SECURITIES FOR

BANKER’S LOAN
• Banks are required to be careful in handling various loans and
advances, otherwise banks may be exposed to various risks.
• Non observance of proper control, monitoring, and checking might
result in the bank’s financial loss and sometimes even affects the
reputation as well.
• In this regard understanding the importance of legal terms i.e., Charges
like lien, set off, mortgage, pledge, hypothecation and assignment are
important.
• Banks lend money to the borrowers against various kinds of securities.
• Banks should ensure that they obtain securities to protect the bank in
case of default by the borrower.
• To protect the interests of the banks, the securities obtained by banks
should have marketable value and also such security can be legally
enforceable.
• S.5(4) of the Banking Regulation Act says that – secured loans &
advances ,means a loan or advance made on the security of assets.
 GENERAL PRINCIPLES OF SECURED
ADVANCES
• While granting advances on the basis of securities offered by
customers, a banker should observe the following basic principles:
(a) Adequacy of Margin: There must be difference between the market
value of the security and the amount of advance granted against it.
(b) Marketability of Securities: it means in case of default by the
borrower, such securities must easily marketable without loss of time
& money i.e., liquidity of the security
(c) Documentation: Necessary documents e.g. agreement of pledge,
mortgage, charge, hypothecation etc. are prepared and signed by the
borrowers at the time of securing loan. Must be signed by the
borrowers.
(d) Realisation of advances: where the borrower defaults in making
payment, the banker may realise his debt from the sale proceeds of
the securities pledged, mortgaged with him
Various Kinds of Securities
• Land/Real Estate
• Stocks and Shares
• Debentures
• Goods
• Life Policies
• Book Debts
• Fixed Deposit
• Supply Bills
 Land/Real Estate as a Security for the Loan/Advance
• Land and building as a security has become an acceptable
collateral in most advances, more particularly to corporate
customers. The advantages and disadvantages of this form of
security cannot be universally applied to all lands and it depends
on the nature of the land offered.
Advantages
1. its value generally increases with time
2. It cannot be shifted
Disadvantages
(i) Valuation is at times difficult
(ii) Ascertaining the title of the owner
(iii) Difficult to realize the security
(iv) Creating a charge is costly
(v) Difficulty on account of Rent Control Act
 • Precautions to be taken by the banker
(i) Financial soundness of borrower
(ii) Borrower’s title
(iii) Enquiry regarding prior charges
(iv) Freehold or leasehol
(v) Valuation of the property
(vi) Registration
(vii) Documentations
(viii) Verification of Tax Receipts
(ix) Insurance of the property
 Stocks and Shares as a Security for the Loan/Advance

• Shares - These may be classified into preference shares (which enjoy preference both
with regards the payment of dividend and repayment of capital) and equity shares, i.e.,
shares which are not preference shares.
• Advantages
(i) Value of the security can be ascertained without any difficulty.
(ii) In normal times, stocks and shares enjoy stability of value and are not subject to wide
fluctuations.
(iii) Stocks and shares require very little formalities, for taking them as security.
(iv) It is easier compared to real estate to ascertain the title, more so with the advent of
depositories.
(v) Creating a charge of this is less expensive than real estate.
(vi) They yield income by way of dividends, which can be appropriated towards the loan
account.
(vii) Being a tangible form of securities they are more reliable.
(viii) The release of such securities involves very little expense and formality.
• Disadvantages
(i) Being easy to realize, they are fraud prone and as such they must be
properly secured.
(ii) In the case of partly paid shares, the following demerits are there:
(a) The banker may have to pay the calls.
(b)Partly paid shares are subject to violent price fluctuations.
(c) They are not easily realizable because of the restricted market for such
shares.
Precautions while taking stocks and shares as security
Banker must take the following precautions while advancing against stocks
and shares:
In the case of partly paid shares
(c) the banker should never register them in his name.
(d)He must ensure that pending calls are paid.
(e) Sufficient margin should be taken to avoid any future loss or change in the
value of the security.
