Chapter: Loans & Advances

Introduction

Loans/
Deposit Bank Cash Credit/
Overdraft
General Rules of Sound Lending
1. Safety
2. Liquidity
3. Return/Profitability
4. Diversification
5. Object of Loan
6. Security
7. National Interest
8. Character of the Borrower
Forms of Lending
• Loans
• Cash Credit
• Overdraft
• Purchase and discounting of bills of exchange
Types of Loans & Advances
• On the Basis of Object or Purpose
• Commercial Loans
• Consumer Loans
• Agricultural Loans

• On the Basis of Time

• Short Term Loan
• Medium Term Loan
• Long Term Loan
Types of Loans & Advances
• On the Basis of Security
• Secured Loan
• Unsecured Loan

• On the Basis of Form

• Loan
• Cash Credit
• Overdraft
Eleven Golden Rules
1. Look upon a loan request as a challenge and an opportunity, Not
routine chore
2. Don’t prejudge or pre evaluate ,but listen attentively
3. Don’t pretend to have knowledge you don’t have.
4. Don’t allow yourself to be confused by the details.

5. Remember to ask yourself how good and how liquid the loan is
6. Don’t commit yourself before getting all the facts, Considering all
the aspects
Eleven Golden Rules
7. Don’t pass on the dirty work to the credit committee, BOD or the
credit division
8.Never apologize or beat around the bush when you have to turn
down a request for a new loan or extension or changing the terms of
an existing loan
9.Accept full responsibility and make decisions promptly on your own
10. When you are going to say yes , say it ungrudgingly
11. Don’t depend too much on any set of rules like this.
Determining Creditworthiness(5 Cs of Good
Loan)
• Character
• Ability to Run the Enterprise(Capacity)
• Adequate Capital
• Condition
• Collateral
Determining Creditworthiness(5 Cs of Bad
Loan)
• Complacency
• Carelessness
• Communication
• Contingencies
• Competition
Sources of Credit Information
• The Borrower
• Credit Information Bureau
• Exchange of Credit Information
• Enquiries from Traders and Businessmen in the same trade
Chapter: Modes of Creating
Charge
Introduction
• Lending principles
• Liquidity
• Profitability
• Safety
• Make investment safe by ensuring security of some tangible assets
• BUT needs to be properly charged in favor of the bank (bank can
recover loan only if they are properly charged in favor of the bank)
• Charge must be registered
Modes of Creating Charge
• Lien
• Pledge
• Mortgage
• Hypothecation
Modes of Creating Charge
Lien
• It is the right of a creditor to hold possession of the goods of the
debtor till he discharges his debt
• Two types
• General lien
• Particular lien
Modes of Creating Charge
Pledge
• Pledge is the bailment of movable property to secure the payment of
debt or the performance of a promise
• Person who offers the security is called pledger
• Person who accepts the security is called the pledgee
Modes of Creating Charge
Pledge
• Pledge is a special kind of bailment having the following essential
elements

1. Goods must be delivered by pledger to pledgee

• Delivery may be actual or constructive
2. Can be made only of movable properties
3. Must be supported by valid considerations
Modes of Creating Charge
Pledge
• Who can Pledge the Goods (apart from real owner of the goods)

1. Pledge by a Mercantile Agent (NOT authorized by the owner)

a. Is in possession with consent of the owner
b. Acts in the ordinary course of business while making pledge
c. Pledgee acts in good faith
2. Pledge by person in possession under voidable contract
Modes of Creating Charge
Pledge
• Who can Pledge the Goods (apart from real owner of the goods)

3. Pledge where the pledger has only a limited interest

4. Pledge by a co-owner in possession
5. Pledge by seller or buyer in possession after sale
Modes of Creating Charge
Pledge
• Rights of Pledger
• Obligations of Pledger

• Rights of Pledgee
• Obligations of Pledgee
Modes of Creating Charge
Mortgage
• It is a mode of charge created on immovable properties, like land and
buildings
• It is the transfer of legal or equitable interest in property as security
for the debt
• Mortgage, therefore, is a charge granted by a borrower to a lender on
part or whole of his property for the repayment of a debt.
• Transferor is called Mortgager
• Transferee is called Mortgagee
Modes of Creating Charge
Mortgage
• Essential Features of a Mortgage

