The banks provide loans and advances against securities, so that in case of non-payment, these can be enforced to recover their dues. These securities can be classified into following different categories based on the nature and individual characteristics:
Primary securities are those securities or assets which are created with the help of finance made available by the bank. For instance, the machinery purchased out of loan made available for purchase of machinery by the bank is a form of primary security.
Collateral securities is the security against which the finance is not made available. It is rather additional security. The banks need such securities in the event of the value of primary security being insufficient/inadequate at the time of realisation. For example, in addition to the machinery in the above case, if the borrower also mortgages his house, the house would be considered as collateral security.
Personal security and tangible security
Personal security provides legal remedy to the bank against the borrower by providing a right of action against the borrower personally. Security such as of a promissory note or bill of exchange or a security bond are such securities.
On the other hand, tangible securities such as land, buildings, machinery etc. are the forms of impersonal security. To recover the loans given, the banks have to get such securities enforced or sold through the intervention of court.
The other classification of securities can be liquid security (easily convertible to cash), government securities (bonds, promissory notes. Treasury bills issued by govt., also called, gilt-edged securities), stock exchange securities (shares debentures), blue chip security (shares of good companies), trustee securities.
CHARGES ON SECURITIES
The bank will utilise this asset on which it has a charge, as allowed by various laws, and recover its dues. Thus the bank’s loan amount and interest on the loan are secured by creation of a charge on some assets which belong to the borrower.
Pledge is the bailment of goods as a security for payment of a debt or performance of a promise. Bailment means delivery of goods with some purpose and with the condition that when the purpose is accomplished the goods will be delivered back to the.bailor.
Pledge can be only in respect of movable goods like stocks, gold.
- In the case of pledge, ownership remains with the borrower, only possession is transferred to the banker.
- The bank as a pledgee must take care of the goods pledged as a person of ordinary prudence would take of his own goods of the same value.
- Bank can sell the goods without intervention of the court in case the pledgor fails to repay the bank loan. But the sale can be done only after giving reasonable notice to the pledgor.
- Bank as a pledgee has priority in right over the goods and Bank’s right of sale under pledge cannot be extinguished even by lawful seizure of goods pledged to it.
- Hypothecation is also done on moveable property like stocks and vehicles
- In case of hypothecation both ownership as well as possession remains with the borrower i.e. neither ownership nor possession is transferred to the bank.
- When stocks are hypothecated to the bank, the charge is floating charge.
- Basic difference between pledge and hypothecation is on account of possession.
- Assignment is transfer of right or interest to recover the debt.
- Assignment is done on Book Debts, Supply Bills, LIC policy, fixed deposit etc.
- Assignment is possible through writing only. Acknowledgment required to be acknowledged by original debtor.
- In case of default, the assignee can recover the actionable claimamount fromthe original debtor without reference to assignor.
Mortgage is the transfer of interest in a specific immovable property, for the purpose of securing an existing or future debt. The person creating the mortgage is called as the mortgagor(customer) and the person in whose favour mortgage is created (bank) is called as the mortgagee. Mortgage is created on immovable property like land and building.
In the case of registeredmortgage (also called legalmortgage) first amortgage deed is written which is stamped as per Stamp Act of the concerned state. The deed is then executed in the presence of two witnesses. Thereafter, in terms of the Indian Registration Act 1908, it is to be registered with the Registrar of Assurances (Sub Registrar) within four months of the execution.
- Today a majority of home loans are backed by equitable mortagage.This mortgage is created by mere deposit of title deeds (original ownership documents like sale deed) and executing a memorandum of deposit of title deeds.
- Equitable Mortgage does not require registration with Registrar of Assurances.
- Property may be situated anywhere in India. For a property located in Lucknow, title deeds can be deposited at Chennai.
- All mortgages in favour of bank require registration with CERSAI within 30 days.