This lesson covers the legal aspects of securities and collateral used to secure bank loans and advances.
5.1 Types of Securities for Bank Loans
Banks take securities to mitigate credit risk. The ABA Law and Banking course covers “how creditors obtain property interests” . Types of securities include:
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Tangible Securities:Â Immovable property (mortgage) and movable property (pledge of goods).
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Intangible Securities:Â Stocks and shares, fixed deposits, government securities, and book debts.
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Personal Securities:Â Guarantees and indemnities from third parties.
5.2 Legal Principles Governing Securities
The creation of a security interest must comply with legal formalities. For mortgages on immovable property, the transfer of property act provides the legal framework. For movable property, the sale of goods act and specific contractual terms apply . The security document must clearly identify the parties, the debt, the property charged, and the rights of the parties. The bank must ensure the borrower has good title to the property and that the charge is properly perfected.
5.3 Loan Documentation and Covenants
Proper loan documentation is essential for legal enforceability. Key documents include the loan agreement, promissory note, security documents (mortgage deed, pledge agreement, hypothecation agreement), guarantee agreement, and subordination agreements. Loan covenants are legally binding terms and conditions imposed to mitigate risks and ensure repayment. They can be affirmative (actions the borrower must perform) or negative (restrictions on borrower actions) . The ABA course covers “how contractual relationships are formed and enforced and the different elements of contracts” .