Banks and the security for the loan

Many a time whenever Banks lend , they try to cover their risk with a primary security as well as a Collateral security. Collateral as the meaning indicates is only secondary . It is additional to the primary security.

But many banks insist Primary as well as adequate Collateral Security since the Primary security may lose value over time and use. Mostly movable fixed assets like plant and Machinery are given as primary security but these assets get depreciated over the period of their use.As a backup Banks will ask for a Collateral to have sufficient cover for the value of the loan.

Banks in India esp. PSU banks adopted a funny logic while lending to King Fisher airlines which went phut after crash landing some years back. The logic was valuing the brand KingFisher Airlines and use it as a Collateral for the loans extended to the airlines.But when the airlines went down the drain , the Brand also lost its value and as a result Banks lost their money. So such Collateral ingenuity invented by the unscrupulous led to PSU Banks' rut. 3Cs expected of the borrower are presumed to be present with the banker or lender. If they are absent on either side or on both sides then the Tax payer bears the brunt. This is the biggest moral hazard of the financial sector of any country and more so of India.

In Ramayana, when Lord Rama was in the forest, his younger brother Bharatha came to invite him back to the country and anoint himself as the King of Ayodhya.Instead Rama gave his sandals as requested by Bharatha and Rama remained in the forest. the sandals were placed on the throne representing Rama.There is a beautiful hymn sung by Swamy Desika in which he says Sandals of the Lord are valued much more than the Lord Himself because Rama was released by Bharatha by taking his sandals as security!!!Finally Rama kept his word, came back and redeemed his sandals.!!

Therefore one must understand that the security perse is not of much intrinsic value if it is not backed up by the most important C-Character. The security should have a moral binding on the borrower and the value of the security is dependant on the strength of this binding.

My banker friends would vouch for that!

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