SECURITIES Mode of Charging Securities

SECURITIES
AND
MODES OF CHARGING
SECURITIES
Banker ordinarily takes a
cover for an advance and
does not lend without
adequate security.
Security is meant to be
an insurance against
emergency.
Personal and Tangible
Security:
• Personal security:
The bank has a right of action
against the borrower personally. The
banker takes from him a demand
promissory note or In certain cases,
the guarantee of a third party.
• Tangible security:
That can be realised by sale or
transfer.
Primary and Collateral
Security:
• Primary security is regarded as the
main cover for an advance and is
generally deposited by the borrower
himself.
• Security deposited in addition to

primary security is called collateral
security and in some cases
deposited by a third party.
Qualities of a good security:
• Marketability:
• Easy ascertainment of value :
• Stability of value :
• Storability :
• Cost and labour of supervision :
• Transportability :
• Durability :
• Ascertainment of title :
• Easy transfer of title :
• Absence of contingent liabilities :
• Yield :
Charging Security:
• Charging security means making it

available as a cover for an
advance.
• The charge must be complete and

all necessary formalities are
complied with so that in case of
default by a borrower the security
will be available to the banker.
Modes of charging Securities:
The common ways of charging a
security are:
 Pledge
 Hypothecation
 Mortgage
 Lien
 Assignment
 Set-off
PLEDGE
◘ Pledge is the bailment of goods
as security for payment of a debt or
performance of a promise.
◘ Bailment is the delivery of

goods by one person to another for
some purpose, under a contract
that the goods shall, when the
purpose is accomplished, be
returned or otherwise disposed of
according to the direction of the
person delivering them.
Characteristics of Pledge:
• Pledge means bailment of goods.

• The bailment must be by or on
behalf of the debtor or intending
debtor.
• It must be the intention of the
parties that the goods will serve
as security for a debt or
performance of promise.
HYPOTHECATION
• Hypothecation is a charge against
property for an amount of debt
where neither ownership nor
possession is passed to the
creditor.
• In hypothecation, the goods remain

in the possession of the borrower
and are equitably charged to the
lender under a document, called
Letter of Hypothecation, signed by
the borrower.
• The difference between a
pledge and a hypothecation is
that under the pledge the goods
are under bank’s own locks
whereas under hypothecation
they remain in the possession of
the borrower and are merely
equitable charged to the bank.
Extra care necessary in Hypothecation:
Extreme care should be taken by the branch in
selecting the borrower.
The Bank’s sign board should be displayed
permanently on the premises.
Stock Reports of goods, machinery and equipment
are to be obtained at regular interval.
Periodical inspection should be done and stocks will
be verified by the branch with the stock report.
Goods, machinery and equipment must be kept
insured as per instructions given by H.O. from time
to time.
Care must be taken that any deterioration in the
security or any change in the borrower’s position is
duly reported so that appropriate action can be
taken in good time.
The Branch will maintain close contact with
borrower.
MORTGAGE
• A mortgage is the transfer of an
interest in specific immovable
property for the purpose of
securing the payment of money
advanced by way of loan, an
existing or future debt, or
performance of an engagement
which may give rise to a
pecuniary liability.
• Mortgagor: The transferor of the property
is called a ‘Mortgagor’
• Mortgagee: The transferee is called a
‘Mortgagee’.
• Mortgage Money: The principal money and
profit of which payment is secured are
called ‘Mortgage Money’.
• Mortgage Deed: The instrument by which
the transfer is effected is called a
‘Mortgage Deed’.
• Immovable Property: ‘Immovable property’
includes land, benefits that arise out of
land and thing attached to the earth like
trees, building and fixed machinery.
Procedures to be followed for creation
of mortgage:
 Legal opinion from the paneled lawyer of the
bank must be obtained regarding the good title
in the property offered as collateral security.
 Mortgage Deed should be drafted by the
paneled lawyer of the bank.
 Mortgage Deed should be registered with the
concerned Sub-Registration Office.
 Mortgage Deed should contain a special clause
to the effect that ‘without the permission of
the court, Bank can take possession of and sell
the mortgaged property’.
 Original Title Deeds and all other related
documents will have to be deposited to the
Bank and will remain in possession of the Bank
until full adjustment of the loans.
LIEN
• Lien is the right of creditor in
possession of goods or securities
belonging to a debtor to retain
them until a debt due from the
latter is paid.
• The right of lien arises in law out
of business dealings between the
parties and does not require any
specific agreement, written or
oral, to support it.
Lien presupposes two things:
• the person vested with the right

of lien is in possession of the
goods or securities in the
ordinary course of business.
• the owner has a lawful debt due

or obligation to discharge to the
person in possession of the said
goods or securities.
Kinds of lien:
• General Lien:
A General Lien is arises when in the
absence of a contract to the contrary, a
creditor can exercise lien and retain
security for a general balance of
account any goods bailed to them.
A General Lien does not as a rule carry

with it the right to sell the property.
• Particular Lien:
A Particular Lien arises where, in the
absence of a contract to the
contrary, goods can be retained by
the creditor in respect of a particular
debt only. The debt or obligation
must have arisen out of some
service rendered or labour or money
expended on the goods on which the
right of lien is to be exercised.
• Banker’s Lien: A Banker’s Lien is
more than a general lien; it is an
implied pledge, in the event of
default by the customer, the bank
have a power of sale without
filing a suit against the customer
in a court of law, but a reasonable
notice will have to be given.
ASSIGNMENT
• An assignment means a transfer
by one person of a right, property
or debt (existing or future) to
another person.
• The person who assigns the right,
property or debt is called the
assignor. The person to whom the
right etc. are assigned is called
the assignee.
A legal assignment must be:
• in writing and signed by the

assignor,
• it must be absolute and not by way
of charge only,
• a written notice of the assignment,
stating the name and address of
the assignee, must be given by the
assignor to his debtor.
Value of assignment as security:
• The right on a debt depends not only upon the
integrity of the borrower who offers the
security, but also on the creditworthiness and
integrity of the borrower’s debtor whose debt
is assigned.
• The assignee only stands in the shoes of the
assignor and cannot have better rights than
those which the assignor possesses.
• If there is a breach of the terms of the contract
between the parties – assignor and his debtor –
not known to the banker, it may result in the
repudiation of the debt.
SET - OFF
• Set-off means the total or partial
merging of a claim of one person
against another in a counter claim
by the latter against the former.
• It is in effect the combining of

accounts between a debtor and a
creditor so as to arrive at the net
balance payable to one or the
other.
Right of Set-Off by a Banker:
The right of Set-off enables a
banker to adjust wholly or partially,
as circumstances permit, a debit
balance in a customer’s account
with any balance lying at his credit.
In practice, a banker will not

arbitrarily and without notice
exercise his right of set-off.
Ingredients of Set-Off:
• Mutual debts must be for sums

certain,
• Debts to be due immediately,
• Debts in same right,
• No contract to the contrary.

SECURITIES Mode of Charging Securities

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SECURITIES Mode of Charging Securities

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SECURITIES

• Security deposited in addition to

• Charging security means making it

• The charge must be complete and

◘ Bailment is the delivery of

• Pledge means bailment of goods.

• In hypothecation, the goods remain

• the person vested with the right

• the owner has a lawful debt due

A General Lien does not as a rule carry

• in writing and signed by the

• It is in effect the combining of

In practice, a banker will not

• Mutual debts must be for sums

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