This document discusses different types of collateral security that can be used to secure loans. It defines collateral security as property or other assets offered by a borrower to a lender to secure a loan. If the borrower defaults, the lender can seize the collateral. The document provides examples of acceptable collateral like cash, securities, land, buildings, and personal guarantees. It discusses the advantages and disadvantages of different types of collateral security and how they can help mitigate risk for the lender.
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Collateral security
1. Collateral Security
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2. DEFINITION OF COLLATERAL SECURITY
ONLINE AND OFFLINE COLLATERAL
EXAMPLES FOR COLLATERAL SECURITY
INSTUMENTS ACCEPTED AS COLLATERAL
ONLINE COLLATERAL VALUATION
LAND & BUILDINGS AS SECURITY
RISKS OF ACCEPTING LAND & BUILDINGS AS SECURITY
ADVANTAGES & DISADVANTAGES OF LAND & BUILDINGS AS SECURITY
ADVANTAGES & DISADVANATGES OF COLLATERAL SECURITY
TYPES OF COLLATERAL SECURITIES FOR CREDIT FACILITIES
TOPICS COVERED:
3. What is Collateral Security
Collateral is a property or
other assets that a borrower
offers a lender to secure a
loan. If the borrower stops
making the promised loan
payments, the lender can
seize the collateral to recoup
its losses.
5. Let's assume you would like to borrow $100,000 to start a business. Even if you
have an excellent credit rating, a bank may be reluctant to lend you
the money because it may be left with nothing if you default on the loan. Thus, the
bank may require $100,000 of collateral in order to lend you the money. This
collateral might consist of financial instruments, houses, cash, or even objects such
as art, jewelry, or other items. You might also pledge your business receivables as
well.
If you do in fact default on the loan, the loan agreement gives the lender the right
to seize and then sell the collateral in order to recover any outstanding balance.
EXAMPLE FOR COLLATERAL SECURITY
6. Offline Collateral
Time Deposit
Bank Guarantee
Stock Exchange
Government Bonds
BI Treasury Bills
Online Collateral
Cash
Listed securities
- Stocks, Government Bonds, Corporate Bonds
7. Cash,
- valued 100 %
- get interest from participating banks
Acceptable Securities,
- marked to market, lowest price in last
three trading days.
8. Bankers were prejudiced against securities such
as land & buildings. Gilbert pointed out that “
the rule of a bank is never to make advances
directly, upon deeds or any other dead security.
The following are the risks for a banker in
accepting land & buildings as securities.
LAND AND BUILDINGS AS COLLATERAL SECURITY
9. Difficulty in ascertaining the title of borrower
Valuation is extremely difficult for a banker.
Advances for a longer period.
Difficult to realize the Security.
Legal formalities.
Creation of charge against the security is costly.
Risks for accepting Land & Buildings
as Security.
10. ADVANTAGES & DISADVANTAGES OF L&B AS
SECURITY
ADVANTAGES
It is immovable property
Value of appreciation is high
Mortgage in buildings can also
satisfy government goals or targets
Ex: Aawas yojana
DISADVANTAGES
It is not easy to assess the title of
property
Legal disputes can be assigned on
land & buildings
There may be any disputes on title
of property
It depends on Market value rate.
12. Types of Collateral security for getting credit facilities
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PRICING• COVENANTS
• MATURITY
• PERSONAL
GAURANTEE
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13. In this case lender is free to use or dispose the entrepenuers assets
as the lender wishes.
So, lender is not sure if the guarantor will have any assets at all
when it is time to settle the claim.
An important distinction between outside collateral and personal
is that outside collateral signifies control over specific assets.
PERSONAL GAURANTEE
14. Debt contracts with very short maturities allow a bank to
limit the period of exposure and at the end of the period
the bank has an opportunity to reassess the credit
worthiness of the venture.
This can be very effectively used while issuing credit
limits.
MATURITY
15. Debt covenants are commitments from borrowers
regarding certain actions or activities . These can be
promises to meet the financial goals and performance
targets or to engage in certain activities.
A banker may prohibit a lender from engaging in
speculative activity by stocking up more than required
inventory when needed.
COVENANTS
16. Kantanas and Green Baum have suggested that lenders
can utilize menu pricing on loans by offering alternative
contacts that differ in terms of upfront fees, penalties ,
interest rates.
Many bankers realize its usefulness in dealing with
marginally riskier lending but find no rationale in using
this to justify extending very risky loans.
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