Lending Operations &

Risk
Management

Ownership of Financed Assets

Agreement for Finance
Loan & Charge Documentation
 Ownership of Financed Assets
Role of
banks as lenders
Lending is a primary business function of banks, making it
the most profitable product of the banking business, they
make profit by accepting deposits at a rate of return & make
out loans at a higher rate of interest. The difference covers
the administrative cost as well as compensates them for the
risk associated with lending

Banks lend to support business activities so as to generate

income ,and share the profits with all the stake holders, the
besides serving the national economy at large.
 Ownership of Financed Assets
LOAN DOCUMENTATION
The documents to be obtained from the borrowers
fall in the following categorizes

-Agreement for Finance

-Security Documents
- Charge documents
In order to determine what documentation is required to
secure the finance it is important that the corporate status
structure of the customer should be clearly established ..
A borrower can be
A Company, a Firm,
A Sole proprietorship
firm
An Individual,

A partnership firm, Trust,

A Ltd company.
 Ownership of Financed
Assets
The Agreement for Finance.
IB-6.

Agreement for finance or Mark up agreement

is the basic and fundamental document in Non
Interest based financing system.

It provides basic terms and

conditions of financing between the Bank & the
customer. which includes :
the amount of finance ,
the mark up there on,
the terms & conditions for repayment.

It in fact establishes the contract between the

Bank and the customer.
 The Agreement for
Finance.
IB-6.

Agreement for Finance is used for :

Short /medium/Long term financing on
markup, other than Agriculture finance.

It is the most necessary document without

which the banks claim cannot be established
in case of all types of financings (except non
find based financing)
 The Agreement for Finance
Other Documents
IB-8 - Application /Agreement for issuance of L/C
IB-12- D.P.Note (Demand promissory note)
IB-20- Agreement for Discount /Purchase of Bills.
IB-28 - Letter of Lien on marketable securities.
IB-29 Letter of Guarantees
IB-22- Mortgage Deed
IB-24- Memorandum of deposit of Title deed
IB-26 Letter of Pledge
IB-25-- Letter of Hypothecation
IB-6 - Letter of Buy Back Arrangement
IB-8 - Agreement for Issuance of L/C
IB -30- Counter Gaurantee
IB- 31- Agreement for sale & Buy back of Marketable
securities
 The Agreement for Finance
Precautions in filling the IB form
-The relevant columns provided in the IBs should
be
filled in accurately
-The date of execution should be mentioned.
-Two witnesses one from the borrowers side other
from the bank,alongwith the CNIC numbers should
sign the form
-Signatures of the executants be verified
-Every page should be signed,
- No cuttings on the form
Lending Operations & Risk Management

The Security Documents

Security.
Security.
.Also referred to as collateral
consists of -Assets
fixed or moveable property, deposits or
valuables pledged as guarantee to obtain a
loan.

-It could be tangible security like plant &

machinery stock in trade or financial
securities shares, bonds, certificates of
deposits, life insurance policies
Security.
Attributes of a good
Tangible security, A good
tangible should possess /be like.
-Marketability.
-Easy ascertainment of value
-Stability of value/yield
-Durability
-Storability
-Transportability
 The Security Documents
Title Documents
(Certificate of Title)
A Title document thus refers to all such
documents which establishes the legal
ownership claim of an individual, or entity to a
specific asset.

It is evidenced by:
A deed ,
Certificate of title, or bill of sale needed to
execute a security for a loan.

Bank may extend mortgage financing to a

customer only if the seller holds
uncontested ownership on the title of the
asset or the property.
 Charge
When an asset or property is identified as a security
against a facility in an agreement or document creating
a borrowing relationship
OR
When a immovable. Property of one person is by act of
parties, or operation of law, made security for payment
of money to another, and the transaction does not
amount to a mortgage, the latter person is said to have
a charge on the property
-Section 100 Transfer of Properties Act

A charge is said to have been created. This charge can either be

registered formally with the Registrar of Firms or remain
unregistered
 Charge
Assignment of Book debts
Debts due or accruing to a customer may
be assigned by him to the bank/creditor
and can thus be made security for an
advance/loan
Example
Charge on Firms current/fixed assets
 Charge
-Registration of Charge;
should be to be registered under Section 17(1-b)of
the Registration Act within 21 days.

- The Company
ordinance 1984
- Fixed/Floating Charge;
Fixed charge is created on ascertained property,
of the company prevents dealings and binding the
property in the hands of third parties & would
restrict day to day business of the company.
 Charge
-Floating Charge;
An equitable charge on the current assets for the time
being of a going concern
The borrowing company creates a floating charge on its
present and future Assets .namely stocks of unfinished &
finished goods
This allows the company to deal with its assets in the
ordinary way until the charge is crystallized
Document witnessing the creation of Charge on Firms Assets
Form 16 Issued by the Registrar Joint.stock Cos
Hypothecation of stocks/assets
Its a A legal transaction, whereby goods may be made
available as security for a debt without transferring
either the title to the property nor the possession to the
lender-
-Neither the property nor the possession of the goods are
passed to the lender (bank)
-Security is granted by handing over a signed ;
Letter of hypothecation
-If the possession is handed over to the lender,bank
the charge is converted into a pledge

Letter of Hypothecation
The Rights of the creditor: Bank
-The right to inspect the goods under hypothecation
-Can ask the borrower to indemnify the bank against
possible risks to the goods, like fire,

-Bank can ask the borrower to maintain a minimum level of

stock/inventory compatible with the amount of loan availed
A Mortgage
A
A mortgage is a transfer of interest in a property by the
customer/borrower (generally an Immoveable
property/asset,) to constitute a security against
loan/advances .
Types of Mortgage
Registered /Simple Mortgage:
The legal title of the asset/property is
transferred to the mortgagee but the physical possession
remains with the mortgagor
Equitable Mortgage
This is a Mortgage by deposit of Title documents to the Asset
with the Bank

-Can be created only in Karachi.

