Q1. Changing Role of Banks in India?

The role of banks in India has changed a lot since economic reforms of 1991. These changes came due to LPG, i.e. liberalization, privatization and globalization policy being followed by GOI. Since then most traditional and outdated concepts, practices, procedures and methods of banking have changed significantly. Today, banks in India have become more customer-focused and service-oriented than they were before 1991. They now also give a lot of importance to their rural customers. They are even willing ready to help them and serve regularly the banking needs of country-side India The above-mentioned points indicate the role of banks in India is changing. Now let's discuss how banking in India is getting much better day after day.

1. Better Customer Service Before 1991, the overall service of banks in India was very poor. There were very long queues (lines) to receive payment for cheques and to deposit money. In those days, some bank staffs were very rude to their customers. However, all this changed remarkably after Indian economic reforms of 1991. Banks in India have now become very customer and service focus. Their service has become quick, efficient and customer-friendly. This positive change is mostly due to rising competition from new private banks and initiation of Ombudsman Scheme by RBI.

2. Mobile Banking Under mobile banking service, customers can easily carry out major banking transactions by simply using their cell phones or mobiles. Here, first a customer needs to activate this service by contacting his bank. Generally, bank officer asks the customer to fill a simple form to register (authorize) his mobile number. After registration, this service is activated, and the customer is provided with a username and password. Using secret credentials and registered phone, customer can now comfortably and securely, find his bank balance, transfer money from his account to another, ask for a cheque book, stop payment of a cheque, etc. Today, almost all banks in India provide a mobile-banking service.

3. Bank on Wheels The 'Bank on Wheels' scheme was introduced in the North-East Region of India. Under this scheme, banking services are made accessible to people staying in the farflung (remote) areas of India. This scheme is a generous attempt to serve banking needs of rural India.

4. Portfolio Management In portfolio management, banks do all the investments work of their clients. Banks invest their clients' money in shares, debentures, fixed deposits, etc. They first enter a contract with their clients and charge them a fee for this service. Then they have the full power to invest or disinvest their clients' money. However, they have to give safety and profit to their clients.

5. Issue of Electro-Magnetic Cards Banks in India have already started issuing Electro-Magnetic Cards to their customers. These cards help to carry out cash-less transactions, make an online purchase, avail ATM facility, book a railway ticket, etc. Banks issue many types of electro-magnetic cards, which are as follows: 1. Credit cards help customers to spend money (loaned up to a certain limit as previously settled by the bank) which they don't have in hand. They get a monthly statement of their purchases and withdrawals. Along with the transacted amount, this statement also includes the interest and service fee. The entire amount (as reflected in the statement of credit card) must be paid back to the bank either fully or in installments, but before due date. 2. Debit cards help customers to spend that money which they have saved (credited) in their individual bank accounts. They need not carry cash but instead can use a debit card to make a purchase (for shopping) and/or withdraw money (get cash) from an ATM. No interest is charged on the usage of debit cards. 3. Charge cards are used to spend money up to a certain limit for a month. At the end of the month, customer gets a statement. If he has a sufficient balance, then he only had to pay a small fee. However, if he doesn't have a necessary balance, he is given a grace period (which is generally of 25 to 50 days) to repay the money. 4. Smart cards are currently being used as an alternative to avail public transport services. In India, this covers Railways, State Transport and City (Local) Buses. Smart card has an integrated circuit (IC) embedded in its plastic body. It is made as per norms specified by ISO.

5. Kisan credit cards are used for the benefit of the rural population of India. The Indian farmers (kisans) can use this card to buy agricultural inputs and goods for self-consumption. These cards are issued by both Commercial and Co-operative banks. 6. Universal Banking In India, the concept of universal banking has gained recognition after year 2000. The customers can get all banking and non-banking services under one roof. Universal bank is like a super store. It offers a wide range of services, including banking and other financial services like insurance, merchant banking, etc.

7. Automated Teller Machine (ATM) There are many advantages of ATM. As a result, many banks have opened up ATM centres to offer convenience to their customers. Now banks are operating ATM centres not only in their branches but also at public places like airports, railway stations, hotels, etc. Some banks have joined together and agreed upon to set up common ATM centres all over India.

