SRM INSTITUTE OF SCIENCE AND TECHNOLOGY

DEPARTMENT OF COMMERCE
CLASS : I BCOM G & H
COURSE CODE : UCM20201J
COURSE NAME : BANKING LAW & PRACTICES

UNIT IV
LOANS AND ADVANCES
Q.WHAT IS ADVANCES?
‘Advance’ is a ‘credit facility’ granted by the bank. Banks grant advances largely for short-term
purposes, such as purchase of goods traded in and meeting other short-term trading liabilities. There is a sense
of debt in loan, whereas an advance is a facility being availed of by the borrower. Credit facility- repayable in
instalments over a period is termed as loan while a credit facility repayable within one year may be known as
advances.

Q.WHAT IS LOAN?
The term ‘loan’ refers to the amount borrowed by one person from another. The amount is in the nature
of loan and refers to the sum paid to the borrower. Thus from the view point of borrower, it is ‘borrowing’ and
from the view point of bank, it is ‘lending’.

Q.DESCRIBE THE UTILITY OF LOANS AND ADVANCES.

Loans and advances granted by banks help in meeting short-term and long term financial needs of
business enterprises. We can discuss the role played by banks in the business world by way of loans and
advances as follows
1) Loans and advances can be arranged from banks in keeping with the flexibility in business operations.
2) Loans and advances are utilized for making payment of current liabilities, wage and salaries of
employees, and also the tax liability of business.
3) Loans and advances from banks are found to be ‘economical’ for traders and businessmen, because
banks charge a reasonable rate of interest on such loans/advances.
4) Banks generally do not interfere with the use, management and control of the borrowed money. But it
takes care to ensure that the money lent is used only for business purposes.
5) Bank loans and advances are found to be convenient as far as its repayment is concerned. This facilitates
planning for future and timely repayment of loans
6) Loans and advances by banks generally carry element of secrecy with it. Banks are duty-bound to
maintain secrecy of their transactions with the customers.
TYPES OF ADVANCES
Q. DESCRIBE THE VARIOUS TYPES OR FORMS OF ADVANCES.
Banker renders different types of borrowing facilities to their customers. They are
1. Loans
The bank lends lump sum for a certain period at an agreed rate of interest loan may be given without
security. The loan may be rapid in instalments or at the expiry of a certain period. Loans may be of demand
loan or a term loan. Demand loan is payable on demand whereas term loan may be medium term or long term
loan.
2. Cash credit
It is an arrangement by which the customer is allowed to borrow money up to a certain level. It is
active account to which deposits and withdrawals may be affected frequently. If the customer does not use the
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cash credit limit to the full extent, a commitment charge is made by the bank. It provides an elastic form of
borrowing since the limit fluctuates according to the needs of the business.
3. Overdraft
It is an arrangement between a banker and his customer in allowing the latter to withdraw over and
above his credit balance in the current account up to a specified limit. The interest is charged only to the amount
drawn and not to the whole amount sanctioned. Overdraft is made occasionally and for short duration.
Banks, sometimes grant unsecured overdraft for small amounts to customers having current account
with them. Such customers may be govt. employees with fixed income or traders. Temporary overdrafts are
permitted only where reliable source of funds are available to a borrower for repayment.

4. Bills discounted and purchased

Banks lend advances to their customers by discounting bill of exchange or pro-note. In this form of
lending, the interest is received in advance by the banker. Sometimes banks purchase bills. In these cases, the
banker grants loan in the form of overdraft or cash credit against the security of the bills.

Q. EXPLAIN ABOUT SECURED AND UNSECURED ADVANCES.

If the loans and advances are made on the personal security of the borrower, it is called as unsecured
advances. If the loans and advances are made on the security of some tangible asset it is called secured
advances.
SECURED ADVANCES
Section 5(1) (N)of the Banking Regulation Act, 1949, defines secured advances as “secured loan or advance
means a loan or advance made on the security of asset the market value of which is not at any time less than the
amount of loan or advance.”
The kind of security offered differs from one place to another. Stock exchange securities are offered in big
cities like Bombay, Calcutta and Madras. In large industrial areas raw materials and finished goods are given to
cover the loan amount. A banker can also lend against movable properties, book debts, life policy etc. Security
can be classified as, primary security and collateral security.
Primary Security
It is the security which is deposited by the borrower himself to cover the loan. Machinery has been bought
with the help of bank finance. The machinery here constitutes the primary security to the banker. All other
securities deposited to cover the same advance are known as collateral securities.
Collateral Security
It is used in two senses. In a narrow sense, it means the securities deposited by the third party to secure
advance for the borrower. In a wider sense, it means any type of security on which the creditor has a personal
right of action on the debtor in respect of the advance.

UNSECURED ADVANCES
Section 5(1)(N) of the Banking Regulation Act defines unsecured loan as “unsecured loan or advance
means a loan or advance not so secured”
Unsecured advances are granted to customers of integrity with a sound financial backing, high business
reputation and capacity to manage the business. Confidence in the borrower is the basis of unsecured advances.
The confidence is judged by three considerations, character, capacity and capital normally known as 3 C’s.
Character
The word character means personal qualities viz, honesty, responsibility, promptness, reputation and
goodwill. A bank can extent credit facilities to a person who posses all the said qualities.
Capacity

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 The capacity of a borrower means his ability to manage the business. Any enterprise’s success depends on
initiative, interest experience and managerial ability of the entrepreneur. To know the capacity, reliance is made
on the economic viability of the project to which the loan is sought. Economic viability refers to the capacity to
manufacture goods at the lowest cost and to leave sufficient profit to meet its commitment of loan.
Capital
A borrower should possess sufficient capital to conduct his business and adequate plant and machinery to
carry out normal productive activity. Dr. C.B.Memoria has given a formula.
(a) Character + Capacity + Capital = Safe Credit
(b) Character + Capacity + Insufficient capital = Fair credit risk
(c) Character + Capacity – Capital = Limited success
(d) Character + Capacity – Impaired Character = Doubtful credit risk
(e) Capital + Capacity – Character = Dangerous risk
(f) Character + Capital – Insufficient capacity = Fair credit risk
(g) Character + Capital – Capacity = Inferior credit risk
(h) Character + Capital – Capacity = Fraudulent one
LENDING PRACTISE
Q. WHAT IS LENDING PRACTISE?
According to Crowther “The secret of successful banking relies in the distribution of the resources
between various forms of assets in such a way so as to strike a sound balance between liquidity and
profitability, so that there is enough cash to meet every claim and at the same time, income to pay its
expenditures and earn profits for share holders.” Liquidity and profitability are the two principles playing
important role and stresses the need to invest. Investment of funds may be on the following types of assets.
 Liquid Assets consist of Cash on hand, Cash with other banks and Cash with Reserve Bank of India
 Semi – Liquid Assets consist of Money at call and short notice and Bills discounted
 Assets termed as earning assets

