Banker’s Duty of Secrecy – Meaning, Scope, and Exceptions

1. What is Banker’s Duty of Secrecy?

The Banker’s Duty of Secrecy refers to the obligation of a bank to keep the financial and personal
information of its customers confidential.
This duty is a legal and ethical requirement imposed on banks to protect the privacy of their
customers’ accounts and transactions.

Legal Basis in India:

 Section 5(b) of the Banking Regulation Act, 1949 defines banking as accepting deposits and
safeguarding customer interests.

 Section 13 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
emphasizes that banks should not disclose customer information without valid reasons.

 Common Law Principles (based on English Law) also recognize this duty as part of the banker-
customer relationship.

2. Scope of Duty of Secrecy

The duty applies to all types of customer information, such as:

Type of Information Examples

Account Details Account number, balance, type of account

Transactions Deposits, withdrawals, fund transfers, loans

Loan and Credit Details Loan amount, repayment history, creditworthiness

Personal Information Name, address, PAN, Aadhaar, contact details

Investment Details Fixed deposits, securities, mutual funds

3. Bank’s Obligation Under Duty of Secrecy

Obligation Description

Non-Disclosure Bank should not disclose any customer information without proper consent or
Obligation Description

lawful reason.

Customer records and data must be securely stored to prevent unauthorized

Secure Storage
access.

Proper
Employees can access customer data only for official purposes.
Authorization

Staff Training Bank employees should be trained on privacy policies and legal obligations.

4. Exceptions to Banker’s Duty of Secrecy

A banker can disclose customer information in certain circumstances. These exceptions are recognized
under Common Law and Indian Banking Regulations:

Exception Description

Under Customer’s Consent When the customer authorizes the bank in writing to disclose information.

Under Legal Requirement When banks are directed by a court, tribunal, or law enforcement
(Court Order) authority.

When disclosure is necessary to prevent a crime, fraud, or protect the

Public Duty
public interest.

When required by government authorities like Income Tax Department,

Statutory Obligation
RBI, or other regulators (e.g., Income Tax Act, 1961).

When disclosure is necessary to protect the bank’s interests (e.g., legal

Bank’s Own Interest
action for loan recovery).

Disclosure to credit rating agencies like CIBIL, as per RBI regulations, to

Credit Information Sharing
assess the creditworthiness of a borrower.

Anti-Money Laundering Reporting suspicious transactions under the Prevention of Money

(AML) Laws Laundering Act (PMLA), 2002.

5. Consequences of Breach of Duty of Secrecy

Consequence Details

Loss of Reputation Customer trust in the bank is damaged.

Legal Action Customer can file a legal case for breach of confidentiality.

Penalty by Regulators RBI or other authorities may impose fines on the bank.

Financial Bank may have to compensate the customer for any financial loss due to data
Compensation disclosure.

6. Importance of Duty of Secrecy

Importance Explanation

Protects Customer Privacy Prevents unauthorized access to sensitive financial data.

Builds Trust Maintains customers' confidence in the banking system.

Reduces Financial Risks Prevents misuse of information by fraudsters.

Ensures Compliance Helps banks adhere to legal and regulatory requirements.

7. Conclusion

The Banker’s Duty of Secrecy is a fundamental responsibility of banks to safeguard the financial and
personal information of their customers.
While the duty is not absolute, banks can disclose information under specific exceptions such as legal
requirements, public interest, or with customer consent.
Maintaining confidentiality is crucial to ensure trust and security in the banking sector.

Advances Secured by Collateral Securities – Meaning, Types, and Importance

1. What are Advances Secured by Collateral Securities?

Advances secured by collateral securities refer to loans or credit facilities granted by banks against the
security of an asset or property provided by the borrower.
If the borrower fails to repay the loan, the bank can sell the collateral security to recover the
outstanding dues.

Key Points:

 Collateral Security = Asset pledged as security for a loan.

 Purpose: To reduce the bank’s risk in case of default.

 Examples of Collateral: Land, buildings, gold, stocks, bonds, fixed deposits, vehicles, etc.

2. Types of Collateral Securities

Type of Collateral
Description
Security

Movable Property Assets that can be moved, such as goods, vehicles, machinery, stock, gold, etc.

Immovable Property Fixed assets like land, buildings, and factories – Mortgaged to the bank.

Shares, bonds, mutual funds, fixed deposits, insurance policies – Pledged to the
Financial Securities
bank.

Gold Ornaments Gold jewelry and bullion as collateral.

