PRINCIPLES OF BANK LENDING - Banking regulation and operations (BRO)

Notes 13 Pages

Savitribai Phule Pune University

Bachelor of Business Administration

AYK

Contributed by

Alpa Yash Khare

FACULTY NAME: Mrs NALINI.N
COLLEGENAME: MES INSTITUTE OF MANAGEMENT
SUB:BANKING REGULATION AND OPERATION

UNIT-5
PRINCIPLES OF BANK LENDING

One of the primary functions of the commercial banks is ‘Lending’. A banker should be very
cautious in lending, because he is not lending money out of his own capital. The money lent
comes from the deposits received from the public. These deposits are mostly repayable on
demand. Hence while lending money, a banker should follow a very cautious policy. After
accepting deposits from the customer, a bank goes for lending or for investment in different
types of securities, such as government, company etc. For deposits received under savings
account and fixed deposits, the bank has to pay an agreed interest rate. This, the bank has to
pay only from its earnings. On the investments, the bank earns a good return. Similarly, when
the bank lends, it earns a higher interest rate. From out of the return on investments and from
the interest earned on loans, the bank will be able to offer interest for the deposits and
improve its profitability.

SOUND PRINCIPLES OF LENDING:
It is a fundamental concept of banking everywhere is that advances are made to customers in
reliance on his promise to repay, but
lending involves some degree of risks, it is necessary for any bank to develop sound and safe
lending policies and new lending techniques in order to keep the risk to a minimum.
As such, the banks are required to follow certain principles of sound lending.
(a) Safety: When a loan or investment is made, the banker will have to ensure that the money
advanced is returned by the borrower along with interest within the stipulated period. This is
possible only when the borrower does not face any risk and strictly adheres to the terms and
conditions of the loan. For this purpose, the banker will have to choose such type of
borrowers who are prompt in repayment of the principal and interest amount.
(b) Liquidity: An asset is said to be liquid when it can be converted into cash within a short
notice, without loss. As the bank is investing or lending the depositors’ money, it has to take
more precaution while doing so. The depositor may demand his/her money at any time and
the bank must be in a position to repay the same.
(c) Purpose: A banker would not throw away money for any purpose for which the borrower
wants. The purpose should be productive so that the money not only remains safe but also
provides a definite source repayment.
(d) Profitability: When a bank is undertaking lending or investment, it has to earn a good
return. The bank has profit as its main business motive. So, while lending or investing the
depositor’s money, the bank must earn higher interest or higher return. If the bank is able to
achieve this, it will be deploying its funds in such ventures which give a higher return.
(e) Shift ability: As the bank is giving loan against the security, in case of bad debts, the
bank must be able to sell the security and realize the loan amount. In some cases, the bank
will not sell the security, but will shift the same to the Central bank which will grant the
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commercial bank additional fund against the security. Mostly treasury bills can be shifted to
Central bank and the commercial bank can raise additional funds.
(f) National Interest: The bank must keep in mind national interest while lending or
investing depositor’s money. When a country is facing unemployment, the bank must give
more loans to employment oriented industries, so that the problem of unemployment can be
reduced. Similarly, when a country is faced with food problem, more loans should be given
for agriculture so that, food production can be increased.
(g) Safety Margin: While granting loan against security, the bank will have to keep
sufficient safety margin. This means that a bank will land only unto 50 or 60% of the value of
security as loan by keeping a safety margin of 4 or 50%. For example, when loan is given
against a jewel whose market value is Rest. 10,000/-. the loan amount will be Rest. 6,000/-
and the safety margin Rest. 4,000/- now even if the market value of the jewel fluctuates to
Rest. 9,000/- or Rs.8,000/- still the banker will be able to realize the loan amount in case the
borrower defaults.
(h) Diversification: As the banker lends or invests, he cannot invest all his resources in a
single industry or with a single borrower. The banker should not keep all the eggs in the same
basket. By choosing a single industry such as iron and steel or sugar, the banker is inviting
more risks. It is likely that these industries may face depression and the banker will find it
difficult to recover the loan or realize his investment.
(i) Law of Limitation Act: A lending banker should also bear in mind the Law of
Limitation Act. According to this Act, a debt will become a bad one after the expiry of three
years from the date of loan. It is applicable to loans and advances granted by banks. Hence,
each and every banker should be very careful in renewing the loan, year after year.
Otherwise, these loans would become bad subsequently.

