SECURITIES
FOR BANK LENDING
Introduction
A. Securities
What factors readily come to the mind of the banker when he is approached for a
facility by a customer.
Opinion is widely but mistakenly held among finance borrowers that
security is the most important factor considered by banks in taking decisions
to grant credit facilities. From the bankers point of view, however, there are numerous
factors to be considered in any request for a credit facility and paradoxically
a security is more often than not given, the last consideration.
A prudent
banker does not lend against security. The social desirability of the venture;
its viability, it’s profitability, both to the customer and the bank, the
reputation of the customer should rank foremost in the mind of the lending banker when considering any
proposal by his customer.
However, since any lending is a risk taken by the banker, the need to have
tangible security so as to provide a kind of insurance to the banker, in case
matters go bad, cannot be over emphasized. If for whatever reason the customer
is unable to comply with his repayment program the banker can have recourse to the
security to recover his money.
Moreover given our present borrowing culture with its high rate of default ,one
is tempted to also argue that the issue of security is equally as paramount as
the ability of the customer to pay. The demand by bankers for tangible. Security
is not only prudent and reasonable but it has the backing of the law where it
is said: where adequate security is required by such rules and regulations, such
security shall be obtained for the advance, loan or credit facility granted by
the bank.
B. Types of Securities Generally
Acceptable
for Bank Lending
The type of security a bank will accept will depend on a number of factors such
as:
(i) the nature of the facility being sought
(ii) the amount of the facility being sought
(iii) the duration of the facility being sought
(iv) the project for which the facility is being sought for
(v) the reputation of the customer etc.
Securities generally acceptable to the bank may consist of any of the following
or even a combination of two or more. The list provided hereunder is not
exhaustive.
(i) Mortgage over land and building
(ii) Debenture
(iii) Charge over Fixed Deposit/Savings Account
(iv) Guarantees
(v) Stock and Shares
(vi) Insurance Securities
(vii) Hypothecation
(viii) Domiciliation of Payments
(ix) Trust Deeds
(x) Trust Receipts etc.
However, whatever type of security that is chosen by a banker to “secure” his
exposure it must possess certain universal attributes or qualities. These
attributes should inter-alia, guide the banker in choosing which security to
accept.
Firstly, the value of the security should be ascertainable and stable over the
years. This is because anything whose value changes frequently should not be
accepted because it could fall below the exposure of the bank.
Secondly, the security should be easily realizable
with minimum delay and expense.
Thirdly, the
security should cover the lending adequately.
Fourthly, it should give absolute title to the
banker with as little formalities as possible. Lastly it should be transferable
easily.
C. Types of Securities “Commonly” Used
The securities to be considered are: Landed properties, Debenture, Fixed
Deposit/Savings Accounts and Guarantees.
A) Landed
Properties
For landed property security, usually a mortgage (Equitable or Legal) ; is
executed by the customer charging the said property and or improvements on the
land (either houses, economic trees,
farm etc.) to the lending banker. In very simple terms, a mortgage could be
defined as a security, effected by the creation or transfer of interest in
property for the payment of a debt or discharge of some other obligation.
Whenever a mortgage is entered into the lender (bank) is referred to as the
mortgagee and the borrower (customer) who owns. The property/improvements on
the land to be used or has the authority of the owner of the
property/improvement on the land to be used is called the Mortgagor.
We will now consider the various types of
mortgages.
(i) Equitable Mortgage
An equitable mortgage passes only the equitable estate or creates an interest
in the land or property. An equitable mortgage could be created by mere deposit
of title documents with the lender with the intention to use it as security for
borrowing. It could also be created if the Mortgagor’s estate or interest is
merely equitable.
(ii) Legal Mortgage
A legal mortgage arises when there is a
transfer of a
legal estate or interest in land or property for the purpose of securing, the
repayment of a facility.
Most banks prefer Legal to Equitable Mortgage for the
obvious advantages, in case of default such as:
(1) The right to sell or foreclose the
mortgage property, without having to obtain the order of a court of law.
(2) The right to appoint a Receiver Manager without having to get an approval
of the Court.
(3) The right to enter and remain in possession without having to obtain an
Order of the Court.
(iii) Tripartite Legal Mortgage
This is the same with a legal mortgage but the main distinction is that there
is a third party apart from the lender and the borrower. The third party
(called Surety) who more often than not owns the property to be charged as the
security is joined along with the borrower as mortgagors. This type of mortgage
is commonly used by corporate bodied borrowers along with another individual
(who more often than not has a vested interest in the corporate body). The
advantages to the lender are the same with those of a legal mortgage in case
there is any default in repayment of the facility by the borrower. Requirements for the Preparation and
Perfection
of Securities, In Respect of Landed Properties
When a facility has been approved for a customer and he offers landed property
as security, the legal department would want the following information and
documents sent immediately to enable preparation
of Legal Mortgage engrossments:
(i) Original or Certified True Copy of the Title Deed.
(ii) Borrower’s full names
(iii) Borrower’s residential address (Registered Office Address if a company)
(iv) Nature of facility (i.e. Term loan, Overdraft, Staff loare.tc. )
(v) Consideration (Amount for which the mortgage should be stamped)
(vi) interest Rate
(vii) Certified True Copy of Certificate of Incorporation n
and Memorandum and Articles of Association (if a
Company)
(viii) Certified True Copy of Certificate of Registration of Business Name Form
(if sole proprietorship or
partnership).
