⚖️ Banking Law · JAIIB / CAIIB / IBPS / SBI PO / RBI 2025
Modes of Charging Securities
Complete Exam Guide
Pledge · Hypothecation · Mortgage · Lien · Assignment · Set-off — with legal sections, 6 types of mortgage, comparison tables and 20 MCQs with explanations
JAIIB / CAIIB
IBPS PO / Clerk
SBI PO / Clerk
RBI Grade B
NABARD
Bank Internal Exams
📋 Table of Contents
📌
Foundation ConceptWhat Is a “Charge” on a Security?
A charge is a legal right created in favour of a lender (bank) over a borrower’s property as security for a debt or loan. It does not always transfer ownership — in most cases it gives the bank a right to recover its money from that specific asset if the borrower defaults.
Banks accept three broad categories of security:
🏭 Movable Property
Goods, stock, gold, shares, vehicles, machinery not fixed to earth
🏠 Immovable Property
Land, buildings, factory premises, house, flat
📄 Actionable Claims
Insurance policies, book debts, supply bills, debts recoverable in court
⚡ The Golden Rule — Match Mode to Asset
- Movable goods + bank holds them → Pledge
- Movable goods + borrower holds them → Hypothecation
- Immovable property → Mortgage
- Bank already holds the asset → Lien
- Transfer of a right/actionable claim → Assignment
- Combining two accounts → Set-off
1
Most Asked in ExamsThe Six Modes of Charging Securities
🔐 Pledge
Sec 172 — Indian Contract Act, 1872
DefinitionBailment of movable goods as security for a debt or promise
Asset TypeMovable (gold, share certificates, warehouse goods)
PossessionWith Bank (Pawnee)
OwnershipRemains with borrower
PartiesPawnor (borrower) / Pawnee (bank)
Bank RightsRetain (Sec 173–174), Expenses (Sec 175), Sell after notice (Sec 176)
Borrower RightRedeem before sale (Sec 177)
Example → Gold Loan: you hand ornaments to bank; bank keeps them until repayment
🚗 Hypothecation
Sec 2(1)(n) — SARFAESI Act, 2002
DefinitionCharge on movable property WITHOUT transfer of possession
Asset TypeMovable (vehicles, stock, plant, book debts)
PossessionWith Borrower (Hypothecator)
OwnershipRemains with borrower
PartiesHypothecator (borrower) / Hypothecatee (bank)
RiskHigher risk — bank doesn’t hold asset; relies on stock statements & inspections
Also called“Equitable charge” / “Mortgage of movable property”
Example → Car Loan / CC against stock: borrower uses asset but it is charged to bank
🏠 Mortgage
Sec 58 — Transfer of Property Act, 1882
DefinitionTransfer of an interest in specific immovable property to secure a loan
Asset TypeImmovable (land, house, factory building)
PossessionUsually with borrower (except usufructuary & English mortgage)
OwnershipInterest (not ownership) transferred to bank
PartiesMortgagor (borrower) / Mortgagee (bank)
DocumentMortgage Deed; secured amount = Mortgage-money
Types6 types under Section 58 (see next section)
Example → Home Loan: property is mortgaged to bank but borrower lives in it
🔒 Lien
Sec 171 (General) / Sec 170 (Particular) — ICA, 1872
DefinitionBank’s right to retain goods/securities already in its possession until debt is paid
General LienRetain goods for general balance of account (Sec 171) — bank’s special right
Particular LienRetain specific goods on which service was rendered (Sec 170)
Also called“Implied Pledge” — bank can sell after notice (Syndicate Bank v. Vijay Kumar)
ExceptionsSafe custody items, securities left by mistake, money for specific purpose
Example → Bank holds FD receipt and adjusts it against unpaid loan
📄 Assignment
Sec 130 — Transfer of Property Act, 1882
DefinitionTransfer of an actionable claim (right) from borrower to bank
Asset TypeActionable claims: LIC policy, book debts, supply bills, debts
Actionable ClaimDefined in Sec 3 TPA — right to recover debt/money through court
PartiesAssignor (borrower) / Assignee (bank)
Legal AssignmentIn writing + notice to debtor (insurer)
Equitable Assign.Informal — not all formalities fulfilled
Example → LIC policy assigned to bank — on death, insurer pays bank first
⚖️ Set-off
Statutory / Contractual Right
DefinitionBank’s right to combine accounts and use credit balance to clear debit balance
Condition 1Accounts must be in same name and same right
Condition 2Debt must be certain and due (not contingent / future)
Condition 3Both debts must be in the same currency
NoticeBank must give notice before exercising set-off
Example → Credit balance in savings a/c adjusted against overdue loan a/c of same customer
🏛
Most Frequently Tested Sub-Topic6 Types of Mortgage — Section 58, TPA 1882
📌 Memory Trick — SCUEAD
- Simple Mortgage | Conditional Sale | Usufructuary | English | Anomolous | Deposit of Title Deeds
- Banks most use: Equitable (Deposit of Title Deeds) and Simple Mortgage
Sec 58(b)
1. Simple Mortgage
No Possession TransferMortgagor does NOT deliver possession but binds himself personally to repay. On default, mortgagee can get property sold through a court decree. No right to foreclose or take possession directly.
