No doubt, the advancing of credit involves a great risk for the bank. Therefore, to cover this risk, the bank keeps different tangible and non-tangible securities, before sanctioning the credit facility to a customer. The bankers prefer such securities that carry less risk of depreciation due to market fluctuations and are easily saleable, even under changing market conditions.
Common securities against banker advances are as under:
P L E D G E
Pledge is the actual delivery of the movable & tangible property to the lender, as a security for a credit. In a pledge, the possession of movable assets is with bank but the ownership remains with the client. Pledge is against short-term finances and is considered to be the best security for the bank. The commodities that are pledged include generally, raw material, consumables, finished goods and in certain cases work in process (WIP).
M A R G I N
For every credit, the bank needs security with margin or cushion. Similar is the case with pledge. For example, if, there is 25% margin requirement then to obtain loan of Rs.1 million, the security that is to be pledged should be of worth Rs. 1.25 million.
Since, in pledge, the possession of the goods is with bank, so bank keeps these goods in the godowns under the custody of Mucaddams.
M U C A D D A M S
People who look after the pledged goods for bank are called Mucaddams. If cotton (raw material) is to be pledged by the bank, it doesn’t mean that this cotton will be kept in bank; such type of goods is kept in the godowns of the company. So, to make these goods secure, the bank appoints its own men called Mucaddams to take care of stock.