5 Most important Rights of Banker in banking law – Allbankinginfo

Rights-of-banker

Before seeing rights of banker let’s know about what is mean by bank, banker and customer? Bank is an institution which receives funds from public and gives loan and advance to one who needs them on other hand banker is the person who is doing banking business. While customer is a person who has a bank account in his name and the relationship which he forms with banker is of banking nature.

    Rights of banker:

    Apart from banker obligation, bankers have some right. Banker can exercise following rights on his customer.

    1. Right of set off
    2. Right of lien
    3. Bankers right of appropriation
    4. Right of charge of interest and service charge
    5. Right to close the account.

    1. Right of set off:

    The bankers has right to set off the account of his customer. It is rights of banker and not defined in any law. It is also called as right of combination of account. This right arises when two parties are debtor and as well as creditor to each other i.e. one account is in debt balance and other account should be in credit. This right arises when bank wants to combine its loan due from a barrower from his deposit account.

    It is generally cross claim for liquidated amount by the bank to its customer. Right of set off is the banks right to combine two account of the same person. Among two, one account should be in credit balance whereas second account is in debt balance. As debt is owned by bank, bank has right to recover the debt from the customer’s account there the balance is available.

    Conditions for exercising Right of set off:

    In following conditions bank can execute his right of set off:

    • There should be debt in the account which is owned by the bank.
    • There should be credit balance in another account of same customer.
    • Deposit account should be in the name of customer
    • Where there is no any agreement.
    • The debt in the account should not be accruing due.
    • Reasonable notice should be sent to the customer before exercising right of set off.
    • Set off can be exercised in case of loan which are time bard.
    • The set off can be exercised on the deposit account of individual and sole proprietorship account.
    • If the loan is in the joint name, set off can be exercised on credit balance of joint account of barrower as well as the individual account of both the barrower.
    • When the loan is in the name of partnership form then the set off can be exercised on the credit balance in the name of firm, partners and any other partnership firm which has same partner as are in barrowing firm.
    • For exercising set off right of bank all branches of the banks are considered as one.

    For safe side bank should have to take authorized letter of set off. The letter should be stating that bank will execute right of set of at any time without notice to customer when there is debt is due for payment.

    Automatic set off:

    Automatic set off will happens automatically. There is no need to take permission of customer. This type of set off is free from any legal proceeding.

    • Automatic set of occurs where
    • At the time of death of account holder
    • When the customer becomes insolvent
    • Garnishee order issued by court
    • Assignment notice received by bank from the customer for credit balance
    • When the security is already charged with the bank and bank receives notice of second mortgage.

    Right of set off cannot applicable:

    It can be applicable in following circumstances –

    • Set off can bot be applied on fixed deposit, which is not due for payment.
    • It cannot be applied for adjustment of term loan or cash credit or overdraft account which are not overdue.
    • If the loan account is in the name of individual
    • The set off cannot be exercised by bank when the deposit account of individual is jointly with another.
    • Where sole partnership account in which barrower is partner
    • In case of minor account where barrower is trustee or guardian

    2. Right of lien:

    This is second rights of banker. Lien means it is right of bank or creditor to retain possession of goods and available security belongs to barrower or debtor till the debt due to debtor is paid.

    In general in case of lien the possession of good and security is available with the bank till the customer will not pay entire debt.

    This right of lien is available only to goods and available security and not applicable for available balance in the account. Lien does not provide right to creditor to sale the good and securities. The lien can be executed on bill of exchange, cheque, promissory note, shear certificate etc.

    The lien is a statutory right but parties may exclude this right by mutual consent.

    Types of right of lien in banking:

    1. Particular lien:

    As per the section 170 of Indian Contract Act, the creditor has right to retain goods and securities on which some labor (some work has been done on goods and securities) has been done and till the charge pertaining to that has been paid.

    2. General lien:

    In case of general lien creditor has right to retain goods and securities of debtor for all due payable to him.

    The right is available only to banker, policy broker, attorney of the high court, wharefingers etc. (Section 171 of Indian Contract Act).

    3. Bankers lien:

    Bankers’ lien is general lien but it is implied pledge because banker has right to retain as well as sale goods and security of barrower after giving him reasonable notice.

    To exercise the right of general lien the banker should have lawful take over its possession. The banker should have to send few days’ notice to barrower before selling the security.

    4. Negative lien

    Negative lien is the declaration from barrower that the goods and securities offered as security are not encumbered and the barrower will not create any charge over them without banks permission.

    The undertaking does not create any change in favor of bank. Hence advance against negative lien is considered as clean advance.

    When Right of Lien can be exercised:

    Following are the conditions where right of lien can be exercised –

    • Goods or securities and debts should be in the same right and in same capacity.
    • Loan should be lawful.
    • Loan should be due or overdue.
    • Reasonable notice is to be given to barrower.
    • Right of lien is available on goods and securities received in ordinary course of business.
    • The right of lien is available when the goods or securities are in the name of barrower or in guarantor.
    • It can be exercised when other dues of the same barrower are unpaid. The goods or securities remains in possession even after other loans or dues are paid against such securities.


