DEPARTMENT OF TECHNICAL EDUCATION ANDHRA PRADESH

Name Designation Branch Institute Semester Subject name Subject code Major topic Duration Sub topic Teaching aids :Sreenivasa Rao B. :lecturer in CCP :Commercial and Computer Practice :S.U.V.R& S.R GPW, Ethamukkala :VI SEMESTER :Banking II :CCP 604 (B) :Loans and Advances – Short Term & Long Term :50 minutes :Various Modes of Creating Charge. :PPT
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Objectives :
On completion of this period you would be able to
 Explain the meaning of mode of creating charge.  Define Lien.  Explain the circumstances for exercising Lien.

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Recap
    Credit-worthiness of a borrower Credit information Credit appraisal meaning importance Procedure for credit appraisal

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Charge

What is the meaning of creating a charge on assets / securities?

What do you know about methods of creating charge?

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INTRODUCTION
 One of the important principle of sound lending policy is to ensure safety of funds lent by a banker to his customer.  The banker provides loans against securities / assets in the form of goods, property, shares, bonds, gold etc.,  charge on assets has to be created to the banker to acquire the right to collect the amount due to him.
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Modes of Creating a charge – Meaning:
 The way by which a banker obtains control over the security offered by a borrower is called ‘Mode of Creating Charge’.  If the security is not properly charged in favour of a banker, he will remain as an unsecured creditor.

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 There are different methods of creating charge  A banker has to select an appropriate one depending upon the nature of the security and the type of loan.  The following are the important methods of creating charge: 1) Lien, 3) Mortgage, 2) Pledge, 4) Hypothecation
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LIEN - Meaning
According to Section 171 of the Indian Contract Act, Lien is a right to retain the property of the customer, given as security, till the loan is repaid.  A banker’s lien is always a general lien.  In exceptional cases, he acquires the right to sell the securities, after giving a reasonable period of notice to the borrower.  Banker Lien acts as an implied pledge.

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Kinds of Lien:
 Lien is of two kinds – i) Particular Lien , ii) General Lien.

i) Particular Lien:  A particular Lien is one which confers a right to retain the goods in connection with a particular debt only.  A particular lien applies to one transaction or certain transactions only.
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ii) General Lien :
 General Lien, on the other hand, gives a right to the banker to retain the goods not only in respect of a particular debt but also in respect of the general balance due to him. It extends to all transactions and thus, it is more extensive than that of a particular lien.

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Banker’s Lien:
  A banker’s lien is always a general lien. Generally a banker has a right to exercise both kinds of lien.  His general lien confers upon him the right to retain the securities in respect of the general balance due from the customer.

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Circumstances for Exercising Lien:
A banker can exercise his right of lien only if the following conditions are fulfilled: v) There must not be any agreement inconsistent with the right of lien. vi) The property must come into the hands of a banker in his capacity as a banker [qua banker] vii) The possession should be lawfully obtained in his capacity as a banker. viii) The property should not be entrusted to the banker for a specific purpose.

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Banker’s Lien as an Implied Pledge:
  It must be noted that a banker’s lien is generally described as an implied pledge. But in some special cases, he has a right to sell the securities and goods of the customer, after giving a reasonable notice to him, when the customer does not take any steps to clear his arrears. This right of sale normally available only in the case of pledge. That is why the banker lien is regarded as an implied pledge.
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Lien on Negotiable and Quasi Negotiable Securities:
  A banker has a lien on all securities entrusted to him in the capacity of a banker. The lien also extends to Quasi negotiable securities like a policy of insurance, share certificate, documents of title to goods , deposit receipt etc.

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No General Lien on Safe Custody Deposits:
 Banker have no general lien on safe custody deposits

No Lien on Documents Entrusted for a Specific Purpose:
 A bill of exchange or any other document or money is entrusted for a special purpose, a banker’s lien can not be extended to them.
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No Lien on Articles Left by Mistake:
 A banker cannot exercise any lien in respect of the property which comes into his hands by mistake.  It amounts to unlawful possession.

No Lien on Deposits:
 Generally speaking, a banker has no lien upon the deposit account of a customer in respect of a loan account due from the same customer.
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No Lien Until the Due Date of a Loan :
 When a specific amount is given as loan for a definite period, no lien arises until the due date.

No Lien on Stolen Bond:
 A banker has no lien on a stolen bond given for sale, if the true owner claims it before the sale is effected.

Lien-not Barred by the Law of Limitation Act:
 A banker’s lien is not barred by the Law of Limitation Act.  A banker has a right to retain the security for any number of years till the loan is repaid. CCP-604(B).14

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Summary

A lien is the right of a person to retain the goods in his possession until the debt due to him has been settled.

  

Lien is of two kinds – particular lien and general line. A banker’s lien is always a general lien. A banker lien is an implied pledge

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Quiz
1) A banker’s lien is always a _____ lien. a) Contract b) Agent c) General d) None of the above

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Quiz
1) The banker has a lien on a) Bonds given for collection b) Bonds given for safe custody. c) Bonds left by mistake

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Frequently Asked Questions

1.

What is banker’s lien ? When can be exercise such a lien.

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