Types of Collaterals and Their Characteristics

Types of Collaterals and Their Characteristics (Jaiib Paper 1, Module B, Unit 18)

Dear bankers,

As we all know that  is Types of Collaterals and Their Characteristics for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are providing the Types of Collaterals and Their Characteristics (Unit-18),FUNCTIONS OF BANKS (Module B), Principle & Practice of Banking JAIIB Paper-1.

♦Collaterals

  • Banks are financial intermediaries where the resources of the public are mobilized and lent to various sectors of the economy. The Money mobilized from the public by way of deposit is repayable as and when demanded by the depositors. Therefore, bankers take utmost care to see that the money lent to various types of borrowers is repaid as per the repayment schedule along with interest. In order to safeguard the advance, bankers normally take securities, on which they fall back in case the borrowers commit default.

There are different types of Collaterals and their Characteristics.

♦Land and Buildings

  • This type of security is not self- liquidating nature. In the event of the bank wanting to sell the property for recovering its advance, it can do so through the legal process. Normally, banks have to file a suit before the civil court for recovery, if the amount due in the loan account is less than Rs 10 lakhs and before the Debt Recovery Tribunal (DRT), if the amount due is Rs. 10 lakhs and above.

Characteristics of Land and Building

  • Examining the Title to the Property
  • Document to be called for from the Mortgagor
  • Valuation of Property
  • Leasehold Properties

♦GOODS

  • Banks advance loans routinely against the security of goods such as agricultural goods, raw material, semi finished goods. An advance goods may be extended by way of keeping goods as pledge Hypothecation. i.e, key cash credit or open cash credit. The nature of the change created may be either a pledge or hypothecation. When the possession of the goods is transferred to the banker, as in the cash of key cash credit, the nature of charge created is pledge.

Characteristics of Goods

  • Precautions of advance against Goods

(a)The borrowers should be dealing in the goods for a sufficient period

(b)No advance should be made for speculation or hoarding purpose

(c)The goods charged to the bank should have been fully paid

(d)The goods should command good demand in the market

(e)The age of the stock should be taken into consideration

  • Storing of Goods
  • Inspection of stocks
  • Stock Audit
  • Valuation
  • Margin of Stock
  • Recovery in case of Default

♦Documents of Title to Goods

  • Section 2(4) of Sale of goods Act defines a document of title to goods as “a document used in the ordinary course of business as a proof of possession or control of goods authorising or purporting to authorize either by endorsement or delivery, the possessor of the documents to transfer or to receive the goods there by represented.

Characteristics of Document of title to goods

  • The Essential Requisites of a Document of Title to Goods
  • Merits of this Security: By mere pledge of the instruments, goods are pledged and serve as a good security. The person in possession of the document can transfer the goods by endorsement and delivery.  The Transferee thereafter is entitled to take delivery of goods in his own rights. The Document are easily transferable and the formalities involved are minimum.
  • Demerits of this Security: Possibly for fraud and Dishonesty, Forged and Altered Documents
  • Precautions to be taken by the Banker

♦Advances Against Life Insurance Policies

Life insurance policies are acceptable either as a primary or collateral Security for an advance.

Points to be taken in to Consideration

Before making an advance, the point to be taken in to consideration are:

  • The Policy must be in force and the premium paid up to date. The latest premium receipt must be kept on record by the bank.
  • The policy should be an original, duly stamped and signed by the issuing authority.
  • The policy should be free from restrictive/ onerous clauses.
  • The insurance company should have admitted to the age of the assured.

Generally, The following life policies are not acceptable as security

  • Children endowment policy.
  • Policies taken out specifically for purposes like estate duty,
  • Children Deferred policy
  • Policies with nominations under Section 6 of the Married Women’s Property Act.

♦Advances against share

General guidelines applicable to advances against shares/debentures/bonds

  • Statutory provisions regarding the grant of advances against shares contained in sections 19(2) and (3) and 20(1)(a) of the Banking Regulation Act’, 1949 should be strictly observed. Shares held in dematerialised form should also be included for the purpose of determining the limits under sections 19(2) and 19(3), ibid.
  • Banks should be concerned with what the advances are for, rather than what the advances are against. While considering grant of advances against shares/ debentures banks must follow the normal procedures for the sanction appraisal and post‑sanction follow‑up.
  • Advances against the primary security of shares/debentures/bonds should be kept distinct and separate and not combined with any other advance.
  • Banks should satisfy themselves about the marketability of the shares/ debentures and the net worth and working of the company whose shares/ debentures/bonds are offered as security.
  • Shares/debentures/bonds should be valued at prevailing market prices when they are lodged as security for advances.
  • Banks should exercise particular care when advances are sought against large blocks of shares by a borrower or a group of borrowers. It should be ensured that advances against shares are not used to enable the borrower to acquire or retain a controlling interest in the company/ companies or to facilitate or retain inter‑corporate investments.
  • No advance against partly paid shares shall be granted. Whenever the limit/ limits of advances granted to a borrower exceeds Rs. 10 lakhs, it should be ensured that the said shares/debentures/bonds are transferred in the bank’s name and that the bank has exclusive and unconditional voting rights in respect of such shares. For this purpose the aggregate of limits against shares/ debentures/bonds granted by a bank at all its offices to a single borrower should be taken into account. Where securities are held in dematerialised form, the requirement relating to transfer of shares in bank’s name will not apply and banks may take their own decision in this regard. Banks should however avail of the facility provided in the depository system for pledging securities held in dematerialised form under which the securities pledged by the borrower get blocked in favour of the lending bank. In case of default by the borrower and on the bank exercising the option of invocation of pledge, the shares and debentures get transferred in the bank’s name immediately.
  • Banks may take their own decision in regard to exercise of voting rights and may prescribe procedures for this purpose.
  • Banks should ensure that the scripts lodged with them as security are not stolen/duplicate/ fake/benami. Any irregularities coming to their notice should be immediately reported to RBI.
  • The Boards of Directors may decide the appropriate level of authority for sanction of advances against shares/debentures. They may also frame internal guidelines and safeguards for grant of such advances,
  • Banks operating in India should not be a party to transactions such as making advances or issuing back‑up guarantees favouring other banks for extending credit to clients of Indian nationality/origin by some of their overseas branches, to enable the borrowers to make investments in shares and debentures/bonds of Indian companies.