8. Internet Banking Internet banking is also called as an E-banking or net banking. Here, the customer can do banking transactions through the medium of the internet or World Wide Web (WWW). The customer need not visit the bank's branch. Through this facility, the customer can easily inquiry about bank balance, transfer funds, request for a cheque book, etc. Most large banks offer this service to their tech-savvy customers. 9. Encouragement to Bank Amalgamation Failure of banks is well-protected with the facility of amalgamation. So depositors need not worry about their deposits. When weaker banks are absorbed by stronger banks, it is called amalgamation of banks. 10. Encouragement to Personal Loans Today, the purchasing power of Indian consumers has increased dramatically because banks give them easy personal loans. Generally, interest charged by the banks on such loans is very high. Interest is calculated on reducing balance. Large banks offer loans up to a huge amount like one crore. Some banks even organise

Loan Mela (Fair) where a loan is sanctioned on the spot to deserving candidates after they submit proper documents.

11. Marketing of Mutual Funds A mutual fund collects money from many investors and invests the money in shares, bonds, short-term money market instruments, gold assets; etc. Mutual funds earn income by interest and dividend or both from its investments. It pays a dividend to subscribers. The rate of dividend fluctuates with the income on mutual fund investments. Now banks have started selling these funds in their own names. These funds are not insured like other bank deposits. There are different types of funds such as open-ended funds, closed-ended funds, growth funds, balanced funds, income funds, etc.

12. Social Banking The government uses the banking system to alleviate poverty and unemployment. Many social development programmes are initiated by the banks from time to time. The success of these programmes depends on financial support provided by the banks. Banks supply a lot of finance to farmers, artisans, scheduled castes (SC) and scheduled tribe (ST) families, unemployed youth and people living below the poverty line (BPL).

Q.2: Explain the measures taken during the first phase of banking sector reforms in India OR Explain the recommendations of Narasimham Committee report of 1991 and the measures adopted by Government to implement them. OR Write note on first phase of banking sector reforms. Ans. A) BANKING SECTOR REFORMS :Since nationalisation of banks in 1969, the banking sector had been dominated by the public sector. There was financial repression, role of technology was limited, no risk management etc. This resulted in low profitability and poor asset quality. The country was caught in deep economic crises. The Government decided to introduce comprehensive economic reforms. Banking sector reforms were part of this package. In august 1991, the Government appointed a committee on financial system under the chairmanship of M. Narasimhan. B) FIRST PHASE OF BANKING SECTOR REFORMS / NARASIMHAN COMMITTEE REPORT 1991:To promote healthy development of financial sector, the Narasimhan committee made recommendations. I) RECOMMENDATIONS OF NARASIMHAN COMMITTEE :1. Establishment of 4 tier hierarchy for banking structure with 3 to 4 large banks (including SBI) at top and at bottom rural banks engaged in agricultural activities. 2. The supervisory functions over banks and financial institutions can be assigned to a quasi-autonomous body sponsored by RBI. 3. Phased reduction in statutory liquidity ratio. 4. Phased achievement of 8% capital adequacy ratio. 5. Abolition of branch licensing policy. 6. Proper classification of assets and full disclosure of accounts of banks and financial institutions. 7. Deregulation of Interest rates. 8. Delegation of direct lending activity of IDBI to a separate corporate body. 9. Competition among financial institutions on participating approach. 10. Setting up asset Reconstruction fund to take over a portion of loan portfolio of banks whose recovery has become difficult. II) Banking Reform Measures Of Government :On the recommendations of Narasimhan Committee, following measures were undertaken by government since 1991:-

1. Lowering SLR and CRR The high SLR and CRR reduced the profits of the banks. The SLR has been reduced from 38.5% in 1991 to 25% in 1997. This has left more funds with banks for allocation to agriculture, industry, trade etc. The Cash Reserve Ratio (CRR) is the cash ratio of banks total deposits to be maintained with RBI. The CRR has been brought down from 15% in 1991 to 4.1% in June 2003. The purpose is to release the funds locked up with RBI. 2. Prudential Norms :Prudential norms have been started by RBI in order to impart professionalism in commercial banks. The purpose of prudential norms include proper disclosure of income, classification of assets and provision for Bad debts so as to ensure that the books of commercial banks reflect the accurate and correct picture of financial position. Prudential norms required banks to make 100% provision for all Nonperforming Assets (NPAs). Funding for this purpose was placed at Rs. 10,000 crores phased over 2 years. 3. Capital Adequacy Norms (CAN) :Capital Adequacy ratio is the ratio of minimum capital to risk asset ratio. In April 1992 RBI fixed CAN at 8%. By March 1996, all public sector banks had attained the ratio of 8%. It was also attained by foreign banks. 4. Deregulation Of Interest Rates:The Narasimhan Committee advocated that interest rates should be allowed to be determined by market forces. Since 1992, interest rates has become much simpler and freer. a) Scheduled Commercial banks have now the freedom to set interest rates on their deposits subject to minimum floor rates and maximum ceiling rates. b) Interest rate on domestic term deposits has been decontrolled. c) The prime lending rate of SBI and other banks on general advances of over Rs. 2 lakhs has been reduced. d) Rate of Interest on bank loans above Rs. 2 lakhs has been fully decontrolled. e) The interest rates on deposits and advances of all Co-operative banks have been deregulated subject to a minimum lending rate of 13%. 5. Recovery Of Debts:The Government of India passed the Recovery of debts due to Banks and Financial Institutions Act 1993 in order to facilitate and speed up the recovery of debts due to banks and financial institutions. Six Special Recovery Tribunals have been set up. An Appellate Tribunal has also been set up in Mumbai.

