CRIDIT MANAGMENT

MBA Banking & Finance

3rd Term
Securing Finance Facilities
Meaning of Security
A security is an interest or a right in property given to
the creditor to convert into cash in case the debtor fails
to meet the principal and interest as and when.
The role of the banker as lender is very important While
sanctioning loan, he secures the loan in one way or the
other. In some cases the banker advances loans on the
credit worthiness of the borrower. In some cases,
personal security is coupled with guarantee of another
person. However, in most of the cases the banker
secure the advances by accepting tangible goods as a
collateral securities.
Modes of Securing Advances
The main modes of securing advances are:
1. Banker’s Lien
2. Pledge
3. Mortgage
4. Hypothecation

What is banker’s lien?

The lien is the right to retain property in its possession
till its banker’s dues are cleared . Lien give a
person/banker only a right to retain the possession of
the goods and not the power to sell.
Thus lien is …..
1. The right of retaining property belonging to the debtor.
2. Till all dues due to borrower are cleared.
Exceptions
The banker can not exercise its right of general lien on
a. Articles lodge for safe custody with the bank.
b. Instruments given for specific purposes as agent to the
bank.
c. Money deposited with specific purposes.
d. Securities deposited before loan is sanctioned.
e. Trust accounting.
Advantages of Lien
1. A tangible security.
A commercial bank can safely lend against goods to the
customers as they have something tangible in their
possession to dispose of in case the debtor refuse to pay or
unnecessary delay in the payment.
2. Less fluctuation in prices.
3. Easy realization of money.
4. Accuracy in ascertaining prices.
5. Seasona
Disadvantages of Lien
1. Deterioration of goods
2. Cut in prices
3. Risk of fraud
4. Difficulty of storage of goods advances.
Pledge
A pledge is a contract whereby a good is deposited with
the lender as security for repayment of the loan. The
delivery of goods may be transferring the goods from
the owner’s godown to a banker’s godown. or the keys
Of the owner godowns be handed over to the lender.
The delivery of documents of the title relating to goods
also creates a valid pledge.
The person delivering the goods as a security is called
the pledger.
The person to whom the goods are delivered is called
pledgee.
Features of pledge
1. There must be bailment of goods(delivery of goods).
2. Bailment must be by way of security.
3. The security must be for payment of debts.
Rights & Duties of a Banker as a Pledgee

Rights of a Banker as a Pledgee

The bankers has the following rights as a pledgee.
1. Right to retain goods: The banker has right to retain
goods pledged not only for the payment of debt also for
interest and other expenses.
2. Right to recover extra ordinary expenses.
If the banker has occurred extra ordinary expenses on the
loan advanced, he has the right to recover same from the
pledger.
3. Default in payment. In case the pledger become
default then the pledgee has right to dispose of the pledge
goods after giving proper notice to the pledger.
4. Right of full value of goods. the pledgee has right
of full value of goods till to entire debt is not discharged.
Duties of a Banker as a Pledgee

1. A pledgee is required to take reasonable care of pledged

goods.
2. Not authorized to make use of goods pledged with him.
3. Pledgee is required to return goods after the full payment
of debt.

Advantages of Pledge
Advantages of the pledge are same as in case of lien like

1. A tangible security.
2. Less fluctuation in prices.
3. Easy realization of money.
4. Seasonal advances.
5. Accuracy in ascertaining prices.
6. Availability of goods for consumers.
Disadvantages of Pladge
1. Deterioration of goods.
2. Cut in prices.
3. Risk of fraud.
4. Difficulty of storage of goods advances.

Mortgage
Mortgage is defined as “ the transfer of the interest in
specific immoveable property for the purpose of securing
the payment of money advanced or to be advanced by
way of loan”.

Mortgage is thus the an assurance given to the creditor

for the legal or equitable interest in property as security
for meeting an obligation.
The lending of money on real estate (immoveable property) is
not popular with commercial banks. The banks have to lock
their funds in the loans having long term maturity. Loans on
real estate lack liquidity. In case of default there is no
organize market to where the property can be sold and
recover the amount to pay off the loan. The other reasons are
1. Legal hindrance: The transfer of property may
involve legal hindrances.
2. Title of the property. the bank has to be very
careful in investigating the borrower title to property.
3. Heavy expenses of legal mortgage. An
immoveable property mortgaged the bank involve heavy
expenditure.
4. Lack of liquidity
5. Difficulty in valuation
6. Delay in recovery of loans
Feature of Mortgage.
1. Specific immovable property. Only immovable property
is accepted as mortgage security.

