Types of Collaterals and their Characteristics
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What type of charge is created when a borrower physically hands over goods to the bank as security?
Pledge is created when the borrower (pledgor) delivers physical possession of goods to the bank (pledgee) as security for a loan.
When possession of goods is transferred to the banker as in key cash credit, what charge is created?
Pledge
When a trader stores goods in a bank-controlled godown and hands over the keys, what charge is created?
Pledge is created, as the bank gains constructive possession of the goods through control of the godown keys.
When possession of goods is NOT transferred to the bank as in open cash credit, what charge is created?
Hypothecation
What is the key distinction between a pledge and a hypothecation?
In pledge, possession of the goods passes to the bank, whereas in hypothecation, the borrower retains possession while the bank holds a charge over the goods.
In both pledge and hypothecation, does the title (ownership) of goods transfer to the bank?
No; title remains with the borrower in both cases
Which type of charge is commonly used for cash credit limits secured against stock of goods where the borrower retains custody?
Hypothecation is used in such cases, where the borrower retains possession of the goods but the bank has a charge over them.
What is the normal margin maintained by banks on book debts for calculating drawing power?
50 per cent
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