Bank is an essential service sector organization. Customers play the most significant part in the bank. The customer is the one who uses the banking products and services and judges the quality of those products and services. A banking relationship is a contract between the Bank & the Customer.
TYPES OF BANK CUSTOMERS
During the opening of accounts, the banker deals with different types of customers. The banker should acquaint himself with various laws governing different types of customers. The customers can be classified as follows:
1. Personal accounts: The Banker should take care and verify certain facts while opening individual accounts. As per the Indian Contract Act 1872, a person is competent to enter into a valid contract and open a bank account provided:
i) The individual should be major, i.e. of 18 years of age;
ii) He should be of sound mind;
iii) He is otherwise not disqualified by any law;
iv) He Should not be insolvent;
v) Drunken person is not legally competent to enter into a contract;
vi) He should be in good sense while lending a loan and entering into a contract.
Various types of personal accounts in banks are as under:
a) Accounts of Single Individual: This is purely a personal account in the name of an individual and is normally operated upon by the account holder himself. The account holder may authorise another person to operate on his account. For this purpose, he gives a Mandate or executes a Power of Attorney in favour of such a person.
In order to avoid legal complications that may arise after the death of the account holder, it is desirable to suggest the opening of a joint account in the names of two individuals (unless it is essential in certain circumstances to open an account in the single name only), and/or to obtain the proper nomination.
b) Joint Accounts of Individuals: A joint account is opened in the names of more than one individual for convenience of operations and/ or to avoid legal complications upon death of one of the joint account holders. A joint account is neither a partnership nor a trust account. It is important to obtain clear and unambiguous instructions regarding the mode of operation and repayment of the balance of a joint account in the event of the death of one or more joint account holder(s). Different types of operational instructions are as under:
(i) Jointly or Survivor (ii) Either or Survivor
(iii) Former or Survivor (iv) any one or Survivor
One or more of the joint account holders can authorise operation on the account on his/their behalf by giving a Mandate or executing a Power of Attorney, but, such Mandate or Power of Attorney must be given by all the parties to the accounts. Addition/deletion of any name, material alteration, closure of account & operational instructions in the joint account can be changed by all the account holders jointly. However, in joint accounts with operational instructions “Former or Survivor”, instructions can be changed/revoked only by Former.
c) Illiterate person: An illiterate person is a person who cannot read or write. Such persons are competent to enter into a valid contract. The account(other than the Current Account) of such a person may be opened provided he calls the Bank with the latest passport-size photograph. A photograph is essential for identification. Thereupon, his thumb impression or mark should be obtained on the account opening form/card in the presence of the Bank’s official. Such thumb impressions or marks affixed by illiterate persons on instruments are equivalent to their signatures. Any withdrawal/repayment of the deposit amount and/or interest by way of withdrawal form or otherwise should similarly be affixed with the thumb impression or mark of the depositor.
d) Blind Persons: Blind Persons can operate the account in a bank. Signature of Thumb impression of a blind person in the A/c opening form to be witnessed by a person who should certify that contents of the A/c opening form were explained to the blind person in his presence. The sign may be authorised by bank officer and a witness known to both the bank and the blind person. He should always visit the branch for cash withdrawal. As per all banking facilities including net banking, ATM, Cheque Book, Locker facility, loans to be offered to visually challenged customers without discrimination.
e) Minors’ Accounts: A minor is a person below the age of 18 years. A minor is a legal incapacity to contract by himself and, therefore, a guardian recognised by law along can deal with the person and property of the minor. The term “guardian” includes a natural guardian or guardian appointed by the Court of Law. Ordinarily, an account of a minor is opened and operated upon by the natural guardian of the minor or by the guardian appointed by the Court.
According to RBI guidelines with a view to promote the objective of financial inclusion and also to bring uniformity among banks in opening and operating minors’ accounts, banks are advised as under:
- A savings /fixed / recurring bank deposit account can be opened by a minor of any age through his/her natural or legally appointed guardian.
