Spend, Save and Invest Smartly
A customer is one who has an account with a bank. To comprise a customer, there must be some recognizable course of habit of dealing in the nature of regular banking business.
The below given persons can be the customer of a bank.
A minor is someone who is under the age of 18. If a minor has a guardian appointed by the court he/ she will remain as a minor till the age of 21.
If the minor is a Hindu, the natural guardian is the father and then the mother. This does not include stepfathers/ stepmothers. With regard to a minor married girl, her husband will be the natural guardian. If the father becomes a Sanyasi (Hindu holy man) or does not remain a Hindu he will not remain as a guardian. A Hindu father can appoint a guardian; such a guardian will act after the death of the parents. The court can appoint a guardian if, in the opinion of court, the father is unfit be a guardian.
The Supreme Court has held that a mother can act as the natural guardian if the father is not in actual charge of the affairs of the minor because of his unresponsiveness or because of an agreement with the mother.
The Reserve Bank of India has advised banks to permit the opening of minor’s accounts (fixed, saving and recurring deposit accounts) with the mother as the guardian even if the father of the minor is alive. The Supreme Court in Githa Hariharan & another held that “and after him” does not mean after the death of the father but refers to the father’s absence from the concern of the minor’s property. Banks must have in place safeguards to make sure that the accounts are never overdrawn and always remain in credit.
The Contract Act 1872 states that a minor is not capable of entering into a valid contract. A contract for the supply of necessaries of life to a minor is a valid contract. A minor can reject all other contracts; therefore a banker must be careful in its dealings with minors. If a minor enters into a contract representing himself as a major and then refuses to honor the contract on the grounds that he is a minor, the minor has to return the benefits he got through the contract.
Savings accounts also can be opened in the name of minors. But this may be in the name of the minor to be operated upon by the guardian and to be operated by himself if he is 12 years old or more. Two minors above the age of 12 can open and operate a joint account. Date of birth of the minor is recorded at the time of opening the account.
When the minor reaches the age of 18, the minor’s account in the guardian’s name should be closed and the balance should be paid to the accountholder or the balance should be transferred to a new account.
If the father of a Hindu minor dies, his mother will becomes the natural guardian. If the mother also dies during his minority there would be either a guardian appointed by the will of the mother or a guardian will be appointed by court.
In the case of Muslim minors only fathers can act as a guardian, mothers cannot sign as guardians. If a minor dies, the guardian can withdraw the balance in the account. If it is a joint account the balance will be at the complete disposal of the guardian. If the guardian dies the balance will be paid to the minor after maturity or to the natural guardian.
There is no risk in opening an account in the name of a minor, but it should not be overdrawn. Bankers cannot recover money due if there is a loan or an overdraft as it is ab initio invalid. If a minor has pledged assets for getting a loan, the banker cannot possess these assets because the pledge with minor is invalid. If an advance is granted to a minor on the guarantee of a third party, this advance cannot be recovered from the guarantor also as the contract between the banker and the principal debtor minor is invalid. A minor can draw, negotiate or endorse cheques and bills but cannot be held liable or sued if these are not honored.
A minor can be admitted to a partnership with the permission of the other partners but he will not be liable for losses. He must deny his liability as a partner within 6 months of becoming a major. Otherwise he can be held liable for the debts of the partnership. A minor can also be an agent but he may not be held responsible to his principal.
A married woman can enter into a valid contract; she can also open a bank account. The husband will not be liable with regard to debts taken unless the loan is taken with his consent and authority or it is for the necessaries of life.
Bank accounts can be opened in the name illiterate persons. As they cannot sign their thumb impressions are usually considered so. It should be attested by a person known to the bank. Normally illiterate persons are not given with cheque books. To withdraw money the account holder is expected to come in person to the bank and affix his thumb impression in the presence of a bank official for identification. There is no legal bar in two illiterate persons opening a joint account. The account opening forms should have a clause wherein it is stated that the terms of account opening and banking has been explained to the account holder. The account holder should affix his thumbprint in the presence of a witness/ official.
