debtor–creditor relationship concept. Despite the relationship’s seeming simplicity, many real-world problems arise due to its legal ramifications. The relationship includes certain banking duties or activities that may be recast as a debtor of the properties in the money that their customer has advanced to the depository, but which do not follow the typical pattern of debtor–creditor.
These include swinging sequentially, being careful, and maintaining comparative confidentiality. They also fall under the purview of the rules pertaining to banking. On the one hand, the customer’s status as a creditor is not absolute since the legal system and other factors, such as regulatory authorities and the terms and circumstances of a contract, contain the regime of rights.
This study highlights the conflict between consumer protection and contract freedom in the banking industry by critically examining and analysing the impact of this complex legal relationship on legal ambiguity in areas such as digital banking fraud, rogue transactions, the theory of lien over one’s banker, and the redefinition of fiduciary poisons.
It also assesses how well the debtor–creditor model safeguards consumers’ rights in our rapidly evolving technical and regulatory environment. The study aims ultimately to propose improvements on how to balance financial stability versus customer security in the banking jurisprudence of India.
Keywords
| Keyword | Area |
|---|---|
| Banker–Customer Relationship | Core Theme |
| Debtor–Creditor | Legal Paradigm |
| Banking Law in India | Legal Framework |
| Customer Rights | Protection |
| Legal Challenges | Issues |
Introduction
The Indian banker–customer relationship has been traditionally shaped and has undergone significant transformation through its history. Initially influenced by pre-independence practices and the activities of agency houses and presidency banks, the relationship began as a simple contractual arrangement. Over time, particularly after the nationalisations of 1969 and 1980, this relationship acquired socio-economic and public policy weight. Banks ceased to be mere commercial destinations; they were expected to fulfil national interests, promote financial inclusion, and deliver services often through remote means such as telephony or other channels. [1]
At the base of this web of interactions lies a creature of law raised by English common law: the debtor–creditor relationship. Though legally convenient and sanctioned, the underlying paradigm is that a customer becomes a creditor to the bank upon deposit and a debtor upon borrowing. One of the important shifts is towards a relationship model grounded in assumptions of good faith, fair dealing, and heightened fiduciary responsibility. This repricing aims to safeguard customers and preserve the public’s trust in the Indian banking system, which is its backbone.
This paper conducts a critical analysis of the banker–customer relationship in India using both doctrinal and analytical research approaches. It examines principal statutes such as the Indian Contract Act, 1872; the Banking Regulation Act, 1949; and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. Judicial precedents from the Supreme Court of India and other higher courts, along with regulatory provisions issued by the Reserve Bank of India (RBI), will also inform the analysis. [2][3]
The route to solutions lies in probing the principles underpinning debt relations between the parties, addressing the existing unequal power balance, assessing the effectiveness of supervisory practices, and proposing reforms. The law of agency between a banker and a customer draws on contract law, common law principles, and statutory provisions. While it manifests differently depending on the transaction’s character, the prevailing judicial construction treats the relation largely as one of debtor and creditor. This section deconstructs that juridical architecture and clarifies how the debtor–creditor model coexists and sometimes conflicts with other legal roles such as agent, trustee, and bailee.
Relevant Statutes and Areas of Legal Interaction
| Statute / Source | Year / Abbreviation | Relevance |
|---|---|---|
| Indian Contract Act | 1872 | Foundation for contractual aspects of banker–customer relations |
| Banking Regulation Act | 1949 | Regulatory framework for banking operations and supervision |
| Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act | 2002 | Measures for recovery of financial assets and enforcement of security interests |
| Judicial Precedents | — | Interpretation and application of statutory and common law principles by courts |
| Reserve Bank of India | RBI | Regulatory directives and supervisory policies affecting banks and customers |
Research Questions
- How has Indian law and judicial interpretation conceptualised the banker–customer relationship as one of debtor and creditor?
- What doctrinal and practical challenges arise from this characterisation, particularly regarding confidentiality, trust, lien, set-off, and electronic banking?
