## Modes of Security for Bank Advances
### Classification of Security
| Type | Meaning |
|---|---|
| Primary Security | The main asset financed by the loan (e.g., the car bought with the car loan) |
| Collateral Security | Additional security offered over and above the primary security |
---
### Six Modes of Creating Security
#### 1. Mortgage (Immovable Property)
Transfer of interest in immovable property to secure a debt. Ownership does not transfer.
| Sub-type | How Created |
|---|---|
| Registered Mortgage | Through a registered instrument — a Mortgage Deed executed and registered with the sub-registrar |
| Equitable Mortgage | By mere deposit of title deeds with the lender — no registration required |
---
#### 2. Pledge (Movable Property)
- Physical possession of goods is transferred to the bank.
- Legal ownership remains with the borrower.
- Bank can sell the pledged goods if borrower defaults.
- Governed by Sections 172–179 of the Indian Contract Act, 1872.
---
#### 3. Hypothecation (Movable Property)
- Both ownership AND possession remain with the borrower.
- Borrower sends periodic stock statements to the bank.
- A Hypothecation Agreement is executed between borrower and bank.
- Used for: car loans (vehicle stays with borrower), CC working capital limits (stock as security).
#### Pledge vs. Hypothecation — Quick Contrast
| Feature | Pledge | Hypothecation |
|---|---|---|
| Possession | With Bank | With Borrower |
| Ownership | With Borrower | With Borrower |
| Asset type | Movable | Movable |
| Example | Gold loan | Car loan, CC against stock |
---
#### 4. Assignment
- Transfer of actionable claims (existing or future rights/debts) from borrower to bank as security.
- The bank steps into the borrower's shoes to collect the assigned claim if there is a default.
- Examples: Assign benefit of Life Insurance Policy to secure a personal loan; assign trade receivables to avail a loan.
---
#### 5. Set-Off
- Bank's right to adjust the debit balance in a borrower's loan account against any credit balance in another account of the same borrower.
- Condition: Both accounts must be in the same name.
- Scope: All branches of one bank are treated as a single entity for this purpose.
---
#### 6. Lien
- Legal charge created (with the owner's consent) giving the bank the right to seize or liquidate an asset.
- Unlike pledge, possession need not be delivered — the right is over assets already held by the bank (e.g., FDs, securities in the bank's custody).
- Example: Bank puts an FD on lien — borrower cannot prematurely break the FD without bank permission.