A banker should take the following precautions:

(a) Loans to be given to Reputed Parties Only: A banker should sanction loan only to such customers who have good reputation and sound financial position. Such parties should have a clean record of past dealings.

(b) Regular Inspection of Hypothecated Goods: The bank should regularly inspect the stock of the hypothecated goods. It should also verify the stocks with account books.

(c) Periodical Statement of Stocks: The banker should ask the borrower to submit periodical statement of stock. It should verify those statements with the stocks of the goods.

(d) Signboard of Hypothecation in Favour of the Banker: The banker should ask the borrower to display a signboard on the gate of the godown where the goods are stored indicating that the goods are hypothecated with the banker. The banker should regularly check that such display is being done. It will be a public notice and would avoid the chances of duplicate charge being created on those goods.

(e) Insurance: The banker should ask the borrower to get the goods insured against fire, theft, flood etc., and assign the policy in its favour. The banker should inform the insurer that the goods are hypothecated with him.

(f) Registration of Charge: If the borrower is a company, the banker should get the charge registered under Section 125 of the Companies Act, 1956. The charge is to be registered with the Registrar of Companies within 30 days of its creation. The banker should obtain a copy of registration of the charge. The banker should also get declaration from the company that it will not create a second charge over those goods. This undertaking should also be registered with the Registrar of Companies along with the registration of charge.

(g) Declaration from the Borrower that he is not Availing Similar Facilities from other Banks: The banker should obtain a declaration from the borrower to this effect. This undertaking should also be obtained periodically along with periodical statement of stock of hypothecated goods. This declaration should be cross-checked with the information obtained from other banks of the area.

From the above discussion, it is made clear that the banker should give the facility of hypothecation to honest persons only because the goods remain in the possession of the borrower. In case the loan is granted to any unscrupulous person, he may sell the goods hypothecated and pay off other creditors.