The right of set-of is a statutory right which enables a debtor to take into account a debt owed to him by a creditor, before the latter could recover the debt due to him from the debtor. In other words, the mutual claims of debtor and creditor are adjusted totether and only the remainder amount is payable by the debtor.
A banker, like other debtors, possesses this right of set-off which enables him to combine two accounts in the name of the same customer and to adjust the debit balance in one account with the credit balance in the other. For example, A ha taken an overdraft from his banker to the extent of Rs. 5,000 and he has a credit balance to the extent of Rs. 2,000 in his savings bank account, the banker can combine both of these accounts and claim the remainder amount of Rs. 3,000 only.
This right of set-off can be exercised by the banker if there is no agreement-express or implied-contrary to his right and after a notice is served on the customer intimating the latter about the former’s intention exercise the right of set-off. To be on the safer side, the banker takes a letter of set-off from the customer authorizing the banker to exercise the right of set-off without giving him any notice.
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