Write down the value of assignment as security? What precautionary measures bank should follow before considering assignment?

Ans.  Assignment is not good security for following reasons:

a). Value of the assignment depends on the integrity and credit worthiness of assignor and his debtor.

b). In case assignor’s debtor exercise right of set off, Assignees position become vulnerable. Assignee can not have better rights than those which the assignor possessor.

c). Right of assignee may be repudiated by breach of contract between assignor and his debtor.

Necessary precautions for the Bank:

1. Assignor to give irrevocable letter to debtor to pay debt to Bankers.
2. Banker must get assignment acknowledged by debtor.
3. Banker must get clear notice of prior assignment.
4. Banker must send notice of assignment to debtor to prevent subsequent assignment.
5. Constant follow up necessary.
6. Assignment for whole.

What is the distinguish between Mortgage & Assignment?

Ans. In a mortgage, there is always a right of redemption for the mortgagor but in an assignment, it is provided by a separate agreement.

What do you mean by Set-off? What are the essential features of set-off? When ‘Automatic right of set off ‘is implemented?

Ans. The right of set off enables the Bankers to adjust wholly or partially as circumstances permit, a debit balance in a customers account with any balance lying at his credit. Both these claim must however be for known amounts in the same right and due immediately.

Set-off arises when a debtor or his creditor wishes to arrive at the net figure owing between them when separate accounts or debt are involved.

Essential features of set-off:

a). Mutual debts for sums certain.

b). Debts must be immediately.

c). Debts must be in the same right.

d). No agreement to the contrary.

Under the following cases ‘Automatic Right of set off’ is implemented:

a). On the death, insanity or insolvency of the customer.

b). On the insolvency of a partner of a firm.

c). On the winding up of a company.

d). On receipt of a Garnishee order.

e). On receipt of a notice of assignment of the credit balance of the customer.

f). On receipt of an information of a second mortgage over the security which is charged to the Bank.

Write short notes on :

i). Notice of set off: As already stated the right of set-off accrues to the banker as a result of banker customer relationship. When a customer open two or more accounts it may be his intention to keep them separate. So his different accounts can not be arbitrarily combined without proper notice to the customer.  Under such situation, it is advisable to take prior letter of set off so that a banker can combine them at its discretion without giving the customer any notice. It also serves as a proof that the bankers right of set off exists and the customer has not waived it. However, in actual practice the bank sends a notice to the customer as soon as the right of set off is exercised.

ii). Automatic right of set off: The following are the situations where the bankers right of set off automatically accrues and no notice of set off is necessary:

1. On the death, insanity or insolvency of the customer.
2. On the insolvency of a partner of a firm.
3. On receipt of a garnishee order.
4. On the winding up a company.
5. On receipt of notice of assignment of the credit balance of the customer.

iii). Bankers right of set off: In following cases branch can exercise the right of set off:

1. To combine two or more accounts of the same customer in the same branch of a bank.
2. To combine two or more accounts of a customer maintained in different branches of the same banks.
3. To adjust the surplus amount of the sale proceeds or realization of the securities held as cover for one particular debt for liquidation of any other debt after realization of that particular debt.

What are the distinguish between Lien & other charges?

Ans. Lien is differentiating from other charges while it is a creation of law under certain circumstances without any agreement whatsoever between the parties & on the contrary all other charges originated as a result of agreement between the parties. Lien is a defensive right not enforceable at a court of law, while others are positive right.

What are the distinguishes between Pledge & Hypothecation?

Ans.

What are the distinguishes between Hypothecation & Mortgage?

Ans.

What are the distinguishes between Mortgage & Charge?

Ans.

What are the general principles to consider prior granting advances on the basis of securities?

Ans. i). Immovable Properties ii). Movable Properties.

Movable properties: a). Goods, b). Documents of title of goods c). Stock exchange securities d). Life insurance policies e). Fixed deposit receipts f). Book debts g). Supply bills

General Principles:

1. Adequacy of margin: Margin implies the excess of the market value of the security over the advance granted against it. In order to determine margin, there are various factors to be consider: * Fluctuation in market price * Financial soundness * Reserves Bank control
2. Ready marketability: Security should be easily marketable.
3. Documentation: In order to avoid all future disputes, documentation should be verified carefully.
4. Realization of advances: The Bank has to monitor that the loans and advances are realized on their expiry.
5. Continuing security clause: The banker should get continuing clause in the loan agreement.

Why bank obtain margin while grating loans?