- Minors above the age of 10 years may be allowed to open and operate savings bank accounts independently if they so desire. Banks may, however, keeping in view their risk management systems, fix limits in terms of age and amount up to which minors may be allowed to operate the deposit accounts independently. They can also decide, at their own discretion, as to what minimum documents are required for opening of accounts by minors.
- On attaining majority, the erstwhile minor should confirm the balance in his/her account and if the account is operated by the natural guardian / legal guardian, fresh operating instructions and specimen signature of the erstwhile minor should be obtained and kept on record for all operational purposes.
Banks are free to offer additional banking facilities like internet banking, ATM/ debit card, cheque book facility etc., subject to the safeguards that minor accounts are not allowed to be overdrawn and that these always remain in credit.
It is permissible to open any type of deposit account in the name of and/or to be operated upon by a minor within the framework of rules of business of the Bank as outlined hereunder, but no Current Account should be opened.
According to Section 26 of the NI Act, a minor can draw, endorse or negotiate a cheque or a bill but he cannot be held liable on such cheques or bill. Minor can be admitted to the benefits of partnership with the consent of other partners but cannot be made liable for the losses. A minor may be appointed as an agent on behalf of his principal but legally he cannot be held responsible to his principal.
When the minor becomes major he has the sole right to operate the account and the guardian’s power ceases. The payment should be made to the erstwhile minor upon providing his identity. When the account is operated upon by the guardian on behalf of the minor a Balance Confirmation Letter duly signed by the erstwhile minor and verified by the guardian. If an account is operated by the minor himself, the erstwhile minor should be asked to sign a Balance Confirmation Letter.
2. Hindu Undivided Family(HUF): Hindu Undivided Family’ otherwise known as ‘Joint Hindu Family’ property, business or ancestral estates and its common possession, enjoyment ownership is the basis of the formation of HUF.As per Hindu law, the Hindus, Buddhists, Sikhs & Jains can form HUF.
HUF is governed basically by two schools of thought. In Bengal and Assam, it is governed by Dayabhag Law. In other parts of India, it is governed by Mitakshara Law. The law governing the Hindu Undivided Family is codified under the Hindu Code and now, succession among Hindus is governed by the Hindu Succession Act, 1956. Parts of this Act were amended in 2005 by the Hindu Succession (Amendment) Act, 2005.Creation of Hindu Law under which all major members of the family get right by birth in the ancestral property of the family.
HUF property is managed by a senior member called ‘Manager’ or ‘Karta’. Upon the death of Karta, the next senior coparcener becomes Karta. Joint owners of HUF are known as coparceners. It consists of one common living ancestor and his all male & female (female included from Sept. 2005) descendent up to three generations next to him. HUF cannot enter into a partnership as per the Supreme Court judgment of 1998.
The HUF account is operated by Karta. Karta has the authority to borrow money for family necessities & for ancestral family business. Documents are to be executed by Karta. All major coparceners are to be made guarantors. The liability of the ‘Karta’ is unlimited, whereas the liability of the coparceners is limited to their shares in the joint family estate.
3. Sole Proprietary Firms: A business is wholly owned by an individual. In law, there is no difference between the proprietor & the firm. In all respects, it is an account in the name of an individual only except that it is operated upon by the proprietor on behalf of the firm. The firm should have PAN or GST Number. A proprietorship letter in the bank’s Performa is to be obtained. Proof of proprietorship to be obtained. Creditors have recourse not only against assets of the firm but also against the private assets of the proprietor. The proprietor can authorize another person to operate the account through Mandate or Power of Attorney.
For opening an account in the name of a sole proprietary firm, the CDD of the individual (proprietor) shall be carried out. In addition to the above, any two of the following documents as proof of business/ activity in the name of the proprietary firm shall also be obtained:
(a) Registration certificate
(b) Certificate/license issued by the municipal authorities under the Shop and Establishment Act.
(c) Sales and income tax returns.
