MODES OF LENDING

Secured Advances

The bank secured advances by means of following

forms of securities.

Lien

Pledge

Mortgage

Hypothecation
L!"

#hat is banker$s Lien%

A lien is the right to retain property in its possession

till its banker$s dues are cleared by the borrower.

Lien gives banker only a right to retain the

possession of the goods and not the power to sell.
Thus lien is&

'. A right of retaining property belonging to the

debtor.

(. till all dues due to the borrower are cleared.

PL!)*!

+A pledge is a contract whereby a good is deposited

with the lender is a security for repayment of loan,.

The delivery of goods may be made by transferring

the goods from the owner$s godown to the banker$s
godown or the keys of the owner$s godown be
handed over to the lender.

The delivery of documents of title relating to goods

also creates a valid pledge.

The person delivering the goods as security is called

PL!)*!-. the person to whom the goods is
delivered is known as PL!)*!!.
/haracteristics or 0eatures of pledge

The following are the essential features of pledge

There must be bailment 1delivery2 of goods

The delivery or goods 1bailment2 must be by way of security.

The security must be for payment of debt

-ights and )uties of a 3anker as a pledge

-ights of a 3anker4

The banker has the following right as a pledgee.

-ight to retain goods

-ight to recover e5tra ordinary e5penses

)efault in payment

-ight of full value of goods

)uties of a 3anker as pledge

A pledgee is re6uired to take responsible care of goods pledge

with him.

The pledgee or any one else is not authori7ed to make use of

goods pledge with him.

The pledgee is re6uired to return the goods pledged after the

full payment of debt.
)ifference between Lien and Pledge

'. pledge is created by contract where as no

contract is re6uired in case of lien.

(. pledge is not terminated by the return of goods

to owner for limited purpose. -ight of lien is lost
with the loss of possession of goods.

8. pledge has right to sue. right of sale and right of

lien. 3ut lien9holder can only hold goods till
payment is made. He cannot go the court of law.
M:-T*A*!

#hat is mortgage%

+A mortgage is the transfer of an interest in a specific

immovable property for the purpose of securing the
money advanced by way of loan. an e5isting or future
debt,.

The person in whose interest the property is

transferred is known as mortgagee.

The person who transfer an interest in property

against a debt is called mortgagor.
0eatures of mortgage

'. Specific immovable property4

As a security against debt. only specific immovable

property as accepted as a mortgage.

(.Transfer of interest4

There is transfer of interest in the property by the

mortgagor for the loan raised or to be raised.

8. -epayment of loan4

The mortgagor has the liability to make repayment

of the loan failing which he forfeits the claim over
his mortgaged property.

;. -eturn the interest of property4

:n the repayment of loan by the mortgagor the

mortgagee is under obligation to return the interest
of the property to the mortgagor.
H<P:TH!/AT:"

Hypothecation is mortgage of movable.

t is defined as +legal transaction whereby goods

1movables2 may be made available as security for a
debt without transferring the property or the
possession to the lender,.

The advance of loans against goods without taking

their possession is very risky on two grounds.

:ne as the goods are in the possession of the owner. the

borrower may take out the goods without informing the bank.

Secondly. the bank does not have a legal claim as it does not
have a valid charge over the goods.
-ight of the 3ank

'. n case of hypothecated goods. the bank has the

right to inspect the godowns. t can also demand
periodic report of the stock.

(. The hypothecated goods are to be insured by the

borrower. n case these are not insured the bank
has the right to get them insured and recover the
insurance charges from the borrower.

8. The bank has the right to ask the borrower to

maintain a balance of goods which in value is not less
than the amount advanced to him.

;. n case the bank finds that the contract is being

violated. t has the right to obtain stop order from
the appropriate authority.
-ights of 3orrower

'. The borrower as per agreement. has the right to

keep the ownership and possession of the goods with
him.

(. Since the hypothecated goods are in custody of the

borrower. he can dispose them of.

Advances granted under hypothecation are not

secure from safety point of view. The bank should
make sure the party has a good reputation. check
property regularly. ask the hypothecator to submit
periodic report.
Summary

'. The term mortgage. in strict sense. is used only

in connection with immovable.

(. The terms pledge and hypothecation are

generally used in case of movables.

8. #here a mortgage of movable is created by

delivery of possession of goods it is known as a
pledge and where no possession is given it is called
hypothecation.