When money deposited by a customer is not repayable on demand and is payable only after the expiry of a specified period from the date of deposit or after a specified period of notice, such deposit is called a fixed deposit. The banker acknowledges such a deposit by a receipt known as Fixed Deposit Receipts.
Sometimes, it happens that customers require advances form the banker on the security of fixed deposit receipt maturing at a future date, or alternatively he may request the banker for the repayment of the deposit before its due date. This term is commonly known as an advance against fixed deposit receipts.
Though banks are not bound to allow such advances, it is customary to do so, as the depositor may require the facility for an urgent need which could not have been anticipated at the time the money was deposited.
For security point, it is certainly the most valuable, as there is no problem of valuation or inquiring about the title or the problem of storage and costs associated with storage. While making advances against the fixed deposit receipt, the banker should observe the following precautions.
Practice and Procedure for an advance against fixed deposit receipts
1. Advances should, as a rule, be granted to the person in whose name the deposit stands.
2. If the deposit is in two or more names, payable to them on their joint signatures, they must all discharge the receipt by signing across a revenue stamp, as also all signing a memorandum of the pledge. The loan documents should also be signed by all of them and the loan amount should also be paid under joint signatures.
3. In case the fixed deposit is in the name of two or more persons and, is “payable to either or survivor”, no advance should be made to one of the parties on the security of the deposit receipt, as no single depositor is entitled to raise a loan on the security of the deposit without the consent of the other or all others. The desirable course is that all depositors should sign the documents including the demand promissory note and the letter of lien. Where this is not possible a letter of authority, signed by all authorizing the applicant to borrow money and to sing the documents and to discharge the receipt and pledge the same with the bank as security, should be obtained.
4. No advance should ordinarily be granted against a deposit standing in the name of a minor. In special cases, banks can make advances where a minor is a son or daughter of a guardian when a declaration from the guardian should be obtained standing that the money belongs to him, but has been kept in the minor’s name as a matter of convenience and, the amount of advances is intended to be utilized for the benefit to the minor.
5. The deposit receipt should be discharged by all the depositors on an appropriate revenue stamp on the reverse of the receipt. Where the receipt is payable “jointly” or, to “either-or survivor,” discharge by all the depositors must be obtained. The signatures must be tallied with the specimen signatures in the bank’s record.
6. The discharged receipt must be surrendered to the bank along with a memorandum of pledge signed by the depositor authorizing the bank to appropriate the proceeds of the receipt on maturity towards the repayment of the advance in case the customer fails to pay the loan on the due date. This letter is usually known as ‘Letter of Appropriation.’
7. The bank’s lien should be prominently noted in the deposit register, ledger, and, also, on the face of the receipt, under the signature of an authorized officer to avoid any complications at some later stage.
8. In case, loan in advanced against a fixed deposit receipt in the name of a third party, the fixed deposit receipt duly discharged by the depositor should be obtained along with the letter of authority, authorizing the bank to allow the loan to the person named in the letter against the receipt and, t apply the proceeds of the deposit towards payment of advance in case of default to liquidate the loan on the due date. Lien is registered in the bank’s books and on the deposit receipt.
9. Generally, no advance is granted by a branch against the fixed deposit receipt issued by another branch of the same bank. If at all such an advance is granted in a special circumstance, the branch granting the advance should get the discharge on the receipt on revenue stamp duly verified by the issuing branch and obtain confirmation that a lien is noted in the fixed deposit register with the branch who issued the receipt before granting the advance. As a further precaution, the lending branch should ascertain that no lien is already noted against the deposit receipt at the issuing branch. A letter should be taken from the borrower addressed to the issuing ranch t remit proceeds to the lending branch of maturity of the receipt issued by another branch of the bank, the depositor must be properly identified.
10. As a rule, no advance is to be allowed against a fixed deposit receipt issued by another bank become of obvious legal complications. A fixed deposit receipt is not transferable. So, if such advance is to be made then a deed of assignment is to be executed by the depositor in favors of the bank from whom he is going to borrow money and, that deed will attract ad valorem with the bank concerned to the effect.
11. In the case of an advance against fixed deposit receipt in the name of a limited company, the same procedure is followed as stated above but the bank should see that
- An inquiry is made to ascertain that no prior assignment in respect of the fixed deposit exists;
- A duly authenticated copy of the resolution of the directors to borrow against the receipts is kept on record;
- The bank’s charge over the fixed deposits has been registered with the Registrar, Joint Stock Company within 21 days of the creation of the charge.
Usually, advances against fixed deposit receipts are automatically adjusted on maturity form the proceeds of the deposit receipts.
If, however, repayment is made before the due date, the deposit receipt is returned to the customer after the cancellation of the discharge thereon. All notes of lien taken in the deposit register and ledger are also canceled.
- Demand Promissory Note
- The fixed deposit receipt duly discharge on revenue stamp by the depositor and pledged to the bank.
- Letter of authority duly signed by the depositor in favors of the bank to adjust the advance form the proceeds of fixed deposit on maturity for liquidation of loan or overdraft account.
- Letter of Continuity (in case of overdraft only)
- Letter of lien executed by the depositor. This generally contains the clause of set-off.
- Letter of guarantee executed by the depositor (if the deposit stands in the name of a third party).
Advance against the savings account balance
The most popular of the secured loan is the loan that has collateral savings in the same bank. This collateral can be easily checked and its value is established with no loss of time, as just a reference to the ledger account will reveal it.
An assignment is given by the borrower and the savings balances are earmarked to show pledge of the account to secure a loan. Interest in savings account continues to be credited to the account at the usual rate of interest.
Lien on balances in current or savings account of third parties
Advances are sanctioned on the security of current or savings bank account against credit balances of third parties by obtaining a letter of lien. After the advance has been made the bank’s lien should be noted in the ledger against the account of the party guaranteeing the advance.
As a matter of fact, the bank has the right of set-off in such a case which is created by agreement and by operation of law. By taking a letter of lien on stamped paper from the guarantor earmarking the balance in his account as a security for the advance, the banker can refuse to honor cheques drawn on the balance is reduced below the stipulated amount. If also gives the bankers a right to adjust the loan through set-off if the borrower makes a default.
- Demand Promissory Note
- Letter of continuity
- Letter of lien from the account holder earmarking balance in his account. This creates a right of set-off both by agreement and by operation of law.
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