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How bankers establish their right over assets of the borrower?


The charge creation means establishment of lender’s right to recover from the specified assets of the borrower, in case the recovery is difficult in normal course. The mode of bank charge on different securities depends upon nature of facility and type of security. Banks grant loan or extend CC facility against marking lien on term deposits of the customer. Loans are granted against Assignment of Life Insurance policies, National Saving Certificates. Cash Credit or overdraft facilities are also extended to customers against hypothecation or pledge of stocks and receivables. Term loans are granted against hypothecation of machinery. Mortgage of land and buildings are the examples of securities held by the bank against term loans and deferred payment guarantees offered by banks and financial institutions. A third party guaranty offered to the bank is also a form of security offered to the bank. As a result, Banks establish their rights over different securities by way of lien, pledge, hypothecation,Assignment/ actionable claim, Trust Receipt etc.

Right of set-off:  The right of set off means where a customer is having one or more accounts with the bank in credit balance. The customer also owes money to banker in another account or other accounts. In the above circumstance, then the banker has the right to reduce the amount which the borrower owes to him from the credit balance available in his other account/s. This right of banker is known as right of set-off or right of combining account. The right of set-off is available to bank only when the money owed to the bank is certain sum, which should be due at the time of set-off and there shall not be an agreement, express or implied to the contrary.

Lien: Lien is akin to bailment. It is the right to retain goods or securities belonging to a debtor until dues are paid fully to the retainer (creditor). No special agreement is necessary for creating the right of lien.  Banks are conferred with the right to retention of goods or security (  such as cheques, bill of exchange, deposits etc,) ,by way of general lien, until some claim attaching to it, is satisfied or discharged. The lien extends to all such documents under which money will or may be payable to the customer.

Pledge: Pledge is only a special kind of bailment where the object of the delivery of assets/goods is to provide a security for a loan or for the fulfillment of an obligation. The essence of pledge is the goods must be delivered to the possession of pledgee, as a security for payment of debt and there should be a contract to return the same goods which were pledged after the debt is repaid. The delivery of goods may be actual or constructive.

Hypothecation:The lender’s right under the term “Hypothecation of assets” is not defined in anywhere in the statute. However hypothecation is defined in SARFAESI ordinance as under;

“a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor ,as a security for financial assistance and includes floating charge and crystallization such charge into fixed charge on movable property”.

In hypothecation, neither the possession of assets nor the ownership of the assets transferred to the lender (hypothecatee). The asset hypothecated remains under the possession of the borrower and he is free to deal with it. The securities commonly covered under hypothecation are goods, book debts machinery, and furniture.

 Assignment: Assignment is when the rights, title and interest in debts due or accruing due to a person are transferred to another person. Actionable claim means any claim other than the debt to mortgage of immovable property or hypothecation or pledge of goods and receivables. Thus the charge by way of assignment can be created on actionable claim by an instrument in writing signed by assignor (Transferor) or through his duly authorized agent. The debts which are sought to be assigned may be present, future, conditional or contingent charge by way of assignment can be created under actionable claim. The transfer of   Life Insurance Policy, National Saving Certificates, Supply bills etc, to the name of bank for the purpose of borrowing are examples of assignment.

Actionable claim: Section 3 of the Transfer of Property Act 1882 defines actionable Claim;

“a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in possession, either actual or constructive, of the claimant, which the Civil Court recognizes as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent”.

 The actionable claim can be assigned to anyone except to a judge, a legal practitioner or an officer of the Court of Justice.  Arrears of rent, PF credit, life Insurance Policy claim, money due under a will, under a contract, money receivable under sale of property are the example of actionable claim.

“Trust Receipt”: In “trust receipt” under the contract of pledge, the borrower gets his assets/goods released from the pledge, only on full payment of his dues which automatically terminates contract of pledge. The purpose of “Trust Receipt” is that allows bankers to maintain the original charge under pledge and if the customer becomes insolvent, the official assigner/receiver cannot claim the goods for the benefit of unsecured creditors.

Related articles:

Difference between Lien and Pledge
Trust Receipt under the contract of pledge

Essence of Pledge and Pledgee’s right & duties
Definition of Assignment and actionable claim

Difference between Assignment and Negotiation

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