32753705 bank lending

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Commercial Banking

Lending Policies of

Banks.

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Lending by Banks Commercial Banking 2

RBI as a regulator

Announces Credit Policy in April every year

Reviews Quarterly June, October and December

Monitors through various reports Helps GOI to formulate Budget and Policies

Advises Banks to follow its Guidelines

Controls money supply, credit, forex, etc

Prescribes certain exposure limits / rates of intt

Priority Sector Agriculture, SSI, Exporters etc

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General Principles of Banks

1. Identification of Borrower

2. Purpose of the Loan

3. Quantum of Loan

4. Period of Loan

5. Source of Repayment

6. Collateral Security Offered7. Appraisal / Sanction / Acceptance of Terms

8. Documentation / Disbursement / Inspection

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General Principles

01. Identification of Borrower

Track Record/Experience/

Educational or ProfessionalQualifications

Type of Business Organisation

Past performance3 Cs - Character, Capacity and

Credit Worthiness

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General Principles ...

02. Purpose of the LoanIs it for productive purpose ?

Is it a legitimate activity ?

Is it new venture or existing ?

If existing - is it for expansion ordiversification ?

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03. Quantum of Loan Is it need based ?

It should be timely

It should be with borrowers stake/

margin (Varying between 5 to 25%)

It should neither be over financed nor

under-financed

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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?

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05 Source of Repayment ? Out of business/salary income ?

Is it self-liquidating ie., a working capitalaccount ? 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 ?

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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)

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07. Appraisal of Proposal / Sanction

08. Convey Terms & conditions in writing

09. Documentation

Proper Documents ProperStamps

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, stockstatements, recovery, renewal ... ... ...

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Bank Lending Principles

5 Cs of good Lending

- Character

- Capital- Capacity

- Collateral

- Conditions

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Principles of good lending

Character :

- Market Report

- Credit history

- Bank Report

- Published Information: website, Stock Exchange,

Industry Sources, Annual Reports

- RBI website, Credit Information System- Credit Information Bureau (CIBIL)

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Capacity :

- Technical feasibility

- Economic viability- Past Track record

* Financials, Annual Report, Other docs

* Operation of the account

- Management team, in-house expertise

- Joint Venture partners

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Capital

- Owners stake in business

- Investors, JV partners

- Margin money

- Adequacy of capital: statutory requirements

- Ratios:

* Industry Norms on ROAA and ROE

* EPS & PE ratio

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Collateral (Security)

- Marketability

- Liquidity- Physical possession/ Storage

- Charging the security

* Mortgage

* Hypothecation/ Pledge

* Lien

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Conditions

- General conditions-follow up, supervision

& monitoring, Annual Review etc- Specific conditions, eg

* Raising capital with in given time

* Recruiting professionals/ technocratscapable to run the business

* Fulfilling any other area of deficiency

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Project Appraisal

Technical Feasibility

Financial Viability

Market potential & Clients strength in tapping

the mkt. potential

Managerial skills

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Analysis of Financial data

Balance Sheet

Profit & Loss account

Ratio analysis

Cash flow analysis

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Types of Lending A. 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, ProfessionalsPersonal Loans, Credit Cards and so on

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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

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01. Overdrafts Temporary facility

Allowed against Current or CC A/c - 5-

10% above available limit

Simple Application & formalities

High rate of Interest

Clean orSecured against stocks,shares, and other assets

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02. Cash Credit A/c

For Working Capital purpose

Limit generally for 1 year

To submit periodic Stock statements Depends on Operating Cycle,

Turnover, Cash Budget or Projected

Balance Sheet

Simple Documentation - DP Note and

Hypothecation/Pledge Agreements

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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

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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

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05.Term Loans For acquiring Fixed Assets

Ascertain Project Report and Cost

Tech. Feasibility & Economic Viability Income to be generated with Project

Economic Life of the Asset

Cash Flows from the Project Charge on Assets, low Rate of Intt

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Types of Bank Borrowers

1. Individuals Retail Banking

2. Sole Proprietor

3. Partnership firms4. Trust Accounts

5. HUFs, Clubs, Societies

6. Private Limited Companies7. Public Limited Companies

8. Public Sector Undertakings, MNCs

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FORMS OF SECURITY FOR LOANS

1. BANKERS LIEN

2. PLEDGE

3. HYPOTHECATION

4. MORTGAGE

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1. BANKERS LIEN

A RIGHT TO RETAIN PROPERTIES

BELONGING TO THE DEBTOR

UNTIL DUES ARE PAID FULLY

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2. PLEDGE

IT IS BAILMENT OF GOODS

PURPOSE OF SECURITY

FOR PAYMENT OF A DEBT OR

PERFORMANCE OF A PROMISE

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PLEDGE .contd..

IT IS NOT A RIGHT OF OWNERSHIP

LENDER CAN ONLY RETAIN POSSESSION

NOT A TRANSFER OF PROPERTY

PLEDGEE TO TAKE PRUDENT CARE OFASSETS

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PLEDGE contd..

