Bank Lending

Money and Banking

 Group Members
Zeeshan Nawaz BE-21-04
Nouman Maqsood BE-21-63
Saifullah BE-21-10

Hafiz Usama Naeem BE-21-43

Abdul Hameed BE-21-46
Faseeh Ullah BE-21-40
 Contents
 Principles Of Lending  Mortgage
 Forms of Lending  Kinds of Mortgage
 Classification of Securities
 Bankers Lien
 Charge
 Pledge
 Hypothecation
 Guarantees
 Indemnity
 Advances against immoveable property
 Principles and Forms of Lending
 Lending
Lending is the core function of financial institutions, particularly banks, wherein
they provide funds to individuals, businesses, and governments for various
purposes.
 Principles of Lending

 Lending operations are guided by a set of principles aimed at ensuring the

efficient allocation of capital, minimizing risks, and safeguarding the interests
of both depositors and lenders.
The following principles are fundamental to the lending process:
1. Safety
2. Liquidity
3. Dispersal
4. Security
5. Remuneration
1. Safety

 Safety is very important in lending

activities, as banks must protect the funds
entrusted to them by depositors. This
involves rigorous credit assessment
procedures to evaluate the creditworthiness
of borrowers and the viability of proposed
ventures. By adhering to stringent risk
management practices, banks mitigate the
risk of default and safeguard depositor
funds.
 Five Elements of safety

1. Character: Assessing the borrower's integrity, honesty, and

reputation.
2. Capacity: Evaluating the borrower's management ability
and business acumen.
3. Capital: Examining the borrower's financial resources and
investment in the business.
4. Conditions: Considering external factors affecting the
business, such as market trends and economic conditions.
5. Cash Flow: Assessing the borrower's ability to generate
sufficient funds to repay the loan and interest
 2 Liquidity
 Maintaining liquidity is essential for banks to meet the demands of depositors
and respond to unexpected withdrawals. Loans should be structured to ensure
timely repayment and the availability of funds for other lending opportunities.
By managing liquidity effectively, banks enhance their ability to fulfill their
financial obligations and support economic stability.

3 Dispersal
 Lending should be diversified across various sectors and segments of the economy
to mitigate concentration risks and promote economic inclusivity. Banks must
avoid overexposure to any single industry or borrower group and extend credit to
a broad spectrum of borrowers, including small and medium-sized enterprises
(SMEs), agriculture, housing, and microenterprises. By promoting sectoral
diversification, banks contribute to economic resilience and sustainable growth.
 4. Security

Security plays a vital role in lending operations, providing a safety net for banks in the
event of borrower default. Collateral evaluation and risk mitigation strategies enable banks
to recover outstanding amounts and minimize losses.

5. Remuneration
 salaries and fringe benefits payable to the staff members;
 overhead expenses and depreciation and maintenance of the fixed assets of the bank;
 an adequate sum to meet possible losses.
 return payable to the money deposited by depositor
 provisions for a reserve fund to meet unforeseen contingencies;
 payment of dividends to the shareholders.
 A major portion of the bankers' earnings comes from the markup or return charged on the money
borrowed by the other.
Forms of lending
Running Finance (Cash Credit)
 It is very common form of borrowing by commercial and industrial concerns.
 It is made against pledge or hypothecation of goods, products or merchandise
 Money can be borrowed up to certain limit and it facilitates borrower to pay
markup or service charges only on amount he actually utilizes.
 If the borrower doesn't utilizes full limit, banker has to loose return on un-
utilized amount.
 Banker may provide a clause in cash finance agreement that the borrower ha to
pay markup and service charges on at least one-half or quarter of the amount,
even when he doesn’t utilize that amount.
Overdraft
 In this form the banker allows withdrawals in excess to his balance against
securities.
 When it against collateral securities, its called “Secured Overdraft”.
 When its against personal security, its called “Clean Overdraft”.
 The borrower has to pay service charges on balance outstanding against him.
 The difference between cash finance and overdraft is that cash finance is for
long term basis and overdraft is for maximum period of 180 days.
Loans (Term Finance)
 When a customer borrows from banker a fixed repayable either in periodic
installment or in limp sum at a fixed future time is called a “Loan”.
 When banker allows loans against collateral securities, its called “secured
loans”.
 When no collateral is taken, its called “clean loans”.
 Loan is placed at borrowers disposal in lump sum for the period agreed and
borrower has to pay markup on entire amount.
 Thus the borrower gets a fixed amount of money, while the banker feels
satisfied in lending money in fixed amount for definite period of time against a
satisfactory security.
Bridge loans and participation loans

 Bridge loans are the accommodation for interim period.