(d) CST/VAT/ GST certificate (provisional/final).
(e) Certificate/registration document issued by Sales Tax/Service Tax/Professional Tax authorities.
(f) IEC (Importer Exporter Code) issued to the proprietary concern by the office of DGFT or Licence/certificate of practice issued in the name of the proprietary concern by any professional body incorporated under a statute.
(g) Complete Income Tax Return (not just the acknowledgment) in the name of the sole proprietor where the firm’s income is reflected, duly acknowledged by the Income Tax authorities.
(h) Utility bills such as electricity, water, landline telephone bills, etc.
In cases where the Regulated Entities (REs) are satisfied that it is not possible to furnish two such documents, Regulated Entities (REs) may, at their discretion, accept only one of those documents as proof of business/activity.
Provided Regulated Entities (REs) undertake contact point verification and collect such other information and clarification as would be required to establish the existence of such firm, and shall confirm and satisfy itself that the business activity has been verified from the address of the proprietary concern.
4. Partnership Firm: Partnership is the relation between persons who have agreed to share profits of business carried on by all or any one of them acting for all (Indian Partnership Act 1932). As per RBI instruction now Registration Certificate and Partnership deed to be obtained. The Indian Partnership Act does not mention anything about the maximum number of partners in a partnership firm. The Central Government has prescribed a maximum number of partners in a firm to be 50 vide Rule 10 of the Companies (Miscellaneous) Rules, 2014. Thus, in effect, a partnership firm cannot have more than 50 members”. A partnership is not a distinct legal person from the partners who have made a partnership firm. HUF cannot enter into a partnership as per the Supreme Court judgment of 1998. The firm should have PAN or GST Number. A partner cannot delegate his authority to operate the account.
In case of death/retirement/insolvency of a partner account should be stopped, if the balance is in debit and a fresh account should opened after fresh sanction of limit. In case of dispute when one partner revokes the authority against the other partner, operation in the account should be stopped.
Dissolution of the Partnership firm can take place by the following ways:
- By mutual consent;
- Death/insolvency/retirement of a partner;
- Operation of Law (insolvency of all partners, business becoming unlawful, dissolution by a competent court; and
- In case of automatic dissolution.
5. Limited Liability Partnership (LLP): A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liabilities. LLP is governed by the Limited Liability Partnership Act 2008. Liability is limited to the extent of his contribution in the LLP. Minimum 2 designated partners and no limit on the maximum number of Partners. A partner is not liable for another partner’s misconduct or negligence, except in certain cases. LLP is a legal entity separate from its partner. It has own assets in his name, sure and be sued. Since LLP contains element of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership. It has perpetual succession (the death of a partner does not affect the existence of LLP). Partners have a right to manage the business directly. Firms and companies can get themselves converted into LLP. LLP cannot raise funds from the public.
6. Companies: Companies are defined in the Indian Company Act 1956. As per the provision of Company Act 2013 (implemented with effect from 1st April 2014), recognizes a joint Stock Company is a legal person with perpetual entity & is distinct from its members. A company or association of persons can be created at law as a legal person so that the company in itself can accept limited liability for civil responsibility. Because companies are legal persons, they also may associate and register themselves as companies otherwise it will be treated as illegal. Address of the registered office is compulsory. It is the address at which all the documents & notices may be served upon the company. Cheques favouring company are not to be credited to the personal accounts of the Directors or other officers of the company.
