Types of Charges in Bank Lending
Two questions decide the charge: what is the asset, and who holds it. Here is every charge the CCP syllabus names.
A charge is the legal right a bank takes over an asset so that it can recover the loan from that asset if the borrower defaults. Which charge a bank creates depends on two questions: what is the asset (movable, immovable or a claim), and who holds it (the bank or the borrower)?
Get those two answers and the charge follows. A gold loan is a pledge because the bank holds the gold. Stock in the borrower's godown is hypothecated because the borrower keeps it. A flat is mortgaged because it is immovable.
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Choose the Charge by Asset and Possession
Lien
Typical asset
Goods or securities already in the bank's lawful possession
Who holds the asset
Bank (retains)
Law
Indian Contract Act, ss. 170 and 171
Pledge
Typical asset
Movable goods: gold, goods in a warehouse, warehouse receipts
Who holds the asset
Bank (actual or constructive possession)
Law
Indian Contract Act, s. 172
Hypothecation
Typical asset
Movables: stock, machinery, vehicles
Who holds the asset
Borrower
Law
SARFAESI Act, s. 2(1)(n)
Mortgage
Typical asset
Immovable property
Who holds the asset
Usually the borrower (varies by type)
Law
Transfer of Property Act, s. 58
Assignment
Typical asset
Actionable claims: book debts, receivables, insurance policies
Who holds the asset
Right is transferred; the debtor is notified
Law
Transfer of Property Act, s. 130
Guarantee
Typical asset
No asset; a third party's personal promise
Who holds the asset
Not applicable
Law
Indian Contract Act, ss. 126 to 147
| Charge | Typical asset | Who holds the asset | Law |
|---|---|---|---|
| Lien | Goods or securities already in the bank's lawful possession | Bank (retains) | Indian Contract Act, ss. 170 and 171 |
| Pledge | Movable goods: gold, goods in a warehouse, warehouse receipts | Bank (actual or constructive possession) | Indian Contract Act, s. 172 |
| Hypothecation | Movables: stock, machinery, vehicles | Borrower | SARFAESI Act, s. 2(1)(n) |
| Mortgage | Immovable property | Usually the borrower (varies by type) | Transfer of Property Act, s. 58 |
| Assignment | Actionable claims: book debts, receivables, insurance policies | Right is transferred; the debtor is notified | Transfer of Property Act, s. 130 |
| Guarantee | No asset; a third party's personal promise | Not applicable | Indian Contract Act, ss. 126 to 147 |
Each Charge in One Line
- Lien
- A right to retain goods or securities until dues are paid. A banker's lien is a general lien over goods bailed to it in the ordinary course of business, and courts have described it as an implied pledge. It does not apply to items left for safe custody or for a specific purpose.
- Pledge
- Bailment of goods as security. The borrower (pawnor) keeps ownership; the bank (pawnee) holds possession. On default the bank may sue while keeping the goods, or sell them after reasonable notice (s. 176). The pawnor can redeem before the actual sale (s. 177).
- Hypothecation
- A charge on movable property, existing or future, created without giving possession to the bank. Because the borrower holds the asset, the bank relies on stock statements, inspections and insurance.
- Mortgage
- Transfer of an interest in specific immovable property to secure a loan. Ownership is not simply handed to the bank; the bank's rights depend on the type of mortgage.
- Assignment
- Transfer of an actionable claim by a signed written instrument. Until the debtor gets express notice, the debtor's payments to the original creditor may still be valid.
- Set-off
- Netting mutual money claims, such as a customer's deposit against an overdue loan. The debts must be between the same persons in the same capacity, due, and certain in amount.
- Negative lien
- The borrower's promise not to sell or charge an asset without the bank's consent. It creates no charge and gives the bank no priority over third parties.
The Six Types of Mortgage (TPA, s. 58)
| Type | Key feature |
|---|---|
| Simple mortgage | No possession to the lender; the borrower binds himself personally to repay, and the property can be sold |
| Mortgage by conditional sale | An apparent sale that becomes absolute or void on a condition in the same document |
| Usufructuary mortgage | The lender takes possession and recovers from the rents and profits |
| English mortgage | Absolute transfer, with a promise to repay on a date and re-transfer on payment |
| Mortgage by deposit of title deeds (equitable mortgage) | Title deeds delivered in a notified town with the intention of securing a debt |
| Anomalous mortgage | Any mortgage that does not fit the other five |
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Equitable Mortgage: The Three Essentials
A mortgage by deposit of title deeds needs (1) a debt, (2) delivery of the title deeds in a town covered by s. 58(f), and (3) the intention that the deeds secure the debt. The deposit itself needs no registered mortgage deed, which is why banks prefer it. But if a memorandum written at the time itself contains the bargain, that document may need registration and stamp duty, so 'an equitable mortgage never needs registration' is not safe to assume.