 Sometimes the banker does not disburse the loan which they have sanctioned
due to deficiency and delay in completion of documentation, whereas the
borrower money badly. In this case bank give a loan for a temporary period to
fill the gap.
 Participation loan is an arrangement where banks join together to arrange funds
for customer. Its also known as consortium loans
 Consortium has a participating bank as the leader whose share is usually high.
Purchase and Discounting of bills
 Bankers in Pakistan engage in purchasing and discounting bills of exchange as
part of their financing services.
 They also acquire out-station cheques from reliable customers to facilitate
transactions.
 Bills accompanied by documents of title to goods are termed "documentary bills
of exchange," while those without are known as "clean bills of exchange."
 Demand bills are payable immediately, while usance bills have a specified
maturity period.
 Businesses often entrust their bills to banks for collection, leading to a
temporary strain on their financial resources.
Purchase and Discounting bills
 Banks offer the facility of purchasing bills from regular customers, subject to
creditworthiness checks and margin requirements.
 This "Bills Purchased" facility serves as security for the advance provided by
the bank.
 Usance bills with a maturity period, typically around 90 days, can be discounted
by banks, providing immediate funds to select customers.
 During discounting, banks deduct a predetermined discount rate from the bill
amount and pay the remaining balance to the party.
 Banks collect the full amount from the drawee upon maturity, earning the
difference between the discounted amount and the bill's value.
Hire-purchase

 Lender buys the asset and leases it to the borrower.

 Borrower makes regular payments, eventually gaining ownership.
 Provides access to assets without a large upfront payment.
 Ownership transferred after final payment.
 Flexibility in payment terms but may incur higher overall costs.
Leasing Finance

 Lender retains ownership and leases the asset to the borrower.

 Lessee makes regular payments for asset use.
 Option to purchase asset at lease end or return it.
 Enables access to assets without tying up capital.
 Flexibility in lease duration but may lead to higher total costs compared to
outright purchase.
Classification of Securities
 Securities play a vital role in the financial markets, representing ownership or
debt obligations. They can be categorized in various ways based on their
characteristics and nature.
 In this presentation, we will explore six types of classifications of securities and
provide examples to elucidate each category.
 Personal Securities
Personal securities are assets that are secured by a pledge
of the personal property of the borrower.
Examples:
1. Personal guarantee: When an individual pledges their
personal assets, such as real estate or savings accounts,
to secure a loan.
2. Collateralized debt obligations (CDOs): These are
structured financial products backed by pools of loans,
often including personal loans and mortgages.
 Tangible Securities

Tangible securities are physical assets that have value and can
be used as collateral.
Examples:
Real estate: Land, buildings, and other tangible properties can
be used as collateral for securing loans or issuing bonds.
Equipment financing: Machinery and equipment owned by a
business can be pledged as collateral to secure financing.
 Prime Securities
Prime securities are high-quality assets with low risk
and high liquidity.
Examples:
U.S. Treasury securities: Treasury bills, notes, and
bonds issued by the U.S. government are considered
prime securities due to their low risk of default.
Blue-chip stocks: Stocks of well-established,
financially stable companies with a history of
consistent earnings and dividend payments.
 Collateral Securities

Collateral securities are assets pledged as security

for a loan.
Examples:
Mortgage-backed securities (MBS): These are
securities backed by a pool of mortgages, where the
mortgage loans serve as collateral.
Securities lending: Investors can use securities they
own as collateral to borrow other securities or cash.
 Movable Securities

Movable securities are assets that can be easily

transferred or converted into cash.
Examples:
Stocks: Ownership shares in a corporation that can be
bought and sold on a stock exchange.
Bonds: Debt securities issued by governments or
corporations that can be traded in the bond market.
 Immovable Securities

Immovable securities are assets that cannot be

easily transferred or converted into cash.
Examples:
Real property: Land, buildings, and other
immovable assets that are not easily liquidated.
Long-term leases: Lease agreements for real
estate properties with extended durations, which
provide a stream of income but lack liquidity.
 Banker's Lien

Banker's lien is a possessory right held by a bank over the property of a customer
to secure repayment of debts owed to the bank.
It allows the bank to retain possession of the property until the customer settles
their outstanding liabilities.
 Conditions for Banker's Lien

 Existence of Debt: The customer must have a

valid debt owed to the bank, such as an unpaid
loan, overdraft, or credit card balance.
 Default: The customer must default on their
payment obligations, failing to repay the debt
within the agreed-upon time frame.
 Notice: In some jurisdictions, the bank may be
required to provide notice to the customer before
exercising the lien.
 Properties Subject to Banker's Lien

