Hypothecation

Hypothecation is a legal arrangement where a borrower pledges an asset as collateral for a loan without transferring ownership or possession of the asset to the lender. The borrower retains the right to use the pledged asset, but the lender has a legal claim over it in the event of default. In India, hypothecation is most commonly used in vehicle loans—the car or two-wheeler is hypothecated to the bank until the loan is fully repaid, after which the hypothecation is removed from the vehicle's registration certificate (RC). In the securities market, hypothecation of shares and mutual fund units is used by investors to obtain loans against their portfolio holdings.