JAIIB · PPB · Unit 7Chapter Notes3–5 Marks Expected

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.

✓ By Bankopedia.co.in✓ Updated 2026✓ Legal provisions fully covered

📌 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.

Section 1

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”

M = Mandate

S = Set-off

L = Lien

A = Appropriation

“My Special Legal Authority”

Section 2

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→A mandate can be withdrawn anytime by the account holder/s.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.

Section 3

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

Joint accountsAll joint account holders must sign the mandate/POA empowering the third party to operate it.

Partnership firmsAll partners must sign the POA/mandate authorising a third party to operate the firm's account.

Limited companiesDelegation is possible only if the authorised person has the specific authority to further delegate powers to a third person.

FiduciariesExecutors, administrators, and legal guardians cannot appoint agents — they must act personally.

Joint POA holdersWhere more than one person is authorised, clear instructions must be obtained — whether to operate the account singly or jointly.

Section 4

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

Section 5

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

Safe custody articles: Bank acts as trustee/bailee — unless covered by special agreement.

Documents for specific purpose: Money/docs deposited with a stated purpose cannot be taken under lien.

Articles left negligently: Securities accidentally left behind — not given in ordinary course of business.

Immature debts: Lien cannot be exercised when the debt has not yet matured.

Stolen goods: Bank cannot have lien over goods stolen by the customer from the real owner.

When set-off is available: Lien and set-off cannot both be exercised simultaneously.

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.

Section 6

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

Statutory right: Arises by law; can also arise from an express agreement between the parties.

Prior notice required: Bank must give notice to the customer before exercising set-off.

No exclusion agreement: No agreement between bank and customer excluding the right of set-off.

Mutual debts: Debts must be mutual — each party owes the other a definite sum.

Determined amounts only: Both claim and cross-claim must be for certain, determined sums.

All branches = single entity: For set-off purposes, all branches of a bank are treated as one entity.

Debts due & recoverable: Set-off applies only to debts that are due and recoverable on the date of exercise.

No contingent debts: Cannot be applied to debts that are contingent or not yet due.

Same capacity / right: If account holds trust funds, they cannot be set-off against the customer's personal debit.

Deceased vs active account: A deceased's credit account cannot be combined with the customer's debit account.

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.

Section 7

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)

Sec. 59

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.

Sec. 60

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.

Sec. 61

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.

Section 8

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

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Practice Test

Chapter 7 Mock Test — Coming Soon

Exam-standard MCQs on Mandate, POA, Banker’s Lien, Set-off, and Appropriation — timed, graded, PRO.

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