2. DEFINITION OF HYPOTHECATION
Hypothecation means offering an asset as a
collateral security to the lender whereby
the ownership lies with the lender and the
possession is enjoyed by the borrower.
3. HYPOTHECATION MEANING
Hypothecation means offering an asset as collateral
security to the lender.
The ownership lies with a lender, and the borrower
enjoys the possession.
In the case of default by the borrower, the lender
can exercise his ownership rights to seize the asset.
4. It is usually done in movable assets to create
the charge against collateral for the loan given.
Under hypothecation, the possession of the
security remains with the borrower itself.
Hence, if the borrower defaults on payments,
the lender would have to first take possession of
the security (asset under hypothecation). And
then sell the asset to recover dues.
5. EXAMPLE OF HYPOTHECATION
In the case of vehicle loans, the vehicle remains
with the borrower, but the same is hypothecated to
the bank/ financer.
If the borrower defaults, the bank takes possession
of the vehicle after giving notice and then sells the
same.
The loan account is credited with the sales
proceeds of the asset to recover the dues towards
the principal amount and interest amount. Any
balance left after that shall be given back to the
borrower.
Apart from vehicles, It can be done for stocks and
bills receivables.
6. DOCUMENTATION
This activity usually requires an agreement to be
made and is known as the hypothecation deed.
The hypothecation deed is an agreement that
contains standard features and rules; which usually
cover the following points: Definitions, Insurance ,
Inspection rules , rights and remedies of each party
, security details marked for hypothecation, sale
realizations, insurance proceeds, the liability of each
party, jurisdiction prevailing, marking of the assets,
etc. This deed protects the rights of both parties to
the contract.
7. MORTGAGE VS HYPOTHECATION
The possession remains with the borrower in
both these cases, however, mortgages are
usually for non-movable assets while
hypothecation is for movable assets.
Common examples include the home loan in
case of mortgage and vehicle loan in case of
hypothecation.
8. How is hypothecation removed?
You can remove the hypothecation by paying off the
entire loan amount. The bank will issue a No
Objection Certificate (NOC) to you. This document
will state that no dues are pending. You can submit
the copies to the Regional Transport Authority and
the insurance company so that the registration and
insurance can be converted in your name instead of
the bank’s name.
9. CONCLUSION
Hypothecation is a way in which the borrower can raise funds
by providing movable security as collateral.
The borrower still gets to use it since the possession usually
remains with the borrower himself. This loan (hypothecation)
is provided by either the bank or the financer at a rate lower
than the unsecured loan as it provides a sense of security to
the lender.
However, the lender takes a risk as there may be instances
where the borrower sells off the hypothecated asset without
the knowledge of the lender. To provide protection to a large
extent to both, i.e., the borrower and the lender, the lender
shall conduct periodic checks and the parties shall add proper
clauses in the hypothecation agreement.
