Lending Policies Of Indian Banks

Commercial Banking Lending Policies of Banks and FIs

Typical B/S of a Commercial Bank ❚ CAPITAL & LIABILITIES

❚ PROPERTY & ASSETS

❚ 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

❚ 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

Lending by Banks

Commercial Banking

2

Business Planning & Performance Review System ❚ Growth plans and Business Levels ❚ Sector-wise sub-plans for next year ❚ Achievement of Targets like Priority Sector (SSI and Agri), Export Finance, etc ❚ Bottom Up and Top Down Approaches ❚ Weekly, Monthly MIS and Review Lending by Banks Commercial Banking 3 Reports

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 Lending by Banks

Commercial Banking

4

General Principles of Banks 1. 2. 3. 4. 5. 6. 7.

Identification of Borrower Purpose of the Loan Quantum of Loan Period of Loan Source of Repayment Collateral Security Offered Appraisal / Sanction / Acceptance of Terms 8. Lending Documentation / Disbursement / by Banks Commercial Banking

5

General Principles ❚ 01. Identification of Borrower ❙ Track Record/Experience/ Educational or Professional Qualifications ❙ Type of Business Organisation ❙ Past performance ❙ 3 Cs - Character, Capacity

Lending by Banks

Commercial Banking

6

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 ?

Lending by Banks

Commercial Banking

7

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 Lending by Banks

Commercial Banking

8

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 ? Lending by Banks

Commercial Banking

9

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? Lending by Banks Commercial Banking 10 ❙ Is it a bridge loan ?

General P ri ncipl es ... ❚ 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)

Lending by Banks

Commercial Banking

11

General P ri ncipl es ... ❚ 07. Appraisal of Proposal / Sanction ❚ 08. Convey Terms & conditions in writing ❚ 09. 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 Lending by Banks Commercial Banking verification, stock statements,

12

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, Professionals Personal Loans, Credit Cards and so on ……

Lending by Banks

Commercial Banking

13

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 Lending by Banks

Commercial Banking

14

01 . O verdra fts ❚ Temporary facility ❚ Allowed against Current or CC A/c - 5-10% above available limit ❚ Simple Application & formalities ❚ High rate of Interest ❚ Clean or Secured against stocks, shares, and other assets Lending by Banks

Commercial Banking

15

02. Cas h C redi t 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 Lending by Banks 16 Agreements Commercial Banking

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 Lending by Banks

Commercial Banking

17

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 Commercial Banking documents obtained

Lending by Banks

18

05.T erm 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

Lending by Banks

Commercial Banking

19

Types of Bank Borrowers 1. 2. 3. 4. 5. 6. 7. 8.

Individuals – Retail Banking Sole Proprietor Partnership firms Trust Accounts HUFs, Clubs, Societies Private Limited Companies Public Limited Companies Public Sector Undertakings, MNCs Lending by Banks

Commercial Banking

20

Typ es o f Bor ro we rs ❚ 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 Lending by Banks Commercial Banking 21 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 Lending by Banks Commercial Banking 22 assessments

04.Trust A/cs ❚ Trust 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 ?

Lending by Banks

Commercial Banking

23

05. HUFs, Clubs, Societies, Assns etc ❚ Karta of the Family & Coparceners ❚ Clubs, Societies and Associations ❙ Office bearers ❙ Rules, Articles, ❙ Authorised persons

❚ Local Bodies : Panchayat or Lending by Banks

Commercial Banking

24

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 ? Lending by Banks

Commercial Banking

25

07. Publ ic Lim ited Cos ❚ Cert of Incorporation by ROC : Cos. Act ❚ Memorandum of Association : Objectives ❚ Articles of Association : Working of Co. ❚ Cert for Commencement of Business ❚ List of Directors, Share Holding pattern Lending by Banks

