lending policies of indian banks

Commercial Banking

Lending Policies of Banks and FIs

Lending by Banks Commercial Banking 2

Typical B/S of a Commercial Bank

CAPITAL & LIABILITIES

Paid up Capital Reserves & Surpluses Deposits (Demand &

Time) and Other a/cs Borrowings from other

Banks, Refinance from IDBI, SIDBI, NABARD, EXIM Bank, etc

Other Liabilities Profit and Loss a/c TOTAL

PROPERTY & ASSETS

Cash / Bal with others Money at Call & at Short

Notice Investments (incl SLR) Advances (Short,

Medium and Long Term), BD, etc

Premises, Furniture, Cars, Vehicles, etc

Profit and Loss (if any) TOTAL


Business Planning & Performance Review System

Growth plans and Business LevelsSector-wise sub-plans for next yearAchievement of Targets like Priority Sector

(SSI and Agri), Export Finance, etcBottom Up and Top Down ApproachesWeekly, Monthly MIS and Review ReportsQuarterly Analysis and Mid-course actions


RBI as a regulator…

Announces Credit Policy in April every yearReviews Quarterly June, October and DecemberMonitors through various reportsHelps GOI to formulate Budget and PoliciesAdvises Banks to follow its GuidelinesControls money supply, credit, forex, etcPrescribes certain exposure limits / rates of inttPriority Sector – Agriculture, SSI, Exporters etc


General Principles of Banks

1. Identification of Borrower2. Purpose of the Loan3. Quantum of Loan4. Period of Loan5. Source of Repayment6. Collateral Security Offered7. Appraisal / Sanction / Acceptance of Terms 8. Documentation / Disbursement /

Inspection…


General Principles01. Identification of Borrower

Track Record/Experience/ Educational or Professional Qualifications

Type of Business Organisation Past performance 3 Cs - Character, Capacity and Credit Worthiness


General Principles ...02. Purpose of the Loan Is it for productive purpose ? Is it a legitimate activity ? Is it new venture or existing ? If existing - is it for expansion or diversification ?


General Principles ...

03. Quantum of Loan Is it need based ? It should be timely It should be with borrower’s stake/

margin (Varying between 5 to 25%)

It should neither be over – financed nor under-financed


General Principles ...

04. Period of Loan Is it for short or long term ? Is it adequate by time ? Is it a renewal/ revival/

enhancement ? What are the chances of

contingencies ?


General Principles ...05 Source of Repayment ?

Out of business/salary income ? Is it self-liquidating ie., a working capital

account ? Cash Credit – Hypothecation or Pledge (lock-n-key) facility?

Out of sale of asset(s) financed or disposal of collateral security?

Any other source of income like guarantor?

Is it a bridge loan ?


General Principles ...06.What is the Security

offered ?

Primary - stock, assets, etc (Hypothecation, Pledge, etc )

Secondary -3rd party guarantee or charge on immoveable property ?

(Type of Mortgage over Assets)


General Principles ...07. Appraisal of Proposal / Sanction08. Convey Terms & conditions in

writing09. Documentation

Proper Documents Proper Stamps Complete in all respects Executed by all authorised signatories / Seal Charge recorded with ROC within 30 days

10.Disbursement, Inspection, Insurance & follow up – asset verification, stock statements, recovery, renewal ... ... ...


Types of LendingA. Fund based (Current & Fixed

Assets) 1. Overdrafts 2. Cash Credits 3. Bills Finance – Demand or Usance Bills 4. Demand Loans 5.Term Loans 6. Other Loans - Car Loans, Consumer

Durables, Educational Loans, Housing Loans, Professionals Personal Loans, Credit Cards and so on ……


Types of lendings ...

B. Non-Fund based (Fee based) Issue of Guarantees Issue of Letters of Credit Deferred Payments Guarantees

C. Others Lease Finance Hire Purchase Finance


01. OverdraftsTemporary facilityAllowed against Current or CC

A/c - 5-10% above available limitSimple Application & formalitiesHigh rate of InterestClean or Secured against stocks,

shares, and other assets


02. Cash Credit A/cFor Working Capital purposeLimit generally for 1 yearTo submit periodic Stock statements Depends on Operating Cycle,

Turnover, Cash Budget or Projected Balance Sheet

Simple Documentation - DP Note and Hypothecation/Pledge Agreements


03.Bills Purchased

Bills of Exchange drawn for Credit

Demand Bills or Usance Bills D/A or D/P basis

Limit for Negotiation or Discount

Close monitoring required


04. Demand Loans

Repayable on Demand - secured loan

Against pledge of Gold, Fixed Deposit, Stocks etc.

