# Bank Advances: Types & Modes of Creation of Security

## Large Advance — Definition

An advance is considered a large advance if the year-end balance is in excess of:

₹10 crore, OR
10% of aggregate year-end advances of the branch,

whichever is LESS.

## Types of Advances

### A. Funded Loans

Those where there is actual transfer of funds from bank to borrower. Examples:

Term Loans
Cash Credits
Overdrafts
Demand Loans
Bills Discounted and Purchased
Participation on Risk Sharing basis
Interest-bearing Staff Loans

### B. Non-funded Facilities

Those which do NOT involve fund transfer. Examples:

Letters of Credit (LC)
Bank Guarantees (BG)

> Note: Advances on the Balance Sheet comprise funded amounts only.

## Legal Requirements of Disclosure in the Balance Sheet

### Part A — By Nature of Facility

Bills purchased and discounted
Cash credits, Overdrafts and loans repayable on demand
Term Loans

### Part B — By Security

Secured by tangible assets
Covered by Bank/Government guarantees
Unsecured

### Part C — By Priority

Priority sector
Non-priority sector

## Modes of Creation of Security

### 1. Mortgage

Used mainly for immovable property. Two main kinds:

Registered Mortgage — Effected by a registered instrument called a 'Mortgage Deed' signed by the mortgagor. It registers the property to the mortgagee as security.
Equitable Mortgage — Effected by mere delivery of title deeds with intent to create security.

### 2. Pledge

A pledge involves bailment or delivery of goods by the borrower (pledger) to the lending bank (pledgee) with intention of creating a charge as security.

Legal ownership of goods remains with the pledger.
The lending banker gets certain interests in the goods.
Pledge of goods constitutes a specific (fixed) charge.

### 3. Hypothecation

Creation of an equitable charge, in favour of the lending bank, by execution of a hypothecation agreement in respect of moveable securities.

Neither ownership nor possession is transferred to the bank.
The borrower holds physical possession of the goods as an agent/trustee of the bank.

### 4. Assignment

Represents the transfer of an existing or future debt, right or property belonging to one person in favour of another person.

Only actionable claims (e.g., book debts, life insurance policies) are accepted by banks as assignment.

### 5. Set-off

A statutory right of the creditor to adjust the debit balance in the debtor's account against any credit balance lying in another account of the same debtor.

The capacity of the account holder in both accounts must be the same.
For set-off, all branches of a bank are treated as one single entity.
Right of set-off can be exercised in respect of time-barred debts also.

### 6. Lien

Creation of a legal charge with the consent of the owner, giving the lender a legal right to seize and dispose of the asset under lien.

## Primary vs Collateral Security

Primary Security: Security offered by the borrower for bank finance or against which credit has been extended. It is the principal security for the advance.
Collateral Security: Additional security beyond the primary.

Security can be tangible or intangible, movable or immovable.

## Common Securities Accepted by Banks

Personal Security of Guarantor
Goods / Stocks / Debtors / Trade Receivables
Gold Ornaments and Bullion
Immovable Property
Third Party Guarantees
Life Insurance Policies
Stock Exchange Securities and Other Instruments

Worked example

### Example 1

Example — Pledge vs Hypothecation:

ABC Ltd takes a working capital loan from PNB. The stock is kept in a warehouse where the bank holds the key vs where ABC operates daily.

Answer: If the bank holds the key (and thus possession), it is a pledge. If ABC continues to handle and use the stock daily, it is a hypothecation.

### Example 2

Example — Set-off:

Mr A has a savings account with ₹1,00,000 credit balance in Mumbai branch and a personal loan account with ₹80,000 debit balance in Delhi branch of the same bank.

Answer: The bank can set off the ₹80,000 against the savings balance, treating all branches as a single entity, provided the capacity is the same in both accounts (i.e., Mr A in his individual capacity in both).

### Example 3

Example — Mortgage type:

A borrower hands over the original title deed of his property to the bank without registering anything.

Answer: This is an Equitable Mortgage — effected by mere delivery of title deeds with intent to create security.

⚠️ Common exam mistakes

Confusing pledge with hypothecation — Pledge = possession transferred; Hypothecation = possession with borrower.
Saying 'advances include LCs and BGs' — these are non-funded facilities and excluded from Advances on Balance Sheet.
Forgetting that set-off can be exercised even for time-barred debts.
Listing buildings/machinery as 'assignment' — assignment is only for actionable claims like book debts and life insurance policies.

Bare-Act text Schedule 9 - Advances · Banking Regulation Act, 1949 - Third Schedule, Form A · click to expand

Banks must disclose advances by (A) nature — Bills purchased & discounted; Cash credits, Overdrafts & loans repayable on demand; Term Loans; (B) security — Secured by tangible assets; Covered by Bank/Government guarantees; Unsecured; (C) priority — Priority sector / Non-priority.

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Advances - Types & Mode of Creation of Security

Worked example

⚠️ Common exam mistakes