Genuine entrepreneurs having good business track record.
Good business models including start ups, movie or tele production house, builders, doctors, IT Professionals, technocrats, manufacturing , trading or export houses, government contractors, tender awardees, top managements of successful organizations who want to start their own ventures for whom only problem is collateral security who can otherwise borrow loans from the organized finance channels like banks, financial institutions and non banking finance companies.
Established corporate/ entities which are holding valid sanction letters from the lenders who need to give collateral security to avail the credit facilities.
Companies, firms where the existing directors or partners are departing and securities are being pulled out to effect the reorganization and the new stakeholders need to support the existing and additional borrowings.
Owners of clear and marketable assets who can mortgage the assets for verified borrowers of the security for period of 2 to 5 years and can stand as co borrower or guarantors of the loan programme.
As per present banking norms, the owner of the assets has to become a co borrower / guarantor for the loans raised from the banks/ NBFC. It is imperative that both the borrower and lender of the asset are clean and scrupulous people. The degree of risk also depends upon the fact that weather the borrower is having a primary security with the bank and also to what extent the owner of the asset is exposed to the loans not covered by the security. The borrower gets credit facilities against the security of the third party and it is his responsibility to use the finance for business purposes and judicious manner. The security lender also has to have untainted, clean and marketable security which can be lend to obtain return out of such assets. Neither of the party should be a defaulter of any borrowings is also a precondition.
No, suitable legal agreements can be executed between the lender and the borrower of the security to safeguard the interests of both including the return on the assets and strategic partnership if any. Shareholders agreement can be drafted or partnership deed may be altered to give effect to the arrangement between the two parties. The arrangement can also result in a situation where a lender of an asset becomes a part of the established business or new venture. The legal documentation depends upon the specific arrangements and is taken care by the qualified legal personnels.
Primary security is the asset created out of the credit facility extended to the borrower. these assets are directly associated with the business / project of the borrower for which the credit facility has been extended by the lender. for ex, debtors and stocks created out of the working capital facilities extended by a bank.
Collateral security is any other security offered over and above the primary security for securing repayment of the loan. For example, hypothecation of jewellery or mortgage of house for securing repayment of working capital loan.
When collateral security is offered by a person other than a borrower for securing repayment of loan/ debt of the borrower, it is termed as third party collateral security. though the spouse, mother, father, son or daughter of the borrower, partner of the firm, director of the company or a trustee of a trust are not trated as third party as per RBI Cir 231 ref 26/36 dated 13.10.2011. Generally , third party security providers either becomes a co borrower or a guarantor for the loan program of the borrower and signs relevant documents and agrees to the terms and conditions of the lending bank / NBFC or financial institution. The owner of the third party asset/ security sometimes also becomes part of the management or partner in a business of a borrowing entity.
RBI Circular 231/ 26/36 dated 13.10.2011 stipulates that a concerned bank branch has to take an administrative clearnace from the next higher authority for accepting the third party collateral security. the third party security provider has to open account in the bank, provide KYC and purpoted assets have to be properly physically verified by the concernd officer of the bank. An attested photo of the security provider shall be kept along with duly executed form RF-255.
As of June 2012 the US Treasury securities and US agency obligations accounted for approximately 85 percent of the collateral in the US third party repo market as per the Federal Reserve .the tri-party repo market is a general collateral market, where parties look to obtain certain classes of third party collateral securities (for example, governments, agencies, corporates,etc.) The practical result is that the tri-party repo market is the largest source of secured funding for US dealers. Bank of new york mellon and JP Morgan Chase , the two largest banks of america provide third party collateral settlement services for triparty repo transaction.
The third party leverage programes have been successfully running world over in mutual fund and money markets as it allows them to earn an additional return on their portfolio of securities and excess cash.
In india , the national stock exchange started the third party security borrowing and lending mechanism (SLBM) in april 2008 , allowing to sell the shares / securities that are not owned by the market participant by using third party lender's shares/ secuirties. the scheme has gained in depth and breadth since then.
China has attempted to establish as many as third party's collateral institutions to tackle the issue of availibility of finance to SME sector . in 2013, a detailed study was also conducted by zheng hong ,Chinese Finance Research Institute, Southwestern University of Finance and Economics, Chengdu, People's Republic of China) and YiHai Zhou (The People's Bank of China, Beijing, People's Republic of China) to study the design of third party collateral arrangements including collateral fee rates, risk sharing, collateral capital requirements, types of collateral institutions and recollateral institution, etc.