Credit Programme

For Axis Bank

Praloy Majumder
Kolkata
October 25th 2010
Session One
 Loans and Advances

Loan Division

Working Capital Term Loan

 Loans & Advances
Working Capital
 Current Assets funding
Term Loan
 Current Assets
 Fixed Assets
 Other non current assets
Term Loan
 Margin Money for working capital
 Margin money for other term loan
 Loans and Advances
Loan Division

Working Capital

Fund Based Non Fund Based

 Loans and Advances
Loan Division

Working Capital Term Loan

Long Term Asset,

Current Asset
Current Asset
Fundamental Concept of
Credit Assessment
 Very important Slide
Business
Evaluation

Inflow of Fund Outflow of Fund

Income Liability Expenses Asset

P&L B/S P&L B/S
 Very important slide
Inflow Outflow Cash and
Bank
Balance
Income > Expenses +
Liability > Asset +

Income < Expenses -

Liability < Asset -
Working Capital
 Production

Borrowing

Repayment Sales

Realisation
 Methods of Assessment of
Fund Based Working Capital
FB Assessment
Method

MPBF CB TO

I II III
 Working Capital Facilities
Concept of Working Capital Funding MPBF

LTA

NWC
FB facility CA
NFB OCL
 Company’s Bank’s CMA
CMA

FA
FA

LTL LTL
NCA NCA

NCA
NWC LTL
WCG NWC
BB CA
BB WCG CA

OCL
 MPBF Process..
I II III

A CA CA CCA

B OCL OCL OCL

C=A-B WCG WCG WCG

D=Min NWC 0.25WCG 0.25CA 0.25CCA

E=Est NWC Est NWC Est NWC Est NWC

MPBF Min (C-D,C-E) Min (C-D,C-E) Min (C-D,C-E)

 Turn Over Method
 This method is applied for small business houses. The
assumption of this method is very simple.
 The working capital cycle is 3 months i.e. the sales are
rotated four times a year. The total working capital
requirement is 25 % of the projected sales.
 Out of this total requirement, at least 5% is to be brought in
from long term sources. So the remaining 20% would be
minimum amount of fund based working capital to be given
to a company.
 This is mainly followed for fund based working capital limit
of up to Rs 500 lacs.
 Export Credit
Export Credit

