Module -6: Principles of Bank Lending

1. Module -6: Principles of Bank Lending

2. Principles of sound lending • Safety • Liquidity • Profitability • Security • Purpose of the loan • Diversification of risks • Assured repayment • Social objectives • The law of limitation act.

3. Credit worthiness of borrowers • The business of sanctioning unsecured loans is more risky and needs special care and attention on the part of the banker . • In the absence of a charge over any security , the safety of advances depends on the honesty and integrity of the borrower . • The banker has to make proper enquiries not only about the borrower’s capacity to pay but also the about his willingness to pay the amount.

4. The credit worthiness of a person means that he deserves certain amount of credit , which may be granted to him. • credit worthiness is judged by a banker based on • Character • Capacity • Capital

5. Modes of creating charge of security • The way by which a banker obtains control over the security is called modes of charging. • If the security is not properly charged in favour of the Banker he becomes a unsecured creditor. • He has to select an appropriate one based on the type of loan and nature of security. • The following are important methods of charging: • Lien • Pledge • Mortgage • Hypothecation

6. pledge • “ the bailment of goods as security for payment of a debt or performance of a promise.” • The person who pledges the property is called pledger. (customer) • The person to whom the property is bailed is called the pledgee ( banker). Conditions : • There must be bailment of goods • The intention of bailment is to provide security for the payment of a debt. • When the debt is repaid , goods must be returned.

7. features • Delivery of goods • Transfer of possession • Existing goods only • Right of sale • Agreement • Right of lien • Redelivery of goods

8. advantages • Simple formality • Easy to sell • No double financing • No manipulation of stock • Protection from loss Precautions: • Ensure ownership • Take reasonable care • Exercise full control • No unauthorized use • Put up sign boards • Draft the agreement carefully

9. mortgage • A mortgage is a method of charging which can be created only in respect of immovable property like land and building. • The person who transfers the interest in the property is called the mortgager ( customer) • The person to whom the interest is transferred is called as the mortgagee. • The document by which this transfer is effected is called the mortgage deed.

10. advantages • Immovable property • Transfer of interest • Specific property • Possession with the mortgager • To secure a loan • Reconveyance of interest • Right to sale • Mortgage deed

11. Forms of mortgage • Simple mortgage: mortgager does not deliver the possession of the mortgaged property. • He binds himself personally to pay the mortgage money and agrees that in case of his failure to repay • The mortgagee has the right to sell the property • Mortgagee has no power to sell the property without the intervention of the court.

12. Mortgage by conditional sale : in this form of mortgage , the mortgager sells the property to the mortgagee o the following conditions: • The sale shall become void o payment of the mortgage money • The mortgagee will retransfer the property on payment of the mortgage money • The mortgagee has no right of sale but he can sue foreclosure • Foreclosure means the loss of right possessed by the mortgager to redeem the mortgaged property.

13. Usufructuarymortgage: the essential feature of this form of mortgage is that the mortgagee is entitled to receive rents and profits relating to the mortgaged property till the loan is repaid and the same is used as repayment towards the loan. • Here the mortgager is not personally liable to repay , so the mortgagee cannot sue the mortgager. • Mortgagee has to keep the possession of the property and pay himself out of the rents and profits . • There is no time limit

14. English mortgage: • The mortgager binds himself to pay the mortgage money on a certain date. • In case of non repayment, the mortgagee has the right to sell the mortgaged property without seeking the permission of the court . • Mortgage by deposit of title deeds: • A debtor delivers to a creditor or his agent document of title to immovable property • Restricted in Kolkata , Mumbai and Chennai. • This type of mortgage requires no registration • Also known as equitable mortgage.

15. Anomalous mortgage • This type of mortgage is one which does not fall under any one of previously mentioned types. • Such a mortgage can be effected according to the terms and conditions of the mortgager and mortgagee. • It can be a combination of two more forms. On the basis of transfer of title to the mortgaged • Legal mortgage • The legal title to the property is transferred in favour of mortgagee by deed. • The deed is to be registered, and expensive Equitable mortgage mere delivery of documents of title, no registration

16. Sub- mortgage: is created when the mortgagee gives the mortgaged property as the security for advance. The mortgaged security is property of the mortgagee and he has the right to remortgage for securing loans. Also known as “ mortgage of the mortgagee”

17. Assignment • Assignment means transfer of any existing or future right, property or debt by one person to another person . • Person who assigns the property – assignor • Person to whom it is assigned is called as assignee. • Assignments are made of claims such as book debts, insurance claims , money due from government department. • Two types – Legal and equitable • Legal assignment- absolute transfer, must be in writing intimating the assignee’s name and address. Assignee gives a notice to the debtor confirming the balance due. Equitable assignment is one which does not fulfil the above requirements.

18. Hypothecation • This is an extended idea of pledge. • Hypothecation is called as mortgage of movable property • Manufacturing concerns cannot pledge their raw materials which are required for daily productions • Hypothecation is a charge over movable property like goods. Raw materials , goods –in-progress. • Here ownership nor possession is transferred to the creditor. • The banker has least control over the security , hence it is a risky advance, granted only to respectable customers. • Also called as open loan facility.

19. Disadvantages: • Least control over the security • False statement of stock • Double financing • No right to sale Precautions : • Letter of hypothecation • Undertaking • Stock statements • Inspection • Guarantees • Insurance of goods • Name boad