securities of bank loans

INTRODUCTION

A bank should ensure that it will receive the loan back on time before issuing loans and advances. A borrower provides security to a lender in exchange for assurance that he or she will return the loan.

Due to the high rate of default on loans, borrowers are required to deposit assets or provide a guarantee as proof of repayment.

The security of credit is the name given to this asset or promise.

The security in the case of a mortgage is the property that the loan is being used to buy.

Oxford Dictionary of Finance and Banking defines security as “an asset or assets to which a lender can have recourse if the borrower defaults on any loan repayments”.

As a result, security is what the borrower puts up as a guarantee of loan repayment. It could consist of tangible or intangible assets, as well as a personal guarantee.

TYPES OF SECURITIES FOR BANK CREDIT

Personal Security

The assurance supplied by the borrower or a third party in lieu of pledging a tangible asset is known as personal security. Because making a loan against a personal guarantee is extremely risky, banks only do so if the borrower has a particular and long relationship with the bank. Before approving a loan against personal security, essential aspects such as character, integrity, financial solvency, and social status are considered.

Non-personal Security

Non-personal security refers to moveable and immovable tangible assets used as collateral for loans. Land, buildings, commodities, and other assets are examples of this sort of security.Personal security is not as safe as non-personal security. A tangible item can be sold in the market to recover the outstanding amount if the borrower defaults. Non-personal security can be charged as a lien, pledge, mortgage, hypothecation, or assignment in the Conn of lien, pledge, mortgage, hypothecation, or assignment.

Collateral Security

When the lender believes the security given by the borrower is insufficient or that recovering the dues will be problematic, the lender may request additional security from the borrower or others on behalf of the borrower. In the event that the borrower defaults on the loan, the collateral securities will be used to service and reclaim the debt.

Features of Good Security/ Canons of a Good Banking Security/ Conditions for Acceptable Securities

Certain variables must be considered by bankers while accepting securities. Otherwise, the chances of getting the loan repaid are slim, and the security will fail to perform its objective. These elements are regarded as necessary for satisfactory security. We’ll go through each of these elements in detail in the sections that follow.

TYPES OF SECURITY FOR BANK CREDIT IN THE CASE OF NON-PERSONAL SECURITY

Acceptability

In order to be accepted as security, the asset must be legal. Any item that is illegal to hold or possess will cause the bank problems when it comes time to sell it. Furthermore, the bank may incur legal ramifications as a result of its possession of unlawful materials.

Marketability

A ready market is required for the security. The asset was not taken by the bank with the intention of keeping it in its control indefinitely, but rather to sell it in the market and recoup the loan amount. As a result, no matter how great an asset is, it is useless if it does not have a large market.

Liquidity

The term “liquidity” refers to the ease with which an asset can be changed into cash or other assets with little or no loss of value. A security should ideally be liquid, allowing the banker to sell it at a known price as soon as the default happens.

Ownership

The banker must verify the property’s ownership before accepting a security. A loan that is secured by an asset that is not owned by the lender may be difficult to repay. Furthermore, if the property’s title is defective, the lender may face difficulties.

Adequacy

The value of the security must be sufficient to cover the entire loan amount. Furthermore, a healthy margin above the loan must be kept. The difference between the market value of the security given and the loan granted is known as the margin.

Stability of Price

The price of necessities of life products and commodities is relatively consistent over a short period of time, but not necessarily over a long period of time. However, large price variations in luxury products occur owing to changes in demand, styles, and consumer preferences.

CONCLUSION

The term “security” refers to any kind of assurance or assurances, whether verbal, personal, or in the form of property. It is necessary for a creditor to secure his loan or advances with various securities. A creditor’s security is the right to convert property or other assets into cash if the debtor fails to repay the amount advanced with interest.

Aishwarya Says:

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