Tuesday, 31 December 2019

Lendings-2 , Banking Fundamentals to Know for Students.

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Securities and mode of Charging

Various types of securities could be offered to the bank by the borrowers. These could be classified as immovable security and movable securities. 

Land and building including agricultural land, plant, and machinery embedded to earth, etc. come under the category of immovable securities or properties. Whereas finished goods / raw material, agricultural product, farm machinery, like tractors, power tillers, combine harvesters, vehicles, agricultural implements, gold ornaments, LIC policies, come under the category of movable securities. Accounts receivables, known as book debts, other trade receivables could also be taken as security. 

In the case of finished goods and raw materials, agricultural produce, farm machinery like - tractors, power tillers, Combine harvesters, vehicles, agricultural implements, gold ornaments, Life insurance policies, come under the category of movable securities.  

Few things to keep in mind before taking securities :  

1. The securities must be saleable. 
2. The value of security can be ascertained at any point in time.
3. The value is not subject to heavy fluctuations.
4. The title of security is easily transferrable.
The securities are classified as Primary and Collateral.

Primary Security - Main security over an advance like standing corps in the field, stock for cash credit, and machinery for term loans, etc.  
Collateral Security - Other than primary security lodged with the bank by the borrower or by a third party.  

Creating a Charge on Security:  

Land :( Including Agricultural land and Building)  
Mortgage: The nature of charge created on immovable properties like land or building while taking them as security to the advance granted by banks is known as a mortgage. Immovable properties are accepted by lending banks both as primary and collateral securities. 
A mortgage is a transfer of an interest in immovable property to secure an advance. Though the transfer of property act mentions six types of mortgages, banks are seen to prefer simple mortgage and mortgage of deposit or title deeds.  

The simple mortgage is created by a deed, which is required to be registered with the register of Assurances. Mortgage by deposit of title deeds is also called an equitable mortgage is created by depositing the document of title to the property by the mortgagor with the mortgage of govt. notified center.  

In the event of borrower’s default in repayment of the advance granted against immovable property, the lending bank may bring it for sale. However, it can do only by adopting an appropriate legal process. Normally banks have to file a suit before civil court for recovery if the amount due in the loan account is less than Rs 10 Lakh and before debt recovery tribunal if it is more than 10 Lakh. However, under the provisions of securitization and reconstruction of financial assets and enforcement of security interest (SARFAESI) act, 2002 banks can sell the immovable property under mortgage without intervention of court after observing certain formalities mentioned in the act. Because of the right to sale without the court's intervention, this type of security has gained importance now and viewed with favor by banks. 

Examining the title to the property

Before an immovable property is accepted as security, the title to the borrower over the said property should be examined by the banks lawyer to ascertain that the person in whose name the property stands has a good , valid , subsisting and marketable title over the property . It may also have to be ensured that the property is free from all legal complications.   

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