PPB Unit BChapter Notes4–6 Marks Expected

Securities for Bank Advances

Principles & Practices of Banking | Unit B · Chapter 25

What separates a secured loan from an unsecured one, what qualities make any asset a reliable security, and the full banker's playbook for land, goods, shares, debentures, life insurance policies, book debts, gold, term deposits and supply bills — with valuation methods, charge creation, RBI regulatory limits and precautions for each.

By Bankopedia.co.inUpdated 2026JAIIB PPB · Module B

📌 Why This Chapter Matters in JAIIB

Expect 4–6 questions from this chapter — the examiner picks one or two security types per paper and tests both the legal charge mechanism AND the regulatory numbers. Lock in: the nature of charge for each security type (pledge/hypothecation/mortgage/assignment), the LTV/margin for gold (75%) and shares (50%), the capital-market exposure ceiling for banks (40% of net worth), and the limits for loans against shares to individuals (₹10 lakh physical / ₹20 lakh demat). Also revise the Sale of Goods Act definition of a document of title, the SARFAESI right of banks, and the trust-receipt mechanism.

All Key Numbers — Chapter 25 at a Glance

₹20 lakhThreshold for DRT recovery; below this, civil court handles the suit

SARFAESI ActBanks can sell mortgaged/hypothecated property WITHOUT going to court

30 yearsPeriod for which parent documents of title to land are called for

13 yearsEncumbrance certificate period for immovable property

50%Uniform margin on all advances against shares / IPOs / guarantees for capital market

25%Minimum cash margin (within the 50%) for guarantees issued for capital market ops

40% (solo)Aggregate capital-market exposure ceiling — % of net worth of solo bank

20% (solo)Sub-ceiling for DIRECT investment within the 40% solo exposure limit

40% (consol.)Aggregate capital-market exposure ceiling on consolidated basis

20% (consol.)Sub-ceiling for direct investment within the 40% consolidated ceiling

₹10 lakhMax loan against shares held in PHYSICAL form per individual

₹20 lakhMax loan against shares held in DEMAT form per individual

₹20 lakh / 90%ESOP / employees' quota IPO finance — lower of ₹20 lakh or 90% of purchase price

Sec 2(4) SGASale of Goods Act definition of a document of title to goods

Sec 176 ICAPledgee's right to sell pledged goods after reasonable notice to pledgor

Sec 130 TPATransfer of Property Act — assignment of an actionable claim (book debts)

75%Maximum LTV ratio for loans against gold jewellery and ornaments

50 gramsMaximum weight of specially minted gold coins accepted per customer

₹2 lakhMaximum bullet repayment gold loan amount

12 monthsMaximum tenure for bullet repayment gold loan from date of sanction

60 monthsMaximum period for demand/term loan against gold ornaments

90%Maximum loan amount as % of term-deposit value / accrued value

1% / 2%Rate of interest on loan against term deposit above the deposit rate

6 monthsMaximum age of book debts eligible as security (some banks: 3 months)

80–85%Government payment on interim supply bills; balance 15–20% settled by final bill

Sec 19(2) BRABanking Regulation Act — bank cannot hold >30% of paid-up share capital of any company

Section 1

Secured vs Unsecured Loans — The Core Distinction

Why Banks Ask for Security

Lending is inherently risky. A bank cannot be certain that any given borrower will generate sufficient returns to repay — the success or failure of a business activity depends on economic factors that even the best analyst can only estimate, not guarantee. Security acts as a buffer that absorbs the shock of economic failure: when a borrower cannot repay, the bank sells the pledged asset and recovers its money. It also works as a deterrent — a borrower is less likely to walk away from a debt when their own property is at stake.

Typically, the asset purchased or created using bank funds is itself charged as the primary security. The bank may also call for any other asset of the borrower or a third party as collateral security.

Secured Loan

→The banker relies not only on the borrower's expected future income, but also on a present asset charged to the bank.
→If the borrower defaults, the bank can sell the charged property to recover what is owed.
→Most Indian bank loans are secured — by assets funded from the loan (goods, machinery) and/or collateral (shares, bonds, immovable property).
→Security mitigates credit risk; it does NOT substitute for a sound credit assessment.