Receivables (Book
Future payments expected from customers – Common in business loans.
Debts)

Third-party guarantee or corporate guarantee – Though not a physical asset, it

Guarantees
serves as security.

3. Forms of Secured Advances Based on Collateral

Type of Loan Collateral Type Nature of Security

Mortgage Loan Immovable Property (Land/Building) Immovable security

Hypothecation Loan Movable Assets (Stock, Vehicles, Movable security

Type of Loan Collateral Type Nature of Security

Machinery)

Pledge Loan Gold, Goods, Shares Movable security

Bank holds the right to retain the

Lien-based Loan Fixed Deposit, Insurance Policy
security

Assignment Loan Life Insurance Policy, Receivables Rights over future payments

4. Characteristics of Advances Secured by Collateral

Characteristic Explanation

Reduced Risk for the

Collateral reduces the risk of default; bank can sell it to recover dues.
Bank

Lower Interest Rates Secured loans generally have lower interest rates compared to unsecured loans.

Legal Documentation Proper legal documentation and valuation of collateral are essential.

Banks do not finance the full value of collateral; a margin (e.g., 20-30%) is
Margin Requirement
maintained to cover price fluctuations.

5. Advantages of Collateral Security

Advantages to Bank Advantages to Borrower

Reduced Default Risk Easier Loan Approval – Better chances of getting a loan.

Faster Recovery Lower Interest Rates due to lower risk.

Confidence in Lending Higher Loan Amounts – Collateral increases borrowing capacity.

6. Risks and Disadvantages

Risks to Bank Risks to Borrower

Value Depreciation Loss of Asset if the borrower defaults.

Legal Complications Legal Disputes if the bank sells collateral unfairly.

Risks to Bank Risks to Borrower

Fraudulent Securities Overvaluation of Collateral – Borrowers may inflate the asset value.

7. Process of Granting Secured Advances

Step Description

Loan Application Borrower submits the loan application with collateral details.

Collateral Valuation Bank evaluates the market value and liquidity of the collateral.

Legal documents like mortgage deed, pledge agreement, or hypothecation deed

Documentation
are executed.

Sanctioning Loan Based on valuation and assessment, the bank sanctions the loan.

Bank creates a legal charge over the collateral (mortgage, pledge, or

Creation of Charge
hypothecation).

Loan Disbursement After securing the collateral, the bank disburses the loan amount.

Monitoring and Bank monitors the performance of the loan and initiates recovery if the
Recovery borrower defaults.

8. Legal Provisions Related to Collateral Security in India

Law/Act Key Provisions

Empowers banks to recover loans by selling mortgaged properties without

SARFAESI Act, 2002
court intervention.

Transfer of Property Act, Defines mortgages and rights of the lender and borrower over immovable
1882 property.

Indian Contract Act, 1872 Governs pledge, hypothecation, and lien agreements.

9. Conclusion
Advances secured by collateral securities are a popular form of lending in banking due to their lower
risk and enhanced security for banks.
They benefit both the lender and the borrower, but require proper evaluation, legal documentation,
and monitoring to avoid potential risks.

Key Takeaway:

Collateral-backed loans help banks reduce lending risks while providing borrowers with better access
to credit and lower interest rates.

Letter of Credit (LC) – Meaning, Types, Process, and Importance

1. What is a Letter of Credit?

A Letter of Credit (LC) is a financial document issued by a bank on behalf of a buyer (importer)
guaranteeing that the seller (exporter) will receive payment for goods or services, provided certain
conditions mentioned in the LC are met.

 It is a payment guarantee instrument primarily used in international trade.

 The bank assures the seller (beneficiary) that they will receive payment, even if the buyer
defaults, as long as the terms and conditions of the LC are fulfilled.

Key Parties Involved:

Party Role

Applicant (Buyer) Importer or buyer who requests the LC from their bank.

Issuing Bank The bank that issues the LC on behalf of the buyer.

Beneficiary (Seller) Exporter or seller who will receive payment upon meeting LC conditions.

The bank in the seller’s country that notifies the seller about the LC and authenticates
Advising Bank
it.

Confirming Bank A bank that guarantees payment along with the issuing bank (optional in some LCs).

Bank that negotiates and processes the payment based on shipping and other
Negotiating Bank
documents.

2. Features of a Letter of Credit

Feature Description

Guarantee of Payment Bank guarantees payment to the seller if the conditions are met.

Payment is made only when the seller provides the required documents like
Conditional Payment
bill of lading, invoice, etc.

