Security Valuation Control for Banking Sector

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1. Security: Valuation, Control, Creation of Charges, Insurance of Goods and Compliance Checklist D. R. Karmaker Ex . GM,Sonali Bank Ltd & Ex.Faculty Member B.I.B.M.

2. Security : Concept and Meaning Security means things deposited as a guarantee of an undertaking or loan, to be forfeited in case of default.

3. Taking security simply means acquiring a claim to an asset or assets so that if repayment is not made as planned the assets taken as security can be used to obtain repayment. For this security also means an insurance against an emergency. Security also means document as evidence of a loan. Security plays a vital role in repayment of advances provided by a bank.

4. Tangible security Something that can be realized from the sale or transfer e.g., land and building, apartment, plant/machinery, furniture and fixtures, motor vehicles, stock of materials, investments, FDR. Share certificates, ICB Unit certificates. Bonds, life Insurance policies etc. Where tile debt is not fully realized from the sale of the tangible security, the bank has usually a right of action in law to recover the balance from the borrower's other assets.

5. Primary security Whenever the loan is sanctioned, some goods or assets are purchased with the help of the banks funds. These are called primary securities. Primary security is that which is regarded as the main cover for an advance and is deposited by the borrower himself. Principal or direct security against which loan is sanctioned. The bank get their charge noted over this security in the form of pledge or hypothecation or mortgage.

6. Collateral security The term collateral security is applied to security deposited by a third party to secure a customer's borrowing. This is the correct sense in which bankers ordinarily understand the term collateral security. A collateral security is an additional, secondary or subsidiary security provided by the borrower. When primary security remains under the custody of borrowers, banker, to secure its position, asks the borrower to provide additional security. Such a tangible security provided by the borrower himself or by third party is called collateral security.

7. Collateral security (Contd.) Direct collateral security means security obtained From the borrower himself to secure his own account. Indirect collateral security means any form of security given by a third person to secure a customer's account. This may be in the form of tangible or intangible security belonging to the borrower himself or to the third party.

8. Attributes of a good security Ready Marketability Easy ascertainment of value Stability of value Storability Cost and labour of supervision Transportability Durability Ascertainment of title Easy transfer of title Absence of contingent liability Yield

9. Margin A cushion against fluctuations in value of securities. Difference between the value of the securities and the amount, up to which the borrower can draw. Percentage of margin depends on- 1. Marketability and fluctuation in prices of the security 2. Central bank Directives 3. Borrower's credit worthiness Drawing power: Value of securities less margin.

10. Valuation The act or giving an opinion on the value of some object, idea or property is often referred to as an appraisal. Valuation of collateral security offered to the bank by a borrowing customer is to be evaluated properly. Security property can be valued either by the branch manager/appraisal officer or a professional valuer depending on the type of property involved.

11. In assessing the value of security like land, the appraisal officer is expected to do justice to the applicant and at the same time to protect the interest of the bank. When a banker lends, safety of advance will be the first consideration. All elements of speculation should be avoided and the appraisal officer should try to arrive at a realistic valuation reliable enough to protect the bank.

12. Urban land valuation: Location of urban land or building is the most important factor for determination of its valuation. In developing cities land and buildings in a particular block/zone, commercial areas may fetch high prices, whereas, the same may not fetch even half of price, in the undeveloped low lying areas. Then again, valuation will vary substantially in the commercial area and posh residential zones or important road side than in undeveloped and urban areas.

13. Determination of value of urban land is, therefore, very difficult and intricate. Lands in cities/towns are sold under manifold conditions and, therefore, variable prices can be shown in a transfer deed. It will not be safe to lay down a definite valuation standard, because of variable factors stated above.

14. Manager's independent judgment and assessment in determining valuation of urban land is extremely important. When a building is evaluated, separate valuation is to be worked out for the building and land. Acceptance of valuation must not exceed per acre ceiling as set by the concerned bank authority.