Q. DESCRIBE THE IMPORTANT OR SIGNIFICANCE OF BANK LENDING.

1. Major source of Revenue
A major portion of a bank’s revenue comes from its lending activity. This is evident from the fact that
nearly 60% of the total assets of a bank is comprised of ‘advances’ and nearly 80% of the revenue comes from
interest and discount, income derived from advances, including bills purchased and discounted.
2. Basis of credit creation
Credit creation power of the banking system results in an elastic credit system, which is necessary for
economic progress to take place at a relatively steady rate.
3. Driving Economic growth
Bank credit governs and supports the growing and changing economy infusing elastic money supply.
4. Agents of Production
Bank lending acts as an agent of production. By making possible financing of the agricultural, industrial
and commercial activities of the country, bank lending facilitates economic development of the country.

PRINCIPLES OF SOUND BANK LENDING

Q. EXPLAIN THE PRINCIPLES OF SOUND BANK LENDING.
This term ‘safety’ refers to the borrower’s position to repay the loan along with interest. The
repayment of the loan depends upon the borrower’s capacity and willingness to repay. The safety of the funds
can be ensured by asking the borrower to furnish a collateral security.
1. Liquidity
It means the bank’s ability to meet the customer’s claim for cash on demand. In case of any need, the
banker must be able to convert the assets into cash quickly.

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2. Profitability
A bank has to make sure that the funds that are lent bring in a reasonably good return.
3. The purpose of a Loan:
Loans given for productive purposes increases the earnings thereby ensure repayment. Loans should not
be advanced for speculative and unproductive purposes.
4. The principle of Diversification of Risks
It is not safe to provide advances to a particular area or held of business or sector alone. So, advances
should spread over a reasonably wide area, in terms of the number of borrowers, the number of sectors, the
geographical area and securities.
5. Security
It means any valuable property given in support of a loan or an advance. The banker recognizes the
security as a loan cover needs to be adequate, readily marketable, easy to handle and free from any
encumbrance.
6. The Financial standing of the borrower
The banker should not ignore the repaying capacity of the borrower. This depends on the character,
capacity and financial standing of the borrower.
7. Maintaining proper Balance of Advances
Generally, it is preferred to invest the modern sums of money in a large number of small advances than
big amount in low big loans.
8. Margin
The market value of the security should be higher than the advance proposed, which gives enough
margin for fluctuations in prices and interest accumulation, after appropriately evaluating them.
9. National polices
Government policies and rational interest enforce certain social responsibilities on commercial banks.
LIEN:
A lien is just a claim on an asset of the borrower that is used as collateral against the funds borrowed or for the
payment of obligations or performance of services to another party. The lien provides the lender with the right
to detain the asset until the repayments are made & do not have the right to sell the assets unless agreed upon in
the contract, for example - Banks grant a loan against marking the lien on customers’ deposits, real-life
examples – cloth given to a tailor for stitching, a bike given to a mechanic for a repair in both the cases the
claim on goods will rest with the service provider unless the payment for the services is paid.
Bailment
Section 148 to 181 of the Indian Contract Act, 1872 provides the law in respect of contract of
“Bailment”. Out of these provisions, Section 168 and 169 provides the rights and duties of the finder of goods.
The term bailment implies a relationship in which the personal property of one person temporarily goes into the
possession of another. Delivering a vehicle, watch or other article for repair or leaving a vehicle at parking
stand etc. are common examples which create the relationship of bailment.
Meaning
The word ‘bailment’, is derived from ‘bailer’, a french word which means ‘to deliver’. Bailment has
been defined under section 148 of the Indian Contract Act, 1872, according to which Bailment involves the
delivery of goods from one person to another for a specific purpose and upon a contract, when the purpose is
fulfilled, the goods has to be returned or dealt with on the direction of the person who has delivered the goods.
Definition of Bailment (Section 148)
Bailment is the delivery of goods by one person to another for some purpose. Upon the contract the
goods shall be returned or otherwise disposed of according to the directions of the person delivering the goods,
when the purpose is accomplished.
NOTE: The physical possession of a personal property is transferred from one individual to another individual
who will subsequently get the property’s possession but not the entire ownership.
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The person delivering the goods is called the “Bailor”. The person to whom the goods delivered is called the
“bailee”.
Essentials of Bailment
There Must Be Delivery of Possession By Bailor To The Bailee:
The first characteristic of bailment is delivery of possession by one person to another. There must be a
delivery of goods, which means, delivery of possession of the goods by the bailer to the bailee to fulfil the
purpose of bailment.
One who has custody without possession, like a servant, or a guest using host’s goods is not a bailee.
The goods must be handed over to the bailee for whatever is the purpose of bailment. Once this is done, a
bailment arises, irrespective of the manner in which this happens.
A jewellery-box with declared contents was handed over to a bank for safe custody, the relationship of bailment
was constituted, the bank was held liable for loss of contents.
Delivery to bailee may be actual or constructive:
SECTION 149 explains the meaning of delivery of possession. The delivery to the bailee may be made by
doing anything which has the effect of putting the goods in the possession of the intended bailee or of any
person authorised to hold them on his behalf.
It means that either the goods can directly be put in the actual physical possession of the bailee or put the bailee
in a position of power over such goods that can be physically possessed later, if possible.
In constructive delivery, the bailor gives the bailee means of accessing the custody of the good and not its actual
delivery.
Delivery upon contract
Delivery of goods should be made for some purpose and upon a contract that when the purpose is accomplished
the goods shall be returned to the bailor.
NOTE: When a person’s goods go into the possession of another without a contract, there is no bailment within
the meaning of its definition in section 148.
The plaintiff’s ornaments, having been stolen, were recovered by the police and, while in police custody, were
stolen again. The plaintiff’s action against the state for the loss was dismissed. The reason is that the ornaments
were not made over to the government under any contract, the government never occupied the position of the
bailee to indemnify the plaintiff.
Conditional delivery
Bailment of goods is always made for some purpose and is subject to the condition that when the purpose is
accomplished the goods will be returned to the bailor or disposed of according to his directions.
A man, for the purpose of cancelling and consolidating nine government promissory notes into a single note of
Rs. 48000, went to a Treasury Officer. Later, the notes were misappropriated by a servant at the treasury and
the man filed a suit against the State to hold it responsible as a bailee. He failed as there is no Bailment without
delivery of goods and a promise to return the same and the government was not bound to return the same notes
or deal with them in accordance with the wishes of the man.
Pledge
Section 172 to 179 of the Indian Contract Act provides the law in respect of contract of pledge. Section 172
provides the definition of some important terms like “pledge”, “pawnor”, “pawnee”.
What is Pledge?
Pledge can be defined as that special form of bailment in which goods are bailed as security by one
party to another, for the repayment of debt or performance of a promise.
Pledges are form of security to assure that a person will repay a debt or perform an act under contract. In a
pledge one person temporarily gives possession of property to another party. Pledges are typically used in
securing loans, pawning a property for cash, and guaranteeing that contracted work will be done.
Definition of Pledge
As per Section 172 of the Indian Contract Act, 1872, Pledge is the bailment of goods as a security for
the loan. Borrower needs to provide the bank any asset or good that is worth the same amount or more than the
loan which he is taking from the bank payment of a debt or performance of a promise.