-Title deeds /documents of the property are to be deposited
with the mortgagee
- Agreement for finance as acknowledgment of debt.Other
loan documents
'Registered Mortgage
Necessary verification of a title to an asset
before creation of a mortgage of property as a
security for a loan
Search certificate from
the registrar Properties as evidence of legal
ownership
Valuation certificate of the asset from a approved
Surveyor
Document witnessing the creation of
Mortgage
Mortgage Deed:
Agreement for Finance
Differences Between Charge &
Mortgage
Mortgage need not be registered,
Charge must be registered at the merely preparing a deed of
relevant land office conveyance is sufficient

Charge is created using There is no prescribed form, there

prescribed statutory form is deed of conveyance
Chargee takes possession after Mortgagee takes possession upon
chargor defaults in repaying the createng the deed
loan
The chargee can seek to sell the The mortgagee cannot sell the
property when chargor defaults
property and infact he has to hold
in the repayment of the loan at
on to the property
any time
Mortgage confers absolute
Charge merely confers interest &
ownership to the mortgagee
not title or ownership to the
Chargee

Ainul Jaria - LAW 3111-Lecture 2 20

Bankers Lien
Lien is the Banks legal right to withhold assets, property
Until the claim on the property is paid The banks lien is a
Protection against possible losses or over draft or other
loans and finances in case of a default by the borrower.

Bankers Lien is an implied pledge

Banks lien is applicable to all documents ,or assets,

properties which come into the bankers hands
possession in the course of His normal business

The Banks have a lien over any goods bailed to them

by their customers as a security for a loan ,or balance
of account.
Section 171 Contract Act 1872
 Charge Documents
Definition:
Charge Documents are pre formatted and printed forms
provided by the bank to client for execution to create charge on
securities against loan and advances
 Charge Documents

IN CASE of Hypothecation of stocks/assets

IB-25-A- Letter of Hypothecation
IB-6 - The Agreement for Finance.
IB-12- D.P.Note (Demand promissory note)
IB-31 - Letter of Buy Back Arrangement
IB -30- Counter Gaurantee
Charge Documents
IN CASE OF Against Mortgage of
assets
IB-6 - The Agreement for Finance.
IB-12- D.P.Note (Demand promissory note)
IB-29 Letter of Personal Guarantees
IB-22- Mortgage Deed
IB-24-Memorandum of deposit of Title deed
 Charge Documents
IN CASE of Bankers Lien
- IB-6 - The Agreement for Finance.
IB-12- D.P.Note (Demand promissory
note)
IB-28 -Letter of Lien on marketable
securities.
IB-29 Letter of Personal Guarantees
Lending Operations & Risk
Management

SAFE KEEPING OF BORROWERS

DOCUMENTATION
Lending Operations & Risk
Management

SAFE KEEPING OF BORROWERS DOCUMENTATION

Retention of legal documentation in safe mode is

an important function of banks lending ,as through
these documents legal rights to reclaim the loan can be
enforced in the court of law.
Inappropriate handling of these documents may lead to
invalidation of legal rights & jeopardize the interest of
the bank .
SAFE KEEPING OF BORROWERS
DOCUMENTATION
The following arrangements for safe custody of
documents are available;
-Archiving & digital copies of the
documents -Conventional safe
custody in vaults .

The two options available are

In House Arrangements
Ex house arrangements
 SAFE KEEPING OF BORROWERS
DOCUMENTATION
In House Arrangements
-Documents should be kept in a separate fire proof
room/vault
-The lodgment should be entered in a separate
register under control of a officer
- A separate register to record any movement of the
documents /folder
-A lodgment receipt to be issued to the concerned
relationship manager as a proof of lodgment
-The documentation should be available for checking
by the internal/external auditors
 SAFE KEEPING OF BORROWERS
DOCUMENTATION
Ex House Arrangements
-In cases where in house arrangement are not
available for safe custody of documents as per
requirements ,an Ex house arrangement can be
considered/opted
The cost and secrecy issues in case of Ex house
arrangement should always be of prime concern by
the bank
When an Ex house arrangement is inevitable all
the essential precautions /procedure as required in
case of in house safe keeping should be observed
Lending Operations & Risk
Management
Learning Outcomes

The students on completion of this chapter will be able to

understand & differentiate between the ;
-Finance agreement,
-The Securities and their ownership essentials
-The Documentation
The Creation of Charge on the assets
of a firm their types,and the Types of Charge on assets &
related precautions documentation,

-The Mortgage of assets as security for loan

-Types of Mortgage ,and the necessary steps before
accepting the same as security for a loan.
- Safe Keeping of documents