Types of Security Required for Bank Credit

Loans and advances are granted by the banks on the basis of some security, which will ensure the bank for safe return of its money. This security may be personal security of the borrower as well as on the security of some assets, besides the standing of the firm.

Thus, securities offered against bank credit may be of two types:

  1. Personal security
  2. Security of assets

Personal security means the credit-worthiness of the borrower. Banks judge the creditworthiness of the borrower on the basis of his financial soundness and past dealings with the bank, and then sanction the amount.

When the banks ask for security of assets, the following are generally accepted as security for extending short-term finance:

  1. Movable Goods: Stock of raw materials and finished goods are accepted by banks as security against bank credit. In case of non-payment, these goods are sold and money is recovered by banks.

  2. Shares: Shares that are quoted on a recognised stock exchange are accepted as security against bank credit. The borrower is required to assign his share holding in favour of the bank.

  3. Documents of Title to Goods: Bill of Lading, Railway Receipts (RR), Goods Receipt (GR), Warehouse warrant are various documents which are recognised as documents of title to goods. To secure credit from bank, the borrower may deposit any of these documents with bank after duly endorsing the same in favour of the bank. This enables the bank to deal with the goods in case of default in repayment.

  4. Fixed Deposit Receipts: It is a receipt issued by bank as evidence of fixed deposit made by the customer. Banks grant loan on the security of this receipt. Banks normally grant loan up to 90% of the value of such receipts.

  5. Life Insurance Policies: Banks extend credit on the basis of life insurance policy up to the amount of surrender value of such receipts.

  6. Jewellery or Precious Metals: This type of security may be offered to borrow money for private as well as for business purposes. Sole proprietary concerns sometimes offer jewellery or other precious metals to obtain credit.

  7. Other Securities: Besides the assets and documents mentioned above, banks also accept National Savings Certificate (NSC), Kisan Vikas Patra (KVP), Government Bonds for grant of short-term credit.