Pre Shipment Post Shipment

Rupee Foreign Currency Rupee Foreign Currency

 Export Credit
Pre Shipment Credit Post Shipment

Receipt Completion On board Realisation

Of Order Of Order

OC = RM+WIP+FG OC = Receivable Cycle

Assessment for FB Limit for
Export Credit
 As mentioned earlier, the packing credit is the fund based working
capital facility given by the bank to meet the expenses incurred till
the shipment stage . The following expenses are incurred by an
exporter till the shipment stage :
 1) Expenses incurred for purchase of raw material
 2) Expenses incurred for conversion of raw material to finished goods
 3)Expenses incurred for ware housing of finished goods
 4)Expenses incurred for putting the goods on board.
 As mentioned earlier, the total assessment is carried out in the
same manner as the assessment for the domestic working capital
and the required NWC of 25% of the current assets is to be
brought in by the company
Assessment for FB Limit for
Export Credit
 Since the fund is disbursed under concessional interest rate, there
should be some mechanism that the fund is going for the export
purpose.
 So any packing credit is disbursed against either LC or confirmed
order and the disbursing bank make an endorsement on the LC or
Export order so that the company can not avail the export packing
credit against the same order from bank. Moreover, the fund under
packing credit needs to be repaid from the post shipment credit and
for this purpose bank maintains a diary of shipment .
 If it is liquidated from the domestic sources, a penal interest rate
well above the market is imposed. This prevents the company to
misuse the packing credit for domestic purpose.
Assessment for FB Limit for
Export Credit
 After the goods is put on board of ship, the bank
provides a post shipment credit to the company.
 The post shipment credit is provided on the cost of
the goods plus Insurance plus freight . This is
popularly known as CIF value.
 For promoting export, apart from the concessional
interest , the bank do not insists for any margin on
Post Shipment Credit.
The entire amount which is disbursed against post
shipment credit would be credited to the pre
shipment account and the pre shipment credit is
closed.
 Assessment for FB Limit for
Export Credit
 So when the bank disburses the packing credit his
main concern is the shipment of the goods.
Once the shipment takes place, the packing credit is
liquidated.
In the case of post shipment credit , the risk of the
bank increases .
This is because in the pre shipment stage , the bank
has the finished goods as the security in the post
shipment stage the bank is having only receivable
which a piece of paper only.
 Assessment for FB Limit for
Export Credit
 To reduce the risk of any delinquency, bank insists on the
following :
 Generally bank asks for Letter of Credit for Post Shipment
Credit
 When LC is not available, banks gets credit rating of the
overseas buyer from the reputed agencies like Dun and
Broad Street
 Bank also insists for Export Credit Guarantee Commission
( ECGC) coverage for Post Shipment Finance. This is an
insurance coverage for counter party risks.
 Bank does not provide the Post Shipment Finance for
exporting to countries where there are significant country
risk involved
 Assessment for FB Limit for
Export Credit
 After the post shipment finance is disbursed, the same
precaution to be taken so that the purpose of concessional
interest is not defeated.
 The post shipment finance is to be realized only from the
Realisation of export proceeds and the export proceeds to
be realized in all cases ( except the case of capital goods
export) within one year.
 If it is not realized within 180 days , details to be given to
RBI and the writing off of export receivable requires
fulfilment of many formalities.
 These formalities would act as deterrent for reaping
unscrupulous benefits of concessional interest rate.
 Important aspect of Export
Credit
The export credit should be used for export purpose not
for domestic purpose .
To ensure that bank must ensure the following :
 At the time of assessment :
 Operating Cycle should not be exceptionally long ; Longer operating
cycle means export credit is enjoyed by the borrower for longer
period. ABC Limited’s actual operating cycle for export is 30 days
and cost per day is Rs 1 lacs the current asset is Rs 30 lacs .
 If borrower projects an operating cycle of 60 days and cost per day
kept at same at Rs 1 lacs the current asset is Rs 60 lacs.
 The borrower can get more export credit than required and it can
use Rs 30 lacs additional fund in other than export .
 Important aspect of Export
Credit
This can also be method for money
laundering :
Higher profit margin means higher inflow of
dollars ;
From this dollars , payment is made to Indian
local marketing agent ;
This marketing agent may be part of money
laundering racket.
KYC is very important in export credit.
 Post shipment credit
Post Shipment
Credit

Advance against
Advance against
Bill Discounting Duty draw back
Bills for collection
Receivable
 Liquidation Source
Liquidation
Source

Specific Other Unfinanced

Export Export EEFC Account
Bill Bill
Session Two
 Different Working Capital
Products
Cash Credit
Working Capital demand Loan
Bill Discounting
Drawer Bill
Drawee Bill
MIBOR Linked Products
LIBOR Linked Products
 Cash Credit
Fund Based working capital Limit can be availed in
the form of Cash Credit
Cash Credit is like a current account
Borrower can deposit and withdraw any number of
times during the period
The maximum amount of outstanding would be the
Drawing Power or Limit whichever is lower
The borrower has to submit stock statement on a
periodic basis and based on the stock statement
the drawing power is fixed
 Cash Credit
Interest rate is linked to Base Rate
Interest rate is charged on the amount of
outstanding on the daily basis
The interest needs to be paid generally on
monthly basis
This is the most popular working capital product
Drawback :
 Cash Management at the hand of bank
Bank should charge higher interest rate
 Working Capital Demand
Loan
In the case of working capital demand loan , the
borrower would mention at the time of borrowing
for what period it is borrowing
The borrower has to repay the money within the
stipulated time frame
The cash management is at the hand of the
borrower
Interest rate charged for this loan would be lower
Drawing power and issues related to stock
statement would be same like cash credit
 Bill Discounting
Bill Discounting

