Security required in bank finance, Financial Management

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Q. Security Required in Bank Finance?

1) Hypothecation: Under this arrangement, the borrower is provided with working capital finance by the bank against the security of movable property, generally inventories. The borrower does not transfer the property to the bank; he remains in the possession of property made available as security for the debt thus, hypothecation is a charge against property for an amount of debt where neither ownership nor possessions passed to the creditor. Banks generally grant credit against hypothecation only to first class customers with highest integrity. They do not usually grant hypothecation facility to new borrowers.

2) Pledge: Under this arrangement, the borrower is required to transfer the physical possession of the property offered as a security to the bank to obtain!", credit. The bank has a right of lien and can retain possession of the goods pledged unless payment of the principal, interest and any other expenses is made. In case of default, the bank may either (a) sue the borrower for the amount due, or (b) sue for the sale of goods pledged, or (c) after giving due notice sell the goods.

3) Mortgage: Mortgage is the transfer of a legal or equitable ‘interest in a specific immovable property for the payment of a debt, in case of mortgage, the possession of the property may remain with the borrower with the lender getting the full legal title. The transferor or of interest (borrower) is called the mortgagor, the transferee (bank) is called the mortgagee, and the instrument of transfer is called the mortgage deed.

4) Lien: Lien means right of the lender to retain property belonging to the borrower until he repays credit. It can be either a particular lien or general lien. Particular lien is a right to retain property until the claim associated with the property is fully paid. Generally lien, on the other hand, is applicable till all dues of the lender ar~ paid. Banks usually enjoy general lien.


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