Unsecured (Clean) Loan

→No tangible asset is charged — the bank relies entirely on the borrower's character and capacity to repay.
→The basis is the borrower's credit-worthiness: the banker's confidence in the person's future financial strength and willingness to honour obligations.
→All such loans depend on the borrower's integrity and financial ability — there is no fallback if these fail.
→Also called 'clean' advances — rarely granted and only to borrowers of undoubted standing.

⚠️ Exam trap — security is a cushion, not a substitute

Security reduces credit risk but does NOT eliminate it. A banker must assess repayment capacity first. "Advance because the security is good enough" is incorrect banking practice. The preferred sequence is: assess viability → assess integrity → take security as a fallback cushion.

Section 2

What Makes a Good Security & Types of Securities

🧠 Mnemonic — Qualities of an Acceptable Security

"The Bank Always Ensures Marketable Transfer"

T — Title: clear and absolute

B — Burden-free: no encumbrance

A — Ascertainable value: from reliable sources

E — Easy identification

M — Marketable: readily saleable

T — Transferable: freely and easily

The Two Dimensions of Security Effectiveness

Economic Dimension

Marketability, stability of value, ease of valuation from reliable sources, and the ability to realise the security quickly without a large price haircut.

Legal Dimension

Enforceability — the bank must be able to actually sell or appropriate the security. This requires the borrower to have a clear, good and absolute title, free from all encumbrances, prior charges and litigation.

Four Categories of Security

Immovable Assets

Land, buildings, factories, machinery embedded in the earth

Charge: Mortgage

Movable Assets

Goods, vehicles, furniture, unembedded machinery, gold ornaments, growing crops, livestock

Charge: Pledge or Hypothecation

Financial Assets / Actionable Claims

Accounts receivable (book debts), shares, bonds, debentures, life insurance policies, NSC/KVP

Charge: Assignment or Pledge (demat shares)

Intangible Assets

Brand value, goodwill — taken as security only in specific situations

Charge: Assignment

Primary vs Collateral Security

Primary Security

The asset directly funded by the advance — e.g., stock of goods in a cash credit, machinery under a term loan, sales receivables in working capital finance. The margin is applied to this security to determine drawing power.

Collateral Security

Any additional asset of the borrower or a third party charged to provide extra cover — e.g., a residential property mortgaged to secure a working-capital facility, or fixed deposits pledged as margin for a bank guarantee.

💡 Four requirements a bank always verifies before accepting security

→ Saleable at any time for recovery on default
→ Value is reasonably stable; margin percentage accounts for volatility
→ Value is ascertainable at any time from reliable sources
→ Easily transferable with minimum legal formality

Section 3

Land and Buildings as Security

Key Characteristics

→NOT self-liquidating — the asset stays in the same form throughout; it does not convert to cash in the ordinary business cycle.
→Banks recover by selling the property through legal process; for amounts below ₹20 lakh, a civil court suit is filed; for ₹20 lakh and above, the Debt Recovery Tribunal (DRT) is approached.
→Under SARFAESI Act 2002, banks can sell a mortgaged immovable property WITHOUT court intervention by following the prescribed procedure — a significant advantage.
→Value tends to appreciate over time and cannot be physically moved — an inherent advantage but also a disadvantage when quick disposal is needed.

Advantages

✓Value generally increases over time (appreciation)
✓Cannot be moved or concealed — always traceable
✓SARFAESI provides out-of-court recovery route

Disadvantages

✗Valuation is complex — depends on location, size, state of repair, amenities, nature of industry; must be conservative
✗Title verification is difficult and expensive (visit RO/SRO to check genuineness of title deeds)
✗Agricultural land has additional restrictions — tenancy protection, land ceiling laws, state debt-relief legislation
✗Encumbrances/attachments may exist; encumbrance certificate covers only 13 years
✗Not easily or quickly saleable — may take months and fetch a lower price in a bad market
✗Creating a mortgage is costly — stamp duty and registration charges; equitable mortgage (deposit of title deeds) is cheaper

Documents the Bank Calls For

Documents of Title

Sale deed / gift deed / will / partition deed conveying title to the borrower — the chain that establishes ownership.