Remedy: Court-ordered sale (not foreclosure)
Sec 58(c)
2. Mortgage by Conditional Sale
No Possession TransferMortgagor ostensibly sells the property. Sale becomes absolute on default; becomes void on repayment. Condition must be in the same document. No personal liability.
Remedy: Foreclosure
Sec 58(d)
3. Usufructuary Mortgage
Possession TransferredPossession delivered to mortgagee (bank), who enjoys rents & profits in lieu of interest/principal. Mortgagee cannot sell or foreclose. No personal liability of mortgagor. Repaid from property income.
Remedy: Retain possession until dues cleared
Sec 58(e)
4. English Mortgage
Absolute TransferMortgagor binds to repay on a certain date and transfers property absolutely to mortgagee, with a condition that it will be re-transferred on repayment.
Remedy: Right to SELL on default (no court needed)
Sec 58(f)
5. Equitable Mortgage Most Common
No Formal RegistrationCreated by simply depositing title deeds with the bank. No registration needed; no stamp-heavy deed. Most popular because it is fast, cheap, and simple. Restricted originally to notified cities (Calcutta, Bombay, Madras).
Remedy: Sale through court
Sec 58(g)
6. Anomalous Mortgage
Composite / MixedAny mortgage that does not fit any of the above five types. A combination or composite mortgage. Rights of parties governed by the terms of the contract and local usage.
Remedy: As per contract terms
| Type | Section | Possession? | Personal Liability? | Remedy on Default |
|---|---|---|---|---|
| Simple | 58(b) | No | Yes | Court-ordered sale |
| Conditional Sale | 58(c) | No | No | Foreclosure |
| Usufructuary | 58(d) | Yes (with mortgagee) | No | Retain possession; income offsets dues |
| English | 58(e) | Yes (absolute transfer) | Yes | Right to sell (no court) |
| Equitable (Title Deeds) | 58(f) | No (deeds only) | Yes | Court-ordered sale |
| Anomalous | 58(g) | As per contract | As per contract | As per contract / local usage |
📊
Exam Favourite — Direct QuestionsMaster Comparison Table
| Feature | Pledge | Hypothecation | Mortgage | Lien | Assignment |
|---|---|---|---|---|---|
| Governing Law | Sec 172, ICA 1872 | Sec 2(1)(n), SARFAESI 2002 | Sec 58, TPA 1882 | Sec 171, ICA 1872 | Sec 130, TPA 1882 |
| Asset Type | Movable | Movable | Immovable | Any (already held) | Actionable claims |
| Possession | With Bank | With Borrower | With Borrower (usually) | Already with Bank | N/A (right transferred) |
| Ownership | With Borrower | With Borrower | Interest → Bank | With Borrower | Right transferred to Bank |
| Risk Level | Low | High | Medium | Low | Medium |
| Registration | Not needed | Not always | Usually needed | Not needed | Notice to debtor needed |
| Real Example | Gold Loan | Car Loan / Stock CC | Home Loan | FD Lien | LIC Policy Assignment |
| Bank Can Sell? | Yes (after notice) | Yes (via SARFAESI) | Yes (court/direct) | Yes (implied pledge) | Collect from third party |
📌 Key Differences to Remember
Pledge vs Hypothecation
Both = movable assets. Pledge: bank holds it. Hypothecation: borrower holds it. Only this one difference.
