There have been several news items pertaining to the acceptance of movable assets as security by banks to secure loan facilities which relate primarily to an impending Gazette notification which contends will compel the banks to accept movables as collateral.
However, there appears to be some misconception on this subject as there is an impression that banks hitherto have not been accepting movable assets as collateral. As a person with substantial exposure in this area of banking, I wish to clarify the position for the benefit of those interested.
Banks have been accepting movable properties as securities and continue to do so and it is not a new phenomenon. Movable properties are defined as any asset which could be physically moved from location to location.
This also include certain movable machinery apart from the generalised items such as stock-in-trade, furniture, gems and jewellery, electronic appliances, motor vehicles and a variety of other movable items. Banks have granted billions of credit facilities against the security of movables in the past and continue to do so.
However, in banking parlance movable assets are considered to be a very high risk security hence Banks always prefer to secure their credit facilities against immovable assets which are categorised as first class security and explore this option initially.
If a prospective borrower is not in a position to offer immovable property then they do consider the second option which is the movable property as they have no other option and have to fall back on this security.
This is due to various important factors, since immovable property offered as security provides a variety of comforts to the banks and strengthens its security i.e., easy to monitor, appreciation of value, easy to realise the advance in case of any eventuality.
In addition there is an underlying factor as facilities secured against immovable assets result in a compelling motivation on the part of the borrowers to honour their commitment as they do not want to forego a valuable asset by defaulting the advance hence the default rate is low compared to facilities secured against movables.
On the contrary, if a facility is secured against movable assets, banks do take a major risk. This will compel the banks to have an effective monitoring mechanism until the full recovery of the facility. This relates to calling for monthly statements of movables mortgaged, carrying out regular site inspection at the site to ensure the movables pledged as security at the time of granting the loan are intact.
The major risk is there is a possibility of the same movables being mortgaged to another financial institution. The management cost on movables on post disbursement is high as this process has to be continued until the full recovery of the advance.
When an immovable property is offered as security the title to the property has to be examined at least for a minimum of 25 to 30 years depending on each bank’s credit policy to ascertain the ownership and compliance of other vital local authority documents. This is done by a legal team which will trace the title by scrutinising the extracts at the relevant Land Registry.
It is only on the recommendation and acceptance of the title a mortgage is executed. This procedure effectively prevents the creation of more than one charge and ensures an absolute and strong security in possession of the bank and minimises the risk of loss. There is no way a prospective borrower could duplicate the charge and create more than one mortgage without the knowledge of the primary mortgagor.
In movable assets, no such precaution is available as a prospective borrower could just give a statement of the movables offered as security and the bank after a verification of the ownership, genuineness of its value by doing a valuation/verification arranges for an inspection of the movables.
The banks hitherto have no effective mechanism to ascertain whether such movable assets have been mortgaged to any other bank or duplication of charge. As an additional precaution banks obtain an affidavit from the borrowers who swear the movables offered are free from any encumbrances and are not under any charge or lien to any other bank or creditor.
However, there have been instances where borrowers have mortgaged such assets to more than one financial institution. The banks have no control over such instances. A large percentage of nonperforming loans are secured against such movable assets since the banks are unable to realise its exposure due to the unavailability of the movables at the time of the conclusion of the legal process.
In motor vehicles which too is a movable, however, when an individual borrower pledges his motor vehicle other than stocks of motor vehicles (stocks of motor vehicle will fall under the category of stocks-in-trade), although this is also considered movable there is a strong precaution since the bank obtains the original certification of registration and registers its charge with the Registrar of Motor Vehicles in addition to the registration at the Land Registry.
This effectively prevents the borrower from disposing the vehicle; the charge created at the Registrar of Motor Vehicles strengthens the bank’s position. The only risk being the vehicles being reported missing or lost. However, this is covered by the insistence of a comprehensive motor insurance policy.
Considering the existing risk involved in accepting movables assets, the Secured Transaction Act No. 49 of 2009 is timely. The CRIB is mandated with the implementation of this regulation under which all movables will be required to be registered with CRIB. The prospective lending banks will be required to verify from the on-line Secured Transaction Registry for movables with CRIB to ensure such assets are free of any charges or encumbrances. This effectively prevents a borrower creating more than one charge as it happens in certain cases now.
The process of the proposed electronic regulation will expedite the updating process of all movable assets as and when a charge is created or deleted. This will prevent the duplication of charges as it exists now due to lack of any mechanism and one important aspect of the risk faced by the banks is being eliminated.
However, the most important precaution still rests with the banks. Banks have to ensure the availability of such movables at all times, ensure the availability of margin, depreciation, age of the movable unlike the immovable assets. All these controlling and monitoring mechanism still rests with the bank.
The regulators have eliminated a major risk by the implementation of the Secured Transaction Registry. The other important factor is no insurer will give comfort to mitigate any loss to the bank arising from wilful removable of the stocks by the borrowers themselves to another location.
Today banking is highly competitive and banks operate in a competitive environment. Facilities against immovable properties are fully secured and strengthen the bank’s position and are considered as a solid security. However, still to expedite the credit delivery banks in certain instances are compelled to secure facilities against movables. This however, gives them additional responsibly of adhering to certain important aspects of post disbursement follow-up, unlike in the case of immovable assets.
The new procedure of the electronic registration however will certainly eliminate one aspect of the risk in obtaining movable assets and the banks will be relieved of one major risk. However they have to strengthen their follow-up mechanism effectively to constantly ensure the availability of the movables at all times, ascertain its value, etc., towards assisting the retail borrowers and small entrepreneurs most of them are not in a position to offer immovable assets.
(The writer has worked at HNB for 30 years and Pan Asia for four years and is presently a Consultant in Banking/Visiting Lecturer. He possesses considerable knowledge in this specialised area. He is also the current President of the HNB Retired Employees Association.)