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The party who deposits the goods is the bailor, called as pledger, whereas the party who takes the possession of
the goods or the one to whom the goods are deposited is the bailee, called as pledgee.
Who Can Pledge?
Ordinarily goods can be pledged by the owner or by any person with the owner’s consent and authority.
A pledge made by another person may not be valid.
The railway company delivered goods on a forged railway receipt. The goods were then pledged with the
defendants. In a suit by the railways to recover the goods the defendants contended that the railways were too
negligent in delivering the goods to a wrong person. But the court held that this would not constitute estoppel
against the railway company and that the pledge was not valid.
Section 178, 178-A and 179 provide for certain circumstances in which a person, being left in possession with
the consent of the owner, make a valid pledge though without the owner’s authority. These circumstances are as
under:
1. Pledge by mercantile agent.
2. Pledge by person in possession under voidable contract,
3. Pledge by pledgee.
What can be pledged?
Any movable items such as assets, documents, valuables, receipt of fixed deposit account or savings
bank account and securities can be deposited with the moneylender or promisee, as collateral, against the
repayment of loan or fulfilment of the obligation.
There must be actual or constructive delivery of the goods to be pledged. However, government securities are to
be pledged by endorsement and delivery.
Essential Characteristics of Pledge
Following are the essential characteristics of pledge-
Delivery of Possession-
Delivery of the property pledged is a necessary element in the making of a pledge. The property pledged
should be delivered to the pledgee.
The producer of a film borrowed a sum of money from a financer-distributer, and agreed to deliver the
final prints of the film when ready, the agreement was held not to amount to a pledge, there being no actual
transfer of possession. Delivery of possession may be actual or constructive.
Delivery of the key of the godown where the goods are stored is an illustration of constructive delivery.
In Pursuance Of Contract:
Pledge is a conveyance to a contract, and it is essential to a valid pledge that delivery of the chattel shall
be made by the pawnor to the pawnee in pursuance of the contract of pledge. But it is not necessary that the
delivery of the possession of the thing pledged and the loan should be simultaneous and pledge may be
perfected by delivery after the advance is made.
Distinction Between Bailment And Pledge
A pledge is only a special kind of bailment, and the chief basis of distinction is the object of the
contract. Where object of the delivery of goods is to provide a security for a loan or for the fulfilment of an
obligation, that kind of bailment is called pledge. Pawn or pledge is a bailment of personal property as security
for some debt. A pawner is one who being liable to an engagement gives to the person to whom he is liable a
thing to be held as security for a payment of his debt or the fulfilment of his liability.
Some key points to remember about pledge-
a. Pledge is a kind of Special Contract.
b. Pledge is a part of Bailment.
c. Pledge is a contract by which possession of goods or assets is transferred as a security.
d. Pledger is the person who gives goods as a security. He is the borrower.
e. Pledgee is the person who receives goods as a security. He is the lender.
f. Pledgee is bound to return pledged goods on the successful repayment of loan.
g. A pledgee has no right to use the goods pledged.
h. A Pledgee has the right to sell the goods pledged, on default after giving a notice to the Pledge

