Relationship Banking

 Relationship Banking is a strategy used by banks to enhance their profitability. They accomplish this by cross-selling  financial  products  and  services  to  strengthen  their  relationships  with  customers  and increase customer loyalty. Relationship banking involves offering customers a broad array of financial products and services that go beyond simple checking and savings accounts.

In  addition  to  these  two  basic  products,  relationship-banking  products  may  include  certificates  of deposit,  safe  deposit  boxes,  insurance,  investments,  credit  cards,  loans  and business  services  (e.g., credit card processing). They may also include specialized financial products designed for specific demographics, such as students, seniors or the wealthy.

Merits and Demerits of Relationship Banking

Relationship  banking  can  add  value  through  its  contractual  features  that,  though  mostly  implicit, facilitate long-term relations (Ferri, Kang and Kim, 2001; Hoshi and Patrick, 2000).5

   Monitoring costs are economized through reciprocal delegated monitoring among credit suppliers, virtually making the loans of a relationship bank subordinate to other banks’ loans and public debt.

   Inefficient closures of distressed but economically solvent firms are prevented, and cases of corporat e financial distress are effectively resolved.

   Liquidity  constraints  are mitigated  and business  risks shared between  a relationship  bank and its corporate clients over their cycles of cash flows and profits, since loans are made from a long -term perspective.

    Potential conflicts of interest between the creditor bank and shareholders are controlled through the holding of corporate shares by a relationship bank, easing the problem of asset substitution (investment decisions  biased  towards  projects  that  enrich  stockholders  at the  expense  of debtholders;  Prowse,1990).

However,  relationship  banking  is  not  without  potential  perils,  which  must  be  minimized  by  sound business judgment and discipline (Ferri, Kang and Kim, 2001; Hoshi and Patrick, 2000).

   Investment efficiency can be low due to soft-budget constraints. That is, given the good chance of loan renegotiations with their banks, firms with a relationship bank may have weaker ex ante incentives to boost their effort (Bolton and Scharfstein, 1996).

   A relationship bank might extract rents from its clients in the form of higher lending rates and others

because they are informationally captured and have difficulties turning to other financing sources.

   Firms with a relationship bank may take too few risks in their businesses, as the bank will discourage investment projects with both high return and high risk.

   The system of relationship banking is often supported by heavy government regulation of the financial markets, which delays capital market (including the market for corporate control) development and results in inefficiency in the banking sector.

Under what circumstances can a banker disclose the secrecy of a customer’s account?

 A  bank  can  disclose  information  regarding  customer's  account  to  a  person(s)  under  the  following circumstances.

(a)Under compulsion of law. 

(b)Under banking practices.

(c)For protecting national interest. (d)For protecting bank’s own interest

(e)Under express or implied consent of the customer Disclosure under compulsion of law:

Banks  disclose  information  to  various  authorities  who  by  virtue  of  powers  vested  in  them  under provisions  of  various  acts  require  banks  to  furnish  information  about  customer’s   account.  The information is called under:

(i)Section 4 of Banker's Book Evidence Act, 1891 (ii)Section 94 (3) of Code of Civil Procedure Act, 1908 (iii)Section 45 (B) of Reserve Bank of India Act, 1934 (iv)Section 26 of Banking Regulation Act, 1949 (v)Section 36 of Gift Tax Act, 1958

(vi)Sections 131, 133 of Income Tax Act, 1961

(vii)Section 29 of Industrial Development Bank of India Act, 1964 (viii)Section 12of Foreign Exchange Management Act, (FEMA) 1999 (ix)Section 12 of the Prevention of Money Laundering Act, 2002

Banks  are  required  to  furnish  only  the  called  for  information  (no  additional  information  is  to  be furnished) on receipt of written request of the person who is vested with the authority to call for such information under the said acts. The customer is kept informed about the disclosure of the information. Disclosure under banking practices:

In order to ascertain financial position and credit worthiness of the person banks obtain information from other banks with which they are maintaining accounts. It is an established practice among bankers and implied consent of the customer is presumed to exist. The opinion is given in strictest confidence and without responsibility on the part of the bank furnishing such information. Credit information is furnished in coded terms to other banks on IBA format and without signatures.

