TYPES OF CHARGES | SMALL FINANCE BANKS IMPORTANT TOPIC | IIBF CERTIFICATION EXAM 2023

TYPES OF CHARGES | SMALL FINANCE BANKS IMPORTANT TOPIC

With learning sessions, you can surely crack your IIBF certification exam since we provide free and premium for many IIBF certifications courses. This post will talk about the types of charges which is a very important part of the syllabus of small finance banks. 

Here you are going to learn comprehensively about the lien, set off, pledge, appropriation, mortgage, assignment, and hypothecation.

Why do banks charge security?

Banks accept movable, immovable, actionable claims or book debts as security against loans. The process used to create a charge over a property relies on both the type of the charge and the property.

By doing this, the loan is protected from default.

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Following are some common types of charges:

Lien

A lien is the banker’s legal right to keep the debtor’s goods and securities in their possession up until the loan is paid off. 

If the debt is not paid, the banker gains the right to sell the items as a result of the implied commitment.

A wide claim on all goods and securities received by the banker is granted by Section 171 of the Indian Contract Act of 1872.

An implied pledge exists with the banker’s lien.

1. Legal status: Indian Contract Act, Section 170, 171
2. Banker-customer relationship: Creditor-Debtor 
3. Applicable on Goods & securities
4. Applicable to Account in the same order same capacity

Set off

Set off is the merging of one party’s claim against another party’s counterclaim. 

It is the process of merging the accounts of the debtor and creditor to determine the balance due to either party. 

It is a statutory privilege that may also result from a contract between two parties.

Subject to meeting certain conditions, it can be exercised and prior notice must be sent to the customer.

Usually, it’s exercised under the following situations:

1. In case of insolvency 
2. Death or lunacy of the customer 
3. Dissolution of a firm/liquidation of the company
4. Attachment order/Garnishee order 

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Characteristics of set-off

1. Debts cannot be offset against prior debts but they must be for a specific amount.
2. Unless the liability of the guarantee is established, the banker cannot set off the credit balance.
3. The credit balance in a current account cannot be set off against a contingent liability of a discounted bill.
4. Until the demand is made or the due date approaches, a banker cannot offset a debt that is owed to him on a loan account.
5. Both parties must be obligated in the same way.
6. Due to their joint and several obligations, the partner’s credit amount can be offset against the partnership account’s debit balance.
7. Between two businesses with the same name and made up of the same partners, the right of set-off may be used.
8. A solitary proprietor’s personal account credit balance may be offset by the sole proprietary concern’s debit balance.

Pledge

• The bailment of goods is known as a pledge, and it is done to guarantee the fulfilment of a promise or the repayment of a debt. 
• The one whose items are bailed is referred to as the Pawnor, while the individual who accepts the items as security is referred to as the Pawnee.
• A pledge has the legal ramifications of retaining the property’s ownership by the pawnor, subject to the qualified interest being transferred to the pawnee by the bailment. 
• The actual or constructive delivery of the items to the pawnee is the primary prerequisite for a promise.

Appropriation

• One way to give a banker security for an advance is to transfer a right, property, or debt. 
• Actionable claims are typically assigned by borrowers to the banks as collateral for an advance. 
• An actionable claim may only be transferred by Section 130 of the Transfer of Property Act of 1882 by the execution of a written document signed by the transferor or his properly authorised agent. 
• The assignment is referred to as an equitable assignment if the formality is not followed.
• The principle is applied to loans obtained from banks.
• Sections 59, 60, and 61 of the Indian Contract Act of 1872 address the appropriation of payments made by a debtor to a creditor where the debtor has multiple debts with the creditor.
• Appropriation and off rights are used when a Fixed Deposit Receipt is appropriated before maturity, while when it is appropriated post-maturity, the set-off right is used.

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Mortgage

According to Section 58 of the Transfer of property act 1882, the sale of a right to use a certain piece of real estate guarantees repayment of a loan advance.

Mortgagees who experience such a default may launch a lawsuit to seize the mortgaged property and sell it to recoup their losses.

The parties included are the mortgagor and mortgagee. 

Security on immovable property is charged here.

Assignment

A method of giving security to a banker for an advance is the transfer of a right, property, or obligation. 

Here without delivering the goods to the lender, a charge is created on the movable property by hypothecation. 

Usually, borrowers give the banking enforceable claims as collateral for an advance. 

According to Section 130 of the Transfer of Property Act of 1882, an actionable claim may only be transferred by the execution of a written document signed by the transferor or his lawfully authorised agent. 

When the formality is broken, the assignment is referred to as an equitable assignment.

Hypothecation

The debtor borrows the money using the security of movable property without giving the creditor any ownership or access to the items.

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