credit question-answer

Special question & Answer of Bank Credit !

Write down the procedure to create charge on stock exchange securities?


Ans.  Charge can be created on stock exchange securities in following two ways:


i). By giving a legal title: in case of legal title the securities are transferred by the borrower to the bank in its name. The name of the banks or its nominee replaces the name of the borrower in the companies records. The borrower may not prefer to a legal mortgage for following reasons:


  • The transfer and retransfer of securities involve costs in terms of stamp duty which has to be borne by the borrower.
  • The reputation of the borrower is lowered because the fact of charging the security becomes public.
  • The borrower is deprived of voting and other rights attached to the securities for the period they stand in the name of the bank. In case the borrower was holding directorship of a company on the basis of these shares, he may lose that also.


ii). By giving an equitable title : In case of an equitable charge the borrower transfers the equitable title of the securities in favor of the bank by depositing the securities with it. The securities continue to stand in the borrowers name in companies records/ The equitable charge may be created by any of the following ways:


  • By mere deposit of securities: Mere deposit of securities with the banker with the intention of creating a charge in favor of the bank is not very popular with the banks on account of likely complications that may arise in the absence of any written document.
  • By memorandum of deposit: The bank may obtain from the borrower a memorandum stating that:

i). Securities mentioned therein have been deposited by the borrower as security for the loan obtained from the bank.

ii). The bank will be entitled to sell the securities in the event of failure of the borrower to make repayment as per terms of agreement.

iii). The banker will be entitled to debit the borrower’s account with any amount that it might have to pay towards payment of call on securities (in case of partly paid up securities)

  • By Blank transfer: The customer may be required to deposit with the bank together with blank transfer forms duly signed by him. The advantage of such a transfer is that the bank may at any time fill its own name or that of any other person to whom it has sold the securities for recovering the loan.
  • By power of Attorney: The bank may get executed from their customers in respect of securities deposited, special power of attorney either in its own favor or in favor of its nominees.



What are the risks in case of equitable charge? Which conditions are to be satisfied prior accept of equitable charge on securities?


Ans. i). Existence of prior equitable title:  An equitable charge becomes defective by a prior equitable charge or a subsequent legal charge.


ii). Companies right of lien: In case the articles give the company right of lien on its shares, it will have an adverse effect on banker’s right of equitable charge.


iii). Absence of information to the Bank: Since the borrower continues to be the registered holder of shares, he gets every information regarding issue of bonus shares, companies meetings, issue of right shares etc. The borrower may gets the bonus shares and may sell them directly. Thus, the bankers security is reduced.


Conditions are to be satisfied prior accepting of equitable charge on securities:


i). The customer is of a high integrity.

ii). The advance is not of a high amount.

iii). The advance is for a temporary period.

iv). The constituents of the shares deposited change frequently.



What do you mean by “Equity shares” & “Preference Shares”?


Ans. Equity Shares: Equity shares (also known as ordinary shares) are those which carry no special rights in respect of annual dividend and the return of capital if the company is  wound up. They are not given any guarantee of dividend on their investment in the company. They are entitled to receive such dividend as are determined by the Board of Directors and approved at the Annual General meeting of the company. Dividend among the equity shareholders of a company is distributed out of the net profits of the company, i.e. after all the fixed charges have been met and preference shareholders have been paid fixed rate of dividend on their shares. Equity shareholders have been called “residual claimants”. Equity shareholders are those who provide “venture or sponsor capital” for the company without insisting on any special conditions for the safety of their capital.


Preference Shares:  Preference shares of a company are those shares which carry certain preferential rights for its holders over those of equity shareholders. Preference shares carry a prescribed rate of dividend, which the company share have to pay before any dividend can be distributed to the equity shareholders.


Preference shares may be either cumulative or non-cumulative. In cumulative preference shares, the dividend due on them is to be paid every year. If there be no profit for a few years, the dividend due for those years on the cumulative preference shares will have to be paid out of the profits of the position to pay the same. Till the dividend due on this kind of share is paid in full for all the years, no dividend will be paid to equity shareholders. Non cumulative preference share do not carry this privilege. Their dividend depends upon divisible profit of each separate year. If the fixed dividend for any year cannot be fully paid, it is not made up out of the redeemable or non-redeemable.