6. Competition From New Private Sector Banks:Now banking is open to private sector. New private sector banks have already started functioning. These new private sector banks are allowed to raise capital contribution from foreign institutional investors up to 20% and from NRIs up to 40%. This has led to increased competition. 7. Phasing Out Of Directed Credit:The committee suggested phasing out of the directed credit programme. It suggested that credit target for priority sector should be reduced to 10% from 40%. It would not be easy for government as farmers, small industrialists and transporters have powerful lobbies. 8. Access To Capital Market:The Banking Companies (Acquisation and Transfer of Undertakings) Act was amended to enable the banks to raise capital through public issues. This is subject to provision that the holding of Central Government would not fall below 51% of paid-up-capital. SBI has already raised substantial amount of funds through equity and bonds. 9. Freedom Of Operation:Scheduled Commercial Banks are given freedom to open new branches and upgrade extension counters, after attaining capital adequacy ratio and prudental accounting norms. The banks are also permitted to close non-viable branches other than in rural areas. 10. Local Area banks (LABs):In 1996, RBI issued guidelines for setting up of Local Area Banks and it gave Its approval for setting up of 7 LABs in private sector. LABs will help in mobilizing rural savings and in channeling them in to investment in local areas. 11. Supervision Of Commercial Banks:The RBI has set up a Board of financial Supervision with an advisory Council to strengthen the supervision of banks and financial institutions. In 1993, RBI established a new department known as Department of Supervision as an independent unit for supervision of commercial banks.

Q.3: Discuss the recommendations of Narasimhan Committee Report of 1988 on banking sector reforms. OR Write note on Narasimhan Committee Report of 1998. OR Discuss the measures taken during the second phase of banking sector reforms in India. Ans. A) SECOND PHASE OF REFORMS OF BANKING SECTOR (1998) / NARASIMHAN COMMITTEE REPORT 1988 :To make banking sector stronger the government appointed Committee on banking sector Reforms under the Chairmanship of M. Narasimhan. It submitted its report in April 1998. The Committee placed greater importance on structural measures and improvement in standards of disclosure and levels of transparency. Following are the recommendations of Narasimhan Committee:1) Committee suggested a strong banking system especially in the context of capital Account Convertibility (CAC). The committee cautioned the merger of strong banks with weak ones as this may have negative effect on stronger banks. 2) It suggested that 2 or 3 large banks should be given international orientation and global character. 3) There should be 8 to10 national banks and large number of local banks. 4) It suggested new and higher norms for capital adequacy. 5) To take over the bad debts of banks committee suggested setting up of Asset Reconstruction Fund. 6) A board for Financial Regulation and supervision (BFRS) can be set up to supervise the activities of banks and financial institutions. 7) There is urgent need to review and amend the provisions of RBI Act, Banking Regulation Act, etc. to bring them in line with current needs of industry. 8) Net Non-performing Assets for all banks was to be brought down to 3% by 2002. 9) Rationalization of bank branches and staff was emphasized. Licensing policy for new private banks can be continued. 10) Foreign banks may be allowed to set up subsidiaries and joint ventures. On the recommendations of committee following reforms have been taken:1. New Areas :New areas for bank financing have been opened up, such as :- Insurance, credit cards, asset management, leasing, gold banking, investment banking etc. 2. New Instruments :For greater flexibility and better risk management new instruments have been introduced such as:- Interest rate swaps, cross currency forward contracts,