Generally in installments - mly, qly, hly etc

Gradually liquidated over a period

DP Note and other documents obtained


05.Term LoansFor acquiring Fixed AssetsAscertain Project Report and Cost Tech. Feasibility & Economic ViabilityIncome to be generated with ProjectEconomic Life of the AssetCash Flows from the ProjectCharge on Assets, low Rate of Intt


Types of Bank Borrowers

1. Individuals – Retail Banking 2. Sole Proprietor3. Partnership firms4. Trust Accounts5. HUFs, Clubs, Societies6. Private Limited Companies7. Public Limited Companies8. Public Sector Undertakings, MNCs


Types of Borrowers

01. Individuals - Minors/Majors/Status Salary Slips/NOC/No Dues Certificate Proof of Residence/Tel or Electricity Bills Agreements / Signatures

/Witnesses/Security

02. Sole Proprietor Certified Business Accounts/ Income Tax or

Sales Tax Assessment Orders etc


Types of Borrowers ...

03. Partnership Firms Oral or Written Deed ? Registered or Unregistered Firm? Joint and Several responsibility of

Partners Certified Accounts Income Tax and Sales Tax

assessments


04.Trust A/csTrust Deed - whether registered ?Capacity to raise loans ?Purpose of Loan ?Signatory to the Documents ?Legal Opinion on Transaction ?Resolution has been passed ?Creation of Charge on Assets ?


05. HUFs, Clubs, Societies, Assns etc

Karta of the Family & Co-parcenersClubs, Societies and Associations

Office bearers Rules, Articles, Authorised persons

Local Bodies : Panchayat or Municipality


06.Pvt Ltd Cos & PSUs Same set of terms and conditions

as Public Limited Companies.In case of PSUs, Guarantee may be

issued by the State or Central Governments !

In some cases, Margin Money and /or State / Central Government Subsidy !

In large accounts - Consortium ?


07. Public Limited CosCert of Incorporation by ROC : Cos. ActMemorandum of Association : ObjectivesArticles of Association : Working of Co.Cert for Commencement of BusinessList of Directors, Share Holding patternPowers of Directors, Common Seal etcResolution by the Board for LoanSignatory to Documents,Charge on Assets


Securities for Bank Advances

Creation of various types of charges


FORMS OF SECURITY FOR LOANS

1. BANKERS’ LIEN

2. PLEDGE

3. HYPOTHECATION

4. MORTGAGE


1. BANKER’S LIEN

A RIGHT TO RETAIN PROPERTIES

BELONGING TO THE DEBTOR

UNTIL DUES ARE PAID FULLY


2. PLEDGE

IT IS BAILMENT OF GOODS

PURPOSE OF SECURITY

FOR PAYMENT OF A DEBT OR PERFORMANCE OF A PROMISE


PLEDGE …………….contd…..

IT IS NOT A RIGHT OF OWNERSHIP

LENDER CAN ONLY RETAIN POSSESSION

NOT A TRANSFER OF PROPERTY

PLEDGEE TO TAKE PRUDENT CARE OF ASSETS


PLEDGE ………………… contd..

Exceptions1. AGENT CAN ALSO CREATE A VALID PLEDGE2. SELLER IN POSSESSION MAY CREATE3. BUYER IN POSSESSION BEFORE PAYMENT4. PLEDGER WITH LIMITED INTEREST 5. ONE OF THE JOINT OWNERS IN POSSESSION6. ANY PERSON WHO IS IN VALID POSSESSION


PLEDGE …………….contd..

BANKER’S RIGHTS AS PLEDGEE1. CAN FILE A SUIT FOR RECOVERY OF DUES

2. CAN FILE A SUIT FOR SALE OF GOODS PLEDGED

3. CAN SELL THE GOODS AFTER DUE NOTICE


PLEDGE …………….contd..

BANKER’S OBLIGATIONS1. NOT ENTITLED TO ENJOY ANY

ACCRETIONS2. GOVT AUTHORITIES MAY NOT

SUPERSEDE THE PLEDGEE’S RIGHTS FOR RECOVERY OF DUES

3. REASONABLE NOTICE TO BE GIVEN BEFORE SALE

4. TO RE-DELIVER THE GOODS ON RECEIPT OF DUES

5. PROPER REGISTRATION WITH REGISTRAR


3. HYPOTHECATION

IT’S A MORTGAGE OF MOVEABLE ASSETSA TEMPORARY TRANSFER OF PROPERTYNO TRANSFER OF POSSESSION BY THE

HYPOTHECATOR TO HYPOTHECATEEPROPER RECORD OF CHARGE CREATION

TO BE DONE WITH REGISTRAR OF COMPANIES

HYPOTHECATOR FREE TO USE THE ASSETS


MORTGAGE - PARTIES

MORTGAGOR - THE BORROWER

MORTGAGEE - THE LENDER/BANKER

REGISTRAR OF ASSURANCES (FOR ASSET)

REGISTRAR OF COMPANIES (FOR CHARGES)


MORTGAGE ……..contd..