Mortgage vs Hypothecation
Mortgage = immovable property. Hypothecation = movable property. Asset type is the key.
Lien vs Pledge
In pledge, possession is given FOR the loan. In lien, bank already holds the assets for other reasons (general balance).
Assignment vs Mortgage
Assignment = transfer of rights (actionable claims). Mortgage = transfer of interest in immovable property.
⚖️
Must Memorise for ExamsLegal Sections — Complete Cheat Sheet
Sec 172
Pledge — Definition
Indian Contract Act, 1872
Sec 173
Pawnee’s right of retainer
Indian Contract Act, 1872
Sec 174
Pawnee retains for interest & costs
Indian Contract Act, 1872
Sec 175
Pawnee’s right to extraordinary expenses
Indian Contract Act, 1872
Sec 176
Pawnee’s right to sell after notice
Indian Contract Act, 1872
Sec 177
Pawnor’s right to redeem before sale
Indian Contract Act, 1872
Sec 170
Particular Lien
Indian Contract Act, 1872
Sec 171
General Lien (Banker’s Lien)
Indian Contract Act, 1872
Sec 58
Mortgage — Definition & 6 Types
Transfer of Property Act, 1882
Sec 58(b)
Simple Mortgage
Transfer of Property Act, 1882
Sec 58(c)
Mortgage by Conditional Sale
Transfer of Property Act, 1882
Sec 58(d)
Usufructuary Mortgage
Transfer of Property Act, 1882
Sec 58(e)
English Mortgage
Transfer of Property Act, 1882
Sec 58(f)
Equitable Mortgage (Title Deeds)
Transfer of Property Act, 1882
Sec 58(g)
Anomalous Mortgage
Transfer of Property Act, 1882
Sec 3
Actionable Claim — Definition
Transfer of Property Act, 1882
Sec 130
Assignment of Actionable Claims
Transfer of Property Act, 1882
Sec 2(1)(n)
Hypothecation — Definition
SARFAESI Act, 2002
🎯 Acts Summary
- Indian Contract Act, 1872 → Pledge (172–177) + Lien (170–171)
- Transfer of Property Act, 1882 → Mortgage (Sec 58 + 58b–g) + Assignment (Sec 130) + Actionable Claim (Sec 3)
- SARFAESI Act, 2002 → Hypothecation [Sec 2(1)(n)] + NPA recovery powers
📝
Tap Any Option to Reveal AnswerMCQ Practice — 20 Questions
Under which section of which Act is Pledge defined?
✔ Correct: B
Section 172 of the Indian Contract Act, 1872 defines Pledge as the bailment of goods as security for a debt or performance of a promise. The borrower is the Pawnor and the bank is the Pawnee.Hypothecation is defined under which section and Act?
✔ Correct: C
Section 2(1)(n) of the SARFAESI Act, 2002 defines Hypothecation as a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property.The KEY difference between Pledge and Hypothecation is:
✔ Correct: B
Both Pledge and Hypothecation involve movable assets, and in both cases ownership stays with the borrower. The only key difference is possession: Pledge = bank holds the asset; Hypothecation = borrower holds and uses the asset.How many types of mortgage are recognised under Section 58 of the Transfer of Property Act, 1882?
✔ Correct: C — 6 types
Section 58 of the Transfer of Property Act, 1882 recognises 6 types of mortgage: Simple, Conditional Sale, Usufructuary, English, Equitable (Deposit of Title Deeds), and Anomalous. Memory: SCUEAD.Which type of mortgage is most commonly used by banks in India because it requires NO formal registration?
