Here briefly explain the precautions required to be taken by a banker in case of advances against the security of goods.
In granting advances certain precautions are necessary.
The integrity of the borrower: The banker should ascertain that the borrower is trustworthy, honest and a man of sufficient experience in his business. Such a precaution is necessary to avoid fraudulent dealings. For example, when a customer offers 100 bags of paddy, as security it is impossible to inspect each and every bag. He has to rely on the honesty of the borrower.
Further, he should see whether the borrower has adequate practical experience in his business. An experienced businessman is conversant with risks and the profitable areas of the business. An inexperienced one may incur a loss and be a potential risk.
Purpose of the loan: The repayment mostly depends upon the purpose for which the loan is obtained. To a borrower who is engaged in speculation, the chances of loss are greater. As such the loss will have to be shared by the banker. So advances should not be allowed for speculative purposes.
Nature of the commodity: The banker should have a working knowledge of some of the special features of the commodities offered as security. The commodities which could be disposed of easily, the quality of goods which are not subject to deterioration and price of goods which are almost steady should be preferred by a banker as security.
Knowledge of different markets: A banker should be conversant with the markets for different commodities. This is essential to regulate the margin for the goods according to the price prevailing in the market. Failure to have knowledge of the market will put him at the mercy of the borrower who may inflate the value to get more advances.
Ascertain the title of owner: Before accepting goods as security, the banker should ascertain the title of the borrower to the goods by inspection of the original invoice or cash memos.
Proper storage: The banker should select godowns which are pucca built and safe in every way for the storage of goods. The roof and flooring should be situated near the bank so that the bank’s representative can have direct and free access to them at any time. All goods stored in bags or bales should be so arranged as to facilitate inspection easily. A careful selection should be made of go down keeper and watchmen. They should be honest and possess a high sense of responsibility.
Rented go down: If the borrower makes use of a rented go down, the bank must obtain an undertaking from the owner of the building stating that the bank has a prior lien. This is necessary because at times the building owner may have a prior claim for rent due and the position of the banker will be at stake.
Insurance up to the full market value: Goods should be insured against all known risks up to their full market value. The relative insurance policies should be held by the bank.
Creation of charge by Pledge and Hypothecation: A banker may create a charge over the goods either by pledge or hypothecation. In the pledge, the goods or title thereto is delivered to the banker. In hypothecation, neither possession nor goods are transferred to the banker. So a written undertaking from the borrower should be obtained that the goods are not charged to any bank and will not be charged till the agreement continues with the bank.
