For every JAIIB PPB aspirant, understanding Types of Charges is essential to grasp how banks secure advances and reduce credit risk. This article covers all subtopics in detail — from Concept of Security to Registration of Charges — with clear explanations and exam-focused insights.
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1. Why Understanding Charges Matters
In banking, a charge represents a lender’s legal right over a borrower’s asset to ensure repayment of a loan. Knowing the concept and legal foundation behind this helps bankers protect their interest and aids JAIIB aspirants in answering conceptual questions accurately.
2. Concept of Security & Purpose of Creating a Charge
Security refers to an asset pledged by a borrower to the lender to secure repayment. The main purposes of creating a charge include reducing credit risk, ensuring loan recovery, and strengthening the bank’s financial control.
3. Meaning of Charge & Its Legal Basis
A Charge is an interest created by the borrower in favour of the bank over movable or immovable assets. It can arise through an agreement or by law. Legal foundation comes from the Indian Contract Act, Transfer of Property Act, and Companies Act.
4. Primary vs Collateral Security
- Primary Security: Main asset offered for the loan (e.g., goods financed, house mortgaged).
- Collateral Security: Additional or secondary security offered to reinforce the bank’s confidence.
5. Overview of Types of Charges
Major types include:
- Pledge
- Hypothecation
- Mortgage
- Assignment
- Lien & Set-off
- Fixed and Floating Charges
6. Pledge – Definition & Essentials
Pledge is the bailment of goods as security for repayment of a debt or performance of a promise. Ownership remains with the pledgor, but possession goes to the pledgee.
Essentials
- Delivery of possession (actual or constructive)
- Existence of debt or promise
- Right of sale upon default
Rights & Duties of Pledgee
- Right to retain and sell goods if unpaid (with due notice)
- Duty to take reasonable care of pledged goods
- Duty to return goods upon repayment
7. Hypothecation – Meaning & Features
Hypothecation is a charge on movable assets where possession remains with the borrower. It’s commonly used for vehicles, stocks, or machinery loans.
- Borrower keeps possession of goods
- Only charge is created in lender’s favour
- Requires documentation & registration
Difference between Pledge and Hypothecation
| Feature | Pledge | Hypothecation |
|---|---|---|
| Possession | With lender | With borrower |
| Asset type | Movable goods | Existing/Future movables |
| Default action | Direct sale of goods | Take possession & enforce |
| Example | Jewellery loan | Vehicle loan, inventory finance |
8. Mortgage – Definition & Types
Under Section 58 of the Transfer of Property Act, a Mortgage means transfer of an interest in specific immovable property to secure repayment of money advanced or to be advanced by way of loan.
Major Types
- Simple Mortgage
- Mortgage by Conditional Sale
- Usufructuary Mortgage
- Mortgage by Deposit of Title Deeds (Equitable Mortgage)
- Anomalous Mortgage
Difference between Simple & Equitable Mortgage
- Simple mortgage involves personal covenant & registered deed.
- Equitable mortgage is created by depositing title deeds without registration.
- Equitable mortgages are common in metro areas for faster processing.
9. Assignment – Meaning & Types
Assignment refers to transferring an actionable claim, such as book debts or insurance policies, from one person (assignor) to another (assignee).
Company Accounts Explained for JAIIB AFM | Types of Companies
Types of Assignment
- Legal Assignment: Follows all formalities and provides full rights to assignee.
- Equitable Assignment: Incomplete compliance but still valid under equity.
10. Comparison: Pledge vs Hypothecation vs Mortgage
| Mode of Charge | Asset Type | Possession | Typical Use |
|---|---|---|---|
| Pledge | Movable goods | Lender | Jewellery, warehouse goods |
| Hypothecation | Movables (current/future) | Borrower | Inventory, vehicles, machinery |
| Mortgage | Immovable property | Borrower (generally) | Home loan, property loan |
11. Registration of Charges under Companies Act
Under Section 77 of the Companies Act 2013, every company creating a charge must register it with the Registrar of Companies. Non-registration makes it void against liquidators or other creditors. Fixed and floating charges must be properly documented, stamped, and filed within the prescribed time.
12. Practical Tips for JAIIB Aspirants
- Understand each charge definition and feature thoroughly.
- Memorize key differences among Pledge, Hypothecation, and Mortgage.
- Remember key sections from Contract Act, TPA, and Companies Act.
- Use charts and tables for quick revision.
- Revise with practice MCQs from previous exams.
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Summary & Key Takeaways
- Charges secure bank advances by providing legal rights over borrower assets.
- Main types: Pledge, Hypothecation, Mortgage, and Assignment.
- Each differs in possession, asset type, and enforcement process.
- Registration and documentation are crucial for legal validity.
- Understanding these ensures conceptual mastery for JAIIB PPB exams.
