Types of Charges in Banking: Lien, Pledge, Hypothecation & Mortgage Explained (2026 Guide)

Understanding the types of charges in banking is non-negotiable if you want to clear JAIIB, CAIIB or any IIBF certification exam. Every secured loan a bank gives rests on a charge. Get the concept right, and an entire chunk of your syllabus becomes easy marks.

This guide breaks down all seven charges that examiners love: lien. Set-off, pledge, appropriation, mortgage, assignment and hypothecation. We keep it simple. Exam-focused and packed with the comparison tables you need on result day.

What Is a Charge in Banking?

A charge is the right a bank creates over a borrower's asset to secure repayment of a loan. If the borrower defaults. The bank can use that charge to recover its money.

Banks accept many kinds of security. These include movable goods, immovable property, actionable claims and book debts. The method used to create the charge depends on two things: the type of charge. The type of property.

Why Do Banks Create a Charge on Security?

The single reason is risk protection. A loan without security is exposed to total loss on default.

By creating a charge. The bank converts an unsecured exposure into a secured one. This gives the lender a legal route to recover dues even if the borrower stops paying.

The 7 Types of Charges in Banking

Below are the seven types of charges in banking that appear again. Again in JAIIB and IIBF papers. Read each one slowly, then revise using the master table further down.

1. Lien

A lien is the banker's legal right to retain a debtor's goods. Securities until the debt is repaid. The bank keeps possession, but ownership stays with the borrower.

If the debt is not cleared. The implied undertaking gives the banker the right to sell those items. This is why a banker's lien is often called an implied pledge.

Section 171 of the Indian Contract Act. 1872 grants a general lien to bankers over all goods. Securities received in the ordinary course of business.

• Legal basis: Indian Contract Act, Sections 170 and 171
• Relationship: Creditor and Debtor
• Applicable on: Goods and securities
• Condition: Account held in the same name and same capacity

2. Set-Off

A set-off is the right to combine a customer's debit. Credit balances to arrive at a single net figure. It merges a claim against a counterclaim between the same two parties.

It can be a statutory right or arise from a contract. The bank must meet certain conditions. Usually send prior notice to the customer before exercising it.

Set-off is generally triggered in these situations:

1. Insolvency of the customer
2. Death or lunacy of the customer
3. Dissolution of a firm or liquidation of a company
4. Receipt of a Garnishee Order or attachment order

Key Features of Set-Off

• The debt must be for a certain. Specific sum, not a future or uncertain amount.
• A banker cannot set off a credit balance against a guarantee unless the guarantor's liability has crystallised.
• A credit balance in a current account cannot be set off against the contingent liability of a discounted bill.
• A debt on a loan account cannot be set off until the demand is made or the due date arrives.
• Both parties must be liable in the same right and same capacity.
• A partner's credit balance can be set off against the firm's debit balance. Of joint and several liability.
• Set-off may apply between two firms with the same name made up of the same partners.
• A sole proprietor's personal credit balance can be set off against the proprietary concern's debit balance.

3. Pledge

A pledge is the bailment of goods to secure repayment of a debt or performance of a promise. Here, possession moves to the bank while ownership stays with the borrower.

The person whose goods are bailed is the Pawnor. The party that accepts the goods as security is the Pawnee.

The legal effect is simple. The pawnor keeps ownership. But a qualified interest passes to the pawnee through bailment. Actual or constructive delivery of the goods to the pawnee is the essential condition for a valid pledge.

4. Appropriation

Appropriation deals with how a payment is applied when a borrower owes the bank several debts. It decides which debt a payment clears first.

Sections 59. 60 and 61 of the Indian Contract Act. 1872 govern appropriation of payments made by a debtor to a creditor with multiple debts.

• If the debtor specifies which debt to clear. The bank must follow that instruction (Section 59).
• If the debtor gives no instruction. The creditor may apply it to any lawful debt (Section 60).
• If neither party appropriates. Payment is applied to debts in order of time (Section 61).

