Securities for Advances

Classification of Securities
The securities have been classified according to the functional or operational aspects as under

1. Personal or Intangible Securities

These are personal exclusive undertakings by some party to pay the amount of advances
outstanding a borrower. A demand promissory note bill of exchange or a bond, guarantee and
indemnity are some of the known forms of personal or intangible securities

2. Tangible Securities
These are the securities which can be realized from sale or transfer. Shares, stocks, land, buildings,
and goods are popular known tangible securities

3. Prime Securities
These are also known as Primary Securities. These are main covers for an advance and they are
deposited by the borrower himself.

4. Collateral Securities
These are the securities provided as an additional cover for an advance where either the security
is not very stable in value, or where the realization of the securities to recover the outstanding
amount of advance is difficult. Collaterals may be deposited by a third party.

5. Moveable Securities
These are the securities which are legally and physically both in the possession of the lending bank.
Paper securities, Term Deposit Receipts, goods, vehicles and merchandise are examples of these
securities.

6. Immoveable Securities
These are the securities where the legal possession or right to takeover is entrusted to the lending
bank, but the physical possession remains with the borrowers.

Legal Forms of Securities

Based on above classification, securities are in the following legal forms:

1. Banker’s Lien
‘Lien’ is the banker’s right to withhold property until the claim on the property is paid. The bankers
look at their lien as a protection against loss on loan or overdraft or any other credit facility. In ordinary
lien the borrower remains the owner of the property, but the actual or constructive possession
remains with the creditor, though he has no right to sell it. However, it does not apply to a banker’s
lien, as it is an implied pledge, and the banker has a right to sell the securities after a reasonable notice.

2. Charge
Charge is a right of payment out of certain property. The charge can be created by act of parties or by
operation of law; and although the property is made a security for the payment of loan, still the
transaction is not a mortgage.
Registration of a Charge:
Though no interest in immoveable property is transferred under a charge, the document creating a
charge would purport to declare a right to immoveable property.

Enforcement of a Charge:
A charge can be enforced against a transferee for consideration without notice.

Fixed Charge
A fixed charge, is created on some space and determined property of the company, which prevents
dealings in it, binds the property in the hands of third parties.

Floating Charge
The floating charge leaves the company free as long as the company remains a going concern; but
when the company goes into liquidation, the floating charge immediately becomes fixed.

3. Pledge
‘Pledge’ is the characteristic mode of taking goods as security; and a pledge occurs when goods or
documents of title thereto or the securities are delivered by a customer to his banker to be held as
security for the repayment of an advance.

The person delivering the goods is called “pledger” or “pawnor” and the person to whom the goods
are delivered is called the “pledgee” or “pawnee”

In a pledge the ownership remains with the pledger, but the pledgee has the exclusive possession of
property until the advance is repaid in full, while in case of default the pledgee has the power of sale
after giving due notice.

4. Hypothecation
When property in the goods is charged as security for a loan from the bank but the ownership and
possession is left with the borrower, the goods are said to be “hypothecated”.

Hypothecation is defined as “a legal transaction whereby goods may be made available as security for
a debt without transferring either the property or the possession to the lender”

Lending against the hypothecation of goods is very risky.

5. Guarantees
When an applicant for an advance cannot offer any tangible adequate or personal security the banker
may rely on personal guarantees to protect himself against loss on advances or overdraft to the
applicant.

Guarantee defined as “A contract to perform the promise, or discharge the liability, of a third person
in case of his default”.

Competency for Guarantee:

Every person who is the age of majority, is of sound mind, and is authorized to enter into a contact is
competent for guarantee.

Company as Guarantor:
Bankers must be very cautious in accepting guarantees of registered companies, for in the ordinary
course of business, a company is not authorized to give a guarantee. Before accepting a company as
a guarantor, the banker must see whether the Articles and the Memorandum of Association have
allowed him to do so.

Firm as Guarantor:
A partner is not supposed to bind his co-partners by guarantees, but can do so if:

(a) Giving guarantee is a part of the ordinary course of the business of the firm
(b) A partner has expressed authority of his co-partners to give such guarantees

Guarantee by Two or More Persons:

A guarantee maybe executed by two or more persons; and the liability of the guarantors would then
be joint or several. Therefore, such a guarantee should be duly signed by all the guarantors.

Minor as Guarantor:
Contract Act, 1872, has disqualified a minor from entering into a contract except one of his necessities.
Therefore, he cannot be a guarantor. Bankers should not accept any guarantee executed by a minor
independently or jointly with an adult.

Kinds of Guarantees:
There are two kinds of guarantees: “Specific” and “Continuing”.

When the guarantee refers to a specified transaction only, it is called a “Specific Guarantee”. Once the
repayment of the entire amount is made, it becomes void.

A guarantee may be worded so as to cover, within an agreed limit, the fluctuating debit balance of an
account at any time during the continuance of guarantee. Such a guarantee is known as “Continuing
Guarantee”.

6. Indemnity
A contract by which one party promises to save the other from loss caused to him by the conduct of
the promisor himself, or by the conduct of any other person, is called a “contact of indemnity”

Difference between Guarantee and Indemnity

A contract of guarantee differs from a contract of indemnity in the following ways

a) A guarantee implies two contracts: a principal contract between the borrower and the lender;
and another between the lender and the guarantor. In case of indemnity, there is only one
contract between the promisor and he promise.
b) In case of guarantee the borrower is the principal debtor to lender while the guarantor liable
only when the principal debtor makes default. On the other hand, in an indemnity the
promisor is primary liable when the promise suffers a loss.
c) If a guarantor pays the debt or performs the obligations of his guarantee, he can file a suit in
his own name against the debtor, while an indemnifier cannot do so.