Different Modes of Charging Securities | Documentation | PAPER II – PRINCIPLES & PRACTICES OF BANKING | MODULE B: FUNCTIONS OF BANKS

Banking Theory: Securities, Contracts, and Documentation

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1. Different Modes of Charging Securities

Securities are assets pledged by a borrower to secure a loan. The main modes of charging securities include:

• Pledge: Physical transfer of goods to lender (e.g., gold loan).
• Hypothecation: Possession remains with borrower; lender has a right over it (e.g., car loan).
• Mortgage: Transfer of interest in immovable property (e.g., home loan).
• Assignment: Transfer of rights (e.g., insurance policy assigned to a bank).

Example: If Mr. A hypothecates his car worth ₹5,00,000 to take a loan of ₹3,00,000, the bank has a charge over the car without possession.

2. Meaning and Essentials of a Contract

A contract is an agreement enforceable by law. Essentials include:

• Offer and Acceptance
• Intention to Create Legal Obligations
• Lawful Consideration
• Capacity of Parties
• Free Consent
• Lawful Object

3. Contract of Agency

Agency is a relationship where one party (agent) acts on behalf of another (principal). Contracts of agency may be:

• Express or Implied
• By Estoppel
• By Necessity

4. Contract of Bailment

Bailment is the delivery of goods for a specific purpose with a promise to return them. It requires:

• Delivery of Goods
• Purpose
• Return of Goods

Example: A gives his laptop to B for repairs. B must return it after repair – this is a contract of bailment.

5. Types of Charges

• Fixed Charge: On specific assets like buildings, machinery.
• Floating Charge: On circulating assets like stock, receivables.

Mathematical Illustration:
Company assets: ₹20,00,000
Fixed assets under fixed charge: ₹12,00,000
Current assets under floating charge: ₹8,00,000
Total chargeable assets: ₹12,00,000 (fixed) + ₹8,00,000 (floating) = ₹20,00,000

6. Registration of Charges

Under the Companies Act, charges must be registered with the Registrar of Companies within 30 days. Non-registration may lead to the charge being void against the liquidator or creditors.

7. Documentation

Documentation refers to the legal records created during the lending process. It serves as proof of the terms of the loan and the charge on security.

8. Different Types of Documents

• Loan Agreement
• Demand Promissory Note (DPN)
• Hypothecation Agreement
• Guarantee Agreement
• Letter of Continuity

9. Documentation Procedure

The basic documentation procedure includes:

1. Sanction of Loan
2. Preparation of Documents
3. Execution by Borrower
4. Stamping and Notarization
5. Safe Custody of Documents

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MCQs on Securities, Contracts, and Documentation

1. Which of the following is a movable asset-based charge where the asset remains with the borrower?
A. Mortgage
B. Pledge
C. Hypothecation ✅
D. Assignment

2. A valid contract must include:
A. Just consideration
B. Mutual love
C. Legal enforceability ✅
D. Social purpose

3. In an agency contract, the person who is represented is called:
A. Agent
B. Principal ✅
C. Executor
D. Mediator

4. The delivery of goods for safekeeping is called:
A. Mortgage
B. Bailment ✅
C. Hypothecation
D. Lease

5. A charge on stock and receivables is called a:
A. Fixed charge
B. Floating charge ✅
C. Legal charge
D. Equitable charge

6. Registration of charge should be done within how many days from its creation?
A. 15 days
B. 21 days
C. 30 days ✅
D. 45 days

7. A document where the borrower promises to repay the loan is called:
A. Agreement
B. DPN ✅
C. Guarantee
D. Mortgage Deed

8. An agency formed by conduct is called:
A. Express agency
B. Agency by estoppel ✅
C. Agency by agreement
D. None of the above

9. In hypothecation, the asset is:
A. Transferred
B. Delivered
C. Retained by borrower ✅
D. Mortgaged

10. Loan documents should be stamped and:
A. Registered with SEBI
B. Sent to CBI
C. Notarized ✅
D. None of the above