♦Loan Against Term Deposits

Eligibility Criteria for Availing Loan Against Fixed Deposit

To be eligible for a loan against FD, the basic criteria is that you must hold a fixed deposit with the bank you are availing the loan from and any of below-given individuals/entities can avail the loan:

  • Resident Indian citizens
  • Family Trusts
  • Hindu Undivided Family (HUF)
  • Clubs, societies, and associations
  • Sole proprietorships, group companies, and partnership firms

Documentation Required to Avail Loan Against Fixed Deposit

To avail a loan against fixed deposit, you will need to provide the below-given documents:

  • Application form duly signed
  • Duly signed agreement
  • Fixed/Term Deposit receipts duly discharged in favor of the bank
  • Please note that these may vary from lender to lender.

How to Obtain Loan Against Fixed Deposit

  • Most lenders allow you to avail a loan against fixed deposit online except in few cases where you will need to visit the nearest branch of the bank. Some of the banks that offer the facility of availing a loan against fixed deposit online through their respective websites are the State Bank of India, HDFC Bank, Axis Bank, and Deutsche Bank. In the case of Federal Bank, you will need to visit the nearest branch of the bank.

Features and Benefits of Loan Against Fixed Deposit

  • Lower interest rates – Since your fixed deposit acts as a security for a loan, the interest rate charged on these loans are lower. The interest rates on these loans are usually lower than the interest rates on personal loans by about 2% to 2.5%. Hence, the equated monthly instalments (EMIs) on these loans are also lower.
  • Minimal paperwork – Since banks already have your details which you furnished during the opening of your FD, the documentation required for availing the loan against your FD will be minimal. You will not be required to submit documents such as your proof of income, Income Tax Returns (ITR), etc.
  • No credit score check – When you apply for any kind of loan, lenders will have a look at your credit score before they offer you a loan. However, in the case of a loan against FD, your CIBIL or credit score will not be considered while evaluating your eligibility. Hence, such loans can be a good option for people who have low or no credit score.
  • The loan amount will depend on the FD amount – If you have to avail a personal loan, the maximum loan amount that you can avail will depend on various factors such as your credit score, income, tenure, etc. However, in the case of loan against FD, the maximum loan amount will depend on the money you have invested in the FD account. This means that if you have invested a higher amount in your FD, you will be eligible for a higher loan amount.
  • No prepayment penalty – When you prepay any loan, the banks lose out on the interest and hence, they will charge you a penalty for the same. However, in the case of a loan against FD, no penalty is charged as banks do not lose out on the interest amount. Instead, they profit from it as they do not have to pay you any interest on the loan amount.

♦Loan against gold ornaments

  • A gold loan is a method of availing finance/loan against your gold ornaments or jewellery such as bangles, necklaces, bracelets, earrings, pendants, watches, gold coins, etc.

Who can avail a gold loan?

  • Any Indian citizen can avail a gold loan from banks or non-banking financial institutions (NBFCs) and generally the age criteria ranges from a minimum of 18 years to a maximum of 75 years. This might vary from lender to lender.

Features of Gold Loans

  • Purpose: You can avail a gold loan from any available lender in order to finance various needs, such as for educational purposes, medical emergencies, going on a holiday, and so on.
  • Security: The gold that has been pledged with the bank or the financial institution acts as the security or collateral against which the loan amount is provided.
  • Tenure options: The tenure options can range from a minimum of 3 months to a maximum of 36 months.
  • Fees: The other fees and charges that might be applicable on a gold loan are – processing fee, late payment charges/ penalty for non-payment of interest, valuation fees, etc.
  • Repayment Options: There are three main options offered by lenders to borrowers for the repayment of a gold loan. These are:

i)Repayment in Equated Monthly Installments (EMI)

ii)Payment of interest upfront and repayment of the principal loan amount at the end of the loan tenure.

iii) Payment of interest on a monthly basis and repayment of the principal loan amount at the end of the loan tenure.

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