2. Transfer of interest. There is transfer of interest in the

property by the mortgagor for the loan raised.

3. Repayment of loan. The mortgagor has the liability to

make repayment of the loan, failing which forfeits the claim
over mortgage property.

4. Return the interest of property.

On the payment of loan by mortgagor the mortgagee has
obligation to return the interest of the property.
Main Characteristics of Mortgage
1. Property mortgaged with the creditor can be sold in case the
debtor fails to repay the debts.
2. The possession of the property remain with the
mortgagor(borrower)
3. It is transfer of an interest in a specific moveable property
only.
4. The securities which are generally mortgaged as a cover for
an advance are title deeds, life policies and stock and
shares.
Mortgage and its Kinds
1. Simple mortgage. In simple mortgage the mortgagor
keeps the possession of the property offered as a security.
Mortgagor is personally responsible for payment of debts.
In case the mortgagor default to pay the money, the
mortgagee has the right to obtain a decree for the sale of
mortgaged property to recover the loan.
2. Mortgage by Conditional Sale. It is a
mortgage where the mortgagor(Borrower) sells the
property to the mortgagee on the condition that on
repayment of loan the property will be restored to him
by the mortgagee (creditor). In case the mortgagor
fails to pay off the loan, the mortgagee obtain the
absolute
proprietorship of the property.
3. Usufructuary Mortgage. In usufructuary
mortgage, the mortgagor actually delivers the
possession of the property to the mortgagee. The
mortgagee is entitled to rent out the property and
receive the rent. On repayment of the loan the
possession of property is transferred to mortgagor.
4. English Mortgage: The mortgagor transfer the
ownership and possession of the property to the
mortgagee on the condition that loan will be repaid on
a certain fixed date. When loan is realized the
mortgagee recovery's the property to the mortgagor.
5. Mortgage by deposit of Title Deeds: It is
also called equitable mortgage. In this mortgage the
mortgagor deposit the title deeds of property with the
mortgagee as security. Equitable mortgage is
considered the weaker mortgage from banker point of
view.
6. Anomolous Mortgage: Anaomolous mortgage is
hybrid of different mortgages. In this mortgage the the
rights and liability of the mortgagor and mortgagee are
strictly determined by their contract as evidenced in the
mortgage deed.
Rights and Liabilities of the Mortgagor

1. Right of Redemption
2. Right to Partial Redemption. As general
rule partial redemption is not allowed however, if
mortgagee happen to acquire a share in the mortgaged
property through purchase or inheritance, the
mortgagor has the right to partial redemption.
3. Right to recover possession: the mortgagor has
the right to recover the possession of the property on
payment of loan.
4. Implied contracts by mortgagor: The
mortgagor has certain implied contracts with the
mortgagee. When the mortgagor is in possession of
property , he will defend the title to property, pay public
charges and taxes. He will also observe all conditions
contained in agreement deed.
5. Mortgagor’s power to lease. The transfer of
property act provides a clause that the mortgagor who is
in possession of the property can make lease of the real
estate in the ordinary course of the management of
property.
6. Waste by mortgagor: The mortgagor who is in
the possession of the property cannot willfully commit
acts of waste. If the property is damaged and its value
diminishes, the mortgagee can claim damage from the
mortgagor.
Rights and liabilities of the Mortgagee
1. Right to Sale the Property.
2. Right to private Sale: The transfer of property act
gives right to mortgagee of private sale of property.
3. Distribution of Sale Proceeds: Mortgage money,
interest charges and other charges and expenses incurred
on sale of property.
4. Right of Foreclosure: A suit to to obtain a decree
that a mortgagor shall be absolutely debarred of his right
to redeem the mortgaged property is called a suit for
foreclosure.
5. Partial Sale of Foreclosure: If there are more than
one mortgagor for a property, then all of them have to file
a suit jointly for the recovery of loans. A single mortgagee
cannot file a suit for closure or sale of his share in the
mortgaged property.
6. Right to Sell Property: A usufructuary mortgagee has
no right to sell or obtain a decree to debar the mortgagor
of his right to redeem the mortgaged property. The
banker will retain the possession of the property till to
recovery of the loan.
Liabilities of the Mortgagee.

