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.

The following are the essential features of a mortgage:

(a) Immovable Property: A mortgage can be effected only in respect of immovable properties. Immovable properties include land and building, trees in the forest, standing crops, and any machinery that is permanently fixed to the earth.

(b) Transfer of Interest in the Property: Creation of a mortgage requires the transfer of interest in a specific immovable property. Transfer of interest does not mean transfer of ownership. The mortgager transfers some of his rights on the property to the mortgagee. Therefore, a mortgaged property cannot be sold without the consent of the mortgager in the event of any default.

 (c) Specific Property: The interest to be transferred is always with respect to a “specific property.” In other words, the property must be made specific through proper identity like its size, location, boundaries etc.

(d) Possession with the Mortgager: The actual possession of the mortgaged property is with the mortgager. He need not always transfer it to the mortgagee.

(e) Object or Purpose of Mortgage: The object of creating a mortgage is either to secure a loan or to perform an engagement. If the transfer of property is made for any other purpose, it cannot be called a mortgage.

(f) Reconveyance of Interest: On repayment of the loan the interest in specific immovable property is reconveyed to the mortgager. Thus, the mortgager gets back all his interest and rights in the property mortgaged as soon as he repays the loan.

(g) Right of Sale: In the event of non-payment of the loan, the mortgage has a right to sell the mortgaged property through the intervention of the court. But in case of legal mortgage, the mortgagee can sell the property without the intervention of the court.

(h) Mortgage Deed: An agreement in writing between the mortgager and the mortgagee is essential for creating a mortgage. The document which contains this agreement is called “mortgage deed.”

Section 177 of the Indian Contract Act, 1872 states as under:

“If a time is stipulated for the payment of the debt, or performance of the promise for which the pledge is made and the pawner makes default in payment of the debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time, before the actual sale of them; but he must, in that case, pay, in addition, any expenses which have arisen from his default.”

From the above statement, the main rights of the pledger are given below:

(a) The pledger has a right to claim accruals to the goods pledged.

(b) The pledger has a right to receive any surplus from the pledgee in case of sale, that may remain with him after the debt is paid off.

(c) The pledger has a right to claim back the security pledged on repayment of the debt along with interest.

(d) In case the pledgee intends to sell the goods, the pledger has a right to receive a notice in stipulated time.

(e) In case there is any increase in the goods, the pledger has right to such increase.

(a) It is necessary for a pledger to disclose any fault or risk before the pledgee.

(b) The pledger must repay from the loan and take the delivery of the property from the pledgee within the stipulated time.

(c) The pledger is bound for any loss of the pledgee in case of any defects in pledger’s title to the goods.

Following are the points of difference between a pledge and a lien:

1. Pledge is always created by a contract, whereas no contract is necessary for a right of lien. In most of the cases, lien is created by law.

2. Though in both the cases the possession of the goods is transferred to the creditor, yet in case of a lien, the party in possession of the goods does not have in general any right to sell the goods. In case of pledge, the creditor or the pledgee has right to sell the goods in his possession on the default by the debtor.

3. Right of lien is lost with the loss of the possession of the goods. But pledge is not necessarily terminated by return of goods to the owner. The goods pledged may be redelivered to the pledger for a limited purpose.

4. Lien is purely a passive right. Lien-holder can only hold the goods till the payment is made. Lien holder cannot enforce its claim through a court of law. But a pledgee enjoys the right to sue, right of sale and the right of lien.