TYPES OF COLLATERALS AND THEIR CHARACTERISTICS | PRINCIPLES & PRACTICES OF BANKING 2024
This post is on the Types of collaterals and their characteristics, a topic from JAIIB PPB Paper 1, Module B for the 2024 Exams.
So, the JAIIB’s upcoming attempt is in May 2024 & the types of collateral and their characteristics is an important topics for the exam. So, today, I am going to provide you the types of collateral and their characteristics to cover up Module B’s topic i.e. FUNCTIONS OF BANKS to get some good scores you’re your Principle and Practice of Banking.
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Now moving on to our PPB 2024 Topic: Collateral
Why is there a need for collateral?
Banks are financial intermediaries where public funds (in the form of deposit is payable as and when the depositors demand) are mobilized and lent to various sectors of the economy. Therefore, bankers ensure that the money lent to different types of borrowers is repaid according to the repayment schedule together with interest. So, to secure the lent money, bankers usually take securities to fall back on if the borrower defaults.
There are different types of collateral with different characteristics & are discussed in below paras:
Banks normally provide loans against the security of goods such as agricultural goods, raw materials, and semi-finished products. Escrow goods can be extended by holding the goods as collateral. The nature of the charge created can be either a pledge or a mortgage loan. When possession of the goods is transferred to the banker, a lien is created.
Characteristics / matter of consideration in case of Goods
- Preventive measures regarding the advance on the Goods
- Storage of Goods
- Warehouse audit
- Inventory control
- Warehouse margin
Gold loan is when loan is given against gold ornaments or jewelry like bangles, necklaces, bangles, watches, gold coins etc. Indian citizen can avail a gold loan from banks & NBFCs
Characteristics of Gold Loans:
- They usually are raised to finance various needs like educational purposes, medical emergencies, going on vacation and so on.
- The term can range from 3 months to 36 months.
- Repayment Options: Repayment in Equal Monthly Installments (EMIs), repayment of interest on monthly basis and repayment of loan principal at the end of loan repayment, or payment of interest in advance and repayment of the loan principal at the end of the loan term
DOCUMENTS OF OWNERSHIP OF THE GOODS
Section 2 of Sale of Goods Act defines a document of ownership of goods as “a document used in ordinary business dealings as a document of possession or control of goods authorizing or establishing authority, either by endorsement or delivery, by the holder of the documents for the transfer or acceptance of the goods represented there.”
Characteristics of the proof of ownership of the goods
- Basic requirements of the goods ownership document
- A simple pledge serves as good security.
- Possibility of fraud and dishonesty, forging and alteration in documents
Life insurance policies are also acceptable as either primary or collateral security for the down payment.
Characteristics / matter of consideration:
- The policy must be valid and the premiums paid up to date.
- Original, duly stamped and signed by the issuing authority.
- Not to contain restrictive/onerous clauses.
Note: the following lifetime policies are not acceptable as security:
- Policy for children.
- Policies adopted specifically for purposes such as property tax,
- Policy with nominations according to Section 6 of the Married Women’s Property Act.
LAND AND BUILDINGS
It’s not a self-terminating in nature & if the bank wants to sell the property in order to return its deposit, it can do so through a legal process by filing a suit in a civil court for recovery if the amount due in the loan account < than Rs 10,00,000.00 and before Debt Recovery Tribunal (DRT) if the amount due is Rs. 10,00,000.00 and above.
Characteristics of the land and building:
- Investigating ownership rights
- Property valuation
- Leased Properties
The criteria are that you must be holding a fixed deposit with the bank from which you are availing the loan and any of the below-mentioned individuals/entities can avail the loan:
- Resident Indian citizens
- Family trusts
- Hindu Undivided Family (HUF)
- Clubs, societies, and associations
- Individual owners, group companies, and partner companies
- Duly signed application form
- Duly signed contract
- Fixed/term deposits duly repaid in favor of the bank
Statutory provisions relating to the grant of advance shares contained in Sections 19(2) and (3) and 20(1)(a) of the Banking Regulation Act’, 1949 & prescribed that Shares held in the dematerialized form are:
- be more interested in what the advances are for than what the advances are against & must follow normal procedures for sanction assessment and post-sanction follow-up when considering the provision of equity/bond advances.
- When advances on primary security of shares or debentures or bonds are given, they should be separate and distinct and should not be combined with any other advance.
- ascertain the marketability of the shares or bonds and the net worth and functioning of the company whose shares or bonds are offered as collateral.
- be valued at prevailing market prices when taken as security for advances.
- be ensured that share advances are not used to enable the borrower to acquire or retain a controlling interest in the company/companies or to facilitate or sustain inter-company investments.
- No advance should be given on partially paid-up shares.
- ensure that the scrips deposited with them as collateral are not stolen or duplicated or fake.
- The Board may decide on the appropriate level of authority for sanctioning advances on shares/debentures.
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