Parent Documents

Chain of documents going back 30 years to establish unbroken flow of title.

Encumbrance Certificate

Obtained for 13 years to check whether any third-party charge subsists on the property. Should be applied through the bank's advocate to prevent manipulation.

Property Tax Receipts

Serve as evidence that the mortgagor is in actual possession of the property.

Court Permission

Required when the property is in the name of a minor — guardian needs court authorisation to mortgage it.

Search Report (ROC)

For company-owned property, a certificate of registration of charges from the Registrar of Companies is needed to check prior charges.

Lawyer's Report

Panel advocate certifies that the title is clear, good, valid and marketable, and that a valid mortgage can be created. Must be unconditional.

Valuation of Immovable Property

Valuation must be conservative, realistic and on a forced/distressed-sale basis. Multiple methods are used and cross-checked:

Approved engineer / architect valuer

Valuation published by local authority

Recent sale transactions of neighbouring properties

Capitalised annual rental value

Enquiries with local real estate agents

Disaster/adverse-situation value where applicable

Factors considered in valuation:

→Nature of construction

→Age and present strength of building

→Area of land and building

→Location

→Value of the site

→Cost of construction

→Rent yield

→Taxes paid

→Nature of title (freehold / leasehold)

Freehold vs Leasehold Property

Freehold

Owner holds absolute title — can deal with the property entirely as they wish. Best title from a security perspective.

Leasehold

Taken on lease for a specific term; reverts to the freehold owner when the lease expires. Longer unexpired period = higher security value. Check lease deed for onerous covenants (e.g., freeholder's consent needed before mortgaging). Loan repayment must not extend beyond the lease expiry.

⚠️ Practical requirements

Physically inspect the property. Get independent confirmation of ownership. Insure buildings for full value at the borrower's expense to guard against fire or natural calamity. Mortgage deed must be witnessed by at least two persons. Simple mortgage attracts ad-valorem stamp duty.

Section 4

Goods as Security — Pledge vs Hypothecation

Pledge vs Hypothecation — The Central Distinction

Pledge (Key Cash Credit)

Physical possession of the goods is transferred to the bank. The bank (as pledgee) must take reasonable care; under Sec 176 ICA it can sell the goods after giving the pledgor a reasonable notice.

Hypothecation (Open Cash Credit)

Possession remains with the borrower; only a charge / equitable interest is created. The bank monitors through stock statements, periodical inspections and stock audits. SARFAESI Act 2002 gives the hypothecatee-bank the right to take possession and sell without court.

⚠️ Exam trap — possession = pledge

If the question says goods are in the bank's godown (key cash credit), the charge is a pledge. If goods are in the borrower's premises under agreement, the charge is hypothecation.

Key Precautions for Advances Against Goods

Genuine trade only

Advance only to genuine traders and producers — never for speculation or hoarding.

Short tenor

Goods are short-term security; grant advances for short periods as value/quality deteriorates.

Full payment proof

Goods must be fully paid for — the unpaid seller retains rights over the goods, and double financing must be avoided.

Written undertaking (hypothecation)

Borrower must confirm goods are not charged elsewhere and will not be charged during the currency of the advance.

Regular stock statements

Obtain periodical certificates of quantity and value; physically verify stocks — element of surprise is desirable.

Ownership verification

Verify with original paid invoices before accepting goods as security.

Age of stock

Always consider how old the stock is — old stock loses value and marketability.

Margin maintenance

Stipulated margin must be maintained at all times; compute drawing power = stock value − unpaid stock value − margin.

Adequate insurance

Goods must be insured against fire, strike, riot, etc. For warehoused goods, verify the insurance policy with the warehouse authority.

Accessibility

Storage must be accessible at all times — not in residential premises or restricted third-party premises.