Case Drill: Which Charge?
Gold loan; ornaments kept in the bank's vault
Charge
Pledge
Why
Movable, and the bank holds it
Cash credit against stock in the borrower's godown
Charge
Hypothecation
Why
Movable, and the borrower holds it
Loan against goods in a warehouse; bank holds the warehouse receipt
Charge
Pledge
Why
Constructive possession with the bank
Bills limit against book debts
Charge
Assignment (or hypothecation of receivables)
Why
A claim on the borrower's buyers, not goods
Home loan; title deeds deposited with the bank
Charge
Equitable mortgage
Why
Immovable, by deposit of title deeds
Loan against the customer's own fixed deposit
Charge
Lien and set-off rights
Why
The bank already holds the deposit
| Situation | Charge | Why |
|---|---|---|
| Gold loan; ornaments kept in the bank's vault | Pledge | Movable, and the bank holds it |
| Cash credit against stock in the borrower's godown | Hypothecation | Movable, and the borrower holds it |
| Loan against goods in a warehouse; bank holds the warehouse receipt | Pledge | Constructive possession with the bank |
| Bills limit against book debts | Assignment (or hypothecation of receivables) | A claim on the borrower's buyers, not goods |
| Home loan; title deeds deposited with the bank | Equitable mortgage | Immovable, by deposit of title deeds |
| Loan against the customer's own fixed deposit | Lien and set-off rights | The bank already holds the deposit |
Fixed, Floating and Pari Passu
- Fixed charge
- Attaches to identified assets. The borrower cannot dispose of them without consent.
- Floating charge
- Hovers over a changing pool, such as inventory, letting the borrower deal in it normally until the charge crystallises.
- Pari passu charge
- Several lenders share the same security on an equal footing in agreed proportions.
- Second charge
- Ranks after the first charge-holder on the same asset.
Registering the Charge: ROC and CERSAI
- check_circleA company must register a charge with the Registrar of Companies, generally within 30 days of creation, with further time allowed on extra fees (Companies Act, ss. 77 to 87).
- check_circleCERSAI (Central Registry of Securitisation Asset Reconstruction and Security Interest of India) was set up under s. 20 of the SARFAESI Act. Its provisions came into force on 31 March 2011, to stop multiple loans on the same asset using forged documents.
- check_circleSince a 2016 notification it covers security interests in immovable property, movables such as plant, machinery and stock, receivables and intangibles such as patents and trademarks, created by companies, individuals or any other entity.
- check_circleCERSAI registration is in addition to ROC registration, not instead of it. A company's charge must be filed with both.
- check_circleUnder s. 26D, a lender cannot use SARFAESI enforcement unless its security interest is registered with CERSAI. It can still file a suit.
- check_circleUnder s. 26E, in force from 24 January 2020, a registered secured creditor's dues are paid in priority over other debts and government dues.
- check_circleThe 2016 amendment removed the old 30-day time limit and the penalty for late filing. But a lender who files late can lose priority to one who filed first.
- check_circleVehicles registered on VAHAN are deemed registered with CERSAI. Agricultural land and security interests below ₹1 lakh are outside it.
FAQs
What is the difference between pledge and hypothecation?expand_more
In a pledge the bank holds the goods; in hypothecation the borrower keeps them. Both are charges on movable property, and in both the borrower remains the owner.
What charge is created on a gold loan?expand_more
A pledge, because the gold is delivered into the bank's possession while the customer remains the owner.
What is an equitable mortgage?expand_more
A mortgage by deposit of title deeds in a notified town with the intention of securing a debt. It is one of the six mortgage types under s. 58 of the Transfer of Property Act.
Is CERSAI registration compulsory?expand_more
There is no longer a time limit or penalty, but without CERSAI registration a lender cannot enforce its security under SARFAESI and may lose priority to a lender who registered first.
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