✔ Correct: D — Equitable Mortgage
Equitable Mortgage (Sec 58(f)) — also called Mortgage by Deposit of Title Deeds — is the most popular bank mortgage. Created by merely depositing title documents with the bank. No registration needed; no stamp-heavy deed. Restricted originally to Calcutta, Bombay, Madras and notified areas.In Usufructuary Mortgage, who gets possession of the property?
✔ Correct: B — Mortgagee (bank)
In Usufructuary Mortgage (Sec 58(d)), possession is delivered to the mortgagee (bank), who enjoys rents and profits from the property instead of receiving interest. The mortgagee cannot sell or foreclose — only holds possession until dues are cleared.Banker’s General Lien is provided under which section?
✔ Correct: C — Section 171, ICA 1872
Section 171 of the Indian Contract Act, 1872 provides for Banker’s General Lien — the right to retain any goods/securities for the general balance of the customer’s account. It is often called an “implied pledge” because the bank can sell after notice.Assignment of actionable claims is governed by which section?
✔ Correct: D — Section 130, TPA 1882
Section 130 of the Transfer of Property Act, 1882 governs the transfer/assignment of actionable claims. Section 3 of the same Act defines an actionable claim. Example: LIC policy assignment to bank.A bank holds a customer’s share certificates against a loan. This is an example of:
✔ Correct: A — Pledge
Share certificates are movable assets and when the bank physically holds them, it is a Pledge (Sec 172, ICA 1872). The bank (Pawnee) holds possession; ownership remains with the borrower (Pawnor).A car loan where the borrower keeps using the car but it is charged to the bank is an example of:
✔ Correct: B — Hypothecation
A car loan is the classic example of Hypothecation — the vehicle is charged to the bank but possession remains with the borrower, who continues to use it. Governed by Sec 2(1)(n) of SARFAESI Act, 2002.In which type of mortgage does the mortgagor “ostensibly sell” the property and the sale becomes absolute on default?
✔ Correct: B — Mortgage by Conditional Sale
In Mortgage by Conditional Sale (Sec 58(c)), the mortgagor ostensibly (apparently) sells the property. The sale becomes absolute on default and void on repayment. Remedy for bank: Foreclosure.Which right allows the Pawnee (bank) to sell pledged goods on the borrower’s default?
✔ Correct: C — Section 176
Section 176 of the ICA, 1872 gives the Pawnee the right to sell the pledged goods after giving reasonable notice to the Pawnor in case of default. Section 177 gives the Pawnor the right to redeem goods before sale.Which mode of charging is also called an “implied pledge” because the bank can sell assets even without the borrower’s permission?
✔ Correct: C — Lien
Banker’s Lien (Sec 171, ICA 1872) is called an “implied pledge” because the bank not only retains securities but also has the power to sell them (held in Syndicate Bank v. Vijay Kumar). General lien applies to the general balance of account.A customer assigns her Life Insurance Policy to the bank as security for a loan. This is an example of:
✔ Correct: D — Assignment
An LIC policy is an actionable claim (right to receive money from insurer). When a borrower transfers this right to the bank, it is an Assignment under Sec 130, TPA 1882. On the borrower’s death, insurer pays bank first.For Set-off to be valid, the accounts must be in the:
✔ Correct: B
For set-off: (1) Accounts in same name and same right, (2) debt must be certain and due (not contingent), (3) both in same currency. Bank must give prior notice before exercising set-off.In which type of mortgage does the mortgagor bind himself personally to repay AND the property is transferred ABSOLUTELY to the mortgagee?
✔ Correct: C — English Mortgage (Sec 58(e))
English Mortgage has TWO features: (1) Mortgagor binds himself personally to repay on a certain date, AND (2) property is transferred absolutely to mortgagee, subject to re-transfer on repayment. Remedy: Right to sell without court order.Which mode of charge is specifically used for immovable property under Section 58 of the TPA?
✔ Correct: C — Mortgage
Mortgage (Sec 58, TPA 1882) is specifically for immovable property (land, buildings, house). It involves transfer of an interest (not ownership) in the property. The home loan is the classic example.In Simple Mortgage (Sec 58(b)), what is the remedy available to the mortgagee (bank) on default?