Inspection of Stocks

→Inspect all pledged/hypothecated stocks at regular intervals — at least once a month; surprise inspections are encouraged.
→Do NOT use the borrower's vehicle for inspection visits (prevents the borrower from staging the stock before you arrive).
→Open bags/cartons at random to verify contents match what is declared.
→Cross-check with the borrower's purchase register, sales register, stock register and GST records at the time of inspection.
→Write inspection observations in your internal bank report — do NOT write on the borrower's official records.

Stock Audit & Valuation of Stock

A stock audit is a credit-monitoring tool for fund-based working capital facilities above a cut-off (e.g., ₹5 crore) — conducted at least once a year by the lending bank. It assesses quality, identifies irregularities and helps the borrower manage inventory better.

Valuation principle: cost price or market price, whichever is lower. Goods are short-term, self-liquidating security — valued on a normal (not distressed) basis. Drawing power = total stock value − value of unpaid stock − stipulated margin.

Section 5

Documents of Title to Goods & Trust Receipts

Definition — Section 2(4) of the Sale of Goods Act

A document of title to goods is a document used in the ordinary course of business as proof of possession or control of goods, authorising (or purporting to authorise), by endorsement or delivery, the possessor of the document to transfer or receive the goods it represents.

Essential features:

→Mere possession of the document creates a right to possess the underlying goods (by law, trade or usage).
→The transferee can take delivery of the goods in their own right.
→Goods are transferable by endorsement and/or delivery of the document.
→These are QUASI-negotiable instruments — NOT true negotiable instruments, since even a bona-fide transferee for value can be affected by defects in the transferor's title.

💡 Examples of documents of title to goods

Bill of lading (sea), railway receipt (rail), lorry receipt (road), airway bill (air), warehouse keeper's transferable receipt. Note: a non-transferable warehouse receipt is merely an acknowledgement, NOT a document of title.

Risks (Demerits) of Advances Against Documents of Title

Fraud / Dishonesty

Document certifies dispatch, not quality. If goods turn out worthless, the bank has no remedy against the carrier or warehouse keeper.

Forged or Altered Documents

Documents may be forged outright, or genuine documents may have quantities altered.

Defective title passes on

Being quasi-negotiable, a bad title in the transferor's hands still taints the transferee-bank's title.

Unpaid vendor's right of stoppage in transit

Under the Sale of Goods Act, an unpaid seller can instruct the carrier to halt delivery. If exercised, the bank cannot obtain the goods — the security is worthless.

Lost document risk

Goods can be released on an indemnity bond if the document is lost — a borrower could misuse this. Remedy: give notice to the carrier of the bank's interest.

Precautions for the Banker

→For bills of lading (prepared in triplicate), obtain ALL copies — presenting any one copy releases the carrier from liability.
→Ensure documents carry no onerous clauses or adverse remarks about the condition of goods.
→Get the bank named as consignee so that endorsement / transfer of title is specific to the bank.
→Ensure goods are fully insured against theft, fire and damage in transit; for sea cargo, marine insurance covering all risks.

Trust Receipts

When the borrower needs to take possession of the goods to sell them (e.g., a trader taking delivery of imported cargo), but the bank still wants protection, the bank releases the documents against a trust receipt (trust letter). Under this arrangement:

→The borrower acknowledges the bank's rights in the goods and agrees to hold them (or their sale proceeds) in trust for the bank.
→On sale, the borrower must hold the proceeds in trust and not mix them with personal funds.
→The goods or proceeds are NOT available to the Official Receiver if the borrower becomes insolvent.
→Borrower undertakes to insure the goods, direct buyers to pay the bank if required, and return unsold goods on the bank's request.

Section 6

Advances Against Life Insurance Policies

Nature & Classification

A life insurance policy is an actionable claim — it is a financial right that can be assigned. It may be accepted as primary or collateral security. Banks lend against the surrender value — the amount the insurance company pays if the policy is surrendered before maturity.