Lunatics and persons of unsound mind are not capable of entering into a valid contract. Accounts should not be opened in the name of persons of unsound mind, if a banker has discounted a bill written, endorsed or accepted by a person of unsound mind, the banker can realize the money only if he can prove that he was unaware of the lunacy of the other person. All transactions in the account of a person declared to be of unsound mind must be stopped when a banker receives notice that an account holder is of unsound mind.
If an account holder becomes a person of unsound mind, he should not be permitted to handle his account.
A trustee is a person on whom confidence is rested. Trusts are formed by a document called trust deed. Bankers should scrutinize the trust deed thoroughly and determine the powers vested in the trustees. Trustees are generally expected to act jointly; they are not permitted to delegate their powers to others unless the trust deed permits them to do so.
If there are two or more trustees, there must be clear instructions on who can operate the account. If one or more trustees die or retire, the power vested in the remaining trustees will be as stated in the trust deed. When all the trustees are dead, new trustees will be appointed by court. The bankruptcy of a trustee does not affect the trust property and a creditor cannot recover his claim from the trust. The banker must protect the interest of the beneficiaries. Otherwise he may have to compensate them for any fraud on the part of the trustee.
Trustees can borrow from banks and pledge or mortgage trust property only if the trust deed confers these powers on them.
Executors are persons appointed by the will of a person to administer his estate after his death. The powers and authority of an executor is resultant from the will and he has to proceed in accordance with the directions given in the will.
Administrators are the persons appointed by the court to manage the estate of a deceased person. The administrator is appointed by the court through a letter of administration, which will specify his authority. They are expected to realize the assets of the departed person and pay off his debts. On the death of an account holder, all transactions from his account must be stopped. The executor may be allowed to operate the account after he has had the will officially informed. The administrator can operate the account after he has received the letter of administration. An account will normally be opened in the name of the executor/ administrator and styled, "ABC executors to the estate of XYZ deceased." If two executors/ administrators are appointed, they will have a joint interest in the estate of the departed, this interest cannot be divided. In relation to bank accounts they should jointly agree on how it is to be operated. If this is cancelled, they should sign jointly or the banker should take a fresh letter of authority. The banker should be careful to ensure there is no misappropriation. He should not allow transfers to the personal accounts of executors/ administrators.
If an executor/ administrator dies and he is one of the joint participants of an account, cheques issued should not be dishonored because his powers are transferred to the surviving executors/ administrators. A banker doesn’t have the right to exercise their right of set off on the deceased’s debit balance against the creditor balance in the executor’s personal account. If the executor requires a loan to make payments before receipt of the probate, the advances are made on the personal security of the executor. After probate is granted, the executor can pledge specific assets to obtain an overdraft unless the will specifically forbids it. If a loan is given all the executors have to sign the documents.
A customer may give his power of attorney to another person to operate his bank account. It is a general notice and an authority; it is different from an ordinary authorization to operate a bank account. The power of attorney holder is an agent of the account holder and acts on his behalf. This may be special or specific (operate the bank account or other specific powers like the sale of property) or general which may give the holder authority to act on the customer’s behalf for many activities including banking.
The power of attorney should be stamped and registered with the Registrar of Documents or attested by a legal representative. It must be in force only at the time the bank account is operated. The attorney holder must act within the span of authority given to him. The power of attorney holder must be properly identified and his address must be verified.
As far as possible the principal should sign the account opening form. If the power of attorney permits the holder to open accounts he can do so. However, confirmation from the principal should be obtained before the operation. The account should be opened in the name of the principal with the heading “ABC (principal) by DEF (power of attorney holder).” It is not essential to use the word “constituted attorney.” If it is signed as “per pro ABC, it means that the holder has the limited authority to sign cheques.
It should be ensured that the power of attorney does not contain conditions or events on it that will make it difficult for the banker. A condition like, “during my absence from India” indicates that on his return the power of attorney would be cancelled. The difficulty could be that the bank would not know when exactly the person will return. A power of attorney holder cannot delegate his powers to another.