Drawer Bill Drawee Bill

Discounting Discounting

With LC Without LC
 Bill Discounting
Bill Discounting

Drawer Bill Drawee Bill

Discounting Discounting

Replacing creditor in OCL

Receivable
with
Financing
Other bank

Replacing Receivable
Financing with
Bill
 Drawee Bill Discounting
Pays on due date
Sends documents
LC
Negotiating
LC Bank
opened
Issuing
Accepts documents and deposits

Bank
Advising
Bank

Seller gets Payment

Pays on due date

Approaches for LC
Opening

Advises

Buyer Approaches
Selller

Buyer/ Goods dispatched Seller/

Drawee Seller Asks Drawer
Buyer to
SendsOpen
BillsLC
of Exchange
And other Documents
Bills Discounting outside
MPBF
Finance for Bill Discounting is part of receivable financing
.
If the drawer enjoys fund based working capital facility it
is getting finance for current asset :
 Inventory Financing
 Receivable Financing
Under receivable financing :
 Open Account Receivable financing : Invoice Financing
 Bills Receivable
If other banks provide drawer bill discounting financing ,
the payee bank under bill discounting has to follow the
following practice :
Bills Discounting outside
MPBF
No Objection in Lending from existing lender .
 Failure of this would mean violation of existing contract with
borrower and existing lender
 Negative covenant

The disbursed amount to be credited by A/C Payee cheque to

the existing lender of the drawer and the payee bank under bill
discounting has to take care of this formalities.
The same amount would have to be reduced from the drawing
power of the drawer up on receipt of the A/C Payee cheque of
the payee bank.
Under no circumstances , this is outside the MPBF .
Commercial Paper-Who can
issue CP??
A company, Primary Dealer and All India Financial
Institutions can issue CP. In the case of a company the
following criteria needs to be fulfilled :
o The TNW of the company as per latest audited balance sheet
should not be less than Rs 4crores;
o The Company has been sanctioned a working capital limit by
Banks and /or all India Financial Institutions
o The Borrowal Account is classified as Standard assets by the
bank/FIs.
 In the case of Primary Dealer and All India Financial
Institutions , RBI permits them to issue CP to meet their
short term funding requirement within an umbrella limit
specified by the RBI .
Interest Rate Situation
GDP Low Low High

Inflation Low High High

Interest Low ? High

Interest Rate Situation- India
GDP 9% 8.5%

Inflation 6% 10% Low/High

Interest Increased
Interest Rate Situation- US
GDP 4% 1.5%

Inflation Low

Interest Low
 Conclusion
Domestic rate would be higher
LIBOR related rates would be lower
LIBOR borrowing would be preferred
compared to domestic borrowing
LIBOR rates are also associated with
exchange risk
This needs to be taken into account before
borrowing
Foreign Currency Borrowing
 India has USD 280 billion FX Reserve
 FX Reserve means amounts of dollar India has
 This balance has been built up by net of Inflows and Outflows:
 Inflows :
 Export
 Capital Account Inflows
 Loans
 Investment in Capital Market
 Recovery of assets
 Out flows :
 Import
 Capital Account Outflows
 Purchase of Assets
 Repayment of Loan


Foreign Currency Borrowing
Permanent foreign currency is when country is having
trade surplus
India is trade deficit country
Dollars are not India’s dollars
This is outsiders money
So RBI would not allow this lenders to lend in the short
term market easily
So restriction on Short Term Lending in the form of
Foreign Currency would always be there
Foreign Currency Borrowing
Foreign Currency
Borrowing

Short Term
Medium Term Long Term
( Medium ( Minimum
( Maximum
Restriction ) Restriction )
Restriction )
 Foreign Currency – Short Term
Borrowing

Short Term

Import – No
Import – Yes Import – No
Export – Yes
Export – No
Only through Export – No
Only through
PCFC and PSCFC Only through
TC for the imported
For export portion FCNR(B)
Portion
Only
 Suppliers credit
Supplier would :
Inform Indian buyer that it would arrange the
fund
Indian buyer has to give a guarantee
 LOU
 SLC

