Working Capital Management Question:
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Explain what forms of security does a bank need to provide security to a company?

Answer:

A bank needs following forms of security to provide security to a company:
1) Hypothecation
2) Pledge
3) Lien
4) Mortgage

a.) Hypothecation is a mode of security in which bank extends the assistance to the company against the security of movable property. Neither the property nor the possession of the goods hypothecated is transferred to the bank. If the company fails to repay the amount of assistance, in such case the bank has the right to sell the goods hypothecated to realize the outstanding amount of assistance granted by it to the company. A consumer entering into a mortgage agreement is an example of Hypothecation.

b.) Pledge is a mode of security in which bank extends the assistance to the company against the security of movable property. But the possession of the goods is with the bank and the goods pledged are in the custody of the bank. Thus, it becomes the duty of the bank to take care of the goods in the custody. In case the company is unable to repay the amount of assistance, the bank has the right to sell the goods pledged to realize the outstanding amount.

c.) Lien is a mode of security in which the bank retains the goods belonging to the company until the debt due to the bank is paid. Lien is of two types: Particular Lien and General Lien. Normally, Bank enjoys general Lien.

d.) Mortgage is a mode of security in which the legal interest in a specific immovable property is transferred as security for the payment of debt. The party who transfers the interest is called mortgager and party in whose favour the interest is so transferred is called mortgagee. The borrower possesses the property while the bank gets full legal title, subject to borrower’s right, to repay to debt.

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