1

Sr

Type / description of security

Type of charge & Process of recovery

Situation for a particular charge

Movable Property
1. Stock of raw materials,
semi & fully finished goods
(Goods that can not be spared
& are needed continuously for
production or trading)

Hypothecation charge

Borrower has to keep possession of

assets to continue activity of trading or
manufacturing

As per Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest (SERFAESI) Act 2002, hypothecation
has been defined as
a charge in or upon any movable property, existing or future, created
by a borrower in favour of a secured creditor without delivery of
possession of the movable property to such creditor, as security for
financial assistance and includes floating charge and crystallization of
such charge on movable property into fixed charge

Type of loan/borrower
Manufacturer or Trader

Ownership +possession remains with borrower.

Bank can give notice & take possession of goods and sell to realize
money in case of default.
2. Stock of raw materials,
semi & fully finished goods
(goods that can be spared for
some time e. g. goods
Imported in bulk for 6 months
requirement but stock for 1
month is needed by borrower
for production, rest of the
stock can be pledged as
security
3. Receivables or debtors in
trade, those keep changing
continuously in trade , old
debtors keep paying, new
debtors keep getting created
every month

Charge of Pledge
Ownership with borrower , Possession with Bank (Lock & key), Bank
can give reasonable notice (say 15 days) in case of default & sell the
goods to recover debt.,
Borrower liable for shortfall after sale & if surplus is there will be given
to him by the bank

Borrower has to buy goods in bulk

with good discounts (say) 1000 Pcs at a
time but monthly sale is 200 pcs. He
has 800 pcs surplus. Bank will finance
such large purchase if 800 pcs are
pledged & 200 pcs are hypothecated.
This kind of facility is not preferred by
borrowers now a days.
Type of loan/borrower
Manufacturer or trader

Hypothecation Charge
Agreement is signed to cover all receivables present or future and
outstanding any time.
Charge is registered with Registrar of Companies so that any one can
inspect and find out previous charges of other creditors.

Type of loan/borrower
Mfr, trader/service provider

4. Single claim on
Receivable/Debtor/LIC
policy /UTI /supply bills
drawn on government
department

Assignment of debt
Notice to debtor (e.g. LIC) of assignment is given
Written consent of debtor is obtained
In case of default, bank can claim from debtor of borrower directly

Individual (borrowers or guarantors)

give as primary security or collateral
security for any loan for personal needs
. supply bills are drawn on govt depts.
by some contractors for supply of
goods

5. Financial instruments:
Stocks /shares /Bonds/Fixed
Deposits Receipt /Kisan Vikas
Patras,Govt.Bonds/Debentures
Of Companies.

Lien
- is a right to retain goods as security for payment of debt.
- Bankers lien is general lien & tentamounts to implied pledge.
- Bank can sell security after giving notice to borrower on default.

These can be given as principal

security for personal or any kind of
needs.
These can also be given as collateral
(additional) security if insisted by
bank. for any other credit facility.
Type of loan/borrower
Manufacture/trader/others give as
collateral
Individual (borrowers or guarantors)
give as primary security or collateral
security.

6.Bills of exchange drawn on

buyers of goods
Bill of exchange may be
drawn under a letter of
credit also.

The bank normally insists on Bill of exchange and documents of title to

goods be made in favor of the bank as payee and obtains satisfactory
credit reports on the buyers in advance. The goods are released when
payment is made by the buyer to the bank in case of demand bills. The
security is constructive pledge as the goods are under control of bank.

Type of loan/borrower
Manufacturers/ traders who have to sell
goods on credit and draw bills on
buyers and get the bills discouanted
with their banker.

In case of DA terms, documents are delivered on acceptance of liability

and hence there is no security and in case of default on due date of bill,
the bank can sue the drawee in court of law as per Negotiable
Instruments Act..
Note: Bank insists on some collateral in form of mortgagee on land /
immovable property, lien on fixed deposits, pledge of shares/ bonds
other paper securities in case of a clean or unsecured loans or credit

facilities. Even a guarantor is insisted and the guarantor if he has some

assets to charge to bank, that too is many times insisted
Bank guarantee/ DA Letter of credit / Acceptance on behalf of
Customer: no assets are created out of bank guarantee facility. Banks
insist on fixed deposit 10% to 100% or pledge of shares, lien on fixed
deposits or mortgage of some immovable property as the case may be.
Immovable property
The valuable properties
1. Land
2. Building
3. Factory shed
4. Plant/Equipment/Mach
inery embedded in
each (not movable & if
moved will get
harmed)

Mortgage
Definition
:transfer of an interest in a specific immovable property for the purpose
of securing the money advanced or to be advanced or an existing or a
future debt or for performance of an engagement which may give rise to
a pecuniary liability
- Bankers deal with two types(without possession)
Legal mortgage
A mortgage deed is prepared mentioning all terms and conditions.
The deed requires registration & stamping with registrar of assurances
(Tehsildar)
Equitable mortgage
Only original documents of title to property are deposited with bank at
notified town for this purpose with an intention to create charge for a
loan. No registration is required, hence confidentiality of transaction is
maintained. No charges/expenses . It is very convenient & quick.

Type of loan/borrower
All companies to secure their loans as
primary or collateral security. , Home
loans borrowers, guarantors who offer
house or other property as security