The following are the general precautions to be taken in case of bank loan against documents of title to goods by a banker to protect himself against the risks:
Precautions for bank loan against documents of title to goods
- Advances against documents of title to goods should be granted only to parties who are honest and thoroughly reliable.
- Special care should be taken to see that documents are genuine and no forged and are of recent origin. In case of a bill of lading, which is prepared in triplicate, all the copies must be obtained by the banker. This is because the carrier is released from his obligation by delivering the goods on the presentation of anyone copy containing ostensibly regular endorsements.
- It should be carefully noticed that the documents of title do not contain any onerous or prejudicial remarks about the packing of the goods received. If the document contains a remark to this effect, such as, “packing defective”, or “goods not properly packed” or “the container leaking”, the banker should not grant any advance against such receipt.
- To get rid of the danger of contents of goods being different from what they have been described in the documents, it is desirable that a certificate from a reliable firm of packers is obtained, especially in case of valuable goods.
- The banker should obtain an appropriate memorandum of charge from the borrower, giving the banker the power to acquire possession of the goods and store them properly and insured them at the cost of the borrower and later sell them in case of default by the borrower in making the payment.
- The banker should ensure that the goods are adequately covered by insurance for the full value against risks of theft, fire, the damage is transit, etc., and in case of goods coming by sea, for all marine risks.
- It is also essential that the issuer of the documents of title to goods, i.e., transporter, warehouseman, etc., is reliable and trustworthy.
- As the instruments are not negotiable, the banker cannot obtain valid title, if the ledger himself is not genuine. Therefore, by making inquiries and with verification of concerned documents, he must ensure that the ledger is a genuine owner of the goods represented by documents.
- The documents of title to goods should be endorsed in favor of the bank, where necessary. For example, if in a railway receipt, the consignor himself is the consignee, he should endorse it in favor of the bank. A railway receipt where the drawee of the bill is the consignee, may not be of much use as security as the drawee/consignee can take delivery of the goods without production of relative railway receipt by executing an indemnity bond.
- If the goods are delivered by the carrier to some wrong party against an indemnity bond, while the bank holds the railway receipt (and is entitled to the possession of the goods), the bank as a pledge will be put to great inconvenience and expenses of litigation. It is, therefore, advisable for bankers to give the carrier (e.g., railway office of destination) notice of his interest in the goods with a request not to deliver them without production of the railway receipt delay discharged.
Subject to the above observations, advances against documents of title to goods may be treated as advances against goods, because it is the goods that form the security for such advances.
The banker has to ensure that the goods are readily saleable and there is an adequate margin not only for the advance but also for clearing and storage charges which may have to be incurred consequent to non-retirement of the bill by the drawee.
The usual documents of title to goods and the special features of each of them are given below.
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