✔ Correct: D — Court-ordered sale
In Simple Mortgage, the mortgagee has NO right to foreclose or take possession. On default, the only remedy is to file a suit and get the property sold through a court decree. The mortgagor has personal liability to repay.Which mode of charge carries the HIGHEST RISK to the bank because it does not hold possession of the asset?
✔ Correct: B — Hypothecation
Hypothecation carries the highest risk because the borrower keeps possession of the asset and can potentially sell/remove/damage it. Banks mitigate this through periodic stock statements and physical inspections. Hence banks charge higher interest on hypothecated loans.Particular Lien (Section 170 ICA) means the right to retain:
✔ Correct: B — Specific goods only
Particular Lien (Sec 170) = right to retain ONLY the specific goods in respect of which services were rendered. Example: a tailor retains a coat until stitching charges are paid. General Lien (Sec 171) = retain ANY goods for the general balance of account — this is what bankers have.⚡
Last-Minute PrepQuick Revision Flash Cards
🔐 Pledge
- Sec 172, ICA 1872
- Movable + possession with bank
- Pawnor (borrower) / Pawnee (bank)
- Right to sell → Sec 176
- Right to redeem → Sec 177
- Example: Gold Loan
🚗 Hypothecation
- Sec 2(1)(n), SARFAESI 2002
- Movable + possession with borrower
- Hypothecator / Hypothecatee
- Highest risk mode
- Bank monitors via stock statements
- Example: Car Loan / Stock CC
🏠 Mortgage
- Sec 58, TPA 1882
- Immovable property only
- Mortgagor / Mortgagee
- Transfers interest, not ownership
- 6 types — SCUEAD
- Example: Home Loan
🔒 Lien
- Sec 171 (General) / Sec 170 (Particular)
- ICA, 1872
- Right to retain already-held goods
- General lien = general balance
- Called “implied pledge”
- Example: FD held against loan
📄 Assignment
- Sec 130, TPA 1882
- Actionable claim (Sec 3 TPA)
- Assignor / Assignee
- Legal = writing + notice to debtor
- Equitable = informal
- Example: LIC Policy to bank
⚖️ Set-off
- No specific section — statutory right
- Same name + same right
- Debt must be certain and due
- Same currency required
- Prior notice to customer needed
- Example: Savings vs Loan a/c
🏛 6 Mortgage Types
- 58(b): Simple → court sale
- 58(c): Conditional Sale → foreclosure
- 58(d): Usufructuary → poss. to bank
- 58(e): English → absolute transfer
- 58(f): Equitable → most common
- 58(g): Anomalous → mixed/composite
📊 Possession Key
- With Bank → Pledge, Lien
- With Borrower → Hypothecation
- Usually Borrower → Mortgage
- Bank in Usufructuary → mortgage exception
- Absolute transfer → English Mortgage
📚 Acts Summary
- ICA 1872 → Pledge (172) + Lien (170,171)
- TPA 1882 → Mortgage (58) + Assignment (130)
- SARFAESI 2002 → Hypothecation [2(1)(n)]
- Actionable claim: Sec 3, TPA 1882
🎯 Exam-Favourite Facts
- Gold Loan = Pledge
- Car Loan = Hypothecation
- Home Loan = Mortgage
- LIC Policy = Assignment
- FD retention = Lien
- Most common mortgage = Equitable
⚠️ Mortgage Remedies
- Simple → Court-ordered sale
- Conditional Sale → Foreclosure
- Usufructuary → Hold possession
- English → Direct sale (no court)
- Equitable → Court-ordered sale
- Anomalous → As per contract
🔑 Pledge Sections (ICA)
- 172 → Definition
- 173 → Retainer (interest)
- 174 → Retainer (principal + interest)
- 175 → Extraordinary expenses
- 176 → Right to sell (bank)
- 177 → Right to redeem (borrower)
📌 Must-Remember Keywords
Pawnor / Pawnee
Sec 172 ICA
Hypothecator
SARFAESI 2(1)(n)
Mortgagor / Mortgagee
Sec 58 TPA
General Lien Sec 171
Assignor / Assignee
Sec 130 TPA
Equitable Mortgage
Actionable Claim
Implied Pledge