Collateral security

This slide is entirely related to collateral security in banking sectire

1. Collateral Security K AJAY KUMAR - 1603002 K AJAY SAI - 1603003 S NAVEEN KUMAR - 1603026 B RAHUL GUPTA - 1603034 PRESENTED BY

2. DEFINITION OF COLLATERAL SECURITY ONLINE AND OFFLINE COLLATERAL EXAMPLES FOR COLLATERAL SECURITY INSTUMENTS ACCEPTED AS COLLATERAL ONLINE COLLATERAL VALUATION LAND & BUILDINGS AS SECURITY RISKS OF ACCEPTING LAND & BUILDINGS AS SECURITY ADVANTAGES & DISADVANTAGES OF LAND & BUILDINGS AS SECURITY ADVANTAGES & DISADVANATGES OF COLLATERAL SECURITY TYPES OF COLLATERAL SECURITIES FOR CREDIT FACILITIES TOPICS COVERED:

3. What is Collateral Security Collateral is a property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses.

4. Time Deposit Bank Guarantee Gov Bond Offline Collateral Online Collateral Total Collateral Cash Securities

5. Let's assume you would like to borrow $100,000 to start a business. Even if you have an excellent credit rating, a bank may be reluctant to lend you the  money  because it may be left with nothing if you default on the loan. Thus, the bank may require $100,000 of collateral in order to lend you the money. This collateral might consist of financial instruments, houses,  cash, or even objects such as art, jewelry, or other items. You might also pledge your business receivables as well.              If you do in fact default on the loan, the loan agreement gives the lender the right to seize and then sell the collateral in order to recover any outstanding balance. EXAMPLE FOR COLLATERAL SECURITY

6. Offline Collateral Time Deposit Bank Guarantee Stock Exchange Government Bonds BI Treasury Bills Online Collateral Cash Listed securities - Stocks, Government Bonds, Corporate Bonds

7. Cash, - valued 100 % - get interest from participating banks Acceptable Securities, - marked to market, lowest price in last three trading days.

8. Bankers were prejudiced against securities such as land & buildings. Gilbert pointed out that “ the rule of a bank is never to make advances directly, upon deeds or any other dead security. The following are the risks for a banker in accepting land & buildings as securities. LAND AND BUILDINGS AS COLLATERAL SECURITY

9. Difficulty in ascertaining the title of borrower Valuation is extremely difficult for a banker. Advances for a longer period. Difficult to realize the Security. Legal formalities. Creation of charge against the security is costly. Risks for accepting Land & Buildings as Security.

10. ADVANTAGES & DISADVANTAGES OF L&B AS SECURITY ADVANTAGES It is immovable property Value of appreciation is high Mortgage in buildings can also satisfy government goals or targets Ex: Aawas yojana DISADVANTAGES It is not easy to assess the title of property Legal disputes can be assigned on land & buildings There may be any disputes on title of property It depends on Market value rate.

11. Advantages and disadvantages of collateral ADVANTAGES Reduced credit risk Higher trading efficiency Improved liquidity Higher profits Diversification DISADVANTAGES Increases operational & legal risk Reduced trading activity Concentration risk Legal risks Increased overheads

12. Types of Collateral security for getting credit facilities

13. In this case lender is free to use or dispose the entrepenuers assets as the lender wishes. So, lender is not sure if the guarantor will have any assets at all when it is time to settle the claim. An important distinction between outside collateral and personal is that outside collateral signifies control over specific assets. PERSONAL GAURANTEE

14. Debt contracts with very short maturities allow a bank to limit the period of exposure and at the end of the period the bank has an opportunity to reassess the credit worthiness of the venture. This can be very effectively used while issuing credit limits. MATURITY

15. Debt covenants are commitments from borrowers regarding certain actions or activities . These can be promises to meet the financial goals and performance targets or to engage in certain activities. A banker may prohibit a lender from engaging in speculative activity by stocking up more than required inventory when needed . COVENANTS

16. Kantanas and Green Baum have suggested that lenders can utilize menu pricing on loans by offering alternative contacts that differ in terms of upfront fees, penalties , interest rates. Many bankers realize its usefulness in dealing with marginally riskier lending but find no rationale in using this to justify extending very risky loans. MENU PRICING

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