Advantages

→ Insurance business is highly regulated; realisation is straightforward
→ Assignment to bank requires minimal formalities; bank gets perfect title
→ On default, bank can immediately surrender the policy to the insurer
→ Longer the policy has run, higher the surrender value
→ On the borrower's death, debt is liquidated from the policy proceeds
→ Tangible security in bank's custody; bank only needs to ensure premium payments

Disadvantages / Risks

→ Non-payment of premium causes the policy to lapse; revival is complicated
→ Any misrepresentation by the assured at inception makes the policy void (utmost good faith)
→ Duplicate policies can be issued if the original is lost — risk of misuse; always verify no duplicate exists
→ Married Women's Property Act policies: all parties must sign the bank's assignment form

Points to Verify Before Granting Advance

→Policy must be in force with all premiums paid to date — retain latest premium receipt.
→No restrictive or onerous clauses in the policy document.
→Policy must be the original, duly stamped and authenticated by the insurer.
→Insurance company must have admitted (verified) the age of the assured.
→Policy must be formally assigned in favour of the bank — sent directly to the insurer for noting the assignment.
→Premiums must continue to be paid regularly throughout the advance to prevent lapse.

Policies NOT acceptable as security

Children's endowment / deferred policies; policies taken specifically for estate duty; policies with nominations under Sec 6 of the Married Women's Property Act (unless all parties sign the assignment form).

Assignment of the Policy

→Assignment is made on the policy itself or on a separate stamped paper, and must be witnessed.
→Any nomination on the policy is automatically cancelled on assignment — the nominee need NOT join the assignment.
→The assignee (bank) is entitled to receive the policy amount on the assured's death.
→On full repayment of the advance, the policy must be re-assigned back to the policyholder.

Section 7

Advances Against Shares & Debentures

General Rules for Advances Against Shares

→Advance must be for productive purposes — NOT for speculation.
→Banks may provide a demand loan or overdraft; shares are also taken as collateral.
→Nature of charge: PLEDGE. Shares must be in dematerialised form wherever possible.
→Advances only against fully-paid shares. No advance against shares of a private limited company (no exit route).
→Banks may also accept listed preference shares; unlisted shares only in specific situations.
→Sec 19(2) of Banking Regulation Act: a bank cannot hold more than 30% of the paid-up share capital of any company (as pledgee, mortgagee or absolute owner) or 30% of its own paid-up share capital and reserves — whichever is less.

RBI Capital Market Exposure Limits

Basis	Overall Ceiling	Direct Investment Sub-Ceiling
Solo Bank	40% of net worth as on 31 March of previous year	20% of net worth (equity shares, convertible bonds/debentures, equity-oriented MF units, VCFs)
Consolidated Bank	40% of consolidated net worth as on 31 March of previous year	20% of consolidated net worth (same instruments as above)

Capital-market exposure includes: direct equity/convertible bond investments; advances against shares for IPOs/ESOPs; secured/unsecured advances to stockbrokers; guarantees for stockbrokers/market makers; bridge loans; underwriting commitments; margin trading finance; all VCF exposures; and Irrevocable Payment Commitments to stock exchanges.

Advances to Individuals Against Shares / Bonds / Debentures

Physical form

₹10 lakh per individual borrower

Demat form

₹20 lakh per individual borrower

Margin — equity / conv. debentures (physical)

Minimum 50% of market value

Margin — equity in demat form

Bank may stipulate higher; minimum determined by bank

→Banks must obtain a declaration from each borrower about loans already availed from other banks against shares, to prevent collusive action by interconnected entities.
→Board-approved loan policy required before lending to individuals against shares.
→For IPOs (including Follow-on Public Offers): same 50% margin applies; no finance to NBFCs for onward lending to individuals for IPOs.
→ESOP / employees' IPO quota: finance up to 90% of the purchase price or ₹20 lakh, whichever is lower. Banks cannot finance their own employees to buy their own bank's shares.

Advances to Stock Brokers & Market Makers

→Only to brokers registered with SEBI and compliant with SEBI/Stock Exchange capital-adequacy norms.
→Need-based overdraft / line of credit against shares and debentures held as stock-in-trade.
→50% margin; 25% minimum cash margin (within 50%) for guarantees for capital market operations.
→Each bank's Board must set a sub-ceiling within the 40% overall limit for (i) all brokers/market makers combined and (ii) any single broking entity including associates.
→No credit to brokers for arbitrage operations.
→Margin trading (loans to brokers for margin trading): minimum 50% margin; shares purchased to be in demat and pledged; Board-approved guidelines required.