(d) The banker should verify share certificate and ensure that the calls, are
paid properly and entered in the space provided for the same.
 Debentures as a Security for the
Loan/Advance
• Debenture is a document issued by a company acknowledging its
indebtedness to the bearer or a registered holder.
• A fixed rate of interest is payable at stated periods on such debentures.
• In the case of mortgage debentures, a charge is created on the assets of
the company issuing such debentures in favour of a trustee who is
responsible to take care of the interest of individual investors.
• Advantages
(i) Easy to sell.
(ii) Not subject to violent price fluctuations.
(iii) They can be transferred at minimum cost.
(iv) Bearer debentures are fully negotiable.
(v) They rank in priority to shares and mostly secured by a charge on the
company’s property.
• Disadvantages
(i) If interest is not paid regularly on the debentures it would affect its price and
marketability.
(ii) If the charge on property of company is not registered, the subsequent
charges will get a priority.
(iii)Debentures may be issued by companies having no power to borrow money.

• Precautions to be taken while taking debentures as security

(i) The nature of the debentures must be ascertained, i.e., whether they are
unsecured or secured, the latter, being preferred.
(ii) The borrowing powers of the company issuing the debentures must be
ascertained, and to verify that the same has not been exceeded.
(iii)Deposit of the debentures plus a memorandum of deposit is necessary.
(iv)The nature and value of the assets charged must be examined
frequently.
(v) The banker must find out whether there are any un-cancelled redeemed
debentures.
 Life Policies as a Security for the
Loan/Advance
• Purpose of Life Policy - A life policy is taken
for two purposes:
(i) It is a source of income for the dependents of
the assured in case of his death.
(ii) It is an ideal form of saving since along with
income tax deduction on the premium, paid
loans can be raised on the policies in times of
need.
• Advantages
(i) Life insurance business being highly regulated and permitted only to
companies having sound financial health, the banker need not doubt
the realisation of the policies, which will be done without any
difficulty, if the policy and the claim are in order.
(ii) The assignment of the policy in favour of the banker requires very
little formalities and the banker obtains a perfect title.
(iii)The longer the period for which the policy has been in force, the
greater the surrender value. It is also useful as an additional security
because, in the event of the borrower’s death, the debt is easily
liquidated from the proceeds of the policy.
(iv) The security can be realized immediately on the borrower’s
default of payment by surrendering the policy to the insurance company.
(v) The policy is a tangible security and is in the custody of the bank.
The banker only has to ensure that regular payment of premiums is
made.
• Disadvantages
(i) If the premium is not paid regularly, the policy lapses and reviving the
policy is complicated
(ii) Insurance contracts being contracts of utmost good faith, any
misrepresentation or non-disclosure of any particulars by the assured
would make the policy void and enable the insurer to avoid the contract.
(iii) The person (proposer) who has obtained the policy must have an
insurable interest in the life of the assured or the contract is void.
(iv) The policy may contain special clauses, which may restrict the liability
of the insurer.
(v) When the banker accepts a policy coming under Married Women
Property Act he must ensure that all the parties sign in the bank’s form of
assignment.
(vi) There is facility to obtain the duplicate policy if the original is lost.
This can be misused by persons by obtaining duplicate policies. Banker
should therefore, verify that no duplicate policy has been issued and there
are no encumbrances on the policy.
• Precautions
(i) The policy must be assigned in favour of the
bank and should be sent directly to the insurance
company for registration and ensured that only
authorized office of Insurance Company has
noted assignment.
(ii) The bank should see that the age of the
assured is admitted.
(iii) The banker should ensure the regular
payment of premium
 Goods as a Security for the Loan/Advance
Documents of Title to Goods
As per the Section 2(4) of the Sale of Goods Act, 1930, a
document of title to goods is ‘a document used in the ordinary
course of business as a proof of possession or control of goods
authorizing or purporting to authorize either, by endorsement or
delivery, the possessor of the documents, to transfer or receive
the goods thereby represented.’
Essential requisites of a document of title to goods are:
(i) The mere possession of the documents creates a right either
by virtue of law or trade usage, to possess the goods
represented by the documents.
