Mode of Security
Banks provide credit on the basis of the following modes of security
Under this mode of security, the banks provide credit to borrowers against the security of movable property, usually inventory of goods. The goods hypothecated, however, continue to be hi the possession of the owner of these goods (i.e the borrower), the rights of the lending bank (hypothecated) depend upon the terms of the contract between the borrow and the lender. Although the bank does not have physical possession of the goods, it has the legal right to sell the goods to realize the outstanding loan. Hypothecation facility is normally not available to new borrowers.
Pledge, as a mode of security, is different from hypothecation in that in the former, unlike in the latter, the goods which are offered as security are transferred to the physical possession of the lender. An essential prerequisite of pledge, therefore, is that the goods are in the custody of the bank. The borrower who offers the security is, called a paw not (pledge), while the bank is called the Pawnee (pledge). The lodging of the good, by the pledge to the pledge is a kind of bailment. Therefore, pledge creates some liabilities for the bank. It must rake reasonable care of goods pledged with it. The term reasonable care means care which a prudent person would take to protect his property. He would he responsible for any loss or damage if he uses the pledged goods for his own purposes: In case of non payment of the loans, the bank enjoys the right to sell the goods.
The term lien refers to the right of a parry to retain goods belonging to another party until a debt due to him is paid. Lien can be of two types: (i) particular lien. and (ii) general lien. Particular lien is a right to retain goods until a claim pertaining to these goods is fully paid. On the other hand, general lien can be applied till all dues of the claimant are paid. Banks usually enjoy general lien.