Certain basic principles at the time of lending loans and advances. Some of the principles to
be followed are:
1.Principle of Safety: Safety is the most important principle of good lending. When a banker
lends, he must feel certain that the advance is safe and the money will definitely come back.
If the borrower invests the money in an unproductive or speculative venture, or if the
borrower himself is dishonest, the advance would be in danger.
2. Principle of Liquidity: The borrower must be in a position to repay within a reasonable
time after a demand for repayment is made. This can be possible only if the money is
employed by the borrower for short-term requirements and not locked up in acquiring fixed
assets, or in schemes which take a long time to pay their way. The reason why bankers attach
as much importance to 'liquidity' as to safety' of their funds is this.
3. Principle of Purpose: The purpose should be productive so that the money not only
remain safe but also provides a definite source of repayment. The purpose should also be
short termed so that it ensures liquidity. Banks should discourage advances for hoarding
stocks or for speculative activities.
4.Principle of Profitability: Profitability is a financial benefit that is realized when the
amounts revenue gained from a business activity exceeds the expenses, costs and taxes
needed to Sustain the activity. Banks must make profits because they have to pay interest on
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the deposits received by them. They have to deserve expenses on establishment, rent,
stationery, etc., received by them.
5.Principle of Security: It has been the practice of banks not to lend as far as possible except
against security. The banker carefully examines all the different aspects of an advance before
granting it.
6.Principle of Spread: The principle of good lending is the diversification of advances. An
element of risk is always present in every advance, however secure it might appear to be. In
fact, the entire banking business is one of taking calculated risks and a successful banker is an
expert in assessing such risks.
7.Principle of National Interest, Suitability ete.: Even when an advance satisfies all good
principles, it may still not be suitable. The advance may run counter to national interest. The
Central Bank may have issued a directive prohibiting banks to allow a particular type
advance.
8.Principle of Ideal Advance: An ideal advance as "one which is granted
to a reliable customer for an approved purpose in which the customer has adequate
experience, safe in the knowledge that the money will be used to advantage and repayment
will be made within a reasonable period from trading receipts or known maturities due on or
about given dates."
5 C'S OF LENDING PRINCIPLES
(a) Character: The character of the borrower indicates two things: the ability to pay versus
the willingness to pay. The ability to pay refers to the borrower's financial credibility to pay.
The lender should check on the borrower's character.
(b) Capacity: Capacity refers to the sources of repayment, i.e. the cash flow. The borrower
must be able to meet all his financial obligations on the due dates.
(c) Capital: Capital represents the degree of commitment and the ability to sustain this
commitment during bad times.
(d) Conditions: Condition refers to the macroeconomic environment. For example, if the
loan is needed for setting up a retail business in a particular area, then the lender must make a
study of the economic conditions.
(e) Collateral: Collateral is the lender's second line of defence. If the payback is derived
from cash flows, then the collateral will not be liquidated for repayment.