Overseas lender would be lending to Indian

buyer on the strength of suppliers
recommendation and LOU/SLC
 Buyers credit
Buyer would be arranging foreign credit on its own
other than the buyer’s own working capital banks
Buyer would be charged higher rate in case of
borrowing in the form of domestic rupee sources
Buyer would be approached by other banks to arrange
the fund in foreign currency
Buyer would be asking its own working capital bank to
give the LOU/SLC
 Sources of Buyers Credit
Indian Banks would get a sanction of Foreign
Currency Limit from the over seas bank
BOM would get a sanction limit from JPMC for
USD 200 million
The interest rate for this limit would be
primarily depend on :
 Country’s strength
 Country’s banking sector strength
 Individual bank’s strength
 Sources of Buyers Credit
The difference among banks for borrowing cost from
JPMC would not be very high
The competitive advantages would be very less among
banks in this form of funds
The spread would determine the product selling aspect
The spread is dependent on the Individual bank’s
marketing policy as well as cross subsidisation policy .
There is a huge opportunity on this area.
Session Three
Non Fund Based Product
 Letter of Credit
Payment Transmitted
Sends Confirmation

Issuing Bank/ Sends Documents Negotiating

Opening Bank Bank
Bank
Sends documents for Acceptance

Payments Made to Bank

Opens
Accepts documents

Submits Documents
LC

Payment Made
For Negotiation
Applies to bank

Advising Bank/
Confirming
Bank
Advises
LC

Applicant/ Goods Receipt Ships Goods

Beneficiary/
Buyer/ Seller/
Drawee Drawer
Sends Invoice
LC for routine operation
Purpose of LC :
Purchase of RM ;
Finding out total RM to be purchased
 Cash Purchase
 Credit Purchase
 With LC

 Without LC
 Assessment of LC
Sl NO Particulars Source

I Estimated/ Projected consumption Form II

of Raw Material & Spares
II Opening Stock of Raw Material & Form III
Spares
III Closing Stock of Raw Material and Form III
Spares
IV Purchase of Raw Material and 1+3-2
Spares
 Assessment of LC
Sl NO Particulars Source

V % of Purchase on Cash

VI % Of Purchase on Credit

VII % of Credit Purchase on LC

VIII Average lead time

IX LC amount ( Limit) (VII/360/VIII)

 Importance of operating cycle
and LC payment
Applicant would pay LC from selling proceeds
of materials purchased under LC.
This is operating cycle of the company .
If a company is having an operating cycle of 6
months and LC usance period is 3 months ,
portion of LC payment has to be arranged
from someone else.
Bank may have to think providing CC limit or
Trade credit during time.
 Bank Guarantee ( BG)
BG are of two types :
Performance
Financial
Financial guarantees are required :
For submitting tender
For taking mobilisation advance
For taking secured advance
Different Banks involved in a
LC
Issuing Bank : The bank which issues the LC.
 If the applicant does not pay , Issuing Bank has to pay
 Proper assessment of applicant’s repayment capability
 Proper terms and conditions stipulations so that real goods are shipped
Advising Bank : The bank which advises the LC.
 The authenticity of LC is the prime concern
Confirming Bank : The bank would pay if the issuing bank does not
pay.
 Confirming bank would take a call on issuing bank
 Confirming bank would take a call on the applicant
 Different banks involved in
LC
Negotiating Bank
The bank which discounts the bill and make the
payment to the beneficiaries.
Negotiating bank would be seller’s bank
Proper scrutinising of documents under UCPDC
600 is the main function
Negotiating bank can be another branches of
issuing bank and confirming bank
 Types of LC
LC :
 Import
 Inland
LC :
 Revocable
 Irrevocable
LC :
 Restricted
 Un restricted
 Types of LC
LC :
 Green Clause
 Red Clause
LC :
 Back to back
 Transferable
LC:
 Revolving
 Non revolving
 Time scale of BG of a construction
Company

