1. Loans and advances

2. Loans and advances
 Business – profit motive
 Banking – business
 So banking needs – profit
 Earns income/ profit by loans and
advances

3. Loans and advances
 Gives loans to businessman, Traders,
Individuals, industrialists – on security
/ personal security
 Risk of default
 So cautious and sound lending policy

4. Loans and advances
Principles of sound lending
 Safety
 Liquidity
 profitability

5. Principles of sound lending
 Safety
 Liquidity
 Profitability
 Security
 Purpose of loan
 Sources of
repayment
 Diversification of
risk
 Productivity of loan

6. Secured and unsecured
advances
 Personal security- unsecured
 Security of some tangible goods-
secured

7. Unsecured advances
Sec 5 of Banking
Regulation Act
“unsecured loan or
advance means a
loan or advance
not secured”.
So it is
 Given to customers
with integrity
 Sound financial
backing
 High reputation
 Capacity to
manage business
 Guarantee

8. Unsecured advances
Character
Capacity
Capital

9. Unsecured advances

10. Secured advances
 Sec 5 of Banking
Regulation Act
“secured loan or
advance means a
loan or advance
made on a security
of assets the
market value of
which is not at any
time less than the
amount of loan or
advance”.
 Primary security
Deposited by
borrower
Ex. Machinery
bought on loan
 Collateral security
All others collateral
Secondary or
additional

11. Forms of advance
Four types
Loans
Cash credit
system
overdraft
Bills purchased
and discounted

12. Loans
 Lump sum advanced for certain period
 For a rate of interest %
 Repaid in installements
 Demand loan or term loan
 dd loan - short period ex. Working
capital
 Term loans – medium / long term ex.
Capital expenditure

13. Cash credit
Arrangement to borrow up to a certain
limit
Withdraw when needed
Interest only for amount withdrawn
Against pledge or hypothecation
No use then only commitment charge

14. Overdraft
 Business man only – current a/c
 Withdraw over and above the balance
up to a agreed limit
 Temporary arrangement
 Interest charged for amount drawn

15. Bills discounted and
purchased
 Discount bills
 Deduct interest and
credit the
remaining
 Interest in advance
 A clean advance
 Credit worthiness
 Purchase bills
accompaning
documents to title
of goods ex. Bill of
lading, RR
 Purchase and
grant loans in form
of o/d but actually it
is holding as a
security

16. Doubts?

17. Modes of charging security
 If customer fails to pay then banker
can fall back on the security
 So create a charge
 It is available as a cover for an
advance
 Should be legal, perfect, complete

18. Methods of charging security
 Lien
 Pledge
 Mortgage
 Assignment
 Hypothecation

19. Lien
 Right to retain the properties
belonging to the dr until the debt due
to him is repaid
 Only to retain not to sell
 Banker’s lien – general lien
 Also implied pledge
 So can sell after due notice

20. Pledge
Indian Contract Act
“Bailment of goods
as security for
payment of a debt
or performance of
a promise”
 Occurs when
goods are
delivered
 Returned only on
repayment
 Serve as security
 Ex. Goods, stock,
shares,
debentures,
movable property

21. Essentials of pledge
 Delivery of goods
may be physical or symbolic
 Transfer of ownership
 Right in case of failure to repay

22. Advantages of pledge
 Easy to dispose as in possession
 No double charge
 No manipulation
 In event of damage or loss can
recover from insurance

23. Pledge
Rights
 To retain
 For particular debt
 Can claim expense
 In default can file a
suit, sue, sell
 Remedy for 3rd party
 Damage for Non
disclosure
 Loss for Defective
title
Duties
 Care of goods
 Use as per
agreement
 Deliver on
repayment
 Along with profit
 Responsible for loss

24. Mortgage
Method of creating charge on
immovable property like L&B
 Only for immovable property
 Some rights only
 To secure loan
 Specific one
 Actual possession with mortgager
 In case of default mortgagee can sell
and recover

25. Forms of mortgage
 Simple mortgage
 Mortgage by conditional sale
 Usufructuary mortgage
 English mortgage
 Mortgage by deposit of title deeds
 Anomolous mortgage

26. Other type of mortgage
 Legal mortgage
Legal title t/f to mortgagee by deed
On repayment re t/f
expensive
 Equitable mortgage
Mere delivery of document
Memorandum only

27. Rights of
Mortgager
 Right of
redemption
 Accession to
property
 Right to t/f to 3rd
party
 Right to inspect
and production of
documents
Mortgagee
 Right to sue
 To sale
 For foreclosure
 Accession
 possession

28. Assignment
Transfer of any existing or future right ,
property, debt by one person to
another
 Who assigns - assignor
 To whom – assignee
 Usually done on book debts,
insurance claims, money due.

29. Types of assignment
Legal assignment
 t/f of actionable
claim
 In writing by
assignor
 Intimating the
assignee name
 Assignee gives a
notice to confirm
balance
 Can sue
Equitable
assignment
 If not legal then EA

30. Hypothecation
 Mortgage of movable property
 charge over goods, raw materials,
goods in progress
Hart defines it as
“A charge against property for an
amount where neither ownership nor
possession is passed to creditor”

31. Characterstics
 Movable goods
 Possession and ownership with
borrower
 Charge by hypo deed
 Submit statements regularly
 Right to inspect
Also called as “open loan”
Convenient method

32. Precautions
 Get stock statement regularly
 Inspect stock and accounts
 Undertaking – not hypothecated
 Letter of hypothecation
 Insure goods
 Board “ hypothecated”

33. Layaway sale -emerging
 Pay and earmark
 Possession later
 No bank lending

34. Doubts?