Presentation made by

Sameer Omles
Shashank mohite
Sandeep jaiswar
Vivek Gupta

Topics
Mortgage
Pledge
Hypothetication

Lien
Charge(1st and 2nd Charge)
Fixed & floating charge
Pari passu
PlR
Margin money

Mortgage
Mortgage is used for creating charge against

immovable property which includes

land,
buildings or
anything that is attached to the earth or
permanently fastened to anything attached to
the earth.

Example of mortgage
The best example when mortgage is created is

when someone takes a Housing Loan / Home

Loan.
In this case house is mortgaged in favor of the
bank / financer but remains in possession of
the borrower, which he uses for himself or even
may give on rent.

Pledge
Pledge is used when the lender (pledgee) takes actual

possession of assets (i.e. certificates, goods ).

Such securities or goods are movable securities.
In this case the pledgee retains the possession of the goods
until the pledgor (i.e. borrower) repays the entire debt
amount.
In case there is default by the borrower, the pledgee has a
right to sell the goods in his possession and adjust its
proceeds towards the amount due.

What is
Pledge?

Some examples of pledge are Gold /Jewellery

Loans

Hypothecation
Hypothecation is used for creating charge against the security of

movable assets, but here the possession of the security remains with the
borrower itself.
Thus, in case of default by the borrower, the lender (i.e. to whom the
goods / security has been hypothecated) will have to first take possession
of the security and then sell the same.

Lets see the example on

Slide

What If a borrower defaults?(Example)

In this case Car / Vehicle remains with the borrower but the same is

hypothecated to the bank / financer

In case the borrower, defaults

Banks take possession of the vehicle
after giving notice and then sell the
same and credit the proceeds to the
loan account

Other examples of hypothecation

Other examples of these hypothecation are loans against stock and

debtors.
Sometimes, borrowers cheat the banker by partly selling goods
hypothecated to bank and not keeping the desired amount of stock of
goods.
In such cases, if bank feels that borrower is trying to cheat, then it can
convert hypothecation to pledge i.e. it takes over possession of the goods
and keeps the same under lock and key of the bank.

Lien
A lien is a lender's claim against a collateral asset that may be legally sold

should the borrower fail to repay a loan.

How it works/Example:
When someone takes out a sizeable loan, such as a home mortgage or
an auto loan, the lender often requires an asset that can be held
as collateral against the loan.
Thus, the collateral has a lien placed upon it. In the event of nonpayment on the part of the borrower, the lending institution can exercise
the lien and sell the collateral asset to offset the unpaid loan. Once the
loan is repaid in full, the collateral asset is returned to the borrower and
the lien dissolved.

Example of lien
Suppose someone takes out a $10,000 loan for a new car.
As part of the loan's terms, the bank gets to hold the title to the car as a

lien against the car until the loan is fully repaid.

Should the borrower, at any point, default or refuse to repay the balance of
the loan,
The bank can use the title to the car to sell it in order to recover
the money that was lent.

Pari-passu
Pari-passu is a Latin term that means "at an equal rate or pace."
Pari passu is equal rights over the assets by two lending institutions. The

term is often used in venture capital.

Why it Matters:
Pari-passu essentially means to treat all parties the same. Obviously,

common shares and preferred shares are not equal; however,

the shares within each class are usually pari-passu.

How it works/Example:
Let's assume Company XYZ is looking for $10 million of capital. It contacts

three venture capital firms, all of which are interested. VC Fund A agrees to
invest $5 million; VC Fund B invests $2 million; and VC Fund C invests $3
million.
To negotiate the deal (and to protect themselves), the venture capital funds give
Company XYZ terms sheets to sign. The term sheets state the equity that
VC Fund A gets in Company XYZ will be pari-passu to all other series of equity,
meaning that it will have the same rights and privileges as the equity that
Company XYZ will issue to VC Fund B or C.
For most companies, common shares are pari-passu, meaning that they all rank
equally and no one set of common shares has a higher claim to a dividend or
assets than any other common shares.

Prime Lending Rate

Default risk is the main determiner of the interest rate a bank will charge

a borrower.
Because a bank's best customers have little chance of defaulting, the bank
can charge them a rate that is lower than the rate that would be charged to
a customer who has a higher likelihood of defaulting on a loan.

PLR, Low To
bank's best
customers

PLR, High To
those customers
who has a higher
likelihood of
defaulting

Prime Lending Rate

The interest rate that commercial banks charge their most credit-worthy

customers known as PLR.

Generally a bank's best customers consist of large corporations.
The prime rate is also important for retail customers, as the prime rate
directly affects the lending rates which are available for mortgage, small
business and personal loans.

Margin money
Margin means the own contribution of the owners for purchase of

machinery as no bank finance 100% of total cost of machinery.

For Instance For Machinery it is 25% and for land it is 40%which is
negotiatable.
The margin for land is more because land as an asset can not be easily
liquidated.
If Bank financed 100% and borrower not contributing anything then there
are chances that borrower may misuse the funds. To avoid that around
30% needs to be financed by borrower and remaining amount is given by
bank.

Fixed and floating charges

Fixed and floating charges are used to secure borrowing by a
company. Such borrowing is often done under the terms of
a debenture issued by the company.
A fixed charge is a charge or mortgage secured on particular
property, e.g. land and buildings, a ship, piece of machinery, shares,
intellectual property such as copyrights, patents, Trade marks, etc.
In case of a fixed charge, the lender can recover his dues from a
certain predecided assets only in case default by the borrower.

Fixed and floating charges

A lender who has a floating charge can recovers his dues from a
gamut of assets.
Lien or mortgage on an asset that changes in quantity and/or value

from time to time (such as an inventory), to secure the repayment of

a loan.
The lender who lends on fixed charged therefore has to bear higher
risk than the one lending on a floating charge.
Generally the lender who has a fixed charge will price is loan higher,
considering the fact he is to bear a greater risk.

Charge
Loans are granted to borrower against securities. Sometimes a borrower

might use the same assets for raising finance from two or more lenders.
In this case the lender who has first lend to the borrower against the assets
will have a right on the assets, before the second lender, in case of default.
This known as the First charge.
Only after the dues of the first lender are cleared, by selling off the assets,
the second lender can claim his dues. This known as Second charge.
Generally the lender who has second charge will price his loan higher,
considering the fact has to bear a greater risk.