1. To keep and secure the property as it is his own.

2. Collect the rent of the real estate.
3. Pay charges and government revenue from the
income of the property.
4. Get the necessary repair.
5. Not to damage the property.
6. Keep the property clear of all dues.
7. Not to make any alteration in the property.
Advances on stocks and shares and
life policies
1.Stock exchange securities
Stock exchange securities as the name signifies are
those securities which are quoted on the stock
exchanges. They cover all such securities such as stock
and share certificates, bonds and debentures issued by
the joint stock companies corporation and government.
The stocks and shares of private co. which are not
quoted on stock exchange can also serve as security for
the loan.
Advantages of stock and share securities
1. Easy marketable.
2. More reliable.
3.easily valued
4. Fully negotiable
5. Easy realization of value
 6. Less liable to market fluctuation
7. easy transferable
8. Less expensive to release
9. Earn interest
10. Refinancing facility (pledging)
Disadvantages
1. In case of partly paid up security bank can be asked to pay
the uncalled amount of share.

2. 2. If sufficient margin is not provided for market fluctuation

the may not be able to recover the full amount in case of
default.

3. If the securities are not negotiable the repayment of loan

become quite difficult.

4. Chance of forged share scrips.

The Precautions
1. The banker can safely advances loans against securities issued
by the govt. semi govt. bodies public utility cos. Bank and well
reputed co. normally safe easily marketable ,stable in price and
yield .
2. There is mushroom growth of joint stock companies after
industrial revolution. The banker while selecting the stock or
share as a cover for advance must have with him up to date list
of approved securities. Thorough scrutiny of co. past standing,
reputation in market ,examination of balance sheet etc.

3. The banker is to take assessment of value of the stock offered as a

security for advance.

4. Right of security mean security offered as a security is held by

borrower as a own not as a trustee for another person.

5. If the banker obtains a legal mortgage of stock and share then they
should be registered with the bank and the bank should be declared
the owner of the shares.
6.
Advance against negotiable Security
Commercial bank can safely advance against negotiable
securities. Negotiable securities are those which are
transferable or negotiable by endorsement.
Forms of Negotiability
There are three main form
1. Negotiability by statute. Certain instrument may be
given negotiability by statute law, like bill of exchange,
promissory note and cheque.
2. Negotiability by structure. Certain instrument which
are negotiable by prevailing mercantile custom and are
judicially recognized in the country. Like bearer bonds
treasury note etc.
3. Negotiable by estoppels: When two parties agree to
make the basis of their actions is meant by estoppel.
Advances against Non-Negotiable Securities
There two types of non negotiable security…
1. Inscribed stock: the stock whose amount and name the
holders are inscribed /recorded in the books kept either
with the govt. or with particular bank or its agent.
2. Registered shares
Registered shares are the share which are issued by the
joint stock companies under their seal.
Advance against Life Policy
Life policy is contract between a certain person and an
insurance company in which the insurance company
promises to pay a stated sum of money either on his death
or on his attainment of a certain age provided the
premium is paid for the duration of the contract.
There are two methods by which a life policy can be employed
as cover for a loan.
1. Legal assignment to the creditor. The banker by a deed
assigning to the creditor by way of mortgage can secure
the loan.
2. Equitable assignment to the creditor. In case of
equitable assignment the simply required to deposit the life
policy plus the memorandum of the reason of deposit
Advantages
1. Simple method of securing loan
2. The surrender value of the security increases with the
passage of time
3. The insurer can easily recover loan from the co. in case
the debtor refuses to pay.
4. At the death of the person the payment is safe.
Disadvantages
1. The policy is invalidated if premium is not paid by
insurer person.
2. In case the insured person committed suicide the policy
is invalidated.
Hypothecation
Hypothecation is defined as a legal transaction whereby
goods may be made available as security for debt with
out transferring property or the possession o the
lender.