It is based on the presentation of shipping and trade documents, not physical

Documentary Credit
goods.

Bank as Intermediary Bank acts as an intermediary between buyer and seller, ensuring mutual trust.

Used in International Reduces risk in international transactions where the parties may not know each
Trade other well.

3. Types of Letter of Credit

Type Description

Can be modified or canceled by the issuing bank without the consent of the
Revocable LC
seller (rarely used).

Irrevocable LC Cannot be altered or canceled without the consent of all parties involved.

Another bank (confirming bank) guarantees payment along with the issuing
Confirmed LC
bank.

Unconfirmed LC Only the issuing bank guarantees payment.

Sight LC Payment is made immediately upon presentation of compliant documents.

Usance (Deferred Payment is made after a specified period (e.g., 30, 60, or 90 days) from the
Payment) LC document presentation date.

Acts as a secondary payment guarantee; payment is made only if the buyer

Standby LC
fails to fulfill their obligations.

Issued based on another LC, often used when an intermediary is involved in a

Back-to-Back LC
trade transaction.

Beneficiary can transfer part or all of the LC to another party (used when the
Transferable LC
seller is not the manufacturer).

Revolving LC LC that can be used multiple times within a specified period for repetitive
Type Description

transactions.

4. Process of Letter of Credit

Step Description

1. Agreement between Buyer Buyer and seller agree on using an LC as a payment method in their
and Seller trade contract.

Buyer applies to their bank (issuing bank) to issue an LC in favor of the

2. Buyer Requests LC
seller.

3. Issuing Bank Issues LC Issuing bank sends the LC to the advising bank in the seller’s country.

4. Advising Bank Notifies Seller Advising bank authenticates and informs the seller about the LC.

Seller ships goods and collects shipping documents (e.g., invoice, bill of
5. Shipment of Goods
lading, insurance, etc.).

Seller submits required documents to the negotiating bank or advising

6. Presentation of Documents
bank.

7. Document Verification Bank verifies if the documents comply with LC terms.

8. Payment to Seller If documents are correct, payment is made to the seller.

Buyer reimburses the issuing bank after receiving the documents and
9. Buyer Reimburses Bank
goods.

5. Documents Required Under Letter of Credit

Document Purpose

Commercial Invoice Details about the goods and their value.

Bill of Lading / Airway Bill Proof of shipment and delivery to the carrier.

Insurance Policy Ensures goods are insured during transit.

Packing List Details the contents of the shipment.

Document Purpose

Certificate of Origin Certifies the country where the goods were produced.

Inspection Certificate Confirms goods meet the required quality and specifications.

6. Importance of Letter of Credit

Importance for Seller

Importance for Buyer (Importer)
(Exporter)

Guaranteed Payment Assurance that goods will be shipped as per agreement.

Payment made only after goods are shipped and documents are
Reduced Risk of Default
submitted.

Access to Financing LC can help exporters obtain pre-shipment or post-shipment financing.

Trust in International Trade LC fosters trust between buyers and sellers in cross-border transactions.

7. Advantages and Disadvantages

Advantages Disadvantages

Security for Both

Costly – Banks charge fees for issuing and confirming LCs.
Parties

Ensures Timely Complex Documentation Process – Errors in documents can cause payment
Payment delays.

Strict Compliance – Even minor discrepancies in documents can lead to non-

Risk Reduction
payment.

8. Conclusion

A Letter of Credit (LC) is a critical financial tool in international trade, ensuring secure and guaranteed
payment between buyers and sellers.
While it offers protection against default risks, it requires strict compliance with documentation and
may involve high costs.
Lenders and traders rely on LCs to build trust in global transactions, making it a vital instrument for
international commerce.
Basic Features of a Letter of Credit (LC):

Feature Description

Written LC is a formal written document issued by a bank, guaranteeing payment to the

Undertaking seller.

The bank assures payment on behalf of the buyer, provided the seller meets all the
Bank’s Guarantee
LC conditions.

Documentary Payment is based on documents, not goods – The bank checks shipping and trade
Credit documents, not the goods themselves.

Conditional Payment is made only when specific conditions and terms are fulfilled, such as
Payment correct documentation.

Independent LC is separate from the actual sale agreement between the buyer and seller. The
Contract bank is concerned only with documents, not the quality or delivery of goods.

Most LCs today are irrevocable, meaning they cannot be canceled or changed
Irrevocable Nature
without consent from all parties.