What are the procedure of forced sale of shares?


Ans. In case the bank decides to close the account by selling the securities, due notice should be given to the borrower. A lawyers notice would be preferable. The securities should be sold after the expiry of the notice. It would be better if the bank obtains an authority from the borrower to sell them. It should be carefully noted that the Bank should sell only so much of the securities that would be required to adjust the debit balance of the account. The sale should be arranged through a respectable broker only under a recognized stock exchange & the party kept informed in writing of the sale of the securities from time to time. After the account is adjusted in full, the balance of the securities should be returned to the borrower unless the bank can, under an agreement, exercise its lien thereon in respect of any other indebt ness.



What are the documents required for allowing credit against shares?


Ans. 1. Application for advance.

  1. Demand Promissory Note.
  2. Letter of Continuity (For Overdraft)
  3. Letter of General Lien
  4. Original share script with blank transfer deeds signed by the shareholder duly witnessed but undated (If the shares are not transferred in the name of the bank).
  5. Letter of Guarantee of the shareholder.
  6. Irrevocable letter of mandate in duplicate for collection of dividend, bonus etc. addressed to relative companies by the shareholder (a copy thereof should be sent to the company concerned under cover of a forwarding letter).
  7. Notice of pledge by the shareholder to the related companies.
  8. Declaration of pledge by the shareholder to the related companies.
  9. In case of renewal of documents in addition to full set of documents, letter of acknowledgement of debt should be obtained.

    What do you mean by Debenture? Briefly discuss different types of debenture?


Ans. A debenture is a document issued by a company usually under its common seal acknowledging the indebtness of the company either to the bearer or to the registered holder of the document. Debenture is a loan to a limited company bearing fixed rate of interest. Interest is payable whether the company makes a profit or not.


Debenture may be secured either by a fixed charge or floating charge on companies assets. If there is no charge, debentures are clean or unsecured, these are sometimes called naked debentures. In case of winding up of a company, the secured debenture holders can have recourse to the property charged. If unsecured they will rank with ordinary creditors.


Different types of debentures:


i). Debenture to bearer: Debenture is payable to bearer, with or without power for the bearer to have them register or to have them at any time withdrawn from it. These are transferable and have been recognized as negotiable instrument transferable by delivery.


ii). Registered Debenture: This debenture is payable to a registered holder. Any transfer must be registered with the company.


iii). Simple or Naked debenture: Those where no security is given for payment of interest or repayment of principal.


iv). Mortgage Debenture: Any debenture secured by a charge, whether specific or floating, on the whole or part of the assets of the company, is called a mortgage debenture.


v). Redeemable or irredeemable Debenture: Redeemable debenture indicate that the company agrees to pay money lent at a stipulated time or after a certain period of notice. Irredeemable debenture have no date of for repayment.


What are the documents required for financing against Debentures?


Ans. 1. Application for advance.

  1. Demand Promissory Note.
  2. Letter of Continuity (For Overdraft)
  3. Letter of Lien
  4. Irrevocable letter of mandate for collection of interest etc. addressed to relative companies by the debenture holder.
  5. Letter of Authority given by the borrower to sell the debenture in default of borrower in repaying the advance.


Define “Life insurance policy”? Discuss different types of policies?


Ans. Life Insurance Policy: A life insurance policy is a contract in which one party (the insurer) agrees to give a certain sum upon the happening of a certain event contingent upon the duration of human life, in consideration of the immediate payment of a smaller sum or certain periodical payments by another (i.e. the insured).


Different types of Life insurance policy:


  1. The whole life policy: Under this policy the premiums are payable throughout the life time of the life assured.


  1. Endowment policy: Under this policy, the insured amount is payable to the insured on his attaining a specific age or on the predetermined date.


  1. Joint life policy: Where two or more lives are insured jointly, such a policy is issued.


  1. With or without profit policy: A with profit policy is one, the holder of which is entitled to take benefit or bonuses declared out after a certain period of time. In case of without profit policy this benefit is not available.

