Compiled by :

Barid Baran Chanda

Ex Faculty Member
Bangladesh Institute of Bank Management
Mirpur-2, Dhaka

Mode of Charging of Security

(Pledge, Hypothecation, Mortgage, Lien, Assignment & Set-off)

What is Security ?
Security means things deposited as guarantee of an undertaking or loan, to
be forfeited in case of default. Also means document as evidence of a loan,
certificate of stock, bonds, etc. it is also meant to be an insurance against an
emergency.
Types of Security:
Securities can be classified into following different categories based on the
nature and individual characteristics:
a. Direct security and third party (or indirect) security :
Direct securities are those securities deposited by debtor to secure his
own account.
Third party (or indirect) securities are those securities deposited by a
third party to secure the customers debt.
b. Primary security and collateral security :
Primary securities are those securities or assets which are created with
the help of finance available by the bank. For instance, the machinery
purchased out of loan available for purchase of machinery by the bank
is a form of primary security.
Collateral security is the security against which the finance is not
available. It is rather than additional security. The banks need such
securities in the event of the value of primary security being
insufficient/inadequate at the time of realization. For example, in
addition to the machinery in the above case, if the borrower also
mortgages his house would be considered as collateral security.
c. Personal security and impersonal security :
Personal security provides legal remedy to the bank against the
borrower by providing a right of action against the borrower personally.
Security such as of a promissory note or bill of exchange or a security
bond are such securities.
Tangible securities such as land, buildings, machinery etc. are the
forms of impersonal security. To recover the loans given, the banks

have to get such securities enforced or sold through the intervention of

court.
d. Specific security or continuing security :
Specific securities are those securities which cover only those loans
which are given against those securities. These can not be utilized in
respect of loans other than the one given there against. For instance,
if a demand loan is given against security of national savings
certificate and the agreement does not provide for covering other
loans as well, the recovery of other loan shall not be possible by sale or
that security.
On the other hand, the continuing securities are those which can be
utilized to recover any kind of loan granted provided these are charged
as such, by way of some agreement etc.
(ii) Validity of title.
b. Economic Aspects :
i) Marketability
ii) Easy ascertainment of value
iii) Stability of price
iv)Easy storability
v)Ddurability
vi) Transportability
vii) Cost consideration
viii) Absence of contingent liability
ix) Yield
CHARGE :
Charge means where in a transaction for value both parties evidence
an intention that property existing or future shall be made available as security for
payment of a debt and that the creditors shall have a present right to have it
available, there is a charge, even though the present legal right which is
contemplated can only be enforced at some future date, and though the creditor
gets no legal rights to property, either absolute or special or any legal right to
possession but only gets the right to have the security made available by an order
of the court.
Classification of Charge:
A charged may be classified as :
(i)
Fixed Charge: A charge is said to be fixed if it is made specially
to cover definite and ascertained assets of a permanent nature
or assets capable of being ascertained and defined, e.g., charge
on assets capable of being ascertained and defined ,e.g., charge
on land and building or heavy machinery. It prevents the loanee
from dealing with the property charged without consent of the
charge holder.

(ii)

Floating charge: It is a charge on property which is constantly

changing, e.g., stock. A company can deal with such property in
normal course of its business until it become fixed on the
happening of an event. Thus it is a charge on the assets of a
company in general
The other classification of charges are:
Pari passu charge: pari passu charge is created in favour of
several creditors, withnthe condition that they have equal priority. It is
generally created in case of consortium accounts.
Second charge: A creditor holding a second charge by way of
mortgage, is entitled to the proceeds after the first charge is met. He
must inform the prior mortgagee of his charge because the first
mortgagee can not part with the proceeds or title of the property if he
has notice of the second charge.
Charging of Security:
Charging a security means making it available as a cover for an evidence.
The manner by which some articles or commodities or properties are made
available is known as charging of securities.
The method of charging used depends upon The type of property to be charged
The nature of the advance
The deree of control over the debtors property required by the banker.
The common method of charging securities area) Pledge
b) Hypothecation
c) Mortgage
d) Lien
e) Assignment
f) Set-off
PLEDGE:
Pledge is the bailment of goods as security for payment of a debt or
performance of a promise (Section 172 of The Contact Act-1872).
Bailment is the delivery of goods by one person to another for some purpose,
under a contract that the goods shall, when the purpose is according, be
returned or otherwise disposed of according to the directions of the person
delivering them.
The essential characteristics of bailment can be summarized as follows:
(i)
Bailment is always based upon a contract.
(ii)
There can be a bailment of movable properties only, but money is not
included in the category of movable goods.

