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CS Professional · Banking and Insurance - Laws and Practice · Advances, Securities and Documentation

Ravi Traders delivers 500 bags of rice to Western Bank, which takes physical possession as security for a cash credit limit. Which description fits this arrangement under the Indian Contract Act, 1872?

The arrangement is a pledge. Section 172 defines pledge as the bailment of goods as security for payment of a debt, so delivering the rice to the bank makes Ravi the pawnor and the bank the pawnee.

  1. AHypothecation, since the goods remain with the borrower
  2. BA pledge, being a bailment of goods as security for payment of a debtCorrect
  3. CA mortgage, since movable goods are involved
  4. DA lien created by the bank unilaterally

Explanation

Section 172 defines pledge as the bailment of goods as security for payment of a debt or performance of a promise. Delivery of rice to the bank is a bailment, so Ravi is the pawnor and the bank the pawnee. Hypothecation is wrong because possession stays with the borrower there.

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