Advances Against Debentures

Advantages

→ Easier to sell when listed
→ Price is a function of interest rates, not market sentiment — less volatile than equity
→ Minimum transfer cost; bearer debentures are fully negotiable
→ Higher priority over shares in liquidation; usually secured by charge on company property

Precautions

→ Confirm whether secured or unsecured (secured preferred)
→ Verify the company's borrowing powers have not been exceeded
→ Obtain deposit of debentures plus a memorandum of deposit; for demat debentures, pledge in the demat account
→ Check for any uncancelled redeemed debentures
→ Regularly assess the nature and value of assets charged for the debenture

Section 8

Loan Against Book Debts (Account Receivables)

What Are Book Debts?

Book debts are amounts owed to a business by its customers arising from credit sales. They appear in two forms: Bills Receivable (outstanding bills drawn on buyers) and Account Receivables (debit balances in customers' accounts). Assignment under Sec 130 of the Transfer of Property Act allows these receivables to serve as security.

Factoring

Sale of receivables to a factor (usually a bank / finance company) who collects from the debtors. Factor takes on the collection risk.

Forfeiting

Outright purchase of book debts — typically used in international trade for medium-term receivables.

OD / Cash Credit

Overdraft or cash credit extended against hypothecation of book debts — commonest form for domestic trade.

Guidelines & Verification

→Restrict to first-class borrowers with undoubted integrity and properly audited accounts.
→Maximum age of book debts accepted: 6 months (some banks limit to 3 months).
→Book debts must arise from genuine trade transactions — not advance payments for capital expenditure or disguised lending.
→Avoid concentration: do not accept book debts where a large share is from a single buyer.
→Notice of assignment must be given in writing to each debtor (Sec 130 TPA).
→For company borrowers: charge on book debts must be registered with the Registrar of Companies.
→Verify sales invoices, debtors ledger, overdue positions; check for bills returned and resubmitted to prevent double financing.
→Confirm that debtors acknowledge outstanding dues and agree to pay the bank directly.

Section 9

Loan Against Term Deposits

Key Features

→Nature of charge: PLEDGE (the deposit receipt is pledged to the bank).
→Maximum loan: 90% of the deposit amount / accrued value.
→Rate of interest: 1–2% above the deposit interest rate.
→The borrower can repay anytime before maturity; if not, the loan is squared off from maturity proceeds. Any shortfall is recovered from the borrower.
→Fixed deposit receipt must be duly discharged by all joint holders (with appropriate revenue stamp); all holders must execute loan documents or authorise one of them in writing.
→After granting the loan, the bank MUST note its lien in the fixed deposit register AND on the deposit receipt itself to avoid accidental payment.
→A letter of appropriation must be obtained, authorising the bank to apply the deposit proceeds towards the loan on maturity or on default.

Deposits in the Name of a Minor

Generally, no loan can be granted against a minor's deposit receipt. Exception: if the guardian seeks the loan strictly for the necessities of the minor depositor, the bank may consider it on obtaining an undertaking from the guardian that the proceeds will be used only for the minor's necessities.

Third-Party Deposits & Other Banks

→Third-party FD can be taken as security — FD holder must discharge the receipt, declare bank's right in writing, and agree to adjustment on maturity or default.
→Loans against FDs held with other banks are NOT permitted — the holding bank has a general lien over those deposits and may refuse to register a charge in favour of the lending bank.

Section 10

Loan Against Gold Ornaments

Core Rules & Limits

Charge type:Pledge

Max LTV (loan-to-value):75% of gold value — strictly capped by RBI

End use:Non-speculative, approved purposes only; no loans to silver bullion dealers for speculative use

Gold coins (minted by bank):Not treated as bullion; loans permitted but coin weight must not exceed 50 grams per customer

Raw/bullion gold:Loans NOT permitted against pure gold / bullion

Loan tenure (general):Up to 1 year; for term/demand loan up to 60 months

Basis of valuation:Average closing price of 22-carat gold for the preceding 30 days as quoted by the Indian Bullion and Jewellers Association (IBJA)

Lower-purity gold:Convert to 22-carat equivalent; value proportionately

⚠️ Valuation is gold-content only

Loans are based on the net weight of gold content — excluding stones, alloys, strings and fastenings. Labour charges are also excluded. The valuation report from the appraiser must clearly state finesse, gross weight and net gold weight.