 Cash Deposits: Funds held in the customer's

bank account can be subject to lien.
 Securities: Stocks, bonds, and other securities
held in custody by the bank can be subject to
lien to secure outstanding debts.
 Valuables: Physical assets such as jewelry,
artwork, or valuable documents deposited with
the bank for safekeeping may also be subject
to lien.
 Concept of Charge

 A charge is a form of security interest granted by a borrower over its assets to

secure a loan or other financial obligation.
 It gives the charge holder the right to recover the debt by enforcing its claim
against the charged assets if the borrower defaults.
 Registration of Charge

 Legal Requirement: In many jurisdictions, charges must

be registered with the relevant regulatory authority to be
valid and enforceable against third parties.
 Purpose: Registration provides public notice of the charge,
ensuring transparency and protecting the interests of
creditors and potential investors.
 Example: When a company takes out a mortgage to secure
a loan for its property, the mortgage is typically registered
with the land registry or other applicable authority.
 Enforcement of Charge

 Default: If the borrower defaults on the debt or obligation secured by the

charge, the charge holder has the right to enforce the charge.
 Enforcement Mechanisms: This may involve seizing and selling the charged
assets to recover the outstanding debt, or taking control of the assets to manage
and dispose of them.
 Example: If a borrower defaults on a secured loan, the lender may foreclose on
the mortgaged property and sell it to recover the loan amount.
 Fixed vs. Floating Charge

 Fixed Charge: A charge over specific, identifiable assets of the borrower, such
as land, buildings, or machinery. The assets are typically specified in the charge
agreement.
 Floating Charge: A charge over a class of assets that may change in quantity
and value over time, such as inventory, receivables, or fluctuating assets.
 Example of Fixed Charge: A company pledges its factory equipment as
security for a business loan.
 Example of Floating Charge: A company grants a charge over its inventory to
secure a line of credit, allowing the inventory to be bought and sold in the
normal course of business.
 Concept of Pledge

 Pledge refers to the act of offering a valuable asset,

known as collateral or security, to a lender to secure a
loan or debt.
 The borrower retains ownership of the pledged asset
but gives the lender the right to take possession of the
asset if the borrower defaults on the loan.
 Examples of pledged assets include real estate,
vehicles, jewelry, stocks, or any other valuable
property.
 Authority to Pledge
 Authority to pledge refers to the legal right or capacity of an individual or entity
to offer assets as collateral for a loan or debt.
 It's essential for the pledgor to have the legal authority or ownership rights over
the pledged assets to validly pledge them as security.
 Authority to pledge may be conferred by law, contractual agreements, or
specific authorization from the asset owner.
 Lack of authority to pledge can result in the pledge being void or unenforceable.
 Examples of Authority to Pledge

 Individuals: An individual can pledge their personal assets, such as a car or

savings account, as collateral for a personal loan if they own those assets
outright.
 Businesses: A business owner may pledge company assets, such as inventory or
equipment, as collateral for a business loan if they have the legal authority to do
so, typically as specified in the company's governing documents.
HYPOTHECATION
HYPOTHECATION

Hypothecation is when you use your belongings,

like goods or property, as security for a loan from
a bank.
 Ownership and possession remain with the
borrower
 Security granted via a Letter of Hypothecation
 Pledge
BANKER'S RISK:

Lending money against goods through hypothecation is risky for banks for two
main reasons:
 Risk of risk of the borrower misusing or selling the goods fraudulently because
they have access to them
 Absence of title to property makes it risky
FLOATING CHARGE

 A floating charge is an equitable charge on the assets for the

time being of a going concern.
 Bankers prefer such a charge on other assets in case of
hypothecated asset such that its value and quantity is
constantly changing.
 This lets the borrower freely use and manage their assets
until the bank decides to take action if there's a problem.
RIGHTS OF THE CREDITOR

 They can inspect the goods hypothecated to him and ask for stock reports.
 They can ask the borrower to get insurance or do it themselves and charge the
borrower.
 They can tell the borrower to keep enough goods to cover the loan.
 They can stop the borrower from selling the goods without permission by
putting a 'stop-order' in place.
RIGHTS OF THE BORROWER

 They can possess and use the goods.

 They can own and control the goods, including selling them.
GUARANTEES
GUARANTEES

 When someone wants a loan but can't offer any

physical assets as security, banks might ask for
personal guarantees instead. A personal guarantee is a
promise by one person (the guarantor) to pay off the
debt if the borrower can't.
 According to the law, a guarantee can be oral or
written
COMPETENCE FOR GUARANTEE

 Authorized to enter into a contract can make a guarantee.

