Life Policy

Loans are given up to 90% of the surrender value on the life policy of the borrower. Merits of life policies as collateral are:

• It is easy to find out their correct price.
• Banks has a lien on the amount of policy can be ascertained from the insolvent.
• The Tittle of the policy can be ascertained from the Insurance Company.

The Demerits are:

• If life policy is can celled due to some wrong information supplied to the Company, then the bank will not get any payment.
• Surrender value of the policy is uncertain.

A banker, therefore, must take care to ascertain whether or not the age of the assured is admitted. The policy should be properly assigned. Endowment policies should be preferred to whole life policies.

Goods And Documents of Tittle

Banks can give loans on the security of goods or documents of tittle viz.. Railway Receipt, Bill of Lading, Dock Warrant etc. Merits of such collateral's are quite easy to sell, loan being short-termed, risk of loss is not great, and there is no danger of money being drowned. Demerits are:

• Difficulty in getting suitable accommodation for warehousing of the goods.
• Risk of damage to good.
• Goods in the category of comfort and luxury are subject to violent fluctuations.
• Difficulty for bank to release goods in installment.
• Documents may be forged.

It is, therefore, essential that banks should keep a proper margin between the amount of loan and the price of goods.Only such goods as can be sold quickly should be accepted as security.

Stock Exchange Securities

Under these collaterals we include securities issued by a Government, semi-government and local authorities. Shares of industrial and commercial companies also come in this category. The merits of such collaterals are quick sale. No difficult in transfer of ownership, stability in prices, loans can be secured from other banks, and prices thereof can be ascertained from stock exchanges.

Demerits of such collaterals may by such as responsibility of party paid-up shares may by on bank and certain securities may not be marketable. Hence, while accepting stock exchange securities as security, banks should always keep in view that they should be free from all defects of ownership, fluctuations in their prices should be limited, and that they should be fully paid. 

Securities Demanded by a Banker

The loans which a banker grants to his customers may be classified in to secured and unsecured loans. Unsecured loans are so called because they are secured only by the promissory notes signed by the customers and not secured by any other additional security. In granting personal loans, therefore, a banker first satisfy himself with regard to the financial stability and integrity of the borrower by examining his balance sheet.

Where the personal security of the borrower is considered inadequate, a banker may require him to furnish some additional security. This may take the form of a guarantee by a third person or a deposit of tangible securities. Such securities as are deposited by way of security for the loan are known as Collaterals. The most common collaterals are discussed above. 

Market Ability of Securities

Securities which are easily sold in the open market, are good for investments. First class securities are considered safe from the point of view of investment. Government securities, shares and debentures of sound companies, first class bills of financially sound parties, are good enough for investment. The securities for which there is a demand in the open market, are to be discarded for investment.

P Versification of Risks

" All eggs should not be in one basket" if the advances are made to different persons instead of one-party, or to many factories, the risk is divided, and at least we can count upon some advances to give good returns and to be repaid in due time.

Security of Funds

The banks creates invest able funds by accepting deposits from the individual. That is, it invests such money as is not its own. Because the funds are not its own, the security of these funds is the prime important factor to be considered while investing the funds. To ensure security, the banker must see

• Investment or Advances are not made to any one individual or business or one factory.
• The Funds are not advanced for long term.
• The advances are made after procuring adequate security.
• The advances are not made against immovable properties.