Difference between Primary Security & Collateral Security

Difference between Primary Security &  Collateral Security

Primary Security : Primary security is the asset created out of the
credit facility extended to the borrower and / or which are directly associated
with the business / project of the borrower for which the credit facility has
been extended. For example, hypothecation of stocks, book debts etc.
Stocks include Raw Materials, Stock in process, Finished Goods, Spares
etc.Book debts are based on invoices and delivery challans. Hypothecation is
the established practice whereby a borrower offers to the lender charge on an
asset as security for a loan, while retaining ownership of the asset and enjoying
the benefits there from. 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.

• Collateral Security: Collateral security is any security, other than
Primary Security, offered to additionally secure the credit facilities
sanctioned by the Bank. Collateral security is normally obtained as a risk
mitigating measure and to sustain the promoters’ interest in the venture.