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.

 

 

 

 

July 17, 2024 Tags : Banking and Finance

Subscribe by Email

Follow Updates Articles from This Blog via Email