Banker’s lien is one of the most important rights available to a bank in its relationship with customers. This topic is frequently tested because it connects banking law, customer relationship, and security of advances. A clear understanding of its meaning, nature, scope, and limitations is essential.
Meaning of Lien
In general legal terms, a lien is the right of a person to retain possession of goods or securities belonging to another person until a debt due is paid. It does not give ownership of the goods but only the right to retain them.
In banking, a banker’s lien is a special type of general lien which allows the bank to retain securities, goods, or valuables of a customer that are lawfully in its possession, until the customer’s outstanding dues are fully cleared.
Banker’s Lien – Definition
A banker’s lien may be defined as the right of a banker to retain goods, securities or other assets of the customer in the bank’s possession as security for the general balance due from the customer, unless there is a contract to the contrary.
Under Section 171 of the Indian Contract Act, 1872, bankers are entitled to a general lien, which means they can retain assets for all dues, not just for a particular debt.
Nature of Banker’s Lien
Banker’s lien has a special legal status. Though called a lien, in practice it is considered almost equivalent to an implied pledge.
This means that:
- The bank has possession of the customer’s securities
- The bank can retain them until payment is made
- In certain cases, the bank can sell the securities after giving due notice
Thus, banker’s lien provides strong protection to banks against default by customers.
Conditions for Exercising Banker’s Lien
A banker can exercise lien only when certain conditions are satisfied.
- The goods or securities must belong to the customer.
- They must be in the lawful possession of the bank.
- The possession should not be for a specific purpose inconsistent with lien.
- There should be no agreement excluding lien, either express or implied.
- The debt must be due and payable.
If any of these conditions are not fulfilled, the banker’s lien cannot be exercised.
Scope of Banker’s Lien
Banker’s lien is a general lien, which means the bank can exercise it for the general balance of account, not merely for a particular loan or advance.
For example, if a customer has:
- An overdue loan account, and
- Fixed deposit receipts lying with the bank
The bank can exercise lien on the fixed deposit to recover the loan dues, unless the deposit was kept for a specific purpose.
Banker’s Lien on Different Assets
Lien on Securities
Banks can exercise lien on securities such as shares, bonds, debentures, fixed deposit receipts, and government securities, provided they are deposited in the ordinary course of banking business.
If securities are deposited specifically for safe custody or for a particular purpose, lien cannot be exercised.
Lien on Fixed Deposits
Banks commonly exercise lien on fixed deposits when a customer defaults in repayment of a loan. Fixed deposits are considered movable property, and lien can be exercised unless the deposit is marked for a specific obligation or pledged elsewhere.
Lien on Goods
If goods are pledged or stored with the bank as security, the banker may exercise lien. However, goods kept merely for safe custody do not attract banker’s lien.
When Banker’s Lien is Not Applicable
There are certain situations where a banker cannot exercise lien.
- Goods or securities kept for safe custody
- Securities deposited for a specific purpose, such as collection
- Trust accounts, where the customer holds money as a trustee
- Money deposited for a particular transaction
- Assets belonging to a third party, unless explicitly agreed
In such cases, the banker acts as a bailee or agent, not as a creditor.
Banker’s Lien vs Right of Set-Off
Although banker’s lien and right of set-off are closely related, they are not the same.
Banker’s lien involves retaining possession of securities or goods, while the right of set-off involves adjustment of accounts by combining debit and credit balances.
Set-off does not require possession of goods, whereas lien does.
Banker’s Lien and Pledge – Relationship
Banker’s lien is often described as an implied pledge.
- In pledge, there is an express agreement
- In banker’s lien, the agreement is implied by law
- Both give the banker the right to retain and, in some cases, sell the securities
This is why banker’s lien is stronger than an ordinary lien.
Importance of Banker’s Lien in Banking
Banker’s lien is an important tool for banks to secure their advances and reduce credit risk. It protects banks against losses due to customer default and ensures financial discipline among borrowers.
Banker’s lien reflects the legal safeguards available to banks and shows how law supports banking operations.
Banker’s Lien – Key Points
- Banker’s lien is a general lien under Section 171 of the Indian Contract Act
- It applies only to assets lawfully in bank’s possession
- It does not apply where assets are kept for a specific purpose
- It is considered an implied pledge
- It helps banks recover dues without court intervention in many cases
Conclusion
Banker’s lien is a powerful legal right that allows banks to protect their financial interests by retaining customer assets until dues are paid. It is wider than an ordinary lien and plays a crucial role in the banker–customer relationship.