MODES OF LENDING

Secured Advances The bank secured advances by means of following forms of securities. Lien Pledge Mortgage Hypothecation

LIEN What is banker’s Lien? A lien is the right to retain property in its possession till its banker’s dues are cleared by the borrower. Lien gives banker only a right to retain the possession of the goods and not the power to sell. Thus lien is;

1. A right of retaining property belonging to the debtor. 2. till all dues due to the borrower are cleared.

PLEDGE “A pledge is a contract whereby a good is deposited with the lender is a security for repayment of loan”. The delivery of goods may be made by transferring the goods from the owner’s godown to the banker’s godown or the keys of the owner’s godown be handed over to the lender.

The delivery of documents of title relating to goods also creates a valid pledge. The person delivering the goods as security is called PLEDGER, the person to whom the goods is delivered is known as PLEDGEE.

Characteristics or Features of pledge The following are the essential features of pledge There must be bailment (delivery) of goods The delivery or goods (bailment) must be by way of security. The security must be for payment of debt

Rights and Duties of a Banker as a pledge Rights of a Banker: The banker has the following right as a pledgee. Right to retain goods Right to recover extra ordinary expenses Default in payment Right of full value of goods

Duties of a Banker as pledge A pledgee is required to take responsible care of goods pledge with him. The pledgee or any one else is not authorized to make use of goods pledge with him. The pledgee is required to return the goods pledged after the full payment of debt.

Difference between Lien and Pledge 1. pledge is created by contract where as no contract is required in case of lien. 2. pledge is not terminated by the return of goods to owner for limited purpose. Right of lien is lost with the loss of possession of goods. 3. pledge has right to sue, right of sale and right of lien. But lien-holder can only hold goods till payment is made. He cannot go the court of law.

MORTGAGE What is mortgage? “A mortgage is the transfer of an interest in a specific immovable property for the purpose of securing the money advanced by way of loan, an existing or future debt”.

The person in whose interest the property is transferred is known as mortgagee. The person who transfer an interest in property against a debt is called mortgagor.

Features of mortgage 1. Specific immovable property: As a security against debt, only specific immovable property as accepted as a mortgage. 2.Transfer of interest: There is transfer of interest in the property by the mortgagor for the loan raised or to be raised.

3. Repayment of loan: The mortgagor has the liability to make repayment of the loan failing which he forfeits the claim over his mortgaged property. 4. Return the interest of property: On the repayment of loan by the mortgagor the mortgagee is under obligation to return the interest of the property to the mortgagor.

HYPOTHECATION Hypothecation is mortgage of movable. It is defined as “legal transaction whereby goods (movables) may be made available as security for a debt without transferring the property or the possession to the lender”.

The advance of loans against goods without taking their possession is very risky on two grounds, One as the goods are in the possession of the owner, the borrower may take out the goods without informing the bank. Secondly, the bank does not have a legal claim as it does not have a valid charge over the goods.

Right of the Bank 1. In case of hypothecated goods, the bank has the right to inspect the godowns. It can also demand periodic report of the stock. 2. The hypothecated goods are to be insured by the borrower. In case these are not insured the bank has the right to get them insured and recover the insurance charges from the borrower.

3. The bank has the right to ask the borrower to maintain a balance of goods which in value is not less than the amount advanced to him. 4. In case the bank finds that the contract is being violated. It has the right to obtain stop order from the appropriate authority.

Rights of Borrower 1. The borrower as per agreement, has the right to keep the ownership and possession of the goods with him. 2. Since the hypothecated goods are in custody of the borrower, he can dispose them of.

Advances granted under hypothecation are not secure from safety point of view. The bank should make sure the party has a good reputation, check property regularly, ask the hypothecator to submit periodic report.

Summary 1. The term mortgage, in strict sense, is used only in connection with immovable. 2. The terms pledge and hypothecation are generally used in case of movables. 3. Where a mortgage of movable is created by delivery of possession of goods it is known as a pledge and where no possession is given it is called hypothecation.