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 Hypothecation
Definition of Hypothecation
Hypothecation refers to a financial arrangement where the borrower borrows money against the security
of goods (Here goods mean movable property). In business parlance, hypothecation is defined as the charge
created over the asset (usually inventories, debtors, etc.) for the repayment of debt of suppliers, creditors, and
other parties.
In this arrangement, the asset is not delivered to the lender but kept by the borrower until he defaults in
payment of debt. So, the possession of asset belongs to the debtor only. There are two parties to hypothecation,
where hypothecator is the borrower while hypothecatee is the lender. The right of the two parties depends on
the agreement signed between them.
If the hypothecator fails to pay the amount, then firstly, the hypothecatee has to take the possession of
the goods hypothecated. Thereafter, he can sell them off to adjust the amount of his loan.
In Hypothecation, the Bank (hypothecatee) is treated to be a secured creditor and has a preferential right to
recover with respect to the other creditors.
Key Differences Between Pledge and Hypothecation
The significant differences between pledge and hypothecation are specified below:
1. The pledge is defined as the form of bailment in which goods are held as security for the payment of the
debt or the performance of an obligation. Hypothecation is slightly different from the pledge, in which
the collateral asset is not delivered to the lender.
2. The pledge is defined under section 172 of the Indian Contract Act, 1872. On the other hand,
Hypothecation is defined in Section 2 of Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002.
3. In the pledge, the possession of the asset is transferred, but in the case of hypothecation, possession lies
with the debtor only.
4. Parties to the contract of the pledge are pawnor (borrower) and Pawnee (lender) whereas in
hypothecation the parties are hypothecator (borrower) and hypothecatee (lender).
5. In the pledge, when the borrower defaults in payment, the lender can exercise his right to sell the asset
to recover the debt amount. Conversely, in hypothecation, the lender does not have the possession of
goods so he can file a suit to realize his dues to take the possession first and then disposing off them.
In Hypothecation, the creditor has the right to sell the goods. He can take charge of goods and can sell the
hypothecated goods without court intervention, on default or breach of terms of Hypothecation by the debtor,
but only if the creditor has been vested with such power under the agreement of Hypothecation.
Pledge is used when the lender (Pledgee) takes actual possession of the asset pledged. In case of Hypothecation,
possession of the asset remains with the borrower. Loan is given on security of immovable property, in case of
Mortgage. Assignment is used when the owner of a contract (Assignor) handovers a contract to another party
(Assignee). Assignment gives the assignee, right of all the responsibilities and all the benefits of the contract
assigned.
Mortgage
What is a Mortgage?
A mortgage is a transfer of an interest in immovable property and it is given as a security for a loan. The
ownership of an immovable property remains with the mortgagor itself but some interest in the property is
transferred to the mortgagee who has given a loan.
DEFINITION:
Section 58 (a) defines mortgage in the following words:
A mortgage is the transfer of an interest in immovable property for the purpose of securing the
payment of money advanced, an existing or future debt or the performance of an engagement which may give
rise to a pecuniary liability.
Essential Conditions of Mortgage:
There is a transfer of interest to the mortgagee.
The interest transferred must be of some specific immovable property.

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(Immovable property includes also things attached to what is embedded to the earth).
But, if machinery or other fixture is not attached for permanent beneficial enjoyment, it shall not form part of
security if the house is mortgaged.
The purpose of mortgage “consideration”.
The Supreme Court has held that a transaction of mortgage does not become ineffective merely because the
mortgage could not advance the money on the date of execution of the deed.
Section 58 further defines mortgagor, mortgagee and types of mortgage –
The transferor is called as mortgagor.
The transferee is a mortgagee.
Types of Mortgage
Simple Mortgage
Is defined under Section 58(b) of Transfer of Property Act, 1882. In a simple mortgage, the mortgagor
does not transfer immovable property to the mortgagee but agrees to pay the mortgage money.
Conditional Mortgage
Mortgage by conditional sale is defined under Section 58(c) of Transfer of Property Act, 1882.
This mortgagee places three conditions to the mortgagor, and the mortgagee shall have the right to sell the
property if:
 mortgagor defaults in payment of mortgage money on a certain date.
 as soon as the payment is made by the mortgagor the sale shall become void.
 on the payment of money by the mortgagor, the property is transferred and such a transaction is called a
mortgage by conditional sale.
Usufructuary Mortgage
Usufructuary Mortgage is defined under Section 58(d) of Transfer of Property Act, 1882.
In this mortgage, the mortgagor delivers the possession of the property to the mortgagee and authorizes the
mortgagee to retain such property until the payment is made by the mortgagor and further authorize him to
receive the rent or profit arising from such mortgaged property and to appropriate the same instead of payment
of interest. Such a transaction is called as Usufructuary transaction.
English Mortgage
English Mortgage is defined under Section 58(e) of Transfer of Property Act, 1882.
In this mortgage, the mortgagor transfers the property absolutely to the mortgagee and binds himself that he will
repay the mortgage money on the specified date and lays down a condition that on repayment of money
mortgagee shall re-transfer the property. Such a transaction is called an English mortgage transaction.
Deposit Of Title Deeds
Deposit of title -deeds is defined under Section 58(f) of Transfer of Property Act, 1882.
In this mortgage where a person is in Calcutta, Madras, Bombay and in any other towns as specified by
the state government and the mortgagor delivers to a creditor or his agent the documents of title of immovable
property with an intent to create security and then such a transaction is called Deposits of title-deeds.
Anomalous Mortgage
An Anomalous Mortgage is defined under Section 58(g) of Transfer of Property Act, 1882. A mortgage
which is not any one of the mortgages mentioned above is called an anomalous mortgage.
Pros and Cons of Hypothecation
Pros
 Makes it possible to afford large purchases
 Can help reduce the cost of borrowing
 Can help a borrower qualify with less-than-stellar credit
Cons
 The borrower may lose the asset if they default
 The application process can be more complicated