LCs have a validity period – The seller must ship the goods and present documents
Time-Bound
within a specified time.

Multiple Parties
Typically involves four parties – Buyer, Seller, Issuing Bank, and Advising Bank.
Involved

Security for Both Protects both the seller (guaranteed payment) and buyer (ensures shipment before
Parties payment).

Transferability Some LCs are transferable, allowing the original beneficiary to transfer the credit to
(Optional) another supplier.

Key Takeaway:

A Letter of Credit is a secure payment method in international trade, ensuring trust and reducing risk
for both buyers and sellers.
Its main strength lies in the bank’s guarantee and reliance on documents rather than the actual
delivery of goods.

Debt Recovery Tribunal (DRT) – Meaning, Functions, and Detailed Overview

1. What is a Debt Recovery Tribunal (DRT)?

A Debt Recovery Tribunal (DRT) is a specialized legal body in India established to resolve disputes
related to the recovery of loans and debts from borrowers by banks and financial institutions.

DRTs primarily deal with cases involving:

 Non-Performing Assets (NPAs).

 Defaulting borrowers who fail to repay their loans.

Objective:
To ensure quick and efficient recovery of debts owed to banks and financial institutions, reducing the
burden on civil courts.

2. Legal Framework Governing DRTs

Act / Law Purpose

Recovery of Debts Due to Banks and Financial

Primary law that led to the formation of DRTs.
Institutions Act, 1993 (RDDBFI Act)

Securitisation and Reconstruction of Financial Empowers banks to recover secured loans without
Assets and Enforcement of Security Interest court intervention, but appeals against bank actions
(SARFAESI) Act, 2002 under SARFAESI can be filed with DRT.

3. Key Objectives of Debt Recovery Tribunal

Objective Description

Speedy Recovery Fast disposal of cases related to bank loans and debts.
Objective Description

Reduce Court Burden Reduce the load on traditional civil courts for debt recovery matters.

Strengthen the financial position of banks by enabling faster recovery of

Ensure Bank Stability
defaulted loans.

Fairness & Protect the interests of both lenders (banks) and borrowers, ensuring a fair
Transparency recovery process.

4. Jurisdiction and Applicability

Aspect Details

Jurisdiction Cases where the debt amount is ₹20 lakh or more.

Who Can Approach DRT? Banks and Financial Institutions can file cases against defaulting borrowers.

Borrowers' Right Borrowers can appeal against actions of banks under the SARFAESI Act in DRT.

5. Structure of DRT

Level Description

Head of DRT – Appointed by the Government (usually a judicial officer or a retired

Presiding Officer
district judge).

Implements recovery orders passed by DRT by attaching and auctioning the

Recovery Officer
defaulter’s assets.

Staff and Support

Assists in administrative work and case management.
Team

6. Powers and Functions of DRT

Function / Power Description

Adjudicate Debt Recovery Hear and decide cases filed by banks and financial institutions for
Cases recovery of loans.
Function / Power Description

Attachment of Property Order attachment (seizure) of defaulter’s property to recover dues.

Direct the sale of mortgaged or hypothecated assets to recover the loan

Sale of Assets
amount.

Issue a Recovery Certificate specifying the amount due, which is enforced

Issue Recovery Certificates
by the Recovery Officer.

Issue temporary orders such as staying a bank’s recovery action in

Grant Interim Relief
appropriate cases.

Hear Borrowers’ Appeals Hear appeals from borrowers against measures taken by banks under the
(SARFAESI) SARFAESI Act.

7. DRT Proceedings Process

Step Description

1. Application Filing Bank files an application with DRT for recovery of dues.

2. Notice to Borrower DRT issues notice to the borrower, requiring a response.

3. Hearing Both parties present their arguments and evidence before the tribunal.

If the bank's claim is valid, DRT issues a Recovery Certificate specifying the
4. Recovery Certificate
payable amount.

5. Recovery by Recovery Recovery Officer enforces the order by attaching and selling the borrower’s
Officer property.

Borrowers can appeal against DRT’s decision to the Debt Recovery

6. Appeal to DRAT
Appellate Tribunal (DRAT).

8. Key Features of DRT

Feature Description

Speedy Disposal Target to resolve cases within 6 months (though often delayed in practice).

Exclusive Jurisdiction DRT handles only debt recovery cases involving banks and financial institutions.
Feature Description

Special Powers Attachment and sale of assets, similar to civil courts.

Borrowers can challenge unfair recovery actions through DRT under the SARFAESI
Legal Protection
Act.