Exceptions

1. AGENT CAN ALSO CREATE A VALID

PLEDGE

2. SELLER IN POSSESSION MAY CREATE

3. BUYER IN POSSESSION BEFORE PAYMENT

4. PLEDGER WITH LIMITED INTEREST

5. ONE OF THE JOINT OWNERS INPOSSESSION

6. ANY PERSON WHO IS IN VALID

POSSESSION

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PLEDGE .contd..

BANKERS RIGHTS AS PLEDGEE

1. 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

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PLEDGE .contd..

BANKERS OBLIGATIONS1. NOT ENTITLED TO ENJOY ANY

ACCRETIONS

2. GOVT AUTHORITIES MAY NOT SUPERSEDETHE PLEDGEES RIGHTS FOR RECOVERYOF DUES

3. REASONABLE NOTICE TO BE GIVENBEFORE SALE

4. TO RE-DELIVER THE GOODS ON RECEIPTOF DUES

5. PROPER REGISTRATION WITH REGISTRAR

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MORTGAGE - PARTIES

MORTGAGOR - THE BORROWER

MORTGAGEE - THE LENDER/BANKER

REGISTRAR OF ASSURANCES (FOR ASSET)

REGISTRAR OF COMPANIES (FORCHARGES)

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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 ORPERFORMING A PROMISE

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TYPES OF MORTGAGES..

1. SIMPLE MORTGAGE

2. MORTGAGE BY CONDITIONAL SALE

3. USUFRUCTUARY MORTGAGE

4. ENGLISH MORTGAGE :(REGISTERED )

5. EQUITABLE MORTGAGE : BY

DEPOSIT OF TITLE DEEDS6. ANOMALOUS MORTGAGE

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SIMPLE MORTGAGE

NO DELIVERY OF POSSESSION OF

ASSETS

MORTGAGOR BINDS PERSONALLYFOR DUES

AGREES TO LENDERS RIGHT TO

DISPOSE OFF THE MORTGAGED

PROPERTY FOR LIQUIDATING THE

DUES

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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 TOTHE SELLER

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USUFRUCTUARY MORTGAGE

POSSESSION IS DELIVERED TO

MORTGAGEE

MORTGAGOR IS ENTITLED TO RE-POSSESS

ON PAYMENT OF DUES OR DEBT ISDISCHARGED BY RENTS AND PROFITS

RECEIVED BY MGGEE

MGGEE IS ENTITLED TO ENJOY THE

PROPERTY TILL DEBT IS DISCHARGED

MORTGAGEE CANNOT SUE MORTGAGOR

FOR FORECLOSURE OR FOR SALE.

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ENGLISH MORTGAGE -

(REGISTERED)

ITS A TRANSFER OF PROPERTY TO

MORTGAGEE

FOR A DEBT OR PROMISE TO BE

PERFORMED

MGGEE SHALL RE-TRANSFER THEPROPERTY UPON PAYMENT OF DUES OR

DISCHARGE OF PROMISE

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ENGLISH MORTGAGE contd..

MORTGAGE DEED TO BE REGISTERED

WITH THE REGISTRAR OF ASSURANCES

INVOLVES HEAVY STAMP DUTY FOR THE

DEED

PRIOR ENCUMBERANCES TO BE

ASCERTAINED

LEGAL FORMALITIES TO BE COMPLIEDWITH

R.O.C. TO BE INFORMED WITHIN 30 DAYS

THRO FORM Nos. 8 AND 13 (AS PER

COMPANIES ACT)

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EQUITABLE MORTGAGE

TRANSFER OF IMMOVEABLE PROPERTY

FOR A CONSIDERATION - DEBT ORPROMISE

BY DEPOSIT OF TITLE DEEDS ONLY WITH AN INTENT TO CREATE CHARGE ON

ASSETS

SIMPLE - NO REGISTRATION WITH

REGISTRAR OF ASSURANCES LEGAL STEPS TO BE PROPERLY OBSERVED

R.O.C. TO BE ADVISED AS IN ENGLISHMGGE

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ANOMALOUS MORTGAGE

NOT ANY OF THE ABOVE 5 TYPES OF

MORTGAGES

A COMBINATION OF 2 OR MORE OFTHE ABOVE

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MORTGAGES - Miscellaneous

Encumberances to be verfied properly

Stamping of Documents to be proper

Appropriate documents to be obtained

Authorised persons only to create

Record of Dates to be observed in case of

second charge, pari-passu charge

NOCs to be obtained properly

Valuation of Properties to be proper

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SECURITIES FOR ADVANCES -

Other issues

Records to be maintained properly

Stock Inspections to be done regularly

Indication Boards to be insisted upon

Insurance of Assets to be regular Renewal /Enhancement of limits to be done

periodically

Revival Letters to be obtained

Acknowledgement of Debts

Proper End-use and follow up to be done

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