- How do inherent power imbalances affect the dual role of the customer as both creditor and debtor in this relationship?
- To what extent do statutory frameworks and adjudicatory mechanisms address the challenges posed by the debtor–creditor paradigm in modern banking?
- What legislative, policy, or doctrinal reforms are required to recalibrate the banker–customer relationship towards transparency, fairness, and accountability in the digital era?
Research Objectives
- To critically analyse the legal foundations of the banker–customer relationship in India and evaluate the implications of its classification as a debtor–creditor relationship.
- To assess the doctrinal and practical challenges posed by the debtor–creditor model, particularly in the context of digital banking, data protection, and the special rights of bankers.
- To examine structural power imbalances within the banker–customer relationship and their impact on the customer’s dual role as creditor and debtor.
- To evaluate the effectiveness of statutory, regulatory, and adjudicatory frameworks such as the Banking Regulation Act, the SARFAESI Act, and the Banking Ombudsman Scheme in addressing these challenges and safeguarding customer interests.
- To propose legislative, policy, and doctrinal reforms aimed at recalibrating the banker–customer relationship towards fairness, transparency, and accountability in a digitising financial ecosystem.
Research Methodology
This study is purely doctrinal research based on the available primary and secondary sources for understanding of banker-customer relationship in India. The primary sources referred are judgments, rules, notifications, Acts, statutes and secondary sources basically include commentaries on the judgment, legal research articles, websites etc.
Literature Review
| Author(s) | Year | Title | Key Points |
|---|---|---|---|
| Srivastav, V. V. & Kheria, N. | 2020 | Annihilation of the Relationship between the Banker and Customer through the Operation of Law | Discusses relations between banker and customer in India and determines its contractual basis and the major debtor-creditor relationship. Observes that while the relationship is contractual, statutory provisions largely inform it; emphasizes increasing issues faced by customers and the need for legal solutions for compensation. |
| Kumar, A. & Sharma, S. | 2024 | E-Banking in India: An Analysis of Regulatory Framework and Compliance Challenges | Examines regulatory complexities from the development of e-banking in India; discusses cybersecurity, information privacy, and fraud-prevention challenges. Finds persistent compliance issues despite a strong regulatory framework and recommends enhanced security measures and stronger data protection regulation. |
| Rupani, R. & Ali, S. | 2022 | An Analytical Study on the Performance of the Banking Ombudsman Scheme in India | Descriptive study using RBI annual reports; finds complaints to the Ombudsman offices have increased, indicating growing customer confidence. Notes operational issues and calls for wider popularisation, especially in rural and semi-urban areas with low awareness. |
| — | 2024 | SARFAESI Act in Practice: Legal Efficacy, Judicial Trends, and Borrower Safeguards | Discusses the effectiveness of the SARFAESI Act; notes the Act enabled banks to reclaim NPAs without court intervention but raised concerns about borrower protection and balance of power between lenders and debtors. |
The Contractual Bedrock and the Challenge of Adhesion
The relationship between a banker and a customer in India is, at its core, a contractual one, governed by the foundational principles of the Indian Contract Act, 1872. This legal relationship is initiated the moment an individual or entity opens an account and the bank accepts the initial deposit, thereby creating a framework of mutual rights and obligations. While key statutes like the Banking Regulation Act, 1949, and the Negotiable Instruments Act, 1881, provide definitions for “banking” and “banker”, a comprehensive statutory definition of a “customer” remains elusive.
Judicial precedent and commercial practice have established that a customer is one who maintains an account with a bank and engages in the course of regular banking business, distinguishing them from individuals involved in casual, one-off transactions. The validity of this relationship hinges on the essential elements of a contract as stipulated in the Contract Act, including free consent, lawful consideration and object, and the legal competence of the contracting parties.
In contemporary banking, the theoretical model of a negotiated agreement has been supplanted by the universal use of standard form contracts, often termed “contracts of adhesion”. These are pre-drafted, non-negotiable agreements presented to customers on a “take it or leave it” basis, effectively eliminating the element of bargaining that is central to traditional contract theory. This practice inherently creates a significant imbalance of power between the institution and the individual.
