Vinu: Manu, I have a doubt. Suppose a borrower has plant and machinery in their factory, but the bank has not funded the purchase of that machinery. Can the bank still classify it as collateral security?

Manu: That's a good question, Vinu. Yes, even if the bank has not financed the plant and machinery, it can still be accepted and classified as collateral security, provided certain conditions are met.

Vinu: Oh! What are those conditions?

Manu: First, the machinery should be owned by the borrower. The ownership must be established clearly through invoices or other legal documents.

Vinu: Got it. So ownership is the first part. What else?

Manu: Second, the machinery must be free from any encumbrance—that means it should not be already mortgaged to another lender or under any hypothecation.

Vinu: That makes sense. But how does the bank take it as collateral if they didn’t finance it?

Manu: The bank will create a charge over the machinery. This can be done through a hypothecation agreement or equitable mortgage, and the charge should be registered with the Registrar of Companies (in case of companies) or CERSAI, depending on the type of borrower.

Vinu: Will that be considered as primary or collateral security?

Manu: Since the bank didn’t fund it directly, it will be considered as collateral security, not primary. The primary security would be what is directly created from the bank’s finance, like raw materials or stock if it’s a working capital loan.

Vinu: Thanks, Manu. One last question. Can this help in improving the security coverage for the bank?

Manu: Absolutely. Even if it's not primary, offering plant and machinery as collateral can improve the asset coverage ratio and give the bank additional comfort. It may even influence sanction terms more favorably for the borrower.

Vinu: Super helpful. Thanks a lot, Manu!

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