Securities are financial contracts. such as shares or bands, that grant the owner a stake in an asset. They have two key features:
They give certain rights to the owner and, They can be traded in the financial market.
Bankers, whenever advancing loans, first ask for the securities to be put for the loan requested. different types of securities are used depending upon the nature of advances issued by the banks. adequate security must be enough to cover the risk, highly liquid, free from any encumbrance, clean in ownership, and easy to handle.
Types of Securities:
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The different types of securities, offered by the banker is as follows:
- Goods.
- Advances against the document of title of goods.
- Advance against stock exchange securities.
- Life insurance policies.
- Fixed deposit receipt.
- Book debt.
- supply bill.
Types of securities for Bank credit:
Personal securities:
Personal security refers to the guarantee given by the borrower or by a third party in the lead of pledging a tangible asset.
Since advancing a loan against a personal guarantee is very risky banks rarely grant a loan against such security unless the borrower has a special and long relationship with the bank.
Character, integrity, financial solvency, and social status are important factors that are looked into before sanctioning of loan against personal security.
Non- personal security:
- Non – personal security refers to movable and immovable tangible properties against which loans are granted. this type of security may include land, building, commodities, etc.
- It is safer than personal security.
- If the borrower defaults a tangible property can be sold in the market to realize the unpaid amount.
- Non- personal security can be changed in the conn of lien, pledge, mortgage, hypothecation, or assignment.
Collateral security:
When the lender feels the security provided by the borrower is not sufficient or it may be difficult to recover the dues smoothly, the lender may ask for additional security to be provided by the borrower himself or by others on behalf of the borrower.
In case of any default by the borrower, the collateral securities will come in hand to service and recover the loan.
Non – personal security: (Type of security for Bank credit)
Acceptability:
Asset accepted as security must be acceptable in the eyes of the law. any asset considered illegal to own or possess will put the bank in difficulty at the time of disposing of it.
Moreover, the bank may face a legal consequence for possession of illegal items.
Marketability:
The security must have a ready market. The bank has not taken the asset to keep it in its possession for an indefinite period but rather to sell it in the market and realize the loan amount.
Hence, no matter how valuable the asset maybe it is of no use if it does not have a broad market.
Liquidity:
Liquidity refers to how quickly an asset can be converted into cash or other assets with little or no diminution in value.
Ideally, security should be liquid which will enable the banker to sell, it properly at a known price as soon as the default occurs.
Ownership:
Before accepting security the banker must ensure the ownership of the property. An asset that is not owned by the lender may render difficulty in getting the loan repaid.
Moreover, if the title of the property is defective the lender may face the problem.
Adequacy:
The value of the security must be adequate to cover the full amount of the loan. Moreover, a reasonable margin over the (loan is to be maintained).
The margin is the difference between the market value of the security offered and the loan granted.
Stability of price:
The price of the goods and commodities which are necessaries of life are relatively stable over a short period, though not necessarily over a long period.
But wide variation in the prices of luxury goods takes place due to changes in demand, fashions, and tastes of the people.
Bankers are generally reluctant to accept the commodities the prices of which are uncertain and fluctuate too widely frequently.
Documentation:
The banker should see that proper documentation such as a mortgage deed or the pledge agreement containing all terms and conditions of the mortgage or the pledge is executed. this should be done in order to avoid all future disputes.
Non- encumbrance:
Property or asset which has already been charged against a prior loan from some other lender should be avoided as security.
Because in that case, the banker will have a secondary claim on that particular security.
Possession:
Where ownership of an asset without its possession may lead to unwanted circumstances for the banker.
Unless the property is considered as security is in the possession of the borrower (though he is the owner) that property should not be accepted as security.
If goods are taken as security the banker should take possession before advancing the loan.
QUALITY:
If a commodity has been used as a security it should be of good quality. A commodity that is perishable and may deteriorate in quantity with the passage of time should not be accepted as security.
