Advantages and Disadvantages of goods as security for bank advances

Advantages and Disadvantages of goods as security for bank advances

Goods can be deposited by way of security either in the form of a pledge or hypothecation. In the case of hypothecation, the borrower must be trustworthy since the banker has slight direct over the movement of goods.

Goods are considered security. Goods as security have some advantages which are stated below:

(1) Easy marketability: Goods are tangible securities and are better than guarantee and bill of exchange. If a borrower makes default, the banker can realize his duties by disposing of the goods in the market.

(2) Ready market: Most of the goods have a ready market. They can be sold off easier than other kinds of securities. The existence of a ready market makes the goods reliable and safe security.

(3) Advances for a short period: Normally, advances against goods are for short periods because of seasonal character. Therefore, there is no necessity to lock up funds for long period.

(4) Easy to evaluate: It is easy to evaluate the prices of goods such as wheat, rice, grains, pulses etc. Market trends and reports are available in respect of almost all commodities in newspapers.

(5) Free from fluctuation: Generally, banks accept goods which are necessaries of life such as rice, Wheat, sugar, cotton etc. The price of such goods does not fluctuate widely.

Although it has many advantages it is not considered as good security for various reasons which are stated below:

  • Risk of deterioration: Goods, especially, agricultural products are likely to deterioration in quality over a period of time resulting in reproduction in .the value of the security.
  • Risk of fraud: In the absence of proper standardization and branding, there is ample scope for unscrupulous people to carry on adulteration. Example: rice of various varieties may be mixed up.
  • Storage and verification: The banker has to find godowns to keep the goods pledged and secure the service of honest go down keepers and ensure proper supervision of the godowns.
  • Fall in the value of security: Unexpected change in the demand for the goods may cause a fall in price. The valuation of such goods is difficult.
  • High transportation cost: When a borrower makes default in repayment, the banker will have to dispose of the goods to realize his dues. Realizing the best possible price for the goods involves the transportation of goods to other markets and higher transportation cost.

At last, we can say that as security goods have both advantages and disadvantages.