Apart from the primary relationship of debtor-creditor, a bank also has a special relationship with its customers that grants it certain rights under the law. These rights are crucial for the bank to protect its interests, especially in the case of lending. The two most important special rights are the Right of Lien and the Right of Set-off.
Right of Lien
Lien is the right of a creditor (the bank) to retain possession of the goods and securities owned by the debtor (the customer) until the debt due from the debtor is paid.
Simple Analogy: Imagine you give your watch to a repair shop. The shopkeeper has the right to keep your watch until you pay the repair bill. This right to retain possession is a lien.
Banks enjoy a General Lien, which means they can retain any of the customer’s goods/securities that are in their possession as security for a general balance of account.
Conditions for exercising General Lien:
- The asset must be in the bank’s possession.
- The asset must belong to the debtor.
- The asset must not be deposited for a specific purpose (e.g., in a safe custody locker).
Example: A customer has taken a business loan of ₹5 lakhs from a bank. The same customer also has some shares and fixed deposit receipts held with the same bank (not pledged for any specific loan). If the customer defaults on the business loan, the bank can exercise its Right of Lien and refuse to return the shares and FDRs until the loan is cleared.
Right of Set-off
The Right of Set-off is the right of a bank to combine two or more accounts of the same customer and adjust a debit balance in one account with a credit balance in another.
Simple Analogy: Imagine you owe your friend ₹1,000. At the same time, your friend owes you ₹400. You can “set-off” the amounts and just pay your friend the net amount of ₹600.
Conditions for exercising Right of Set-off:
- The accounts must be in the same name and the same right (e.g., you cannot set-off a debit in a personal account with a credit in a trust account).
- The debt must be due and certain.
- There should be no agreement to the contrary.
Example: A customer has a savings account with a credit balance of ₹50,000. The same customer also has a personal loan account with the same bank, which is overdue by ₹20,000. The bank can exercise its Right of Set-off by debiting the savings account for ₹20,000 to clear the overdue loan amount.
Summary of Differences
| Feature | Right of Lien | Right of Set-off |
| What it is | Right to retain assets. | Right to combine accounts. |
| Applies to | Customer’s goods and securities. | Customer’s account balances. |
| Nature | A possessory right. | An accounting adjustment. |