Banking law

Querist : Anonymous (Querist) 29 August 2011 This query is : Resolved
Dear Sir,

Pl. tell me what is a 'letter of continuing security' in banking loan procedure. Under what law it is defined and what is the requirement of stamp on it in UP and in DELHI.

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Raj Kumar Makkad (Expert) 29 August 2011
Something a borrower gives to a bank, which the bank can keep if they fail to repay a loan is continuing security in banking loan procedure.

For stamp duty, it is better to visit the office of registrar.

malipeddi jaggarao (Expert) 30 August 2011
Dear Anonymous,
In Banking terms, Letter of continuing security is a security document to be stamped as per the local stamp duty act. This document is obtained by Banks if the prime security is hypothecation of goods and also of rotating nature. For example in OCC/Cash Credit facilities, the advance facility is fixed but linked with the value of security. The borrower need not repay the principal amount, but serve the interest periodically if prescribed turnover is shown in the account and also as this facility is secured hypothecation of goods, the borrower is required to submit a stock statement periodically sometimes monthly, sometimes quarterly. This stock is in the possession of the borrower and as he sells the stock daily, the stock rotates. To cover this rotated stock, Bank obtain the security document called "Letter of Continuing Security.
Expert Mr.Makkad saheb - please excuse me for the correction.

Raj Kumar Makkad (Expert) 30 August 2011
Thanks Mr. Malipeddi for correcting me.

Guest (Expert) 30 August 2011
Dear Author,

Expert jaggarao has elaborated the term very well. Although there remains no scope for any more elaboration or doubt, but for more clarity, probably the following information may add more to your knowledge:

Letter of continuing security, in fact intends to convey that the guarantee by the letter would serve as an uninterruptedly extended guarantee in terms of time that may not need renewal at any time, or say, that won't lapse at any time during the mortgage period.

THE LETTER OF CONTINUING SECURITY WOULD ALSO INTEND THAT --

If the debtor declares himself bankrupt his unsecured debts will be included in the bankruptcy and the creditors will have to apply to the debtor's trustee (Bank) for a share of any money.

The mortgage lender will rely on its security in debtor's property and will not usually be included in the bankruptcy.

However in bankruptcy the debtor usually loses his property if he has equity in it - unless he can get someone to buy that.

It doesn't mean the debtor won't be able to own anything else. Either he loses the property in bankruptcy or he gets to keep that and carry on paying the mortgage as normal. That however depends upon the decision of his trustee.

If he can't afford the mortgage or the property is in negative equity, he can sell the property and include the shortfall in the bankruptcy on the advice of his trustee.