Free from disabilities:
A banker should disqualify securities crippled with certain disabilities like party paid-up shares life insurance policy without surrender value and so on. he should see before accepting that the security is free from such disabilities.
Meld generating security:
An asset that generates earnings during the period in which the loan is outstanding is better security than those which do not and are preferred by the bankers.
Easy store ability and low maintenance cost:
Security should not create a headache or be a burden for the banker. It must be easy to store with low maintenance costs.
Personal Security (Types of security for bank credit)
Financial Ability:
The banker must inquire into the financial condition of the guarantor.
If the guarantor does not have the financial solvency to repay the loan in case the principal debtor defaults the existence of a guarantee will be futile.
Honesty:
The ability of the guarantor to repay the loan is of use only if the guarantor also has the willingness and integrity.
so, in addition to the financial solvency of the surety, his honesty is of immense importance in case of personal guarantee.
Social status:
The social status of the borrower and that of the guarantor must be ensured before granting a loan.
A person who holds esteemed kudos in the society is more likely to be conscious about fulfilling his promises.
Advance against goods:
Advance sanctioned by the scheduled bank in India is secured by goods and commodities and it is divided into four main heads.
Food articles
Industrial Raw material
Plantation product
Manufacture and materials
The above-mentioned advances are essential for all types of leading and commercial activity run in the country. All these advances fulfill the needs of the working capital of a large number of businesses and are related to the industry.
Easy Marketability:
Other than fixed assets like land, building or plant goods & commodities can be easily liquidity.
Precaution to be taken by a banker.
(a) Selection of the borrower:
Although goods and commodities are safe and dependable securities for a banker it also includes some risk and to avoid that risk, the banker has to be very important and must be honest and trustworthy otherwise there may be the possibility of fraud or other mishappenings. While choosing the borrower he has to keep in mind all good and bad post records of the borrower so that the banker can minimize his risk.
(b)- Selection of commodity:
The second precaution which has to be kept in mind by the ranker towards the borrower is that he should check that the borrower is well acquainted with the native of its demand while accepting any commodity or good. he must ensure that the subjected commodity is the item of necessity or it comes under luxury or comfort goods. In addition, the elasticity of demand should also be checked.
Charging the security:
It is a very important aspect that bankers must have full knowledge with respect to the commodity market. Besides, he should also know all the market customs, trades, and trends of the prices of the commodity which have been affected as security.
- The banker should possess the goods before granting a loan to the customer against it. The delivery may either be actual or constructive.
- Precaution is required while estimating the value of goods. whatever the actual price of goods pledge to him, according to market price a careful step is required.
- The goods pledged to him require reasonable care during the storage process. It must be carefully checked out that the godown is safe and it is free from water fire etc.
Advances against the document of title to goods:
The title of the document is the document that actually proves that the procession or control of the goods is with those party who holds the title. Thus the document of title to goods represents that the actual goods are in the possession of somebody else. SECTION 2 (4) of the sales and goods act confers the right to receive and transfer such goods to any other person by mere delivery or endorsement.
Risk increase of advances against document:
(a) Risk of fraud and dishonesty:
The godown keeper/warehouse keeper only gives the receipts for goods received by him but can not certify or give any guarantee over the goods or goods in a container that those goods are according to description and specification of the customer or borrower which might have been specified during.
(b) Non- negotiable document:
The documents of title of goods are non-negotiable instruments unlike promissory notes, bills of exchange, and cheques. Thus the documents of title are considered as the transferable instrument but the transferor does not get a better title than the transferor.
Precautions:
- Reasonable care should be taken to see whether the documents are genuine or not.
- To avoid any kind of dishonesty, fraud the banker should accept such document from a reliable & honest person only. It must be checked that the goods are insured against fire, theft, or any other risk with its full value.
- It is important to check that the pledged goods are of the same quality and quantity and according to the description.
- The memorandum of charge should be taken by the banker from the borrower which should authorize him to sell the goods in case of any default of payment by the borrower.
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