9. Advantages of DRT

Advantages for Banks Advantages for Borrowers

Faster Recovery Fair Trial and Appeal Process ensures the borrower’s rights are protected.

Reduced Legal Costs Stops Harassment by Banks through illegal recovery methods.

Strengthens Banking System Opportunity to Settle Loans through legal mediation.

10. Limitations of DRT

Limitation Explanation

Delayed Proceedings Cases often take longer than the prescribed 6 months due to backlog.

Heavy Workload Limited number of DRTs in India, leading to overburdened tribunals.

Limited Jurisdiction Cases below ₹20 lakh are not entertained by DRT; such cases go to civil courts.

11. Important Differences – DRT vs Civil Court

Aspect DRT Civil Court

Only debt recovery cases involving banks/financial

Jurisdiction All types of civil disputes.
institutions.

Speed Faster (target: 6 months) Slower (years)

Powers Can issue Recovery Certificates and attach properties General civil orders

General cases (land, contracts,

Focus Specialized in banking and debt recovery
etc.)
12. Conclusion

The Debt Recovery Tribunal (DRT) is a critical institution in India’s banking and financial system aimed
at ensuring swift and efficient recovery of loans.
It protects the interests of both banks and borrowers, enabling fair dispute resolution and reducing
NPAs in the financial sector.

Key Takeaway:

 For Banks: Ensures faster recovery of defaulted loans.

 For Borrowers: Protects their rights against unfair recovery actions.

 For Economy: Strengthens the banking system and improves credit flow in the economy.

Good Lending by Banks – Meaning, Key Factors, and Significance

1. What is Good Lending by Banks?

Good lending refers to the practice of providing loans in a careful, responsible, and secure manner to
ensure that the borrower can repay on time, and the bank earns a reasonable profit while
safeguarding depositors’ money.

It involves evaluating the borrower’s creditworthiness, purpose of the loan, security provided, and
ensuring that funds are used productively.

2. Objectives of Good Lending

Objective Description

Ensuring the borrower can repay the loan with interest and the bank’s funds are
Safety
secure.

Loans are the main source of income for banks, so lending must generate
Profitability
adequate profit.
Objective Description

Banks must lend in such a way that funds are recoverable when needed to meet
Liquidity
depositor withdrawals.

Economic
Supporting industries, agriculture, and businesses to promote economic growth.
Development

Diversification Avoiding concentration of loans in one industry or sector to reduce risk.

3. Principles of Good Lending

Principle Explanation

Safety of Funds The borrower must be capable and willing to repay the loan.

Purpose of the Loan The loan must be for a legitimate, productive, and legal purpose.

The bank should obtain adequate collateral or guarantees to secure the

Security (Collateral)
loan in case of default.

Liquidity Loans should be recoverable quickly when the bank requires funds.

Character and The borrower’s reputation, honesty, and past repayment history must be
Creditworthiness verified.

Loans should generate interest income sufficient to cover costs and

Profitability
provide a profit.

Spread lending across different sectors, businesses, and borrowers to

Diversification of Risk
minimize risk.

4. Key Factors Considered in Good Lending

Factor Description

Borrower’s Financial
The income, assets, and liabilities of the borrower are assessed.
Position

Future earning capacity of the borrower and stability of the business are
Business Prospects
evaluated.

Past Credit History Previous loans and repayment behavior are checked.
Factor Description

Security Offered The market value, liquidity, and legal status of collateral are assessed.

Loan Purpose Ensuring that the loan is used for genuine and productive purposes.

Evaluating how the borrower will generate funds to repay the loan (e.g.,
Repayment Source
business income).

5. Types of Security in Lending

Type Examples

Movable Property Goods, stocks, machinery, vehicles.

Immovable Property Land, buildings, factories.

Financial Assets Fixed deposits, shares, bonds.

Personal Guarantees Third-party guarantees or corporate guarantees.

6. Importance of Good Lending

Importance Explanation

Prevents NPAs (Non-Performing

Minimizes bad debts and defaults, ensuring bank stability.
Assets)

Protects Depositors' Funds Ensures that public deposits are safeguarded and used responsibly.

Enhances Bank’s Profitability Interest earned on loans is the primary source of income for banks.

Provides funds to businesses and individuals, promoting growth and

Ensures Economic Stability
development.

Builds Trust and Reputation Maintains public confidence in the banking system.

7. Characteristics of Good Lending

Characteristic Description

Proper evaluation of borrower’s capacity and collateral before sanctioning a

Careful Assessment
loan.

