Fund Based Lending

Koustubh Joshi

Lien
It is a right of creditor (bank) to retain the properties belonging to the debtor (borrower) until the debt due is repaid. The banker is empowered to retain all securities of the customer in respect of the general balance due from the customer. The ownership of such securities is not transferred from the customer to the banker.

 Under the negative lien the banker does not get the right to retain any asset of the borrower. The borrower submits declaration to the banker that his assets mentioned are free from any charge.

Pledge
A pledge occurs when goods are delivered (in the possession of) to the bank and the goods pledged will be returned to the borrower on repayment of the loan. Thus, the goods serve as security for the loan. A borrower is called the bailor or pledger and the banker is called the bailee or pledgee.

 Goods which are of movable nature are pledged to the bank. Charge on shares, debentures, fixed deposit receipts, units of UTI and National Saving Certificates can be created by the bank by way of a pledge. Transfer of possession, is compulsory in case of pledge, though ownership continues to remain with the pledgee. If the borrower fails to repay the loan within the stipulated time, the banker can sell the security pledged by giving reasonable notice to the pledger or he may file a suit against the pledger to recover the debt and retain the property pledged as security.

Mortgage
Immovable property like land and building, plant and machinery is offered as security, to cover the advance, the charge should be created by way of mortgage. The mortgage instrument by which the transfer is effected is called a mortgage deed. Ownership and possession of the property remains with mortgagor.

 Mortgage can be classified as legal mortgage and equitable mortgage. In case of legal mortgage, the mortgager transfers legal title to the mortgaged property in favour of the mortgagee by a deed. However, in case of equitable mortgage, the mortgager transfers the documents of title to mortgagee for the purpose of creating an equitable interest of the mortgage in the property.

 The mortgagee is empowered to apply to the court to convert the equitable mortgage to a legal mortgage in the event that the mortgager fails to pay the mortgage money on the specified date.

Hypothecation
In case of hypothecation a charge over the movable property is created for an amount where neither ownership nor possession is passed on to the bank. A charge over movable properties like goods, vehicles, raw materials can be created. There is a high risk of multiple financing by two or more banks against the same goods. This is overcome by putting up a board to indicate that the stocks are hypothecated to a specific bank at the place where the stock is stored.

 It is the transfer of any existing or future right, property or debt by the borrower to the bank for loan. The person who assigns the property is called assignor and the person to whom the property is assigned is called assignee. Normally, assignments are made of actionable claims, such as book debt, insurance claims, etc. All assignments except that of an insurance policy attract ad valoram stamp duty.

 By creating a charge by assignment, the assignee gets total control over the assignees claim and therefore, he is entitled to top priority over other creditors.

Term Loans
Short and Medium Term Loans With effect from April, 1997, stipulations for obligatory formation of consortiums for borrowers with credit limits of over Rs. 50 crores were withdrawn. Banks are now free to provide need-based finance required by borrowers on their own, subject to observance of exposure norms or with other banks.

Bridge Finance
There is always a time gap between the date of sanctioning and its disbursement by the financial institution to the concerned borrowing company. Bridge Finance: is a loan taken by a company from commercial bank, pending disbursement of term loan from the financial institution.

 The bridge finance is secured against mortgage of fixed assets or hypothecation of movable properties of the borrowing companies. The rate of interest on such a finance is usually higher than that of term loans.

Loan syndication
Two or more banks agree to finance a particular project. One of the bank or financial institution may become a lead institution. Other types Cash Credit Overdraft Bill Discounting

 This power Point Presentation is for Understanding of Subject It is Highly recommended that Students should refer text book for specific reference