Cancellation of power of attorney
A power of attorney can be cancelled in the following ways :
A joint account should in the name of more than one person. The application for the joint account should be signed by all the persons opening the account. Banks must examine every request to open joint accounts carefully, in particular the purpose, the nature of business and the financial status of the account holders. Clear instructions must be obtained regarding the manner of operation which may be. Following are the ways in which the operations can be done :
It should be clearly stated that who may operate the account and state their authority. If this is not given then only cheques signed by all the persons in whose name the account stands should be honored. A joint account holder who is allowed to operate the account cannot by himself appoint an agent to operate the account.
Any joint account holder, even the one who is not authorized to operate the account also can stop the payment of a cheque. The full name of the account must be mentioned on all documents sent to the bank even if the account is operated by one or some of the joint account holders. The banker must take an authorization to determine who are permitted to overdraw the account. The authority to operate the account can be cancelled by any of the joint holders. It is automatically revoked if any of the joint holders becomes bankrupt, dies or of unsound mind. In these situations all cheques must be stopped. The banker should be given clear instructions with regard to withdrawal of securities in the joint account and the powers of joint account holders to pledge these securities. If one or more of the joint holders becomes insolvent, the authorization jointly given by them to the banker ceases to operate. No payments from the account should be permitted in order to find out the liability of the person who has become bankrupt. Payments will be made only on the instructions of all the joint account holders and the receiver of the insolvent account holder.
The application form of joint account should have a clause stating to whom the balance is payable in the event of the death of the account holders; this may be a specific person or the survivor. This instruction can be revoked by any of the account holders. In such case the amount will be payable on the discharge of all the joint account holders.
If there is no agreement to the contrary, his legal representatives and the surviving joint holder/s are jointly entitled to claim money from the bank. If all the joint holders die, the legal representatives of all of them can jointly claim the amount.
Where an account is opened “either or survivor”, the banker is not responsible to repay the amount to the representatives of the deceased and the survivor jointly. It permits him to repay the amount to the survivor. The banker should also not honor cheques drawn by the deceased joint holder without obtaining the concurrence of the surviving joint holders. If the joint account has a debit balance, the account must be closed to determine the liability of the deceased joint holder.
If the banker pays the balance to the survivor/s he gets good discharge. He need not examine whether the survivor is entitled to the amount in question. The legal heirs of the departed will need to move the court if they wish to claim the balance or a part of it. Joint holders can together nominate a person who should receive the money when all of them die.
A proprietorship, this is the account of an individual that he maintains for a commercial enterprise that he owns. It is not important that the proprietor alone should operates the account. He can permit/ authorize others also to do.
A Hindu undivided family (HUF) holds ancestral property and carries on ancestral business. All the members of (HUF) are descended from a common ancestor. So that ownership of the assets/property passes onto the members of the family. In those families every male member acquires an interest in the joint property on birth.
After the passing of the Hindu Succession Act the share of a deceased coparcener (member) is divisible among his wife, daughters and other female members. The HUF business and assets are managed by the eldest male member of the family, he is known as the ‘Karta’. The Karta has an implied authority to take a loan, pledge securities, execute the required documents and on behalf of the family for the sake of the business. It is recommended though that either all the family members sign the documents or they authorize the Karta in writing. This is to avoid disputes at a later stage.
The Karta is permitted to borrow only for the purpose that is beneficial to the family. Coparceners’ liability for loans granted is limited to the extent of their interest in the joint property. If they authorize the loan along with the Karta, then they become personally liable.
If there is a minor member, his guardian must sign the documents on his behalf. When he reaches 18, he should sign again to signify his agreeableness to the undertaking given by the adult coparceners. The account is usually opened in the name of the Karta or in the name of the HUF business. The account is operated by the Karta or any other authorized coparceners.
A partnership is the relationship between persons who have agreed to share the profits of the business carried on by all of them acting for all. A partnership is established by an agreement between the partners, it can be oral or written. As several bodies expect the partnership to be registered and to avoid uncertainty it is better the partnership agreements to be written. The minimum number of partners in a partnership firm cannot be less than two. The number of partners should not go beyond the statutory limit. A partnership firm of more than 10 persons carrying on banking business or more than 20 persons carrying on any other business should be registered under the Companies Act otherwise it is considered as illegal, or else it should be a Hindu undivided family or formed in pursuance of some other law. If the partnership exceeds this limit it is illegal and it cannot enter into a contract or sue in its own name.
