Secured loan

Definition: Section 5 (i, h) of Banking regulation Act, 1949 defines secured loan as one which is offered on the security of the asset whose market value at no time will be less than the loan amount to be repaid to the lender (principal + interest)

If the asset value becomes less than the amount to be repaid to the lender at any point of time during the loan period then the loan becomes partially secured.

If the borrower defaults on the repayment in the earlier period of loan then the interest add up to the total loan amount & this could exceed the market value of asset and the secured loan becomes partially secured loan.

Classification of loans based on security

•Personal loans

•Collateral / chattel loans

•Pledge loans

•Hypothecation

•Mortgage loans

Personal security loans: The loan is advanced on borrower’s promissory note. Third party guarantee may or may not be insisted upon.

Collateral security loans: The loan is advanced on the security of movable assets. Ex: Animal, Tractor etc.

Chattel loans: Specific type of loans provided by a particular category of lenders – pawn-brokers, by pledging movable properties such as jewellery, utensils etc.

Pledge loans: Loan is advanced on pledging the movable properties.

Hypothecation: Loan is advanced on the security of assets created out of the loan advanced. Ex: Standing crops, vehicles etc.

Mortgage loans: Loan is advanced on the security of immovable properties like land, building etc.

Different modes of creating charge on asset in favour of lender

•Lien•Pledge•Hypothecation•Mortgage

a), b), c) …. On movable property d) …. On immovable property

Creation of charge: Passing on certain rights to the lender

•Right to retain the asset•Right to use•Right to destroy•Right to donate•Right to sell•Right to offer as security

Once the loan is repaid the rights are vested back to the borrower.

Lien

The right of a lender to claim the property of a borrower incase a borrower defaults.

In the event of more than one lien, the claim of the lender with the first lien is fulfilled first and then the second lien and so on.

This mode is not generally followed in agriculture.

Lienor = borrower lienee = lender

General lien – A claim can hold against an asset until all the obligations to the creditor are cleared.

Particular lien – A claim can hold against an asset just until the obligations against that particular asset are cleared.

Pledge

An Indian contract Act, 1872, section 172 defines pledge as “the bailment of goods as security for payment of a debt”.

Section 148 defines Bailment of goods as “delivery of goods from one person to another for some purpose upon the contract that the goods be returned back when the purpose is accomplished or otherwise disposed off according to the instructions of the bailer”.

Bailer = borrower bailee = lender bailment = transaction

lien pledge

Only right on asset is transferred. No physical transfer of asset.

Both physical transfer of asset and transfer of right on the asset.

Hypothecation

Neither the ownership nor the possession is transferred to the lender, but an equitable charge is created in favour of the lender.

It means, the borrower doesn’t have 100 percent rights of the asset – right to sell, right to destroy, right to offer it as security for other loans.

But, the borrower has the right to retain it, use it, maintain it, generate income & use it to repay the loan.

The right to convert hypothecation in to pledge rests with the lender.

Equitable charge: It does not pass on the ownership or possession to a creditor but gives him or her the right to the judicial process for recovery of the loan amount in case of non-payment.

Mortgage

Section 58 to 104 of the transfer of property Act, 1882 says, “Mortgage means transfer of the interest” in the immovable property to the creditor to secure the payment of the money lent.

Essential conditions:

•Both the creditor & the owner of the immovable property must be living persons ( individuals, partnerships, companies, associations).

•The immovable property offered as security must be specific in description with boundaries and should be easily identifiable.

•Minors & mentally challenged persons are excluded from mortgaging property.

•The guardian of a minor can create a mortgage on obtaining permission from the court.

•The person who transfers the interest in the immovable property is called mortgagor.

Generally, the mortgagor would be the borrower.

•Any other person may also transfer the interest in his immovable property to the lender to secure the payment of money by the borrower.

•The person to whom the interest in immovable property is transferred is the mortgagee (lender,creditor).

•Principal + interest put together is called mortgage money.

•The document executed by the mortgagor transferring the interest in immovable property to the creditor –mortgage deed.

•In case of joint owners (partnership firms) all the co-owners should sign the mortgage deed.

•In case of HUF (Hindu Undivided Family), all the male members, widows of the deceased members and daughters who have been conferred property rights by the State Government, have to sign the mortgage deed.

•The lender has the first right on the property for which they provide the loan.

•In case of more than one lender pari passu charge is created in favour of all the lenders.(pari passu = equal rights of payment or equal seniority)

•After repaying the loan amount the mortgagor has the right to receive back the mortgage deed and other documents related to the mortgaged property – redemption of mortgage.

•When the mortgage exists, the mortgagor is entitled to inspect the documents of title or take copies thereof, after giving due notice and paying cost, if any. (Ex: for selling of property)

•Mortagee gets the right to recovery of loan amount due from sale proceeds of the property.

•Time limit for filing a suit to recover mortgage money is 12 years.

For personal liability – 3 years.

Types of mortgages

•Simple mortgage

•English mortgage

•Mortgage by deposit of title deeds

•Usufructuary mortgage

•Mortgage by conditional sale

•Anomalous mortgage

1.Simple mortgage

•Possession of the property is retained with the mortgagor

•The mortgagor binds himself personally to pay the mortgage money apart from offering his property as security.

•The mortgagor agrees that in the event of his failing to repay as per the contract, the mortgagee will have the right to sell the property mortgaged and proceeds of the sale to be applied for adjustment of the loan and balance, if any, after sale has to be refunded to the mortgagor.

2.English mortgage

•Mortgagor binds himself to repay mortgage money on a certain date.

•He transfers the property absolutely to the mortgagee.

(Undesirable – mortgagor loses all rights till the repayment of dues.)

3. Mortgage by deposit of title deeds

Title deeds are –

•Purchased property – absolute sale deed

•Hereditary property – record of right or gift deed

These deeds are registered by the sub-registrars.

The mortgagor delivers these title deeds to the mortgagee with an intent to create security.

4. Usufructuary mortgage

•Mortgagor binds himself to deliver possession of the mortgaged property to the mortgagee, when demanded.

•Mortgagee can retain the possession until repayment of the mortgage money.

•Mortgagee can receive the rents and profits accruing from the property and to appropriate it towards payment of mortgage money.

•Borrower will not have access to the property until the loan amount due is paid. (So, not practiced in agriculture).

5. Mortgage by conditional sale

•Mortgagor sells the property on condition that

-On default of payment of mortgage money on a certain date the sale will become absolute (becomes absolute sale deed).

-On payment being made the sale will become void.

- On payment being made the lender transfers back the property to the mortgagor.

6. Anomalous mortgage

•Any mortgage other than the ones specified above is called an anomalous mortgage.

•Terms of mortgage are as agreed by the two parties, as per local usage, or word of mouth.