(iii)

(iv)

(v)

Delivery of goods is essential for a contract of bailment. Delivery

means transfer of possession, actual or constructive (symbolic), from
one person to another.
In bailment, ownership is not transferred, but only special right of
retaining the goods for the security is passed on to the lender until
payment of debt.
Goods are delivered upon a condition that on accomplishment of the
purpose the very goods in their original form are to be returned by the
bailee or are otherwise to be disposed of according to the directions of
the bailor.

Who can create a pledge?

Generally speaking, any one who is in legal possession of the
goods can pledge them. The parties who can make a valid pledge are:
a) The owner of the goods himself.
b) Mercantile agent (section 178 of Contract Act 1872).
c) A person, who has obtained possession of goods by fraud,
misrepresentation coercion or undue influence, such contract
is voidable at the option of the lawful owner. However, such
person shall create a valid pledge provided the following
conditions are fulfilled.
i)
The contract has not been rescinded before he enters
into the contract of pledge.
ii)
The pledgee acts in good faith without knowledge of
the defective title of the pledger. This principle does
not apply to a thief who has no title to goods and can
give none.
d) Joint owner with the consent of other co-owner(s).
e) A person who , with the consent of the seller , obtains
possession of the goods or documents of title to the goods
for which the title has not yet passed tothat person provided
the pledgee acts in good faith and without notice of the
pledgers defect in the title thereto.
f) A seller who is in possession of the goods after selling them,
can create a valid pledgee must act in good faith and
without notice of the previous sale.
g) A pledgee may repledge the goods for borrowing money to
the extent of his interest in the said goods.
Rights of pledgor:
a) The pledgor has a right to claim back the security pledge on
repayment of the debt with interest and other charges.
b) The pledgor has a right to receive a reasonable notice in case
the pledge intends to sell the goods and, in case he does not

receive the notice, he has a right to claim and any damages

that may result.
c) In case of sale, the pledgor is entitled to receive from the
pledge any surplus that may remain with him after the debt
is completely paid up.
d) If the debt is satisfied from the sale of a portion of the
pledged security, the pledgor is entitled to receive back the
remaining unsold security.
e) If any loss is caused to the goods, because of mishandling or
negligence on the part of the pledge, the pledgor has right to
claim the same.

Obligations of pledgor:
a) A pledgor must disclose to the pledgee any material faults
or extraordinary risks involved in the goods.
b) A pledgor is responsible to meet any extraordinary
expenditure incurred by the pledgee for the preservation of
the goods.
c) Where the pledgee has exercised his right of the sale of
goods the pledgor is liable to make good the shortfall, if
thereby any.
d) The pledgor is liable for any loss caused to the pledge
because of defects in his (pledgors) title to the goods.
Rights of Pledgee:
a) The pledgee has a right to retain the goods pledged to him
by the pledgor till the debt, together with the interest due
thereon and the expenses for preservation of the goods, are
fully repaid by the pledgor.
b) The pledgee has no right to retain his possession over the
goods pledged for any debt or promise other than the debt
for which they were pledged, unless otherwise provided for ,
by a contract.the pledge can also claim any extraordinary
expenses incurred by him for the preservation of the goods
pledged. In respect of such expenditure he cannot claim lien
over the goods but can only sue to recover the money.
c) In case of default by the pledgor to make payment of the
debt, the pledgee has the right eitheri)
To file a suit against the pledgor for the amount
due and retain the goods as a collateral security; or
ii)
to sell the goods pledged after giving the
pledgor reasonable notice of sale.

d) Pledgee has the same remedies against third person, as the

owner himself would have if he is deprived of his goods.
Obligations of Pledgee:
a) The pledgee must take care of the goods pledged to him.
b) The pledgee cannot make unauthorized use of the pledged
goods.
c) The pledgee is bound to returne the goods on payment of the
debt.
d) The pledgee will pay the pledgor any benefit accrued from
the pledged goods.
e) The pledgee is responsible to the pledgor for any loss,
destruction or deterioration of the goods, if the goods are not
returned by the pledgee at
Proper time.