KINDS OF LENDING FACILITIES GRANTED BY BANKS
1) Loans: A loan is an advance granted by the bank to a borrower wherein the entire amount
sanctioned is paid to the borrower in lump sum. When it is granted for a period of one year or
less it is called short-term loan. If it is for a period of two or more years it is called medium
term loan and if it is for more than five years it is called long term loan. A loan is granted
against collateral securities or personal securities of the borrower. Interest is charged on the
entire amount of the entire of the loan sanctioned, irrespective of the amount actually
withdrawn by the borrower. It is advantageous to the banker to give this form of advance as
he can collect interest on the entire amount sanctioned irrespective of the amount withdrawn
by the customer but is disadvantageous to the customer, as he has to pay interest even on the
unutilized portion of the loan.
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2) Overdraft: It is a form of advance under which the customer is allowed to overdraw his
account up to a certain limit. This facility is given only to a current account holder. This is a
temporary financial arrangement made for a short period. By the end of the year, the
borrower should bring back the current account to credit balance. It is advantageous to the
customer as the interest payable is only on the amount utilized by him and not on the entire
limit sanctioned to him. But it is disadvantageous to the banker as he is required to keep at
the disposal of the borrower the full amount of the overdraft sanctioned. So the banker
changes commitment charge on the unutilized portion of the cash credit limit at a nominal
rate of 1% per annum.
3) Cash credit: It is a popular type of advance made by the commercial banks. This is
sanctioned against the pledge of the goods like agricultural or industrial products or against
the guarantee of the individuals. It is a financial arrangement under which a borrower is
allowed an advance under a separate account called cash credit account up to a specified limit
called the cash credit limit. The borrower can withdraw the amount in instalments as and
when he needs and interest is charged only on the amount actually withdrawn and not on the
amount sanctioned. Since it is disadvantageous to the banker he generally charges
commitment charge on the unutilized portion the cash credit limit.
4) Discounting of bills of exchange: The banker takes a bill of exchange from the customer
and pays him immediately the present value of the bill (i.e. face value of the bill minus
discount charges) then on the due date of the bill he receives the face value of the bill from
the acceptor of the bill. In case the bill is dishonoured by the acceptor the banker recovers the
amount from the customer himself. Advantages of Discounting of Bills:
(a) There is certainty of payment on the due dates.
(b) There is security of payment in the case of bills. This is because even if the bill of
exchange is dishonoured by the acceptor the banker can look to the other parties to the bill,
i.e. the drawer and the endorser for the payment. Bills are supported by trade documents and
transport receipts, which facilitates the banker to realize the value in case of default. Even if
the bill is dishonoured by the acceptor, the banker can debit the account of the drawer. That is
why it is secured.
(c) Investment in bills of exchange is for a short period say 30 days, 60 days or 90 days.
Therefore the funds of a banker are not locked up for a long period.
(d) A bill of exchange is a Negotiable Instrument. So the transferee of the bill, i.e. the banker
can get a better title than that of the transferor of the bill, i.e. the customer. Hence safety of
the bill is assured.
(e) Bills are liquid in the sense that they can be rediscounted with the RBI or with a fellow
banker whenever there is need for cash.
(f) The value of the bill is fixed and does not change for any reason. The amount advanced
against bills remains intact unlike the tangible assets whose values are subjected to change.
(g) The profit obtained by discounting the bill will be more when compared to the profit
gained by lending in the form of overdraft or cash credit.
5) Letter of credit: It is a sort of loan facility extended by a banking institution to its
customers.
They are if two types,
(1) personal letter of credit, and
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(2) commercial letter of credit.
Personal Letter of Credit or Traveler’s Letter of Credit: This is issued to a person who
will be traveling abroad for a specific period. The required amount is deposited by the
customer with the Issuing Bank, which will have an arrangement with a bank where the
customer stays and is called a corresponding Bank. The Issuing Bank sends the specimen
signature of the customer to the corresponding Bank and request the bank to pay the customer
on issue of cheque up to a specified amount which is already debited to customer’s account.
This amount will be debited to Issuing Bank’s account by the Correspondent Bank. A LOC
will be given to the customer by the issuing bank to be produced before the Correspondent
bank obtaining money as and when required in a far off place. The amount drawn by the
customer each time will be noted on the back of LOC by the Correspondent Bank. When
LOC is issued to be produced before only one correspondent bank it is called Direct Letter of
Credit. In case it is addressed to more than one correspondent bank it is called Circular letter
of Credit.
Commercial Letter of Credit: Commercial Letter of Credit is the letter of credit issued by a
bank in the importer’s country, at the request of the importer in favour of the exporter,
informing him that the issuing undertakes to accept the bill of exchange drawn by the
exporter up to a specified amount.
KINDS OF LETTERS OF CREDIT
(a)Documentary and Clean Letters of Credit: If a letter of credit is issued on the condition
that it must be accompanied by the relevant shipping documents such as bill of lading, marine
insurance policy, invoice etc. it is called a documentary letter of credit.
(b)clean letter of credit: If the letter of credit is issued by the banker without insisting on
the relevant shipping documents then it is called a clean letter of credit.
(c)Revocable and Irrevocable Letters of Credit: A letter of credit which can be revoked
(i.e. cancelled) by the issuing banker at any time he likes without the prior consent of all the
parties concerned is called a revocable letter of credit. It is risky from the point of view of the
exporter. A letter of credit which cannot be revoked by the issuing banker without the prior
consent of all the parties concerned is called an irrevocable letter of credit.
(d)Confirmed and unconfirmed letters of credit: If along with the issuing bank, the
negotiating bank (exporter’s bank) also gives an undertaking to honour the bill drawn by the
exporter it is called a confirmed letter of credit. The negotiating bank confirms the credit at
the request of the issuing bank. A confirmed letter of credit assures absolute safety to the
exporter as he can proceed against both the negotiating bank and the issuing bank in the event
of the dishonour of the b ill drawn by him.
If a letter of credit does not contain the undertaking of the negotiating bank in exporters’
country to honour the bill it is called an unconfirmed letter of credit.
(e) Fixed and Revolving Letters of Credit: If a letter of credit is issued for a fixed amount
and for a fixed period it is called a fixed letter of credit. If the amount of credit allowed under
a letter of credit is automatically renewed after the bills negotiated under it are duly honoured
it is called a revolving letter of credit
(f)With Recourse and Without Recourse Letters of Credit: If the paying bank can turn
back to the drawer of the bill i.e. the exporter for payment in the event of default on the part
of the importer to honour the bill, then it is called as a with recourse letter of credit. If the
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paying banker cannot turn back to the exporter for payment in the event of dishonour of the
bill by the importer then it is called a without recourse letter of credit.
(g) Transferable and Non-transferable Letters of credit: If the exporter can transfer the
right to draw a bill to another person it is called a transferable letter of credit. If the exporter
cannot transfer his right to draw a bill to another person it is called a non-transferable letter of
credit.