forward rate agreements, liquidity adjustment facility for meeting day-to-day liquidity mismatch. 3. Risk Management:Banks have started specialized committees to measure and monitor various risks. They are regularly upgrading their skills and systems. 4. Strengthening Technology :For payment and settlement system technology infrastructure has been strengthened with electronic funds transfer, centralized fund management system, etc. 5. Increase Inflow Of Credit :Measures are taken to increase the flow of credit to priority sector through focus on Micro Credit and Self Help Groups. 6. Increase in FDI Limit :In private banks the limit for FDI has been increased from 49% to 74%. 7. Universal banking:Universal banking refers to combination of commercial banking and investment banking. For evolution of universal banking guidelines have been given. 8. Adoption Of Global Standards :RBI has introduced Risk Based Supervision of banks. Best international practices in accounting systems, corporate governance, payment and settlement systems etc. are being adopted. 9. Information Technology :Banks have introduced online banking, E-banking, internet banking, telephone banking etc. Measures have been taken facilitate delivery of banking services through electronic channels. 10. Management Of NPAs:RBI and central government have taken measures for management of non-performing assets (NPAs), such as corporate Debt Restructuring (CDR), Debt Recovery Tribunals (DRTs) and Lok Adalts. 11. Mergers And Amalgamation :In May 2005, RBI has issued guidelines for merger and Amalgamation of private sector banks.

12. Guidelines For Anti-Money Laundering:In recent times, prevention of money laundering has been given importance in international financial relationships. In 2004, RBI revised the guidelines on know your customer (KYC) principles. 13. Managerial Autonomy:In February 2005, the Government of India has issued a managerial autonomy package for public sector banks to provide them a level playing field with private sector banks in India. 14. Customer Service:In recent years, to improve customer service, RBI has taken many steps such as Credit Card Facilities, banking ombudsman, settlement off claims of deceased depositors etc. 15. Base Rate System of Interest Rates:In 2003 the system of Benchmark Prime Lending Rate (BPLR) was introduced to serve as a benchmark rate for banks pricing of their loan products so as to ensure that it truly reflected the actual cost. RBI introduced the system of Base Rate since 1st July, 2010. The base rate is the minimum rate for all loans. For banking system as a whole, the base rates were in the range of 5.50% - 9.00% as on 13th October, 2010.

3. Causes of NPA?
Ans. Non-Performing Assets (NPA) - Meaning Non-Performing Assets are popularly known as NPA. Commercial Banks assets are of various types. All those assets which generate periodical income are called as Performing Assets (PA). While all those assets which do not generate periodical income are called as Non-Performing Assets (NPA). If the customers do not repay principal amount and interest for a certain period of time then such loans become non-performing assets (NPA). Thus nonperforming assets are basically non-performing loans. In India, the time frame given for classifying the asset as NPA is 180 days as compared to 45 days to 90 days of international norms. India and Non-Performing Assets In India, NPA were very high in the beginning of 90's. Over a period of time there is considerable decline in the NPA's of all banks. In the case of public sector banks, gross non-performing assets were 9.4% in 2002-03 and it declined to 7.8% in 2003-04. The net NPA during the same period declined from 4.5% to 3%. Types of NPA NPA have been divided or classified into following four types:1. Standard Assets: A standard asset is a performing asset. Standard assets generate continuous income and repayments as and when they fall due. Such assets carry a normal risk and are not NPA in the real sense. So, no special provisions are required for Standard Assets. 2. Sub-Standard Assets: All those assets (loans and advances) which are considered as non-performing for a period of 12 months are called as SubStandard assets. 3. Doubtful Assets: All those assets which are considered as non-performing for period of more than 12 months are called as Doubtful Assets. 4. Loss Assets: All those assets which cannot be recovered are called as Loss Assets. These assets can be identified by the Central Bank or by the Auditors.

Causes of NPA
NPA arises due to a number of factors or causes like:1. Speculation: Investing in high risk assets to earn high income. 2. Default: Willful default by the borrowers. 3. Fraudulent practices: Fraudulent Practices like advancing loans to ineligible persons, advances without security or references, etc. 4. Diversion of funds: Most of the funds are diverted for unnecessary expansion and diversion of business. 5. Internal reasons: Many internal reasons like inefficient management, inappropriate technology, labour problems, marketing failure, etc. resulting in poor performance of the companies. 6. External reason: External reasons like a recession in the economy, infrastructural problems, price rise, delay in release of sanctioned limits by banks, delays in settlements of payments by government, natural calamities, etc. 7. Family run business: A problem more in Indian business where families run businesses with the management vested in the family members. Although sufficient measures are taken by the lenders for financial audit, absence of management audit restricts introduction of professionalism and thus collapse in business houses.