A TRANSFER OF INTEREST IN IMMOVEABLE ASSETS LIKE LAND, BUILDING, PLANT, M/c.,

IMMOVEABLE PROPERTY TO BE SPECIFIC

CONSIDERATION MAY BE MONEY ADVANCED/ TO BE ADVANCED OR PERFORMING A PROMISE


TYPES OF MORTGAGES…..

1. SIMPLE MORTGAGE2. MORTGAGE BY CONDITIONAL SALE3. USUFRUCTUARY MORTGAGE4. ENGLISH MORTGAGE :

(REGISTERED )5. EQUITABLE MORTGAGE : BY

DEPOSIT OF TITLE DEEDS6. ANOMALOUS MORTGAGE


SIMPLE MORTGAGE

NO DELIVERY OF POSSESSION OF ASSETS

MORTGAGOR BINDS PERSONALLY FOR DUES

AGREES TO LENDER’S RIGHT TO DISPOSE OFF THE MORTGAGED PROPERTY FOR LIQUIDATING THE DUES


MORTGAGE BY CONDITIONAL SALE

MORTGAGOR SELLS THE PROPERTY TO LENDER

CONDITIONS THAT ON DEFAULT, SALE SHALL BECOME ABSOLUTE

ON PAYMENTS MADE, SALE SHALL BE VOID

ALSO, ON RECEIPT OF PAYMENT, BUYER SHALL TRANSFER BACK THE PROPERTY TO THE SELLER


USUFRUCTUARY MORTGAGE

POSSESSION IS DELIVERED TO MORTGAGEEMORTGAGOR IS ENTITLED TO RE-POSSESS

ON PAYMENT OF DUES OR DEBT IS DISCHARGED BY RENTS AND PROFITS RECEIVED BY MG’GEE

MG’GEE IS ENTITLED TO ENJOY THE PROPERTY TILL DEBT IS DISCHARGED

MORTGAGEE CANNOT SUE MORTGAGOR FOR FORECLOSURE OR FOR SALE.


ENGLISH MORTGAGE - (REGISTERED)

IT’S A TRANSFER OF PROPERTY TO MORTGAGEE

FOR A DEBT OR PROMISE TO BE PERFORMED

MG’GEE SHALL RE-TRANSFER THE PROPERTY UPON PAYMENT OF DUES OR DISCHARGE OF PROMISE


ENGLISH MORTGAGE contd..

MORTGAGE DEED TO BE REGISTERED WITH THE REGISTRAR OF ASSURANCES

INVOLVES HEAVY STAMP DUTY FOR THE DEEDPRIOR ENCUMBERANCES TO BE ASCERTAINEDLEGAL FORMALITIES TO BE COMPLIED WITHR.O.C. TO BE INFORMED WITHIN 30 DAYS THRO

FORM Nos. 8 AND 13 (AS PER COMPANIES ACT)


EQUITABLE MORTGAGE

TRANSFER OF IMMOVEABLE PROPERTYFOR A CONSIDERATION - DEBT OR PROMISEBY DEPOSIT OF TITLE DEEDS ONLYWITH AN INTENT TO CREATE CHARGE ON

ASSETSSIMPLE - NO REGISTRATION WITH

REGISTRAR OF ASSURANCESLEGAL STEPS TO BE PROPERLY OBSERVEDR.O.C. TO BE ADVISED AS IN ENGLISH

MGGE’


ANOMALOUS MORTGAGE

NOT ANY OF THE ABOVE 5 TYPES OF MORTGAGES

A COMBINATION OF 2 OR MORE OF THE ABOVE


MORTGAGES - Miscellaneous…

Encumberances to be verfied properlyStamping of Documents to be properAppropriate documents to be obtainedAuthorised persons only to create Record of Dates to be observed in case of

second charge, pari-passu chargeNOCs to be obtained properlyValuation of Properties to be proper


SECURITIES FOR ADVANCES -Other issues

Records to be maintained properlyStock Inspections to be done regularlyIndication Boards to be insisted uponInsurance of Assets to be regularRenewal /Enhancement of limits to be

done periodicallyRevival Letters to be obtained Acknowledgement of DebtsProper End-use and follow up to be done