What is a Pledge, Hypothecation, Mortgage & Assignment?

What is charge creation in banking?

Creation of charge by the. borrowers on various kinds of. securities/assets means creation of a right in favour of the bank. By creation of charge, the. ownership is not transferred in.

Charges by Borrowers in Favour of Bank

Usually, the borrowers create the following types of charges in favour of the bank:

 1. Pledge

2. Hypothecation

 3. Mortgage

4. Assignment of Actionable Claim

What is Pledge?

Definition: As per Section 172 of the Indian Contract Act, 1872, Pledge is the bailment of goods as a security for the payment of a debt or performance of a promise. The bailor in case of Pledge is known as Pawnor and the bailee is known as Pawnee.

Borrower needs to provide the bank any asset or good that is worth the same amount or more than the loan which he is taking from the bank.

All about Pledge

  • Pledge is a kind of Special Contract
  • Pledge is a part of Bailment
  • Pledge is a contract by which possession of goods or assets is transferred as a security
  • Pledger or Pawnor is the person who gives goods as a security. He is the borrower
  • Pledgee or Pawnee is the person who receives goods as a security. He is the lender
  • Pledgee is bound to return pledged goods on the successful repayment of loan
  • A pledgee has no right to use the goods pledged
  • A Pledgee has the right to sell the goods pledged, on default after giving a notice to the Pledger

What is Hypothecation?

Definition: As per Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, hypothecation is defined as “a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance, and includes floating charge and crystallization into fixed charge on movable property”.

Hypothecation is used as a security of movable assets while taking a loan from the bank. Here the possession of the security remains with the borrower instead of the lender. When the borrower is not able to repay the loan and its interest, then the bank has the right to sell the hypothecated asset such as car, two wheeler, etc. and recover the outstanding loan amount along with accrued interest.

All about Hypothecation

  • Hypothecation is a charge created on movable assets
  • Under Hypothecation, possession of the asset remain with the borrower
  • Loan Period is smaller
  • Loan amount is comparatively lesser
  • The bank should verify that the party has a good reputation. It can check the property regularly. It can even ask the hypothecator to submit periodic report of the property
  • There may be some incidents wherein the borrowers may cheat the banker by either partly selling goods hypothecated to the bank or not keeping the required stock of goods. Here, if bank finds that borrower is trying to mischief, it can insist upon or can convert hypothecation to pledge and takes over possession of the goods and keeps the same under its own custody

What is Mortgage?

Definition: As per Section 58 of the Transfer of Property Act, 1882, Mortgage is the transfer of an interest in specific immovable property for the purpose of securing payment of money advanced by way of loan, existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability.

All about Mortgage

  • Mortgage is a charge created on immovable assets
  • Immovable Assets include land, building, or anything attached to earth
  • The transferor is called a mortgagor
  • The transferee a mortgagee
  • The principal money and interest of which payment is secured for the time being is called the Mortgage Money
  • The instrument (if any) by which the transfer is effected is called a Mortgage Deed
  • Possession of the asset remain with the borrower
  • Loan Period is longer
  • Loan amount is comparatively higher

Essentials of Mortgage

  • Transfer of Interest
  • Specific Immovable Property
  • To Secure the Payment of a Loan
  • Return of interest of Property
  • A mortgage is a type of home loan in which the lender provides a property loan against the mortgage of the property itself. This gives them the right to acquire and sell the property if the borrower defaults on the repayment or violates the set terms and conditions otherwise.
  • But it does have different types of mortgage in it. And it is important to know what the types of mortgages are and what the actual meaning is.

There are six common types of mortgages in India:

Types of Mortgage

  1. Simple Mortgage
  2. English Mortgage
  3. Usufructuary Mortgage
  4. Mortgage by deposit of title of deeds
  5. Mortgage by Conditional Sale
  6. Anomalous Mortgage

·         1. Simple Mortgage

  • In this, the possession of the mortgaged property is not delivered to the mortgagee*. However, the mortgagor^ legally binds themselves to repay the mortgage money, in return for which the mortgagee agrees to have them the right to sell off the property to earn their money back in case they fail to repay.
  • Note: (* – the party which is granting a mortgage), (^ – the receiver of a mortgage)

·         2. English Mortgage

  • In this, the mortgagor agrees to repay the mortgage money by a certain date and then transfer the property to the mortgagee. The mortgagee, on the other hand, agrees to retransfer the property back to the mortgagor once they have paid the mortgage money as per the terms and conditions.