    When Right of Lien can not be exercised:

    In following conditions right of lien cannot be exercised –

    1. Safe custody:

    Bank generally receives customer’s valuables, articles, securities or documents of title etc. for safe custody. This articles or security left with the bank for specific purpose and not for the purpose of general lien. In such type of banker customer relationship, bank is supposed to be acting as bailee and such goods are not in the capacity of banker.

    2. Bill of Exchange or documents entrusted for specific purpose:

    Suppose X sold goods to Y and draw a bill of exchange on Y which Y accepted. Y sold this good to Z. similarly Y also draw bill on Z which also Z accepted. Y handed this bill to bank for collection with a conditions that proceeds should be utilized to meet the bill which is accepted by Y, payable at different bank.

    As here the special purpose is involved bank cannot exercise his right of lien.

    3. Securities remains with the bank after repayment of secured loan:

    When security remains with the bank even after repayment of secured loan, in such condition bank cannot have the right of lien. The reason behind this is the security becomes subject to the bankers lien as the customer by leaving them is supposed to have re-deposited them.

    4. Goods left by the debtor negligently:

    Bank cannot exercise lien on goods or documents or valuables left negligently with the bank. In case of a property which is placed in the hand of bank with the object of covering an advance which is not granted.

    5. No lien on amount not due:

    In respect of advance of specified amount made for specified tenure, no lien arise until there is due date. In other word lien can be exercised only when there is debt is due.

    3. Bankers right of appropriation

    In normal course of business the customer maintains more than one account with the bank or has taken more than one loan and he deposits some money. In such situation he has right to indicate bank to which account, the deposited amount should be credited. If such indication is given by the customer then bank binds to follow the given instruction.

    In some cases when customer does not exercise his right to indicate account, and then bank can exercise his right of appropriation.

    If there are more than one debts outstanding in customers account than bank can deposit the amount as a payment of any debt by applying right of appropriation.

    Banker can apply this right against time bard debt. Once the right of appropriation exercised it cannot be reversed.

    Section 59, 60 and 61 of Indian Contract Act deals with and elaborates the appropriation of payment.

    As per Section 59 of Indian contract Act, if the debtor owes several debts to the creditor and paid certain amount, later he requested to creditor to credit paid amount in a particular debt account in order to discharge the said account. If creditor accepts the request then creditor bound to act accordingly as per the request of debtor. This condition is applicable only when there is several debts and for single debt.

    Section 60 of Indian Contract act implies when debtor having several debits and paid some amount without any request or instruction how the payment is to be used then the right of appropriation vested to creditor.

    According to section 61 of Indian Contract Act, when the situation where none of the party appropriation to settle this situation the right of appropriation is applicable by law. Settlement of all the debts are done in accordance with the order of the time they have incurred. When the debts are in same time then all the debts are settled proportionately.

    Applicability of Claytons Rule:

    The rule is applicable in case of death, insolvency, insanity of joint barrower or partner or guarantor or retirement of partner or at the time of revocation of guarantee by guarantor.

    Claytons rule is related to appropriation of payment and applicable in case of running account of barrower like cash credit or overdraft. As per Claytons rule credit entry will set off debts in chronological order of time. This means that first item in debt side will be discharged first by credit and so on.

    Example: In case of cash credit account of a partnership form there was a debt balance of Rs. 10.00 lakh, where one of the partners died. The bank continues operation in the account. In such situation if the Rs. 8.00 lakh were credited in this account and Rs. 5.00 lakh were withdraw the estate of deceased partner is liable only for Rs. 2.00 lakh i.e. Rs. 10.00 lakh minus Rs. 8.00 lakh.

    4. Rights of banker to charge interest and service charge

    As a creditor a banker has the right to charge interest, service change and processing fee on the loan and advance sanctioned to customer. Interest is charges monthly, quarterly or annually.

    5. Rights of banker to close the account.

    If the customer is not maintaining proper account also there is continuous dishonor of cheque then with due proper notice bank have all right to close the account. Before closing the account banker should have sent at least one month notice.

    Summary:

    In banking law to fulfill the obligation towards the customer banker can exercise Rights of banker like Right of lien, set off, appropriation, charge interest and service charge. If the customer is not maintaining the account properly banker has right to close account with due notice. In right of lien banker have the right to keep goods and securities of debtor as a security to loan, until the loan is repaid by debtor. In right of set of banker can merge couple of accounts which are in the name of customer and set off the debt balance in one account with credit balance in another. If the customer availed many loan facility and deposited some money which is not sufficient for discharge the loan , then bank has right to appropriate the amount to any loan but the customer should informed the same.

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