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Pros Explained
 Makes it possible to afford large purchases: For many people, it may be impossible to purchase a
vehicle or a home without financing the transaction.
 Can help reduce the cost of borrowing: Choosing to secure some types of loans could help you score
a lower interest rate than if you were to choose an unsecured loan.2
 Can help a borrower qualify with less-than-stellar credit: With hypothecation, creditors can afford to
accept borrowers with lower credit scores because there's no risk of losing all of their money, compared
to an unsecured loan.
Cons Explained
 The borrower may lose the asset if they default: Losing your home or your vehicle can be
devastating, so it's crucial you always make payments on time. And if you're investing, it's important to
understand the risks associated with margin trading and short selling before you engage.
 The application process can be more complicated: Mortgage lenders typically require an appraisal
and an inspection before agreeing to finance a purchase. These processes cost the borrower money and
can take extra time. Some auto lenders may also require an appraisal, especially with refinance loans.
Life Policies as a Security for the Loan/Advance
Purpose of Life Policy A life policy is taken for two purposes:
 It is a source of income for the dependents of the assured in case of his death.
 It is an ideal form of saving since along with income tax deduction on the premium, paid loans can be
raised on the policies in times of need.
Advantages
 Life insurance business being highly regulated and permitted only to companies having sound financial
health, the banker need not doubt the realisation of the policies, which will be done without any
difficulty, if the policy and the claim are in order.
 The assignment of the policy in favour of the banker requires very little formalities and the banker
obtains a perfect title.
 The longer the period for which the policy has been in force, the greater the surrender value. It is also
useful as an additional security because, in the event of the borrower’s death, the debt is easily
liquidated from the proceeds of the policy.
 The security can be realized immediately on the borrower’s default of payment by surrendering the
policy to the insurance company.
 The policy is a tangible security and is in the custody of the bank. The banker only has to ensure that
regular payment of premiums is made.
Disadvantages
 If the premium is not paid regularly, the policy lapses and reviving the policy is complicated.
 Insurance contracts being contracts of utmost good faith, any misrepresentation or non-disclosure of
any particulars by the assured would make the policy void and enable the insurer to avoid the
contract.
 The person (proposer) who has obtained the policy must have an insurable interest in the life of the
assured or the contract is void.
 The policy may contain special clauses, which may restrict the liability of the insurer.
 When the banker accepts a policy coming under Married Women Property Act he must ensure that all
the parties sign in the bank’s form of assignment.
 There is facility to obtain the duplicate policy if the original is lost. This can be misused by persons
by obtaining duplicate policies. Banker should therefore, verify that no duplicate policy has been
issued and there are no encumbrances on the policy.
Precautions
 The policy must be assigned in favour of the bank and should be sent directly to the insurance
company for registration and ensured that only authorized office of Insurance Company has noted
assignment.

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  The bank should see that the age of the assured is admitted.
 The banker should ensure the regular payment of premium.
Fixed Deposit as a Security for the Loan/Advance
When money deposited by a customer is not repayable on demand and is payable on the expiry of a
specified period from the date of deposit such a deposit is called a ‘Fixed Deposit’. The banker evidences a
deposit by issuing a receipt known as fixed deposit receipt. Interest, is paid at regular intervals at a specified
rate on such deposits. Banks usually permit depositors to borrow against the deposit. This security is certainly
the most valuable, as the money represented by the receipt is already with the bank and there is no problem of
valuation or enquiring the title, or the problem of storage and costs associated with storage.
Precautions
 The banker should grant the advance only to the person in whose name the money is deposited. Banker
should not advance against fixed deposit receipts of other banks. This is because the banker who has
received the deposit will have a general lien over such monies. Even if the lending bank gives notice to
the bank, which has received the deposit, the latter may even refuse to register the lien in favour of the
lending bank.
 If, the deposit is in joint names the request for loan must come from all of them.
 When the deposit receipt is taken as security, the banker should ensure that all the depositors duly
discharge it on the back of the instrument, after affixing the appropriate revenue stamp. In addition to
this, the banker should obtain a letter of appropriation which authorizes the banker to appropriate the
amount of the deposit on maturity or earlier towards the loan amount.
 After granting the advance, the banker must note his lien in the fixed deposit register to avoid payment
by mistake and the lien, must also be noted on the receipt itself.
 Advance should preferably not be made against fixed deposit receipt in the name of a minor, unless a
declaration is taken from guardian, that loan will be utilized for benefit of the minor.
 Where the money is being advanced against the fixed deposit receipt issued by another branch, the
FDRduly discharged must be sent to the branch, where such money is deposited, for the following
purposes:
(a) To verify the specimen signature of the depositor
(b) To ensure that no prior lien exists on the fixed deposit receipt
(c) To mark lien on the FDR and the FDR register, in favour of branch advancing money.
 Sometimes, a person may approach for advances by offering the fixed deposit receipts held by third
parties as security. In such a case, the fixed deposit receipt must be duly discharged, by the third party,
i.e., FD holder and he should declare in writing the bank’s right to hold the deposit receipt as security,
and also to adjust the deposit amount towards the loan account on maturity or on default in repayment of
instalment if any
MUTUAL FUNDS
Mutual Funds play a key role as a financial intermediary in the financial services sector. A mutual fund pools
money from investors and invests in Stocks, Debt and other financial securities. SEBI Regulations 1993 defines
a mutual fund as: “ a fund established in the form of a trust by a sponsor to raise monies by the trustees through
the sale of units to the public, under one of more schemes, for investing in securities in accordance with these
regulations”
Role of Mutual Funds in the Capital Market:
Mutual funds assist investors to have access to the capital markets through various schemes (as explained
below). Mutual funds through their network across the country and also as financial advisors to their clients
help the investors to invest in different schemes. To bring in uniformity as per SEBI’s directives it is mandatory
for any entity/person who markets/sells mutual fund products, to clear the required examinations conducted by
the Association of Mutual Funds in India (AMFI)
Mutual Funds are classified into two broad categories based on the basis of execution. (i) Open ended and
(ii) Close ended. Apart from the above classification, mutual funds can also be classified into :

