Chapter 7: Banker’s Special Relationship (JAIIB - Paper 2)
1. A mandate in banking is generally used for:
A. Creating a legal mortgage
B. Transferring ownership of property
C. Authorizing another person to operate a bank account
D. Registering a charge with ROC
A mandate is a simple authority given by the account holder to another person to operate the account, generally in savings or current accounts.
2. Which of the following is true about a mandate?
A. It automatically expires on the death of the account holder
B. It continues even after the account holder’s death
C. It is irrevocable under all circumstances
D. It must always be registered with the Registrar of Companies
A mandate is revoked on death, insanity, insolvency of the account holder or the person authorized. Hence, it does not survive beyond the life of the account holder.
3. A Power of Attorney (POA) is:
A. A simple bank mandate
B. Always valid only for 6 months
C. Applicable only for immovable property transactions
D. A legal document authorizing an agent to act on behalf of the principal
A Power of Attorney is a legal document executed under the Indian Powers of Attorney Act, 1882, granting authority to an agent to act on behalf of the principal.
4. Which of the following is NOT a feature of a bank mandate but IS a feature of a Power of Attorney (POA)?
A. Authority can be revoked by the account holder
B. It can be general or specific in nature
C. It ends automatically on death of the principal
D. It allows someone to sign cheques on behalf of the account holder
Unlike a simple mandate, a POA can be general (broad powers) or special (specific transaction powers), making it legally stronger.
5. In banking, which of the following situations requires a properly executed Power of Attorney instead of a simple mandate?
A. Authorizing someone to sell securities or execute loan documents
B. Allowing a family member to withdraw small cash amounts
C. Authorizing operation of a savings account for cheque deposits
D. Issuing standing instructions to debit utility bills
A Power of Attorney is mandatory where legal authority is needed, like selling securities, executing loan documents, or representing the principal in legal/financial matters.
6. A banker’s lien is generally considered as:
A. A pledge of securities
B. A mortgage of property
C. An implied pledge
D. A hypothecation
Banker’s lien is regarded as an implied pledge. The banker has the right to retain securities of the customer and, if necessary, sell them to recover dues.
7. Which of the following assets can a banker exercise lien upon?
A. Securities held by the bank as trustee
B. Documents deposited for safe custody
C. Assets held in trust accounts
D. Securities belonging to the customer deposited with the bank in normal course of business
Lien can be exercised only on assets belonging to the customer and deposited with the bank for general purposes, not when kept in trust or for safe custody.
8. A banker cannot exercise lien in which of the following cases?
A. Securities deposited for safe custody
B. Securities deposited for securing a loan
C. Securities given to cover a letter of credit
D. Negotiable instruments endorsed in blank for collection
Lien cannot be exercised over items deposited for safe custody, since ownership and purpose of deposit are specific, not for banking advances.
9. What is the difference between a general lien and a particular lien in banking?
A. General lien applies only to a specific debt, while particular lien covers all debts
B. General lien allows retention of securities for any debt, while particular lien allows retention only for a specific debt
C. Particular lien and general lien are identical
D. Particular lien gives right of sale, general lien does not
A banker’s lien is a general lien, meaning the bank can retain securities for any amount due from the customer, not just a particular transaction.
10. Case Study: A customer deposits share certificates with a bank for safe custody. Later, he defaults on a loan. Can the bank sell those shares under banker’s lien?
A. Yes, because bank has lien over all securities of customer
B. Yes, but only after informing the customer
C. No, because lien cannot be exercised on items given for safe custody
D. Yes, only with RBI permission
Banker’s lien does not apply to items deposited for safe custody, trustee accounts, or items given for a specific purpose. Hence, shares kept in safe custody cannot be sold.
11. The Right of Set-off allows a banker to:
A. Sell the customer’s securities to recover dues
B. Transfer money from one customer’s account to another customer’s account
C. Close a customer’s account without consent
D. Adjust debit balance in one account with credit balance in another account of the same customer
Right of Set-off allows a bank to combine accounts of the same customer and adjust debit balances with available credit balances.
12. Which of the following is a condition for exercising the right of set-off?
A. Both accounts must be held in the same name and same capacity
B. Bank can set-off balances even between father and son’s accounts
C. Bank can set-off balances between individual and partnership accounts
D. Bank can always exercise it irrespective of the nature of the accounts
For set-off to apply, accounts must be in the same name and same right/capacity. For example, a personal account cannot be set off against a joint or trustee account.
13. A bank customer has a current account with credit balance of ₹2,00,000 and a loan account with debit balance of ₹1,50,000. Can the bank exercise set-off?
A. No, because both accounts are of different nature
B. Yes, because both accounts belong to the same person in the same capacity
C. No, unless customer gives written permission
D. Yes, but only if it is a joint account
The right of set-off applies as both accounts belong to the same person and are held in the same capacity. Bank can adjust the debit balance using the credit balance.
14. Which of the following accounts is NOT eligible for set-off by the bank?
A. Current account against term loan account
B. Fixed deposit account against overdraft account
C. Trust account against personal account of trustee
D. Savings account against personal loan account
Bank cannot set-off trust accounts against personal liabilities of trustee, since they are not held in the same capacity.
15. Case Study: Mr. X holds a joint account with his wife having a balance of ₹1,00,000. He also has a personal loan account with the bank showing a debit balance of ₹80,000. Can the bank adjust the joint account balance under right of set-off?
A. No, because joint accounts cannot be set off against individual liabilities
B. Yes, because both accounts belong to Mr. X
C. Yes, if Mrs. X provides written consent
D. Yes, automatically under banker’s lien
A joint account cannot be set off against an individual’s liability without consent of all account holders, as ownership and capacity differ.
16. The right of appropriation in banking refers to:
A. The bank’s right to sell securities of the borrower
B. The right to adjust a payment received against one or more debts of the customer
C. The customer’s right to close the account at any time
D. The banker’s right to charge interest at any rate
Right of appropriation means when a customer owes multiple debts, payments made can be appropriated (adjusted) to any of those debts as per certain rules.
17. If a debtor specifies while making payment that it should go towards a particular debt, the bank must:
A. Ignore the instruction and adjust as per convenience
B. Apply it to the oldest debt first
C. Apply it to the largest debt
D. Apply it only to the debt specified by the debtor
As per the rule of appropriation, if the debtor clearly specifies the debt to which a payment should be applied, the creditor (bank) is bound to follow that instruction.
18. If the debtor does not specify the appropriation of payment, then:
A. The bank can appropriate it to any debt of its choice
B. The payment must be adjusted to the latest debt
C. The payment must be adjusted to the lowest amount due
D. The payment must be adjusted only to secured loans
When the debtor gives no instruction, the creditor (bank) has the right to appropriate the payment towards any debt due from the customer.
19. If neither the debtor nor the creditor makes appropriation, then as per law, the payment should be applied to:
A. The most secured loan
B. The debt with highest interest rate
C. The debt which is time-barred first (oldest debt)
D. The debt chosen by the auditor
If neither party makes appropriation, the law applies payment to the debts in order of time – oldest debt first.
20. Case Study: A borrower has two loans with a bank – Loan A (₹2 lakh, secured) and Loan B (₹1 lakh, unsecured). He pays ₹50,000 without giving any instructions. The bank chooses to adjust it against Loan B. Is this valid?
A. No, because unsecured loans cannot be adjusted first
B. Yes, because when the debtor is silent, the creditor has the right to choose
C. No, because secured loan should always be reduced first
D. No, because law applies it automatically to the oldest debt
When the debtor does not specify, the creditor has the discretion to appropriate payment towards any debt. Hence, adjusting against Loan B is valid.