·         3. Usufructuary Mortgage

  • In this, the mortgagor grants the possession of the property to the mortgagee until the repayment of mortgage money and allows them to receive the profits earned from it (in the form of rent, etc.). In return, the mortgagee agrees to appropriate the same instead of interest or in payment of the mortgage-money.

·         4. Mortgage by Deposit of Title Deeds

  • In this mortgage, the mortgagee provides their documents of title to the immovable property to the mortgagor, with intent to create security on the same.

·         5. Mortgage by Conditional Sale

  • A mortgage by conditional sale is when the mortgagor sells the property to the mortgagee on the condition that the sale will become absolute if there is a default of repayment. Also, on the repayment of the money, the sale will become void and the mortgagee will transfer the property back to the mortgagor.

·         6. Anomalous Mortgage

  • A mortgage that doesn’t come under any of the above-mentioned mortgage types is an Anomalous Mortgage.

What is Assignment?

Assignment is an agreement between two parties wherein one party transfers some or all his ownership rights on a particular property owned by him to the other party. After Assignment, the property is transferred to the person receiving the property rights.

All about Assignment

  • Assignment is an agreement between two parties
  • The property owner transferring the ownership right is called Assignor
  • The person receiving the property right is called Assignee
  • Assignor can transfer the rights either partly or fully
  • Assignment is irrevocable
  • Assignment is used generally in case of insurance policy or annuity
  • Assignment can either be made by endorsement on the insurance policy or by some separate instrument
  • After Assignment, the property is transferred to the Assignee
  • Assignee gets all the rights of the assigned item
  • Assignee can deal with the assigned item in any manner as per his wish
  • If the insured person dies, the insurance company pays the outstanding amount of debt of the insured person (assignor) to the assignee and then pays the rest of the amount to the beneficiaries of the insurance policy

Types of Assignment

  • Absolute Assignment: In it, Assignor transfer all ownership rights to the Assignee
  • Collateral Assignment: In it, Assignor transfers a part of his ownership rights to the assignee which is limited upto to outstanding loan value and the remaining ownership rights with the assignor (insured person)

Benefits of Assignment

  • Assignor gets loan more easily
  • Assignee is more secured in case of demise of the borrower or default by the borrower