HYPOTHECATION:
Hypothecation is a charge against property for an amount of debt where
neither ownership nor possession is passed to the creditor. Though the borrower is
an actual physical possession but the constructive possession remains with the
bank as per the deed of hypothecation. The borrower holds the possession not in his
own right as the owner of the goods but as the agent of the bank.
Features of Hypothecation:
o
o
o
o
o
o

Charge against a property for an amount of debt.

Godds remain in the possession of the borrower
Equitable charge to the bank under document Letter of Credit.
Borrower binds himself to give possession of the hypothecated
goods to the bank when called upon to do so.
It is a floating charge
It is rather precarious

Precautions to be taken by the banker under hypothecation:

The position of the banker under hypothecation is not as safe as under a
pledge. The borrower may fail to give possession of the goods hypothecated to the
bank, or sells the entire stock or borrows from another banker on the security of the
same goods.
a) This facility should be given only the persons or business houses of high
reputation and sound financial standing.
b) The bank should ensure that the applicant is not enjoying similar facilities
with other banks.

c) The bank should also obtain from the borrower a written application
accompanied by a declaration about the existing credit arrangements and
an undertaking that the stocks will not be hypothecated to any other bank
without prior approval of the bank.
d) Before granting credit facilities to the party, as also during the pendency
of the advance, an inspection should be conducted with a view to ensuring
that the same stocks have not been hypothecated to other banks.
e) In case the borrower is allowed to avail himself of credit facilities against
hypothecation of stocks from various banks, it should be ensure that such
stocks are segregated to demarcated in different godowns/shops and the
same are properly recorded in separate stock books so as to facilitate
easy verification by bank officials.
f) The banker must periodically inspect the hypothecated goods and the
account books of the borrower should be checked to ascertain the position
of stocks under hypothecation.
g) The borrower should be asked to submit a statement of stock periodically
giving correct position about the stocks and its valuation and declaration
that the borrower possesses clear title to the same.
h) A nameplate of the bank, mentioning that the stocks are hypothecated to
it, must be displayed at a prominent place in the business premises of the
borrower for public notice.
i) Stocks should be fully insured against fire and other risk.
MORTGAGE:
What is a mortgage?
As per section 58 of transfer property act 1882, mortgage is transfer of
interest in specific immovable property for the purpose of securing the payment of
money advanced or to be advanced by way of loan, an existing or future debt or
the performance of an engagement which may give rise to
Interest in the Property:

The mortgagor only parts with the interest in the property and not the
ownership. Mortgage is not merely a contract but it is conveyance of interest in the
mortgaged property.
Mortgagor and mortgagee:
The transferor is called a mortgagor and the transferee is called a mortgagee.
Mortgage money and mortgage deed:
The principal money and the interest of which payment is secured are called
the mortgage money and instrument if any by which the transfer is affected, is
called the mortgage deed.
Essential features of mortgages:
a) Mortgage can be created to cover general balances, existing payment as
well as future loans and advances.
b) There must be a creditor and debt relationship (or contract of
guarantee)between the bank and the mortgagor at the time of deposit.
c) Actual existence of the debt is necessary but even an application for debt
and its acceptance establishes this relationship.
d) A partner cannot mortgage the property of the firm without other partners
joining him in doing so.
Who to create?
The owner/s or his agent.
Duplicate title documents:
When an original title deed in equitable mortgage is not available, a true copy
certified by the Sub-registrar can be deposited where it is proved that original is
either not an existence or has been lost. A public notice of creation of mortgage is
also desirable in such circumstances.
Kinds of Mortgages:
There are six forms/kinds of mortgages:
a) Simple mortgage-Sec 58 (b):
When mortgagor undertakes personal liability and agrees that in event of his
failure to pay the mortgage money, the mortgagee shall have a right to cause
the property to be applied so farc as may be necessary by means of a decree
for sale of property.
b) Mortgage by conditional sale-Sec 58 (c) :
Where mortgagor ostensibly sells the mortgaged property on conditions
that :
o On default of payment of the mortgage money, the sale shall
become absolute or
o On such payment being made, the sale become void
o On such payment being made the buyer shall transfer the
property to the seller.
c) Usufructuary mortgage-Sec 58(d):
Where the mortgagor delivers the possession and authorizes the
mortgagee to retain possession until payment of the mortgage money and

