Types of Securities and Modes of Creating a Charge
Gold is pledged, a bike is hypothecated, a flat is mortgaged. Here's every mode and the law behind it.
A security is what a lender holds so that it can get its money back if the borrower stops paying. It can be a thing (gold, a vehicle, a house, stock in a shop) or a person's promise (a guarantee). The legal method used to tie that security to the loan is called creating a charge.
Recovery agents meet every type in the field. The two-wheeler on the road is hypothecated, the gold in the bank locker is pledged, and the flat is mortgaged. Knowing which is which tells you what the lender can lawfully do, and what it cannot.
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Ways to Classify a Security
- Primary security
- The asset bought with the loan, or the asset the loan is directly for. A car bought with a car loan; the stock financed by a cash credit.
- Collateral security
- Additional security on top of the primary one. A shop owner's house mortgaged against a working capital loan.
- Personal security
- A promise, not an asset. A guarantee is a contract to pay another person's debt if they default (Indian Contract Act, section 126). The guarantor is the surety.
- Tangible vs intangible
- Tangible security can be touched: land, gold, machinery. Intangible security is a right: book debts, an insurance policy, fixed deposit receipts.
- Movable vs immovable
- Movable property can be moved: vehicles, goods, gold. Immovable property is land and what is attached to it: houses, shops, factories.
The Six Modes of Creating a Charge
Pledge
Used for
Movable goods
Who keeps the asset
Lender
Everyday example
Gold loan
Hypothecation
Used for
Movable goods
Who keeps the asset
Borrower
Everyday example
Two-wheeler or car loan, shop stock
Mortgage
Used for
Immovable property
Who keeps the asset
Usually the borrower
Everyday example
Home loan
Lien
Used for
Goods or money already with the bank
Who keeps the asset
Lender
Everyday example
Bank holds a fixed deposit against an overdraft
Assignment
Used for
Rights and receivables
Who keeps the asset
Not applicable
Everyday example
Life insurance policy or book debts assigned to the bank
Set-off
Used for
Money the bank owes the customer
Who keeps the asset
Lender
Everyday example
Bank adjusts a deposit against an overdue loan of the same customer
| Mode | Used for | Who keeps the asset | Everyday example |
|---|---|---|---|
| Pledge | Movable goods | Lender | Gold loan |
| Hypothecation | Movable goods | Borrower | Two-wheeler or car loan, shop stock |
| Mortgage | Immovable property | Usually the borrower | Home loan |
| Lien | Goods or money already with the bank | Lender | Bank holds a fixed deposit against an overdraft |
| Assignment | Rights and receivables | Not applicable | Life insurance policy or book debts assigned to the bank |
| Set-off | Money the bank owes the customer | Lender | Bank adjusts a deposit against an overdue loan of the same customer |
What Each Mode Means in Law
- check_circlePledge: "the bailment of goods as security for payment of a debt" (Indian Contract Act, section 172). The goods are physically handed over.
- check_circleHypothecation: a charge on movable property, existing or future, created without giving possession to the lender (SARFAESI Act, section 2(1)(n)). It includes a floating charge, for example on a shop's changing stock.
- check_circleMortgage: a transfer of an interest in specific immovable property to secure a loan (Transfer of Property Act, section 58).
- check_circleLien: the right to keep goods until a debt is paid. Bankers have a general lien: they may retain goods bailed to them as security for the general balance of account, unless the contract says otherwise (Indian Contract Act, section 171).
- check_circleAssignment: transferring a right to receive money, such as a debt or an insurance claim, to the lender. It must be in writing, signed by the person transferring it (Transfer of Property Act, section 130).
- check_circleSet-off: the bank's right to combine two accounts of the same customer, in the same capacity, and use the credit in one to settle the debt in the other.
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Where a Charge Gets Registered
Registration puts the world on notice that the asset is not free. Three registries come up most often:
- checkCompany borrowers: the company must register the charge with the Registrar of Companies within 30 days of creating it (Companies Act, section 77). Late registration is possible only with the Registrar's permission and extra fees.
- checkVehicles: the RTO enters the hypothecation in the registration certificate (RC), and cancels the entry once the loan ends (Motor Vehicles Act, section 51).
- checkCERSAI: the Central Registry set up under the SARFAESI Act, where lenders file the security interests they create.
How the DRA Exam Tests This
Most questions here are matching questions: which mode applies to which asset, and who has possession. The trap is possession. In pledge the lender holds the goods; in hypothecation the borrower does. A question like "A gold loan is an example of" wants pledge; "A car loan is secured by" wants hypothecation.
A second trap: lien versus pledge. Both leave the lender holding the goods, but a pledge is created on purpose to secure a loan, while a banker's general lien arises from goods already in the bank's hands.
FAQs
What are the types of securities in banking?expand_more
Securities are classified as primary or collateral, tangible or intangible, movable or immovable, and personal (a guarantee) or impersonal (an asset). A charge on them is created by pledge, hypothecation, mortgage, lien, assignment or set-off.
What is the difference between primary and collateral security?expand_more
Primary security is the asset the loan is for, such as the car under a car loan. Collateral security is extra security taken on top, such as a house mortgaged against a business loan.
Is a guarantee a security?expand_more
Yes, a personal security. The guarantor promises to pay if the borrower defaults, so the lender can recover from the guarantor. It does not give the lender any right over a specific asset.
Can a bank take money from my savings account for an unpaid loan?expand_more
Banks have a right of set-off between accounts of the same customer held in the same capacity, subject to the loan terms. If you think a deduction was wrong, raise it with the bank first and then with the RBI Ombudsman.
Next steps
- Pledge vs Hypothecationarrow_forward
- Loan Documentationarrow_forward
- SARFAESI Actarrow_forward
- Syllabusarrow_forward
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