Differences among Pledge, Hypothecation, Mortgage and Assignment

Basis of DifferencePledgeHypothecationMortgageAssignment
Type of Assets/ GoodsMay be Movable or Immovable but must be long lastingMovableImmovableMovable
PurposeTo avail secured loan easilyGetting smaller amount of loan in an easy way alongwith possession of the assetAvailing higher amount of loan for immovable assets in a simple way at comparitively lower interest ratesTo cover outstanding amount of debt
Act under which it is definedSection 172 of the Indian Contract Act, 1872Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest ActSection 58 of the Transfer of Property Act, 1882N.A.
DefinitionPledge is the bailment of goods as a security for the payment of a debt or performance of a promise.Hypothecation is a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance, and includes floating charge and crystallization into fixed charge on movable propertyMortgage is the transfer of an interest in specific immovable property for the purpose of securing payment of money advanced by way of loan, existing or future debt, or the performance of an engagement which may give rise to a pecuniary liabilityAn agreement between two parties wherein one party transfers some or all his ownership rights on a particular property owned by him to the other party
ExampleGold Loan, Loan against NSCs, etc.Vehicle Loan, Loan against Securities, etc.Housing LoansAssignment of Insurance Policy while taking home loan
Possession of AssetPledgeeHypothecator (Borrower)BorrowerAssignee
Owenership of AssetPledgerHypothecator (Borrower)BorrowerAssignee
Rights to sell the AssetA Pledgee has the right to sell the goods pledged, on default after giving a notice to the PledgerLenderIf the mortgagor fails to repay the loan, the mortgagee has the right to sell the property and recover the loan from the sale amountN.A.
Right to use the assets or goodsA pledgee has no right to use the goods pledgedHypothecator (Borrower)BorrowerN.A.
MCQ
 1. Under which of the mortgages, the lender gives money to the borrower in the form of instalments?
1.       Reverse mortgage
2.       Anomalous mortgage
3.       Equitable mortgage
4.       Lend Back mortgage
Answer: (1)
 2. A man mortgaged his 2 BHK flat to a money lender in return of a sum of money and the lender decided to let the flat on rent. This is an example of which type of mortgage?
1.       Equitable Mortgage
2.       Usufructuary Mortgage
3.       Fixed Rate Mortgage
4.       None of the above
Answer: (2)
 3. The one who mortgages his/her property is also known as _______
1.       Mortgagee
2.       Lender
3.       Debtor
4.       None of the above
Answer: (3)
 4. If the lender sells the mortgaged property if the borrower is unable to repay the loan by the decided date, this type of mortgage is called _________
1.       English Mortgage
2.       Simple Mortgage
3.       Sale Mortgage
4.       Mortgage by Conditional Sale
5.       Anomalous Mortgage
Answer: (2)
 5. The term “Bailment” means
1.       A delivery of a thing entrusted for some special purpose or object upon a contract
2.       Delivery of goods free of cost
3.       Delivery of goods without cost for welfare of public
4.       None of above
Answer – (1)
 6. The delivery of goods by one person to another for some purpose upon a contract that they shall when the purpose is accomplished be returned or otherwise dispose of upon discretion of the delivering person the contract is called
1.       Indemnity
2.       Bailment
3.       Contingent Contract
4.       None of above
Answer – (2)
 7. In pledge contract, bailee is called
1.       Pawnor
2.       Pawnee
3.       Pledger
4.       None of above
Answer – (3)
 8.. In pledge, bailor is called
1.       Pawnor
2.       Pawnee
3.       Both (a) and (b)
4.       None of above
Answer – (1)
Q9The Bailment of goods as security for payment of a debt or performance of a promise is called:
1.       Pledge
2.       Bailment
3.       Contingent contract
4.       Agreement
Answer – (1)
 10.Bailment means ………..
(a) temporary delivery of goods
(b) permanent delivery of goods
(c) part delivery of goods
(d) None
Ans. (1)
Important MCQ
 