Bid Award Mob Performance

Bond Advance Guarantee
Performance Progress
Guarantee Retention
Report
Amount
Performance
Measurement
 Bank Guarantee ( BG)
Performance Guarantee is required for
releasing retention money.
Bank must comprehend the entire process .
Finding out the requirement at each stage.
Number of issued guarantees to be returned
during this period.
Closing balance of bank guarantee.
Bank Guarantee Assessment –
Fresh Guarantee
Activity Type of Calculation Average
Guarantee Tenure
Participating in a Financial guarantee (100/Success rate) Tenure of Bid Bond
Tender * targeted job

For mobilisation Financial guarantee Mob advance % of Tenure of BG for

advance the contract * Mod Advance
contract to be
started during the
year
Secured Advance Financial Guarantee Secured advance % Tenure of BG for
* job for which Secured Advance
secured advance is
eligible
Retention Money Performance % of works Defect Liability
Guarantee completed Period
Bank Guarantee Assessment –
Fresh Guarantee
Type of Opening Fresh Expiry of Closing
Guarantee Balance Guarantee existing Balance
Guarantee
Financial guarantee
– Bid Bond

Financial
guarantee- Mob
Advance
Financial
Guarantee- Secured
Advance
Performance
Guarantee-
Retention Money

Total Guarantee Limit

 Important Terms and
Conditions
Mobilisation advance diversion
Guarantee issuing bank is at risk
Proper monitoring of progress of the project
At the time of issuance of Mobilisation
advance
Projected performance report
Projected cash flow statement
Reading of the contract
 Important Terms and
Conditions
Monthly progress report
In the same format as to be submitted to the
authority
External engineering appointment in case of
necessity
Meeting with the department
Necessary action in case of any difficulty
Difference between LC & BG
LC is paid for performance of the beneficiary
and BG is paid for the non performance of the
applicant
LC is paid most of the times , BG is not paid
most of the times
LC is less riskier where as the BG is more
riskier
LC can be discounted , BG can also be
discounted
 Type of Banking
Sole banking Arrangement : When the entire
working capital facility is taken from a single
bank it is called sole banking arrangement .If
the working capital requirement is not very
large , a company would prefer sole banking
arrangement.
 Type of Banking
o Consortium Banking Arrangement : When the working capital
requirement is large, a single bank may not be willing to lend such
large amount .In that case , the company must go for a banking
arrangement where more than one bank is involved. One type of
banking where more than one bank is involved is called Consortium
banking arrangement. Under this method, a bank assumes the role of
a leader and the bank is called Lead Bank.
o Lead bank assesses the limit and then informs other bank about the
limit. The other banks joins an association and this is called as
Consortium. Once the leader assess the limit it informs the other
member bank and other member banks carry out its own assessment
and inform the lead bank about the share they are taking . Once this
is formalized , a meeting called consortium meeting is called and the
process for disbursement of fund takes place.
 Type of Banking
o Multiple Banking : When the requirement of working capital is
large, more than one banking would be involved. In this case,
apart from the consortium banking , multiple banking
arrangement is also possible. Under multiple banking
arrangement , the limit is assessed by individual banks and
individual banks take exposure.
o The benefit of multiple banking is that in case of consortium
banking there is lot of rigidity from the point of view of the
company. In case there is more requirement of working capital
and even though other member banks wants to disburse their
share , they can not do anything unless the lead bank approves
the limit. This cause some delay which can hamper the business
of a company. In case of multiple banking , such problem is not
there.
 Primary Security …
A Primary Security with respect to a particular
type of finance is defined as the security
which is created out of that finance. For
example, when working capital is provided ,
current assets are build up from the working
capital . In this case, the current asset is
called as Primary security.
Similarly for term loan the Primary security
would be the fixed assets.
 Collateral Security …
A collateral security with respect to a particular type of
finance is defined as the security on which charge is
created even though the security is not created from
the sad finance. For example, in case a charge on the
fixed asset of a company for working capital loan is
created, the collateral security is the fixed asset.
 Procedure for Charge
Creation
Lien : Under this process, security is created on
financial asset. The name of the liability holder is
marked on the face of the financial instrument as
lien. Under this system, the ownership is with the
borrower where as the possession is with the
lender. The security is created on financial assets.
Pledge : Under this process , security is created on
both financial and physical assets. In the case of
Pledge, the ownership is with the borrower where
as the possession is with the lender. The lender can
keep the assets in its own premises or in other
premises.
 Procedure for Charge
Creation
Hypothecation : Under this process, security is created
on physical assets. In the case of hypothecation, both
the possession and ownership is with the borrower. For
creation of hypothecation, charge needs to be created
for limited company.
Mortgage : For immovable property, mortgage is
created. In the case of mortgage, the possession and
ownership is with the borrower. But mortgage is
created on the immovable property where as the
hypothecation is created on movable physical assets.
 Comparison…
Name of ProcessOwnership ofPossession of the Type of Asset Governing
the Asset Asset on which Statute
During the During the tenure charge is
tenure of the of the loan created
loan