    What are the merits & demerits of granting advances against life insurance policy?


Ans. Merits: i). Valuation can be done easily.

ii). Security requires no supervision & expenses except keep watching on premium payment.

iii). Assignment can be affected simply & perfect title easily obtained.

iv). Value steadily increases.

v). Surrender value can be easily ascertained. (Surrender value: A life policy has a certain value even before it matures. Such a value is called the surrender value).


Demerits: i). They are contract of the utmost good faith & requires utmost accuracy and trust from the proposer.


ii). Risk of non payment of premium by the borrower.


iii). The persons claiming under any policy of insurance must have insurable interest in the life assured otherwise the contract is void.


What do you mean by ‘Surrender Value’?


Ans. A Life policy has a certain value even before it matures. Such a value is called the ‘Surrender Value’. Surrender value is thus the amount which the company is prepared to refund on a policy should the policy holder wish not to continue the policy. Normally a policy acquires surrender value after complete three years premiums has been paid.



What do you mean by ‘Real Estate’? What are demerits to consider credit against ‘Real Estate’?


Ans. The term ‘Real Estate’ indicates all types of immovable property which are attached or unattached to land or forming part of land. Thus it includes such tangible assets as land, buildings, factory premises, etc.


Demerits to consider credit against real estate :


i). Title of the owner.

ii). Difficulty in valuation of property.

iii). Legal formalities and time consuming.

iv). Absence of ready realization.

v). Legal bar.


What are the disadvantages of credit against ‘supply bills’? How the disadvantages may be overcome?


Ans. Followings are the disadvantages:


i). The collection of supply bills takes time specially from Government Offices.

ii). Despite the assignment of debts to the bank, the department still has a right of set off against the supply bill amount for any amount due to it.

iii). Unless the Registered assignment, possibility of bill could be paid direct to the creditor.

iv). Since the goods are already supplied, the bank has not other security other than the supply bill furnished by the contractor.

v). The amount claimed by the supplier may be reduced due to short or defective supply.


Precautions to overcome the disadvantages:

i). Supplier must be confined to first class who is not only honest but also have enough business experiences.

ii). Original contract paper should be scrutinized carefully & attested copy of the same should be retained at bank’s custody.

iii). Registered Irrevocable Power of Attorney should be obtained from the borrower in favor of the bank to collect the bills receivable.

iv). Bill must be accompanied with the inspection notes or challans.

v). Appropriate margin to be retained by the bank.



What are the disadvantages of credit against ‘Book Debts? How the disadvantages may be overcome?


Ans. Followings are the disadvantages:


i). It is by nature an unfavorable from Bankers point of view due to clean credit facility.

ii). The realization of book debts is not so easy job and is risky.

iii). In the case of book debts, the banker is placed in the position of a debt collector.

iv). If the book debts are subject to a prior charge or a counter claim of the debtor, the banker will not be able to get the full benefits of the book debts.


Precautions to overcome the disadvantages:


i). Solvency of the debtor must be ascertained.

ii). Legal Assignment to be effected by execution of an instrument in writing.

iii). The banker should give notice of assignment to the debtor.

iv). The debtor should acknowledge receipt of notice and to confirm the debt.

v). The borrower must authorize the bank to receive the debt of the party by executing a power of attorney.

vi). The assignment should be of whole debt not for part one.



Write short notes on the following:


Ans. a). Average Clause: Under the ‘average clause’ if the property is under insured, the assured shall be considered to be his own insurer for the difference between the market value of the property and the amount of insurance. Similarly uninsured goods should not be left with insured goods. In the event of loss, the insurance company will not compensate the loss to the full extent as it would have done, had the property been insured for the full value, the company will compensate only rate ably. Thus this average clause will reduce bank’s claim as uninsured or underinsured goods will be including in calculating the actual loss.


b). Bank/Mortgage Clause: It provides that inter alia notice in all matters shall be given to the bank by the insurance company, all claims shall be paid to the bank whose receipt shall be a valid and complete discharge, and the bank can settle or compromise the claim with insurer without reference to the borrower.

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