(ii) Goods represented by the documents can be transferred by
endorsement and/or delivery of the documents.
(iii) The transferee of the documents can take
delivery of the goods in his own right.
(iv) Although they appear to be negotiable
instruments, documents of title to goods are not
negotiable instruments.
Examples of documents of title to goods are
bills of lading, dock warrant, warehouse-keeper’s
certificate, railway receipts, delivery orders, etc.
• Merits of this Security
(i) By mere pledge of the instruments the goods
are pledged and serve as a good security.
(ii) The person in possession of the document
can transfer the goods by endorsement and/or
delivery. The transferee thereafter is entitled to
take delivery of the goods in his own right.
(iii) The documents are easily transferable, and
the formalities involved are less compared to
mortgage or assignment.
• Demerits of this Security
(i) Possibility for fraud and dishonesty Since the bill of lading or a railway receipt or a
warehouse-keeper’s certificate does not certify or guarantee the correctness of the
contents of the bags or packages, the banker will have no remedy against the carrier or
warehouse-keeper, if they turn out to be containing worthless goods.
(ii) Forged and altered documents The documents might be forged ones, or even if
genuine, the quantity may be altered.
(iii) Not Negotiable documents The document being “Not Negotiable”, the transferee of
such documents will not get a better title than that of the transferor. Therefore, if the
person who pledged the documents has a defective title, the banker will not acquire a
better title.
(iv)Unpaid vendor’s right of stoppage in transit: Under the Sale of Goods Act, 1930,
an unpaid vendor has the ‘right of stoppage in transit’ and he is entitled to direct the
carrier that the goods need not be delivered, if not already done. If this right is
exercised by the unpaid vendor, the banker cannot obtain the goods and his security is
of no value.
(v) In the case of lost documents, delivery of the goods is allowed on the execution of an
indemnity bond, this option may be misused by the borrower by selling the goods to
some other customer who may take delivery of the goods declaring that he had
lost/misplace the document and indemnifying the carrier. To avoid such a contingency,
the banker can give notice to the carrier regarding his interest and the pledge.
• Precautions to be taken by the banker
(i) The documents must be examined thoroughly to ensure that they
are genuine and of recent origin. In the case of bills of lading, they
are prepared generally in triplicate and as such all the copies must
be obtained by the banker. Otherwise, the carrier is released from
his obligation by delivering the goods on the presentation of any
one copy containing ostensibly regular endorsements.
(ii) The banker should ensure that the documents do not contain any
onerous clauses or prejudicial remarks about the condition of goods
received.
(iii) Banker should ensure that the goods are adequately covered by
insurance for full value against risks of theft, fire, damage in transit,
etc., and in the case of goods shipped by sea, all the marine risks
should be covered.
(iv) Banker should ensure to get consignee copy and banks name being
entered as consignee, so that endorsement/transfer of title is specific.
 Book Debts as a Security for the
Loan/Advance
• Borrowers can take advances by assigning book debts
in favour of the bank. Section 130 of the Transfer of
Property Act, permits assignment of actionable claim
and the procedure to be followed is:
(i) The assignment must be in writing and signed by
the transferor or his duly authorised agent
(ii) Notice of the assignment in writing must be given to
the debtor; and
(iii) The assignment may be absolute or by way of
charge
• Legal Implication of assignment
(i) The assignee can sue in his/ their own name and can give a valid discharge
(ii) The debtor can exercise any right of set off against the assignee, which but for
such transfer, he could have exercised against assignor
(iii) As an actionable claim includes future debts, there can be a valid assignment
of future debts as well
• Precautions to be taken
(i) The value of the security depends on the solvency of the debtor and his right
of set off, if any. The banker must enquire into both aspects
(ii) The instrument of assignment must be in writing and duly signed in the
presence of the banker, signed by the assignor or his duly authorized agent
(iii) The banker must serve notices of assignment on debtors, who must be asked to
acknowledge its receipt and confirm: (a) The amount of the debt (b) His right
of set off, if any, and (c) Whether he has received notice of prior assignments,
if any
(iv) An undertaking from the borrower should be taken that the amount of debts
collected directly if any by him will be passed on to the banker, towards the
loan account and operations in account be controlled to ensure this compliance
 Fixed Deposit as a Security for the
Loan/Advance
• When money deposited by a customer is not repayable on
demand and is payable on the expiry of a specified period from
the date of deposit such a deposit is called a ‘Fixed Deposit’.
