Loan against Documents of Title of Goods
Documents which in the ordinary course of trade, are regarded as proof of the possession or control of the goods, are called documents of title. They authorize the holder thereof to transfer or receive goods which are mentioned therein. Bill of lading, dock warrants, a warehouse-keeper’s certificate, wharfinger’s certificate, railway receipts, etc. can be easily cited as a few examples of documents of title. It is presumed that the holder of document of title shall have the right to claim possession of goods from every other person. Since they are regarded as equivalent to possession of goods, they can be. transferred just like goods either by mere delivery or by endorsement and delivery.
Granting of advances against documents of title involve the following risks in addition to the risks involved in case of advances against goods:
(i) Possibility of frauds: The transporter issuing a railway receipt or bill of lading certifies that the goods have been received by him but he does not certify the contents or quality of the packages delivered to him. This increases the chances of frauds being played. For example, the consignor may mention in the forwarding note 10 bags of sugar but may actually send 10 bags of sand. The bill of lading or railway receipt will mention. 10 bags of sugar though actually there are 10 bags of sand instead. In case the banker has advanced money against such a document of title, it has remedy against the borrower but has no remedy against the transporter. Moreover, the documents may also be forged.
(ii) Non-negotiability nature:On account of the non-negotiability nature of the documents of title, the title of the transferee will not be better than that of the transferor. In other words, if the borrower’s title is defective, banker’s title will also be defective. The banker will not be in a position to prove its claim against goods which those documents represent.
(iii) Obtaining delivery on the basis of indemnity bond: The borrower , on the one hand, may pledge the documents of title with the bank and on the other hand, manage to obtain the delivery of goods on the basis of indemnity bond or some other device. Thus, the banker’s risk increases.
Precautions to be taken
1. The advances against documents should be made only to trusted and reliable borrowers.
2. The borrower should be asked to submit the complete set of documents such as bill of lading or railway receipt. invoice, bill of exchange etc. The documents should be either in the name of the borrower or the bank. Documents in the name of the consignee should not be accepted as he may obtain delivery of goods on the basis of indemnity bond without producing the R/R or lorry receipt.
3. The banker should carefully go through the documents to check that the documents are of recent origin and they do not contain any onerous clauses.
4. The borrower should be asked to sign an agreement with the bank pledging the documents with the bank. The agreement should also authorise the bank to acquire the possession of goods and sell them, if necessary
5. The banker should inform the transporter regarding its interest in the goods and requiring it to deliver the goods only when a proper discharge receipt from the bank is also produced.
6. In case the consignee fails to take delivery of goods, the bank should take over the goods in its control, store them properly and later on dispose them according to the direction of the borrower.
Principal Documents of Title
The following are principal documents of title to the goods.
1. Bill or Lading. A bill of lading is .’a document in writing signed on behalf of the owner of the ship in which the goods are embarked, acknowledging the receipt of the goods, and undertaking to deliver them at the end of the voyage, subject to such conditions as may be mentioned in the bill of lading”. It serves three functions:
(a) It is an acknowledgement of the receipt of goods on the ship.
(b) It is a contract of carriage. It contains terms and conditions on which the carrier agrees to carry goods from one port to another.
(c) It is also a document of title and property in goods. It can be transferred by its mere delivery in case it is a bearer instrument and by endorsement and delivery if it is an order instrument. Under the Bill of Lading Act, 1856, the transferee or endorsee of a bin of lading acquires by such transfer, all the rights as to goods shipped that the transferor had and is also subject to the same liabilities as that of the transfer,
A bill of lading possesses certain characteristics of a negotiable instrument. It is (i) a document of title, (ii) freely transferable, and (ii,) its transferee can sue in his own name and give a valid discharge to the person liable. But the title of the transferee of a bill of lading will not be better than that of the transferor though he might have accepted it in god faith and for valuable consideration. On account of this limitation, it is considered to be a semi-negotiable instrument.
A bill of lading begins with the words “shipped in good order and condition” and the last words are “weight, value and the contents unknown”. When the goods are delivered to the master, he cancels either of them repenting upon the condition of the good received. In case goods are received by him in perfect condition, he cancels the words, “weight, value and contents unknown”. This is called a “clean bill of lading”. In such a case the captain is bound to deliver goods in the same condition as they were at the time of loading. If goods are received by him in a bad condition, he cancels the words, “shipped in good order and condition”. In such a case the bill of lading is called a “qualified bill of lading’ “. When goods are to be carried partly by sea and partly by land or partly in the ship of the ship- owner issuing the bill of lading and partly in the ship of another ship-owner for an inclusive freight, the bill of lading in such a case is called “through bill of lading”. In such a case also, the subsequent transporters are only the agents of the first ship-owner who continues to be liable to the consignee for any loss or damage to the goods in transit.
Bills of lading are generally prepared in sets of three. To avoid the risk of loss in transit one copy is sent by one mail, the second by the following mail and the third is kept by the shipper. The consignee can obtain delivery of good on the basis of any of these copies. In each copy a reference is made of the other two copies and the other copies become useless on taking delivery of goods on the basis of any of the three copies. The banker should take all the three copies in its possession while advancing money on the security of the bill of lading.