NON-PERFORMING ASSETS (NPA):
Non-Performing Assets are popularly known as NPA. Commercial Banks assets are of
various types. All those assets which generate periodical income are called as Performing
Assets (PA). While all those assets which do not generate periodical income are called as
Non-Performing Assets (NPA).
If the customers do not repay principal amount and interest for a certain period of time then
such loans become non-performing assets (NPA). Thus non-performing assets are basically
non-performing loans. In India, the time frame given for classifying the asset as NPA is 180
days as compared to 45 days to 90 days of international norms.
Meaning:
Loans and advances given by the banks to its customers are an Asset to the bank. Just for the
sake of simplicity, we can understand that a loan (an asset for the bank) turns as NPA when
the EMI, principal or interest component for the loan is not paid within 90 days from the due
date. Thus a Bad Loan is an asset that ceases to generate any income for the bank.
As per RBI guidelines, NPA is defined as under: Non-performing asset (NPA) is a loan or an
advance where;
a) Interest and/ or instalment of principal remain overdue for a period of more than 90 days in
respect of a term loan,
b) The account remains ‘out of order’ in respect of an Overdraft/Cash Credit.
c) The bill remains overdue for a period of more than 90 days in the case of bills purchased
and discounted,
d) The instalment of principal or interest there on remains overdue for two crop seasons for
short duration crops,
e) The instalment of principal or interest there on remains overdue for one crop season for
long duration crops,
f) The amount of liquidity facility remains outstanding for more than 90 days, in respect of a
securitization transaction undertaken in terms of guidelines on securitization dated February
1, 2006.
Classification of Assets
RBI has directed the banks to make provisions or set aside money when an account turns bad.
Banks should, classify an account as NPA only if the interest due and charged during any
quarter is not serviced fully within 90 days from the end of the quarter.
The assets or loans are classified as:-
1. Standard Assets: A standard asset is a performing asset. Standard assets generate
continuous income and repayments as and when they fall due. Such assets carry a normal risk
and are not NPA in the real sense. So, no special provisions are required for Standard Assets.
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2. Sub-Standard Assets: All those assets (loans and advances) which are considered as non-
performing for a period of 12 months are called as Sub-Standard assets.
3. Doubtful Assets: All those assets which are considered as non-performing for period of
more than 12 months are called as Doubtful Assets.
4. Loss Assets: All those assets which cannot be recovered are called as Loss Assets.

