management of advances

Version: 1College of Agricultural Banking, RBI, PUNE

Management of Management of AdvancesAdvances

Management of Management of AdvancesAdvances

Dr. Ajit KumarAGM & MoFCAB, PUNE

Date: 2College of Agricultural Banking, RBI, PUNE

Introduction Introduction

• What is Banking?• Loan Policy• Bank’s own Guidelines + RBI

Guideline =Loan Policy {each broad category of economic activity} + Manual on Loans and advances

• Loan Policy of Commercial Bank vis-à-vis Cooperative Bank


Types of LoanTypes of Loan

• Term Loan• Cash Credit• Book Debt• Bill Limit – Bill purchase/ discounting• WCDL• Export Credit-Pre shipment (Packing

Credit) & Post shipment Credit• Retail Loan- Housing, Education etc.• Overdraft

Term Loan

• Long Term Stake; Careful Appraisal• Project Viability: techno-economic

viability, market, competitors • Management’s Competence• Regulatory Clearances• Credit Opinion Report• Repayment Capability: DSCR• Collateral

Working Capital Working Capital RequirementRequirement

• Less stringent appraisal requirement but greater/ higher post credit supervision/ surveillance required.

• Under loaning and excess loaning both are dangerous

• Need based credit • Periodic stress testing required



Working Capital Working Capital RequirementRequirement

• Assessment of working capital requirement:

• Traditional methods• Turnover method-upto Rs.1.0 cr. for

non SSI and upto Rs.5.0 cr. for SSI -Gross sales including excise duty -for others UCBs may adopt any

method • Cash Budget method- products of

seasonal nature

Traditional MethodTraditional Method

Current Liability Current Asset Creditors - 300 Current assets – 740Bank borrowing-330

1st method:Current assets – creditors = 740-300=44025% margin to be deducted= 440-110=330Current ratio= current asset/ current liability 740/630 = 1.17


Traditional MethodTraditional Method

Current Liability Current Asset Creditors - 300 Current assets – 740Bank borrowing-330

2nd method:(Current asset – margin 25%)- less creditors740-185=555-300 =255Excess borrowing- 75Current ratio= current asset/ current liability 740/555=1.33


Turnover Method (Nayak Turnover Method (Nayak Committee)Committee)

Current Liability Current Asset Creditors - 300 Current assets – 740Bank borrowing-330NWC-740-660=80Projected Sales- 200025%of sales=500 less 5%margin i.e. 500-100=400Now margin(100) or NWC(80) whichever is higher to

be deducted from 25% of sales500-100=400 is the permissible financeOr simplistically 20% of projected turnover i.e.400


Working Capital Working Capital RequirementsRequirements

• Actual drawals to be allowed on the basis of DP after excluding unpaid stock

• Banks to ensure regular and timely submission of monthly statements of stocks, receivables etc.

• Periodical verification of stock• Incentive for Loan system• Banks to laydown policy guidelines for

periodical review of the WC limit and the same to scrupulously adhered to


Interest RateInterest Rate

• Banks are free to determine lending rates but it should not be exorbitant

• Interest rate charged by banks should incoporate risk premium having regard to the internal rating of the boprrower

• Interest spread to be rational.


Transparent Pricing of loanTransparent Pricing of loan

• Banks are required to publish the minimum and maximum interest rates charged on advances and display the information in every branch{Base Rate}

• A Board approved Policy for charging of Penal Interest

• No Penal Intt. for loans upto Rs 25000/-for priority sector borrowers.


Pricing of loan

• Banks should ensure that the total interest debited to an account should not exceed the principal in respect of short term advances granted to small and marginal farmers. SMF= land holding of five acres and less.

• An appropriate ceiling of interest+ processing and other charges to be decided and publicised.


Credit facility to a new Credit facility to a new borrowerborrower

• UCBs should not finance a borrower already availing credit facility from another bank without obtaining a ‘No objection Certificate’ from the existing financing bank (as per declaration of the borrower/financial statement) – Credit opinion report.