2. Warehouse Receipts:It is a receipt issued by a warehouse keeper certifying that the goods mentioned therein have been received by him for store- keeping. The Sale of Goods Act though includes a warehouse receipt in the definition of a document of title, its status depends on the respective state legislation where the warehouse is situated. For example Bombay Warehouse Rules provide for the issue of warehouse receipts both in negotiable and non- negotiable forms. A negotiable warehouse receipt can be transferred by endorsement and delivery while transfer of a non-negotiable warehouse receipt requires execution of a separate document. In any case, a warehouse receipt is not a negotiable instrument and therefore the title of the transferee (i.e the banker) will not be better than that of the transferor (i.e, borrower).
Precautions:The bank should take the following additional precautions, besides the usual precautions which it takes while advancing money against the security of documents of title:
(I) He should see whether the warehouse is a licensed or an W1licensed one. No money should be advanced against receipt issued by an unlicensed warehouse.
(ii) The intending borrower should be entitled to receive goods in his own name. It will be appropriate to have the following declarations signed by the borrower.
(a) The goods evidenced by the receipt are his absolute property.
(b) He will not take delivery of goods by furnishing indemnity bond without payment of bank’s loan.
(c) He will continue to pay all dues to the warehouse-keeper for his charges. ,
(iii) The banker should immediately intimate the warehouse-keeper about the lodgment of the warehouse receipt with it as security against a loan. The warehouse-keeper should also be instructed not to deliver goods to the depositor unless the warehouse receipt duly discharged by the banker is produced.
(iv) The goods evidenced by the receipt should be fully covered by insurance. The premium will be payable by the borrower and the policy may be taken jointly in the name of the borrower and the bank. Alternatively, the warehouse-keeper may take the policy. The banker must see that the premium is paid regularly.
(v) Proper margin must be kept.
3. Railway Receipt: A railway receipt is a document issued by the railway company acknowledging the receipt of the goods and undertaking to carry the goods delivered to a place mentioned therein. The terms and conditions of carriage. are generally printed on the back of the receipt. The advances are granted against the railway receipt for a very short period since the receipt is to be presented before the railway authorities at destination for obtaining delivery of goods. The consignor usually draws a bill of exchange on the consignee for the amount of the invoice. The railway receipt is attached with the bill of exchange and the banker grants advance by discounting such bill. The banker presents the bill for acceptance or payment (as per the terms of the bill) before the consignee and on his acceptance or payment. delivers him railway receipt. A railway receipt is a document of title but not a negotiable instrument A banker, therefore, should take the following additional precautions, besides taking the usual precautions, while advancing money against it:
(i) The banker should either be as a consignee of the railway receipt or it should be endorsed to him by the consignor as the original owner.
(ii) The goods evidenced by the railway receipt should be at railways risk’ and preferably they should be ‘freight paid.’
(iii) The banker should immediately inform the railway authorities of its interest in the goods and ask them to deliver the goods only when the railway receipt duly discharged by the banker is produced.
1 Application for credit
2 Accepted copy of sanction letter
3 D. P. note
4 Letter of Arrangement
5 Letter of continuity
6 Letter of lien.
7 Letter of assignment
8 Letter of guarantee from 3rd party (if any).
Stock exchange securities include securities in which dealings take place on the stock exchanges. They can be classified into three categories :
(i) Government securities:They include securities issued by the Central and the State Governments.
(ii) Semi-government securities. They include securities issued by semi-government institutions like Port Trusts, Improvement Trusts etc.
(iii) Corporate securities: They include securities issued by public limited companies. They may further be classified as (i) ownership securities consisting of equity and preference shares, and (ii) creditor-ship securities represented by debentures.
Shares and debentures of private limited companies are not suitable form of security for grant of bank advances on account of their being not quoted on a stock exchange, restrictive transferability and non-marketability.
Government and Semi-government securities (also known as gilt-edged securities) are the safest form of security on which the banks can advance money. Out of corporate securities the banks would prefer debentures in comparison to shares and preference shares in comparison to equity shares since debentures have a priority in payment over shares and preference shares have a priority in payment over equity shares. However, while investing their funds in or granting of loans against shares, the banks have to keep in mind the statutory restrictions placed by section 19(2) of the Banking Regulation Act, 1949. The section provides as follows : “No banking company shall hold shares in any company, whether as pledgee. mortgagee or absolute owner, of an amount exceeding 30% of the paid-up share capital of that company or 30% of its own paid-up share capital and reserves, whichever is less.
Merits or stock-exchange securities
In comparison to other form of securities, stock. exchange securities have the following merits :
(i) Reliability: The security being tangible, is better in comparison to personal guarantees given for payment of debts. Moreover, it is easier for the banker to verify the title of the borrower to these securities.
(ii) Liquidity:Stock exchange securities, particularly gilt-edged securities. are more easily realizable as compared to land, buildings, goods and similar other securities.
(iii) Price stability: Good stock exchange securities do not have much fluctuation in their prices. Hence, a banker can be more sure of recovering his If the need arises.
(iv) Easier valuation:Since the securities are quoted on the stock exchange, the banker can ascertain their value quite easily.
(v) Transferability:The ownership of the stock exchange securities can be easily transferred as compared to other partially negotiable securities such as land, buildings etc. Moreover, in time of need the banker may also obtain funds on the basis of these securities.
(vi) Regular recovery: The dividend or interest which is received from time to time on these securities can be used for recovery of interest due on the loan or repayment of the principal itself.