Key Precautions

Ownership

Comply with KYC. Obtain a declaration from the borrower that the ornaments are their own property and they have the full right to pledge them.

Appraiser

Appoint an approved jeweller or shroff as appraiser. Valuation should take place in the bank premises. If the appraiser visits the borrower, arrange insurance coverage for ornaments in transit.

Valuation report

Must include description, finesse, gross weight, net gold weight (excluding stones/alloy/fittings), and market value. The report is part of the loan file.

Hallmarked jewellery

Prefer hallmarked jewellery — safer and easier to assess. Banks may set more favourable margin/rate for hallmarked ornaments.

Custody

Each borrower's ornaments go in a separate bag labelled with the loan account number and the party's name. Bags are stored in the strong room or fireproof safe under joint custody.

Insurance

Pledge jewellery must be insured against burglary at the appraised value. Fire insurance may be unnecessary if stored in a fireproof strong room.

Part release

On part repayment, check that the remaining ornaments cover the outstanding balance with the prescribed margin before releasing any pieces.

Default procedure

Give the borrower a notice to repay; on no response, send a registered-post reminder; then auction the ornaments, apply sale proceeds to the loan, and return any surplus to the borrower.

General lien

Even after the gold loan is closed, the bank can retain possession under its general lien if any other overdue amount is outstanding in the borrower's name.

Surprise verification

An officer other than the joint custodian should conduct surprise checks of ornament packets and record findings in a separate register.

Bullet Repayment of Gold Loans

Banks may offer bullet repayment (principal + interest payable at maturity) for gold loans taken against agricultural purposes, subject to strict conditions:

Max loan amount:₹2.00 lakh

Interest accrual:Monthly rests; collected only at maturity with principal

Max tenure:12 months from date of sanction

Margin:Bank must prescribe minimum margin; loan limit fixed considering market value, price fluctuations and accrued interest

NPA classification:Account becomes NPA (sub-standard) before due date if margin falls below the minimum — even without a repayment default

Income recognition:Interest income recognised in P&L only on actual collection

Section 11

Supply Bills & Vehicle Finance

Supply Bills — Government / PSU Trade Finance

Supply bills arise from contracts with Government departments or Public Sector Undertakings. A supplier / contractor submits bills for work done or goods supplied to claim payment under the contract. These bills are NOT negotiable instruments — they are debts that can be assigned to the bank.

Interim Bill

Government pays 80–85% of the bill amount on an interim basis as work progresses. Banks prefer to finance this portion — faster settlement, lower risk.

Final Bill

The remaining 15–20% is paid after complete verification of goods / work at the destination. Payment is delayed by administrative procedures. Banks prefer to take this for collection rather than advance against it.

Risks & Precautions

✗Advance is essentially clean — risk that Government may deduct for inferior quality, defective work or delayed delivery.
✗Recovery may take long due to Government administrative procedures.
✓Advance only to suppliers with proven Government-sector experience.
✓Scrutinise the contract: volume, supply period, agreed rates, terms.
✓Obtain an irrevocable power of attorney from the supplier, authorising the bank to collect payment directly from the Government department.
✓Reserve the right to demand repayment if bills remain unpaid beyond a specified period.

Vehicle Finance

→Charge created: HYPOTHECATION — vehicle remains with the borrower/operator; bank registers a charge with the Regional Transport Authority (RTA).
→Ownership is registered with the RTA, making ownership definite and transfer without the owner's consent difficult.
→On default, the lender can take possession of the vehicle (SARFAESI) and sell it for recovery.
→Vehicle value depreciates quickly — the loan tenor should be shorter than the useful life of the vehicle (typically 3–5 years).
→Being mobile, a vehicle may be difficult to trace if the borrower absconds — an inherent risk compared to immovable security.
→A prior charge registered with RTA prevents the security from being recharged to another lender without clearance.