Lien Borrower Lender Financial Indian Contract

Asset Act

Pledge Borrower Lender Both Indian Contract

Financial Act
Asset and
Movable
Physical
Asset

Hypothecation Borrower Borrower Movable Indian Contract

Physical Act
Asset

Mortgage Borrower Borrower Immovable Transfer of

Physical Immovable
Asset Properties Act
 Security
Borrowing

Secured Unsecured

Senior Subordinate Senior Subordinate

Exclusive Exclusive Exclusive Exclusive

Paripassu Pari passu Pari passu Paripassu

Comparison of Hypothecation
and Pledge
Pledge versus Hypothecation
A pledged article can be sold in case of default without
any reference to a court of law, but not a hypothecated
article.
The only apparent benefit of hypothecation is it allows
the borrower owner of the hypothecated asset
continuous use of the asset without any hindrance.
But this is no big deal as in pledge too the asset after
taking possession of by the creditor can be given back
to the pledger borrower who holds the assets in trust
for and on behalf of the pledgee creditor.
Pledge versus Hypothecation
Legal positions may be different but for all practical
purposes, (i.e. use of the assets for business) are
served with same effectiveness.
A pledger merchant can run his business without the
tribulation of taking the assets to and fro the bank’s
warehouse as if he were a mere hypothecator.
However, in hypothecation the creditor’ position gets
more weakened than what is suggested by the
absence of an amorphous property interest.
Pledge versus Hypothecation
 Since in pledge the debtor holds the securities in trust on
behalf of the creditor and since a breach of trust is a
criminal offence in most jurisdictions, if the borrower
removes the assets or sells the assets and does not deposit
the sale proceeds in the loan account he becomes liable to
be charged for the criminal offence of breach of trust
 In addition to the civil liability he carries - of an
undischarged debtor.
 On the other hand, in hypothecation the lender only gets a
charge, which entitles him priority in recovering dues from
the sale proceeds of the assets without any element of
'entrustment of the property‘

Pledge versus Hypothecation
Consequently misappropriation of
hypothecated asset generally does not give
rise to any criminal offence and the lender
cannot invoke the majesty of State to his aid
which he invariably does in case of
misappropriation of a pledged asset entrusted
to the borrower.
 Mortgage
 The transferor of the interest is called a mortgagor, the transferee a
mortgagee; the principal money and interest of which payment is
secured with the property are called the mortgage-money, and if
mortgage is created by a document that document is called a
mortgage-deed.
 Mortgages, in some jurisdictions, can indeed be created without a
mortgage deed. An example of such a mortgage (i.e. mortgage without
a mortgage deed), by far the most common form of mortgage in India,
is mortgage by deposit of title deeds.
 In such a mortgage a person (mortgagor) delivers to a creditor
(mortgagee) document of title to immovable property, with intent to
create that property a security for an existing or prospective loan. The
mortgagor must be the title holder and must be deriving his title from
the documents being deposited, and must deposit the title deed with
an intent to create a mortgage.

