As a banker between pledge and hypothecation, which one you will prefer? Justify in favor of your argument

 If  disbursement of loan is done without considering the honesty of debtor, past experience, education, business skill etc. the loan will be bad in classification. So between pledge and hypothecation which one is better depend on the advantages and disadvantages of them. Advantage and disadvantages of pledge and hypothecation are discussed below---

Pledge-when loan debtor deposit his goods to the investor as a guarantee for repay of loan and investor has the possession of the goods then it is called pledge.

 

1.Advantages

* in case of a default, the pledgee has the right to sell the goods in his possession and adjust its proceeds towards the amount due with a single notice.

* as The pledgee retains the possession of the goods pledger cannot sell or pledge to another pledge.

 

2. Disadvantages

*need appoint of extra manpower for security of pledge goods.

*need more inspection so that cannot sell or destroy the goods

*perishable goods are not applicable for pledge loan

*raw materials for industry and products for packing is not applicable for pledge loan.

Hypothecation- when loan debtor has the possession of the goods but  ownership is to the investor as a guarantee for repay of loan then it is called hypothecation. .

 

1.Advantages

*collateral security is mandatory for which if loan is default in can recover by selling security.

*no need for extra expense for appointment of security for safety of goods.

*no need extra inspection

2. Disadvantages

 *need approval from court for auction of goods/collateral security

*debtor can sell the goods without concern of investor.

From the above discussion we can say that, from theoretical view though pledge is suitable but it is un-useful in nature. Its past experience is not also good. So use of pledge loan is decreasing day by day. Other side, use of hypothecation is increasing day by day because of its less inspection of goods and has collateral security for loan default. For this reason banks usually prefer hypothecation than pledge.

Distinguish between pledge & hypothecation Mortgage

 

Sl no	Pledge	Hypothication
1	Incase of pledge ,bank take the possession of the goods but ownership remain to the debtor	For hypothecation, possession remains with the borrower but owner is bank
2	Both the pledge and pledgor conduct an aggremnet about agreement for pledge of goods and produces	Both the financer and the debtor conduct an agreement about hypothecation of goods and produces.
3	The pledgee can retain the possession	In case of hypothecation The

 

	of the goods until the pledgor repays the entire debt amount and in case of a default, the pledgee has the right to sell the goods in his possession and adjust its proceeds towards the amount due.	possession and the ownership remain with the borrower and so, he may, at any time either create a subsequent charge by way of pledge over same goods or may sell them.
4	There are two types of pledge. 1.actual pledge; 2. Constructive pledge	Hypothecation has no types.
5	For safety of pledge product, bank appoint security guard	For safety of hypothecated product, owner ownself arrange the security of the product
6	Risks for Pledged goods as goods may stolen, perish, burn by fire or  damage any other way	If occurs such type of  damage collateral security help to recover the loan.

What do you mean by mortgage, pledge & hypothecation

 Mortgage: Mortgage is a type of charge related to immovable property. Immovable property shall include land, benefits to arise out of land and things attached to the earth or permanently fastened to anything attached to the earth. It does not include standing timber, growing crops or grass.

 

Pledge: Pledge arises when the lender (pledgee) takes possession of either the goods or bearer securities for extending a credit facility to the borrower (pledgor). The pledgee can retain the possession of the goods until the pledgor

repays the entire debt amount and in case of a default, the pledgee has the right to sell the goods in his possession and adjust its proceeds towards the amount due.(example Jewel loan).

 

Hypothecation: Hypothecation is a way of creating a charge against the security of movable assets, which is much similar to pledge.(example purchasing a bike from bank loan). The possession and the ownership remain with the borrower. Since the possession remains with the borrower, he may, at any time either create a subsequent charge by way of pledge over same goods or may sell them. In such cases, the rights of the pledgee usually super cedes the rights of the person in whose favor the goods were hypothecated, if the fact of existence of such a

charge is not known to the subsequent pledgee.