Section 12

Exam Strategy

✅ Exam Strategy — Chapter 25 (Securities for Bank Advances)

1.Security is a CUSHION — mitigates credit risk but never replaces credit assessment. A loan is NOT sanctioned purely because security is adequate.
2.Two dimensions of security effectiveness: Economic (marketability, stable value, ascertainable value) and Legal (enforceability — clear title, no encumbrances).
3.Four categories: Immovable (mortgage) → Movable (pledge/hypothecation) → Financial/Actionable claims (assignment/pledge) → Intangible (assignment).
4.Primary security = funded by the advance itself. Collateral = additional asset of borrower or third party.
5.Land: DRT threshold ₹20 lakh; SARFAESI allows out-of-court enforcement; parent documents for 30 years; encumbrance certificate for 13 years; valuation conservative/distressed-sale basis.
6.Leasehold: longer unexpired period = higher value. Loan repayment must not extend beyond lease expiry.
7.Goods: pledge = possession with bank (key cash credit); hypothecation = possession with borrower (open cash credit). SARFAESI covers hypothecation too. Stock valuation: cost or market, whichever LOWER.
8.Documents of title to goods: defined in Sec 2(4) Sale of Goods Act. Quasi-negotiable (NOT negotiable). Risk: unpaid vendor's right of stoppage in transit. Bill of lading = obtain ALL three copies.
9.Trust receipt: borrower holds goods/proceeds in trust for bank; proceeds not available to Official Receiver in insolvency.
10.Life insurance: nature of charge = ASSIGNMENT. Surrender value is the lending base. Nomination auto-cancelled on assignment. Unacceptable: children's policies, estate-duty policies, MWP Act policies (without all signatures).
11.Shares: charge = PLEDGE. Only fully paid, listed shares (demat preferred). No advance against private company shares. Sec 19(2) BRA: max 30% shareholding in any company or 30% of own capital/reserves — lower of two.
12.Capital market exposure: 40% of net worth (solo, 31 March). Direct investment sub-ceiling: 20%. Same percentages apply on consolidated basis.
13.Individual share loans: physical ₹10 lakh; demat ₹20 lakh. Margin: 50% on equity/convertible debentures. Cash margin in guarantees: 25% (within the 50%).
14.ESOP: up to 90% of purchase price or ₹20 lakh, lower limit applies. Banks cannot finance their own employees to buy their own bank's shares.
15.Debentures: price driven by interest rates (not sentiment) — less volatile. Bearer debentures = fully negotiable. Verify borrowing power of issuer.
16.Book debts (Sec 130 TPA): charged by assignment or hypothecation. Maximum age: 6 months. Must arise from genuine trade. Notice of assignment mandatory in writing to each debtor.
17.Term deposits: charge = PLEDGE. Max loan = 90%. Interest = deposit rate + 1–2%. Lien must be noted in FD register AND on the receipt. No loans against FDs held with other banks.
18.Minor's FD: no loan generally; exception = guardian certifies use for minor's necessities.
19.Gold ornaments: charge = PLEDGE. LTV cap = 75%. Valuation base = IBJA 30-day average price of 22-carat gold, proportionate for lower purity. Net gold content only — no labour charges. Gold coins: max 50 grams per customer. Pure bullion: not eligible.
20.Gold loan tenure: generally 1 year; term/demand loan up to 60 months.
21.Bullet repayment (gold, agricultural): max ₹2 lakh; max 12 months; interest monthly rests but collected at maturity; NPA if margin drops below minimum even before due date.
22.Supply bills: NOT negotiable instruments — they are debts (assign to bank). Government pays 80–85% interim; 15–20% final. Bank finances interim; takes final for collection. Obtain irrevocable PoA from supplier.
23.Vehicle finance: charge = HYPOTHECATION. Registered with RTA. Loan tenor must be less than vehicle useful life (3–5 years). Depreciating asset — security cover depletes fast.
24.Best/most reliable security overall: Fixed Deposit Receipt of the bank itself.

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