15. Building valuation: Valuation or urban buildings will be assessed on the basis or cost estimates prepared by Public Works Department (PWD) after making provision for depreciation, where necessary. To facilitate valuation of security buildings it is essential to have approved house plan municipal rental value type and class or construction year of construction standard of upkeep and maintenance Provision of water, gas, electricity etc.

16. Before assessment of valuation, the Manager/ Bank’s engineer must inspect security buildings. Such valuation may be made as per PWD standard prescribed rates, in consultation with the manager The manager may consult the local PWD engineer as to proper valuation of a security building. This may be a good guidance for him.

17. For life Insurance policies, the surrender value is obtainable from the insurance company. Banks examine the valuation of stocks charged to them against cash credit limits for fixing drawing power. The stocks generally include raw material, stock-in-process. finished goods, consumable stores/spares, etc.

18. As per general practice, raw material is valued at the cost price or market price, whichever is lower . stock-in-process on the basis of raw material cost but in certain cases at cost of production . finished goods at net selling price minus margin of profit or cost of sales, whichever is lower. As regards consumable stores/spares, these are valued at particular price.

19. Safe custody of security documents Custodial duties are the important functions of credit administration department and is critical in ensuring that proper security documentation is held under strict control, preferably in locked fireproof storage in a systematic manner as per prescribed register.

20. What is a Charge? Charge means right of payment out of certain property. In a charge there is no transfer of interest or property, It is a right over some tangible asset of the borrower. It is a legal transaction as a result of which the lender acquires certain rights over the property and the borrower is refrained from dealing in them. A charge in a transaction for value means that the creditor shall have the right to make the property on which charge is created available to him as security for payment of a debt by an order of a court of law.

21. Fixed Charge: Charge is said to be fixed if it is made specifically to cover definite and ascertained assets of a permanent nature or assets capable of being ascertained and defined, e.g., charge on land and building or heavy machinery. Floating Charge: It is a charge on property which is constantly changing, e.g., Stock.

22. Pari Passu Charge: The term is usually used in case of consortium lending. In case of such lending, a number of banks or financial institutions join together to lend to a single borrower in an agreed ratio against some common securities. The securities are charged to all the bankers/financial institutions without any reference like first charge or second charge etc. The term that institutions will have a ' pari passu charge' over the assets of the borrower means that the lenders arc entitled to have equal. rights over the assets as per the agreed share.

23. Charging over Securities: Creating a charge means making it available as a cover for an advance. The manner by which some articles or commodities or properties arc made available to a banker as security is known as charging of securities. The method of charging should be legal, perfect, and complete. It should, however , be noted that whatever form of charge may take, the banker does not become the absolute or exclusive owner of the property; he has only certain defined rights in it, until the debt due to him is repaid.

24. Types of Security & Modes/Ways of Charging security Types of Security Modes of Charging security A. Immovable Security: Land, Building, Apartments, Factory Building, Heavy Machinery etc. Mortgages B. Movable security: Goods (Inventory) e.g. raw material’s, Work-in-progress and Finished goods, Machinery, vehicles Hypothecation, pledge C. Financial obligations (Instruments): FDR, ICB Unit Certificates, Wage earner development Bonds, Shares etc. Lien, Set-off

25. Types of Security Modes of Charging security D. Actionable Claim: Book Debt (accounts Receivable), Supply bill (Contract bill), Life Insurance Policy etc. Assignment E. Title to Goods: Shipping Documents, Commercial Invoice. Transport Documents (Bill of Lading, Truck Receipt, Railway receipt), Insurance documents and Other documents Lien

26. Lien : Lien means the right to retain the goods of the borrower until the debts are repaid. Pledge : Pledge is the bailment of goods as security for payment of a debt. Only movable goods can be pledged. Hypothecation : Hypothecation creates an equitable charge on movable property without possession. However, the hypothecation deed provides that the banker will have the right to take the goods hypothecated in its possession if the need arises.

27. Mortgage : A mortgage is a conveyance of an interest in property (land or any immovable property) for securing a debt . A legal mortgage is created by a registered deed and gives the mortgagee the right of sale in case of default of the borrower. Assignment : Assignment is transfer of ownership from one person/authority to another person/authority. Set-off : Set-off means the total or partial merging of a claim of one person against another in a counter-claim by the latter against the former.

