PPB TYPES OF COLLATERALS SECURITIES
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Principles and Practices of Banking — JAIIB.
One-liners from this chapter
Free sample — 8 of 66 rapid-fire Q&A cards.
What is a collateral security in the context of bank lending?
Collateral security is an additional security offered by the borrower over and above the primary security to provide extra comfort to the lender in case of default.
What is the meaning of the term 'security' in the context of bank advances?
An asset pledged to protect the lender against loan default.
What is the difference between primary security and collateral security?
Primary security is the asset directly created out of the bank's finance (e.g., hypothecated stock), whereas collateral security is any additional asset pledged by the borrower or a third party to secure the loan.
What is the primary security in a bank loan?
Asset financed by the loan itself, e.g., machinery or stock.
Which type of collateral involves the transfer of ownership of movable goods to the lender?
Pledge involves the transfer of possession (and in some cases constructive possession) of movable goods to the lender, giving the lender the right to sell the goods upon default.
Which legal document creates a charge on movable goods without transfer of possession?
Letter of hypothecation creates a charge without possession transfer.
How does hypothecation differ from pledge as a form of collateral?
In hypothecation, possession of the asset remains with the borrower while only a charge is created in favour of the bank, unlike pledge where possession is transferred to the lender.
What is the nature of a pledge as a security in bank lending?
Borrower delivers possession of goods to lender as security.
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