1. Immovable Property
2. Transfer of Interest in the Property
3. Specific Property
4. Possession with the Mortgager
5. Object or Purpose of Mortgage
6. Reconveyance of Interest
7. Right of Sale
Modes of Creating Charge
Mortgage
• Types of Mortgages

1. Simple Mortgage
2. Mortgage by conditional sale
3. Usufructuary mortgage
4. English mortgage
5. Mortgage by deposit of title deeds
6. Anomalous Mortgage
Modes of Creating Charge
Mortgage
• Simple Mortgage
• Mortgager binds himself personally to pay mortgage money
• Mortgager does NOT transfer possession; so non possessory
• If mortgager fails to repay, mortgagee can sell through intervention of court
Modes of Creating Charge
Mortgage
• Mortgage by conditional sale: Ostensible sale subject to certain
conditions
• Sale becomes absolute incase of non-failure to pay by mortgager
• Sale become void if mortgager pays the mortgage money
• Mortgagee will re-transfer the property if the mortgager makes payment on a
certain date
Modes of Creating Charge
Mortgage
• Essential features of such a mortgage
• Ostensible sale (NOT a real sale)
• Possession continues with mortgager
• Mortgager does NOT have any personal liability
• In the event of non-payment, mortgagee has right to sue for foreclosure only
and not for sale of property
Modes of Creating Charge
Mortgage
• Usufructuary Mortgage
• Mortgagee is authorized to retain the possession till loan repaid
• Mortgagee is also authorized to receive income, like rents and profits arising
from the property (income is to be appropriated towards the loan amount)
• In the event of non-payment, mortgagee can NOT sue (for mortgage money,
sale of property or even for foreclosure)
• Only remedy is to retain possession of property and receive income
• If mortgager fails to pay within 60 years, the mortgagee becomes the absolute
owner
Modes of Creating Charge
Mortgage
• English Mortgage
• Mortgager transfers the property absolutely in favor of the mortgagee
• Transfer is subject to a condition that the property will be transferred to the
mortgager on repayment of the mortgage money
• Mortgager binds himself personally liable to repay the mortgage money
Modes of Creating Charge
Mortgage
• Mortgage by Deposit of Title Deeds
• Mere deposit of title deeds to property
• Intention of the deposit is to secure a loan
• This mortgage does not require registration
Modes of Creating Charge
Mortgage
• Anomalous Mortgage
• Legal Mortgage
• Equitable Mortgage
Modes of Creating Charge
Mortgage
• Rights of Mortgager
• Right to Redeem Mortgaged Property
• Right to Inspect and Copy Documents
• Right to Improvement and Accretion
• Right to possession
Modes of Creating Charge
Mortgage
• Rights of Mortgagee
• Right to Foreclosure
• Right of sale
• Right to sue for payment
• Right to re-imbursement of certain expenses
• Right to Possession and Income from Mortgaged Property
Modes of Creating Charge
Hypothecation
• Mortgage of movable goods is called hypothecation
• It is a pledge without transferring the possession of goods
• The salient feature of it is that neither the ownership nor possession
is transferred.
• Instead, a charge is created to give possession of the goods to the
lender whenever they demand.
Modes of Creating Charge
Hypothecation
• In the eye of law, there is no difference between pledge and
hypothecation with regard to legal possession of the bank
• However, to enforce the claim it is essential for the bank to take
possession of the hypothecated property.
• In case of failure to do so, the banker will be deemed to waive their
rights as a hypothecate; their debt will become unsecured
Modes of Creating Charge
Hypothecation
• Risks in giving loans against hypothecation

1. Greater chances of fraud

2. High legal costs
3. No liquidity
Modes of Creating Charge
Hypothecation
• Precautions to be taken by banker in case of lending against hypothecation

1. Loans to be given to reputed parties only

2. Regular inspection of hypothecated goods
3. Periodical Statements of Stocks
4. Signboard of hypothecation in favor of the banks
5. Insurance
6. Registration of charge
7. Declaration from the borrower that s/he is not availing similar facilities
from other banks