1.       In the contract of bailment the person delivering the goods is called ………

(a) bailor
(b) bailee
(c) seller
(d) agent
a.        Ans. (1)
2.       Lien means ………..
(a) to retain goods in his possession
(b) rights to sell the goods
(c) right to purchase the goods
(d) right to destroy the goods
a.        Ans. (a)
3.       When goods are lent to a person to be used by him on free of cost. That is ……….. contract.
(a) comodatum
(b) pawn
(c) hire
(d) gift
4.       The meaning of COMMODATUM is a gratuitous loan of movable property to be used and returned by the borrower.
a.        Ans. (a)
5.       The person to whom goods are delivered temporally is ………
(a) baliee
(b) bailor
(c) purchaser
(d) user
a.        Ans. (a)
6.       When in transaction of Bailment comes to an end, the duty of transfer the goods lies upon whom ?
(a) Bailee
(b) Bailor
(c) Bailment
(d) Person
a.        Ans. (a)
7.       Commodatum is a one type of Bailment in which ………..
(a) no consideration is charged
(b) consideration is charged
(c) reimburse severance of expenses is include behind the assets
(d) none of these
a.        Ans. (a)
8.       The bailor is bound to disclose to the bailee ……….
(a) faults the goods
(b) price of goods
(c) weight of goods
(d) owner of goods
a.        Ans. (a)
9.       The finder of goods has right of ………
(a) lien
(b) purchase
(c) succession
(d) none
a.        Ans. (a)
10.    A finder of goods is subject to the same responsibility as that of a ……..
(a) bailee
(b) bailor
(c) surety
(d) purchaser
Ans. (a)
11.    The bailment of goods as security for payment of a debt is called ………
(a) pledge
(b) bailment
(c) mortgage
(d) none of these
Ans. (a)
12.    The bailment of goods as security for performance of a promise is called
(a) pledge
(b) bailment
(c) mortgage
(d) None of these
Ans. (a)
13.    The pledge is a contract of ………..
(a) bailment
(b) agency
(c) guarantee
(d) mortgage
Ans. (a)
14.    An agreement reached between a bailer and a bailee  is  
a.        Mortgage 
b.       Bailout 
c.        Bailment 
d.       Codicil 
Ans.c
15.    In general all of the following are requirement for a bailment; except that the: 
a.        Bailor must be in possession of goods 
b.       Bailee must intent to possess goods 
c.        Bailee must return identical goods 
d.       Actual ownership of goods is necessary 
Ans.d
16.    A person who finds the goods belonging to others and takes them into his possession is called  
a.        Bailee  
b.       Bailor  
c.        Pledgor 
d.       Pawnee 
Ans.a
17.    Which are the rights of finder of goods 
a.        Rights of lien 
b.       Right to sue for reward 
c.        Right to sale 
d.       All of the above 
Ans.d
18.    The bailment of goods as security for payment of a debt or performance of a promise 
a.        Pledge 
b.       Lien 
c.        Agency 
d.       Bailment 
Ans.a
19.    Pledgee is also known as 
a.        Pawnee 
b.       Pawnor 
c.        Principal 
d.       Agent 
Ans.a
20.    Pledgor is also known as 
a.        Pawnor 
b.       Pawnee 
c.        Bailor 
d.       Agent 
Ans.a
21.    The term bailment is derived from a French word “bailor”, which means: 
a.        Depends 
b.       Deliver 
c.        Selling 
d.       Buying 
Ans.b
22.    The person delivering the goods for achieving some purpose and returned the same after completion is called 
a.        Bailee 
b.       Pledgee 
c.        Bailor 
d.       Agent 
Ans.c
23.    The person who delivered the goods for bailment process is called 
a.        Bailee 
b.       Bailor 
c.        Pawnor 
d.       Pawnee 
Ans.b
24.    When No consideration passes between the bailor and bailee, it is called
a.        Non gratuitous bailment 
b.       Gratuitous bailment 
c.        Special bailment 
d.       Conditional bailment 
Ans.b
25.    Choose the correct one; Duties of bailor 
a.        To return the goods 
b.       To disclose known faults 
c.        Not to set up an adverse title 
d.       To return any accretion to the goods 
Ans.b
26.    Right of a person to retain possession of some goods belonging to another until some debts of the person in possession is satisfied 
a.        Pledge 
b.       Bailment 
c.        Lien 
d.       Guarantee 
Ans.c
27.    A gives B two suitcases to store for him while he is at a meeting. What is the correct relationship between A and B. 
a.        A is the bailee and B is the bailor 
b.       A is the bailor and B is the bailee 
c.        A and B are both bailees 
d.       A and B are both Bailor 
Ans.b
28.    Which of the following is not an example of bailment 
a.        A coat check 
b.       Valet parking 
c.        Dry cleaning 
d.       A gift given on birthday 
Ans.d
29.    An example of bailment without a contract is ——
a) Giving a vehicle in a workshop for repair
b) Giving something in courier
c) Finder of the lost goods
d) None of these.

Ans: c
30.    A finder of goods is
a) Entitled to retain the goods
b) Entitled to claim compensation when specific reward is offered
c) Not entitled to claim compensation and thus not entitled to retain the goods
d) Both (A) and (B)

Ans: d
31.    Which of the following are the rights of bailee?
a) Right of indemnity
b) Right of remuneration
c) Right of lien
d) All the above.

Ans: d
32.    Which of the following are the rights of bailor?
a) Right to demand restoration of goods
b) Right to get increase or profit from goods bailed
c) Right to sue the bailee for the enforcement of the duties imposed upon a bailee
d) All the above.

Ans: d
33.    Which of the following is not an example of bailment?
a) Giving clothes for dry-cleaning
b) Keeping property in mortgage
c) Giving clothes for tailoring
d) Giving book for reading

Ans: b
34.    ———- entitles the bailee to retain those goods of the bailor for a general balance of the account.
a) Particular lien
b) General lien
c) Ownership
d) Pledge
Ans: b

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