Rights of a banker: lien, set-off, appropriation and charges

1. The rights in outline

The banker's rights against a customer are: general lien; set-off (combination of accounts); appropriation of payments; charging interest, commission and incidental charges; closing the account on reasonable notice; and the statutory protections the Negotiable Instruments Act gives it when paying or collecting cheques.

2. Banker's general lien

Lien is the right to retain goods belonging to another until a debt is paid. A particular lien attaches only to the goods in respect of which the debt arose (s.170 of the Indian Contract Act, 1872). A general lien allows the holder to retain any goods of the debtor for any balance due.

Section 171 of the Contract Act provides that bankers, factors, wharfingers, attorneys of a High Court and policy brokers may, in the absence of a contract to the contrary, retain as a security for a general balance of account any goods bailed to them. The leading English authority is Brandao v. Barnett (House of Lords, 1846), where Lord Campbell called the general lien of bankers part of the law merchant, to be judicially noticed.

Its features:

• General. It covers all securities, bills, cheques, documents and money coming into the banker's hands in the ordinary course of banking business, for the general balance due from the customer, whatever debt they were originally given for.
• An implied pledge. An ordinary lien gives only a right to retain. The banker's lien is treated as an implied pledge, so after giving reasonable notice the banker may sell the securities and apply the proceeds, as a pawnee may under s.176 of the Contract Act.
• Only for sums due. It secures debts presently due. For a loan repayable at a future date the lien arises only when it falls due, unless the contract provides otherwise.
• Can be excluded by contract, express or implied from the circumstances.

The Supreme Court applied s.171 in Syndicate Bank v. Vijay Kumar (Supreme Court, 1992), AIR 1992 SC 1066. The Court held that a bank holding fixed deposit receipts of its customer has a general lien over them under s.171 and may retain them for the customer's other liabilities to the bank, the lien operating as an implied pledge.

3. Where there is no lien

• Safe custody. Articles or securities deposited for safe custody are held as bailee for that purpose only; their deposit shows an intention inconsistent with lien. In Brandao itself, exchequer bills kept in a locked box in the bank were held free of lien.
• Specific purpose. Money or securities handed over for a specific purpose (to buy particular shares, to pay a particular creditor) are held for that purpose.
• Trust property. Securities the bank knows belong to a third party, or that the customer holds as trustee, are not subject to lien for the customer's personal debts.
• Securities left by mistake or after the bank's business with them is over, or documents given in connection with a loan application that was refused.
• Lockers. The bank does not have possession of the contents of a locker it has leased; there is nothing to which a lien can attach.

4. Set-off and combination of accounts

Set-off is the banker's right to combine two accounts of the same customer and treat the balance as the only amount due: a credit balance in the savings account may be set against an overdraft in the current account. It is a right of the banker as debtor to set his debt against what the customer owes him, and in a suit it operates under Order VIII Rule 6 of the Code of Civil Procedure.

Conditions:

• the debts must be due and certain; a time deposit not yet matured cannot be combined unless the contract allows;
• the accounts must be held in the same right: a customer's personal account cannot be set against an account he holds as trustee or executor, and a joint account cannot be set against an individual account of one of the joint holders;
• there must be no agreement to keep the accounts separate;
• notice to the customer is expected before set-off is exercised on a running account, since cheques drawn in reliance on the credit balance would otherwise be dishonoured.

On the customer's death, insolvency, or a garnishee order, the bank may combine the accounts automatically, since the relationship has come to an end and only the net balance survives. In a winding up, s.16(3) of the DICGC Act deducts the bank's set-off before computing insured deposits.

5. Appropriation of payments

When a customer with several debts pays money, sections 59 to 61 of the Contract Act decide which debt it discharges:

• the debtor may appropriate, expressly or by implication, at the time of payment (s.59);
• if he does not, the creditor may appropriate to any lawful debt due, even a time-barred one (s.60);
• if neither does, the payment goes to the debts in order of time (s.61).

For a running account, the rule in Clayton's case (Devaynes v. Noble, 1816) applies: in the absence of appropriation, the first item on the debit side is discharged by the first item on the credit side — first in, first out. It matters when a partner dies or retires, or a guarantee is revoked: later credits wipe out the earlier debt for which the estate or the surety was liable, while new debits are not covered. Banks protect themselves by stopping the old account and opening a new one on notice of such an event.

6. Interest, commission and charges

The bank may charge interest on advances, compounded at agreed rests, and commission and incidental charges for services, as agreed or as notified. Section 21A of the Banking Regulation Act bars a court from reopening a transaction on the ground that the interest is excessive, and the Constitution Bench in Central Bank of India v. Ravindra, 2001 INSC 520, (2002) 1 SCC 367, accepted that interest capitalised at agreed rests becomes part of the principal for the purpose of further interest. Charges must be reasonable and disclosed under RBI directions on fair practices.

7. Protection of bankers

Statute protects a bank which acts in good faith in the ordinary course: payment in due course (ss.10, 85, 89 and 128 of the Negotiable Instruments Act) protects the paying banker, and s.131 protects the collecting banker against the true owner. These are dealt with in the Unit IV note on paying and collecting bankers. Section 21A, above, protects the rate of interest.

8. Problem

Raju instructs his banker to buy certain debentures for him and asks the banker to keep them for him and collect the interest on them. Later Raju's current account is overdrawn. Can the banker exercise lien over the debentures? (August 2024)

Issue. Whether debentures bought through the bank and kept by it to collect interest are subject to the banker's general lien for an overdraft.

Law. Section 171 gives bankers a general lien over goods and securities bailed to them, in the absence of a contrary contract, for the general balance of account. The lien covers securities that come into the banker's hands in the ordinary course of banking business. It does not cover property deposited for safe custody or for a specific purpose (Brandao v. Barnett). Being an implied pledge, it entitles the banker to sell after reasonable notice. Syndicate Bank v. Vijay Kumar applies s.171 to securities held by an Indian bank.

Application. The bank did two things. It bought the debentures, an agency function whose purpose was fully performed on purchase; and it kept them to collect interest, which is ordinary banking business, not mere safe custody. The debentures therefore came into the bank's possession as banker. The overdraft is a debt presently due. There is nothing to show that the parties agreed the debentures would be kept free of any claim. The position would be different if Raju had handed them over in a sealed cover for safe custody, or with an express instruction that they were held only for a stated purpose.

Conclusion. The banker may exercise its general lien over the debentures for the overdraft and, after reasonable notice to Raju, may sell them and apply the proceeds. If any interest collected stands to Raju's credit, the bank may also set it off against the overdraft.

How this is examined

Short note “Banker's lien” appears almost every year (June 2025, February 2025); the essay is “Explain the various rights of a banker” (June 2025). For the essay give all six rights with authority for each, and take most space on lien and set-off. The debentures problem (August 2024) is answered as above; versions with articles left in safe custody have the opposite answer.