to receive the rents and profits accruing from property or any part of such
property to appropriate the same in lieu of interest. Undertakes personal
liability and agrees that in event.
d) English mortgage-Sec 58 (e):
Where the mortgagor binds himself to repay the mortgage money on a
certain date and transfer the mortgaged property absolutely to the
mortgagee, but subject to the condition that he will retransfer it to the
mortgagor upon payment of the mortgage money, as agreed.
e) Equitable mortgage-Sec 58 (f):
Where the mortgagor delivers to the mortgagee , the documents of title to
immovable property with intention to create a security thereon to secure a
loan. The transaction need not be reduced to writing. In case of nonpayment, the mortgagee can sue for sale but he can not foreclose the
mortgaged property. According to Section 58(f) of transfer of property Act
1882, where a person delivers to a creditor or his agent documents of title
to immovable property, with the intent to create a security thereon, the
transaction is called a mortgage by deposit of title deed.
f) Anomalous mortgage Sec 58 (g):
A mortgage which is not of any of the above five kinds, is called an
anomalous mortgage.
LIEN:
According to contact act 1872 sec: 170, a lien is the right of a creditor in
possession of goods, securities or any other assets belonging to the
debtor to retain them until the debt is repaid.
Classification of Lien:
Lien can be classified as under:
LIEN
Possessory Lien
Particular Lien
Negative Lien
General Lien
Equitable Lien
Bankers Lien
Maritime Lien
1. Particular Lien: Particular Lien is a right of the creditor to retain the goods
of the debtor in respect of a particular debt and this debt must have arisen
out of service rendered or money expended on the goods.
2. General Lien: general lien is a right of the creditor to retain in possession of
the goods and securities till the dues are paid. In case of general lien the
creditor has no right to sell or liquidate the property without filing suit against
the debtor.
3. Bankers Lien: Bankers lien is more than a General Lien, it is an implied
pledge. In the event of the borrower, the banker has a power of sale or to
liquidate without intervention of the court.

4. Negative Lien: The banker sometimes asks a borrower to execute a letter

declaring that his assets are free from encumbrance at the time advance is
made. The borrower also undertakes that the assets stated in the said letter
shall not be encumbered or disposed of without the Banks permission in
writing so long the advance continues. This undertaking is a negative Lien.
5. Equitable Lien: An equitable lien is a equitable right conferred by law to a
charge upon the the movable or immovable property of another until certain
claim is satisfied such as, a partner who pays partnership debts on
dissolution has an equitable lien on the property of the partnership.
6. Maritime Lien: A maritime Lien is a right specially binding a ship her
furniture, machinery, cargo and freight for the payment of claim based upon
the maritime Law. For example, the person who has suffered losses as a
result of collision due to ships negligence has the right of lien on ship and
her belongings.
Commercial Banks Generaly extends loan facility to its customers against
the lien of
a) Fixed Deposit Receipt.
b) Sanchaya patra (Savings Certificate)
c) Wage Earners Development Bond
d) Share Certificate
e) Unit Certificate of Investment Corporation of Bangladesh.
f) Credit balance of D. P. S. & S.P.S. A/Cs (lien-cum-set off)
The following essential conditions for exercising the right of lien must be
fulfilled:
a) The goods of securities over which the right of lien shall be exercised must
be in the possession of Bank.
b) There must be a lawful advance due to the Bank
c) There shall be no contract contrary to Lien.
d) Goods or securities over which right of lien shall be exercised must be
suitably discharged in favour of Bank