Proper Documentation Legal agreements, mortgage deeds, and guarantees are maintained.

Timely Disbursement Loans are granted without unnecessary delay.

Monitoring and Follow-

Regular checks on loan utilization and repayment progress.
Up

Legal Compliance Loans are granted as per RBI guidelines and banking laws.

8. Conclusion

Good lending is the foundation of a healthy banking system.

It ensures that banks lend money safely, profitably, and responsibly, promoting economic growth while
safeguarding the interests of depositors.
Following proper lending principles like safety, liquidity, and diversification helps banks minimize risks
and maintain long-term stability.

What is Pledge?

A pledge is a type of security arrangement in which the borrower (called the pledgor) delivers goods or
movable property to the lender (called the pledgee) as security for a loan. The ownership remains with
the borrower, but possession is transferred to the lender until the loan is repaid.

It is a form of bailment, specifically for the purpose of securing a debt or performance of an obligation.

Key Features of Pledge:

Feature Explanation

Possession with
The lender takes possession of the pledged goods but does not own them.
Lender
Feature Explanation

Ownership with
The borrower retains ownership of the goods during the pledge.
Borrower

Purpose – Security for

The pledge is made to secure a debt or obligation.
Debt

If the borrower fails to repay the loan, the lender has the right to sell the
Right to Sell
pledged goods to recover the dues.

Delivery is Essential Physical delivery of goods is necessary for creating a pledge.

Examples of Pledge:

Example Description

Gold Loan Borrower pledges gold ornaments to a bank as security for a loan.

Pledging of Shares Shares are pledged to obtain a loan from a financial institution.

Agricultural Produce A farmer pledges crops to get credit from a bank.

Rights of the Pledgee (Lender):

Right Description

Retention Lender can retain the pledged goods until the loan is repaid.

Sale In case of default, the lender can sell the goods after giving notice to the borrower.

Reimbursement Recover expenses for preservation of pledged goods.

Duties of the Pledgor (Borrower):

Duty Description

Repayment Repay the loan on time and redeem the pledged goods.

Care of Goods (if agreed) In some cases, borrower may agree to maintain or insure the goods.
Legal Basis:

 Indian Contract Act, 1872 – Section 172 to 176 governs the law of pledge in India.

Difference Between Pledge and Other Securities:

Basis Pledge Hypothecation Mortgage

Possession With the lender With the borrower With the borrower

Ownership With the borrower With the borrower With the borrower

Property Movable goods Movable goods Immovable property

Conclusion:

A pledge is a common financing method in banks where borrowers pledge movable property like gold,
stocks, or crops as collateral for a loan.
It ensures the lender’s security while giving the borrower access to funds.

What is Mortgage?

A mortgage is a legal agreement in which a borrower (mortgagor) pledges immovable property (such as
land, building, or house) as security for a loan from a lender (mortgagee).

The ownership of the property remains with the borrower, but the lender gets the right to sell the
property if the borrower fails to repay the loan.

Definition (As per Section 58 of the Transfer of Property Act, 1882 – India)

A mortgage is the transfer of an interest in specific immovable property for securing:

  The payment of money advanced (loan).

 Future debt.

 Performance of an obligation.

Key Features of Mortgage:

Feature Explanation

Immovable Property Only immovable property like land, building, or house can be mortgaged.

Borrower transfers interest in property to lender as security, but ownership

Transfer of Interest
remains.

Security for Loan Mortgage is created to secure repayment of a loan or fulfillment of an obligation.

If the borrower defaults, the lender can sell the property to recover the loan
Right to Sell
amount.

Legal Document Mortgage agreement is legally registered under property laws.

Parties Involved in a Mortgage:

Party Role

Mortgagor Borrower who mortgages the property.

Mortgagee Lender (bank or financial institution) who grants the loan.

Types of Mortgage (As per Transfer of Property Act, 1882 – India):

Type of Mortgage Description

Borrower agrees to repay the loan; if default occurs, lender can sell the
Simple Mortgage
property through court.

Mortgage by Property is transferred to the lender; if the borrower fails to repay, the sale
Conditional Sale becomes final.

Usufructuary Mortgage Possession of the property is given to the lender, and lender uses property
Type of Mortgage Description

income for interest or repayment.

Property is transferred absolutely to the lender with a condition to retransfer

English Mortgage
after repayment.

Deposit of title deeds with the lender (without registration), mostly in urban
Equitable Mortgage
areas.

