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Industrial
organizations have to invest a large sum of money to build stocks of raw material
to up keep their manufacturing line. This is apt to create liquidity constraints
in the Financial Balance Sheet of the customer. To manage such financial gaps/shortfall
in their cash flow they usually resort to borrowings from Banks against Hypothecation
of raw material/semi or finished goods held by them in their stocks.
Banks in such cases although do not have a physical custody of the goods, however
have a legal Charge/Lien established, thereon, providing a legal recourse to the
Bank to take custody of the stocks, in the event the borrowers default to repay
the loan or fail to meet their obligations, as agreed. Criteria to merit this facility
is provided in the Banks Credit Policy Manual, which is care fully assessed by Risk
Managers, while recommending a credit proposal to credit committee.
Some of the basic requirements are as follows which are included for general understanding
of the Processing Officers at Branches/CAD:-
- It shall be ensured that the borrowers
have absolute title to the goods and the same are not encumbered or previously hypothecated
to any other Bank.
- Formal charge (First/Second/Pari
Passu) is created in the name of the Bank.
- Goods offered are not perishable,
or have short expiry period and do not warrant special storing.
- Stocks offered for hypothecation
are easily marketable and its price is not highly fluctuating, otherwise the Bank
retains higher margin.
- Stocks under hypothecation are
not restricted by SBP/Government as a policy to maintain market supply.
POLICY
Advances against hypothecation of goods is subject to the
policies as applicable to other loans, and as spelled out in the Credit Policy Manual
with the exceptions given below:-
Stock Reports, duly signed by borrowers, are received periodically at a frequency
as spelled out in the DAC/Credit Proposal etc.
Limits are adjusted by CAD in the system in accordance with the Drawing Power worked
out each time a stock reports is received and value of stocks reassessed by applying
latest Pricing Index.
Negative Variance between the net value of stocks (i.e, market value less margin)
and the outstanding advance shall be reported to the relationship/Risk Manger, who
shall advise the borrowers to cover the shortfall by additional stocks or adjust
the facility accordingly.
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