Loans & Advances | Types Of Securities | STUDY NOTES

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Loans & Advances | Types Of Securities 

A security is a document that is an evidence of specific claims on a stream of income and/or the particular assets. Debt securities include bonds and mortgages. Ownership securities include common stock certificates and the title to marketable assets. In addition, preferred stock is a hybrid security which entitles its owner to a mixture of both ownership and creditor-ship privileges.

Types :-

A. Goods
B. Documents of title to goods
C. Stock exchange securities
D. Real estates
E. Life Insurance policies
F. Fixed Deposits Receipts
G. Book debts

A. Advances Against Goods
Banks lend a large part of their funds on the security of goods. The goods may be agricultural products like paddy, rice, wheat, cotton, oil-seeds and raw-jute. They may be manufactured goods like cloth and sugar. They include minerals also. Advances against goods are mainly granted for working capital requirements of business and industries. The bankers in India are increasingly lending against goods. Goods are accepted as security by pledge or hypothecation.

B. Advances Against Documents of Title to Goods
Documents, which in the ordinary course of trade, are regarded as proof of the possession or control of the goods are called “documents of title to goods.” They authorizes the possessor or holder to transfer or receive the goods represented by them. These might include :-
1. Bill of lading
2. Dock warrant
3. Warehouse keeper’s certificate
4. Delivery order
5. Railway receipt and lorry receipt

C. Advances Against Stock Exchange Securities
Shares and debentures which are regularly purchased and sold in the stock exchange may be accepted as security by the bank. A stock exchange is an organized market where securities are purchased and sold. The securities traded on the floor of a stock exchange include the following:
(a) Bonds issued by the Central and State Governments.
(b) Securities issued by semi-Government authorities like port trusts, electricity boards,improvement trusts, etc.; and
(c) Shares and debentures issued by the companies.

D. Advances Against Real Estate
By the term ‘real estate’ is meant all types of immovable properties including tangible assets like land, building etc. Generally, commercial banks do not favour granting of loans and advances against the security of real estates due to a number of risks and demerits. The commercial banks accept real estate as security in the exceptional cases only, i.e., if the customer has no security to offer except real estate. Causes of Refusing Real Estate as Security :- Heavy expenses, Valuation, Legal formalities, Loss of liquidity, Delay in realisation, Administration of properties, Maintenance.

E. Advances Against Life Insurance Policies
A life insurance policy is accepted by bankers as a main security or as a supplementary security. Whereas the banker accepts life insurance policy as a main security, he advances between 85 to 90 per cent of its surrender value. But as a supplementary form, a life insurance policy is more useful because it is advisable to cover the signature by the life of the guarantor.

F. Advance Against Fixed Deposits Receipts
The term ‘Fixed Deposit’ means the money or deposit which is repayable on the expiry of a fixed period of time. This time-period may vary from 15 days to 60 months. The Fixed Deposit Account cannot be withdrawn before the expiry date, as mentioned in the Fixed Deposit Receipt. But sometimes, depositor may require advance-money before the due date of maturity. In such case, ordinarily banks extend advancing facility to their customers, but it should be noted here that banks are not bound to extend such facility. Another option is beneficial for the banker and the customer.Suppose, a fixed deposit is made for 36 months and the customer demands money after one or two months, it will be better for the customer to take loan against his Fixed Deposit Receipt. In such case the banker will gain by charging a higher interest rate than allowed on deposits.

G. Advance Against Book Debts
Sometimes banks may grant loans and advances to the customers against the security of book-debts. Whereas the bank is fully satisfied with the solvency of the customers can grant such types of loans. The book-debt (actionable claims) means “the amount which the customer of the bank has to get from other persons.

Every Security has its pros-cons & before lending the banker should take precautions very carefully