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Open ended funds:
This is one of the popular mutual fund scheme. In this case, the size of the fund and the period of the fund is not
pre fixed. The investors are free to buy and sell any number of units at any point of time. The main objective of
the fund is income generation. The investors have the freedom of free entry and exit to/from an open ended
fund. The units are not listed on the stock market; however the mutual fund would buy the units based on the
Net Asset Value (NAV) of the units. Advantage to the investor is that the investor gets quick cash when he sells
the units to the mutual fund on any working day.
Close ended funds:
Unlike the open ended funds, the corpus (total amount to be collected) and the duration are predetermined in
this scheme. These are available for a parrticular period, and the investors can buy the units at the face value.
Other important features are:
(i) The objective of the fund is capital appreication
(ii) The units under this scheme are traded in stock exchanges
(iii) At the time of redemption, the total funds collected under a close ended scheme would be liquidated
and the proceeds are distributed among the unit holders.
Income Funds:
The objective of this fund scheme is to distribute income to the investors, regularly. The fund managers
through their investment strategy, aim to provide a return better than the bank’s fixed deposit interest .
Growth Funds:
For long term investors, one of the suitable option is growth funds. The fund managers aim to achieve
capital appreciation through this fund. Regular income, is not distributed under this fund, like income funds.
Balanced Funds:
The features of the balanced funds are the combination of both income and growth funds. The special
feature is that this fund aims at distribution of regular income and capital appreciation. The fund managers try
to achieve this by balancing the investments between high growth equity shares as well as fixed income
securities like debt instruments (T Bills, GOI Sec, etc.)
Money Market Funds:
An open ended scheme which exclusively invest in Money Market instruments like Certificate of
Deposits, Commercial Papers,T.Bills and similar instruments, which are higly liquid and safe instruments. .
Tax Savings Schemes:
As part of tax planning, investors and income tax payers can invest in this fund. Depending upon the tax
concession based on the provisions of the Income Tax Act, the investments under this fund attracts lot of
investments especially during the period of January, February and March every year.
Government securities
Government securities play a crucial role in the financial market, serving as a means for the government to borrow
funds from the public. These securities are considered safe investments, as the creditworthiness and stability of the
government back them. In this article, we will explore the concept of government securities, their types, trading in
India, and their advantages as an investment option.
What Is Government Security In India?
Government securities, also known as G-Secs, refer to the debt instruments issued by the government to
finance its fiscal requirements. These securities are backed by the government’s guarantee of repayment and are
considered risk-free investments. They are an integral part of the fixed-income market and are traded on the
government securities market.
Government securities serve as a means for the government to raise funds from the public to meet its
expenditure needs, bridge budget deficits, and fund developmental projects. Investors who purchase these securities
lend money to the government in return for regular interest payments and the principal amount at maturity.
What Are Examples Of Government Securities?
Examples of government securities include:
 Treasury Bills (Short-Term G-Secs)
 Dated Securities (Long-Term G-Secs)

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  Cash Management Bills (CMBs)
 State Development Loans
 Treasury Inflation-Protected Securities (TIPS)
 Zero-Coupon Bonds
 Capital Indexed Bonds
 Floating Rate Bonds
 Savings Bonds
 Treasury Notes
 Treasury Bonds
Types of Govt Securities
 Treasury Bills (Short-Term G-Secs)
Treasury Bills, commonly known as T-Bills, are short-term government securities with a maturity
period of less than one year. They are issued at a discount to their face value and are highly liquid
instruments. T-Bills serve as a mechanism for the government to efficiently manage its short-term
funding requirements.
 Dated Securities (Long-Term G-Secs)
Dated Securities are long-term government securities with a fixed maturity period, typically 5 to 40
years. They pay regular interest to investors, known as coupon payments, and return the principal
amount at maturity. Dated Securities are vital for financing long-term projects and meeting
government borrowing needs.
 Trading in Government Securities in India
Government securities are actively traded in the secondary market in India. The trading of G-Secs
takes place through the NDS-OM (Negotiated Dealing System – Order Matching) platform, which
ensures transparency and efficiency in the trading process. Market participants, including banks,
primary dealers, and institutional investors, actively trade these securities based on their investment
objectives and market conditions.
 Cash Management Bills (CMBs)
Cash Management Bills are short-term government securities issued to manage temporary liquidity
mismatches in the government’s cash flows. They have a maturity period of up to 91 days and are
issued at a discount to their face value.
 Dated Government Securities
Dated Government Securities are long-term debt instruments issued by the government. They have
fixed coupon payments and a specified maturity period.
 State Development Loans
State Development Loans are debt instruments issued by state governments in India to finance their
developmental projects and meet fiscal requirements. These securities have different interest rates
and maturity periods based on the issuing state.
 Treasury Inflation-Protected Securities (TIPS)
Treasury Inflation-Protected Securities (TIPS) are government securities designed to protect
investors from inflation. The principal amount of these securities is adjusted based on changes in the
Consumer Price Index (CPI).
 Zero-Coupon Bonds
Zero-Coupon Bonds are government securities that do not pay regular interest to investors. They are
issued at a discount to their face value and provide the full principal amount at maturity.
 Capital Indexed Bonds
Capital Indexed Bonds are inflation-indexed government securities that protect against inflation by
adjusting the principal amount based on changes in the price index.
 Floating Rate Bonds
Floating Rate Bonds are government securities with variable interest rates that reset periodically
based on a reference rate. These bonds protect against interest rate fluctuations.

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  Savings Bonds
Savings Bonds are government securities designed to encourage retail investors to save. These bonds
offer attractive interest rates and various tax benefits.
 Treasury Notes
Treasury Notes are medium-term government securities with a maturity period of 1 to 10 years. They
pay regular interest to investors.
 Treasury Bonds
Treasury Bonds are long-term government securities with more than ten years of maturity. They
provide fixed-interest payments to investors.
Features of government securities
 Most government securities are issued at their face value, and no premium is added to the price.
 Government securities guarantee fixed income to the investors.
 The liquidity of G-sec in the secondary market is high as compared to the primary market. Therefore,
retail investors get high liquidity in the secondary market, and you can directly sell in the secondary
market.
 No tax is deducted at the source in the case of government securities.
 The premium, face value, and interest rate are fixed at the time of issuance, and they can not be changed
once the security is issued.
 Investors can store government securities in dematerialised format.
 In the case of redemption, the securities are redeemed at face value.
 The maturity tenure ranges between 2-30 yrs.
How do investors make money by investing in government security?
The return generation in the G-sec segment depends upon the type of G-sec investor chooses. Investors
who want a fixed half-yearly income can choose G-sec with coupon rates. Also, the investor can buy some
of the G-secs at a discounted rate. They are redeemed at a premium at the time of maturity. Thus, investors
can make money in these two ways by investing in the G-sec. The G-sec or government bonds are issued
by the Reserve Bank Of India (RBI) on behalf of the government. RBI focuses on reducing the fiscal
deficit of the ruling party. Over the years, G-sec has gained a lot of popularity and attraction.
Advantages of Investing in government securities
Returns: Government securities offer decent returns similar to bank deposits. They offer steady returns.
Negligible risk: The risk on the government securities is negligible as it is backed by the government, and
the chances to go default on interest or principal amount is very low.
Liquidity: Due to its low-risk profile, the G-sec are highly liquid.
Regular income: On most government securities, there is an interest offered to the investors every 6
months.
Risks of investing in government securities
There are two types of risk involved in G-sec.
Credit risk: There is always a risk of non-payment of the principal amount and the interest rate. Although, in
the case of government securities, the risk is almost negligible. But, investors should be diligent and always
check third-party ratings before making any investment.
Inflation risk: When inflation rises, the low interest on the bonds does not attract many investors. Therefore,
inflation affects the purchasing power and viability of these instruments. However, inflation-linked bonds
increase the investor’s principal and interest amount when inflation rises.
Tax on government securities in India
Similar to fixed deposits, government securities are not tax-free. The taxes on G-sec is as follows:
On bonds and SDL: The interest credited to the bank account is considered income from other sources and
taxed as per the income tax slab. The returns are taxed as per the duration of the investment:
Long-term capital gains (LTCG) – the investment held for more than 1 yr are taxed at 10% flat Short-
term capital gains (STCG) – the investments held for less than 12 months are taxed as per the applicable
income tax slab rate. Also, there is no TDS for the interest payments received for government securities.