The following documents are required for the account opening of a company:
i) Certificate of Incorporation: Issued by Registrar of Companies. It is conclusive proof for incorporation of the company & compliance of all formalities by promoters.
ii) Certificate of commencement of business: A company having share capital cannot commence business until it has obtained the certificate to commence business (COB) from the concerned Registrar of Companies. Certificate of commencement of business is not required by Private Ltd. Co. as its shares are closely held & it can commence business on its incorporation.
iii) Memorandum of Association: Company’s fundamental & unalterable law. Embodies Company’s name, Authorized capital, Objectives of the company, Liability of shareholders.
iv) Article of Association: Regulations controlling internal management of the company. Rights & powers of the Directors, rules about conduct of company meetings & business, Procedure for borrowing & limit on borrowing etc.
iv) Copy of Board Resolution: Certified copy of Board Resolution authorizing to borrow from the Bank with details of limit, security etc., Persons who are authorized to sign the security documents & operate the Bank Account, persons in whose presence Seal of the company will be affixed to the security documents.
v) Company identification Number (CIN): As per RBI guidelines Company Identification Number (CIN) assigned by the ROC is now compulsory for opening of bank account of the company.
vi) Company common Seal: The common seal if any, of the company available, should be embossed on the bank`s documents. As per Companies (Amendment) Act, 2015 and RBI instructions Company Common Seal is not necessary if other documents are available during the current account opening.
Different types of companies in India
a) Private Company: Private Company has shareholders with limited liability and its shares may not be offered to the general public. Private Limited Company has a no minimum paid-up share capital limitation now. (As per the Companies (Amendment) Act, 2015, paid-up share capital of one lakh rupee or such higher paid-up share capital as may be prescribed is omitted now). It has a minimum of two members and a maximum member restricted to two hundred and a Minimum two directors and no maximum number of directors is restricted.
b) Public Company: Public company means a company that is not a private company and has no minimum paid-up share capital limitation now (As per Companies (Amendment) Act, 2015, paid-up share capital of five lakh rupee or such higher paid-up share capital as may be prescribed is omitted now). Shares are offered to the public & are listed on the stock exchange. Minimum seven members no limit of maximum number. Minimum 3 directors maximum 15 director limits. Provided that a company may appoint more than fifteen directors after passing a special resolution (As per Companies Act 2013, no Central Govt. permission is required now). At least one-woman director shall be on Board. A certificate of commencement of business is a must to do any type of business.
c) Government Company: “Government Company” means any company in which not less than fifty one percent. Of paid-up share capital is held by the Central Government, or by any State Government, or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary company of such a Government company.
d) One Person Company: The Companies Act 2013 Act introduces a new type of entity to the existing list i.e. apart from forming a public or private limited company, the 2013 act enables the formation of a new entity a ‘one-person company’ (OPC). An OPC means a company with only one person having a sole member [section 3(1) of 2013 Act]. An OPC can be formed only by an Indian Resident and citizen.
e) Other Companies: As per the Companies Act 1956, companies can be classified on the basis of time, place of incorporation and nature of working share capital as follows:
i) Foreign Company: It means a company incorporated outside India and having a place of business in India whether by itself or through an agent, physically or through electronic mode and conducting any business activity in India in any other manner.
ii) Existing Company: A company which is established before the Company Act 1956 is called Existing Company.
iii) Holding Company: A company is known as the holding company of another company if it has control over another company.
iv) Subsidiary Company: A company is known as a subsidiary of another company when control is exercised by the latter over the former called a subsidiary company. A company is to be deemed to be a subsidiary company of another.
7. Trust: Trusts are governed by the Indian Trust Act, 1882. A trust is created when ownership of a property is transferred to someone for holding or managing it for the benefit of another person(s). A trust may be a public charitable trust or a private trust (for the benefit of private individuals). Trusts are managed by trustees. Loan can be granted if it is for the purpose of the trust. The trustee is authorised to borrow as per the trust deed. Original Trust Deed to be examined before financing. Certificate of Registration under Public Trust Act to be examined & copy to be kept on record.
8. Clubs & Societies: Clubs & Societies are non-profit making organisation and represent a group of persons. These are normally incorporated under Cooperative Society Act. Clubs can be registered under Society Act 1860, or Company Act 1956. These get the status of a legal entity only after their incorporation in their own name. These are governed by rules & regulations (bye laws). A certified true copy of the resolution. Cheques favouring society, club, association not to be collected in individual accounts of office bearers or employees.