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In this video tutorial, the concept of collateral debentures is explained using XYZ Company as an example. When XYZ seeks a loan of 50 lakhs, it pledges its machinery as primary collateral. To further secure the loan, the company issues debentures worth 60 lakhs, which are provided to the bank as additional security. These debentures serve as collateral, meaning they will only be utilized if the company defaults on the loan. The bank holds these debentures but does not use them unless necessary, highlighting their role as supplementary security for the original loan secured by the machinery.