Different types of securities against bank loan before sanction to its client

Security is what the borrower puts up to guarantee repayment of the loan. It may include tangible, intangible assets or even personal guarantee.

Securities against Bank loan

There are two types of security:

A. Personal Security

B. Non-personal security

A. Personal Security

Personal security refers to the guarantee given by the borrower or by a third party in the lead of pledging a tangible asset.

Since advancing loan against personal guarantee is very risky banks rarely grant a loan against such security unless the borrower has a special and long relationship with the bank.

The character, integrity, financial solvency, and social status are important factors that are looked into before sanctioning of loan against personal security.

B. Non-personal Securities

There are four types of securities which are as under:-

• Lien
• Pledge
• Mortgage
• Hypothecation

Lien

Lien is first kind of security which is the right of holdings the goods of the borrower until the loan is repaid. The borrower remains the owner of the goods but the possession is given to the lender. The agreement of lien explains whether it relates a particular debt or debts in general.

In ordinary lien creditor has only the right of possession of goods. He has no right to sell it, but the banker’s lien is not the same. The banker has a right to sell the good after a proper notice. The banker gets the property of the customer as his banker. 

Thus papers of money or goods with the banker are not for the purpose other than lien. The banker takes the possession lawfully. There must not imply or expressed agreement against lien.

 Pledge

Pledge is also from one of the types of securities. It can be defines as “Bailment of goods as protection for payment of a money owing or act of a promise”. The borrower is called pledger and the banker is called pledge. 

In case of pledge there should be bailment of goods and the bailment should be on behalf of the debtor or an intending debtor. The delivery of goods is necessary for the contract of bailment. The delivery may be actual or constructive. The constructive delivery is made when the bailee puts his lock on the doors of Godowns storing the pledged goods or merely key of the lock on the Godowns door is received. It is essential that the bailee should return the same goods to the bailer or dispose them of according to his instructions.

Mortgage

Mortgage another type of security which can be defines as “A mortgage is the reassigning of interest in particular fixed property for the reason of protection of payment of funds advanced by means of loan, an presenting of future balanced due, or the act of commitment which maybe rise to a financial liability”. The transferor may be known as mortgager. The transferee may be known as mortgagee. The contract is treated as mortgage deed.

Hypothecation

 

Hypothecation is also from one of the types of securities and can be defines as “A lawful transaction and essential goods are always accessible as security for a balance due without transferring either the property or the possession to the lender”. It is clear that possession and ownership of the goods remain with the borrower and an equitable charge is created in favor of the lender. 

The position of the banker under hypothecation is not as safe as under a pledge. If the borrower fails to give the possession of eth goods hypothecated, the bank can file a suit in the court of law for the recovery of amount lent. The advances against hypothecation are risky. The bank should make sure that the party has a good reputation, should check property regularly and asks the hypothecator to submit periodical reports.