28. Security Compliance Certificate Checklist : Security documents are prepared in accordance with approval terms and are legally enforceable. Standard loan facility documentation that has been reviewed by legal counsel should be used in all eases. Exceptions should be referred to legal counsel for advice based on authorization from an appropriate executive in CRM.

29. The borrower mal have excellent credit worthiness. The security offered by him may be ideal from the Banker's point of view. But all these advantages are lost if there is any legal flaw in the documents taken against the advances made to him. Documents form the basis of contract between the banker and the borrower. So utmost care should be taken in their execution. Before we go for study of legal consequence of defective documentation , let us study the documents required to be taken against different nature of advances and different kinds of borrowers.

30. DOCUMENTS COMMON TO ALL ADVANCES : Letter of borrower requesting for new facilities/renewal Sanction advice Acceptance of the terms and conditions of sanction advice by the borrower Demand promissory note (depending on the types of borrowers such as , single/Double for companies) Letter of arrangement Letter of Authority ( Letter of authority from partners in case of partnership concern and resolution in case of companies) with list of partners/Directors Form XII certified by RJSC regarding list of existing directors for limited company.

31. DOCUMENTS REQUIIIED IN CASE OF ADVANCES DIFFERENT TYPES OF BORROWERS: To single/ Individual: Common documents mentioned above Letter of disbursement (in case of loan) Letter of Continuity in case of overdraft/ cash credit) To more than one individual: Joint and several demand promissory note Letter of Arrangement Acceptance of the terms and conditions of sanction Advice duplicate copy by the borrower Letter of Disbursement (in case of Loan) Letter of installment (in case of Lean) Letter of continuity (in case of overdraft/ cash credit)

32. To Partnership Concern: Common documents mentioned above signed by the sole proprietor A declaration from the borrower that he is the sole proprietor borrowing firm Letter of Disbursement (in case of Loan) Letter of Installment (in case or Loan) Letter of continuity (in case of overdraft / cash credit) To joint stock Company: Common documents mentioned above signed by authorized person on behalf of the company. Memorandum and Article of Association . Certificate of incorporation and certificate of commencement Resolution of the Board of Directors confirming the borrowing from the bank.

33. Creation of charge on the assets, authoring the person to execute documentation and operate the account Personal guarantee of the Directors Letter of disbursement (in case of Loan) Letter of installment (in case of Loan) Letter of continuity (in case of OD & CC). Registration of charges on the properties "with Registrar of Joint stock company within 21 days, in Form No .. xviii in case of Limited Company. To cooperative society / statutory bodies: Copy of Certificate of Registration Bye-laws Resolution of meeting Clearance from Registrar, Co-operative Societies.

34. DOCUMENTS AS PER NATUHE OF SECUIUTY OFFERED AGAINST (SOME SELECTED & COMMON ADVANCES ) Clean Advance: All common documents mentioned above All documents as per borrower type. Documents as per nature of advance (Loan or OD/CC). Advance against fixed deposit receipt: All common documents mentioned above All documents as per borrower type. Documents as per nature of advance (Loan or OD/CC) Fixed Deposit Receipt duly discharged. Letter of Lien (Third Party Lien in case of advances made to the third Party ) Letter of authority for automatic renewal of FDRs held under lien

35. Against Shores of Various Companies: All common documents mentioned above. All documents as per borrower type, Documents as per nature of advance (Loan or ODICC). Letter of Lien. Letter of ownership. Transfer Deeds duly verified. An undertaking from the Director of Limited Company by the Bank before declaring any dividend.

36. Advance against Life Insurance Policies: All common documents mentioned above All documents as per borrower type. Documents as per nature of Advance (Loan or OD/CC). Insurance Policy With the assignment endorsed in favor of the bank Letter of under taking from the assured to pay all future premiums regularly or letter of authorization to pay by Bank by debiting borrowers A/C. Acknowledgement from the Insurance Company that the assignment has been registered with them Interim/final dividend.

