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Mortgage, Hypothecation, NPA


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A debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large real estate purchases without paying the entire value of the purchase up front. Over a period of many years, the borrower repays the loan, plus interest, until he/she eventually owns the property free and clear. Mortgages are also known as "liens against property" or "claims on property." If the borrower stops paying the mortgage, the bank can foreclose.

Read more: Mortgage Definition | Investopedia 
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The established practice of a borrower pledging an asset as collateral for a loan, while retaining ownership of the assets and enjoying the benefits therefrom. With hypothecation, the lender has the right to seize the asset if the borrower cannot service the loan as stipulated by the terms in the loan agreement. Hypothecation also refers to securities in a margin account that an investor uses as collateral to borrow funds from a brokerage.


Since the practice of hypothecation provides security to the lender because of the collateral pledged by the borrower, the lender generally offers the loan at a lower rate of interest than on an unsecured loan. 

Mortgages and margin loans are the most common examples of hypothecation. While it enables the borrower to obtain loans on more favorable terms than unsecured loans, the borrower risks losing the asset if prices plunge precipitously and the loan cannot be serviced. For example, a record number of U.S. homeowners lost their homes to foreclosure in the wake of the 2006-08 housing collapse and financial crisis, as home prices plunged and interest rates on mortgages rose.

Read more: Hypothecation Definition | Investopedia 
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PA’s (Non Performing Assets):
A mortgage in default would be considered non-performing, after a prolonged period of non-payment(90 days).

The lender will force the borrower to liquidate any assets that were pledged as part of the debt agreement. If no assets were pledged, the lenders might write-off the asset as a bad debt and then sell it at a discount to a collections agency. 

Here is an example to help you understand what NPA’s are and how Banks counter it-

Mr. X decided to start a business for that he needed money (the fuel) , X had 25% of the money in his pocket, he decided to go through the route of Initial Public Offering(IPO) to generate 25% more by offering his company shares to public , the remaining 50% he borrowed from Lena bank by mortgaging his papa’s land.

Days passed and the company started to do badly then to worse and the loan installments lapsed month on month, Lena bank issued warning but X continued the bad practice for more than 90 days (condition for NPA) and the bank labeled X as defaulter and the loan as a Non Performing Asset.

Now what X will do?
 He could take his case against the bank to Debt recovery tribunal (DRT- A court for such cases).

What are Lena bank’s options?
In 2002, Govt. gave bank’s a lifeline called as SARFAESI Act (Securitization and Reconstruction of Financial Assets and Enforcement of security interest Act)
With this Act Lena bank has the power to take possession of Mr.X’s property or can transfer this to some other ownership.

What bank will do with the acquired property?
Ø  Bank can use this for their own purpose like , opening a new branch on it, installing of ATM’s etc.
Ø  Bank can advertise in newspapers for the auction of the property acquired and could auction them on any pre decided day.
Ø  Bank can sell the property to ARC (Asset Reconstruction Company), these are registered companies under RBI, they buy such assets from banks and sell them at higher prices to gain profits.

NOTE- Total amount of NPA’s are around 4.4% of the total assets of banks in India and expected to increase to 4.7% till the end of FY’15

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