If a partner joins or leaves the partnership, the old partnership ends and a new one comes into existence unless there is an agreement of continuity. A minor may be admitted into a partnership with the consent of other partners but he may not be liable for any loss off the firm.
A partnership account should always be opened in the name of the firm and not in the name of the individual or partners. At the time of opening an account, the application form should be signed by all the partners or by those authorized by all the partners. In the second case there should be a resolution signed by all the partners. If a partner is out of the country the other partners can open an account but to be safe, operations should not be allowed until the partner returns and signs the account opening documents.
Specimen signatures of all the partners must be obtained. The bank should take a letter signed by all the partners that should include:
The power of a partner to operate the account can be revoked by any of the partners by giving notice to the banker. In that situation the banker must stop payment of cheques signed by that particular partner. Though the banker may pay cheques signed by all the partners, it is recommended that a fresh mandate signed by all the partners be required. A partner can stop the payment of a cheque signed by any other partner of the firm. In addition sleeping partners and partners who are not authorized to operate the bank account can also revoke the power of other partners and issue instructions to the bank. In such cases also a fresh consent from the partners should be sought.
A partner authorized to operate the account cannot delegate his authority to another person without the consent of other partners. If a cheque payable to the partnership is endorsed by a partner and is deposited by him to be credited to his personal account, the transaction should be preceded only after checking with the other partners.
A partner acts as an agent of the partnership for the purpose of the business of the partnership firm and thus closes the partnership by his acts and deeds; this power is called “implied authority”. Every partner is individually and jointly to other partners for all the acts of the firm or instruments executed provided :
Even one partner can bind the partnership for the debts incurred by him on behalf of the firm. To bind the firm the signature should state the legend “for and on behalf of the firm” Just stating “ABC, Partner XYZ & Co” is not sufficient. If a partner does something which is not related to the business activities of the firm, other partners are not liable for the losses/ debts incurred.
A partner has the right to borrow on behalf of the firm to carry on the firm’s business. Such a debt will be binding on the firm and all the partners. If the partner’s powers are limited and he is not permitted to deal with the affairs of the firm, then he does not possess the power to borrow.
The liability of a partner is unlimited, it is limited only if he is a limited partner.
During the termination of the partnership the debts of the firm shall be settled out of the assets of the firm and the surplus is to be applied for paying the debts of the partners. If the partners are also indebted, the personal assets of the partners should be used first to meet the claims of their individual creditors. The remaining must be used to meet the dues to the creditors of the firm. However the documents are signed by the partners individually as well as jointly, creditors of the firm can recover their debts simultaneously.
The joint liabilities of partners continue till :
If a partner dies the partnership ends provided there is no agreement to the contrary. The beneficiaries of the partner do not automatically become members. But have a right to the deceased’s share of the partnership assets.
On the closure of the partnership arising from the death of a partner, the firm’s bank account also should be closed. If the firm is not dissolve, a new account must be opened in the name of the firm.
On the retirement of a partner, his liability to outside parties, including the bank ends in respect of all transactions entered into after his retirement. If the banker is not informed, the retiring partner will continue to be liable. If a partner becomes bankrupt the partnership comes to an end. The insolvent partner ceases to be a partner from the date he is declared bankrupt and will not be liable for transactions entered into thereafter. An insolvent partner’s cheques written before he has become declared as insolvent should be paid only after getting confirmation from all other partners. The moment a partner is declared insolvent, the account should be closed and a new account should be opened.
Limited companies are legal entities registered under the companies Act. They are viewed as artificial persons and are entitled to enter into contracts, own property, sue in their own name and do all acts that an individual can do. A public limited company should have a minimum of seven members, there is no maximum. On the other hand a private limited company has to have a least of two members and it cannot have more than fifty members. This does not include those in the employment of the company during the period of share allotment. Banks should examine the company’s memorandum and articles of association to determine what it can and cannot do.