A useful exam point: when a Fixed Deposit Receipt is adjusted before maturity. Appropriation rights apply; when adjusted after maturity, the set-off right applies.

5. Mortgage

A mortgage is a charge created on immovable property to secure a loan. It is the transfer of an interest in specific immovable property to secure repayment.

This is defined under Section 58 of the Transfer of Property Act, 1882. The parties are the mortgagor (borrower) and the mortgagee (bank).

On default. The mortgagee can file a suit to take possession of the mortgaged property. Sell it to recover the dues.

6. Assignment

An assignment is the transfer of a right. Property or debt by a borrower to the bank as security. Borrowers usually assign actionable claims. Such as book debts or life insurance policies, as collateral.

Under Section 130 of the Transfer of Property Act. 1882. An actionable claim can be transferred only by a written document signed by the transferor or a lawfully authorised agent.

If this formality is not followed. The transfer is called an equitable assignment rather than a legal one.

7. Hypothecation

Hypothecation is a charge on movable property where the borrower keeps possession. The bank gets neither ownership nor physical control of the goods.

This is the typical charge on vehicles, stock-in-trade and book debts. Because the bank has no possession. Recovery on default needs a legal route to first take possession of the asset.

Pledge vs Hypothecation vs Mortgage: Master Comparison

This is the single most tested table on types of charges in banking. Memorise the possession and parties columns first.

Quick-Facts Table: All 7 Charges at a Glance

How to Study Types of Charges for JAIIB & IIBF Exams

Theory alone will not get you marks here. Examiners test application, so study with a method.

1. Anchor on possession and ownership. Almost every question hinges on who holds the asset. Who owns it.
2. Learn the law-charge pairs. Link each charge to its section. Like mortgage with Section 58 of the Transfer of Property Act.
3. Use one real example per charge. Car loan for hypothecation, gold loan for pledge, home loan for mortgage.
4. Drill the comparison table. Cover one column and recall the rest from memory.
5. Practise application questions. Attempt our free mock tests to lock the concept under timed pressure.

Common Mistakes Students Make

These errors cost easy marks every single exam cycle. Avoid them.

• Mixing up pledge and hypothecation. Remember: pledge = bank holds the goods; hypothecation = borrower holds the goods.
• Calling a mortgage a charge on movable property. A mortgage is always on immovable property.
• Confusing lien with set-off. Lien is over goods and securities; set-off is over account balances.
• Forgetting the FDR rule. Before maturity it is appropriation; after maturity it is set-off.
• Memorising outdated sections. Always confirm exact sections and figures on the latest official IIBF notification.

Frequently Asked Questions

What are the main types of charges in banking?

The main types of charges in banking are lien. Set-off, pledge, appropriation, mortgage, assignment and hypothecation. Each creates a different kind of security interest for the bank over a borrower's asset.

What is the difference between pledge and hypothecation?

In a pledge. The bank takes possession of the movable goods. Ownership stays with the borrower.

In hypothecation. The borrower keeps possession of the movable goods. And the bank holds only a charge.

Is a mortgage a charge on movable or immovable property?

A mortgage is a charge on immovable property. Such as land or a building. It is governed by Section 58 of the Transfer of Property Act, 1882.

What is the difference between lien and set-off?

A lien is the right to retain a customer's goods. Securities until a debt is paid. Set-off is the right to combine the debit. Credit balances of a customer's accounts into a single net figure.

Why are types of charges important for IIBF exams?

Charges form the foundation of secured lending. A core topic in JAIIB, CAIIB and IIBF certification syllabi. Questions on possession. Ownership and governing law appear in almost every exam. Making this a high-return area to master.

Final Thoughts: Turn This Topic Into Guaranteed Marks

The types of charges in banking look intimidating at first. But once you fix possession. Ownership and the governing law in your mind. The whole topic clicks into place.

Revise the two comparison tables daily for a week. Pair every charge with one real-world example. Then test yourself until the answers come on reflex. Do this. And these questions become some of the easiest marks on your paper.

Keep going. Consistent. Focused revision is exactly what separates candidates who pass from those who postpone. You have got this.

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