Causes of NPA:
NPA arises due to a number of factors or causes like:-
1. Speculation: Investing in high risk assets to earn high income.
2. Default: Willful default by the borrowers.
3. Fraudulent practices: Fraudulent Practices like advancing loans to ineligible persons,
advances without security or references, etc.
4. Diversion of funds: Most of the funds are diverted for unnecessary expansion and
diversion of business.
5. Economic conditions: Economic condition of a region effected by natural calamities or
any other reason may cause NPA.
6. Mis-management - Often ill-minded borrowers bribe bank officials to get loans with an
intention of default.
7. Internal reasons: Many internal reasons like inefficient management, inappropriate
technology, labour problems, marketing failure, etc. resulting in poor performance of the
companies.
8. External reasons: External reasons like a recession in the economy, infrastructural
problems, price rise, delay in release of sanctioned limits by banks, delays in settlements of
payments by government, natural calamities, etc.
Measures to Solve Problems of NPA
The problems of NPA have been receiving greater attention since 1991 in India. The
Narasimham Committee recommended a number of steps to reduce NPA. In the 1990's the
Government of India (GOI) introduced a number of reforms to deals with the problems of
NPA. Major steps taken to solve the problems of Non-Performing Assets in India:-
1. Debt Recovery Tribunals (DRTs) Narasimham Committee Report I (1991)
recommended the setting up of Special Tribunals to reduce the time required for settling
cases. Accepting the recommendations, Debt Recovery Tribunals (DRTs) were established.
There are 22 DRTs and 5 Debt Recovery Appellate Tribunals. This is insufficient to solve the
problem all over the country (India).
2. Securitization Act 2002 :Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act 2002 is popularly known as Securitisation Act. This act
enables the banks to issue notices to defaulters who have to pay the debts within 60 days.
Once the notice is issued the borrower cannot sell or dispose the assets without the consent of
the lender. The Securitisation Actfurther empowers the banks to take over the possession of
the assets and management of the company. The lenders can recover the dues by selling the
assets or changing the management of the firm.
3. Lok Adalats: Lok Adalats have been found suitable for the recovery of small loans.
According to RBI guidelines issued in 2001. They cover NPA up to Rs. 5 lakhs, both suit
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filed and non-suit filed are covered. Lok Adalats avoid the legal process. The Public Sector
Banks had recovered Rs. 40 Crores by September 2001.
4. Compromise Settlement: Compromise Settlement Scheme provides a simple mechanism
for recovery of NPA. Compromise Settlement Scheme is applied to advances below Rs. 10
Crores. It covers suit filed cases and cases pending with courts and DRTs (Debt Recovery
Tribunals). Cases of Willful default and fraud were excluded.
5. Credit Information Bureau: A good information system is required to prevent loans from
turning into a NPA. If a borrower is a defaulter to one bank, this information should be
available to all banks so that they may avoid lending to him. A Credit Information Bureau
can help by maintaining a data bank which can be assessed by all lending institutions.

Impact of NPA:
The impact of NPA can be summarized as follows:
1. Profitability NPA means booking of money in terms of bad asset which occurred due to
wrong choice of client. Because of money getting blocked the prodigality of bank decreases
not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit
invested in some return earning project/asset. So NPA doesn’t affect current profit but also
future stream of profit, which may lead to loss of some long-term beneficial opportunity.
Another impact of reduction in profitability is low ROI (return on investment),which
adversely affect current earning of bank.
2. Liquidity Money is getting blocked, decreased profit lead to lack of enough cash at hand
which lead to borrowing money for short period of time which lead to additional cost to the
company. Difficulty in operating the functions of bank is another cause of NPA due to lack of
money.
3. Involvement of Management Time and efforts of management is another indirect cost
which bank has to bear due to NPA. Time and efforts of management in handling and
managing NPA would have diverted to some fruitful activities, which would have given
good returns. Now day’s banks have special employees to deal and handle NPAs, which is
additional cost to the bank.
4. Credit Loss: Bank is facing problem of NPA then it adversely affect the value of bank in
terms of market credit. It will lose its goodwill and brand image and credit which have
negative impact to the people who are putting their money in the banks.
TYPES OF CHARGES ON SECURITIES
Security for bank advance has no doubt been reduced to secondary importance in the present
context particularly for priority sector advances but it is still very important to influence the
decision of banks in conventional advances.
Reserve Bank of India has also stipulated certain quantitative restrictions on the banks' power
to grant clean advances. Banks have prescribed their own formats for documentation for
various types of advances and the borrowers in almost all the cases have to execute those
documents without any choice. It would never be advantageous to know the general
characteristics of securities, methods of their charging and documentation procedures adopted
by the banks.
The securities may primarily be divided in two categories
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 Primary security: The assets created by the borrower from the credit facilities granted
by the bank form the primary security for the bank advance as a matter of rule. The
bank invariably obtains a charge over those assets. Similarly, other assets on which
the advance is primarily based even if it is not created from the credit facilities
granted by the bank will also be taken as primary security.
 Collateral security: In some cases where primary security is not considered adequate
or the charge on the security is open the bank may insist on an additional security to
collaterally secure advances granted by it. Such securities are termed as collateral
securities. Collateral security may either be tangible or third party guarantees may
also be accepted.

