Solution:

Mode of Security:

• Banks provide a credit on the basis of the following modes of security :

Hypothecation:

• Under this mode of security, the banks provide credit to borrowers against the security of movable property, the usual inventory of goods.

• The goods hypothecated, however, continue to be in the possession of the owner of these goods (i.e., the borrower).

• The rights of the lending bank (hypothecated) depend upon the terms of the contract between the borrower and the lender. Although the bank does not have physical possession of the goods, it has the legal right to sell the goods to realize the outstanding loan.

Pledge:

• Pledge, as a mode of security, is different from hypothecation in that in the former, unlike in the latter, the goods which are offered as security are transferred to the physical possession of the lender.

• An essential prerequisite of the pledge, therefore, is that the goods are in the custody of the bank. The borrower who offers the security is, called a “pawner” while the banks are called the “pawner”.

• The lodging of the goods by the pawnor to the pawnee is a kind of bailment. Therefore, the pledge creates some liabilities for the bank.

• It must take reasonable care of goods pledged with it. The term “reasonable care” means care that a prudent person would take to protect his property.

• He would be responsible for any loss or damage if he use the pledged goods for his purposes. In case of non-payment of the loans, the bank enjoys the right to sell the goods.

Lien:

• The term “lien” refers to the right of a party to retain goods belonging to another party until a debt due to him is paid.

• Lien can be of two types :

  • (i)particular lien, and

  • (ii) general lien.

• A particular lien is a right to retain goods until a claim about these goods is fully paid.

• On the other hand, a general lien can be applied till all dues of the claimant are paid. Banks enjoy general lien.

Mortgage:

• It is the transfer of an interest in specific immovable property for securing the payment of money advanced.

• The person who parts with the interest in the property is called the “mortgagor” and the person in whose favor the transfer takes place is the mortgagee.

• A mortgage is, thus, the conveyance of an interest in the mortgaged property. The mortgage interest in the property is terminated as soon as the debt is paid.

Charge:

• Where immovable property of one person is by the act of parties or by the operation of law made security for the payment of money to another and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property and all the provisions of a simple mortgage will apply to such a charge.

• These are :

  • (i) A charge is not the transfer of an interest in the property though it is security for payment. But a mortgage is a transfer of an interest in the property.

  • (ii) A charge may be created by the act of parties or by the operation of law. But a mortgage can be created only by the act of parties.

  • (iii) A charge need to be made in writing but a mortgage deed must be attested.

  • (iv) Generally, a charge cannot be enforced against a transferee for consideration without notice. In a mortgage, the transferee of the mortgaged property can acquire the remaining interest in the property, if any.