• The banker evidences a deposit by issuing a receipt known as
fixed deposit receipt.
• Interest, is paid at regular intervals at a specified rate on such
deposits.
• Banks usually permit depositors to borrow against the deposit.
• This security is certainly the most valuable, as the money
represented by the receipt is already with the bank and there is
no problem of valuation or enquiring the title, or the problem
of storage and costs associated with storage.
• Precautions
(i) The banker should grant the advance only to the person in whose name
the money is deposited. Banker should not advance against fixed deposit
receipts of other banks. This is because the banker who has received the
deposit will have a general lien over such monies. Even if the lending
bank gives notice to the bank, which has received the deposit, the latter
may even refuse to register the lien in favour of the lending bank.
(ii) If, the deposit is in joint names the request for loan must come from all of
them.
(iii)When the deposit receipt is taken as security, the banker should ensure
that all the depositors duly discharge it on the back of the instrument,
after affixing the appropriate revenue stamp. In addition to this, the
banker should obtain a letter of appropriation which authorizes the banker
to appropriate the amount of the deposit on maturity or earlier towards the
loan amount.
(iv)After granting the advance, the banker must note his lien in the fixed
deposit register to avoid payment by mistake and the lien, must also be
noted on the receipt itself.
(v) Advance should preferably not be made against fixed deposit receipt in
the name of a minor, unless a declaration is taken from guardian, that loan
will be utilized for benefit of the minor.
(vi) Where the money is being advanced against the fixed deposit receipt
issued by another branch, the FDR duly discharged must be sent to the
branch, where such money is deposited, for the following purposes:
(a)To verify the specimen signature of the depositor
(b)To ensure that no prior lien exists on the fixed deposit receipt
(c) To mark lien on the FDR and the FDR register, in favour of branch
advancing money.
(vii) Sometimes, a person may approach for advances by offering the
fixed deposit receipts held by third parties as security. In such a case, the
fixed deposit receipt must be duly discharged, by the third party, i.e., FD
holder and he should declare in writing the bank’s right to hold the deposit
receipt as security, and also to adjust the deposit amount towards the loan
account on maturity or on default in repayment of instalment if any.
 Supply Bills as a Security for the
Loan/Advance
• Supply bills arise in relation to transactions with the Government and
public sector undertakings.
• A party might have taken a contract for execution, and he is entitled to
progressive payments based on work done, for which he has to submit
bills in accordance with the terms and conditions of the contract.
• Similarly, parties who have accepted tenders for supply of goods over
a period are entitled to payments on the supply of goods, for which
they submit bills in accordance with the terms of the contract. These
bills are known as supply bills.
• These bills do not enjoy the status of negotiable instruments. They are
in the nature of debts and are assigned, in favour of the banker for
payment, after affixing a revenue stamp for having received the
amount. The bank should also obtain a letter from the supplier or
contractor, requesting the appropriate department to make the payment
directly to the banker.
• Risks involved in advancing against supply bills
(i) Although the advance is self-liquidating in nature, in
certain cases it can take quite some time before the
advance is realized because of administrative and other
Governmental procedures.
(ii) It is virtually a clean advance and the bank may not
realize the full amount, because of the possibility of
counter claim or the right of set off by the Government,
as the charge is only by way of assignment.
(iii) Sometimes, the Government may not pass the bills
for full payment because of the unsatisfactory quality
of goods or defective work done by the contractor or
delays in the completion of work.
• Precautions to be taken by the banker
(i) Advances against supply bills should be made only to borrowers who
have sufficient experience in Government business and Government
regulations.
