The contract between the banker and borrower is a contract between debtor and creditor. The contract implies that the borrower promised to repay the money borrowed by him.
Right of set off is the right of the bank to combine the two accounts of the same person where one account which is in credit balance and the other account is in debit balance , in order to cover a loan default.
However, the banker can exercise the right of set-off only when the money owed to him is a sum certain, which is due and where there is no agreement, express or implied to the contrary.
CONDITIONS TO APPLY RIGHT OF SET OFF
For exercising the right to set off all branches of a bank are treated as a single unit, which means a loan from branch-A can be adjusted by the funds in branch-B under following conditions :
- The right can be exercised when the relationship is that of debtor/creditor on one hand and creditor/debtor on the other and exist simultaneously.
- A prior Notice of reasonable period must be given to the depositor expressing the intention to exercise the right to set off .
- This right can be exercised only in case of those loans which have become due & customer have defaulted in making payment of the loan.
- Time barred loans can be recovered by exercising the right to set off.
- It must be ensured that the account must be in the same name and in the same capacity. The money belonging to someone else cannot be made available to satisfy personal debts of some other person.
- Right to set off cannot be exercised on such accounts which are opened in the name of minor by his guardian.
- The funds held by a person in a trust account are to be treated in a different right from his own liability as an individual. Theses cannot be used by the bank for set-off.
- The bank cannot exercise this right in case of joint accounts.
- The right to set off can be exercised only after the term deposits become due.
Thus, in simple words the right of set off also known as the right of combination of accounts is a bank’s right to set off a debt owing to a customer against a debt due from him . It is a self-help remedy and is therefore available without litigation.