To understand what the different types of securities are? Firstly we should know about what security is? The words security means safety or guarantee of any kind, which may be verbal, personal, or in the form of any property. It is essential for a creditor to secure his loan or advances through different securities. Security is a right possessed by a creditor in property or anything to convert the same into cash if the debtor fails to refund the amount advanced with interest.
Bankers, whenever advancing loans, first ask for the security to be put for the loans requested. Different types of securities are used depending upon the nature of the advances issued by the banks. Adequate security must be enough to cover the risk, highly liquid, free from any encumbrance, clean in ownership and easy to handle.
Types of Securities
There are four types of securities which are as under:-
Lien is the first kind of security which is the right of holdings the goods of the borrower until the loan is repaid. The borrower remains the owner of the goods but the possession is given to the lender. The agreement of lien explains whether it relates a particular debt or debts in general. In the ordinary lien, the creditor has only the right to possession of goods.
He has no right to sell it, but the banker’s lien is not the same. The banker has a right to sell the good after proper notice. The banker gets the property of the customer as his banker. Thus papers of money or goods with the banker are not for the purpose other than a lien. The banker takes the possession lawfully. There must not imply or express agreement against the lien.
Pledge is also one of the types of securities. It can be defined as “Bailment of goods as protection for payment of money owing or act of a promise”. The borrower is called pledger and the banker is called pledge. In case of pledge, there should be a bailment of goods and the bailment should be on behalf of the debtor or an intending debtor.
The delivery of goods is necessary for the contract of bailment. The delivery may be actual or constructive. The constructive delivery is made when the bailee puts his lock on the doors of Godowns storing the pledged goods or merely key of the lock on the Godowns door is received. It is essential that the bailee should return the same goods to the bailer or dispose of them according to his instructions.
Mortgage another type of security which can be defined as “A mortgage is the reassigning of interest in the particular fixed property for the reason of protection of payment of funds advanced by means of a loan, an presenting of future balanced due, or the act of commitment which maybe rise to a financial liability”. The transferor may be known as a mortgager. The transferee may be known as mortgagee. The contract is treated as a mortgage deed.
Hypothecation is also from one of the types of securities and can be defined as “A lawful transaction and essential goods are always accessible as security for a balance due without transferring either the property or the possession to the lender”.
It is clear that possession and ownership of the goods remain with the borrower and an equitable charge is created in favor of the lender. The borrower agrees to give the possession of the goods to the banker whenever the banker requires him to do so. It is possible when the transfer of possession is either inconvenient or impracticable.
If the borrower offers raw material or goods in possession as security, the transfer of possession will stop the functioning of the borrowers’ business. The creditor possesses the right of a pledge under the hypothecation deed. The position of the banker under hypothecation is not as safe as under a pledge.
If the borrower fails to give the possession of eth goods hypothecated, the bank can file a suit in the court of law for the recovery of the amount lent. The advances against hypothecation are risky. The bank should make sure that the party has a good reputation, should check the property regularly and asks the hypothecator to submit periodical reports.
Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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