(ii) The contract between the supplier and the Government department
should be scrutinized by the banker, to know the volume of
transaction, period of supply, rates agreed upon and various other
terms and conditions. The Government will not pass the bills unless
there is faithful adherence to the terms and conditions by the supplier.
(iii)The banker should obtain a power of attorney from the supplier
authorizing him to receive the money. The same should be registered
with the appropriate Government department.
(iv)The banker should obtain the inspection note or the engineer’s
certificates along with the bills. There should be no adverse remarks
in the inspection report regarding the quality and quantity of goods
supplied.
CHARGE OVER SECURITIES
• Charging a security means that the borrower
gives the lending bank a right to:
(i) transfer the title from the borrower to the
bank
(ii) take possession of the securities
(iii)recover the dues through legal course
• Creation of charge on securities is done as per
the nature of the security as under:
1. Hypothecation (for movable stocks such as,
goods, plant and machinery)
2. Pledge (for movable stocks)
3. Mortgage (in respect of immovable property)
4. Assignment of debts (life like insurance
policy/book debts)
5. Lien on deposits with the bank
 Pledge of Security
• Pledge means bailment of goods for the purpose of providing security
for payment of debt or performance of promise.
• Section 172 of Indian Contract Act, 1872 defines pledge.
• Valid Pledge - Important requirements
- There should be delivery of goods (bailment).
- The bailment (delivery of goods) must be by or on behalf of the debtor.
- The bailment (delivery of goods) must be for the purpose of providing
security for the payment of a debt or performance of a promise.
- For example, an agriculturist is sanctioned a gold loan by his banker.
The borrower delivers his gold ornaments to the bank as a security for
the gold loan. The borrower pledges gold ornaments to raise the loan. In
this case, the agriculturist has created a valid pledge. (1) there is
bailment of gold (delivery of gold) (2) The bailment of gold is made by
the debtor (borrower) (3) The bailment of gold is provided as a security
to the gold loan (debt)
• Pledge – Precautions required:
(i) Banks, as pledgee should ensure that the pledger has good
title to the goods/assets
(ii) Bank verifies and satisfies that the contract of pledge
(deed of pledge) is complete in all respects, and it covers
all important clauses to protect the interest of the bank.
(iii) Bank carryout regular inspection of goods pledged to
ensure the quality, quantity, value, and insurance of such
goods are as required and as per the stock statements.
(iv) Bank takes reasonable care of the goods (like a man of
ordinary prudence would under similar circumstances
take) to protect the value of the goods and prevent any
loss
 Hypothecation over Securities
• The term “Hypothecation’ means a charge created on any
movable asset/property, for a loan borrowed by the owner of
goods/movable assets (existing or future) without transferring,
either the property or the possession to the lender.
• Important features:
1. The charge hypothecation is applicable to movable assets.
2. The ownership and possession are held by the borrower of the
assets (security).
3. The document (hypothecation agreement) provides for a
covenant, whereby the borrower agrees to give possession of the
goods (movable assets) when called upon to do so by the creditor.
Upon taking over the possession of goods, the charge is treated as
pledge.
• Hypothecation - Precautions required:
1. Banks should ensure that the borrower enjoys hypothecation facility
with only one bank and not with multiple banks. An undertaking to
this effect in writing should be taken by the bank to avoid any risk.
2. Banks should display boards in the show room, shops where
hypothecated goods are displayed/stored, indicating that such goods
are hypothecated to bank.
3. Banks should ensure that
(i) periodical stock statements are submitted by the borrower.
(ii) stock statements should contain relevant, and correct details as
regards to quantity, quality and price.
(iii) Regular inspections are carried out to verify the facts mentioned in
the stock statements
(iv) In case of any discrepancy, depreciation in the value of stock,
appropriate action should be taken by the bank immediately by
calling for additional securities and increase in the margin.
 Lien
• Section 171 of the Indian Contract Act,1872 gives to
the banker an absolute right of general lien on all
goods and securities received by the banker.
• The banker has general lien on all deposits.
