Pledge, Bailment and Hypothecation: Explained

Introduction

Whenever we opt for loans from any financial institution, for example, a bank we usually need to provide a security against the loan to the respective bank. These securities may be in different forms. Some types of such securities are discussed below.

Pledge

  • Pledge has been defined in the Indian Contract Act 1872 (section 172).
  • It is a condition in which the lender (bank) holds the possession of the securities against the loan given to the respective customer.
  • In this case, the securities are movable in nature for example goods, certificates, gold etc.
  • Till the repayment of the loan is done the possession is kept with the bank preserved carefully.
  • If the loans are repaid on time the possessions are returned safely to its owner.
  • In case the customer is unable to pay back the loan on time, the bank has the right to sell the possession and recover the amount of loan given along with the interest.
  • A very common example for the pledge is Gold Loan.

Bailment

  • In general terms, the bailment is the transfer of goods from one individual to another for a certain purpose mentioned in the contract which shall be returned or disposed of depending on the return conditions. In banking terms, this simply refers to loans.
  • Bailment is done in the presence of a contract which may be oral or in written form.
  • The delivery of the goods is temporary and is done only in case of movable items.
  • The individual who transfers the possession of the assets temporarily to the lending individual is known as the Bailor. The one who accepts the possession of assets in return for the loan provided is known as the Bailee.
  • Similar to pledge, the possessions are returned to its original owners once the loan amount is paid back.

Hypothecation

  • Hypothecation is defined in the SARFAESI Act 2002 (sec 2n).
  • n such a case the individual or the borrower who has taken the loan has the actual possession of the asset for which the loan opts.
  • These types of loans are also applicable only in case of movable objects like cars, buses and machinery.
  • Here the asset for which the loan is taken (for example a car) remains with the borrower and he or she is hypothecated to the respective bank for the loan.
  • If the borrower is not able to pay the loan back in time the asset is taken from the borrower and the bank has the right to sell the asset in order to recover the loan amount with interest.
  • Car Loan is a common example of Hypothecation.

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