Negative Pledge

This is a form of security usually given by blue chip companies. There is no formal charge over company's assets, but rather a written undertaking by the borrowing company that it will not charge any of its assets to any other lender without the bank's consent.

Advantages of Negative pledge to the bank

i.  It can be easily taken
ii.  It is not expensive to perfect.
iii. If the borrower's external financing         is much lower than the worth of its         assets, the risk is reduced since there       will be enough for all the creditors.
iv. The higher the repayments, the                 lower the lender's risk.
v. If the terms and conditions of the              security are complied with, the                  borrower's penchant to borrow and        pick up debts is reduced.
vi. The higher the borrower's hidden              /secret reserve, the stronger the                security.

Disadvantages/risks to the bank

i.  It is a weak security.
ii. The security does not attach any                specific assets.
iii. In the event of the borrower's                   liquidation, the unattached assets             could be seized and disposed off by         the liquidator.
iv. In effect of winding up of the                     company, the bank can only prove           as an unsecured creditor.
v. If the company's unattached assets         are insufficient to cover it's liabilities,     the bank might be unable to recover       its total exposure.
vi. Any legal charge subsequently                  created by the borrower in regard to      the existing negative pledge takes            precedence over the bank's security.

Security For Bank Advances/Lending

                           

A security is an interest or a right in property given to the creditor to convert it into cash in case the debtor fails to meet the principal and interest on loan . It is an insurance against unforeseen development and the last avenue through which the bank can get its money recouped should things turn sour. It provides bankers with succour if every other things fails. Apparently, good security does not guarantee that loans will not be bad and neither does its absence impair the chance of success of the investment.

Bankers hold various kinds of securities as a cover of advances to their customers. The securities offered to the banks vary in rating.Securities which can be converted into cash without loss of value are ranked higher than that whose value fluctuate widely and tends to become frozen under adverse economic conditions . The main types of security offered against the loans are stocks and shares, title deeds, life policies, bills of exchange, bills of sale, and promissory notes. The banks also sometimes extend credit to their trusted customers on their personal securities or on the guarantees of responsible parties. The guiding principles of accepting securities are that they should be adequate, stable easily realizable e. t. c

Virtues of a good banking security

A good banking securities therefore must have the following essential attributes, viz,

1. Sufficiency
A good security must be adequate to cover the bank's entire exposure. To be on a safer side, the value of the pledge security should be 100% or more of the loan seek.

2. Objective and Stable value
A good banking security must be capable of being valued in a relatively objective rather than sentimental way. And apart from this,  its value must not be volatile but stable in the market.

3. Easily realizable
This attribute has to do with high marketability of the security. This implies that the pledged assets must be in high demand and easy to be sold off without loss in value.

4. Ease of assignment
The security must be capable of having its title legally passed to the bank with little problem. It must also be easy for the bank to re-transfer it back to the customer on liquidation of the debt.

5. Not Onerous
The security must not pose undue liabilities or inconvenience on the bank. For example, a basket of tomatoes.

6. Prime Asset
At best, security must be the borrower's prime asset  i. e an asset that the borrower hold in high esteem and would not like to lose. Borrowers normally have psychological attachment to their prime assets hence they will have the urge to liquidate their debt and take back the asset.

7. Legal binding
The security must be legally water tight so as to make it legally binding and enforceable.

8.Good Title
A good security must have unquestionable title. Registered land without encroachment and encumbrances obviously have good title.