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Collateral security refers to additional security provided for a loan. For example, if XYZ Company seeks a loan of 50 lakhs, it may pledge its machinery as security. Alongside this, the company can issue debentures worth 60 lakhs to the bank. These debentures serve as collateral security, meaning they are additional protection for the bank. While the primary loan of 50 lakhs is secured by the machinery, the debentures will only be utilized if the company defaults on the loan. The bank retains the debentures, ensuring there is further security in the event of non-repayment.