The Indian judiciary has demonstrated an increasing willingness to intervene in such situations to protect the weaker party. A landmark precedent was set by the Supreme Court, which held that terms in a standard form contract could be struck down as void under Section 23 of the Indian Contract Act if they are unconscionable, unfair, unreasonable, and opposed to public policy, particularly where bargaining power is grossly unequal. This principle has been extended to the banking sector.
In the recent case, while dealing with an employment bond, the Supreme Court affirmed that in standard form contracts, the onus shifts to the dominant party — in this case, the bank — to prove that a restrictive or onerous clause is not oppressive. Although the context was employment, this judgment signals a robust judicial posture against the imposition of arbitrary terms by banks in any of their standard form agreements with customers.
This judicial activism marks a significant evolution in Indian contract law, moving from a rigid doctrine of freedom of contract to a more equitable principle of fairness in contract. The courts are increasingly piercing the veil of signed consent to scrutinize the substantive fairness of the terms themselves, a direct response to the economic reality of large corporations leveraging their dominance. Consequently, any term within a banking contract, whether pertaining to liability, fees, or data usage, is potentially subject to judicial review on grounds of fairness, fundamentally altering how banks must approach the drafting of their terms and conditions.
Debtor-Creditor and Ancillary Functions
The primary and most frequent relationship between a banker and a customer is that of a debtor and creditor. When a customer deposits money into an account, the bank becomes the debtor, and the customer, the creditor. As established by the Supreme Court[10], the money deposited ceases to be the property of the customer and becomes that of the bank, which is free to use it for its business operations. The bank’s obligation is simply to repay an equivalent amount upon demand. In this capacity, the depositor is an unsecured creditor of the bank. Conversely, when a bank extends a loan, advance, or overdraft facility, the roles are inverted: the bank assumes the position of the creditor, and the customer becomes the debtor. This debtor-creditor status persists until the loan is fully discharged, as affirmed in cases like Balaji.S vs The Banking Ombudsman[13].
Lien and Set-Off
Arising from the debtor-creditor dynamic are two powerful rights vested in the banker: the right of general lien and the right of set-off.
Right of General Lien
Section 171 of the Indian Contract Act, 1872, statutorily confers upon bankers the right of general lien. This allows a bank to retain any goods or securities belonging to the customer that have been bailed to it, as security for the general balance of account owed by that customer. Unlike a particular lien, it is not restricted to debts arising from the specific goods being held. This right is often described as an “implied pledge”[11], empowering the bank to sell the securities to recover its dues, often without court intervention.
Right of Set-Off
Distinct from a lien, the right of set-off is a common law remedy that allows a bank to merge a customer’s accounts. It enables the bank to apply a credit balance in one account to satisfy a debit balance in another account held by the same customer. This right is not a lien over the bank’s own property but an equitable right arising from the mutual debtor-creditor relationship. Its exercise is subject to specific conditions: the debts must be mutual (in the same name and same right), the amount must be certain and legally recoverable, and the debt must be due.
| Feature | Right of General Lien | Right of Set-Off |
|---|---|---|
| Source | Section 171, Indian Contract Act, 1872 (statutory) | Common law / equitable remedy |
| Nature | Right to retain and sell goods or securities bailed to the bank | Right to merge accounts and apply one balance against another |
| Scope | General — covers overall balance, not restricted to specific goods | Applies when debts are mutual and due |
| Requires court intervention? | No — bank may sell securities to recover dues (often without court). | No — typically exercised by bank, subject to conditions and judicial review. |
Conditions for Exercising Set-Off
| Condition | Explanation |
|---|---|
| Mutuality | Debts must be between the same parties in the same capacity (same name and same right). |
| Certain Amount | The amount to be set off must be definite and legally recoverable. |
| Due Debt | The debt to be satisfied must be due (not contingent or prospective). |
While potent, these rights are not absolute. Courts have actively constrained their application, ensuring they are not exercised beyond the scope of a live debtor-creditor relationship. For instance, in cases like Indus Sor Urja Private Limited vs Indian Bank[12] and Balaji S vs The Banking Ombudsman[13], it has been clarified that the bank’s general lien ceases to exist upon the culmination of the relationship, such as the full repayment of a loan. This judicial check prevents banks from indefinitely holding a customer’s assets for unrelated or potential future claims, reinforcing the principle that these rights are remedies for existing debts, not perpetual privileges[14].