(ix) Solicitors Search Report on the Title Deeds (if available).
However, if a tripartite legal mortgage is to be prepared.
In addition
to the above requirements in respect of a legal mortgage the Lender should
also carry out the following legal
checks
(i) Surety’s full names
(ii) Surety’s residential address (Registered Office if a Company)
(iii) Surety’s Certificate of Incorporation and Memorandum and Article of
Association (if a company).
After the preparation of the engrossments, same would be sent back to the
lender for their customer’s execution. After execution, the engrossments should
be sent back for Legal
perfection. To facilitate the
perfection, the
bank should send the following to the Legal department along with the executed
engrossments viz:
(i) The Tax Clearance Certificate of the borrower
(ii) Stamping and registration Fees
(iii) Valuation Report of the mortgaged property (where applicable)
(iv) Tax Clearance Certificate of two Directors (if the borrower is a corporate
body).
(v) Tax Clearance Certificate of the Surety in the case of a Tripartite Legal
Mortgage.
(vi) The Clearance Certificate of two of
the Surety Company Directors (if the Surety is a limited liability company in
respect of a tripartite legal mortgage).
Thereafter, they would stamp and register the mortgage at the appropriate Land
Registry. The mortgage is also registered at the Company’s Registry in the case
of a corporate borrower.
The requirements for the preparation and perfection of a Debenture are the same
as those earlier mentioned in respect of a limited liability company. However,
in addition there must be a Board Resolution of the Company authorizing
execution of the debenture.
When a customer must have paid up the facility he would want to have his title
deeds returned to him. What the branch Manager should do in this respect is to
write the Control point and categorically say that the customer was no more
indebted to the bank.
The Manager
of the bank should also forward the earlier perfected mortgage deeds along with
a photocopy of the title deed to the Legal department. The necessary Deed of
Release or Surrender (as the case may be) would be prepared for
execution. After execution the Legal department would return the deeds to the
branch Manager who would then hand them over to the customer along with the
original title deeds. The customer would then go to the Land Registry where the
mortgage was initially registered and
register the deed of release or surrender.
B) Debenture
A debenture may be defined as an instrument usually issued by a corporate body
(i.e. a limited liability company) to its creditors as evidence of a debt or as
a security for a facility. It contains a promise to pay the amount stated on
its face, plus the interest. It usually gives a charge on the Company’s assets
to secure the indebtedness.
A debenture can be fixed or specific. This means the
borrower cannot dispose of the assets so charged without obtaining the approval
of the lender.
The debenture could be floating, which means the borrower is at liberty to deal
with the property during its usual course of business i.e. it could sale the
charged property, and purchase new ones without necessary obtaining the
authority of the lender.
A debenture could also be pari-pasu. This means there are two or more lenders
to the company and they share equally in the security without giving priority
to one over the other.
C) Charge
Over Fixed Deposit/Savings Account
A charge is a form of security for the payment of a debt consisting of the
right of the creditor to receive payment out of some fund in case of default by
the borrower in his repayment.
Today charge over deposit or savings account is considered by most banks as one
of the best type of security for lending. The reason is obvious.
Before accepting this type of security it is advisable
that the Manager should ensure:
(a) that the customer has enough funds in the account to
cover the lending.
(b) that the account is in the name of the customer.
(c) that where the fixed deposit is in the name of another person, that there
is a valid and dully registered assignment of the fixed deposit to the customer
for the purpose of the borrowing.
(d) In the case of a corporate body’s account, that a board resolution is
obtained authorizing the charging and same must be stamped and registered at
the Company’s Registry.
(e) that there is authority to appropriate the funds in the account to
liquidate the debt in case of any default by the customer.
D) Guarantees
A guarantee can be defined as a promise by one person called the guarantor to
answer for the debt of another person called the principal debtor who must be
legally bound to pay
the debt.
A guarantee is one of the simplest form of bank securities. Individuals or corporate
bodies could stand as guarantors for another person. However, before accepting
guarantees as security, the branch Manager should ensure the following:
a) ensure that the guarantor is credit worthy
b) ensure that the guarantee is a continuing one, so that
an increase in the facility beyond the amount guaranteed does not discharge the
guarantor.
c) ensure that the guarantee is stamped.
d) in case of a limited liability company being a guarantor ,ensure that the
Memorandum and Articles of Association allow
for that and a board resolution is obtained. The document must be registered at
the Company’s Registry.
e) in case of an individual being a guarantor , ask for some other tangible
asset if possible.
CONCLUSION
All said, if security is not the primary consideration of a lending banker when
approached by his customer for a facility, it could also be safe to argue, it
is also not the least in his consideration. From the checklist of the
requirements for perfection of landed property security, one could venture to
say that it’s an onerous exercise for both the customer and the banker.
Unfortunately, despite the difficulty in perfecting landed property security,
its efficacy in terms of realization is very low, disappointedly though. As
such, it is suggested that it is time we started thinking seriously in terms of
utilizing more of the other types of securities for bank lending.
Finally, Lenders should not hesitate to ask questions when in doubt or are not
clear about any securities issue.