Q4. Debt Restructuring: Types and Methods?

Meaning
Debt restructuring refers to the reallocation of resources or change in the terms of loan extension to enable the debtor to pay back the loan to his or her creditor. Debt restructuring is an adjustment made by both the debtor and the creditor to smooth out temporary difficulties in the way of loan repayment. Debt restructuring is of two types, and there are many ways to carry out the restructuring process.

Debt Restructuring: Types

Debt restructuring is of two kinds, depending on the terms and the cost to the debtor.

1) General Debt Restructuring

Under the terms of general debt restructuring, the creditor incurs no losses from the process. This happens when the creditor decides to extend the loan period, or lowers the interest rate, to enable the debtor to tide over temporary financial difficulty and pay the debt later.

2) Troubled Debt Restructuring

Troubled debt restructuring refers to the process where the creditor incurs losses in the process. This happens when the Debt Restructuring leads to reduction in the accrued interest, or due to the dip in the value of the collateral, or through conversions to equity.

How to Plan Debt Restructuring:

1) The crediting company should prepare a roadmap for the debt restructuring process. The strategy should include the expected time to be taken to recover the debts, the terms of loan repayment, and watching the financial performance of the debtor. 2) The decision of the financial institution regarding Debt Restructuring depends on whether the debtor has invested in the company, holds shares with the company, or is a subsidiary of the company.

3) If there is conflict within the company's board of directors regarding the process, then it is advisable to ask for help from a third party. However, third party mediation is not needed if the debtor is a subsidiary of the company. 4) Making a cash flow projection is also important to the Debt Restructuring process. It is advisable not to include uncertain cash flow estimates in the plan. 5) The debtor's financial situation should also be considered while making a Debt Restructuring plan. The debtor's ability to repay the loan depends on his or her financial management, so the financial company needs to look into the debtor's roadmap for repaying the loan. If the debtor is another company, then changing the key people associated with it, like the director, board of directors or chairperson might help.

Q5. Types of risks faced by banks?

Ans: Commercial banks are among the major financial intermediaries in the marketplace. As a result of this role, commercial banks are exposed to the risks that affect both the securities markets and the economic conditions that affect consumers. To understand the risks associated with commercial banks, it is helpful to consider some key areas that affect banking operations.

Types of risks 1. Credit Risk

It is the potential that a borrower fails to meet the commitment on agreed terms. There is always possibility of the borrower to default from his commitments for one or the other reason. This risk is intrinsic to the business of lending funds to the operations linked closely to market risk variables. The objective of credit risk management is to minimize the risk and maximize banks risk adjusted rate of return by assuming and maintaining credit exposure within the adequate parameters. Credit risk consists of primarily two components:

Quantity of risk Outstanding loan balance as on the date of default, and Quality of risk The severity of loss defined by Probability of Default as reduced by the recoveries that could be made in the event of default

2. Market Risk It can be defined as the possibility of loss to bank caused by the changes in the market variables. In other words market risk is the risk of adverse changes in the value of on-/off-balance sheet positions caused by movements in equity and interest rate markets, currency exchange rates and commodity prices. Market Risk Management provides a complete and dynamic frame work for measuring, monitoring and managing liquidity, interest rate, foreign exchange and equity as well as commodity price risk of a bank which needs to be closely integrated with the banks business strategy.

3. Liquidity Risk Generally, bank deposits have a much shorter contractual maturity than loans and thus liquidity management needs to provide a cushion to cover anticipated deposit withdrawals. The cash flows are placed in different time

intervals based on future likely behavior of assets, liabilities and off-balance sheet items. Liquidity risk consists of Funding Risk, Time Risk & Call Risk.

Funding Risk: It is the necessity to replace net out flows owing to unanticipated withdrawal of deposit Time risk: It is the need to reimburse for non-receipt of expected inflows of funds, i.e. performing assets turning into nonperforming assets. Call risk: It happens on account of crystallization of contingent liabilities and inability to undertake profitable business opportunities when desired.