Opening of Current Opening of Current AccountsAccounts

• A declaration that the borrower is not having any credit facility with any other bank.

• If yes, NoC required from that bank• If no response to the request for NoC

is received, account may be opened after a minimum waiting period of a fortnight.


• Certification of accounts of non corporate borrowers – Income tax Act 1961

• UCBs to ensure that borrowers do not default of payment of statutory dues like PF etc.


Loan Appraisal

• Proper Appraisal of Loan• No oral sanction• Deviation to be recorded- sanction

within discretionery powers• Adhoc sanction only when original

limit utilised fully and supported by proper documents

Monitoring of accountsMonitoring of accounts

• Ensure end use of fund• Ensure that security hypothecated/

pledged to the bank is not tempered with• Early warning system: Recognition of

potential NPA


Monitoring operations in loan account

• Monitoring end use of fund/fund flow to and fro- no loan for FD/KVP

• The primary responsibility for preventing misuse of funds rests with the management of banks. UCBs to take appropriate steps to review and tighten control measures.

Annual Review of Advances

Valuation of Valuation of properties – properties –

empanelment of empanelment of valuersvaluers


Exchange of credit Exchange of credit informationinformation

• UCBs required to take membership of at least one credit information company and provide credit data (positive as well as negative) to the credit information company.

• - to incorporate suitable clauses in the loan agreement for the purpose.


Disclosure of defaulting Disclosure of defaulting borrowersborrowers

• Scheduled UCBs are required to submit to RBI at the end of Sept and March every year data on defaulting doubtful, loss and suit filed borrowers with outstanding limit of Rs.1.0 cr. and above

• Data on suit filed case of Rs.1.0 cr & above and willful defaulters of Rs.25.0 lakh and above is availbale on CIBIL site- www.cibil.com

• Scheduled UCBs to report to CIBIL all cases of willful default Rs.25.0 lakh and above

http://www.cibil.com/

Loan RestructuringLoan Restructuring

• There will not be any asset class degradation upon restructuring in following cases:

• (i) Project Financing (ii) borrowers engaged in important business activities (iii) housing loan

• This exceptional treatment is not available to • (i) consumer and personal advances • (ii) Advances to traders



• In case of default in payment of agricultural loans due to natural calamities UCBs on their own may decide to

- convert the short term production loan into a long term loan or reschedule the repayment period and

- sanction fresh short term loans- these fresh/ restructured loans will not be

treated as NPAs and will be governed by fresh terms and conditions



• PRECONDITIONS:(i)Provision for diminution in the fair value of

restructured Advances• Interest sacrifice to be calculated on the

basis of discounting present value of cash flow with both pre and post restructuring rate of bank’s BPLR+ appropriate term premium +credit risk premium

• Simpler method:5% of the exposure(ii)The dues of the bank are fully secured

with certain exceptionsDate: 26College of Agricultural Banking, RBI, PUNE


• Exceptions of (ii)• (a) SSI borrowers where outstanding

is up to Rs.25.0 lakh• (b) Infrastructure projects with an

escrow account with valid legal claim and where the cash flows generated form the project are adequate for repayment of the advance


Gold Loan up to Rs.1.0 lakhGold Loan up to Rs.1.0 lakh


Advances to Real EstateAdvances to Real Estate

• UCBs should frame comprehensive prudential norms relating to the ceiling on the total amount of real estate loans, single/aggregate limit for such loans, margins, security, repayment schedule etc

• Policy should be approved by the Board• While framing the policy the banks may

also consider for inclusion the National Building Code framed by Bureau of Indian Standards (BIS)


Bill DiscountingBill Discounting

• Banks to have Board approved policy on bill discounting-proper appraisal

• Banks should not extend bill discounting facility or other non fund based facilities to non-constituent borrower.

• No accommodation bills; onus on bank to ensure genuineness of trade transactions- any violation Penal Action


• THANK YOU


management of advances

Documents

pune date

pune introduction

current ratio

current asset margin

current assets creditors

guidelines rbi guideline

pune management of advancesdr

bank borrowing