Documentation and Margin in Bank Lending
Documentation is a salient feature of sound lending.
The terms and conditions under which the loan is sanctioned and the security accepted are put down, in writing and signed by the borrower.
Obtaining such agreement is called documentation.
Such agreement specifies the rights and liabilities of the banker and the customer.
So, there is no room for misunderstanding of the terms between both the parties.
The margin is the provision of safety maintained by the banker while advancing against sureties. A banker does not lend the full value of the security offered by the borrower.
He retains a margin over it. The margin is the difference between the market value of the security offered and the loan granted.
For instances, if a building worth $10000 is submitted as security.
The borrower will sanction only $5000. He lends only 50% of the value of the property the remaining 50% is margin.
Write the documents that are associated with the secured advances.
Obtaining such agreement is called documentation.
In documentation, each type of advance requires a different set of documents.
The documents also depend upon the nature of security. The usual documents that are associated with the secured advances are stated below:
- Promissory Note,
- Letter of continuity if O.D. is sanctioned,
- Letter of lien which must be adequately stamped,
- Letter of pledge or hypothecation duly signed by the borrower,
- Letter of a declaration by the borrower that the goods are according to specifications and he has got the right to pledge them, and
- Title deeds to property.
At last, we can say that these above documents are associated with the secured advances.
Although there are no hard and fast rules about the documents to be taken and each bank has its own set of forms.
