Different modes of securing advances or Define security and explain the various forms of security for loan or Write a note on the following or distinguish 1. Mortgage 2. Lien 3. Pledge 4. Hypothecation
A security is a right of property given to the creditor. If the debtor fails to repay the debt, then creditor can convert it in to cash. The bankers hold various kinds of securities as a cover for advances to their customers. The rate of securities can be different in various cases. These securities are preferred which can be converted into cash without loss. The main kinds of security are :
1. Stocks and shares.
2. Title of deeds life policies.
3. Bills of exchange.
4. Bills of sale.
5. Promissory notes.
The banks also extend credit on the personal securities. Following are the main forms of security.
1. MORTGAGE :-
Mortgage is a legal assurance given to the creditor. The interest of the property gives to the creditor for meeting an obligation. After the repayment of the debt the property will return to his borrower.
Main Conditions :-
1. If the debtor fails to repay the debt, the creditor can sell the property.
2. The possession of the property remains with the borrowers.
3. It is only the transfer of an interest in a specific mortgage property.
The securities which are generally mortgaged as a cover for an advance are title deeds, life policies stock and shares.
A pledge is an actual delivery of the moveable property to the lender as a security for a loan. The ownership however, remains with the borrowers.
Difference Between Mortgage and Pledge :-
The difference is that in case of mortgage, the possession of property remains in the hand of borrower. In case of pledge the lender is entitled to the exclusive possession of the property till the debt is repaid.
A lien is a right to retain property till the debt is repaid, it is a legal claim on the securities which come into the bankers hands in the ordinary course of his business.
1. The difference between, lien, mortgage and pledge is the lien arises by implication of law from certain situations.
2. While the mortgage and pledge arises from a special agreements between a borrower.
It can be defined in the following words, " Legal transaction whereby goods may be mode available as a security for a debt but property will remain in the possession of the borrower."
In this case loan is given to the borrower against goods without taking their passions.
Disadvantages Of Hypothecation :-
In this case there are two disadvantages :
i. A borrower may take some goods without informing the bank, because all the goods are in his hand.
ii. The bank does not have a legal claim because goods are not in his possession.
iii. Advances against such goods are not safe.
Rights Of The Borrower :-
1. Goods are in the custody of the borrower so he can sell them.
2. According the agreement he has a right to keep the ownership of goods.
Rights Of Bank :-
1. It can check the stock in the godown of the hypothecated goods.
2. The bank has a right to obtain stop order if contract is being violated.
3. If banker feels that the value of available goods in the stock is less than the amount of loan it may ask to maintain the balance.
4. It may demand periodic report of the stock.
5. The banker has also the right of insurance of goods. The charges will be payed by the borrower.