The certificate of incorporation and certificate of commencement of business should be examined as these provide certain proof that the company is incorporated and is permitted to do business. A private limited company is not required to get a certificate of commencement of business. The memorandum of association is the document that details the constitution of the company. It contains the name of the company, authorized share capital of the company, its objects, the amount it may borrow and the liability of the members. The objects clause is important as any contract entered into contrary to the objects is unenforceable. The articles of association specify the rules and regulations relating to its day to day management such as the powers of directors. Along with an application to open a bank account, the company should provide a board resolution that approves the opening of the bank account and how the account should be operated and by whom. The maximum amount a company can borrow is stated in its memorandum of association. If the company wishes to borrow more, it should be approved by the members in a general meeting. The maximum that may be borrowed is stipulated by the Companies Act 1956. If the directors borrow money without authorization and the money is used by the company, the company is bound to repay the money. Banks must ensure that borrowings are used only for the purposes mentioned in the memorandum of association. The bank should obtain a certified copy of the resolution to borrow. The board must also pass a resolution that the borrowing is within its limits agreed. If any collateral is taken for loans/ advances, a charge must be created with the registrar of joint stock companies within 30 days. While granting a loan, it is important to check whether there are prior charges as these can have a prior right over the charge being created.
If a director of the company has his personal account with the bank and he endorses and deposits cheques drawn on the company to his personal account, the banker must determine the nature of the deposit.
While clubs, societies and charitable institution open accounts with banks, it must be ensured that they are incorporated. These organizations are directed by their byelaws or its constitution which will specify how they are to operate. To open a bank account a resolution of the managing committee is required. It should detail who are the signatories and the manner in which the account should be operated. Before permitting a society or club to borrow the bank should be ensured the borrowing is permitted.
If the person appointed to operate the account dies or resigns, operation must stop till the society/ club nominates/appoints another person. Care should be ensured that an authorized signatory does not endorse the club/ society cheques into his own account.
The Foreign Exchange Management Act (FEMA) defines a resident and states that all others are non-residents.
I. A person residing in India for more than one hundred and eighty two days during the course of the earlier financial year but does not include:
A. A person who has gone out of India or stays outside India, in either case :
B. A person who has come to India or stays in India, in either case other than:
II. Any person or corporate body registered or incorporated in India.
III.An office, branch or agency in India owned or controlled by a person resident outside India.
IV.An office, branch or agency in India outside India owned or controlled by a person resident in India.
A person resident outside India is such a person who is not resident in India i.e. a person who stays outside India or has otherwise gone out of India.
This includes :
In the year 2002 the Government of India created a new category called Persons of Indian Origin (PIO). A PIO is a foreign citizen but should not be a citizen of Pakistan, Bangladesh and other countries as may be specified by the Central Government from time to time.
Persons of Indian Origin (PIO) include the following :
On December 2003 the Citizenship (Amendment) Act 2003 was passed permitting nationals of certain countries dual citizenship provided they are of Indian origin.
In this context Indian origin means a citizen of another country who is eligible to become a citizen of India at the time of commencement of the constitution or belonged to a territory that became a part of India after August 15, 1947. The act does not cover those people who are the citizens of Pakistan, Bangladesh or any other country which the government may notify in the official gazette. Those who acquire citizenship will be known as an “overseas citizen of India.”An “overseas citizen of India” is defined in the following ways:
An overseas citizen will not be entitled to the rights conferred on a citizen of India and will not have the right to equality of opportunity in matters of public employment, they will not have voting rights and also will not be eligible to be a member of either the Lok Sabha or the Rajya Sabha. Dual citizenship has been extended to people of Indian origin living in Australia, Canada, France, Finland, Greece, Ireland, Israel, Italy, Netherlands, New Zealand, Portugal, Republic of Cyprus, Sweden, Switzerland, UK and the United States of America. The fee to secure Indian overseas citizenship is Rs. 12,500. Out of this US$25 would be non refundable if the application is turned down.
Foreigners are citizens of another country who are not of Indian origin, foreigners residing and working in India can also open bank accounts.