Anomalous Mortgage Any mortgage that does not fall under the above categories.

Rights of Mortgagee (Lender):

Right Explanation

Right to Sell Sell the mortgaged property in case of default (after giving notice).

Right to Foreclosure Apply to the court to seize property and recover dues.

Right to Possession (Usufructuary) Take possession and use the property’s income for loan repayment.

Right to Sue File a suit for recovery of the loan amount.

Duties of Mortgagor (Borrower):

Duty Explanation

Repay Loan on Time Ensure timely repayment of the loan with interest.

Maintain Property Keep the mortgaged property in good condition.

Provide Clear Title Ensure the property is free from legal disputes before mortgage.

Importance of Mortgage for Banks:

Aspect Explanation

Secures Large Loans Helps banks provide high-value loans (e.g., home loans, business loans).

Reduces Risk Banks recover money by selling property in case of default.

Aspect Explanation

Source of Income Interest earned on mortgage loans is a significant source of revenue for banks.

Difference Between Pledge and Mortgage:

Aspect Pledge Mortgage

Property Type Movable property (e.g., gold, goods) Immovable property (e.g., land, building)

Possession Possession with lender Possession usually with borrower

Ownership Borrower Borrower

Right to Sell Without court order Usually requires court order (except special cases)

Delivery Physical delivery is required Delivery not required

Conclusion:

A mortgage is a secure way of lending where immovable property is used as collateral.

It ensures that banks have a fallback option in case of default while borrowers can access large sums of
money for housing, business, or other purposes.
Proper legal documentation and compliance with property laws are critical for creating a valid
mortgage.

Deposit Insurance – Meaning, Features, Benefits, and Coverage

1. What is Deposit Insurance?

Deposit insurance is a financial safeguard provided to depositors in case a bank fails or becomes
insolvent. It protects depositors by guaranteeing the repayment of their deposits up to a certain limit.

In India, deposit insurance is provided by the Deposit Insurance and Credit Guarantee Corporation
(DICGC), which is a subsidiary of the Reserve Bank of India (RBI).

2. Objectives of Deposit Insurance:

Objective Description

Guaranteeing repayment of deposits up to a certain limit if the bank

Protection of Depositors
fails.

Public Confidence Building trust in the banking system to prevent panic among depositors.

Stability in the Banking System Maintaining financial stability by reducing the risk of bank runs.

3. Key Features of Deposit Insurance in India:

Feature Details

Provided by Deposit Insurance and Credit Guarantee Corporation (DICGC).

Coverage Limit ₹5 lakh per depositor per bank (increased from ₹1 lakh in 2020).

Types of Deposits
Savings, Fixed Deposits (FD), Current Accounts, Recurring Deposits (RD).
Covered

Premium Paid by Banks Banks pay a premium to DICGC, but depositors do not pay any charges.

All commercial banks and cooperative banks are automatically covered under
Automatic Coverage
the scheme.

Multiple Accounts in Deposits across all accounts of a depositor in the same bank are added
Same Bank together, and covered up to ₹5 lakh in total.

Different Banks Deposits in different banks are insured separately.

4. Types of Deposits Covered:

Type of Deposit Covered by Insurance?

Savings Bank Account ✅ Yes

Fixed Deposit (FD) ✅ Yes

Current Account ✅ Yes

Recurring Deposit (RD) ✅ Yes

Foreign Currency Deposits ❌ No

Deposits of Governments/Institutions ❌ No

5. Institutions Covered Under DICGC:

Type of Institution Covered?

Commercial Banks (Public & Private) ✅ Yes

Regional Rural Banks (RRBs) ✅ Yes

Cooperative Banks ✅ Yes

Foreign Banks (operating in India) ✅ Yes

NBFCs (Non-Banking Financial Companies) ❌ No

6. Benefits of Deposit Insurance:

Benefit Explanation

Deposit insurance ensures that depositors get their money back (up to ₹5 lakh),
Depositor Protection
even if the bank fails.

Trust in Banking
Increases public confidence in keeping money in banks.
System

Financial Stability Prevents panic withdrawals (bank runs) during financial crises.

Encourages Savings Assures depositors that their money is safe, encouraging people to save in banks.
7. Exclusions (Deposits Not Covered):

Not Covered Explanation

Deposits held by foreign governments and central/state

Deposits of Foreign Governments
governments are not insured.

Deposits of Public Financial

Large financial institutions' deposits are not covered.
Institutions

Inter-bank Deposits Money deposited by one bank in another is not insured.