• If the deposit receipt is given as a security for raising
a loan or discharging an obligation then the lien on
such deposit receipt, is a particular lien, and it would
exist till the debt is cleared or the obligation is
fulfilled.
• General lien covers the entire amount due to the bank
from the borrower/ debtor.
• Banker’s General Lien:
This is applicable in the following situations:
– when a banker receives goods and securities for a purpose
– lien is applicable for the goods and/or securities which are
belonging to a person who has delivered them to the banker
– there is no contract to the contrary and the debt is not
barred by limitation
• A banker’s lien is also called as an implied pledge.
• A banker has the right to retain and if necessary, can also
sell the goods and/or securities charged in his favor.
• As pledgee, a banker can sell the goods/securities pledged
to him.
 Assignment
• Assignment is a type of charge on certain securities offered to
a creditor.
• It is transfer of right, for a property or debt.
• Two persons are involved, the person who transfer his right is
called the assignor and the beneficiary is called assignee.
• For example when a bank gives loan to a borrower against
his book debts (future receivables), two parties involved are
(i) the borrower (debtor) and
(ii) the banker (creditor).
• The borrower/debtor, who is called the assignor, transfers his
rights of receiving the funds from his customers..
• The banker (lender/creditor) to whom the rights are
transferred is called as the assignee.
• Assignment – important features:
1. Section 130 of the Transfer of Property Act, states that the transfer of
an actionable claim can be effected only by the execution of an
instrument in writing signed by the transferor or by his duly authorized
agent.
2. An actionable claim is defined as a claim to any debt other than a debt
secured by
(i) mortgage of immovable property or
(ii) hypothecation or
(iii)pledge of movable property or
(iv)any beneficial interest in any movable property} not in the possession
of the claimant.
3. A borrower may assign any of the following items to secure a loan viz.,
(v) book debts
(vi)life insurance policies
(vii)money due from Government department.
4. An assignment can be absolute or by way of security
5. An assignment may be a legal or equitable assignment
• As regards of book debts, the assignor informs his debtor, in
writing, about the details of the assignee’s full
communication details like name address e mail and
telephone numbers etc., to enable him to pay the amount to
the assignee directly until further instructions from his client.
• In the case of a life insurance policy, is assigned by an
endorsement on the back of the policy or by a special deed of
assignment.
• Notice of such assignment must be given to the insurer by
the assignor or assignee, to enable the life insurance
company to register the assignment in the records of the
company records and act as per instructions.
 Mortgage
• Section 58(a) of the Transfer of Property Act, 1882
defines a mortgage as follows:
‘A mortgage is the transfer of interest in specific
immoveable property, for the purpose of securing the
payment of money advanced or to be advanced by way of
loan, on existing or future debt or the performance of an
engagement which may give rise to a pecuniary liability.’
- The transferor is called the ‘mortgagor’;
- the transferee a ‘mortgagee’ ;
- the principal money and interest of which payment is
secured is called mortgage money and
- the instrument by which the transfer is effected is called
the ‘mortgage deed’.
• Ingredients of Mortgage
(i) There should be transfer of interest in the property by
the mortgagor (the owner or lessor).
(ii) The transfer should be to secure the money paid or to
be paid by way of loan.
• Mortgage of Land – Various Types
(i) Simple mortgage
(ii) Mortgage by conditional sale
(iii) Usufructuary mortgage
(iv) English mortgage
(v) Mortgage by deposit of title deeds (Equitable mortgage)
(vi) Anomalous mortgage
 Simple mortgage : Section-58 (b) – Features
(i) The mortgagee has no power to sell the property
without the intervention of the court In case there is
shortfall in the amount recovered even after sale of
the mortgaged property the mortgagor continues to
be personally liable for the shortfall.
(ii) The mortgagee has no right to get any payments out
of the rents and produce of the mortgaged property
(iii) The mortgagee is not put in possession of the
property
(iv) Registration is mandatory if the principal amount
secured is ` 100 and above
 Mortgage by way of conditional sale – Section 58 (c)
• Essential features
(i) The sale is ostensible and not real.
