Modes of creating Charge on Property
Security
In the context of Lending by financial institution, Security refers to asset deposited/pledged by the borrower for any kind of credit facility availed, as a guarantee for fulfilment of the undertaking to repay the . Security given are of two types namely, primary and collateral securities. Primary security is the principal security for an advance and collateral security is an additional security.
Mode of Creation of Security:
I. Mortgage
(a) Mortgage is transfer of interest in Specific immovable property, for the purpose of securing the loan repayment or performance of engagement.
(b) Possession remains with the borrower
(c) Registered Mortgage is executed by registering the mortgage deed (transfers the interest in title) on the property with the registrar. Equitable mortgage is effected by mere delivery of title deeds/title documents to the lender, with an intent to create security thereof.
(d) Mandatory for the banks to get all types of mortgages registered with Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI)
(e) In case of default by borrower : Mortgagee can file a suit in court to take possession of mortgaged property and sell it to recover debt amount.
(f) Example: Getting Housing loan by equitable mortgage.
II. Pledge
(a) Pledge is bailment/delivery of movable goods by the borrower to the lender, with an intention to create a charge thereon as security for re payment of debt or performance of promise.
(b) Lender retains possession of the security until the debt is repaid, while the legal ownership of goods remains with pledger.
(c) In case of default by borrower, Lender can sell the asset to recover debt amount.
(d) Example: Gold loan where gold is pledged with bank
III. Hypothecation
(a) Hypothecation is creation of an equitable charge on moveable property of borrower in favour of lender.
(b) Neither ownership nor possession is transferred to the bank.
(c) Borrower holds the physical possession of the goods as an agent/trustee of the bank. The borrower periodically submits statements regarding quantity and value of hypothecated assets (stocks, debtors, etc.) to the lending banker based on which the drawing power of the borrower is fixed.
(d) In case of default by borrower, lender can file a suit to take possession and dispose it off to recover debt amount.
(e) Example: Vehicle loan where charge is created in favor of the bank but borrower continues to use the vehicle.
IV. Assignment
(a) An assignment is an agreement where the borrower transfers the debt owed to him, to the lender (FI).Only actionable claims such as book debts and life insurance policies are accepted by banks as security.
(b) Borrower (who is the creditor of that debt) does not need the consent of the debtor to assign a debt.
(c) Assignment gives the assignee (lender), absolute right over the moneys/debts assigned to him. Note: On assignment, not only the debt but also the liabilities and equity attached to the debt as on the date of transfer, also gets assigned.
(d) Example: Assignment of Life Insurance policies as security.
V. Set-off
(a) Set-off is a clause in the agreement that gives a statutory right to the creditor, to set off the mutual debt. Meaning, the lending entity is entitled to set off any amount it owes the debtor (debit balance in books) against the amount that the debtor owes to the entity. (credit balance lying in another account of the same debtor)
(b) In the context of bank finance, right of set-off enables a bank to combine/square off two accounts (a deposit account and a loan account) of the same person, provided both the accounts are in same name and capacity.
Note: For the purpose of set off , all bank branches are treated as one single entity.
(c) This right can be exercised in respect of time-barred debts as well.
VI. Lien
(a) Lien gives legal right to the lender to seize the possession of property, (given as collateral), in case of default by borrower to repay the dues and retain until a debt owed by that borrower is discharged.
(b) The legal right is created by way of a legal charge in favor of the lender.
(c) Important point to note here is , Lien gives the right to the lender to hold on to the goods, until payment is made. Lender cannot sell/dispose the goods in the time gap.