 Age of Majority
 Sound Mind
 Even married women can make guarantees, but some banks prefer to involve
their solicitor.
COMPANY AS GUARANTOR

 When a bank considers a company as a guarantor, they need to be careful.

Normally, a company isn't allowed to give guarantees unless it’s Memorandum
and Articles permit it.
 If the Memorandum allows the company to support other businesses, then it
likely has the power to give guarantees.
 If a company does give a guarantee, it should be done officially with the
company's seal and signed by a director or someone authorized by the
company's board.
FIRM AS GUARANTOR

 Normally, a partner can't make guarantees for the firm without specific
authorization, unless partner has been given authority by his co-partners.
 In a case of Brette v. William (1849), it was decided that a partner can only bind
the firm with a guarantee if it's necessary for the firm's business.
 According to Section 25 of the Partnership Act, every partner is responsible for
the firm's actions. So, any guarantee by the firm needs to be signed by all the
partners.
GUARANTEE BY TWO OR MORE PERSONS

 When two or more people give a guarantee together, they are jointly and
individually responsible for fulfilling it. This means that each person is
responsible for the entire guarantee if needed.
 So, if multiple people are guaranteeing something, all of them need to sign the
guarantee document.
MINOR AS GUARANTOR

 Ineligibility of minors to enter into guarantee contracts

 Even if a minor becomes an adult later, the guarantee they made as a minor
remains invalid because guarantee contracts aren't included in the exceptions for
minors upon reaching adulthood.
 Therefore, Bankers should not accept any guarantee executed by a minor
independently or jointly with an adult.
KINDS OF GUARANTEES

 Specific Guarantee: This guarantee is for a particular transaction only. Once

that transaction is completed and the full amount is repaid, the guarantee ends.
 Continuing Guarantee: This type of guarantee covers a fluctuating debt, like
an overdraft. It's ongoing until it's explicitly ended or until there's a change in
the business's structure, like a partner leaving or joining, which can cancel the
guarantee for future transactions.
CONSIDERATION

 In a guarantee contract, just like in any other contract, there must be something
of value exchanged, which is called consideration.
 According to Section 127 of the Contract Act, consideration in a guarantee can
be anything done or promised for the benefit of the borrower.
 It doesn't have to directly benefit the guarantor. As long as there's some benefit
to the borrower, the guarantee contract is valid.
 RIGHTS OF A GUARANTOR

 They can ask the bank to tell them how much they owe under the guarantee. However,
the bank can't share the customer's account details without the customer's permission.
 If the borrower can't pay and goes bankrupt, the guarantor can claim on the borrower's
assets.
 The guarantor can pay the borrower's debt and then go after the borrower to get their
money back. This makes the guarantor the new creditor to the borrower.
 The guarantor can cancel the guarantee with enough notice. But any cheques issued after
notice can only be paid at the bank's risk.
 After paying off the guarantee, the guarantor gets the same rights as the bank and can
benefit from any securities the bank holds as collateral for the debt.
RIGHTS OF THE CREDITOR

 If the borrower can't pay, the bank can get the money owed from the guarantor.
 Even if the time limit to claim from the borrower has passed, the bank can still
sue the guarantor.
 The time limit rules don't apply to guarantees; they still apply to the borrower.
 The bank can sue the borrower after suing the guarantor, but it must do so
within the time limit.
CONCEALMENT ON GUARANTEE

 Section 143 of the Contract Act, 1872, states that if a creditor doesn't disclose
important information or hides it, a guarantee becomes invalid.
 Intentionally hiding crucial details makes the guarantee void.
GUARANTEE BY MISREPRESENTATION

 If a guarantee is obtained through misrepresentation, the guarantor can cancel it.