(ii) If the money is not repaid on the agreed date, the ostensible
sale will become absolute upon the mortgagor applying to the
Court and getting a decree in his favor. The mortgagor in such
a case loses his right to redeem his property.
(iii)The mortgagee can sue for foreclosure, but not for sale of the
property. Foreclosure, means the loss of the right possessed by
the mortgagor to redeem the mortgaged property.
(iv)There is no personal covenant for repayment of the debt and
therefore bankers do not prefer this type of mortgage. The
mortgagee cannot look to the other properties of the mortgagor
in case the mortgaged property proves insufficient.
 Usufructuary mortgage –Section-58 (d)
Essential features
(i) The mortgagee is put in possession of the mortgaged
property. Here, by possession it is meant, the legal
possession and not the physical possession. For example, the
mortgagor may continue to enjoy the physical possession as
the lessee of the mortgagee, or the mortgagor may be the
caretaker of the property directing the tenants to pay rent to
the mortgagee. However, the deed must contain a clause
providing for the delivery of the property to the mortgagee
and authorizing him to retain such possession.
(ii) The mortgagee has the right to receive the rents and profits
accruing from the property. Such rents and profits or part
thereof, may be appropriated in lieu, of interest or in
payment of the mortgage money or partly for both.
(iii) Unless there is a personal covenant for the
repayment of the mortgage money, there is no personal
liability for the mortgagor. Therefore, the mortgagee
cannot sue the mortgagor for repayment of the mortgage
debt; nor can he sue mortgagor for the sale or
foreclosure of the mortgaged property
(iv) There is no time limit specified and the mortgagee
remains in possession of the property until the debt is
repaid. The only remedy for the mortgagee is to remain
in possession of the mortgaged property and pay
themselves out of the rents and or profits of the
mortgaged property. If the mortgagor fails to sue for
redemption within thirty years, the mortgagee becomes
the absolute owner of the property.
 English Mortgage –Section 58(e)
It is a transaction in which, the mortgagor binds himself ‘to repay
the mortgage money on a certain date and transfers the mortgaged
property absolutely to the mortgagee, but subject to the provision
that he will retransfer it to the mortgagor upon payment of the
mortgage money as agreed’.
Essential features:
(i) It provides for a personal covenant to pay on a specified date
notwithstanding the absolute transfer of the property to the
mortgagee.
(ii) There is an absolute transfer of the property in favor of the
mortgagee. However, such absolute transfer is subject to a
provision that the property shall be re-conveyed to the
mortgagor in the event of the repayment of mortgage money.
(iii) The mortgagee can sue the mortgagor for the recovery of the
money and can obtain a decree for sale
 Equitable mortgage or mortgage by deposit of title
deeds – Section 58(f)
Essential features
(i) Such a mortgage can be affected only in the towns
notified by the State Government. However, the
territorial restriction refers to the place where the
title deeds are delivered and not to the situation of
the property mortgaged.
(ii) To create this mortgage, there must be three
ingredients i.e., a debt, a deposit of title deeds and
an intention that the deeds shall be act as security
for the debt.
 Anomalous mortgage – Section 58(g)
Anomalous mortgages are usually a combination
of two mortgages.
Examples of such mortgages are:
(a) a simple and usufructuary mortgage, and
(b)an usufructuary mortgage accompanied by
conditional sale. There may be other forms,
molded by custom and local usage.
(c) Merits and Demerits of an Equitable
Mortgage
 BANK GUARANTEE
• Businesses sometimes need to guarantee payments and the best way to do so is to
provide a bank guarantee, which ensure the creditor that payment will be made
once the transaction is complete.
• It is a type of warranty that a bank provides individuals to provide loan, payment or
services to start any business activity.
• This is a surety that is provided by a bank or a financial institution that they will
pay off the debts and liabilities incurred by an individual or a business entity in
case they are unable to do so.
• This enables a business to grow and expand by deferring payment of goods and
services they are utilizing now to a later date. This helps a business to invest on a
larger scale than would have been possible without the bank guarantee.
