Secured Advances The bank secured advances by means of followingforms of securities. Lien Pledge Mortgage Hypothecation
LIEN What is banker’s Lien? A lien is the right to retain property in itspossession till its banker’s dues are cleared by theborrower. Lien gives banker only a right to retain thepossession of the goods and not the power to sell.Thus lien is;
1. A right of retaining property belonging to thedebtor. 2. till all dues due to the borrower are cleared.
PLEDGE “A pledge is a contract whereby a good isdeposited with the lender is a security forrepayment of loan”. The delivery of goods may be made by transferringthe goods from the owner’s godown to the banker’sgodown or the keys of the owner’s godown behanded over to the lender.
The delivery of documents of title relating to goodsalso creates a valid pledge. The person delivering the goods as security iscalled PLEDGER, the person to whom the goodsis 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 ofsecurity. The security must be for payment of debt
Rights and Duties of a Banker as apledge 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 goodspledge with him. The pledgee or any one else is not authorized to makeuse of goods pledge with him. The pledgee is required to return the goods pledgedafter the full payment of debt.
Difference between Lien and Pledge 1. pledge is created by contract where as no contractis required in case of lien. 2. pledge is not terminated by the return of goods toowner for limited purpose. Right of lien is lost withthe loss of possession of goods. 3. pledge has right to sue, right of sale and right oflien. But lien-holder can only hold goods till paymentis made. He cannot go the court of law.
MORTGAGE What is mortgage? “A mortgage is the transfer of an interest in aspecific immovable property for the purpose ofsecuring the money advanced by way of loan, anexisting or future debt”.
Q. ? The person in whose interest the property istransferred is known as mortgagee. The person who transfer an interest in propertyagainst a debt is called mortgagor.
Features of mortgage 1. Specific immovable property: As a security against debt, only specific immovableproperty as accepted as a mortgage. 2.Transfer of interest: There is transfer of interest in the property by themortgagor for the loan raised or to be raised.
3. Repayment of loan: The mortgagor has the liability to make repayment ofthe loan failing which he forfeits the claim over hismortgaged property. 4. Return the interest of property: On the repayment of loan by the mortgagor themortgagee is under obligation to return the interest ofthe 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 adebt without transferring the property or thepossession to the lender”.
The advance of loans against goods without takingtheir 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 withoutinforming the bank. Secondly, the bank does not have a legal claim as itdoes not have a valid charge over the goods.
Right of the Bank 1. In case of hypothecated goods, the bank has theright to inspect the godowns. It can also demandperiodic report of the stock. 2. The hypothecated goods are to be insured by theborrower. In case these are not insured the bank hasthe right to get them insured and recover theinsurance charges from the borrower.
Q. 3. The bank has the right to ask the borrower tomaintain a balance of goods which in value is notless than the amount advanced to him. 4. In case the bank finds that the contract is beingviolated. It has the right to obtain stop order fromthe appropriate authority.(Q.)
Rights of Borrower 1. The borrower as per agreement, has the right tokeep the ownership and possession of the goodswith him. 2. Since the hypothecated goods are in custody ofthe borrower, he can dispose them of.
Advances granted under hypothecation are notsecure from safety point of view. The bank shouldmake sure the party has a good reputation, checkproperty regularly, ask the hypothecator to submitperiodic report.
Summary 1. The term mortgage, in strict sense, is used only inconnection with immovable. 2. The terms pledge and hypothecation are generallyused in case of movables. 3. Where a mortgage of movable is created bydelivery of possession of goods it is known as apledge and where no possession is given it is calledhypothecation.