Wednesday, 19 September 2012

Define stock exchange securities and discuss its main advantages and disadvantages and also discuss those precautions taken before while advancing the loan

All the securities like shares, bonds, debentures issued by Government on public, private or joint stock companies can serve as a security for loan. Any how those securities which are quoted on the stock exchange are called stock exchange securities.


Following are the main advantages of stock and shares to use as a security for loans :

1. These are easily sale-able.

2. Their value can be assessed very easily.

3. Repayment of loan is easy by their sale.

4. These are negotiable.

5. The transfer of these  securities is very easy.

6. Expenditure on the release  of securities is less as compared to the other securities.

7. Interest on securities reduces the burden of loan.

8. These can be easily pledged with the other banks.

9. These are more reliable.

There are also some problems while making advances against these securities. These are following :

1. Due to market fluctuation of the securities the bank may not be able to recover total debt.

2. In case of forged signatures of a customer a bank will suffer a loss.

3. If the shares are partially paid up and the bank is registered as their owner, the bank may be asked to pay the uncalled amount of shares.

4. If the loan is advanced on the forged share scripts then its repayment will be difficult.

5. The repayment problem can arise if the securities are not negotiable.

The banker should keep in view the precautions while advancing the loans against securities :

1. Thorough Scrutiny :-
The banker should select the securities after thorough scrutiny of the companies, reputation balance sheet, dividends paid on shares and marketability of the shares of the company.

2. Efficient Margin :-
While advancing loan against securities a banker must keep sufficient margin for market fluctuations of the shares prices.

3. Checking Of Ownership :-
The securities which are offered as security, the banker should check the ownership right of the customer. Customer may not be the trustee for another person.

4. Checking Of Registration :-

In case of non negotiable shares the banker must check the record of the company that borrower is registered holder of the shares or not.

5. Obtain Legal Assignment :-
In case of equitable mortgage of shares banker should obtain legal assignment of these shares till the process is completed.

6. Registration With The Bank :-
In case of legal mortgage shares there should be registered with the bank and should be declared, as the owner of the shares.

7. Partially Paid Up Shares Case :-

In the case of partially paid up shares and stock banker must be very careful. If the bank has taken a legal mortgage and is registered as a holder of shares the bank shall have to meet the liability of the unpaid amount.


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