Based on IRAC norms – Asset Classification, the bank has to do less provisioning for the secured advance than for Unsecured Advances, which improves the bank’s profitability; therefore, Banks try to make secured advances as secured advances reduce bank risk.
Various charges on assets like – Pledge, Hypothecation, Mortgage, Assignment, and Lien of assets are created against advances to increase security.
Pledge
The lender (Pledge) takes actual possession of asset/security, known as the Pledge. In the case of pledges, Assets/securities are movable like gold. A gold loan has been given against the Pledge of gold. The lender (Pledge) returns the assets/securities after the borrower has paid the lender’s total amount. The lender (Pledge) has a right to sell the assets/securities in possession if the borrower defaults to adjust the due amount.
Hypothecation
Hypothecation is used to create the lender charge against the security of movable assets (vehicle, plant and machinery, stock and book debts, etc.), but the security ownership remains with the borrower. The lender must take possession of the assets/securities and then sell the assets/securities if the borrower defaults to adjust the due amount. The lender release hypothecation on the asset/security after the borrower has paid the total amount to the lender. Agriculture land is immovable, but the hypothecation of agriculture land has been created against crop loans. Asset/security remains with the borrower in the case of hypothecation, so the borrower can use it to generate income.
The government has taken hypothecation creation charges as it is one of the revenue sources for the government. Mortgage creation charges and processes may be changed state by state.
Mortgage
A mortgage is used to charge the lender against the protection of immovable property, which includes land, houses, or anything attached to the earth (but does not include growing crops or grass as it can be easily removed from the ground) or permanently attached, but the owner of the security remains with the borrower. The lender must take possession of the assets/securities and then sell the assets/securities if the borrower defaults to adjust the due amount. The lender release mortgage on the asset/security after the borrower has paid the total amount to the lender. An example of a mortgage charge is a home loan in which a mortgage of a house is created.
The government has taken mortgage creation charges as it is one of the revenue sources for the government. Mortgage creation charges and processes may be changed state by state. For an example, in Gujarat, the Mortgage creation charge is 0.35% of the loan amount, so if someone takes a home loan of RS.25.00 lacs, then they have to pay 0.35% of Rs.25.00 lacs mean Rs.8,750/- to the government at the time of the creation of the mortgage.
There is various type of mortgage, as mentioned below,
Simple mortgage
In this, the borrower has to sign an agreement that if they will be unable to pay back the borrowed amount along with interest in particular time duration, then the lender has the right to sell the property to anyone to recover the money back.
Equitable mortgage
This is mainly used mortgage across the baking industry. In this, the borrower has to submit the original title deed of the property to the lender by signing an agreement that if they will be unable to pay back the borrowed amount along with interest in particular time duration, then the lender has the right to sell the property to anyone to recover the money back.
Legal mortgage/English mortgage
In this, the borrower has to transfer the property to the lender while obtaining a loan with an agreement that the lender will transfer the property back to the borrower once the borrower is paid the total loan amount (Principal and interest); otherwise, the lender has right to sell the property to anyone to recover the money back. This mortgage is preferred by banks when a copy of the chain of title is not available or any doubt in the chain of title document of the property. In this mortgage, the borrower has not to submit the original title deed to the lender but has to enter the lender’s name as the property owner in the registrar’s office.
Assignment
An assignment is a charge created on asset/security held in books. An assignment occurs when the contract owner (the assignor or borrower) gives a contract to another party (the assignee or lender). The assignee or lender assumes all benefits of the contact. The assignee or lender has the right to sell the assets/securities in possession if the borrower defaults to adjust the due amount. An example of an assignment charge is a loan against a life insurance policy in which the assignment of life insurance policy is created.
Lien
In a lien’s case, the lender can hold up the asset/security used as collateral against borrowed funds by the borrower. In a lien’s case, possession is with the lender; therefore, the lien is the most potent security form. An example of a lien charge is a loan against a first deposit in which the lien of a fixed deposit is created.