Precautions required to be taken by a banker in case of advances against the security of goods.
In granting advances certain precautions are necessary.
1. Integrity of the borrower
The banker should ascertain that the borrower is trustworthy, honest and man of sufficient experience in his business. Such a precaution is necessary to avoid fraudulent dealings.
when a customer offers 100 bags of paddy as security it is impossible to inspect each and every bag. He has to rely on the honesty of the borrower.
Further he should see whether the borrower has adequate practical experience in his business.
An experienced businessman is conversant with risks and the profitable areas of the business. An inexperienced one may incur loss and be a potential risk.
2. Purpose of the loan
The repayment mostly depends upon the purpose for which the loan is obtained.
To a borrower who is engaged in speculation, the chances of loss are greater. As such the loss will have to be shared by the banker. So advances should not be allowed for speculative purposes.
3. Nature of the commodity
The banker should have working knowledge of some of the special features of the commodities offered as security.
The commodities which could be disposed of easily, the quality of goods which are not subject to deterioration and price of goods which are almost steady should be preferred by a banker as security.
4. Knowledge of different markets
A banker should be conversant with the markets for different commodities. This is essential to regulate the margin for the goods according to the price prevailing in the market.
Failure to have knowledge of the market will put him at the mercy of the borrower who may inflate the value to get more advances.
5. Proper care in valuation
The banker should appoint experts to value the goods.
Care should be taken to provide sufficient sale margin to avoid loss resulting from market fluctuation. In some cases the price mentioned in the bill may be an inflated one.
So. it is advisable to compare the price which those prices prevailing in the market. If the goods are packed the banker should insist on a certificate from reliable packers.
6. Ascertain the title of owner
Before accepting goods as security, the banker should ascertain the title of the borrower to the goods by inspection of the original invoice or cash memos.
7. Proper storage
The banker should select warehouse which are properly built and safe in every way for the storage of goods.
The roof and flooring should be situated near the bank so that the bank’s representative can have direct and free access to them at any time.
All goods stored in bags or bales should be so arranged as to facilitate inspection easily.
A careful selection should be made of godown keeper & watchmen. They should be honest & posses a high sense of responsibility.
8. Rented godown
If the borrower makes use of a rented godown, the bank must obtain an undertaking from the owner of the building stating that the bank has a prior lien.
This is necessary because at times the building owner may have a prior claim for rent due & the position of the banker will be at stake.
9. Insurance up to the full market value
Goods should be insured against all known risks up to their full market value. The relative insurance policies should be held by the bank.
10. Creation of charge by Pledge and Hypothecation
A banker may create a charge over the goods either by pledge or hypothecation. In pledge the goods or title thereto is delivered to the banker.
In hypothecation neither possession nor goods is transferred to the banker. S o a written undertaking from the borrower should be obtained that the goods are not charged to any bank and will not be charged till the agreement continues with the bank.
11. Handling of go down keys
Under no circumstances should the keys of go downs be allowed to pass into the hands of the borrower.
The keys of the go down should be kept in a strong room under dual control and taken out at the commencement of the business and received back at the close of the business.
Periodical inspection of the go down should be undertaken as to the quantity and quality of the goods.
The quantity of stock in go down should be tallied with the record in the bank and with the books of the borrower.
13. Supervision regarding release of goods
When the borrower is allowed to repay the debt in installments, the banker should release the goods only in proportion to the amount repaid.
It is also possible that the customers may request the banker to release the amount a part of the goods when they get parties to sell.
14. Reserve bank directives
The Reserve Bank issues directives from the time to time prohibiting advances against specific goods or stipulating minimum margin against certain commodities.
The directives may also specify the level up to and conditions on which bank may grant credit. Bank should follow the conditions in the directives while lending against goods.
Finally, we can say that these above precautions should be taken by a banker in case of advances against the security of goods.