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other forms of security (Bank Guarantee (contractual commitment by the…
other forms of security
Pledging Goods
- bailment of goods as security for payment/performance of promise
-means delivering goods without transfer ownership
- delivery possesion to hold but not the ownership until borrower finish the repayment
-redelivered to customer
- customer delivered bill of lading,warehouse receipts to the bank,bank will redelivered the documents to give up the possession.
Hypothecation goods
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- an encumbrance on goods/ legal arrangement as security when cannot transfer the possession to bank
- no popular coz no possession=no control,merely a document to give right of payment
Bill of Sale
- include assignments, transfers,
assurances of personnel chattels
- the security is released upon settlement
- Realisation when
-defaults
-bankrupt
-goods is distrained for rent or for payment of rates
-fraudulently removes the goods
-execution has been levied under process of court
- Enforcement
-seizure
-cannot sold until the payment of 5 clear days from the date of seizure
-customer can make good the default during these 5 days
-no remedied after the five days,bank will sell through auction
Trust Receipt
- goods pledged to a bank are released back to the customer so that the goods can be
-manufacture
-disposed off.
- holds the goods and proceeds of sale on trust for the bank
- empowers the customer to release the goods on behalf of the bank without in any way affecting the bank’s rights.
Bank Guarantee
- contractual commitment by the bank to pay as stipulated in the bank guarantee.
- pay according to the guarantee if an honest and proper demand is made without proof or conditions.(except fraud)
- tender guarantee, a performance bond and an advanced payment guarantee.
Tender guarantee/bond
- to ensure that the party whose bid for a certain project is successful accept the award of the contract.
-compensation to gov require in case success bider turn down the project
Performance bond/guarantee
- ensure the due performance of the project by the successful bidder.
Advance Payment Guarantee/bond
- advance payment of the contract sum paid to the successful bidder before the commencement of the project will be repaid back to the principal in the event of default or breach by the successful bidder
precaution
- can be secured, unsecured or partially secured according to the credit standing
- take a counter indemnity from its customer and at the same time ensuring that the bank is secured
-limit the duration of the BG and the BG amount
- ensure the BG is in the exact format as requested by the principal
- ensure the BG spells out the exact documents required
- If the bank makes a payment under the BG, the BG must be returned to the bank for cancellation and the principal confirming that no further claims will be made thereto
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Negative Pledge (NP)
- Lending without taking any collateral, usually taken a valued customer
- by way of a pledge with covenants undertaken by the borrower not to do anything which might prejudice the bank
negative pledge clause
- lending agreement language designed to prevent borrowers from pledging the same collateral to multiple lenders or otherwise taking actions that might jeopardize the security of existing lenders.
- to ensure that a bank does not suffer from the subsequent actions of the borrower.
-Without such clauses, borrowers might have the option to pledge the same collateral to multiple lenders. In the event of default, these lenders would scramble to recover the same collateral.
- without the bank’s consent:
-Not to borrow from other financial institutions
-Not to create further securities in favour of other parties
-Not to dispose of the assets and property of the borrower
-Not to do anything which might prejudice the bank’s position?
- vulnerable form of security to the bank
- subject to breaches of trust and integrity of the borrowing customer.
Charge of Deposits
- lend by taking a deposit as security
- can be realised easily if the customer is unable to pay.
- by way of a letter of set-off:
-express right to set off the deposit
-Not to withdraw the deposit until all liabilities secured have been fully repaid
-A covenant that the deposit is unassignable and is earmarked to meet the stated liability to the bank.
Earmarking of Accounts
- a process whereby a portion or the whole of the funds in an banking account is set aside or earmarked(book) for a certain authorized purpose:
-To comply with a garnishee order(right to allow lender to collect money from bank) from the court
-To serve as collateral for a banking facility
-bank can physically book/lock/earmarked the acc
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Letter of Awareness (LA)
- Lending to subsidiaries issued by their parent company
- statements of knowledge and acknowledgement of the loan and the assurance that the nature of the borrower’s business will not be materially changed
- do not give rise to any intention to raise legal relations.
- merely comprise of a simple acknowledgement that the parent company is aware of the loan to the borrower.
-meaningful commitment, legally and/or financially
- Disadv
-not actionable, merely considered as evidence of a loan
-gives the banker’s a false sense of security
-Lending against LA is base on the foundation of trust and integrity
-A borrowers financial position may change
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