Table of Contents
Different Modes of Charging Securities (Jaiib Paper 1, Module B, Unit 17)
Dear bankers,
As we all know that is Different Modes of Charging Securities for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are providing the Different Modes of Charging Securities (Unit-17),FUNCTIONS OF BANKS (Module B), Principle & Practice of Banking JAIIB Paper-1.
♦Charging Securities
- Bank tend to safeguard their advances by taking different kinds of securities .The main purpose of taking a security is to fall back on it in case the loan is defaulted. Bank take movable properties immovable properties or a debt as securities for a loan .The method of creating charge over a property depends upon the nature of property and nature of charge.
♦Types of charges
Bank charge over property confines itself to one or more of the following seven types of charges.
- Assignment
- Lien
- Set-off
- Hypothecation
- Pledge
- Mortgage
- Appropriation
◊Assignment
- It is a mode of providing securities to a banker for an advance .It is transfer of a right , property or a debt .The transfer is called assignor and the transferee assignee.
- Borrowers generally assign the actionable claims to the banker as security for an advance. It is transfer of right, Property or debt. The transferor is called assignor and the transferee assignee. Borrowers generally assign the actionable claims to the banker as securities for an advance.
- Section 130 of the transfer of property Act: The transfer of an actionable claim can be effected only by the execution of an instrument in writing, signed by duly authorized agent.
- Section 3 of the Transfer of property act: Defines an actionable claim to any debt other than a debt secured by mortgage of immovable property, or by hypothecation of or pledge of movable property or two beneficial interest in movable property, not in the possession of the claimant, which the civil courts recognize as affording grounds of relief.
- All the rights and remedies of the transferor vest in the transferee .The transferee of an actionable claim takes it, subject to all the liabilities and equities to which the transferor was subject on the date of transfer.
◊Lien
- Lien is the right of the banker to retain possession of the goods and securities owned by the debtor until the debt due from the latter is paid .The banker’s lien is an implied pledge. A banker acquires the right to sell the goods which came into its possession in the ordinary course of banking business, in case the debt is not paid.
- Section 171 of the Indian contract act 1872 gives to the banker an absolute right of general lien on all goods and securities received by the banker.
◊Set-off
- Set off means total or partial merging of a claim of one person against another in a counter claim by the latter against the former. It is in effect, the combining of accounts of the debtor and creditor, to arrive at the former. It is in effect, the combining of accounts of the debtors and creditors, to arrive at the met balance payable to one or the other .The right of set off is a statutory right and can also arise out of an agreement between parties.
Salient features of Set off
- Both debts must be for certain sums. A debt accruing due to cannot be set off against the debt already due.
- The banker cannot set off the credit balance in the account of guarantor till the liability of the guarantor is determined.
- The credit balance in the current account cannot be set off against a contingent liability of a bill discounted but not yet due.
- A banker cannot set off a debt due to him upon a loan account repayable on demand or at a specified date against a credit balance in the current account until the demand is made or due date arrives.
- The parties must be mutually indebted in the same right.
- The credit balance in the partner’s account can be set off against the debit balance of a partnership account since the liability of the partner is joint and several.
- Right of set- off is exercisable between two firms , which have separate names but are composed of same set off is exercisable between two firms, which have separate names but are composed of same set of partners.
- The credit balance in the personal account of a sole proprietor can be set off against the debit balance of the sole proprietary concern and vice versa.
- When the right set off is available to the bank , lien right cannot apply .These two different rights cannot be exercised simultaneously at the same time.
Automatic right of set off arises in the following circumstances
- On the death, insanity or insolvency of the customers.
- On the insolvency of a partner of a firm or winding up of a company
- On receipt of a garnishee order.
- On receipt of notice of assignment of a customer’s credit balance.
◊Hypothecation
- The term hypothecation means 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 of such charge in to fixed charge on movable property. The mortgage of movable property is called hypothecation.
◊Pledge
- Pledge means bailment of goods for purpose of providing security for payment of debt or performance of promise. (As per the section 172 of Indian Contract Act 1872).
- The person, whose goods are bailed is called the Pawnor, the person who takes the goods as security is called the Pawnee.
The followings are the legal implications of a pledge:
- The ownership of the property is retained by the pawnor, which is subject only to the qualified interest which passes to the pawnee by the bailment.
- One of the main and most essential requirements of a pledge is the actual or constructive delivery of the goods to the pawnee. By constructive delivery, it is meant that there need be no physical transfer of goods from the custody of the pawnee or of the any person authorized to hold them on his behalf.
Goods may be delivered by one of the following ways
- By handling over the key of the godown, in which the goods are kept.
- By attornment I e if goods are in public warehouse, the warehouseman acknowledges to the pawnee that he will hold the goods thereafter on behalf of the pawnee.
- Handling over the document of title to goods such as railway receipt, bill of lading , warehouse receipts etc.
- Even if goods are in possession of the pawnor , he may acknowledge that he holds them thereafter for and on behalf of the pawnee.
- An agreement of pledge may be implied from the nature of the transaction or the circumstances of the case .However, an agreement in writing clearly laying down the terms and conditions leaves no ambiguity.
◊Mortgage
- Mortgage is a transfer of interest in immovable property to secure an advance loan or an existing debt or a debt or performance of an obligation.
Transfer of property act contemplates six types of mortgage
- Simple mortgage
- Mortgage by conditional sale
- Usuafructury mortgage
- English mortgage
- Mortgage by deposit of title deeds
- Anomalous mortgage
In simple mortgage: the mortgage is by deposit of title des and in English mortgage , the possession of the mortgage properties is not given to the mortgage
In usufructuary mortgage and in mortgage by conditional sale , possession of the mortgaged properties is normally given to the mortgage
In the case of simple mortgage and mortgage by deposit of title deeds , the mortgagee has a right to proceed against the property mortgaged and also personally against the mortgagor.
Mortgage is to be created by way of deed and requires to be registered under the registration act.
Mortgage by deposit of title deeds is not required to be created by way of a deed and does nor require registration.
The rule of priority in case of successive mortgages is in the order of the time they are created.
Limitation period for filing a suit for foreclosure is thirty years that date mortgage debt becomes due.
Limitation period for filing a suit for sale of mortgages property is twelve years from the date mortgage debt become due.
Enforcement of mortgage is government by the code of civil procedure 1908 .suit for sale of mortgages properties should be filed in the court within whose jurisdiction the mortgage property is situated.
In a suit for sale of mortgaged properties, the court first passes a preliminary decree and thereafter final decree.
◊Right of Appropriation
- When a debtor has several debt with a creditor, section 59, 60 and 61of the Indian Contract Act 1872, deal with appropriation of payment made by the debtor to the creditor. The principle also applies to the loans obtained from a bank. We should also understand clearly the different between right of appropriation and right of off. When a Fixed deposit receipt of appropriated before maturity it is under the right of appropriation and when it is appropriated after maturity the right of set off is exercised.
