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Principles of Sound Lending & Types of Advances

This document discusses principles of sound lending and types of advances. It outlines key lending principles like safety, liquidity, profitability, and security. It also describes different types of advances like secured advances using primary or collateral security, and unsecured advances based on character, capacity and capital. The document further discusses various forms of advances like loans, cash credit, overdraft, and bill discounting. It provides details on loans, cash credit systems, overdraft facilities and bills purchased and discounted. It also explains different modes of charging securities like lien, pledge, mortgage, assignment and hypothecation.

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530 views

Principles of Sound Lending & Types of Advances

This document discusses principles of sound lending and types of advances. It outlines key lending principles like safety, liquidity, profitability, and security. It also describes different types of advances like secured advances using primary or collateral security, and unsecured advances based on character, capacity and capital. The document further discusses various forms of advances like loans, cash credit, overdraft, and bill discounting. It provides details on loans, cash credit systems, overdraft facilities and bills purchased and discounted. It also explains different modes of charging securities like lien, pledge, mortgage, assignment and hypothecation.

Uploaded by

SAMBIT SAHOO
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Principles of sound lending &

Types of Advances
Prof. Divya Gupta
Principles of Sound Lending

• Safety
• Liquidity
• Profitability
• Security
• Purpose of Loan
• Sources of repayment
• Diversification of risks
• Concept of Priority Sector lending
Advances:

• Secured Advances-
1. Primary security
2. Collateral security

• Unsecured Advances
Character , Capacity and Capital
Forms of Advances
• Loans
• Cash credit system
• Overdraft
• Bills Discounting
Loans
• Given for a definite purpose and for a predetermined
period.
• Non repetitive transactions.
Merits:
1. Financial discipline on the borrower
2. Periodic review of loan account
3. Profitability
Demerits
1. Inflexibility
2. More comprehensive
Loans
• Demand Loans – less than 1 year, working capital
• Term Loans – one to five years, vehicles, tools
and equipments
• Long Term Loans – more than 5 years, land,
building, machinery
• Composite Loans – capital asset + working capital
eg. Small ind, farmers
• Consumption Loans – Needy person, personal
loans.
Cash Credit System
• Active and running account
• Against inventory
• Interest charged(amount, days basis)
• Credit limit on basis of borrowers capacity
• More liquidity
• commitment charges
1% penalty, 15% tolerance level
calculation of unutilized funds
Cash Credit System
• Merits
1. Flexibility
2. Operative convenience
• Demerits
1. Fixation of credit limit
2. End use of funds
Overdraft
• Facility to withdraw above credit balance
• Overdrafts are made occasionally or for short term tenure.
• Most of the time given against securities
• Temporary overdraft without security
• Interest charged
Bills purchased and Discounted

• Clean advances– creditworthiness


• Interest is deducted in advance
• Bills purchased
accompanied by all documents
Modes of Charging Securities

• Lien
• Pledge
• Mortgage
• Assignment
• Hypothecation
LIEN

It’s a right of a person to retain the


possession of the goods and not the power
to sell them.
1. Particular lien
2. General lien
PLEDGE
• There should be bailment of goods
1. Delivery of goods
2. Transferability of ownership
3. Return of goods
4. Right in case of failure to repay

• The objective should be to hold goods for as


security for the performance of a promise.
Who can pledge the goods?
• The owner of the goods
• Mercantile agent of the owner

Pleger and plegee, pawner and pawnee


Advantages
• Easy to dispose
• No manipulation
MORTGAGE
• It is a method of creating charge on
immovable properties
• Mortgager and mortgagee
• Property intended to be mortgage must be
specific
• Actual possession need not always be
transferred to mortgagee
• Co-owners in case of immovable assets
Forms of mortgages
• Simple mortgage
• English mortgage
• Mortgage by deposit of title deeds
• Usufructuary mortgage
Rights of Mortgager
• Right of redemption
• Accession to mortgage property
• Right to transfer to third party
• Right to inspection and productions of
documents

SUB Mortgage
Rights of Mortgagee
• Right to sue for mortgage money
• Right of sale
• Right to foreclosure
• Right of possession
Reverse Mortgage
• A reverse mortgage (or lifetime mortgage) is a loan
available to senior citizens. Reverse mortgage, as its name
suggests, is exactly opposite of a typical mortgage, such as
a home loan.
• In a typical mortgage, you borrow money in lump sum
right at the beginning and then pay it back over a period of
time using Equated Monthly Installments (EMIs).
• In reverse mortgage, you pledge a property you already
own (with no existing loan outstanding against it). The
bank, in turn, gives you a series of cash-flows for a fixed
tenure. These can be thought of as reverse EMIs.
Assignment
• Transfer of any existing or future right,
property or debt
• Assignor and assignee
• Types of Assignments
Legal Assignment
Equitable Assignment
Hypothecation
• Charge of movable assets
• Neither ownership nor possession of goods
transferred
• Open loan facility
• Risky and clean advances
• Example car loan
Hypothecation
• Precautions to be taken:
Review stock statement periodically
Inspect the books of account
Undertaking from the debtor
Letter of Hypothecation
Goods to be insured
A board should be displayed
Class Exercise
• Neither possession nor ownership is transferred
in:
a) Pledge b) Mortgage c) Hypothecation

• A mortgage can neither sue for foreclosure nor


for sale of the property in:
a) English mortgage b) Usufructuary mortgage
c) Mortgage by conditional sale
THANK YOU!!!!!

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