1. The integrity of the borrower

2. Purpose of the loan

3. Nature of the commodity

4. Knowledge of different markets

5. Proper care in valuation

6. Ascertain the title of the owner

7. Correct storage

8. Rented Warehouse

9. Insurance up to the complete market price

10. Creation of charge by Pledge and Hypothecation

11. Handling of go down keys

12. Inspection

13. Superintendence regarding discharge of products

14. Federal Reserve Bank directives

Precautions needed to be taken by a banker just in case of advances against the safety of products. In granting advances, sure precautions square measure necessary.

The integrity of the borrower

The banker ought to ascertain that the receiver is trustworthy, honest, and a person of sufficient expertise in his business. Such a precaution is critical to avoid dishonest dealings. For example, when a client offers one hundred baggage of paddy as security, it’s not possible to examine each bag. He needs to admit the honesty of the receiver. Further, he ought to see whether or not the receiver has adequate sensible expertise in his business. A skilled man of affairs is informed with risks and therefore the profitable areas of the business. Associate inexperienced one could incur a loss and be a possible risk.

Purpose of the loan

The compensation principally depends upon the aim that the loan is obtained. To a receiver UN agency is engaged in speculation, the probabilities of loss square measure larger. As such, the loss can have to be compelled to be shared by the banker. Therefore advances mustn’t be allowed for speculative functions

Nature of the commodity

The banker ought to have an operating data of a number of the special options of the commodities offered as security. A banker ought to like the commodities that may well be disposed of simply, the standard merchandise that don’t seem to be subject to deterioration and therefore the worth of just about steady goods as security.

Knowledge of different markets

A banker ought to be informed with the markets for various commodities. This is often essential to control the margin for the products in keeping with the worth prevailing within the market. Failure to grasp the market can place him at the mercy of the receiver, UN agency could inflate the worth to urge a lot of advances.

Proper care in valuation

The banker ought to appoint specialists to worth the products. Care ought to be taken to supply sufficient sales margin to avoid loss ensuing from market fluctuation. In some cases, the worth mentioned within the bill is also associate inflated one. So it’s well to check the worth that those costs square measure prevailing within the market. If the products square measure packed, the banker ought to put into effect a certificate from reliable packers.

Ascertain the title of the owner

Before acceptive product as security, the banker ought to ascertain the title of the receiver to the products by review of the first invoice or money memos.

Correct storage

The banker ought to choose a warehouse that’s properly designed and safe in each approach for the storage of products. The roof and flooring ought to be settled close to the bank in order that the bank’s representative will have direct and free access to them at any time. All product keep in baggage or bales ought to be therefore organized on facilitate review simply. A careful choice ought to be product of warehouse keeper & Watchmen. They must be honest & possess a high sense of responsibility.

Rented warehouse

If the receiver makes use of a rented warehouse, the bank should get associate endeavor from the owner of the building, stating that the bank features a previous lien. This is necessary as a result of, at times, the building owner could have a previous claim for rent due & the position of the banker are going to be at stake.

Insurance up to the complete market price

Goods ought to be insured against all legendary risks up to their full market price. The relative insurance policies ought to be control by the bank.

Creation of charge by Pledge and Hypothecation

A banker could produce a charge over the products either by pledge or hypothecation. In the pledge, the products or title thereto is delivered to the banker. In hypothecation, neither possession nor product square measure transferred to the banker. Therefore a written endeavor from the receiver ought to be obtained that the products don’t seem to be charged to any bank and can-not be charged till the agreement continues with the bank.

Handling of go down keys

Under no circumstances ought to the keys of godowns be allowed to pass into the hands of the receiver. The keys of the taking place ought to be unbroken in an exceedingly sturdy space underneath twin management and brought out at the commencement of the business and received back at the shut of the business.


Periodical review of the taking place ought to be undertaken on the number and quality of the products. The quantity of stock in go down ought to be tallied with the record within the bank and with the books of the receiver.

Superintendence regarding discharge of products

When the receiver is allowed to repay the debt in installments, the banker ought to unharness the products solely in proportion to the quantity repaid. It is additionally attainable that the shoppers could request the banker to unharness the quantity a section of the products once they get parties to sell.

Federal Reserve Bank directives

The Federal Reserve Bank problems directives from time to time, prohibiting advances against specific product or stipulating minimum margin against sure commodities. The directives can also specify the extent up to and conditions on that bank could grant credit. The bank ought to follow the conditions within the directives whereas disposal against product.

Finally, we are able to say that these on top of precautions ought to be taken by a banker just in case of advances against the safety of products.

About the Author

BankReed Admin

Banking Professional with 16 Years of Experience. The idea to start this Blogging Site is to Create Awareness about the Banking and Financial Services.

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