Ans. a). The market value of the security is subject to fluctuations. In case of a fall in the value of the security, the interests of the bank are safe if there is an adequate margin.

b). The security remains the same while advance against the borrower may go on increasing on account of non-payment of interest,  charges etc.

For which reasons bank do not prefer to advance money on the security of immovable security? What precaution should follow prior allowing credit against immovable security?

Ans. i). Difficulty in ascertaining the title of property ii). Not readily realizable iii). Restrictive laws. iv). Valuation problem v). Legal formalities.

Precautionary measures:

i). Borrower should be financially sound & the business for which money is borrowed should be economically viable.

ii). The borrower should have a clear title over the property to  be given as security. It should be free from any encumbrance.

iii). The property should be properly valued. (Value depends on Ownership right, location of the property, type of construction, size & structure layout, rental value etc. )

iv). Proper margin should be kept.

What are the precautionary measures prior allowing advance against goods?

Ans. i). Selection of borrower: Three “C” s should be ensured.

ii). Selection of the commodities: Commodities should have fairly stable price.

iii). Charging the securities: Which method would be proper for charging securities.

iv). Storage of goods: Storage facility should be safe & easily reachable.

v). Conduct of the account: Account performance of the borrower.

vi). Legal requirements: to be followed properly.

What are the risks involved for granting advances against documents of title?

Ans. i). Possibility of frauds ii). Non-negotiability nature iii). Obtaining delivery on the basis of indemnity bond.

What are the classification of Stock Exchange Securities?

Ans. i). Government Securities: They include securities issued by the Central Governments.

ii). Semi-Government Securities: They include securities issued by semi –government institutions like port trust, improvement trust.

ii). Corporate Securities:  They include securities issued by public limited companies.

What are the merits & demerits of stock exchange securities?

Ans. Merits: i). Reliability: Tangible, better in comparison to personal guarantee & easier for banker to verify the title of the borrower.

ii). Liquidity: Stock exchange securities & Govt. & Semi-Government securities are more easily realizable as compared to stock, land, buildings etc.

iii). Price stability: Good stock exchange securities do not have much fluctuations in their prices. Hence a banker can be more sure of recovering his funds.

iv). Easier valuation: Since the securities are quoted on the stock exchange, the banker can ascertain their value quite easily.

v). Transferrability: The ownership of stock exchange securities can be easily transferred as compared to other partially negotiable securities such as land, building etc. Moreover, in time of need the banker may also obtain funds on the basis of these securities.

vi). Regular recovery: The dividend of interest which is received from time to time on these securities can be used for recovery of interest due on the loan or repayment of the principal itself.

Demerits: i). Liability to pay in case of partly up shares: In case partly paid shares have been transferred in the bankers name and the company makes a call, the banker will have to make payment of such a call. So, Banker should not accept partly paid up shares as security.

ii). Companies Lien: The articles of companies generally provide that the company will have right of lien on its shares for any call due on them or any money due by the shareholder to the company. However this right of lien will not be available to the company against such debt which the company might have contracted after receipt of notice of pledge from the bank. But in case the bank fails to give notice or there are already large debts outstanding against the debtor in favor of the company, the bankers interest will be adversely affected.

iii). Forgery: The bank may suffer loss on account of forgery committed by the borrower, i.e. the transferor signatures may have been forged or the original as well as duplicate copy of the same certificate might have been pledged with different bankers by the borrower. In case the shares have been registered in the name of the bank on the basis of forged signatures of the transferor, the banker is liable to the company for any loss suffered by it.

iv). Fluctuations in prices: The bank may have to suffer loss in case there are violent fluctuations in the value of the securities and it has not kept adequate margin.

What precautions banker should take prior granting advances against Stock Exchange Securities?

Ans.  1. Selection of securities: The task of the selection of corporate securities is performed by the Head Office of the Bank. While selecting such securities for inclusion in the list, the following factors are considered: a). Nature of companies business b). Companies management c). Past working results d). Market trends in values of the shares of the company.

2. Valuation of securities: The valuation of corporate securities dealt on stock exchange can be done on the basis of daily stock exchange quotations. However, the bank should also calculate the break up value of the shares. While valuing these securities in case they are quoted cum-dividend or cum-interest, the amount of dividend or interest included in the price should be subtracted.

3. Creation of Charge: The banker should finally get the securities charged in its favor & the charge can be created in either of the two ways:

i). By giving a legal title & ii). By creating an equitable title.