Ancillary Functions and Special Relationships
The banker-customer relationship is multifaceted and extends beyond the debtor-creditor paradigm[15], transforming based on the specific service rendered.
| Role | When Arises | Bank’s Obligations |
|---|---|---|
| Agent-Principal | When bank collects cheques, pays standing instructions, or trades securities on behalf of a customer | Act for the principal (customer) in carrying out instructions |
| Bailor-Bailee | When a customer entrusts valuables to the bank for safekeeping (distinct from a safe deposit locker) | Exercise reasonable care over the goods (Contract Act, Section 151) |
| Trustee-Beneficiary | When bank holds funds for a specific mandated purpose (e.g., escrow account) | Keep funds separate; do not comingle with general assets; act in fiduciary capacity for that purpose |
As seen in The National Tobacco Company of India Ltd. v. Simla Banking and Industrial Company Ltd.[16], where a bank collected funds for remittance but failed before the draft was honoured, the court held that the funds were held in trust. This granted the customer the status of a preferential creditor, entitled to recover the full amount, rather than being treated as an ordinary unsecured creditor.
The Cornerstone of Trust: Confidentiality and the Fiduciary Conundrum
A cornerstone of the banker-customer relationship is the implied contractual duty of confidentiality. The bank is obligated to maintain secrecy regarding its customer’s account details, financial standing, and transactions. This common law duty is reinforced by statutes such as the Bankers’ Book Evidence Act, 1891. Disclosure is permissible only in exceptional circumstances, such as under compulsion of law, in the public interest, with the express or implied consent of the customer, or to protect the bank’s own interests[17].
The concept of a “fiduciary relationship” — one founded on trust and confidence where one party must act in the other’s best interests — has been a point of legal contention in banking. While it is accepted that banks hold customer information in a fiduciary capacity with respect to third parties, often justifying non-disclosure under Section 8(1)(e) of the Right to Information (RTI) Act, 2005, the broader relationship has been viewed differently. In Uco Bank v. Hem Chandra Sarkar[18], the Supreme Court was reluctant to classify the general banker-customer dynamic as fiduciary, emphasizing its primary nature as that of debtor and creditor.
A paradigm-shifting judgment was delivered by the Supreme Court[19]. The RBI had refused to disclose its inspection and audit reports of commercial banks, arguing that it held such information in a fiduciary capacity. The Court decisively rejected this contention. It ruled that the RBI, as a statutory regulator, owes a primary duty to the public at large, which supersedes any purported fiduciary duty to the banks it oversees. The Court did not consider the existence of some type of relationship of trust between RBI and the banks in this situation, and indicated that good transparency in the operations of such institutions is beneficial to the general welfare and economy of the nation.
This determination essentially reworked the aspect of secrecy and transparency in the Indian financial industry. It brought a clear distinction to the lines of responsibilities whereby a regulator’s statutory liability to the population ranks higher than its association with controlled parties. The judgment was a direct judicial response to the apparent tension between the inherent requirement of the RTI Act for openness and the banking industry’s traditional culture of secrecy. The prioritization of the former by the Court has produced a ripple effect that has greatly challenged any attempt by any public authority to use the fiduciary relationship as a cornucopian defence against providing information of public interest. However, with the later acknowledgment by the Supreme Court of a basic right to privacy in the Puttaswamy case and the passage of the Digital Personal Data Protection Act, this ruling is now being given renewed scrutiny.