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 T-bills: In the case of T-bills, the returns are considered STCG and taxed as per the applicable income tax
slab rate.
Gold Loan
What is a Gold Loan?
Gold loan (also called loan against gold) is a secured loan taken by the borrower from a lender by pledging their
gold articles (within a range of 18-24 carats) as collateral. The loan amount provided is a certain percentage of
the gold, typically upto 80%, based on the current market value and quality of gold.
What are the benefits of going for a gold loan?
Gold loan is similar to personal loan in meeting your immediate financial requirements, be it an international
education, marriage expenses, covering medical emergencies or any other personal use.
 Quick Disbursal- Minimum documentation leads to faster processing of gold loan due to its secured
nature.
 Flexibility of Use- Since there is no monitoring of the end use, it gives you the flexibility to use the loan
for any type of expense.
 Secured Loan Type: You are not required to submit any other security/collateral to the lender other
than the pledged gold ornaments.
 Lower Interest Rate: Interest rates on gold loans are on the lower side when compared to personal
loan, since gold serves as collateral.
 Liquidate your idle asset: An idle asset, gold is seldom used for generating money. Hence gold loan is
the perfect solution to raise capital and use the fund when you require money to meet your financial
needs. It is also more secure in the confines of a bank’s or a financial institution’s locker than your
home.
What are the typical interest rates and processing fees?
Interest rates for gold loan varies from lender to lender and ranges from 9.24% to 17%. A nominal
processing fee ranging from 1-3% of the loan amount is also charged by some lenders. It is always
advisable to check and compare interest rate, processing fee, late payment charges and pre-payment charges
with the lender before going for the loan.
Documents Required to Process Loan Application
Q. Which are the documents required to process loan application?
Documents that are required to seek a gold loan vary from lender to lender. However, the common list of
documents includes: Passport Size Photographs, Identity proof (PAN Card, Voter’s ID, Aadhar Card etc.) and
Address proof (Passport, Driver’s License, Electricity Bill etc.).
Different Types of Loans in India
Following are the different types of bank loans in India that are provided by the banks and financial institutions:
Secured Loans
Secured loans are those loans that are provided against security. The borrowers need to furnish security for
availing of secured loans. In the case of secured loans, lenders face a lower risk of default by the borrower. In
case the borrower is unable to repay the loan, then the lender can sell the asset to recover its dues. This is the
main reason why secured loans carry a lower interest rate than unsecured loans.
Unsecured Loans
These are the exact opposite of secured loans. Unsecured loans are provided against the income or the
prospective income-earning capacity of the borrower. Regarding unsecured loans, the borrowers are not
required to furnish any security. The lenders extend unsecured loans based on the documents provided by the
borrower, their income potential, and their CIBIL history. Unsecured loans increase the risks of the lender
because, in case of default by the borrower, there is no security available with the lender from which it can
recover its dues. This is the reason why lending institutions charge a higher interest rate for unsecured loans.
Types of Secured Loans
Following are the different types of secured loans that borrowers can avail of from the lending institutions:
Home Loans These are the most common types of secured loans availed of by borrowers. As the name
suggests, home loans are taken for the purchase or construction of a home by the borrower. Here, the home

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itself acts as a security for the lender. However, while the home is the primary security, the lender may require
the borrower to furnish collateral security as well depending upon the borrower’s profile and the valuation of
the home. This can either be a fixed deposit or any other asset. Home loans are long-term loans and the loan
tenure can range from 10 years to as long as 25 years. They are usually high-ticket loans running into lakhs and
also the most affordable ones. The home loan interest rates start anywhere between 7% per annum to 7.5% per
annum. The loan needs to be repaid in Equated Monthly Installment (EMIs). The Loan-to-Value (LTV) ratio is
usually 80%. It means, the borrower can avail of a loan up to 80% of the property value.
Gold Loans
Gold loans are taken against the gold owned by the borrowers. Here, gold acts as a security for the lender
whereby the borrower can pledge the gold with the lender and avail of money from them. The lender retains
possession of the gold until the loan is repaid. The gold loan interest rate starts from 7.50% per annum. Here,
most lenders require the borrowers to pay only the interest on the loan amount each month. The principal can be
repaid by the borrowers anytime, and they can take back the possession of the gold. Till the principal is repaid,
interest needs to be paid each month on the outstanding principal. Further, the LTV on gold loans can go up to
90%.
Gold Loans
Gold loans are taken against the gold owned by the borrowers. Here, gold acts as a security for the lender
whereby the borrower can pledge the gold with the lender and avail of money from them. The lender retains
possession of the gold until the loan is repaid. The gold loan interest rate starts from 7.50% per annum. Here,
most lenders require the borrowers to pay only the interest on the loan amount each month. The principal can be
repaid by the borrowers anytime, and they can take back the possession of the gold. Till the principal is repaid,
interest needs to be paid each month on the outstanding principal. Further, the LTV on gold loans can go up to
90%.
Vehicle Loans
These are the loans taken for the purchase of the vehicle. Vehicles can include both passenger and commercial
vehicles as well as two-wheelers, four-wheelers and heavy vehicles. Here, the vehicle acts as a primary security
for the lender. In the event of non-repayment, the lender can seize the vehicle. The interest rate on vehicle loans
can start anywhere between 7% per annum to 7.5% per annum. The LTV depends upon the type of vehicle. For
certain vehicle loans , the lender can even offer a loan of up to 100% of the vehicle’s value.
Loan Against Property
This is a kind of mortgage loan whereby the borrowers can avail of funds by mortgaging their property with the
lender. Loan against property can be availed of against both residential and commercial property. The
administration charges for loans against property are higher than for home loans. The funds can be used by the
lender for either business or personal purposes. The LTV in case of a loan against property can be anywhere
between 65% to 70%. Further, the interest rates on loans against property are also slightly higher as compared
to those on home loans. The interest rate here starts from 8% per annum.
Loan Against Securities
Investors often invest in shares and securities. This can include shares, mutual funds, bonds and debentures. The
investors are eligible to borrow money from banks and financial institutions against these securities. However,
as the securities are volatile in nature, LTV for loans against securities is 50% of the security value. This is to
protect the lender against any downside risk due to a fall in the value of the security. Further, the interest rate in
the case of loans against securities also varies depending upon the type of security. It can start anywhere
between 7.50% per annum.
Title Loans
In title loans, the lender provides loans to the borrowers against their vehicle. Here, the borrowers can borrow
up to 25% to 50% of the value of their vehicle by handing over their vehicles as collateral security to the
lenders. While the possession of the vehicle remains with the borrower, in case of default, the lender may seize
the vehicle. These loans are usually ultra-short-term loans and can be taken for as short a period as 30 days. One
of the major drawbacks of title loans is that the interest rate is very high. The interest rate is usually 25% per
month. That means it's 300% per annum.

