Banker’s Special Relationship
Principles & Practices of Banking | Unit 7 Chapter Notes
Mandate, Power of Attorney, Banker’s Lien (Sec 171 ICA), Right of Set-off, and Right of Appropriation — the four special banker rights that regularly appear in JAIIB MCQs. All legal provisions, conditions, and exam traps in one place.
📌 Why This Chapter Matters in JAIIB
This chapter covers the legal tools that expand or restrict the banker–customer relationship. Expect 3–5 questions— particularly on the distinction between mandate and POA, when a banker’s lien does NOT apply, and the conditions for exercising right of set-off. Case-law based questions (Mohammed Hussein Saheb vs Chartered Bank) also appear occasionally.
Introduction — When Does a Special Relationship Arise?
Normally, a customer operates their own account. But there are occasions when a third personis authorised to operate the account on the customer’s behalf. This creates a special relationshipbetween the banker, the customer, and that third person.
Separately, a banker’s obligation to honour a cheque is not unconditional. There are situations where the banker is legally justified in refusing payment — and even has a right to retain orappropriate funds. This chapter covers all four of those special rights.
🧠 Mnemonic — 4 Special Rights: “MSLA”
“My Special Legal Authority”
Mandate — Definition & Key Points
A mandate is an authority given by the account holder in favour of a third person (the mandatee) to do certain acts on his/her behalf. It is issued with a direction to the bank authorising the mandatee to operate the account.
Salient Points of a Mandate
- →The customer informs the bank about the authority given to the third person (mandatee).
- →The mandate is normally temporary — issued for a short period.
- →The signature of the mandatee is verified by the customer in the mandate letter.
- →Institutions must issue a Power of Attorney — not a mandate.
- →A mandate can be withdrawn anytime by the account holder/s.
- →A mandate ceases to be valid on death, insanity, or insolvency/bankruptcy of the account holder.
⚠️ Exam trap
Institutions (companies, trusts, societies) cannot use a mandate. They must execute a Power of Attorney. A common MCQ tries to trick you into saying institutions can use either — they can only use POA.
Power of Attorney (POA) — Definition & Features
A POA is a document executed by one person (the donor / principal) in favour of another person (the donee / agent) to act on behalf of the former, as per the authority given in the document.
Types of POA
General / Universal POA
Issued for acting in more than one transaction. Confers very extensive powers to the donee — including signing cheques, stopping payment, and signing borrowal documents on behalf of the principal.
Specific / Limited POA
Issued for a specific purpose — often a single transaction. Authority is narrowly defined and ends once that purpose is achieved.
Key Features of a POA
- (a)It is a stamped document executed in the presence of a Notary Public / Magistrate of a Court / Government official authorised to do so.
- (b)The POA holder must sign as: Per Pro / Sd/ Constituted Attorney — not in their own name alone.
- (c)The principal can revoke the POA at any time for future transactions.
- (d)A POA stands revoked by the death, insanity, or insolvency (winding up / liquidation in case of companies) of the principal.
- (e)An attorney cannot delegate their powers unless the POA specifically provides for the power of substitution.
3.1 Delegation of Powers — Special Cases
Mandate vs Power of Attorney — Quick Comparison
This comparison is a favourite MCQ source — memorise the differences.
| Feature | Mandate | Power of Attorney |
|---|---|---|
| Issued by | Individual account holders | Any person/entity (incl. companies) |
| Formality | Simple letter to the bank | Stamped document before Notary/Magistrate |
| Scope | Specific, limited banking tasks | General (all transactions) or Specific (one) |
| Duration | Usually short-term / temporary | Can be long-term |
| Power to delegate | Cannot be sub-delegated | Only if POA explicitly allows substitution |
| Signing style | Mandatee signs normally | Must sign as 'Per Pro / Sd/ Constituted Attorney' |
| Revocation | Anytime by account holder | Anytime by principal (for future transactions) |
| Ceases on | Death / insanity / insolvency of holder | Death / insanity / insolvency of principal |
| Institutions | Cannot use mandate | Must use POA |
Banker’s Lien
Banker’s lien is the right of the banker to retain possession of goods and securities owned by the debtor until the debt due from the latter is paid.
— Sec. 171, Indian Contract Act, 1872
Key Characteristics
- →Implied pledge: A banker's lien is more than a general lien — it confers the power to sell the goods and securities in case of default. Because it resembles a pledge, it is called an 'implied pledge'.
- →Sec. 171 ICA 1872: Gives the banker an absolute right of general lien on all goods and securities received in the ordinary course of banking business.
- →Letter of lien: While no separate agreement is strictly necessary, banks take a letter of lien mentioning that goods are entrusted as security for an existing or future loan — and authorising sale on default.
- →Two types: General lien and Particular lien. Banks can exercise both depending on the circumstances.
General Lien vs Particular Lien
| Aspect | General Lien | Particular Lien |
|---|---|---|
| Definition | Right to retain ALL goods until ALL debts are paid. | Right to retain goods only for dues arising from those specific goods. |
| Legal basis | Sec. 171, Indian Contract Act, 1872 | General contract law principles |
| Who has it | Bankers, factors, wharfingers, attorneys of high courts, policy brokers | Any creditor in possession of the goods |
| Right to sell | Yes — implied pledge allows sale on default | No — only retention, not sale |
Where Lien CAN Apply
Right to sell
A banker's general lien gives the right to sell the debtor's properties — not just to retain them.