BASIC CHARACTERISTICS OF SECURITIES
The securities acceptable to banks either as primary or collateral must have certain, basic
characteristics are
Ascertainment of value. A security will be considered good and will be acceptable to the
bank only if its value can be ascertained with a definite degree of correctness. Certain articles
may be valuable but may not be accepted as security if the value cannot be ascertained such
as paintings/antiques etc.
Marketability. A good security must have a ready market. Raw materials, articles of
necessity, other primary commodities are easily marketable and are considered good security.
Semi-finished goods may be more valuable than raw material for the borrower but may not
be marketable at all and will thus be considered inferior to raw material in as much as its
acceptance as a security is concerned.
Stability in value. A good security should have a stable value over along period. If the value
of a security fluctuates violently over a short period, it may not be considered a good security
and may be accepted by the bank only after keeping a very high margin.
Ascertainment of title and transferability. An asset can be accepted as security by the bank
only when the title over that asset can be ascertained. Furthermore, the title should be easily
transferable. The purpose of obtaining a security is to apply the sale proceeds of the security
if the customer fails to repay the advance. But if the security is not easily transferable the
very purpose of obtaining a security may be defeated. Immovable property located at a prime
location may be very stable in value has a ready market and the value can also be ascertained
but may still not be considered as a good security due to difficulty in ascertaining the title and
elaborate legal process involved for effecting its sale through a court of law.
Durability. The security accepted by the Bank must be durable. No bank advance is granted
against perishable commodities.
controllability : The controllability of an asset as a security and securities having a yield
which will enhance their value etc. which are critically analysed by the bank while accepting
any security. The percentage of margin which is kept by the bank as a cushion for any
unforeseen drop in the value of security is directly linked to various characteristic as
discussed above.

TYPES OF CHARGES
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Security is obtained by the bank as an additional cover against default by the borrower in
repayment of bank's dues. Charging of security means making such security available to the
bank and involves certain formalities. Charging should be legal and perfect so that it is
possible to realise the security if such a need arises.
There are six different modes of charging a security as under:

Pledge. Pledge is bailment of goods by the debtor to the creditor with an intention to create a
charge thereon as security for the debt. It has a legal backing as per the Indian Contract Act,
1872 wherein the definition of pledge and bailment and also the rights and liabilities of all the
parties to pledge have been clearly spelt out. Important conditions to be complied with for
constitution of a valid pledge are:
 There should be bailment of goods which implies that goods should be delivered the
debtor (pledger) to the creditor (pledgee). The delivery may nevertheless be actual
physical delivery or constructive delivery as in case of documents of title to goods.
 The bailment must be by the debtor or on behalf of the debtor.
 The delivery of goods must be with an intention of the parties to create security for
die debt or performance of a promise.
 In pledge the ownership of the goods remain with the borrower whereas physical
control over these goods will be exercised by the bank. The borrower has a right to
get the goods returned to him after payment of debt created here against.
 In case of default by die borrower the bank can sell the goods after giving a
reasonable notice of sale as required under Section 176 of the Indian Contract
Act,1872. Notice must clearly indicate the intention of the pledgee to sell the security
and is compulsory before the sale can be effected. If the bank realises more than its
dues by such sale, the excess realised will have to be returned to the borrower.
 This mode of charge may be considered as an ideal one for the bank as it has full
control over the security and can even realise it without any legal process merely by
serving a notice on the borrower.
Hypothecation.
An equitable charge in favour of the bank over the goods is created in such cases without
parting with the possession of the goods. A charge on a property for a debt where neither
ownership nor possession is passed on to the creditor is known as ‘hypothecation charge’
 Hypothecation agreements obtained by banks generally have a clause under which
hypothecation can be converted into a pledge at, a later date.
 Pledge takes away control over the goods from the borrower which may not be
practicable as the borrower would require certain goods under his control to continue
its manufacturing and/or trading activities.
 This form of charge is ideal from the point of view of the borrower as he is always in
control of goods offered as security to die bank. In case of default by the borrower,
the bank may take possession of goods and convert it to pledge only with the consent
of the borrower notwithstanding any clause w this effect being included in the
hypothecation agreement. The bank will have to move a court of law for taking
physical possession of goods or their attachment before judgement.
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PRINCIPLES OF BANK LENDING - Banking regulation and operations (BRO)

PRINCIPLES OF BANK LENDING - Banking regulation and operations (BRO)

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