What are collaterals for bank lending?
“Collaterals are security in the form of an asset or property offered against a loan. Financial institutions require collaterals for mortgages and other secured loans, including foreclosure, non-recourse loans, and repossession. If the borrower stops making payments, the financial institution can take possession of the home or vehicle pledged.
“The collaterals for bank lending can be equal to, less, or greater than the value of the loan. This depends on many factors, including credit score, income, and how liquid the asset is. Applicants can pledge anything of value, including real estate, vehicles, inventory, stocks and bonds, and equipment including cash. Intangible and tangible properties are accepted by financial institutions. Tangible properties include machinery and equipment, fixtures, annuities, art, jewelry, etc. Intangible properties include investment funding, chattel paper, and payment rights”. Financialized.com
These are the different collateral acceptable by bank for lending.
1. Landed Property.
2. Lien on Asset or Asset Debenture.
3. Cash Security.
4. Stock Hypothecation.
5. Domiciled Payment.
1. Landed property is one of the most commonly acceptable form of collateral for bank lending.
Banks will prefer landed property and not undeveloped land with titles like Certificate of Occupancy (C of O), Deed of Conveyance, Deed of Assignment, Deed of Gift, Deed of Sub-Lease and any other Title Deed.
Depending on the tenor of the loan, your bank may hold the title as equitable mortgage and not place a lien on it in form of perfected legal mortgage. But be rest assured that you would have given your bank the go-ahead to perfect the title in the event of default before your loan is disbursed. With this condition, the bank will have no need to contact you before the property is realized in the event of default in loan repayment.
2. Another of the popular form of collateral for bank lending is ‘Lien on Asset’.
Lien on Asset refers to joint registration of asset like automobile, office equipment, machines and home equipment in the banks and customers name. Lien is placed on asset jointly financed by the bank and its customer until the loan facility is fully paid up. Some banks will also take lien on asset as collateral for other loan types not related to the asset collateral. Banks does this in other to have a form of security for their depositors’ funds being loaned out.
Asset debenture refers to borrowings a company made against its asset. Such borrowings comes with fixed interest rates which are charges as a first line deduction on the company’s profit. Corporate customers that pledged their asset for bank loan does so as an alternative to legal mortgage.
3. Cash security is the simplest form of collateral for bank loans.
Loans secured with cash in call accounts, fixed deposit accounts, current accounts or saving accounts are the cheapest form of loans. The interest however varies from one bank to another. Most bank will only mark up with a margin of between 5 to 10% over whatever rate you have on the cash deposit used as collateral. Processing time for loan secured with cash is faster than loans secured with other form of security.
4. Stock Hypothecation or Hypothecation Agreement is a form of collateral for bank loans that is common among traders and wholesale distributors of Fast Moving Consumer Goods (FMCG).
It is an arrangement where a bank customers enters into a special arrangement with the banks to have the good financed warehoused and released to hin bits. Either in exchange for cash equivalent of goods worth or cash equivalent of good released previously deposited to the customer bank account before more good are released to the customer.
Such warehousing arrangements may be provided by a 3rd party warehouse agent or in the customer’s warehouse with locks jointly held by the bank and the customer as control over the bank lending.
5. Domiciled Payment is a form of collateral popular with loans to bank customers involved in contract with multinational companies and/or well known principals. It is also popular with loan availed to individual salary earners
The customer with a Local Purchase Order (LPO) or contract agreement with a multinational as well as known principal will approach his bank with a confirmation that the principal is ready to make payment to his bank account upon completion of the job order. The bank in turn confirms the readiness of the principal to domicile payment into the customer’s account with the bank upon satisfactory completion of the job.
The task for the bank however is to ensure that the customer performs inline with the principal’s expectations otherwise the principal may decline payment if the job is not satisfactorily done.
Banks will only enter into this kind of arrangement with blue chip principals and trusted customers with pedigree of performance.
Short Term Loan availed to individual salary earners is also secured with domiciliation of salary payments. As long as the employer undertakes to continue to pay the employers salary into a particular bank account?. The bank will be willing to provide short term Loans to such salary earner. Long Term Loans like Mortgage may have to be otherwise secured because of its long repayment period.