Do you know what is primary security and collateral security for a bank loan? After reading this article you will understand all of them because all of them are discussed in detail.
Table of Contents
What is security
One of the most important functions of a bank is to employ its fund by way of loans and advances to its customers and a bank’s strength depends considerably on the quality of its loans and advances. The position is quite different today.
Banks having a large number of offices over a wide area cannot allow loans and advances without retention of security in one form or the other.
Security is obtained as a line of last defense to fall back upon. It is meant to be insurance against an emergency. By taking security, the bank acquires a claim upon the assets of the borrower if repayment is not made as planned.
Security taken by banks may be classified into two broad categories: Primary Security and collateral Security.
Let’s discuss what is primary Security and collateral security
What is primary security
Primary Security is one that is deposited by the borrower himself and thus provides the main cover for the advance made. Primary security may be either personal Security Impersonal security or both.
Personal Security
When a personal advance is made the borrower is personally liable to repay the advance for which he executes a promissory note, accepts or endorses a bill of exchange, and makes personal covenants in mortgage deed or loan agreements.
The banker has the right of action to proceed against the borrower personally in the event of default or non-fulfillment of conditions as per agreements.
Impersonal Security
Impersonal security is given when a charge is created by way of hypothecation/pledge/mortgage over the borrower’s tangible assets such as goods and commodities, fixed assets, book debts, bills receivables, etc.
In case of default, the bank is empowered to proceed directly or through the intervention of the court to dispose of the impersonal security and realize the dues. Impersonal security may take the form of either specific security or continuing security and realize the dues.
Impersonal security may take the form of either specific security or continuing security. She specific security covers the specific loan alone and does not cover any other indebtedness of the borrower to the bank.
In case of continuing security for an advance in cash credit or overdraft account, the memorandum creating a charge on the assets is so worded as to make it a continuing one to cover all sums due now or in the future from the borrower until the ultimate balance is determined and regardless of whether the account may at times go into credit.
Collateral Security meanings
Collateral security is security belonging to and deposited by the borrower himself or by a third party to secure loans and advances.
Collateral security in a wider sense is used to denote any type of security that runs parallel to or side by side with the personal right of action against a debtor in respect of an advance.
Collateral security may be direct or indirect.
Collateral security obtained from the borrower himself to secure his own account is known as direct collateral security. Advance against hypothecation of stock-in-trade which is considered weak security is strengthened by equitable mortgage of title deeds of house property of the borrower.
Indirect collateral security means any form of security given by a third person to secure a customer’s account. A guarantee is indirect collateral security because it is given by one person to secure another person’s indebtedness.
These collateral securities are advantageous from the banker’s standpoint because, in the case of insolvency of the customer, the can prove for his whole amount of debt against the assets of the debtor and receive from the customer’s estate all he can in the course of distributing by the official assigned, and thereafter fall back upon the collateral security for the deficiency.
The usual practice should be to obtain a memorandum of deposit of security in a proper form. This is most essential because even though in law such memorandum is not necessary, the banker, by using it, protects himself by inserting in the clauses necessary for such protection.
The most significant categories of security lodged as cover are:
- Goods and commodities
- Fixed Deposit Receipt
- Real estate iv) stock exchange securities
- Life Insurance policies
- Gold and gold ornaments
- Documents of title to goods
- Book debts
- Supply bills.
Each of these properties is of a different type and needs to be dealt with differently. But it must be clearly borne in mind that every form of security has its drawbacks, and there is nothing like absolutely perfect security.
Each has its own special merit, and it is all a question of comparative advantages and disadvantages.
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