8. How Does Deposit Insurance Work?

 If a bank fails, DICGC pays insured deposits up to ₹5 lakh to each depositor.

 The claim settlement is processed within 90 days of bank failure.

 Depositors do not need to apply separately; it is automatically processed.

9. Recent Updates (Important):

 Limit increased from ₹1 lakh to ₹5 lakh in 2020 after Punjab and Maharashtra Cooperative
Bank (PMC Bank) crisis.

 Deposit Insurance Credit Guarantee Corporation (Amendment) Act, 2021 made the claim
settlement process faster, requiring payouts within 90 days after a bank’s moratorium.

10. Conclusion:

Deposit insurance is a crucial protection mechanism for depositors, ensuring that savings remain safe
even if a bank fails.
It builds trust in the banking system and promotes financial stability, making DICGC’s role vital in
India’s financial structure.

What is Credit Guarantee?

Credit Guarantee is a financial arrangement in which a third party (guarantor) provides a guarantee to a
lender (usually a bank) that, in case the borrower defaults on a loan, the guarantor will cover a part or
the full amount of the loan.
It is used to reduce the risk for banks and financial institutions, especially when lending to small
businesses, startups, or individuals who lack collateral or a credit history.

Key Features of Credit Guarantee:

Feature Explanation

Third-Party A third-party institution (e.g., government or credit guarantee organization)

Guarantee guarantees the loan.

Reduces risk for lenders because the guarantor takes responsibility if the
Risk Sharing
borrower defaults.

Encourages banks to lend without demanding collateral, especially to small

Collateral-Free Loans
businesses and startups.

Boosts Lending Helps borrowers who lack security or credit history to access bank loans.

Partial or Full The guarantor may cover a portion (e.g., 50%, 75%) or the entire loan amount in
Coverage case of default.

Objective of Credit Guarantee Schemes:

Objective Explanation

Encourage banks to lend to small businesses, MSMEs, and startups that lack
Facilitate Lending
collateral.

Promote
Support entrepreneurs and small businesses by improving access to credit.
Entrepreneurship

Share the risk of non-repayment with banks, making them more willing to
Reduce Risk for Banks
lend.

Financial Inclusion Bring more small businesses and individuals into the formal credit system.

Example: Credit Guarantee Scheme in India

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE):
Aspect Details

Launched In 2000

Joint Initiative Government of India & SIDBI (Small Industries Development Bank of India)

Objective Provide collateral-free loans to Micro and Small Enterprises (MSEs).

Coverage Limit Up to ₹2 Crore per borrower.

Guarantee
75-85% of the loan amount (varies based on category).
Coverage

New and existing micro and small enterprises engaged in manufacturing, trading,
Eligibility
and service sectors.

Benefits - No need for collateral/security. - Encourages banks to lend to small businesses.

Advantages of Credit Guarantee:

Advantage Explanation

Easier Loan Access Helps small businesses and individuals get loans without collateral.

Risk Reduction for Banks Banks are more confident to lend as the risk of default is shared.

Encourages
Promotes new startups and small enterprises by improving access to funds.
Entrepreneurship

Supports MSME Growth Boosts the growth of Micro, Small, and Medium Enterprises (MSMEs).

Promotes Financial Helps bring underprivileged sectors and small entrepreneurs into the
Inclusion formal banking system.

Challenges/Limitations of Credit Guarantee:

Challenge Explanation

Over-dependence on
Banks may become careless in assessing borrower creditworthiness.
Guarantees

Moral Hazard Borrowers may misuse funds or default intentionally knowing that their
Challenge Explanation

loan is guaranteed.

Delay in Claims Settlement Processing claims for defaulted loans may be time-consuming.

Awareness Gap Many small businesses and entrepreneurs are unaware of such schemes.

How Does Credit Guarantee Work?

1. A borrower applies for a loan from a bank.

2. Bank evaluates the application, but the borrower has no collateral or credit history.

3. Bank applies to a credit guarantee scheme (e.g., CGTMSE).

4. The guarantee institution provides a guarantee cover (e.g., 75% of the loan amount).

5. Bank sanctions the loan to the borrower.

6. If the borrower defaults, the guarantor compensates the bank up to the guaranteed amount.

Conclusion:

Credit guarantee schemes play a vital role in improving access to credit, particularly for small
businesses and startups.
They reduce the risk for banks and promote collateral-free lending, thus supporting entrepreneurship
and economic growth.