Banker does not have lien over the following items:

a) Credit balance of deposit account of the borrower
b) Securities received by Bank for sale
c) Goods or securities left by the customer in the Bankers hand
inadvertently.
d) Money deposited for a special purpose.
e) Instrument deposited for collection.
f) Articles deposited for safe custody etc.
SET OFF

The right of set off is the right of a creditor to the total or partial merging of a
claim against the counter claim of the debtor. In other words, a set off is a
right which, enable a creditor to adjust wholly or partially a debit balance in
the debtors account with any credit balance lying in his (debtors) favour.
Essential Features of SET OFF:
a) Mutual debts must be certain: before exercising right of set off the claim and
the counter claim must be determined accurately.
b) Debts must be due: only those debt which are due and recoverable on the
date of set off can be the subject of set off.
c) Debts in the same right: the loan account and the deposit account which will
be appropriated must be in the same right.
d) No agreement to the contrary: The right of set off can not be exercised if
there is any agreement between banker and borrower to the contrary of set
off.
e) Notice of set off: Before exercising right of set off bankers should serve
notice of set off to the borrower before reasonable time.
Notice of set off:
Banker should give reasonable notice to the customer of its intention to exercise its
right of set off otherwise it may face troubles. So it is better for a banker to obtain a
letter of set off signed by the customer before disbursement of loan so that he can
exercise his right of set off without notice.
It is noted that without serving any notice Banker can exercise his right of set
off in the following cases even before the loan becomes due.
a) On the death, insanity or insolvency of the customer.
b) On the insolvency of a partner of a firm.
c) On the winding up of a company.
d) On receipt of a garnishee order.
e) On receipt of an information of a second mortgage over the security which is
charged to the Bank.
f) On receipt of a notice of assignment of the credit balance of the customer.
It is noted that all branches of a bank are of same entity: If a borrower maintains
loan account and deposit account in the same capacity in different branches, the
balances in the loan and deposit accounts at all branches can be combined at the
time of exercising right of set off.
ASSIGNMENT
An assignment means a transfer of right property or debt (existing or future) by one
person to another person. In banking the usual subject of assignment is actionable
claim. Actionable claim is an unsecured claim to money which is actionable e.g. for
recovery of which an action may be brought into the court of law.
Assignments are of two types:

a) Legal assignment
b) Equitable assignment
Legal Assignment:
A legal assignment is one where ,
a) Assignment must be in writing uly signed by the assignor. In banking
Practice it is done through a registered irrevocable power of attorney
where transfer of actionable claim is clear and absolute.
b) A written notice of assignment containing the name and address of the
assignee is to be sent by the assignor to the debtor.
c) The assignee informs the principal debtor about the assignment and also
gets the confirmation of the notice. In Banking business , Banker informs
the assignors debtor with a copy of P.A. and gets the confirmation of it.
Equitable Assignment:
An equitable assignment is one which does not fulfill any of the above.
Banker does not allow equitable assignment in any case;
The most common types of assignment in Banking business area) Contract Money.
b) Supply Bills
c) Life Insurance Policy
Assignment as security is not a good one due to following reasons:
a) Breech of the terms of contract between assignor and his debtor may
hamper the interest of the Banker.
b) Value of the assignment does not depend only on the integrity and credit
worthiness of assignor but also on the assignors debtor.
c) The assignor debtor can exercise his right of set off, if the assignor has
any debt to him.

Compiled by
Barid Baran Chanda
Faculty Member
Bangladesh Institute of Bank
Management
Mirpur-2, Dhaka
REFERENCE BOOKS:
1. Hand book on Banking Information-NS TOOR
2. A Handbook of Banks Advances- L R Chowdhury
3. Practical Banking (Advances)-H L Bedi
4. The Indian Contract Act-1872