Advances against securities

Prof. Divya Gupta

 General Principles of secured Advances

 1. Adequacy of Margin
 2. Marketability of securities
 3. Documentation



 Adequacy of margin
 Reasons for adequate margin
 a) Fluctuation in market value of securities
 b) Liability of borrower increases
 Factors determining Margins
 a) Necessity goods or luxury goods
 b) Shares of industrial concern
c) Selective credit control by RBI
Continue…
Nature of security Margins generally
recommended
Stock in trade 25% to 30%

Equipment & immovable 30% to 50%

property

Book debts 40% to 50%

Equity shares 50%

preference shares 25%

gold bullion 20-30%

 Types of securities
1. Advances against goods
2. Advances against Title of goods
3. Advances against Stock exchange securities
4. Advances against LIP
5. Advances against FDR
6. Advances against Book debts
7. Advances against Land & Building
8. Other securities
Advances against Goods

Divided into four broad categories

1. Food articles
2. Industrial raw-material
3. Plantation products
4. Manufacturers and materials
Merits:

Safety
Easy Marketability
Shorter duration of advances
Easy to evaluate
 Demerits
 Risk of deterioration
 Risk of fraud
 Storage and verification
 Fall in the value of security
 High transport cost
 Precaution to be taken :
1. Integrity of the borrower
 2. Purpose of the loan
 3. Nature of the commodity
 4. Knowledge of different markets/ Proper care in
valuation
 5. Proper storage
 6. Rented godown
 7. Title of the owner
 8. Insurance
9. RBI directives
 Advances against Title of Goods

 Bill of Lading
 Warehouse receipt
 Delivery order
 Railway receipt
 Dock warrant
 Bill of Lading
 Three copies
 Original, duplicate and triplicate

 Features :
 Contract of Affreightment
 Full ownership of goods
 Not a negotiable instrument


 Precaution for Bill of Lading
 1. All copies of Bill of lading
 2. Document endorsed in blank (Freight
charges)
 3. No onerous condition
 4. Insurance policy
 Warehouse Receipt
 It is a document issued by a warehouse keeper stating that he
holds the good described therin and awaits instruction from the
person to whom it is addressed.
 Precautions to be taken:
 1. Not a negotiable instrument
 2. Licensed warehouse
 3. Acknowledge or new receipt
 4. Storage conditions
 5. Insured & rent paid



 Others:
 Delivery Order

 Railway Receipt

 Dock Warrant
 Precaution in case of delivery order

 Verify the delivery order

 Should not remain outstanding for a long
period
 Register delivery order from warehouse
keeper
 Railway receipt
 Documentary Bill/instrument
 DA/DP
 Not negotiable
 Precautions in case of Railway receipt

 Well established parties

Cross check
 Endorsed favoring Bank
 Insured wherever its necessary
 Should be ‘Freight paid’


 Advances against stocks & shares

 Merits
 1.Value can be easily ascertain
 2. Safety
 3. Realization is easier/Liquidity
 4. Income by dividend


 Continue:
 Demerits
 1. Approver list
 2. Case of partly paid up shares
 3. Selection of right type of securities
 4. No loan against unquoted securities

 Precautions :
 1. Verify, registration, sufficient margin, pending
calls
RBI Guidelines on loan against Shares

 Loans against the security of shares, debentures and bonds should not exceed the limit of
Rupees ten  lakhs  per individual  if the securities are held in physical form and  Rupees
twenty lakhs per individual  if the securities are held in dematerialised form.

 Banks should maintain a minimum margin of 50 percent of the market value of equity
shares / convertible debentures held in physical form. In the case of shares / convertible
debentures held in dematerialised form, a minimum margin of 25 percent should be
maintained..

 The ceiling of Rupees ten lakhs / Rupees twenty lakhs for advances against
shares/debentures to individuals will not be applicable in the case of share and stock
brokers / commodity brokers and the advances would be need based.


 No bank should grant any loan / advance against security / collateral of IDRs issued in
India.
 Advances against LIP
 Types of Life Insurance Policy
 1. Whole Life Policy
 2. Endowment Policy
 3. Money Back policy


 Continue:
 Merits:
 1. Liquid security
 2. Stability in value
 3. No problem in ascertaining the value
 4. Assignment made easy
 5. No supervision
 Demerits:
 1. Evasion of facts when policy is effected
 2. Non payment of premium
 3. Risk in case of suicide

 continue:
 4. Admission of age

 Precaution to be taken:
 1. Preference to endowment policy
 2. Existence of insurable interest
 3. Proof of admission of age
 4. Ensuring survival of the policy
 5. Extent of advance
 6. Assignment of the policy
 Advances against FDR

 Precautions to be taken :
 1. Deposit receipt in borrowers name
 2. Deposit receipt in minors name
 3. Advances against third party receipt
 4. Margin
 5. Rate of interest
6. Note the lien(of other branch or bank)
 Advances against Book Debts

 Precautions to be taken:
 1. Finding out the validity of the claim
 2. Getting legal assignment
 3. Notice of assignment forwarded to debtor
 4. Assignment by joint stock company
 5. Enquiries about the debtor

Thank You!!!