Commercial Banking

26

Securities for Bank Advances Creation of various types of charges

Lending by Banks

Commercial Banking

27

FORMS OF SECURITY FOR LOANS 2. BANKERS’ LIEN 4. PLEDGE 6. HYPOTHECATION 8. MORTGAGE Lending by Banks

Commercial Banking

28

1. BANKER’S LIEN ❚ A RIGHT TO RETAIN PROPERTIES ❚ BELONGING TO THE DEBTOR ❚ UNTIL DUES ARE PAID FULLY

Lending by Banks

Commercial Banking

29

2. PLEDGE ❚ IT IS BAILMENT OF GOODS ❚ PURPOSE OF SECURITY ❚ FOR PAYMENT OF A DEBT OR PERFORMANCE OF A PROMISE

Lending by Banks

Commercial Banking

30

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 Lending by Banks

Commercial Banking

31

PLEDGE ………………… contd.. ❚ Exceptions 2. AGENT CAN ALSO CREATE A VALID PLEDGE 3. SELLER IN POSSESSION MAY CREATE 4. BUYER IN POSSESSION BEFORE PAYMENT 5. PLEDGER WITH LIMITED INTEREST 6. ONE OF THE JOINT OWNERS IN POSSESSION 7. ANY PERSON WHO IS IN VALID Lending by Banks 32 POSSESSION Commercial Banking

PLEDGE …………….contd.. ❚ BANKER’S RIGHTS AS PLEDGEE 2. CAN FILE A SUIT FOR RECOVERY OF DUES 4. CAN FILE A SUIT FOR SALE OF GOODS PLEDGED 6. CAN SELL THE GOODS AFTER DUE NOTICE Lending by Banks

Commercial Banking

33

PLEDGE …………….contd.. ❚ BANKER’S OBLIGATIONS 2. NOT ENTITLED TO ENJOY ANY ACCRETIONS 3. GOVT AUTHORITIES MAY NOT SUPERSEDE THE PLEDGEE’S RIGHTS FOR RECOVERY OF DUES 4. REASONABLE NOTICE TO BE GIVEN BEFORE SALE 5. TO RE-DELIVER THE GOODS ON RECEIPT OF DUES 6. PROPER REGISTRATION WITH REGISTRAR Lending by Banks

Commercial Banking

34

3. HYPOTHECATION ❚ IT’S A MORTGAGE OF MOVEABLE ASSETS ❚ A TEMPORARY TRANSFER OF PROPERTY ❚ NO TRANSFER OF POSSESSION BY THE HYPOTHECATOR TO HYPOTHECATEE ❚ PROPER RECORD OF CHARGE CREATION TO BE DONE WITH REGISTRAR OF COMPANIES ❚ HYPOTHECATOR FREE TO USE THE ASSETS Lending by Banks

Commercial Banking

35

MORTGAGE - PARTIES ❚ MORTGAGOR - THE BORROWER ❚ MORTGAGEE - THE LENDER/BANKER ❚ REGISTRAR OF ASSURANCES (FOR ASSET) ❚ REGISTRAR OF COMPANIES (FOR CHARGES) Lending by Banks

Commercial Banking

36

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 Lending by Banks

Commercial Banking

37

TYPES OF MORTGAGES….. 1. 2. 3. 4.

SIMPLE MORTGAGE MORTGAGE BY CONDITIONAL SALE USUFRUCTUARY MORTGAGE ENGLISH MORTGAGE : (REGISTERED ) 5. EQUITABLE MORTGAGE : BY DEPOSIT OF TITLE DEEDS 6. ANOMALOUS MORTGAGE Lending by Banks

Commercial Banking

38

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 Lending by Banks

Commercial Banking

39

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 Lending by Banks

Commercial Banking

40

USUFRUCTUARY MORTGAGE ❚ POSSESSION IS DELIVERED TO MORTGAGEE ❚ MORTGAGOR 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.

Lending by Banks

Commercial Banking

41

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 Lending by Banks

Commercial Banking

42

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 COMPLIED WITH ❚ R.O.C. TO BE INFORMED WITHIN 30 DAYS THRO FORM Nos. 8 AND 13 (AS PER Lending by Banks Commercial Banking 43

EQUITABLE MORTGAGE ❚ TRANSFER OF IMMOVEABLE PROPERTY ❚ FOR A CONSIDERATION - DEBT OR PROMISE ❚ 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 ENGLISH Lending by Banks Commercial Banking 44 MGGE’

ANOMALOUS MORTGAGE ❚ NOT ANY OF THE ABOVE 5 TYPES OF MORTGAGES ❚ A COMBINATION OF 2 OR MORE OF THE ABOVE

Lending by Banks

Commercial Banking

45

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 ❚ ❚ ❚ ❚ ❚

Lending by Banks

Commercial Banking

46

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 ❚ ❚ ❚ ❚ ❚

Lending by Banks

Commercial Banking

47