4. Interest Rate Risk Interest Rate Risk is the possible adverse impact on the Net Interest Income It refers to the exposure of an institutions financial condition to the movement in interest rates. Any fluctuations in interest rate affect earnings, value of assets, liability off-balance sheet items and cash flow. Therefore, the purpose of interest rate risk management is to maintain earnings, improve the ability, capability to absorb potential loss and to ensure the sufficiency of the compensation received for the risk taken and affect risk return trade-off. Interest rate management risk intends to capture the risks arising from mismatches in the maturity and re-pricing and is calculated both from the earnings and economic value perspective. Income perspective involves evaluating the impact of changes in interest rates on reported earnings in the near term. 5. Forex Risk It is the risk that a bank may face loss due to adverse exchange rate movement during a period in which it has an open position, either spot or forward or both in same foreign currency. Even though spot or forward positions in individual currencies are balanced, the maturity pattern of forward transactions may produce mismatches. There is also a settlement risk arising out of default of the counter party as well as out of time lag in settlement of one currency in one center and the settlement of another currency in another time zone. Interest rate risk can also expose banks due to maturity mismatch of foreign currency position. 6. Country Risk Country arises because of cross border transactions which are growing dramatically in the recent years due to economic liberalization and

globalization. It is the risk that a country will not be able to repay debts to foreign lenders in time. It includes following sub-risks:

Transfer Risk Arising on account of possibility of losses due to restrictions on external remittances. Sovereign Risk Associated with lending to government of a sovereign nation or taking government guarantees. Political Risk When political environment or legislative process of country leads to government taking over the assets of the financial entity and preventing discharge of liabilities in a manner that had been agreed to earlier. Cross border Risk Arising on account of the borrower being a resident of a country other than the country where the cross border asset is booked. Currency Risk A possibility that exchange rate change, will alter the expected amount of principal and return on the lending or investment.

Q6. Modes of creating Charges? Ans: Loans and Mortgages

The Banking Regulation Act defines banking as accepting for the purpose of lending or investment of deposits of money from the public Thus, lending of funds constitutes the main business of banking. It is a major source of revenue to banks in the form of interest income. All the same, the business of lending is not free from risk. Therefore, banks usually follow certain basic principles such as safety, liquidity and profitability. Lending is mainly in the form of loans or advances. All loans are contractual agreements between the bank and the borrower. The contract states the purpose of the loan, the period for which it is extended, terms of repayment, the rate of interest charged and security required. Types of credit Credit extended by banks can take any of the following forms:

Overdraft Cash credit Term loans Purchase and discounting of bills

Security offered for loans Loans can be lent against some security or can be unsecured. Unsecured advances: Loans given without any tangible asset as security are categorised under unsecured loans. However, unsecured loan can have the personal liability of the individual or the borrower himself. Secured advances: Secured advances are those under which loans are lent against the charge created on the tangible asset. The security can be primary and collateral. Primary security is an asset against which the loan is given; while, collateral security is an additional security over primary security.

Modes of creating charge are:

1. Pledge: Under pledge, the lender (pledge) takes possession of the goods or security for extending the credit to the borrower or (pledger) owner of the security. The banker (pledgee) can retain the goods pledged till the repayment of the debt. In case of default, the banker has the right to sell the goods to make good the loss. Lien: Section 171 of the Indian Contracts Act confers the right of general lien to banks. The banker is empowered to retain all forms of securities of the customer, given in the ordinary course of business. In lien there is no transfer of ownership; the banker has the right to sell the securities to adjust the debt obligation of the borrower if required Hypothecation: In hypothecation, the banker is neither vested with ownership rights nor is he allowed to take possession of goods. However, an equitable charge is created in favour of the banker. Hypothecation is very convenient where the transfer of possession of assets is either inconvenient or impossible. Eg. a floating charge is created on raw material or goods in process, so that the borrower can carry on his normal business i.e. use the raw material and goods in process to convert into finished goods. Though hypothecation is an extended form of pledge, unlike pledge, it is not defined under law. It is closely linked with the floating charge. Assignment: It is another mode of providing security against borrowing. Under assignment, the borrower usually assigns the actionable claims, as defined under section 3 of the Transfer Of Property Act, to the banker. Assignment is the charge created on the book of debts, life insurance policies, receivables, etc. Eg. a bank can finance against the book debts. In such a case, the borrower assigns the book debts to the bank. Mortgage: When the security offered is immovable property, the charge created on such security is by means of mortgage. Under mortgage, the borrower (the mortgagor) transfers the interest and rights on the mortgaged property to the bank (the mortgagee). The principal money and the interest thereon, which is secured by the mortgage, is known as mortgage-money.

2.

3.

4.

5.

Mortgage is classified into different categories, each defining different rights and liabilities. The most commonly used ones are simple mortgage and equitable mortgage.