Mention the protection Available Under the Negotiable Instruments Act for paying banker

 The Negotiable Instruments Act has come to the rescue of the paying banker and provided protection under certain circumstances. These circumstances are given below:

1. Protection in Case of Bearer Cheque.

2. Protection in Case of Order Cheque.

3. Protection in Case of Crossed Cheque.

4. Protection in Case of Obliterated Cheque.

5. Protection in Case of Drafts.

1. Protection in Case of Bearer Cheque: Section 85 (2) of the Negotiable Instruments Act, 1881 states, “Whereas a cheque is originally expressed to be payable to bearer, the

drawee is discharged by payment in due course to the bearer thereof, notwithstanding any endorsement whether in full or in blank appearing thereon, notwithstanding that any such indorsement purports to restrict or exclude further negotiation.”

The above protection is given in the Act on the basis that a bearer cheque always remains a bearer cheque and it bears endorsement in blank or full whether any endorsement restricts further negotiation or not. In case a bearer cheque is stolen or lost and the banker honours the cheque without any knowledge, the banker will be discharged from his duty under the protection given in Section 85 (2) of the said

Act. In such a case, the paying banker is not required to verify the endorsement on bearer cheque.

In case a bearer cheque is crossed, the paying banker has no right to pay in across the counter in disregard of the crossing.

2. Protection in Case of Order Cheque: In case the payment is made to a person other than the payee, the paying banker does not get any protection under the Negotiable

Instruments Act. If the endorsement is regular and payment is made in due course, the paying banker gets the protection under Section 85 (1) of the Negotiable Instruments Act, 1881 : “Whereas a cheque payable to order purports to be endorsed by or on behalf

of the payee, the drawee is discharged by payment in due course.” In case, payment is made to a wrong person whose signature is not according to

specimen signature, the protection is given to a banker under Section 16 (2) of the Negotiable Instruments Act : “It is not possible for a banker to know each of the endorsers and their signatures.” For getting the protection, the banker should note the following:

(a) Regular Endorsement: According to Section 85 (1) of the Act the endorsement should be regular. For example, if a cheque is payable to a right person and signature is bearing same name and the same spellings this is known as regular endorsement, though this is not a valid endorsement.

(b) Payment in Due Course: According to Section 10 of the Act the cheque should be paid in due course. In case the payment is made on forged signature of the endorser and not that of the drawer, the banker gets statutory protection under Section 10 of the Act.

3. Protection in Case of Crossed Cheque: Regarding payment of crossed cheque, the paying banker gets the protection under Section 128 of the Negotiable Instruments Act, 1881 : “Whereas the banker on whom a crossed cheque is drawn has paid the same in due course, the banker paying the cheque and the drawer thereof (in case such cheque has come to the hands of the payee) shall be entitled respectively to the same rights and placed in the same position if the amount of the cheque had been paid to and received by the true owner thereof.”

In case the payment is made on the instructions of the drawer in good faith without any negligence, the paying banker gets the statutory protection under the Negotiable Instruments Act, 1881: “The payment of crossed cheque in due course makes the drawee banker liable to the true owner of the cheque besides disentitling himself to debit the customer’s account.”

4. Protection in Case of Obliterated Cheques: According to Section 89 of the

Negotiable Instruments Act, 1881, “Whereas a cheque is presented for payment which does not at the time of presentation appear to be crossed or to have had a crossing which has been obliterated, payment thereof by a banker is liable to be paid and paying the same according to the apparent tenor thereof at the time of payment and otherwise in due course, shall discharge such banker from all liability thereon and such payment shall not be questioned by reason of the cheque having been crossed.”

Thus the above Section is very meaningful where crossing of a cheque is obliterated by dishonest person. Under the above Section the banker gets the protection in the way that the payment is made according to the apparent tenor of the cheque and due course.

5. Protection in Case of Drafts: In case of demand drafts drawn by one branch of a bank upon another branch of the same bank, the banker gets protection under Section 85 of the Negotiable Instruments Act. The Section states: “Whereas any draft, that is, an order to pay money drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand, purports to be endorsed by or on behalf of the payee, the bank is discharged by payment in due course.”

In short, a banker may get statutory protection under the various Sections of the Negotiable Instruments Act, if he fulfils the terms and conditions of the said Section of the said Act. No protection however is available, in case the drawer’s signature is forged.