Charging a security is the legal process by which a borrower gives a lender (the bank) a right over an asset (the collateral). This right allows the bank to take possession of and sell the asset if the borrower fails to repay the loan.
Key Modes of Charging Securities
The mode of charge depends on the type of asset being offered as security.
1. Pledge
A bailment of goods as security for payment of a debt.
- Type of Asset: Movable goods (e.g., gold jewelry, share certificates, goods in a warehouse).
- Possession: The possession of the asset is transferred from the borrower to the bank. The borrower still owns it, but the bank physically holds it.
- Parties:
- Pledgor/Pawnor: The borrower who gives the asset.
- Pledgee/Pawnee: The bank that receives the asset.
- Example: The best and most common example is a Gold Loan. You physically hand over your gold ornaments to the bank, which keeps them until the loan is repaid.
2. Hypothecation
A charge created on movable assets where the possession remains with the borrower.
- Type of Asset: Movable goods (e.g., a car, inventory/stock of a business).
- Possession: The possession of the asset remains with the borrower. The borrower can use the asset, but it is technically charged to the bank.
- Example: A Car Loan. You buy a car with a loan from the bank. You get to drive the car (possession is with you), but the car is hypothecated to the bank. If you default, the bank can repossess the car. The same applies to loans against a shop’s inventory.
3. Mortgage
A charge created on immovable property to secure a loan.
- Type of Asset: Immovable property (e.g., land, house, apartment, factory building).
- Possession: The possession of the property usually remains with the borrower.
- Parties:
- Mortgagor: The borrower who offers the property as security.
- Mortgagee: The bank that gets the right over the property.
- Example: A Home Loan. You take a loan to buy a house. You live in the house (possession is with you), but the property is mortgaged to the bank.
4. Lien
The right of the bank to retain assets or securities belonging to a borrower until a debt is paid.
- Type of Asset: Goods and securities in the bank’s possession.
- Possession: The possession is already with the bank.
- Example: A bank exercising a lien on a Fixed Deposit receipt of a customer who has defaulted on a credit card payment. The bank can hold the FD and prevent its withdrawal.
5. Assignment
The transfer of a right, property, or debt from one person to another.
- Type of Asset: Actionable claims (debts or rights that can be claimed in court).
- Examples:
- Assigning the right to receive money from a Life Insurance Policy. A borrower can take a loan by assigning their life insurance policy to the bank. If the borrower dies, the insurance money will be paid to the bank first to settle the loan.
- Assigning book debts (a business’s accounts receivable).
Summary Table for Quick Revision
| Feature | Pledge | Hypothecation | Mortgage |
| Type of Asset | Movable | Movable | Immovable |
| Possession | With the Bank (Lender) | With the Borrower | With the Borrower |
| Example | Gold Loan | Car Loan, Loan on Stock | Home Loan |
Summary
Charging securities is the process of creating a legal right for the bank over a borrower’s asset. The method used depends entirely on the type of asset. For movable goods, if the bank takes possession, it is a Pledge (like a gold loan). If the borrower keeps possession, it is Hypothecation (like a car loan). For immovable property like a house, the charge created is a Mortgage. Understanding which charge applies to which asset is fundamental to securing a loan properly.
Quick Revision Points
- Pledge: Movable Asset + Possession with Bank. (Think Gold Loan).
- Hypothecation: Movable Asset + Possession with Borrower. (Think Car Loan).
- Mortgage: Immovable Asset + Possession with Borrower. (Think Home Loan).
- Lien: The right to retain an asset already in the bank’s possession.
- Assignment: Transferring a right to receive money (e.g., a Life Insurance Policy).