October 24, 2016

Banking Awareness 2017 in Simple Language - Lesson 13

Banking Awareness : Charging of Securities

Earning money (Wealth creation) is the basic aim of any human being. One of the concepts used for wealth creation is “Leveraging”.

What is leveraging ?
Using debt (giving loans) to create further assets/investments or to increase the return on investments is called leveraging. Debts may be in the nature of ‘Secured’ or ‘Unsecured’. Unsecured debts are costlier and may not serve the purpose. Hence, we may resort to secured debts that require offering some asset/ investment as security for the loan. The process of secured lending is done through Charging of Securities’. A charge means an interest or right which a lender or creditor obtains in the property of the company, by way of security that the borrower will pay back the debt.

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There are different modes of charging securities. They are,

Pledge :

Pledge is done on moveable goods and securities. In pledge ownership remains with borrower and possession is transferred to bank.

Example : Gold loan

Hypothecation :

Hypothecation is a charge on movable assets. Under hypothecation ownership as well as possession remains with the borrower i.e., neither ownership nor possession is transferred to the bank.

Example : Car Loan, Bike loan etc.

Mortgage :

Mortgage is a charge on immovable property. Mortgage means transfer of interest (right) in specific immovable prpoerty by borrower in favour of bank to secure the loan.

Example : Home Loan

Assignment :

Assignment is transfer of right or interest over actionable claims. Assignment is done on unsecured debts.

Example : LIC Policy, Fixed Deposit.

NPA (Non Performing Assets)

Non-performing assets also called Non-performing loans, are loans made by a bank or finance company, on which repayments or interest payments are not being made on time. Banks usually classify as non performing assets any commercial loans which are more than 90 days overdue and any consumer loans which are more than 180 days overdue.
NPA does not just reflect badly in bank account books, they adversely impact the national economy.

How to Identify ?
With effect from 31st March 2004, a Non Performing Asset (NPA) is a loan or an advance where :
Interest and / or installment of principal remain overdue for a period of more than 90 days n repsect of a term loan,

The account remains 'out of order' for a period of more than 90 days, in respect of an Overdraft / Cash Credit (OD / CC),
The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
Interest and / or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and
No active transactions in the account (Cash Credit / Over Draft / EPC / PDFC) for mroe than 90 days.

Note : With a view to moving towards international best practices and to ensure greater transparency, it had been decided to adopt '90 days' overdue norm for identification of NPA from the year ending 31st March 2004.

Classification / Categories of NPA:

Banks are required to classify Non-Performing-Assets further into the following three categories based on the period for which the asset has remained non performing and the realisability of the dues.

Sub-standard assets : It is one which has been classified as NPA for a period not exceeding 12 months.
Doubtful Assets : It is one which has remained NPA for a period exceeding 12 months.
Loss Assets : Where loss has been identified by the bank, internal or external auditor or central bank inspectors. But the amount has not been written off, wholly or partly.