• A bank guarantee refers to a promise provided by a bank or any other financial
institution that if a certain borrower fails to pay a loan, then the bank or the
financial institution will take care of the losses. The bank will assure the original
creditor through this bank guarantee that if the borrower does not meet his or her
liabilities, then the bank will take care of them.
• A bank guarantee is a contract between 3 different parties and
they include:
1. The applicant (the party that requests a bank guarantee from
the bank and borrows from a creditor)
2. The beneficiary (the party that receives a partial guarantee)
3. The bank (the party that agrees to sign and assures payment
in case the applicant fails to repay the loan)
• With the help of a bank guarantee, the debtor or borrower or
customer will be able to purchase equipment, machinery, raw
materials, acquire additional funds, etc. for commercial
purposes.
• Bank guarantees help businesses as creditors will get a proper
reassurance that the loan amount will be repaid by the bank if
the business is unable to repay the loan entirely on time.
 How Do Bank Guarantees Work?
The system for providing bank guarantees work like this:
• Applicant and the creditor ascertain that there is a need
for a bank guarantee.
• Applicant reaches out to a financial institution to issue
a bank guarantee to the creditor.
• The bank runs a risk assessment and asks for a security.
• The applicant furnishes the security and the bank, or
the financial institution processes the bank guarantee.
• The bank guarantee is sent to the creditor’s bank or the
creditor, or the applicant may be asked to collect it in
person to give it to their creditor.
 When is the Bank Guarantee payable?
• As per section 128 of the Indian Contract Act,
1872, “The liability of the surety is co-extensive
with that of the principal debtor, unless it is
otherwise provided by the contract.”
• Bank Guarantee is payable as per the agreement
between the parties which can vary in different
types of contracts and different types of
guarantees.
• It can be payable on demand and at a latter date
as mentioned in the clause of the contract.
What precautions can be taken by banks to avert frauds?
• As per the Master Circular dated 1st July 2013 by Reserve
Bank of India to all the Scheduled Commercial Banks, the
following precautions should be taken:
1.It should be ensured by banks that the customers would be
able to reimburse the bank if the guarantee is invoked.
2.In case of performance guarantee the bank must ensure that
the customer will not commit any default and has the
necessary experience and capacity to perform the obligation.
3.Banks should preferably issue secured guarantees and the
maturity period for the bank guarantees should not exceed 10
years.
4.Customers who don’t enjoy credit facilities, guarantees
should not be issued to them.
 Banks deal with two types of guarantees:
(i) Accepted by the bank, and
(ii) Issued by the bank
(1) Guarantees accepted by the Bank:
- At the time of lending money, banks accept securities. In addition to the
tangible assets a borrower arranges to furnish a personal security given by
surety (guarantor). This is called third party guarantee, who undertakes to pay
the money to the bank inclusive of interest and other charges, if any, in case
the principal borrower fails to repay or if the borrower commits default.
- Banks also obtain Corporate guarantees issued by companies who execute
corporate guarantee as authorized by the Board of Directors’ resolution.
- As per Sec 128 of the Contract Act,1872, the surety’s liability is co-extensive
with that of the principal debtor.
- For example, Bank MNC has sanctioned a term loan of Rs 10 lakhs to P on the
personal guarantees of Q and S. In this case Bank MNC is the creditor. P is the
borrower or the principal debtor. Both Q&S are the sureties or guarantors. In
case P commits a default, in repaying the debt to the Bank MNC ( as per the
terms and conditions of bank’s sanction letter) then both Q&S (as
sureties/guarantors) are liable to pay the dues to the bank.
(2) Guarantees issued by the Bank:
- A Bank Guarantee is a commitment given by a banker
to a third party, assuring her/ him to honour the claim
against the guarantee in the event of the non-
performance by the bank’s customer.
- A Bank Guarantee is a legal contract which can be
imposed by law.
- The banker as guarantor assures the third party
(beneficiary) to pay him a certain sum of money on
behalf of his customer, in case the customer fails to
fulfill his commitment to the beneficiary.