Specific persons
Sec. 171 applies to bankers, factors, wharfingers, attorneys of high courts, and policy brokers. No separate agreement needed.
Against the customer
Exercised on goods and securities of the customer only. Cannot be exercised against a joint account.
Where Lien CANNOT Apply — Exam Hotspot
Conditions for Particular Lien
For a particular security to fall under a bank’s lien, all of the following must be satisfied:
- →(i) The property must come into the hands of the bank in its capacity as a creditor bank.
- →(ii) There should be no entrustment for a special purpose which is inconsistent with the lien.
- →(iii) The possession of the goods/security must be in the same right as the account of the customer.
- →(iv) There should be no contract — expressed or implied — to exclude the lien.
Right of Set-off
Set-off is the right of a debtor to take into account a debt owing to him by a creditor, when paying a debt due from him to the creditor. A bank may adjust the debit balance in one account with the credit balance in another account of the same customer.
Essential Conditions for Set-off
Automatic Right of Set-off (without prior notice)
In the following cases, set-off operates automatically — the bank need not give advance notice:
- →Death or insanity / insolvency of the customer
- →Receipt of a garnishee order
- →Insolvency of a partner or winding up of a company
- →Receipt of notice of assignment of customer's credit balances
- →Receipt of a notice of secured mortgage over the security charged to the bank
Additional Rules — Exam Level Detail
- →The account of a sole proprietor (of a trading firm) and their individual account CAN be combined.
- →A customer does NOT have a right of set-off across different branches of the same bank. (Mohammed Hussein Saheb vs Chartered Bank, Madras AIR 1965 — see case note below)
- →The right of set-off is available to the banker ONLY in respect of credit balance held in a customer's account.
- →Where a customer has stood as guarantor to another party, their credit balance CANNOT be set-off against the borrower's dues until the guarantee amount is determined.
⚖️ Case Law — Mohammed Hussein Saheb vs Chartered Bank, Madras (AIR 1965)
Facts: The defendant bank returned cheques drawn by the plaintiff on his overdraft account at Madras because the drawings exceeded the limit. The plaintiff argued the bank should have honoured the cheques, taking into account his deposit balance held at the Karachi branch.
Held:“The fact that the plaintiff had funds in the Karachi branch would not entitle him to insist on the first defendant bank honouring his cheques at Madras in excess of the overdraft limit.”
Exam point: A customer has NO right of set-off between accounts at different branches of the same bank.
Right of Appropriation
When a customer has more than one account or has taken more than one loan, the question of how a payment should be applied arises. Sec. 59 to 61 of the Indian Contract Act, 1872 govern appropriation.
Three-Stage Appropriation Rule (Sec. 59–61 ICA)
Debtor appropriates
The debtor can direct where the payment should be applied — by express intimation or circumstances implying the purpose. If the creditor accepts, it must be applied accordingly.
Creditor (bank) appropriates
If the customer deposits without specific direction, the bank can exercise its right of appropriation and apply the payment to any loan account it chooses.
Neither party appropriates
Payment is applied to discharge debts in order of time — whether or not they are barred by limitation. If debts are of equal standing, payment is applied proportionately to each.
⚖️ Case Law — M/s Kharavela Industries vs Orissa State Financial Corporation (AIR 1985)
Question: Should payment by the debtor be adjusted first towards principal or towards interest, in the absence of any stipulation?
Held: In the absence of any agreement to the contrary, payment is first applied towards satisfaction of interest, and thereafter towards the principal.
Exam point: Default order = Interest first, then Principal.
⚠️ Key Distinction — Set-off vs Appropriation
Set-off is the bank’s right to combine two accounts (debit vs credit balance). It requires notice and specific conditions. Appropriation is about how a fresh payment is applied across multiple outstanding loans. They are entirely separate rights — and cannot be exercised simultaneously in place of each other.
Let Us Sum Up — Chapter at a Glance
| Concept | Core Meaning | Legal Basis |
|---|---|---|
| Mandate | Simple authority to operate account; only individuals; temporary; no sub-delegation | Not codified; bank's internal practice |
| Power of Attorney | Stamped legal document; general or specific; POA holder signs 'per pro'; can sub-delegate only if POA allows | Indian Registration Act / Stamp Act |
| Banker's Lien | Right to retain goods till debt is paid; more than a lien — an implied pledge with power to sell | Sec. 171, Indian Contract Act, 1872 |
| Right of Set-off | Adjust debit balance in one account against credit balance in another; requires notice except in 5 automatic cases | Statutory / Contract |
| Right of Appropriation | Apply a payment to a specific debt; hierarchy: debtor → creditor → time order. Interest before principal by default. | Sec. 59–61, Indian Contract Act, 1872 |
Practice Test
Chapter 7 Mock Test — Coming Soon
Exam-standard MCQs on Mandate, POA, Banker’s Lien, Set-off, and Appropriation — timed, graded, PRO.
Discussion
No comments yet. Be the first to share your thoughts.