What is a security in banking terms?
Security in banking terms is anything that makes the money advanced by bank safer. Presence of security gives more confidence to bankers while processing loan applications as it improves recoverability in case the account turns bad.
What are the types of securities?
Securities can primarily be grouped as
Primary security
Collateral security
Personal security and
Intangible security
Bank loans and advances are generally granted against primary security, collateral security or both.
Primary security is the asset created by utilising the proceeds of loan. For example, if a house is constructed by availing housing loan, the land with building is treated as primary security. Similarly, when a working capital is extended to a textile shop, the stock of cloths, readymade dresses etc are treated as primary security.
In the above example of textile shop, if the bank demands mortgage of flat, landed property, gold etc as additional security to secure the amount, then such securities are termed collateral security. Security which is considered as primary security in one type of loan may become collateral security in another type of loan. The purpose of advance decides whether the security is primary or collateral.
Banks insist for collateral security to ensure that they recover the amount even if the textile owner removes all primary security fraudulently. Other than in government sponsored loan schemes, loans for educational purpose, loans to customers of long standing relation, loans guaranteed by DICGC / ECGC, and special loan schemes announced by government etc, collateral security is normally insisted.
In certain types of loans like personal loans which are extended for consumption purposes, banks takes the guarantee of persons of salary income, high credit worthiness etc. Personal assurance given by a relative or third party authorising to bind him for repayment of loan by a borrower is known as personal guarantee.
Intangible security is one the presence of which can only be felt. Brand name, good will etc come under this category.
What are generally accepted securities?
Some of the generally accepted securities are
Promissory notes,
Own Bank deposits,
National Saving certificates
Gold ornaments/ bullions
Life Insurance policies
Machinery
Vehicles
Landed properties with our without building
Residential houses, flats and apartments
Book debts/ receivables
Assets created by availing of the loan
How does bank create security interest?
Banks create security interest on assets/ securities by executing proper documents creating any of the charges of the following:
Pledge (mainly in the case of gold ornaments)
Lien ( in the case of Bank Fixed deposits and bank accounts)
Hypothecation ( in the case of movable securities like items in a shop, manufactured products, machines etc)
Assignment ( in the case of life insurance policies)
Mortgage (in the case of immovable properties)
