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What is set off in banking ?

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1 2022-10-31T23:08:10+00:00
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Hey,

There are many technicalities one must be aware of while availing of a loan from the bank. You must have knowledge about the right of set off in banking along with loan closing charges. Banks employ certain methods to safeguard themselves in case the loan amount is not paid back. Keep reading to know more.

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 What is set off in banking?

It is the agreement between the creditor and a debtor wherein the bank/creditor has the legal right to seize the debtor’s deposit in case of the loan has defaulted. The set off clause is written in the legal agreement.

In simple words, set off in banking is a mutual agreement wherein the customer's current deposit or bank account can be seized in case the loan amount is not returned. This clause is used by businesses and manufacturers as well. This protects the sellers to protect them from a default by a buyer.

Take a look at the example below to further understand what is right to set off in banking.

Let's assume, you have a credit account in the bank with rs.500 deposited. 

You have taken a loan of 100 rupees from the bank in your debit account.

You have willfully defaulted on your loan payment. 

Under the set off clause, the bank can seize your credit account and seize a percentage of the sum( % of rs.500) or the entire sum (Rs.500).

I hope my explanation on what is right of set off in banking

was helpful.

Read more:

What is PEP in banking?   

What is sanction screening in banking?   

What is provisioning in banking?   

What is CMS in banking?    

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