Hypothecation of Stocks
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.
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.