 In Mackenzie v. Royal Bank of Canada (1934), Lord Akin ruled that a guarantee
induced by a material misrepresentation can be voided, even if made innocently.
 This means that if important facts are misrepresented, the guarantor has the
right to cancel the guarantee.
INDEMNITY
 Indemnity
 Indemnity is based on a mutual contract between two parties, where one
promises the other to compensate for the loss against payment of premiums. It
typically occurs in the form of a contractual agreement made between parties in
which one party agrees to pay for losses or damages suffered by the other party.
Rights of Indemnity Holder
Guarantee and Indemnity
 Guarantee and Indemnity
 A guarantee implies two contracts; a principal contract between the borrower
and the lender; and another between the lender and the guarantor. In case of
indemnity, there is only one contract between the promisor and the promisee .
 In case of a guarantee the borrower is the principal debtor to the lender. As such
he is primarily liable, while the guarantor is liable only when the principal
debtor makes default. On the other hand, in an indemnity the promisor is
primarily liable when the promisee suffers a loss on account of his doing some-
thing at the express desire of the promisor.
Advances Against Immovable Property
Immovable Property
 Land As Security For Advances
 There are several advantages and disadvantages in taking the land as security.
 The main advantage is its tendency to increase in value over a period of time.
When the value of money falls, the value of land rises, therefore, it forms a
sound and reliable security.
 Disadvantages include the inheritance and other disputes about the title of the
property make it difficult for the bank to sell it to recover the outstanding dues.
 The status of property as residential, commercial, agricultural or industrial may
also affect the marketability.
 Preliminary Enquiries
 Preliminary enquiries serve as an important steps in various processes,
including workplace investigation, property transactions etc. They are designed
to assess evidence, gather information and insure the integrity of transactions
and legal proceedings.
 For example, in the Investigation of Title enquiry, the banker must satisfy
himself that his borrower has a good title to the property. Therefore, the banker
must conduct a proper investigation into the borrower title to the property.
Mortgage
Definition
 A mortgage is a security interest in real
property held lender as a security for a debt.
usually a loan or money.
 Wex Law Dictionary: A mortgage involves the
transfer of an interest in land as security for a
loan or other obligation.
Transfer of Property Act, 1882 SECTION 58 (α)

 A mortgage is the transfer of an interest in specific immoveable property for the

purpose of securing the payment of money advanced or to be advanced by way of
loan, an existing or future debt, or the performance of an engagement which may
give rise to a pecuniary liability.
 The transferor is called a mortgagor, the transferee a mortgagee; the principal
money and interest of which payment is secured for the time being are called the
mortgage money, and the instrument (if any) by which the transfer is effected is
called a mortgage-deed.
Formation of Mortgage
 According to Section 59 of the Transfer of Property
Act, 1882 :
 The mortgage must be effected only on a written
document which should be signed by the mortgagor and
attested by at least two witnesses.
 This written document is called a mortgage deed, as per
Section 2 (17) of Stamp Act. The mortgage deed must
be stamped under Article 40 of the Act. This deed must
confirm the right of redemption to the mortgagor.
 The document must be registered, otherwise it will be
ineffective.
Kinds of Mortgage
Simple Mortgage
 Where, without delivering possession of the mortgaged property, the
mortgagor binds himself personally to pay the mortgage-money, and
agrees, expressly or impliedly, that, in the event of his failing to pay
according to his contract, the mortgagee shall have a right to cause the
mortgaged property to be sold and the proceeds of sale to be applied, so
far as may be necessary, in payment of the mortgage-money, the
transaction is called a simple mortgage and the mortgagee a simple
mortgagee.
Mortgage by Conditional Sale

 A mortgage by conditional sale is when someone sells property with conditions

tied to loan repayment. If the borrower doesn't pay, the sale is final, and the
buyer owns the property. If the borrower pays, the sale is canceled, and the
original owner keeps the property. Conditions must be in the sales document for
it to count as a mortgage by conditional sale, the transaction is called a
mortgage by conditional sale and the mortgagee a mortgagee by conditional
sale.
Usufructuary Mortgage

 Where the mortgagor delivers possession or expressly or by implication binds

himself to deliver possession of the mortgaged property to the mortgagee, and
authorizes him to retain such possession until payment of the mortgage-money,
and to receive the rents and profits accruing from the property or any part of
such rents and profits and to appropriate the same in lieu of interest, or in
payment of the mortgage-money, or partly in lieu of interest or partly in
payment of the mortgage-money, the transaction is called an usufructuary
mortgage and the mortgagee an usufructuary mortgagee
English Mortgage

 Where the mortgagor binds himself to repay the mortgage money on a certain
date and transfer the mortgage property to the mortgagee but subject to a
condition that he will retransfer it to a mortgagor upon payment of the mortgage
money as agreed. The lender has the right to sell the property if the borrower
defaults.
Mortgage by Deposit of Title Deed

 A mortgage by deposit of title deed occurs when a borrower gives the title deeds
of their property to the lender as security for a loan. This action serves as
evidence of the mortgage agreement, with the lender holding the title deeds
until the loan is repaid.
Anomalous Mortgage

 A mortgage which is not a simple mortgage, a mortgage by conditional sale, an

usufructuary mortgage, an English mortgage or a mortgage by deposit of title-
deeds within the meaning of this section is called an anomalous mortgage.
 Further, Section 98 of this Act elaborates that, "In the case of an anomalous
mortgage, the rights and liabilities of the parties shall be determined by their
contract as evidenced in the mortgage-deed, and so far as such contract does not
extend by local usage"
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