- Validity of the title of the borrower: when a consumer applies for loan against some security, the banker must ascertain the validity of the title of the borrower. If he gets a defective title, he cannot enforce his rights against the debtor. The banker must also get the tilt transferred to him by executing appropriate documents.
- Liquidity: the main feature of a secured loan is reliance on security and not on the creditworthiness and financial standing of the borrower. So, a banker must consider whether the security offered is easily marketable without loss. He should prefer only liquid assets such as manufactured goods, raw materials, gold, etc.
- Stability is value: the value of the security must be stable and steady. It should not fluctuate widely.
- Easy transferability: the security must be transferable. A document of title to can be transferred by endowment and delivery. Immoveable property does not have easy transferability.
- Clean and marketable title: the security should have clear title. It it is not clear, charging of security becomes defective and disposal of the property on a subsequent date becomes impossible. The security should be free from encumbrances.
- Free from disabilities: a banker should disqualify securities crippled with certain disabilities, like, partly paid up shares, life insurance policy without surrender value and so on. He should see before accepting that the security is free from such disabilities.
- Realisation of advance: if the borrower fails to repay the debt within the time specified, the banker, after serving a reasonable notice, can sell the securities and recover his dues. If the banker is unable o recover the full amount from the sale proceeds, he can file a suit against the borrower for the recovery of the balance within three years from the date of sanction do advance.
- Margin: margin is he provision for safety maintained by the baker while advancing against securities. A banker does not lend the full value of the security offered by the borrower. He retains a margin over it he margin is the difference between the market value of the security offered and the loan granted. E.g. If a building worth for ₹10,000 is submitted as a secutrity, then the banker will sanction only ₹5000. Here, he lends only 50% of the security and keeps a margin of 50%.
Margin is retained on the advance because of the following reasons:
- The fluctuations in the market value of the security.
- The liability of the borrower increases on the account of interest and other charges while the value of security remains the same.
- Value of security may go down due to deterioration and depreciation.
- Banker maintains a margin so that the borrower repays the debt promptly.
The margin differs from security to security:
- For precious metals (gold, silver, etc): it depends upon the nature of the security. If there is a permanent demand of the security and if the value is steady enough. Banker will keep a small margin. E.g. Only 5 to 10% on gold.
- Industrial securities: it depends upon the company and the type of security. A higher margin is maintained for equity shares than for preference shares. Generally, it is 25% on preference share and 40% for equity shares.
- Government security: the securities issued by government will be less steady. They vary within very narrow limits. In such case, a small margin of 5 to 10% is sufficient.
- Margin for goods: the demand and nature of the goods determines the margin. A low margin is sufficient for staple goods like wheat, sugar and cotton. Similarly, higher margin is kept for perishable commodities and luxury goods.
- In case of commodities subject to reserve bank’s selective credit control the margin is set according to the direction of the reserve bank.
- Also, the creditworthiness and integrity determines the margin.
- Documentation: it is a salient feature of sound lending. The terms and conditions under which the loan is sanctioned and the security accepted are put down in writing and signed by the borrower. Obtaining such agreement is called documentation. It specifies the rights and liabilities of the banker and the customer. So there is no room for misunderstanding of the term between both the parties. Usually, an agreement contains a declaration by the borrower that he has absolutely good title over the property deposited. This prevents the depositor from declaring himself as the legal owner. If he has defective or no title over them.