When you hear the word ‘loan’, what come to mind? It’s difficult to get one, it is messy, it’s confusing – all those paper works, you need to keep your house as a security, then there’s paying of installments – and if you don’t pay they’ll take away the house!
Oh, yes – Loans are messy and complicated and more so when you need to study about them – and specially the types of charges.
I have always found it so confusing – which one is ‘hypothecation’? When do we ‘mortgage’? ‘What is a lien?!’
Today, Dear Readers, we are going to clear up the fog in these concepts and hopefully attempt to remember it for life … after all …everyone takes a loan these days!
When we are planning to avail a bank loan, our second thought, right after we’ve thought of taking a loan, will be – which asset should I provide as a security?
The Bank will utilize this asset on which it has a charge, in the manner(s) allowed by various laws, and recover its dues. Thus Bank’s interests (the loan amount and interest on the loan) are secured by creation of a charge on some assets which belong to the borrower – hence known as a security.
(ii) Floating Charge is created on assets which undergo change of ownership – like stocks of goods of a shop. A trading concern, like a saree shop, may take a loan, pledging its stock (all the sarees) as security.
Such a stock which is its trading stock maybe used for business, i.e., it can be sold in the ordinary course of its business. Thus the charge is on the stock, which keeps changing, because it is capable of being traded.
Oh, yes – Loans are messy and complicated and more so when you need to study about them – and specially the types of charges.
I have always found it so confusing – which one is ‘hypothecation’? When do we ‘mortgage’? ‘What is a lien?!’
Today, Dear Readers, we are going to clear up the fog in these concepts and hopefully attempt to remember it for life … after all …everyone takes a loan these days!
When we are planning to avail a bank loan, our second thought, right after we’ve thought of taking a loan, will be – which asset should I provide as a security?
Security
Security in banking terms and specifically in relation to a bank loan refers to any asset on which a charge is created by a bank in its favour; where any default occurs, i.e., the borrower (loan taker) is not able to pay the loan amount back, then this asset is the Bank’s refuge!The Bank will utilize this asset on which it has a charge, in the manner(s) allowed by various laws, and recover its dues. Thus Bank’s interests (the loan amount and interest on the loan) are secured by creation of a charge on some assets which belong to the borrower – hence known as a security.
Kinds of Charges:
Type of Charge | Is created on | Such as | And the possession of the asset is with |
|---|---|---|---|
I. Mortgage | Immovable Properties (properties that do not move!) | Land and Building | Borrower…i.e., the one who has taken the loan. |
II. Pledge | Movable goods or property | Share Certificates/NSC Certificates/Gold jewelley | Lender, i.e., the Bank = Pledgee |
III. Hypothecation | Movable goods or property | Plant and Machinery/ Automobiles | Borrower. Usually for car/vehicle loans…has anyone noticed that some autos have ‘Hypothecate to/with XYZ Bank, abc Branch..as on xx/xx/xxxx’ painted in small letters on the back. |
IV. Lien | Paper security | Shares/Debentures/Mutual Funds/ Bonds | |
V. Personal Liability | Is nothing but personal guarantee | By 3rd parties | Like a guarantee |
Also important to know:
(i) Fixed Charge is the kind of charge created on properties/assets the identity/nature/ownership of which does not change. For example, a fixed charge would be created on Land & Building, Plant & Machinery.(ii) Floating Charge is created on assets which undergo change of ownership – like stocks of goods of a shop. A trading concern, like a saree shop, may take a loan, pledging its stock (all the sarees) as security.
Such a stock which is its trading stock maybe used for business, i.e., it can be sold in the ordinary course of its business. Thus the charge is on the stock, which keeps changing, because it is capable of being traded.