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Non-recourse Loans
Non-recourse loans are the type of secured loans whereby the borrowers can provide collateral security to the
lender for borrowing the funds. In case of default by the borrower, the lender has the right to seize the collateral
security. However, one of the key features of a non-recourse loan is that the lender cannot proceed against the
borrower if the collateral security does not provide full compensation to the lender. Thus, the lender shall forgo
the remaining amount of the loan after recovery from the collateral security. The borrower does not have any
personal liability to repay the non-recourse loan. The LTV in the case of a non-recourse loan can be anywhere
between 60% to 80%.
Loan Against Fixed Deposits
Here, banks and financial institutions provide loans to borrowers against fixed deposits. The fixed deposits act
as primary security for the lender. Further, as the fixed deposit is equivalent to money, banks do not face many
risks in the case of loans against FD. Borrowers can avail of loans against FD for an amount up to 60% to 75%
of the FD value. In terms of interest rates, while some banks charge a flat interest rate, other banks may charge
interest that is 1%-2% rate higher than the FD rate. Currently, the FD rate is anywhere between 5% to 7.5% per
annum, depending upon the amount and tenure. Thus, it can be said that loans against FD are one of the most
affordable secured loans.
Loan Against Insurance
Loans against insurance are also one of the popular secured loans in India. Many people have life insurance
policies but seldom do they know that policies can act as a security against which money can be borrowed. To
avail of a loan against an insurance policy, the policy must have a surrender value. The LTV in case of loan
against insurance is anywhere between 85% to 90% per annum. The interest rate in this case can start anywhere
between 10% per annum to 12% per annum.
Working Capital Loans
Working capital loans are extended by banks and financial institutions to help businesses meet their working
capital needs. Also known as Cash Credit, here the amount of loan that can be availed of depends upon the
creditors, debtors and stock that the business holds which also constitutes the working capital for the business.
Each lending institution has its own way of calculating the working capital limit. Further, the interest rate on
working capital loans can start from 12% per annum. While the stock and debtors act as a security in the case of
working capital loans, the lending institution may require the borrower to furnish collateral security as well.
Types of Unsecured Loans
Following are the different types of unsecured loans that borrowers can avail of from the lending institutions:
Personal Loans
These are one of the most sought-after bank loans in India. Personal loans are loans extended by banks or
financial institutions without any collateral security. It is essentially a loan against the income of the borrower.
The key features of personal loans are that it does not require any collateral security, and there is no restriction
as to the end use of the borrowed funds. The borrower can utilise the amount borrowed for any purpose, be it
medical emergencies, marriage, education of the children, purchasing any asset or travelling. The amount of
personal loan that a borrower can avail of depends upon the income of the borrower and his/her CIBIL score.
Further, the rates of interest on personal loans can range anywhere from 8% per annum to 10% per annum.
Short-term Business Loans
Uncertainties can strike the business anytime. In case a business is facing a financial crunch, then it can go for
short-term business loans. These bank loans are structured to help businesses meet short-term uncertainties and
financial crises. The eligibility criteria are simple, and the amount of loan that can be disbursed depends upon
the profitability of the business and the profile of the borrower. The interest rates for short-term business loans
can be anywhere between 1% and 1.5% per month, i.e., 12% to 18% per annum. The reason that business loans
attract a higher interest rate than personal loans is that there is a chance of loss of borrowed funds in the
business. In such cases, the risk falls on the shoulders of the lenders.
Education Loans
The cost of education is rising at a rapid pace. If one wants to pursue quality education, then he/she needs to
shell out lakhs of rupees. In such cases, an education loan provides monetary assistance. The interest rate on

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education loans can start from 8.85% per annum, and the amount of the loan depends upon the cost of
education. The repayment for education loans usually begins 12 months after completion of the education.
Credit Cards
Many banks offer credit cards . These are great tools as one gets to spend using the credit card without actual
cash outflow. The grace period provides the time for repayment to the credit card holder. However, credit cards
are unsecured in nature. Further, they come with an option to convert the outstanding balance to a loan if the
credit card holder requires it. This becomes an unsecured loan for the borrower. One of the major drawbacks of
credit card is that it attracts a very high interest rate. The credit card interest rate can be anywhere between 18%
and 36% per annum. Further, like any other loan, credit cards also have a great impact on the CIBIL score .

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