Stock Exchange Securities and Other Instruments :
Stock exchange securities include shares, debentures and bonds which are traded on stock exchanges. These securities are easily marketable; their market value is readily ascertainable; it is easy to ascertain the title of the depositor; and they are easy to pledge. In addition to stock exchange securities, banks also make advances against such instruments as gilt-edged securities, National Savings Certificates, Kisan Vikas Patras, Indira Vikas Patras, Gold Bonds, etc. It may be noted that the banks are not allowed to provide loans to companies for buy back of shares / securities. Further, the banks are not allowed to provide loans against security of its own shares.
These securities are usually in the possession of the bank. Wherever the shares are held as security by a bank (whether as primary or as collateral security), banks are required to have them transferred in their own names if the loan amount exceeds the ceiling prescribed by RBI. The ceiling is different for shares in dematerialised form and those in physical form. In other cases, (i.e., where the loan amount does not exceed the prescribed ceiling), banks accept the aforesaid securities subject to the following conditions:
(a) in the case of physical shares, if they are accompanied by blank transfer deeds duly signed by the person in whose name they are registered; in case of shares held in dematerialised form, authorisation slips should be obtained from the borrower and should be passed on to relevant depository participant who immediately marks those shares as pledged or:
(b) if the bank holds a general power of attorney from the person in whose name they are registered. If the person in whose name the securities are registered is other than the borrower, the bank has to particularly satisfy itself that the person has a good title to the security. The bank also obtains a letter of renunciation from the person in whose name the securities are registered.
In the case of advances against bearer securities (Kisan Vikas Patras/ Indira Vikas Patras), banks obtain independent/direct confirmation of the genuineness of the certificates from issuing authorities. In the case of bearer securities, only possession by the bank is sufficient.
In the case of government paper and inscribed stock, the banks should get them registered in their own name while accepting them as security.
Before accepting shares as security, the lending bank has to ensure that the provisions of section 19 of the Banking Regulation Act, 1949 are not
contravened. This section prohibits a banking company from holding shares in any company, whether as pledge, mortgagee or absolute owner, of an amount exceeding thirty per cent of the paid up share capital of that company or thirty per cent of its own paid-up share capital and reserves, whichever is less.
Goods
Goods constitute a significant proportion of the securities taken by banks. They are either the stock-in-trade of its trading customers or the
finished products of manufacturers. Raw materials, work-in-process, etc., are also accepted as security. Banks should have a system in place to ensure that the borrower does not take advantage of double financing on same stock, i.e., in respect of unpaid stocks and is financed against paid stocks.
Goods may be either hypothecated to, or pledged with, the bank. As mentioned earlier, in case of hypothecation of goods, banks obtain periodic
statements from the borrowers (generally, monthly), declaring the quantity and value of the goods on the basis of which the drawing power of the borrowers is fixed. The officers of the lending bank pay regular visits to godowns or factories of the borrowers to inspect them and to check the correctness of records maintained by the borrowers on the basis of which, the periodic statements are prepared by them. They also check the value of the goods in stock with reference to sale bills, market quotations, etc. In case of large advances, the inventory is subject to inspection and verification (stock audit) by external agency at stipulated intervals. The auditor may go through the same for determining existence and adequacy of security and also to determine the irregularity in the account, if any.
Stock registers are maintained by the godown keepers of the lending bank in respect of goods pledged with the bank. The godowns are regularly
inspected by the inspectors and other officers of the bank. When goods are brought into the godown, the godown keeper has to satisfy himself, by
appropriate test checks, regarding the quantity and quality of goods. Banks have to exercise care to ensure that frauds are not perpetrated against them by pledging packages not containing the specified goods and later on holding them responsible for the goods supposed to have been pledged according to the documents.
The goods are insured against fire and other risks involved and the insurance policies are either in the name of, or endorsed in favour of, the bank.
In case the borrower is a company, the bank has to ensure that charge on the goods hypothecated is registered with the Registrar of Companies.