AN OVERVIEW OF THE
FRAMEWORK FOR SECURITIES
FOR BANKERS ADVANCES
SUBMITTED BY:
SURBHI VERMA
SECURITIES FOR BANK ADVANCES
The banker safeguards his interest by granting loans and advances on
the security of tangible assets, i.e., a large variety of goods and
commodities, documents and immovable property.
Security is what the borrower puts up to guarantee payment of the loan.
Moreover security means immovable & chattel or personal asset or
assets to which a lender can have recourse if the borrower defaults in
the loan payment.
Section 5(4) of “Banking Regulation Act” says that secured loans and
advances means a loan or advance made on the security of assets.
GENERAL PRINCIPLES OF SECURED
ADVANCES
While accepting security on loans and advances a
banker should observe the following basic principle:
Adequacy of margin
Marketability of Securities
Documentation
Realization of Advances
TYPES OF SECURITIES
TYPES OF SECURITIES
NON-PERSONAL
PERSONAL SECURITY
SECURITIES
LIEN PLEDGE MORTGAGE HYPOTHECATION
Section 171 of “Indian Contract Act,1872”, Rights of a person to
retain possession of some goods belonging to another until some debt
or claim of the person in possession is satisfied. Possession must be
rightful, not for a particular purpose and continuous.
A creditor in possession of goods or securities belonging to his debtor
can continue to retain them till his dues are paid. Such a right to retain
is called Lien.
Right of lien is available to a creditor in respect of goods or securities.
Right of lien gives power to retain and not to sell.
PLEDGE
Section 172 of “Indian Contract Act, 1872”: The bailment of goods as
security for payment of a debt or performance of a promise is called
Pledge.
Under pledge, the ownership of goods remain with the borrower but the
possession of the goods is in the hands of the bank.
When the loan is fully repaid, the bank must handover possession of
goods pledged back to the borrower.
The bank enjoys the Right of Sale in case the loan is not repaid, after
giving adequate notice of sale to the pledger.
Only movable assets can be pledged and the owner of the assets can only
pledge the assets.
Simple Mortgage
Mortgage by
Conditional Sale
Usufructuary
Mortgage A legal agreement by which a bank, building society, etc.
lends money at interest in exchange for taking title of the
debtor's property, with the condition that the conveyance of
English Mortgage title becomes void upon the payment of the debt.
Mortgage is defined in “Section 58(a)” of “Transfer of
Mortgage by Deposit
Of Title Deeds Property Act, 1882” involves the transfer of interest in a
Kinds of immovable property, for securing an existing or future debt.
mortgage Anomalous
Mortgage Mortgage involves transfer of some interest in property and
not its ownership.
MORTGAGE OF IMMOVABLE PROPERTY
“Mortgage”- Transfers of Property Act 1882 Section 58 (a):
Transfer of Interest in specific immovable Property for the
purpose of securing
Payment of money advance or to be advance by way of loan
And existing future debt
Performance of an engagement which may give rise to
pecuniary liability
Only immovable properties can be mortgaged.
HYPOTHECATION
The Indian Contract Act does not define Hypothecation, however, Section
2(n) of “Securitization and Reconstruction of Financial Assets &
Enforcement of Securities Interest Act, 2002” define it as:
“Hypothecation means a charge in or upon any movable property, existing in future,
created by a borrower in favor of a secured creditor, without delivery of possession of
the movable property to such creditor, as a security for financial assistance and
includes floating charge and crystallization of such charge into fixed charge on
movable property.”
Under hypothecation the asset continues to be in the possession of the
borrower.
In case of default, Bank has the right to take possession and sell the asset.
CHARGE
Section 100 of the “Transfer of Property Act, 1882” defines a charge:
“Where immoveable property of one person is by act of parties or
operation of law made security for the payment of money to another; and
the transaction does not amount to a mortgage, the latter person is said
to have a charge on the property; and all the provisions hereinbefore
contained which apply to a simple mortgage shall, so far as may be,
apply to such charge.”
It is the Bankers right to receive money lent to the borrower from the
borrowers assets, if the debt is not paid on time by the borrower.
The charge over the asset created out of Banks finance or the assets
offered by the borrower to ensure the repayment of the loan is called
security.
In case of default of repayment Bank has got right to take possession
of this asset and recover the dues out of the sale proceeds of the
security.
DIFFICULTY IN THE
EXISTING LEGISLATION
1. The “Transfer of Property Act” is very old, and
with time not developed creating a problem of
conflicting laws with modern interest.
2. There has been no mention about how will the
charge be created.
3. Due to separate stamp duty in every state, the
unforeseen expenses increases and the margin in
securities decreases.
4. Legal disputes can be assigned on land and
building leading to decreasing the profitability of
banks.