 Mortgage
 Difference between a “legal mortgage” and an “equitable
mortgage”:
 This requires appreciation of differences between law and
equity; not equity of finance and economics which denotes
ownership (as in home equity loan) but equity of law which
resembles natural justice and which has given us such a
useful word as equitable.
 The practice of transferring some property right by deposit of
title deeds was common in England and British administrators
allowed it at selected centres in India.
 Though there was no provision for mortgage by deposit of
title deeds in any law (before 1882), such a mortgage has
been as effective as a simple legal mortgage so far as
availability of legal remedies is concerned.

 Mortgage
 In India there are five types of mortgages recognized in the Act.
 A simple mortgage is created by a mortgage deed and
gives only a non possessary interest to the mortgagee,
just like a mortgage by deposit of title deed.
 In another type called mortgage by conditional sale, the
property is sold to the mortgagee but the sale is
conditional, which becomes absolute in case of default
and becomes void on repayment of mortgage money.
 In yet another type of mortgage called usufructuary
mortgage the mortgagee enjoys the benefits of the
property (rent or crop etc) until the mortgage money is
repaid. Usually this benefit is adjusted against the
mortgage money.
 Mortgage
In India there are five types of mortgages recognized
in the Act.
 In English mortgage the mortgager makes absolute
transfer of the property but retains the right to redeem it
by repaying the mortgage money as per agreement.
(Incidentally English mortgage is no longer valid in the
UK.)
 In a rare instance of fresh open mindedness the Indian
law provides for a sixth type of mortgage describing it as
a mortgage which is not one of the five types described
earlier!

 Mortgage
 Let us take a look at the interest passed on to the
mortgagee in these different types of mortgage.
 In simple mortgage, usufructuary mortgage and mortgage
by deposit of title deed the mortgagee needs to obtain court
order fro selling the property.
 In other two, viz. mortgage by conditional sale and English
mortgage the mortgagee can sell the property, without
requiring a court's permission, if mortgagor fails to repay
the mortgage money.
 In both these cases the registration of mortgages attract
stamp duty and court fee as applicable in transfer of
properties.

 Negative Lien
 Negative lien does not relate exclusively to immovable
properties.
 Negative lien does not create any encumbrance on the
property. Negative lien denotes that the issuer of the debt
will not create any charge or encumbrance on its
unencumbered property in favour of any body in future
without creating same charge in favour of those who would
be subscribing to the present debt issue.
 Since it is a conditional promise to create a charge it does
not create any security.

 Meaning of charge
A charge is not passing of any property interest in any
asset from the charge-giver to the charge-holder, as
evidently is the case in pledge and mortgage.
Having a charge means having a priority in recovery of
one’s dues from the liquidation proceeds when the
charged asset is liquidated.
It can be described as the creation of a right of
payment out of an immovable or movable asset. It
entails no transfer of interest.
 Position of 1st Charge vs 2nd
Charge…
 Let us take an example .A lender provides a working capital
loan of Rs 25 lacs against a first charge on current assets of
the company values at Rs 32 lacs. In the case of liquidation
of the company, the lender on liquidation of the current
assets would get Rs 32 lacs and it would first appropriate Rs
25 lacs and the remaining Rs 7 lacs would go to the second
charge holder if any.
 Generally, the working capital banker would take the first
charge on current assets and second charge on fixed
assets . The term lender on the other hand take first charge
on fixed assets and second charge on current assets of the
company .The purpose of taking second charge of a
company is to increase its security coverage.
 Exclusive v/s Pari Passu
Charge
 Now the first charge can be on the basis of exclusive charge or
can be on pari passu basis. In the case of exclusive charge , a
lender gets the entire realization obtained from the liquidation
of the asset. However , when the credit facility is significantly
large, more than one bank is involved .
 For example, a company has been sanctioned a working capital
limit of Rs 50 crores and the total amount of working capital
facility would be provided by say 4 banks each providing Rs
12.50 crores . Since all the banks are lending against the same
current assets of the company , the charge is created on pari
passu basis.
 Now if the value of the security is say Rs 60 crores, in case the
charge is created on pari passu basis, each bank are entitled to
get Rs 15 crores each from the realization of the current assets
of the company.
Thank You