37. Advances Against Hypothecation of Goods/Stocks : All common documents mentioned above. All documents as per borrower type. Documents as per nature of Advance (Loan or ODICC). Letter of Hypothecation. Authority letter for obtaining insurance policy by debiting borrower's account.

38. Against Pledge of goods /stocks: All common documents mentioned above. All documents as per borrower type. Documents as per nature of advance (Loan or OD/CC). Letter of Pledge. Letter of authority for engaging godown staff and also for payment of salary etc. to them. Letter of disclaimer in case the godown is rented. Necessary Insurance Policy. Letter of authority to obtain insurance policy by debiting borrower's account .

39. Against LIM: Letter of clearance duly stamped and signed by the borrower indicating the name of clearing agents from among the Bank's approved list. Bill of Exchange and connected shipping documents. Customs purpose copy of relative import license /LC Authorization form . Customs Declaration Form. Insurance policy in the joint names of borrower and the Bank. Letter of Pledge. Bill of Entry along with customs certified copy of invoice (after clearance).

40. Against "hypothecation of power Driven Vehicles & Water Crafts: All common documents mentioned above. All documents as per borrower type. All documents as per nature of advance [Loan or OD/CC). Hire Purchase agreement for hypothecation of vehicles/water craft. Comprehensive Insurance Policy in joint name of the bank and the owner . Registered Power of Attorney favoring the Bank to retain the vehicle/water craft under Bank-control in the event of failure to repay Loan installments. Copy of Blue Book registered in the joint names of the borrower and the bank. Route permit from concerned transport authority

41. Advance against Construction of House: All common documents mentioned above. All documents as per borrower type. Letter of disbursement. Letter of installment. Approved Plan from Rajuk or related authority. No Objection Certificate from the related authority in case of leased/allotted property before creation of mortgage.

42. Advance against mortgage of Immovable Property: Against Registered Mortgage: Mortgage Deed drafted by Bank's approved lawyer and registered with concerned Registrar's office. Original Title Deed of Property. Memorandum of Deposit of Title Deed . Related chain documents, DCR, up to date rent/tax payment receipt, Mutation Khatian, Present Filed Survey Porcha etc. Non encumbrance certificate.

43. Valuation certificate Report of the Physical verification by Bank Officials regarding physical possession of the property. Report of the Physical verification by bank official in the Tahsil office sub-Registrar/AC Land Office/Land Acquisition Office. Lawyer's opinion regarding title of the property. Registered irrevocable Power of Attorney Affidavit by the mortgagor. Undertaking from the borrower for executing a legal mortgage. Registration of charge with the registrar of Joint Stock Companies within 21 days in case of Limited Company and obtain certificates from them .

44. Advance against Mortgage of Leased/Allotted Property: All documents required under legal mortgage. Deposit of title Deed (Leased Deed/allotment letter). No Objection Certificate from Lessor / Allotment authority . Advance Against Mortgage of Third Party Property: All documents listed under legal mortgage. Mortgage Deed signed by the borrower as well as owner of the property (mortgagor). Citizenship certificate of the third party property owner by the Chairman or the Union Council/Ward Commissioner.

45. Copy of Passport Size Photo of the owner of the Property duly attested by the Chairman of Union Council/Ward Commissioner Certificate of verifications of identity of third part mortgagor through spot Visit of the office of the Chairman/Ward Commissioner by Bank Officials . Report of the physical verification of the property offered for mortgage Personal Guarantee of the mortgagor/owner of the property. Advertisement in the daily News Paper stating detailed schedule, ownership of the proposed mortgage properly to raise objections with in a stipulated time (if any) against the proposed mortgage property.

46. Advance against Second Mortgage of Property: No Objection certificate from the first mortgagee with the clearance to extent of advances to be made . (This will be treated as the main title Deed for the second Mortgagee). Original title Deed be retained by the first mortgagee. All other documents listed under legal mortgage ( copy).

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